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CRISTIAN SEGURA

Creating a Military Sector in Ukraine’s Economy: Why worth the investment?

Oleksiy Kushch

6 mins - 23 de Febrero de 2024, 07:00

In the near future, the military-industrial sector may become one of the drivers of economic growth, constantly increasing production and creating jobs.

There are very real prerequisites for this: Ukraine's military budget is almost $40 billion a year, which means that the state will spend almost all of the money on the military-industrial complex and critical infrastructure. 

However, there are not enough budget funds to launch new projects. Moreover, focusing military-industrial programs exclusively on state-owned companies can lead to corruption risks or reduced efficiency of such programs.

That is why it is better to involve effective private businesses in the defense industry alongside systemic state-owned companies. An example of successful arms production by private manufacturers is, for example, Lvivska Bronetekhnika company.

However, in order to activate private business projects, it is necessary to use credit incentives, as business's own funds are clearly not enough to launch projects with a high level of capital investment.     

The topic of Ukraine's transition to the so-called "war economy" has become quite popular now, although before the war, the issue of the country's industrial development was usually not too unpopular both in society and at the level of political elites.

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The "grain and brains" concept of Ukraine's development, which was first presented at the Davos forum before the full-scale war, did not include the development of industry as such.

This situation has not changed even now, as the government has not yet adopted an industrial policy that would define the main vectors of industrial development, including the military-industrial complex.

However, UNCTAD reports show that more than 100 countries, accounting for almost 90% of global GDP, have such policies. They focus either on vertical expansion (building industrial muscle), horizontal development (increasing labor productivity and minimizing the gap with the world's leading countries), or adaptation (adapting the economy to the sixth technological mode).

Ukraine faced the war in an active phase of deindustrialization, symbolized by the conversion of the Arsenal plant in the city center into a fast food restaurant. Whether it is necessary to produce military optics in the very center of the capital is a separate issue, but a symbol is a symbolic unit, not a semantic one.

In short, the core of the economy is industry. The core of industry is machine building. The outer contour of the industrial core is processing/manufacturing. This structure forms the contour of the military-industrial complex. Plus science and vocational education. 

This architectonic makes it clear that any stimulation of the military-industrial complex from the "end", i.e. from the final part of the technological chain, will not work. At best, we will have a "screwdriver" defense industry based on imported components. It will be under constant pressure from the supply chain of imported components.

So the algorithm of actions is very simple: 

vocational education + creation of innovation transfer centers in the industrial cluster (from science and innovators to production) + development of processing and manufacturing industries + development of mechanical engineering = competitive military industry.

So what should Ukraine do during the war, how should it adjust its economy to the specifics of martial law?

First of all, to accumulate revenues from the raw materials and service sectors for the needs of technical education, science, innovation, and incentives for the development of breakthrough industries, including the military-industrial complex. That is, to allow the civilian economy to earn money to finance the necessary branches of the military-industrial complex. 



We need to understand that the military-industrial complex is not built in a vacuum. We need dual-purpose industries: allied industries, components, raw material processing, manufacturing industries, and engineering. This requires public investment at the expense of civilian revenues and private investment under state guarantees, thousands of highly qualified technical specialists, increased labor productivity, generation of inventions, etc.  Relatively speaking, we need a military-industrial cluster that is formed in the environment of industrial development, technical education and science at the expense of civilian revenues and profits from raw material exports.

Mobilization economics or military Keynesianism in the specific conditions of the 21st century is the creation of economic incentives by the state to ensure victory in the war. Systemic conditions and incentives are also about using the creative energy of entrepreneurs, provided that the state has the appropriate policy. Synergy of state incentives and entrepreneurial activity.

In January-September 2023, industrial production grew by 2.4%.

In certain growth items, we can find indicators that camouflage the indicators of the development of the domestic military-industrial complex.

This is the growth of production in 2023: finished metal products - 38%; weapons and ammunition - 76.1%; military vehicles - 97.3%; metalworking - 56.8%; mechanical engineering - 15.3%; electrical engineering, optics - 56.1%; electric motors - 19.6%; wires, cables - 101.2%. 

This means that, despite the stereotypical perception, the Ukrainian industry has restarted with the old industrial and human resources base and is operating at the limit of its capacity (in particular, in the context of insufficient electricity sources).

The direct military production is growing by 70-90%, while indirect industries are growing by 10% to 100%.

All of this does not negate the expediency of building a more efficient military-industrial sector and the industrial core as a whole. But the work here should be systematic and consistent, without agitation, demagoguery and economic fantasy such as the "military economy", the transition to which will only lead to the collapse of the civilian economy, when, on the one hand, workshops will not be built "in every house", and on the other hand, an effective tertiary sector of the economy will be lost, which currently generates jobs, taxes to the budget and GDP.

And one of the sources of this growth may be loans from international financial organizations, whose loans have a chance to become a significant incentive to launch effective private arms production in Ukraine during the war. In particular, loans from the EBRD and the EIB.
 
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