Ukraine Annual Review 2017: growth returns and the constraint changes
A second year of recovery, visa-free travel, the association agreement fully in force, and the emergence of a labour shortage that would bind harder than any capital constraint had.
The year in one paragraph
Ukraine halted trade with the non-controlled eastern areas in the first quarter and reorganised its coal and metallurgical supply chains, gained visa-free travel to the Schengen area in June, saw the association agreement enter fully into force in September, passed health, pension and education reforms in the autumn, and ended a second year of growth with labour shortage emerging as the economy's binding constraint.
The four quarters
Q1 — eastern trade halt; coal supply and metallurgical chains severed.
Q2 — visa-free travel; the wage floor becomes European.
Q3 — agreement fully in force; social sector reforms; reform pattern clear at midpoint.
Q4 — second growth year closes; labour constraint widespread.
The constraint changing
This is the year's most important structural development and it is easy to miss.
From 2009 to 2015 the binding constraint on Ukrainian growth was finance: an impaired banking sector, no credit channel, high cost of capital, and firms funding expansion from cash flow alone.
From 2017 the binding constraint became labour: emigration, demographic decline, and a wage floor set in Poland rather than in Ukraine.
The difference matters because the two constraints respond to entirely different things. A credit constraint eases when banks are repaired and rates fall — a process measured in years and responsive to policy. A labour constraint eases only through productivity growth, automation, immigration or demographic change — processes measured in decades and largely outside the reach of economic policy.
What carried into 2018
Growth, an expanding EU export relationship built facility by facility, a labour market tightening every quarter, an unreformed judiciary, and an IMF programme progressing slowly.
The commercial reading
For a company assessing Ukraine from 2017 onward, the single most important adjustment to make is to stop treating labour cost as the country's principal advantage.
It was, from 2009 to about 2016. From 2017 it has been eroding continuously, and any business case built on a large and durable wage gap against central Europe has been working from a premise that stopped being true.
What replaced it as the genuine advantage is more specific: a large, well-educated technical workforce, a strong agricultural cost base, and EU regulatory alignment. Those are narrower and more durable than cheap labour, and they select for different kinds of investment.
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