Introduction

Even as Ukraine fights for its survival, it faces a historic opportunity to remake itself and reshape Europe in the process. Smashed by war, Ukraine needs significant reconstruction to rebuild its economy, restart critical services, and reattract its refugees. But reconstruction is more than just rebuilding roads and factories—it can help Ukraine leapfrog several stages of economic and governmental development and reemerge a stronger country that is part of a stronger Europe.

Across the world, countries and donor organizations recognize the opportunity to help Ukraine with its reconstruction.¹ The value of reconstruction is clear, meaning that the most pressing questions are what is to be rebuilt and how. At times, the governance of reconstruction efforts can be more important to overall success than the specific projects undertaken. Luckily, organizations can draw important lessons from reconstruction efforts of the past. The Marshall Plan in Europe as well as the reconstruction of Japan, Kosovo, Afghanistan, Iraq, and others offer insights from their many successes and failures. From these historical examples, we have drawn three key lessons for the governance of any reconstruction efforts in Ukraine:

1. Enable Ukraine’s human capital
2. Pursue projects in a layered rather than sequential approach
3. Create a central institution for governance

With these principles in mind, the international donor community can coordinate resources and efforts more effectively and help Ukraine achieve not just a victory on the battlefield but a lasting victory in the peace to come.

Success depends on the “what” and “how” of reconstruction

The sheer scale of the destruction in Ukraine underscores not just the importance of reconstruction but also how difficult and wide-ranging it will be. At the Ukraine Recovery Conference in Lugano, Switzerland, on July 4 and 5, 2022, Ukraine’s Prime Minister, Denys Shmyhal, estimated that a 10-year reconstruction effort would cost around US$750 billion.² Most estimates from credible sources confirm Shmyhal’s analysis, with some exceeding it; European Investment Bank (EIB) president, Werner Hoyer, suggested that costs would exceed €1 trillion or US$1.1 trillion.³ With each passing day, the cost of reconstruction climbs.

With needs for that funding scattered across every aspect of Ukrainian society, what reconstruction projects are needed and how those projects are to be administered are far from academic questions.

The “what”—Reconstruction should cover all elements of economic development

It bears repeating: The reconstruction of Ukraine must go beyond the heavy task of rebuilding and refurbishing damaged physical infrastructure; the efforts, which should begin immediately, need to address all elements of economic development. Organizations, such as the Ukrainian government, humanitarian groups, and global financial institutions, have been providing, and will continue to provide immediate assistance. The European Bank for Reconstruction and Development (EBRD) has established a recovery fund that currently holds over US$650 million, all in the form of grants. The fund’s purpose is to stabilize and protect private sector growth, and provide humanitarian support, particularly food security. Additionally, in May, the Biden administration committed US$7.5 billion to Ukraine’s Ministry of Finance to help pay health worker and educator salaries, of which US$1.3 billion has been sent.⁴

For the assistance to move beyond this immediate (and necessary) help, it is important to get a detailed picture of the scope and scale of the costs incurred from the war. We have broken down the costs of likely reconstruction efforts into five categories policymakers should target. These are as follows:

• Physical infrastructure. As of August 22, 2022, Ukraine’s Ministry of Economy and the Kyiv School of Economics (KSE) estimated that the war had caused physical infrastructure damage amounting to US$113.5 billion.⁵ Rebuilding it is essential so that the housing, education, and employment opportunities needed for reconstruction can grow. It also offers an opportunity to reexamine urban planning with an eye not just toward efficiency or economic growth, but toward the flourishing of communities.
• Education and workforce. More than 2,000 educational institutions have been damaged across Ukraine.⁶ Prior to the war, Ukraine’s human capital was a key competitive advantage. Rebuilding these institutions and creating opportunities for workers could be critical to attracting returning refugees and recapturing this economic advantage.
• Financial sector. The loss of a key trading partner in Russia has damaged the Ukrainian financial sector. With issuer credit ratings of CCC+ by S&P Global Ratings and CC by Fitch Ratings, Ukraine may struggle to raise funds on its own.⁷ It needs capital investment to strengthen its economy and allow for postwar economic growth.
• Government services and revenue. Not only does war disrupt trade, resulting in reduced excise revenue, but it also hampers collection of other taxes. The World Bank expects Ukraine’s budget deficit to grow US$5 billion each month until the war’s end. Kristalina Georgieva, the managing director of the International Monetary Fund (IMF), summarized the situation: “In the immediate future, Ukraine would have dramatically reduced revenues, and even after the war would be faced with very high bills related to reconstruction.”⁸
• Agriculture. Ukraine’s agriculture sector accounted for 11% of the country’s GDP, almost 20% of its labor force, and nearly 40% of total exports prior to Russia’s invasion.⁹ But in June 2022, Ukraine’s grain exports were down 44% compared with June 2021.¹⁰ Damage to farmland, unharvested crops, storage facilities, and more must be addressed if Ukraine’s agriculture sector is to recover to its former state.

While these categories do not cover everything Ukraine has lost in the war, they do provide a clear starting point for systematic reconstruction planning, as each of them is a cornerstone of Ukraine’s economy. It’s difficult to overstate the importance of identifying critical areas that require attention throughout, and particularly, in the early stages of the reconstruction process. Past reconstruction efforts have shown the risk associated with failing to identify these areas, which differ from country to country. In Kosovo, for instance, inadequate macroeconomic management and the failure to open regional trade opportunities resulted in poor economic performance of the domestic economy outside of donor-related activities, low job creation, and a dearth of economic opportunity for Kosovars.¹¹ If structured and managed effectively, this clarity of focus on the key areas mentioned above could encourage investment from donor organizations and other funding sources, which would help stabilize Ukraine’s economy and set it on a faster path to recovery.

The “how”—Success rests on governance

Lessons from previous reconstruction efforts show that the ultimate success of interventions in each economic development area depends largely on how those interventions are designed and administered. Choices made in three segments of program governance are particularly important: program structure, donors and administration, and sustainment through anti-corruption management. To prevent further catastrophe and help Ukraine achieve long-term economic stability, an effective structure behind reconstruction should be established as early as possible.

Program structure. The first determination in program structure is the overall structure of the reconstruction program. Historically, most programs have been either multilateral or led by a single donor. The success of a reconstruction effort is only partially related to whether one donor manages reconstruction or several. The US-led efforts in postwar Germany and Japan are generally viewed as effective, while the US-led role in Iraq has received more ambiguous evaluations.¹² The multilateral effort in Bosnia is not considered to have been well-coordinated, while multilateral efforts in Kosovo and Afghanistan generally have been judged to have better results.¹³

With significant interest already from the European Union (EU), the United States, and the government of Ukraine, reconstruction of Ukraine will almost certainly be multilateral. However, significant choices in program structure remain. For example, will the multilateral effort be led by a chief donor, will it be coordinated by an existing international organization such as the United Nations, or will a purpose-built multilateral organization be required?

Donors and administration. Donor organizations’ reconstruction efforts, funding, and related aid activities can only go so far. Critical to success is the effective management and administration of donor organizations’ contributions. Donor investment should come largely in the form of grants rather than loans. Kristalina Georgieva, the managing director of the IMF, argued for this at the IMF and World Bank spring meetings: “In the immediate future, Ukraine would have dramatically reduced revenues, and even after the war would be faced with very high bills related to reconstruction. So, piling more debt on top of the one they already carry ... it’s just not wise.”¹⁴ Case in point: Grants made up around 90% of Marshall Plan investments.¹⁵ The estimated US$1.1 trillion in Ukraine’s cost in damages should be the target floor, as a higher percentage of loans allows for the possibility of defaults and, thus, a drag on future growth.

Regardless of fund form, it is important to avoid donor fatigue. US Agency for International Development (USAID), the EU, the European Bank for Reconstruction and Development, and others, have shown signs—both verbal and tangible—that they are willing to contribute now, but there is always the possibility of this momentum slowing. The sooner the institutions of economic governance are reestablished and once again fully operational, the sooner Ukraine can justify, explain, and seek additional donor funds. Transparency is critical. The closer the budget and financial reporting of the recipient state is to international standards, the easier it will be to make its case for needed financial assistance to steering committees consisting of donor representatives.

Anti-corruption and fraud prevention. Once an administrative agency is established, the focus should be on how to acquire the largest investment, how to sustain the inflow of funds over the long term, and how to ensure they are applied in the most efficient manner. The reconstruction administration should include a team assigned to sustainability and governance structures to ensure transparency for funding use.

Previous postwar efforts have demonstrated that fraud prevention and anti-corruption can simultaneously attract continued investment and create a pathway of reform toward established societal goals.¹⁶ Given that conflicts strain states’ resources, the bulk of aid is often frontloaded. For example, Afghanistan’s highest USAID spend was US$2.5 billion in 2010 and US$2.1 billion in 2012; it has since tapered off to US$400 million in 2022.¹⁷ Ukraine’s resources will likely be thinnest in early stages, and it is expected to need the most aid early on.¹⁸

Combining a large influx of aid early during reconstruction with governance structures offers a brief window of opportunity to make fundamental changes. This is exactly what happened to European manufacturing in the 1940s. After falling behind global trends, investments and, importantly, skill-sharing from trade unions under the Marshall Plan allowed European manufacturers to leapfrog into the era of high-throughput manufacturing.¹⁹ The same opportunity exists today in Ukraine. Investments and knowledge-sharing can help Ukraine create the digital infrastructure needed to create both a cutting-edge economy and more effective and efficient government services.

Kosovo experienced a similar leapfrog moment for reform during its reconstruction. In the early years after the country’s conflict, reconstruction focused not only on physical capital (particularly the housing stock), but also on building much of the country’s legal and institutional foundation for a market economy. New legislation was enacted on company law, contracts, pledges, procurement, and a host of other areas. A modern tax system emphasizing indirect taxes (VAT and customs) rather than labor-based taxes was created. A modern pension system with personally funded retirement accounts was established, and new institutions related to economic governance were created. Budget and macroanalysis units in the ministry of finance and tax and customs administrations were created along with a central bank and modern private commercial banks.²⁰

Below are some of the areas Ukraine needs to address:

• Financial stability will be a major issue, as it was in the reconstruction efforts in Kosovo, Afghanistan, and Iraq. In Kosovo, the IMF helped implement the adoption of the German Deutsche Mark (later the Euro) as the new currency—eschewing the use of a weak national currency.²¹ This effectively reduced inflation-induced price increases to temporary supply shocks and stabilized interest rates almost immediately. Both Afghanistan and Iraq retained their currencies but required a complete revamping of monetary policy interventions.²² In both cases, the IMF set up and advised the central bank. This served to almost immediately stabilize the currencies.
• Banking sector reform is a program already in existence.²³ But, it is likely that USAID and the Zelensky government will want to start anew. Over 50 banks failed in Ukraine between 2012–2019, calling for a massive restructuring.²⁴ The West has done this extensively in Ukraine in the late 1990s as well as elsewhere. Growing Ukraine’s credibility in this sector will help limit donor fatigue.

• Monetary (central banking) reform will likely be the province of the IMF, but new systems of financial control and oversight are expected to be necessary. Monetary reform will likely entail large system purchases and technical assistance with operating those systems. The IMF may be too small to handle those projects and could ask USAID and/or the EU to provide contract support to help implement the programs agreed upon with the Government of Ukraine. The Central Bank of Ukraine is sophisticated and may design its own assistance package—but USAID or the EU will likely be asked to partially fund it.
• State-owned enterprise and privatization is an important part of domestic revenue reforms. USAID and other donors already have programs dealing with these issues. As the economy recovers, they should look for additional opportunities to encourage competition in key industries.
• Anti-corruption is another area that requires focus. Even before the war, Ukraine struggled with perceptions of corruption, a situation likely not aided by the confusion and lawlessness of war. But transparency into where and how funds are spent is critical for donors to see the impact of their funding. Donors are likely to insist on internal controls and cost reviews as baseline anti-corruption and fraud prevention measures. In fact, the European Commission recently proposed that the Rebuild Ukraine facility embed funds in the EU budget to ensure transparency and emphasize anti-corruption and rule of law efforts.²⁵

Governance lessons from history

The size of the reconstruction effort and number of moving parts in governance can seem daunting. Luckily, the United States, EU, and other potential donors have decades of experience to draw on. Lessons learnt from successes and failures in reconstruction efforts in Europe, Japan, Kosovo, East Timor, Iraq, Afghanistan, and elsewhere can help accelerate reconstruction efforts in Ukraine. Three considerations stand out:

1. Enable Ukraine’s human capital

The war has deprived Ukraine and the world of the country’s most valuable natural resource—not wheat, coal, oil, natural gas, nor metals, but an educated labor force and an ambitious young population. Ukraine has a highly skilled workforce—70% of adults have at least a secondary degree.²⁶

With millions of Ukrainians exiting the workforce either to fight directly or to seek refuge in neighboring countries, the mass exodus of people from the workforce—and when and how the issue is resolved—will have major implications on the nation’s economic growth. It is difficult to find a precise count of Ukrainians who have already returned since the onset of the war, but in April, Ukraine’s border force reported that 30,000 people were crossing back into the country each day.²⁷ Encouraging that return and creating enough housing, education, and work opportunities for those who do return will be a critical first step in reconstruction.

But lessons from history show that special attention should be paid to how the Ukrainian workforce is rebuilt. Reconstruction efforts can often create unintended incentives that pull against the goals of reconstruction. For example, in 1979, only 43 doctors remained in Cambodia, creating an emergency need to attract new doctors.²⁸ One solution was to offer expedited training to nurses, midwives, and others already in the medical field. While this did develop many badly needed doctors, it also deprived nursing and midwifery field of senior leaders, setting back those professions while still not fully improving quality of care.

Organizations supporting Ukraine’s reconstruction will need to find sustainable methods for the long term that will accelerate the return of a skilled labor force to Ukraine. The reconstruction’s administering agency should help encourage foreign firms with the ability to hire Ukrainians to do so.

Encouraging the return of skilled workers is important for more than just economic development; it is important for the reconstruction effort itself. A highly skilled workforce with intimate knowledge of the needs of the country, Ukrainians themselves are in a perfect position to play central roles in the administration of reconstruction efforts. So, in addition to encouraging the return of refugees and the reintegration of soldiers into the workforce, reconstruction organizations should ensure that they themselves are creating opportunities to attract Ukrainian talent into their ranks.

2. Pursue projects in a layered rather than sequential way

With so many aspects of reconstruction needing attention, it can be tempting to try to order them in a sequential fashion—first security, then economy, and so on. However, this belies the fact that all aspects of reconstruction are interdependent. Economic recovery depends on availability of skilled workers, but workers will return only if they have adequate and safe housing; housing projects require infrastructure to move construction materials, and improvements to infrastructure can only begin when funding is available, and so on.

As a result, reconstruction projects should be layered together to build effects rather than ordered sequentially. Reconstruction efforts in East Timor could provide a successful model. At the beginning of the postconflict period, the number of staff positions in state organizations was greatly reduced while other efforts focused on creating jobs in the private sector.²⁹ By reducing employment costs for government and creating more revenue-generating positions in commercial industry, reconstruction helped lay the foundation for a sustainable fiscal policy. Low tax rates, conducive to economic growth, yielded sufficient revenues to cover a portion of state expenditure. Budget deficits were covered with World Bank–managed donor trust funds, until future oil revenues came onstream. These factors, along with community-based reconstruction and a significant international presence, contributed to East Timor’s economic development.

A layered approach can help build markets that can become flywheels for further economic development. Even at the initial reconstruction stage, growth and job creation should be expected to come from private sector–led growth, not government and donor spending. It is important that the private sector is not crowded out. The administering organization should include Ukrainian expertise to help ensure that those who value industry development have a major voice in the process.

3. Create a central institution

A layered approach to reconstruction highlights some of the challenges with governance. If different projects are to be layered together to achieve common goals, who is determining which projects need to be grouped together? Who is determining project goals, and so on? The answer from history is a single central institution to oversee and coordinate reconstruction. This can be a single nation, a multilateral organization, or any number of other organizational structures.

But regardless of form, this central organization needs to play a few key roles. First, it should include a Ukrainian voice. Reconstruction efforts dominated by outside donors can often struggle to identify needs and prioritize projects in an efficient manner. Plus, with a highly skilled workforce available in Ukraine, formally integrating Ukrainian organizations into the central institution is critical. Second, the central institution should have built-in mechanisms for transparency and oversight. Building these into the budgetary and decision-making structure of the institution from the start could help reduce fraud and aid the anti-corruption efforts so important to avoiding donor fatigue. Finally, the institution should have the authority to coordinate all reconstruction projects, even those agreed upon bilaterally between Ukraine and another state. Without this authority, it may be difficult to layer all the right projects together, and it opens the door to wasteful duplication of effort.

One successful example of a central institution filling these three roles is the United Nations’ Interim Administrative Mission in Kosovo (UNMIK).³⁰ After the end of military operations in Kosovo in 1999, UNMIK served as the de facto administrator of Kosovo. It oversaw elections creating a government, fulfilling the first role and giving Kosovars a voice in reconstruction. Second, UNMIK pursued internal benchmarks to help improve transparency and tackle corruption along with other divisive issues. Finally, UNMIK was given authority to coordinate all humanitarian relief and reconstruction efforts from all international donors. By filling these three roles, UNMIK could successfully layer projects across four pillars (civil administration, police and justice, democratization and institution-building, and reconstruction and economic development) and improve outcomes for all Kosovars.

The recently announced Ukraine Reconstruction Platform comprising the European Commission and Government of Ukraine can serve all of these roles. It is not for us to say whether that is the right choice for a central institution, but whatever the final institution chosen, it should be built with these three roles in mind from the outset.

How to get started today

The reconstruction of Ukraine is so important to Ukraine, Europe, and the world that it has already begun. Therefore, other nations and donor organizations need to begin putting the above principles into practice. They can get started by:

1. Acting now. It is important to acknowledge that the war is still being fought, but that should not prevent reconstruction actors from working with urgency. As costs continue to pile up, it will become more difficult to lift Ukraine back onto its feet. Accurate and timely cost-recording is a good start, as are the financial commitments some countries have made, but more can be done.
2. Creating a central, multilateral administering body. Such an organization would allow for maximum adaptability and the most effective representation. Involvement and leadership from the United States and the EU are key, as both have useful resources and recovery experience, but it is crucial to allow Ukraine to lead its own reconstruction. The presence of a technocratic perspective in the administration across each area of economic development is recommended to prevent the private sector from being crowded out. Ukrainian experts from different fields should have a large voice in this process, providing the best environment for private sector growth.

• Crystalizing a “leap forward” vision. As the Ukrainian government's focus justifiably remains on the battlefield, organizations involved in reconstruction can help coordinate their efforts by coalescing around a vision of the future. Seeing reconstruction as an opportunity for Ukraine to leapfrog over several stages of technological and institutional development can help align donors and administrators alike. A common vision of the future can help projects support areas that gave Ukraine its competitive advantage (such as agriculture and human capital) while tackling those areas that have hindered growth in the past.

This is a pivotal moment for Ukraine. Without help, it would struggle economically as well as militarily. But if Ukraine and international donors can learn lessons from history, a successful reconstruction program can help Ukraine leapfrog to a brighter and more prosperous future.

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