Lviv, Odesa, Dnipro, Kharkiv, Kyiv: Five Economies That Never Became One Country

The new government’s Program of Action and the anniversary of Ukraine’s independence together offer a historic opening: not merely to take interim stock, but to try to form a vision of our future—however thickly the smoke of war obscures that future for now.

The first thing worth examining is how productive forces are distributed across the regions because we are living on the economic legacy of the Ukrainian SSR. An economy of a new type has never been built here, unless you count the strengthening of the raw-materials component.

The division into oblasts and raions inherited from the Ukrainian SSR can be compared to the corps-and-division structure of the Soviet army: an oblast was an army corps, a raion a division, a reasonably large settlement a regiment, and so on. Everything then was subordinated to the needs of mobilization and to the need to hold peripheral territories in a tight grip through “viceroys” sent out from the center in the shape of district and regional Communist Party secretaries.

That territorial grid was, of course, designed without any regard for the principles of a market economy, and it was never suited to the tasks of decentralization.

Poland’s economic reform, incidentally, began with a sweeping overhaul of the country’s administrative and territorial division. From 1 January 1999, the number of Polish voivodeships fell from 49 to 16, a reduction of more than two thirds. The structure of the division itself—voivodeship, powiat, gmina—was retained.

This strengthened local self-government and left the regions economically stronger.

In Ukraine, the equivalents are oblasts, raions and amalgamated communities, towns or villages.

It was the new administrative division that became the foundation of Poland’s regional economy and the platform for attracting domestic and foreign investment.

Today it is regional technology and industrial clusters that are growing fastest in Poland.

What can be done in Ukraine?

The first part of the reform has already taken place in Ukraine: the 490 old raions have given way to 136 enlarged ones and to a system of territorial communities, or hromadas.

After the war, without altering the overall system of administrative division, oblasts could be given the right to create economic clusters that would multiply the efforts of regional administrations to attract investment and develop the local economy within their territorial-economic areas.

A reform of that complexity has to marry the methodology of the distribution of productive forces (territorial and economic areas) with modern world-systems analysis.

Several territorial and economic areas are identified in Ukraine today. They took shape gradually, under the influence of various factors governing where productive forces were located, and they are now being drawn together within a single Ukrainian historical project.

The distribution of productive forces in Ukraine today is, on the one hand, the “wreckage” of the old territorial-economic areas of the Ukrainian SSR and, on the other—the more or less chaotic formation of several economic “proto-clusters,” each with its own dominant city.

In the west of Ukraine that city is Lviv; in the south, Odesa; in the southeast, Dnipro and Kharkiv; in the center, Kyiv. The country as a whole binds these “regional systems” into a single development space.

This is how Fernand Braudel’s world-systems theory shows itself at our own micro level. Apply the world-systems analysis of another theorist, Immanuel Wallerstein, and it becomes clear that our greatest risk of economic stagnation lies in a young market economy turning into a local “quasi-empire”—one in which territories are held together solely through a dominant centre that collects taxes centrally and redistributes them in a manual mode.

That is precisely the model pursued under Kuchma and Yanukovych, and precisely the model that brought about grave historical consequences.

Decentralization policy ought to lead somewhere entirely different: our currently inefficient economic model should be transformed, step by step, into a system of economic development clusters, as happened in European countries, the United States and even China. This, incidentally, is exactly what did not happen in Russia, where the integrity of the system still rests on the unstable antagonism of “center” and “periphery.”

For development to be sustainable, the distribution of productive forces in Ukraine should be rebuilt around structures better suited to a market economy: taxons—that is, territorial and economic areas, or clusters in modern parlance—grouped on the basis of shared properties and characteristics.

In the Ukrainian SSR, productive forces were organized around three basic territorial-economic areas:

• the Donetsk-Dnipro area, with several large industrial centres (Dnipro, Donetsk and Kharkiv) and three basic industrial proto-clusters (the Azov region, the middle Dnipro and Slobozhanshchyna);
• the Central area (the Kyiv and Lviv industrial clusters);
• the Southern area (the Odesa industrial cluster).

Given the particular features of their economies, these territorial-economic areas call for differentiated economic approaches and for policies tailored to their own needs.

In the Central area, logistics and transport infrastructure has to be developed to carry goods to the EU market. That would make it possible to create innovation and technology clusters, industrial sites and free economic zones in the centre and west of the country.

What is required from the state here is a policy that strengthens the role of medium-sized business.

New centers of innovation-driven growth should emerge in this area, and the role of small and medium-sized business in the overall structure of production should increase markedly.

Transit logistics and infrastructure will develop rapidly here too.

In the Central area, one can also expect a considerable strengthening of entrepreneurial initiative and a more effective transfer of innovation into the real economy.

This would be something close to a notional “Polish model” of growth.

The Donetsk-Dnipro area, by contrast, calls for dirigisme and intelligent protectionism to restore the country’s industrial core and make the extractive industries more efficient.

Big business will objectively retain its role there, and the pool of investment will continue to be assembled with the active involvement of the state and of large financial-industrial groups through public-private partnership.

This might loosely be called a “South Korean” model of development.

The Southern economic area, for its part, offers substantial prospects in tourism and services, and in creating duty-free transit trade zones and trade terminals.

Unlocking the region’s potential calls for the fullest possible deregulation and for credit support for small and medium-sized business. The state’s role here extends no further than infrastructure projects—ports, for instance.

The founding principles for free economic zones and free trade terminals in this territorial-economic area could be borrowed from Spain, where free economic clusters gather around large port cities on the trade routes running from Europe to Asia and Africa.

Such “islands of entrepreneurial freedom” comprise a free customs area, free warehouses, industrial sites, technology parks and specialized trade centres.

Their economic development is run not by officials but by consortia of the companies that make up the core industrial cluster.

That model might loosely be called “Spanish” or “Turkish”.

Cluster-based development makes it possible to set a course towards innovation, to build export potential, to integrate the country into global technology and trade chains and to create jobs.

As for creating economic clusters in future, it makes economic sense to build them on the territorial-economic areas that already exist, within the theory of the distribution of productive forces in Ukraine.

Scholars today identify the following territorial and economic areas of Ukraine, formed during the years of independence:

• Donetsk (Donetsk and Luhansk oblasts)
• Prydniprovia (Dnipropetrovsk and Zaporizhzhia oblasts)
• North-Eastern (Kharkiv, Sumy and Poltava oblasts)
• Central (Cherkasy and Kirovohrad oblasts)
• North-Western (Volyn and Rivne oblasts)
• Podillia (Vinnytsia, Ternopil and Khmelnytskyi oblasts)
• Black Sea (Mykolaiv, Odesa and Kherson oblasts, and Crimea)
• Carpathian (Zakarpattia, Lviv, Ivano-Frankivsk and Chernivtsi oblasts)
• Capital (Kyiv, Zhytomyr and Chernihiv oblasts)

Under such a system, local self-government would be centred on the hromadas, while economic policy—above all the attraction of investment and the quality of the business environment—would sit at the level of the economic clusters.

The creation of an economic cluster should be governed by a dedicated law, and the initiative should come from local self-government, at the level of oblast councils and large cities.

Some of the self-regulatory functions of these clusters should at the same time be delegated to investors’ councils or consortia, leaving the state with nationwide functions and with the task of infrastructure development.

Local communities would then determine the quality not only of roads and hospitals but of the business environment—and with it ordinary people’s standard of living and the number of jobs available.

And central government would answer for security, defense and social protection, rather than for redistributing economic rents and cutting corrupt deals.