OPINION: Culture of Productivity Needed

War is a time of significant productivity shifts, resulting from resource reallocation, labor changes, and social impacts. The notion that wars enhance productivity for an economy has flourished for decades after WWII. However, facts suggest otherwise.

In particular, the Total Factor of Productivity in US manufacturing fell at a rate of 5.1 percent during the period from 1941 to 1945.

The United Kingdom experienced a similar, albeit less pronounced, trend during that timeframe. These declines in the leading economies were explained by their extraordinary technological advancements before the war and the subsequent rapid pre-war growth.

The current Ukrainian context is markedly different in this regard.

Prior to 2022, Ukraine had one of the lowest productivity levels in Europe. After the full-scale Russian invasion, it has diminished even further. Findings indicate that the effect of human capital outflow alone is expected to decrease Ukraine’s Total Factor of Productivity by about 7 percent over the next 10 years.

In essence, this implies a continued downturn in living standards, widening inequality, ongoing brain drain, and an ultimate competitiveness loss.

In the described context, “productivity” refers to the efficiency of converting inputs into outputs. This involves directing resources to their most optimal use, leveraging comparative advantage, and driving cost-efficient production of goods and services, spanning from pizza delivery to the manufacture of long-range missiles.

Productivity is influenced by numerous factors, including but not limited to the quality of management, human capital, and the nature of institutions that determine opportunities and the rules of the game. Let's examine the primary root causes of poor productivity in Ukraine, apart from the war:

• Quality of Management: The demand for effective managers is a global phenomenon and not unique to Ukraine. What is unique, however, is the prevalence of unconscious incompetence, especially in the Ukrainian public sector, which has persistently been nurtured for decades.

This manifests as a state where a manager lacks the necessary knowledge, skills, and attitudes but is unaware of their deficiency; instead, they are convinced of their own high professionalism.

As a result, it turns into typical forms of managerial irresponsibility such as good intentions without corresponding competencies, mixing activities and accomplishments, “like-dependency,” limited reliance on causal relations, and lack of coherence and consistency in decision-making. Common corruption practices only worsen matters.

• Human Capital: Human capital, as another factor impacting productivity, is the most crucial form of capital in creating wealth and growth. The situation surrounding it has posed a significant challenge for Ukraine even before the war, exacerbating it in recent years. Mismatches between education and market demands, the outflow of talent, and cross-industry shortages of professionals are just the tip of the iceberg.

When discussing the topic of post-war state recovery, the success of the Marshall Plan after WWII is often cited as a partially relevant example for modern Ukraine. However, unlike many large Ukrainian businesses, German corporations such as Daimler-Benz, Porsche, BMW, Siemens, Hugo Boss, and many others had already gained leading positions in the European, and in some cases, the world markets before the war.

American capital helped them reinforce their labor supply and reactivate their high productivity—a scenario that might be questionable to replicate in Ukraine.

• Institutions: Despite some improvements in public service provision (e.g., 'Diia'), the lack of unbiased legal system and secure private property rights, which are essential for ensuring a level playing field, hinders the economic growth of Ukraine. The current institutions, largely designed to extract wealth from one subset of society to benefit another, are impeding Ukrainian productivity.

While institutions have a significant impact on shaping favorable economic conditions and fostering the influx of human capital, their nature significantly depends on the first factor – the quality of those who are in charge. No amount of financial aid or foreign investment will yield positive outcomes without the effectiveness of management.

To achieve a substantial boost, Ukraine needs thousands of superb managers who can effectively coach, guide, and develop the current Ukrainian leadership team at all levels, not merely as consultants but as playing coaches. Ukraine cannot generate this resource internally. Just like a pilot or a surgeon, a middle or senior manager is not made overnight. It is a long professional development process that requires appropriate conditions, which Ukraine has never had. The negative selection of the last decades has brought it to a critical point, and there are unlikely to be any good reasons to believe that continuing previous practices will improve the trend.

To undergo a fundamental shift, Ukraine needs competent American, British, German, and other Western managers engaged in various fields—individuals whom transatlantic partners can help attract on a mutually beneficial basis. If successful, Ukraine will gain access to previously untapped productivity, while the allies will achieve a faster and greater return on investment in a significant market after the war.

Some may view this approach as shirking responsibility or compromising Ukrainian sovereignty, but it is far from that. This is about addressing the urgent existential need to utilize scarce resources effectively, strengthen internal resilience, foster investor confidence, and develop a sustainable culture of productivity for the long run. In fact, it is about launching the accelerated Euro-integration project immediately.

The views expressed in this opinion article are the author’s and not necessarily those of Kyiv Post.