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Can Ukraine be rebuilt with its own efforts?

RECONSTRUCTION / During the first year of the war, the damage to Ukrainian homes is estimated at 50 billion dollars, and another 36 billion is damage to other physical infrastructure. How can one kick-start a war-ravaged industry and economy? So far it seems that the EU, the World Bank and the UN are coordinating their own donor systems independently of each other and Ukraine. But what does Norway do?


The reconstruction of Ukraine – the day the war ends – is about bombed-out cities and towns: providing 8 million refugees and 6 million internally displaced people with a place to live. But it means more than rehabilitating apartment blocks from the Stalin era. It is about building new communities and homes.

«Leaving no one behind»

The challenges provide an opportunity to promote better governance, fight corruption, strengthen decentralisation, social inclusion and participation. When new cities, institutions and communities are to be organised, it is also about putting lessons learned from the pandemic into practice. Above all, it means to promote green urban development within a climate adaptation framework. It is about strengthening people's rights, especially marginalized and excluded groups.

In order to reduce future dependence on foreign aid, it is important that Ukraine owns the planning and implementation processes. An interesting model is the post-war German economic miracle. A prerequisite for this was that the war had not wiped out German knowledge. It was, among other things, used to get the building materials industry started based on its own natural resources and labour. Employment that resulted in income for both the people and the nation was created independently of foreign interests.

The Russian invasion has caused widespread destruction of housing, factories, energy, transport systems and other physical, economic and social infrastructure. During the first year of the war, the Kiev School of Economics (KSE) estimates the destruction of housing at 50 billion dollars. Another $36 billion has been reported as damage to other physical infrastructure. The environmental damage to air, water and soil is estimated at 51 billion dollars.

More than 3,5 million inhabitants are left without residential and in addition, it is estimated that 2,4 million have had their homes destroyed to varying degrees. More than 3000 educational institutions have been destroyed, worth $8,6 billion.

More than 700 attacks on medical infrastructure, hospitals and health workers have been recorded.

More than 700 attacks on medical infrastructure, hospitals and health workers have been recorded. Specifically, 218 hospitals and clinics have been destroyed as well as dozens of pharmacies and blood donation centers. Damages in health are estimated at 1,7 billion dollars. The KSE report stipulates that expected costs related to reconstruction after a year of war have reached 411 billion dollars. And overall, Ukraine's gross domestic product fell by 29 percent in 2022, while poverty increased from 5,5 to 24 percent.

Fall in aggregate demand

The housing situation in Ukraine is precarious, but not only because of Russian destruction. For three decades, the authorities have prioritized owners – who today make up 95 per cent of the housing market – and not tenants. The needs of 15 million refugeeare, internally displaced persons and even more newly-poor are not met. They lack purchasing power – the market is not prepared for them.

In terms of economic development, Ukraine is falling further behind its European neighbours. For example, Poland's nominal GDP exceeded 700 billion dollars in 2022. For Ukraine, it fell to 140 billion dollars. The countries have approximately the same population. The main reason behind the economic contraction is the fall in aggregate demand. Domestic due to loss of jobs and income. And exports were reduced because much of the industry had to close, supply lines broke down and maritime communication with the outside world was blocked. This was reinforced by the fact that the pre-war trend had weakened finished goods production – and in 2021 it accounted for only 10,4 per cent of the country's GDP. That is significantly less than developed countries' 17-21 per cent.

One of Ukraine's most important post-war tasks will therefore be to increase finished productproduct-
the tion. The maximum effort from our own building material manufacturers in the reconstruction will contribute to this. According to a recent USAID report, the sector has retained much of its capacity. Assuming regular access to electricity, Ukrainian manufacturers can supply 90 percent of the building materials needed for reconstruction. By using Ukrainian materials, 100 jobs can be preserved, $000 billion in wages secured, and $5,6 billion in taxes and fees collected. The country will therefore need less macroeconomic aid from abroad. And the total reconstruction costs will be less because production in Ukraine is cheaper.

At the same time, there are products that are difficult to obtain. There are no manufacturers of glass windows, aerated and dry concrete mixes. Such production is now being tried to be arranged for.

An important limitation is building materialindustry access to investmentequity capital. Projects larger than 2 million dollars do not receive support from the state-subsidized credit program '5–7–9'. If international financial institutions and bilateral donors signal confidence that the sector can meet the reconstruction needs and increase the framework to $10 million, this could kick-start a war-torn industry and economy.

The status quo ante bellum?

United Nations mantra for reconstruction er building back better. Whether in Ukraine, Turkey, Syria or Nepal, humanitarian actors have a particular responsibility to avoid maintaining existing inequalities from the time before the disasters. In line with another UN slogan do no harm, it is necessary to put the conditions right so that conflicts are neither intensified nor prolonged. Strengthening distribution and participation from excluded groups becomes important. Reconstruction provides an opportunity to promote better governance, fight corruption and strengthen decentralisation, participation and social inclusion. It is about more than rebuilding buildings – mortar and bricks. It concerns people's rights.

The question becomes what kind of ownership the Ukrainian authorities have for the effort?

Today's transaction systems in Ukraine have neither the competence nor the capacity to handle the challenges. The city architect in one of the larger cities, with whom I have contact, points to existing challenges such as registration of companies and employees as well as business agreements and contracts as particularly problematic. Lack of English skills also limits effectiveness. But since 'fresh' foreign capital is available, lawyers always find loopholes – which open doors and lubricate systems. The only thing that can be said about open, transparent competition among national and international bidders, according to my contact, is that it does not exist.

Preparations for EU membership and Zelenskyi's success with 'de-oligarchisation' may open the way for necessary governance reforms. The finanstykonen's grip on power has weakened. Now new fortunes can only be created based on the impending reconstruction. And Zelensky owns the key to cooperation with expanding, Western interests.

Norwegian assistance

The public sector needs reform in Ukraine. For foreign donors, the strategic question is how far one can go in terms of to strengthen the sector without fundamental reform issues being resolved. Which comes first: basic reforms or administrative capabilities? Will a parallel run be possible? Or will a 'free forward', neoliberal chaos follow after the state-centralised, bureaucratic system is swept away?

Little information is available on how Norway will dispose of the 75 billion over 5 years that has been adopted. Half will go to reconstruction and humanitarian support. One would think that via the 'Nansen aid', exciting opportunities would open up for Norwegian players. But according to our development politicians – given the scope of reconstruction and the need for rapid channeling of 'big money' – it is the multilateral development banks, international multi-donor funds and commercial, global consortia that are preferred. Such channeling is also in line with the new Norwegian aid policy where outsourcing is a main principle. Unfortunately, it reflects both limited administrative capacity and a lack of competence when it comes to urban and regional development, which the reconstruction of Ukraine will primarily be about.

In 2023, Norwegian will be increased aid to Ukraine from 5,6 billion in 2022 to 7,5 billion kroner. It will be like this for five years. NORAD will administer civil aid, while the Ministry of Foreign Affairs has strategic, overall responsibility. In NORAD's Numbers that count (2022), two main efforts are mentioned: Through the World Bank, salaries for teachers and educational materials are financed (1 billion), while the European Development Bank supplies energy/gas (2 billion). The question becomes what kind of ownership the Ukrainian authorities have for the effort? Is it based on the authorities' priorities, and is it coordinated in relation to aid from other donor countries and organisations? Does the aid strengthen the capacity of Ukrainian institutions and organizations, or are they bypassed through international NGOs and commercial consortia? So far it seems that the EU, the World Bank and the UN are coordinating their own donor systems independently of each other and Ukraine.

As far as Norway is concerned, the question is whether we have our own, ongoing policy dialogue with the Ukrainian authorities – where Norwegian actors such as local authorities, civil society and research are also at the table. But perhaps most importantly: Where are the Norwegian efforts produced, and under what conditions?

These are questions that need to be answered.


Eric Berg
Erik Berg
Erik Berg worked in the Ministry of Foreign Affairs / NORAD from 1978 to 2013. He now heads Habitat Norway.

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