The COVID-19 crisis has become a challenge for the majority of developing economies in the world, with its most severe results occurring half a year after the lockdown. Therefore, for countries is vitally important to find a new opportunity to stabilize economic development. For sure investment is one of the potentials which can contribute to economic stabilization and growth. Ukraine shall think of available possibilities to attack investors. Industrial parks can be considered among such possibilities. Moreover, the introduction of eco-industrial parks can not only be interesting for investors as a source for business development, but possibilities to make its contribution to improving our environment.
How COVID-19 influenced international trade and how it is influenced by Ukraine’s competitiveness?
According to the National Bank of Ukraine report, in the past six months, Ukraine’s gross domestic product has fallen by 6.5%, and the International Monetary Fund forecasts it to fall by up to 8.2% by the end of 2020. Decreased export returns combined with low energy efficiency and energy intensity create a situation in which Ukraine’s industries face high production costs and low revenues. The economic downturn is further worsened by the growing environmental pollution, which essentially poses a long-term threat.
Although by signing the Ukraine-European Union Association Agreement and entering the World Trade Organization we have enhanced the volume of our trade with the world, the structure of our economy has not changed much. Our world exporter index places us at the 49th position worldwide, and our exports account for a little over 1% of the EU’s trade balance. The trade balance deficit issue occurs from the low complexity of export products compared to our neighbors. Our country places 85th in the World Economic Forum’s Global Competitiveness Report, while the similar ranks for Poland, Lithuania, and Turkey in 2019 were 37th, 39th, and 61st respectively.
Another factor that affects the competitiveness of our goods is the high energy intensity of production. Ukraine’s energy consumption index ranks 73rd in the global WEF Energy Architecture Performance Index (EAPI), the weakest spots being dependent on imported fuels, slow GDP growth, and high CO2 emissions. Consuming about 92 million tons of oil equivalent of energy (toe) annually, Ukraine has an energy intensity index of 0.27 toe/$1,000, while in Italy, Germany, France, Poland, Slovakia, and the Czech Republic this figure ranges between 0.08 and 0.13 (at purchasing power parity). The competitiveness of our goods can be further lowered once the EU imposes a carbon tax on production that damages the environment as a part of their Zero Carbon Strategy.
As a result, Ukraine ranks 44th in the Economic Complexity Index (ECI) ranking, and, while not being the worst, our position hasn’t changed in a decade. We are consistently failing to diversify our exports and produce high-value-added goods and services that could meet foreign demand and bring high returns back home. As a result, its economy is projected to grow slowly. The Growth Lab’s 2028 Growth Projections foresee growth in Ukraine of 2.3% annually over the coming decade, ranking in the bottom half of countries globally.
In terms of economic development, the COVID-19 will also greatly influence the foreign direct investment flows in the world, as well as in Ukraine. According to the United Nations conference on Trade and Development World Investment Report, 2020 FDI flows will decrease by up to 40% in 2020, from their 2019 value of $1.54 trillion. FDI in Ukraine decreased by $1.5 million in the first quarter of 2020. Ukraine counted on FDI as a possibility to approach its strategic economic targets, but under such circumstances, projections will not be fulfilled.
Therefore, Ukraine will need a prudent macroeconomic policy to address critical investment bottlenecks and provide an important signal to investors regarding new possibilities. Strengthening the framework for industrial parks can be a quick win point for Ukraine to attract investors’ attention for consideration of Ukraine as an investment target.
How industrial parks can stipulate industry transformation?
Many developing countries have proven to successfully transition out of the past economic crises through embracing the phenomenon of the industrial parks – the modern industrial clusters for conducting joint production activity. Such parks combine human resources, education, infrastructure, territorial development, and have been one of the most effective tools for attracting investments. Indeed, by providing guarantees and necessary regulation for foreign business, industrial parks often serve as entry points for investors into the economy and catalyze economic growth.
The existing foreign systems of industrial parks foster economic growth, which in turn alleviates poverty, creates jobs, and raises living standards in the regions. In less than a decade, Turkey has turned from light industry and agricultural exporter into one of the regional industrial giants; in 2013, the country fully paid back to the IMF. Poland has also utilized the IP scheme: in just 25 years, its industrial parks have brought more than 25 billion euros of investments, created more than 300,000 modern jobs, and allowed Poland to more than triple its exports.
In Ukraine, the idea of industrial parks has been discussed since the mid-2000s. Surprisingly, nowadays our country has 43 industrial parks, of which 60% (26) are municipal, 33% (14) are private, 5% (2) are mixed, and 2% (1) are state-owned. If worked properly, the parks could bring our economy billions of dollars and create hundreds of thousands of workplaces annually. However, only 10 Ukrainian parks are operational, and the figures are much more modest: in 6 years of operation, IP’s have created just over 400 jobs, and the whole concept of industrial parks remains rather unpopular.
At the moment, Ukrainian legislation on the industrial parks is very limiting and incomplete. The existing parks lack preferences and simply wise management. It is necessary to reform the law according to the latest European trends and provide sufficient conditions for the parks to work. We should go beyond just developing new technologies and start organizing production more effectively, developing our know-how. It will then be possible to attract investments by creating tools that would stimulate the development of depressed regions and industries as well as promote sustainable development.
To the Green Deal through decoupling
Nowadays it is no longer enough to be a productive or profitable business – modern enterprise must aim to protect human societies and the environment to ensure a safe and stable future for the next generations. Yes, Ukraine still should aim to generate high added value, but one of doing so with environmental benefit is to decouple GDP growth from the increasing use of natural resources.
This is the goal that eco-industrial parks execute. According to the UN Industrial Development Organization, “To become an eco-industrial park, an industrial park must demonstrate higher standards of environmental and social responsibility, resource-efficient production methods and reuse of waste energy and waste materials.”. Eco-industrial parks are organized in a synergistic manner, which promotes circular economy: waste that one business produces that could be thrown on landfills might be a precious resource for another company, and in eco-industrial park markets for by-products thrive. Responsible use of resources allows the business to save money on materials, energy, and water. Hence, the principles of decoupling must be documented in Ukraine’s legislation to build modern-day industrial parks.
Among other benefits, eco-industrial parks will help Ukraine resolve issues with the abandoned mining areas, which will occur as the closure of the subsidized mines will happen shortly. We need to retrain miners and transform the underdeveloped regions, and in this process, we could follow the successful examples of Germany or the UK.
Ukraine has already successful cases. Bila Tserkva Industrial Park has become a participant of the Global Eco-Industrial Parks Programme (GEIPP) in Ukraine. It should be noted that the purpose of the GEIPP is to “demonstrate the viability and benefits of Eco-Industrial Park approaches in scaling up resource productivity and improving economic, environmental and social performances of businesses and thereby contribute to inclusive and sustainable industrial development in the participating developing and transition economies.”
Therefore, it is eco-industrial parks that we should orient our economy’s transformation towards. In particular, the Law needs an amendment to include the idea of achieving qualitative results first, then focus on finance. It should be clearly introduced incentives for such industrial parks in the current legal framework in order to demonstrate government’s commitment to arrack investment not only for economic purpose, but to ensure environment improvement. The existence of eco-industrial parks in Ukraine would, first and foremost, enable economic development of regions with extremely low living standards or high levels of unemployment. Besides, they would introduce new, innovative, and energy-saving technologies, create green jobs, help Ukraine achieve sustainable development, and protect our environment. Finally, building eco-industrial parks would allow us to approach the implementation of the Green Deal and hence strengthen its links with the EU.
The Ukrainian government therefore should find its anti-crisis movement plan on achieving a sustainable economic breakthrough. One of the feasible entry points is reforming the existing industrial parks and improving legislation for the new ones. Moreover, to give Ukraine a chance to stand in one line with the most progressive European countries in the strive for sustainable economic growth, our government should introduce effective green policies and attract green investments that will promote energy efficiency and low carbon development. Finally, the government should raise awareness about the benefits of eco-industrial development, ensure good planning, establish information network systems, form strong leadership, and foster exchange between stakeholders.
Nataliya Katser-Buchkovska is co-founder of Ukrainian Sustainable Fund and a member of the Verkhovna Rada, Ukraine’s parliament from 2014-2019.
