A Smart Specialization Strategy for Ukraine: Recommendations to Spark an Economic Rebound After the War

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Postwar Ukraine faces a daunting challenge: It must generate and sustain the strong economic growth needed to rebuild its economy, uplift the incomes of its relatively poor population, and successfully compete in the European Union and the broader transatlantic and global economies. This challenge can be met only through a focused effort to maximize Ukraine’s comparative economic advantages, transforming Ukraine from a commodity exporter into a supplier of value-added food, mineral, military, and information technology products. To accomplish this, the Kyiv government will have to make tough economic and political choices about the allocation of scarce resources and the legal reforms necessary to maximize investment. Ukraine’s success will require the US and European governments to support foreign and domestic private investment in Ukraine and to further open their markets to Ukrainian exports.

Wars are often followed by economic rebounds, and Ukraine can expect a postwar economic resurgence. But such growth spurts are not necessarily automatic or sustainable. They depend on decisions made during and immediately after the conflict, not only about the future direction of the economy, but also about correcting the shortcomings of the prewar economic order. Even though planning for post–World War II Europe began in 1943, the Marshall Plan did not begin until 1948, three years after the war had ended. Ukraine cannot afford such delay, and such delay will not be necessary. A strategic environment conducive to such a massive transfer of funds has already arrived: a competitive world order with an imperial Russia as a major player.

China, the United States, and the nations of the European Union all pursue industrial policies to varying degrees. To compete successfully, Ukraine needs its own industrial policy, or what the European Union has called “smart specialization”. This does not mean a return to Soviet-era, woefully unsuccessful central planning. But Ukraine’s future economic prosperity will require doubling down on its competitive strengths and making smart bets on the future direction of the global economy and the role Ukraine can play in it.

Compared with other countries in Central and Eastern Europe, Ukraine is less integrated into global value chains. Given Ukraine’s low-cost labor and potential as a producer of green energy, critical minerals, IT services, and military equipment, it can provide an important link in the friend-shoring and near-shoring of supply chains now advocated by both Washington and Brussels.

But to do so will require significant foreign investment, and this will depend on the potential to export. A USAID survey has shown that 60% of American firms believe that their future investment in Ukraine will hinge on access to EU markets. And access is contingent upon European governments’ willingness to admit Ukraine into the EU’s single market, preferably in an unprecedented rolling fashion that enables foreign and domestic investors in Ukraine to begin to gain some access to the EU market sooner rather than later.

Increasing exports, in turn, will fuel economic recovery, as export earnings are recycled into domestic spending and investment. But Ukraine’s exports as a portion of its economy have been sliding since 2015, when they accounted for over half of the nation’s GDP. In 2022, that export share had fallen to just over a third of GDP.

International competitiveness and the maximization of comparative advantage are means to an end. Ukraine’s economic recovery and successful, rapid integration into the EU will depend on strong, sustained, equitable economic growth that significantly narrows Ukraine’s per capita income gap with the EU. Such a pathway will help to maintain the Ukrainian people’s commitment to a democratic, Western-oriented society. Experience in Spain and Portugal suggests that economic success and knock-on political benefits can best be achieved through competition in the global marketplace bolstered by high levels of investment, diffusion of cutting-edge technologies, and a supportive regulatory and legal environment.

For Ukraine, the benefits of smart specialization are manifold, just as they are for the West. The last thing Europe and the United States need in the decades ahead is a failed economy and a destabilized democracy inside the EU or on its frontier.

Ukraine’s task and, by extension, that of its partners in Europe and the United States, is the just and equitable management of the inevitable social and political challenges posed by the country’s economic transformation. Postwar economic reconstruction is never easy. But Ukraine will not succeed economically if it fails democratically. And opening the European and US markets is the best investment the West can make to ensure the future of Ukrainian democracy.