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Opinion of the Chief Economist of ZPP on the importance of demography for the reconstruction of Ukraine



Warsaw, 6 October 2022 

 

OPINION OF THE CHIEF ECONOMIST OF ZPP ON THE IMPORTANCE OF DEMOGRAPHY FOR THE RECONSTRUCTION OF UKRAINE

 

Ukraine’s military success, the probability of which is as high as never before (although this is only probability, not certainty, and the war still continues), will result in the recovery of some (more likely) or all of the territories lost to Russia after 2014. Those territories are largely depopulated as a result of internal resettlement caused by hostilities, refugeeism, forced relocations deep into Russia and, finally, losses caused by the warfare.

The military success of Ukraine makes us think with increasing optimism about the upcoming challenge of rebuilding the country after the war. The scale of the damage is severe and the reconstruction will cost billions of dollars. The discussion on the reconstruction of the country, the model of its financing and the way of engaging private enterprises, in particular Polish ones, should be supplemented by considering the great challenges that Ukraine faces in the short and medium term.

First, the question arises of what to rebuilt and how. Should the transport, transmission and industrial infrastructure or settlement network be restored first? Already before 2014, the eastern regions of Ukraine were struggling with development challenges (somewhat similar to those experienced by the industrial regions of Upper and Lower Silesia in Poland). The infrastructure and material capital inherited from the USSR was consumed rapidly and was restored to a far insufficient degree. The process of depleting the economic potential of the region was further accelerated by the policy of the oligarchs,  who were often looking for ways to maximise their income in the short term.

Therefore, the project of reconstruction of Ukraine should be a civilisational undertaking on a scale similar to the systemic transformation in Central and Eastern Europe, with the transformation of economic structures, expansion of foreign capital, reduction of the scale of corruption and arbitrary actions of the administration. As part of that project, it is necessary to answer the question of what the economic future of the eastern regions of Ukraine should be. To do so, an assessment of the actual state of the material and human capital of the region is necessary.

It is important to remember that the initial optimism of the reconstruction period can quickly turn into disappointment and frustration of local communities. Considering the globalised world of open borders, this may result in further waves of migration. At the same time, a rational strategy is of great importance, taking into account the potentially rapid first wave of financial aid. The aid should be well administered, as with equal probability, successive waves of financial support – once the memory of the war and success fade away to some extent, will be smaller and smaller. And the risks associated with the allocation of the aid are considerable. European companies, including Polish and American ones, will be involved in the reconstruction project – and will be interested in achieving short-term benefits (especially as they will be affected by the recession that has just begun). Therefore, the participation in the reconstruction of Ukraine may turn out to be another way of boosting Western economies mired in recession or recovering from it. It is worth reminding that similar goals (apart from those officially declared) were pursued by the Americans during the Marshall Plan, or by the Germans during the reconstruction and integration of FRG-GDR in the 1990s.

However, a more serious challenge awaits Ukraine in the longer term. For decades, the country has been struggling with a very deep demographic crisis, which is the result of a low birth rate, still low life expectancy, large scale of emigration and territorial losses. The country, which at the beginning of its existence had a population of over 50 million, according to the partial e-census conducted 2 years ago, was inhabited (in government-controlled areas) by approximately 37 million people, including 5.8 million children under the age of 14. According to estimates by the IOM, approximately 7 million people left the country due to the war. Based on the survey conducted by the IOM in July, at least two-thirds of them (i.e., approximately 5 million) are not planning to return, at least not yet.

Who has emigrated from Ukraine? Mostly women and children. According to PESEL (Polish resident indentification number) data, out of the 1.3 million Ukrainians who have obtained that number, 580 thousand are  children (under the age of 18). Assuming that approximately 400-450 thousand of them are under the age of 14 and that the structure of the Ukrainian population in other countries is similar, 1/3 of the refugees, or 2-2.5 million people, are children of that age. This means that 30 to 40% of children under the age of 14 have left Ukraine! To realise the consequences: this generation will be entering the Ukrainian labour market in 4 years, and there will be 3-3.8 million workers within 14 years (assuming no returns but also no further waves of migration). Let us compare the above to the generation leaving the labour market at that time (let’s say those born between 1961 and 1975). During that period, between 687,000 and 843,000 babies were born each year,  with an average of 740,000.  In total, more than 11 million children were born (let us assume that approximately 9-10 million actually live in Ukraine and are professionally active). The difference (loss of employees) can therefore reach 6-7 million in 14 years! The cohorts entering the labour market will amount to 200-250,000 –  to compare, between 330,000 and 400,000 children were born in Poland in the last decade.

The demographic crisis may constitute a fundamental barrier to development. That need not be the case – there are countries and regions that have experienced periods of rapid growth under the conditions of both dramatic population decline and long-term unfavourable demographic trends. After World War II, West Germany experienced a period of impressive development despite huge losses due to the war. Reconstruction has also been successful in many other countries, including Poland – although it must be remembered that the aversion towards migrants and refugees “helped” in that case and supported returns after the war. Things are going to be different now. Additionally, at that time, further development was supported by demographics – the post-war baby boom.

Countries and regions in Central and Eastern Europe struggling with demographic challenges also experienced a period of development after the transition: Hungary and East Germany are good examples. In those cases, however, we are dealing with slow demographic changes rather than a rapid population decline (Hungary), or with internal migrations balanced by the policy of convergence within the country (Germany).

Thus, while there are considerable hopes for the reconstruction of Ukraine, factors such as demographic conditions raise concern for its future – they may cast a shadow over hopes for rapid reconstruction and convergence with Europe afterwards. The role of politicians is to look for solutions that would reduce the consequence of those processes.


Dr hab. Piotr Koryś
Chief Economist of the ZPP

 

See: 06.10.2022 Opinion of the Chief Economist of the ZPP on the importance of demography for the reconstruction of Ukraine

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