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Special Project 11:25 02 Aug 2022

Ukrainian economic miracle: how do we get back to economic growth?

We heard many exciting things about post-war Ukraine during and after the International Ukraine Recovery Conference in Lugano. One of them was the Ukrainian economic miracle—long-term annual GDP growth at the level of 7%. How can we even get it?

First, creating conditions to reveal the Ukrainian nation's entrepreneurial potential is necessary. Economics says the main pillars of growth are free commerce, investment, innovation, and reliable financial institutions.

Trade

Trade increases the wealth of people and entire countries by moving goods from ones who value them less to those who appreciate them more. It enables higher levels of production and consumption and allows each of us to specialize more deeply in what we do best cost-effectively. In this way, we will produce a more significant total amount of goods and services than under other circumstances. How does it work? According to the law of comparative advantage, you use time and resources to produce more goods that cost you relatively less to make than others. Trying to do everything yourself would mean spending time and resources on a rather expensive production for you.

Trade also allows you to benefit from economies of scale, launching mass production and production processes to sell your goods to a broader market. It will enable reducing costs per unit of production. Computer programs, movies, and other information products are generally replicated almost for free. So the more people buy them, the lower the price for everyone can be to pay off the production. Just imagine how much our beloved Bayraktar combat drones would cost if Baykar Machine produced them exclusively for the Turkish market.

Українське економічне диво: звідки взятися економічному зростанню?

Therefore, thanks to trade, we consume a much larger set of goods and services than we could produce ourselves. See for yourself by taking a closer look at your purchases after your next trip to the supermarket, and try to imagine how much of what you bought could you make if you were Robinson Crusoe. Although he also used the equipment that the sea washed ashore after the accident of his ship.

However, there is another way of organizing the division of labor—planning. Still, the attempt to manage such a process on a national scale with the help of a centralized planning system ultimately failed because, as theory suggested and practice confirmed, optimal planning on such a scale is technically impossible. Incentives to innovate and improve product quality are lost.

Investments

The next component of economic growth is an investment in human capital and production assets, improvement of technologies, and improvement of economic activity organization. Here everything is as simple as possible: a healthy and skilled worker is more productive, not to mention the industries such as IT or medicine, where knowledge and skills are the principal capital.

With more machinery and better performance, workers can produce more: a truck can carry more goods than a wagon. The effect will only increase if you add better working conditions and various types of personnel training.

Innovations

Innovation allows us to introduce less expensive production methods and invent new products. Thanks to them, we live much better: think about laptops, smartphones, air conditioners, and coffee machines, but rather about how you would be without them.

Українське економічне диво: звідки взятися економічному зростанню?

Innovations don't happen out of thin air; they require, first, entrepreneurs with their unique talent to organize the production of goods and services so that the work of people under their leadership creates more value than it does by itself. The entrepreneurs buy time and effort of hired workers on the labor market (selecting the most productive ones) for the price for which people voluntarily agree to work. Then they sell finished products on the market of goods or services for the price the consumer is willing to pay. So, if they organized everything successfully, then everyone remains in the profit, part of which the entrepreneurs themselves receive as profit.

In addition, it is the entrepreneur who invests funds that they could spend on their consumption and bears all the associated risks—not all investments turn out to be profitable. In the same way, they risk introducing specific innovations or investing in their development. No one knows precisely where the next breakthrough will occur or which product will skyrocket. Therefore, it is necessary to give people the opportunity to test their ideas for their profitability and encourage them to refrain from wasting resources on unproductive projects. After developing innovative technology, it is necessary to secure the support of a sufficient number of investors to finance the project. It requires free markets and, again, investment.

At the same time, the competition encourages entrepreneurs and investors to be responsible for effectively distributing their resources. The final decision regarding the fate of the product or service is made by consumers, voting with their wallets. The government's job is to enable them to do this, not to try to decide which goods or services we should prefer.

Changing the rules of the game

The main question is: how easy is it to engage in trade, start your business or find investors in Ukraine? If the answer is not easy, then we need to change the rules by which our economy operates. We won't get far in this matter without a legal system that protects people and their property and enforces contracts, and settles disputes. Why so? Because our local innovators will look for better opportunities abroad, investors will prefer projects in places where private property and contracts are respected and protected, and 7% economic growth will remain just words.

About the project

The fact that only economists need economic knowledge is one of the greatest myths of our time. We all live in a world of limited resources, so we constantly have to make choices. Working and volunteering in the rear or volunteering at the front, doing homework or playing in the League of Legends, going to study programming or realizing the dream of your band, staying in a secure job or starting your startup, investing in Bitcoin or sports collectible cards, shoot TikTok video or improve your English? In such situations, economic thinking will help you make an informed choice. So let's think economically together!*

*The project is implemented in cooperation with the international educational initiative Economic Fundamentals Initiative with the support of the Atlas Network. The articles are based on the Common Sense Economics Handbook (https://www.econfun.org/uk).

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