Sergey Oboguev (oboguev) wrote,
Sergey Oboguev

Originally posted by prof_yura at Ukraine’s real problem, in four graphs

"To Western observers and analysts, the choice of Europe might seem obvious. But making such a pivot is never easy, and a close look at Ukraine’s economy shows that such a decision may be far harder, and more costly, than most political commentators tend to allow.
. . .
Its main export partner is Russia; it exports to that one nation almost double what it exports to the entire European Union. So any turn away from Russia will have obvious, immediate costs—especially if Russia, as feared, punishes Ukraine by clamping down on imports.

But even that imbalance doesn’t tell the whole story. The deeper problem for Ukraine lies in just what it sells to Russia compared to what it sells to Europe. The crucial issue here is “complexity.” Our research shows that a country grows as its economy diversifies and moves towards more complex products. Simple products like agriculture and natural resources can raise cash, but they use capabilities not easily redeployable in other industries, and thus provide few opportunities for economic diversification.

Unfortunately for Ukraine’s pro-European contingent, it turns out that the products Ukraine currently exports to Russia are much more strategic for its growth prospects than those it exports to Western Europe. Russia buys a diverse range of complex products from Ukraine—steam turbines, for instance—while Western Europe buys relatively simple ones, such as honey.

If Ukraine abruptly turns away from the Russian market—or, more likely, is abruptly shut out—it will be its most advanced and valuable industries that suffer most. The decision to turn toward Western Europe and away from the Russian market isn’t just an ideological choice: It’s a gamble on whether Ukraine’s complex industries would recover and retool in a way that makes them globally competitive. Can a country with political instability and heavy debt have the guts to take such a risk? Will the West be willing to commit the high costs involved in a successful transition?"


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