Upgrading existing strengths

In the metals sector, production increases and competitiveness depend heavily on investments, most importantly in energy saving technologies. Ukraine’s metallurgical sector is largely characterized by an outdated and inefficient production model inherited from the Soviet Union. Investments in newer production technologies could significantly decrease energy costs and increase productivity.

Technology upgrades would also allow Ukrainian steelmakers to move from semi-finished to higher value added products and thereby tap into less volatile and more profitable market segments. As one industry insider points out, “in its current composition, Ukraine’s steel industry effectively competes with scrap metals on global markets”. According to some estimates, labour productivity in Ukraine’s steel sector is more than 80% lower than that of the United States. Hence, moving up the value chain and increasing productivity is an imperative for remaining competitive.

The agri-food sector faces a similar challenge. The country’s ability to fully leverage its unique endowments is limited by low productivity, certification challenges and an opaque regulatory environment. Restrictive laws of land ownership and past experiences with privatization of state assets do not inspire investor confidence and, ultimately, help shield politically connected businesses from genuine competition. Underperformance of the agri-food sector is, in large part, self-imposed and could be overcome through limited but concerted policy efforts. Significant investments are necessary to improve transport infrastructure and storage, which are crucial for modern food supply chains.

Across all these sectors, it is evident that without unlocking significant new investments in infrastructure, machinery, and technology, as well as retooling the education system to help grow Ukraine’s talent pool and sustain technology adoption, the country will struggle to remain competitive and generate long-term prosperity. FDI and partnerships with multinational firms that enable technological transfers are crucial for this. But deficiencies in the rule of law as well as weak intellectual property rights protection deterred many potential investors in technology intensive sectors. As one industry leader said, “We didn’t perceive this market as a level playing field and face high uncertainties for long-term planning.”

Other investors in technology-intensive sectors maintain that access to skilled labour is an increasing barrier to their operations in Ukraine, partly because many skilled professionals are leaving the country. What connects all these challenges is the imperative to strengthen institutions and maximize use of the country’s physical and human assets. As one executive put it, “The most important thing is clarity. The country will need to start looking strategically at its economic development and it cannot continue changing policies every six months.” In other words, it comes down to reliable institutions that effectively steer public policies towards long-term goals and generate the requisite levels of trust within society as well as the business and investor community.

As one business leader argued, “We lacked any sense of a service-oriented public administration and understanding of the government’s role in fostering value-creation in the economy to the benefit of everyone.” As a consequence, “there was an utter lack of trust between the government, businesses and the society and this affected the economy.”