22.06.23 Review

The Great Reconstruction: RAND Corporation outlines a Marshall Plan for Ukraine

A conference dedicated to Ukraine's post-war reconstruction has concluded in London. At its core, this event aimed to discuss plans and prospects for the country's recovery with the international business community, which is expected to play a crucial role subject to guarantees from the United States, the European Union, and international organisations. Analysts from the RAND Corporation have outlined the contours of this ambitious project by analysing the historical experiences of 'reconstruction' in countries following wars and natural disasters. Ukraine is faced with a dual task of rebuilding the country and overcoming the institutional trap it has been in for nearly 30 years of its post-Soviet history. This plan needs to be implemented, even if Kyiv is unable to reclaim the majority of the occupied territories in the near future.

The reconstruction of Ukraine will become the largest international 'reconstruction' project for a country in the past 75 years and will require the participation of numerous international organisations and governments of other states. The success of such a project, which is estimated to need funding in the range of $400-750 billion, demands meticulous preparation, according to analysts at RAND. Their report analyses the lessons learned from major cases of 'recovery and reconstruction,' including that of Japan after World War II, the Marshall Plan, international assistance in the transformation of Central and Eastern Europe in the early 1990s, and the Western Balkans after the Yugoslav War. The report also examines the diverse experiences of overcoming the consequences of natural disasters, taking into account tried and tested mechanisms for emergency assistance and the restoration of the basic livelihoods to local communities.

In most cases of post-war 'reconstruction,' the United States provided the initial capital and security guarantees, while Europe contributed the main financing, reform design, and 'vision of the future' through the promotion of integration processes. The experts from RAND estate that the 'reconstruction' of Ukraine should be based on similar principles: Ukraine should set its priorities, the United States should be responsible for ensuring security (with the participation of European partners), and the EU should handle the plans for economic recovery and integration (with assistance from the United States).

The experts note that the recovery and reconstruction plan should account for any scenarios for the end or temporary suspension of the war. They also emphasise that reforms leading to long-term prosperity have been successful even in divided countries such as post-World War II West Germany and South Korea after the Korean War.

At the same time, clear and long-term security guarantees will play a crucial role in launching the plan, without which the risks for investors would be too high, and some refugees may choose not to return to their regions. One of the factors contributing to the success of the Marshall Plan, experts note, was the simultaneous creation of NATO. In the case of Ukraine, the task does not have a simple solution, and it appears that comprehensive and innovative measures will be required. However, Ukraine must be included in the pan-European security architecture in some way. It will likely require broad support in the establishment of a powerful and efficient Ukrainian army, as well as the development of an international system of security guarantees for Ukraine, notwithstanding the country’s accession to NATO.

A crucial principle in the design of 'reconstruction' is that institutional reforms should precede the key phase of infrastructure restoration. These reforms will pose a significant challenge for the country, given Ukraine's post-Soviet history which was marked by some of the worst economic growth and productivity results in the region, while Kyiv’s attempts at reform have yielded limited results. The two key problems here are corruption and state capture by businesses (oligarchisation). Thus, Ukraine will face a dual task of rebuilding the country and overcoming the institutional trap it has been in for nearly 30 years of its post-Soviet history. However, it is precisely the acute need for reconstruction financing that might serve as the lever to help Ukraine escape this trap.

During the initial stages of financing, it is crucial to establish effective monitoring of the use of financial aid, which will be carried out by a trusted inspector general agreed upon by all parties. If cases of widescale corruption are identified, the funding will be terminated.

Reconstruction will require immense resources. The plan presented by Kyiv itself last year assumes that, by 2032, Ukraine will need to implement 850 projects worth more than $750 billion (essentially envisioning the country's complete reconstruction). In March 2023, the World Bank estimated the cost of 'reconstruction' and recovery to be a more modest sum of $411 billion. Of course, financial assistance must be divided into stages and tasks.

Today, the most pressing need is direct support for Ukraine to meet its current needs. However, in the future, a transition to more complex forms of financing is inevitable, involving primarily private funds in the reconstruction process. To achieve this, guarantee mechanisms and entrepreneurship support funds need to be created in order to attract foreign capital and stimulate local entrepreneurial activity based on market principles. The conference held in London this week marked the first step in this direction.

As a successful example, the RAND analysts point to the establishment of entrepreneurial funds in 1989 to support reforms in Central and Eastern Europe. Ten corporate funds covered 19 countries and accumulated $1.3 billion for loans and equity investments in small and medium-sized enterprises. The political oversight of funding compliance was carried out by the US State Department, while operational oversight was handled by USAID. As a result, the investments proved profitable; the funds reinvested $1.7 billion in net revenue and attracted $6.9 billion in external capital. A significant advantage of these forms of financing is that they stimulate reforms aimed at improving business regulation and the entrepreneurial climate.

The report is sceptical about the idea of using frozen Russian assets to finance the reconstruction. Their expropriation lacks sufficient legal grounds and would undermine trust in the dollar, the euro, and the international banking system. As was revealed during the London conference, the idea has been definitively rejected by the EU. It would be more appropriate to seek compensation from Russia for the damage caused, using the frozen assets as leverage: Moscow should only gain access to the funds upon agreeing to pay reparations. The compensation mechanism itself could be organised as a deduction of a fixed portion of income from oil and gas exports, as was the case with Iraq after its attempted occupation of Kuwait in 1990.

However, the report’s authors emphasise that the most crucial effort needed for the successful launch of Ukraine's 'reconstruction' should come from Ukraine itself. The focal point of this effort should be strengthening the state when it comes to increasing its transparency, solidifying the principles of the rule of law, combating corruption, and creating a favourable business environment.