Ukraine Annual Review 2018: growth against a rising wage floor
A third year of growth, an IT sector that had become a top-tier export earner without any policy support, and a labour market where the binding price was set outside the country.
The year in one paragraph
Ukraine grew for a third consecutive year while its labour costs rose faster than its productivity, saw access to its Azov ports constrained from May, established a specialised anti-corruption court in law, experienced a security incident and a limited period of martial law in November, and agreed a short IMF arrangement in December ahead of an election year.
The four quarters
Q1 — growth; the wage-productivity gap becomes the central problem.
Q2 — Azov port access constrained; anti-corruption court legislated.
Q3 — IT sector among the largest export earners; transit contract expiry approaching.
Q4 — Kerch incident, martial law, short IMF arrangement.
The year's structural feature
Ukrainian wages were being set, at the margin, by employers in Poland.
That is an unusual position for an economy of forty million and it has specific consequences. It puts a floor under labour costs that domestic conditions cannot lower. It makes labour-intensive investment less attractive. And it transmits Polish labour market conditions directly into Ukrainian cost structures with almost no lag.
The corollary is that any Ukrainian business model requiring a large, stable pool of low-cost labour was working on borrowed time from 2017 onward, and the sectors that recognised this early — agriculture through mechanisation, IT through moving up the value chain — are the ones that kept their margins.
What carried into 2019
A presidential election in the spring and a parliamentary election following it. A gas transit contract expiring in December with no replacement. An anti-corruption court due to begin work. A labour market tightening further. And an economy growing steadily on agriculture, IT and EU-facing manufacturing.
The commercial reading
2018 is a useful year for a specific kind of analysis: it shows what a country looks like when the macroeconomic position is sound and the structural position is deteriorating.
Growth was positive, inflation was falling, the currency was stable and reserves were adequate. Underneath, the working-age population was shrinking, wages were outrunning productivity, and the country's most successful sector was absorbing the technical graduates that every other sector needed.
Sound macro figures can coexist with a deteriorating structural position for years. The macro data tells you whether this year will be difficult. The structural data tells you what the next decade looks like, and they frequently point in opposite directions.
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