No Marshall Plan For Ukraine
The war between Russia and Ukraine is far from over. Russia, already heavily sanctioned by the West, seems committed to get what it can of the eastern part of Ukraine even if that entails a more protracted conflict than they initially expected. Ukraine, backed heavily by the U.S. and Western European nations, still seems uninterested in finding a diplomatic solution to the crisis, despite Russia’s having offered President Volodymyr Zelensky and Ukrainian leadership several outs in the first two months of fighting. For its part, NPR is already looking past the end of hostilities between Russia and Ukraine to investigate what it would take to rebuild Ukraine in the war’s aftermath as though a Ukrainian victory is a fait accompli.
Certainly, the war has already exacted significant human and economic costs. Ukraine’s infrastructure has been decimated. A little over a month ago, in late April, Zelensky claimed that 1,500 educational facilities had been destroyed or damaged, as well as 350 medical outfits, 1,500 miles of road, and 300 bridges. The Ukrainian president added that around 32 million square meters of housing had been compromised by the war. Current projections from the World Bank suggest that the Ukrainian economy will contract by nearly half this year.
But how much would it cost to rebuild Ukraine, and who would foot the bill? It’s an important question. To get some answers, NPR spoke to two economists from my alma mater, the University of California, Berkeley: Yuriy Gorodnichenko and Barry Eichengreen.
Gorodnichenko, a Ukrainian-born economist who got his Ph.D. in Economics from the University of Michigan, has served as the Quantedge Presidential Chair in Economics at U.C. Berkeley in 2018. He isn’t a particularly well-known professor by economics undergrads around campus. He mostly sticks to his research, which focuses on macroeconomics and development economics. Already, Gorodnichenko has co-authored a paper, published by the Center for Economic and Policy Research, that lays out a roadmap for reconstructing Ukraine.
Eichengreen, on the other hand, is a living legend among Berkeley students. Almost every student whose major is even tangentially related to economics will read Eichengreen at some point during their four years as an undergrad. I recall many late-night conversations with economics-minded fraternity brothers about Globalizing Capital and Golden Fetters.
“All of us see images of total destruction in Ukraine. You look at big cities like Kharkiv, Mariupol, and barely any building is not damaged,” Gorodnichenko told NPR. On estimating the cost of repairing the destruction, Gorodnichenko said, “One way to look at this is to do an inventory of damaged bridges, buildings, and so on, and calculate the cost of replacement. That would be easily somewhere between $100 and $200 billion.”
The total could get much higher than $200 billion, however, which is already a pretty penny—$15 billion more than the U.S. Department of Education’s projected budget for 2023. A study from the Kyiv School of Economics estimated that Ukraine’s infrastructure suffers about $4.5 billion of war-related damage every week. The researchers estimate that losses could total about $600 billion.
Gorodnichenko recognized that the damages could well exceed $200 billion. “We can also look at other measures and similar efforts that were done in the past. For example, what was the cost of reconstructing Iraq or Afghanistan? If you look at the size of these countries, the level of damage, and scale it to the Ukrainian case, you come to somewhere between $500 billion, maybe $1 trillion,” he told NPR.
Rebuilding Ukraine, according to Gorodnichenko, would offer a unique opportunity to propel the country into modernity. Ukraine, he said, had one of the highest levels of energy consumption per unit of GDP in the world, which is “very bad for the climate.”
“We should really rebuild Ukraine up to modern standards,” Gorodnichenko told NPR. “And this is going to be good not only in terms of climate change,” he added, “but it also makes Ukraine less vulnerable to future blackmail from Russia.”
“You can kill two birds with one stone.”
But who is wielding the sling?
In the best-case scenario, Gorodnichenko said the international community could pressure Russia to fund the reconstruction of Ukraine, even if the Russians don’t agree to paying reparations. Gorodnichenko used the example of Iraq, which paid about $50 billion over 30 years to Kuwait via increased energy taxes after it invaded the oil-rich nation in 1990. Members of the international community, he argued, could band together and tax Russian energy, with some of those tax dollars going towards rebuilding Ukraine’s infrastructure.
Even Gorodnichenko seems to believe that the prospect of Russia and its enablers paying for most of the Ukrainian rebuild is a pipe dream. Nevertheless, both Gorodnichenko and Eichengreen see an appetite in the West to front most of the costs for rebuilding Ukraine, given the amount of aid the U.S. and allied nations have already provided to the Ukrainians.
The E.U. recently announced it would loan Ukraine 9 billion euros, and claimed it would create a platform for countries to donate to Ukraine’s reconstruction plan “drawn up and implemented by Ukraine, with administrative capacity support and technical assistance by the E.U.”
The U.S. has committed about $54 billion to Ukraine as it attempts to stave off the Russian invasion. The aid bonanza began the day after the Russians invaded Ukraine, when Biden authorized $350 million in military aid to the Ukrainians. From mid-March to early April, the U.S. committed to sending three $800 million aid packages to the Ukrainians, supplying them with Javelins, Howitzers, and other military equipment. The U.S. also sent a series of smaller aid packages, the largest of which amounted to $200 million, between the three installments of $800 million. Of course, these payments were followed by the massive $40 billion aid package.
About 40 percent of U.S. aid thus far has been devoted to bolstering Ukraine’s capacity to wage conventional war against the Russians. It seems the U.S. approach to Ukraine is to use American taxpayer dollars to fund Ukraine’ destruction, before forking over billions more for its reconstruction.
The two Berkeley economists, however, see little problem with this, despite their concerns about the use of loans. “A country that is destroyed by a big war is not going to have the capacity to repay loans anytime soon,” Gorodnichenko told NPR. Eichengreen pointed out that in 2020, the E.U. borrowed 750 billion euros to create a recovery fund for the Covid-19 pandemic. He argued that the E.U. could do something similar with Ukraine, except in the form of grants.
Grants were key to the success of the Marshall Plan, the U.S.’s massive effort to rebuild the European economy in the wake of World War II. America provided 17 European countries over $13 billion in economic aid ($150 billion in current dollar terms), overwhelmingly in the form of grants.
Though Eichengreen admitted to NPR that it wasn’t an apples-to-apples comparison, the U.S. experience in assisting Europe’s rebuild after World War II could provide powerful lessons in the coming effort to rebuild Ukraine.
But many of the beneficiaries of Marshall Plan aid were already well on their way to recovery. Though Europe’s agricultural and industrial production still lagged behind pre-war levels by 1948, it had made significant economic gains relative to the destruction caused by World War II. Some of the most war-torn countries, like Britain, France, and the Netherlands, had already seen their economies return to pre-war levels of production by 1947. These three nations nevertheless were some of the largest recipients of Marshall Plan aid. And though it was a massive undertaking for its time, Marshall Plan aid accounted for less than 3 percent of the total national incomes of the 17 countries that received it.
This would not, of course, be the case with Ukraine. The figures being thrown around for Ukraine’s reconstruction could exceed, if not double, the country’s gross national income in 2020. And while the Marshall Plan may get too much credit for the revival of the European economy, it was at least more modest and strategically justifiable than any of the floated efforts to not only rebuild but modernize Ukraine’s economy if the Ukrainians prevail—which, again, is a very big “if.”
When the U.S. enacted the Marshall Plan, the world had just seen two massive wars break out on the European continent in short succession. The Soviet Union, even though it was also in a period of economic recovery, still loomed large in the East, and had territorial ambitions of its own. If America were called to fight another war on the Eurasian landmass, the countries that could call it into service ought to have the capacity to muster their own defense, or so the thinking went.
These conditions are not analogous to the situation in Ukraine. The country is of little strategic importance to the United States, beyond its being the breadbasket of Europe. Restoring Ukraine’s agricultural capacity seems to be the most worthwhile initiative America and its allies could undertake to rebuild Ukraine, but forking over massive sums to rebuild and modernize the entire Ukrainian economy wouldn’t just be Western altruism. It would amount to rubbing the Russians’ nose in their defeat. And where American dollars go, its institutions follow. Don’t be surprised if, after U.S. taxpayer dollars prop the Ukrainian economy back on its feet, hawkish politicians argue Ukrainian membership in NATO is necessary to defend America’s investment.
Lather, rinse, repeat.