The histories of Poland and Ukraine have been intimately interwoven for centuries. For much of the later part of the 20th century, they found themselves under the tutelage of the Soviet Union and, in the case of Ukraine, were part of it. Poland during this time was able to preserve private ownership of arable land, to maintain a private small-business sector, and to pursue international academic and cultural relations – factors that facilitated transition.
Specifically, after 1989 Poland had a clear EU (and NATO) vision, liberally minded political leaders and embraced democracy, and thus became a full-fledged democracy embedded in the EU. Meanwhile, Ukraine’s aspirations after 1991 vacillated between the EU and Russia, shied away from full transition, and got stuck under anocracy. No wonder then that Ukraine, which suffered the steepest transition recession after gaining independence in 1991, stagnated thereafter, while Poland had the mildest and shortest transition recession of all Central and Eastern European (CEE) countries and thereafter enjoyed rapid, sustained real growth up to the present. Poland was a pioneer of shock therapy, which served the country well (Sachs 1993).
In the analysis of systemic transformation, qualitative and quantitative approaches go hand in hand, exploiting the concepts of path dependence, Schumpeterian creative destruction, and modern growth theory. Ukraine followed a transformation path that was predominantly passive and history-determined, while Poland chose a radical departure from the past in a creative and Schumpeterian way (Åslund 2015, Kowalski 2013).
In quantitative, growth-theoretic terms, we ask whether economic growth has been extensive, by accumulating dead capital, or intensive, by using existing capital more efficiently. In the latter case, education, on-the-job training, and health care are decisive. Further, free trade, democratic institutions, and good governance are also good for sustained growth (Gylfason et al. 2022).
Figure 1 GDP per capita and life expectancy
Source: World Bank, World Development Indicators, 2022.
What, then, could account for the threefold difference in per capita GDP and the five-year difference in life expectancy between Poland and Ukraine? We compare some key determinants of growth and growth trajectories, using economic and social indicators side by side, and try to disentangle efficiency and accumulation and combine path dependence and the role of creative destruction.
As always, when dealing with statistics, a dose of caution is necessary, but, for our country pair, it is paramount, considering that there is no agreement – by a substantial margin – even regarding the relative initial real GDP level. So, statistics alone do not suffice. We need to supplement them with a narrative.
Investment, trade, and education
Investment – domestic and foreign – matters for growth. Both Poland and Ukraine invested about 21% of GDP on average in 1990-2021, a figure that is equal to the OECD average of recent decades, but far less than is needed in the two countries under review. Net foreign direct investment (FDI) inflows in both countries fluctuated widely and amounted to about 14% of gross fixed capital formation on average in 1990-2021. In 1996 in Poland, according to the wiiw database, 72% of all FDI stock was domiciled in the EU15 countries. FDI contributed to the rapid modernisation of manufacturing and services and thus became a significant pillar of the country’s competitiveness and trade expansion.
The EU15 countries were much less pronounced in Ukrainian FDI. According to the wiiw database, the EU15 accounted for more than 44% of the FDI stock in 1994, dropping to 35% in 2004. In 2005 the EU15-controlled FDI stock jumped to 57%, but declined thereafter to about 40%. In contrast to Poland, inward FDI flows and stocks in Ukraine did not have a significant impact on the modernisation of the economy’s supply side.
In the new political and economic environment, the two countries’ economies underwent substantial structural change but, as we see, Poland was more successful in adapting to the new realities. In both countries the share of agriculture in GDP has declined sharply while both continued to be net exporters of food and other agricultural products. At the same time, the share of manufactures in exports grew from about 60% to 80% in Poland in 1992-2021, but declined from 66% to 43% in Ukraine in 1996-2021.
Turning to exports, during the observation period 1995-2021 Poland exported 39% of its GDP on average, compared with 47% in Ukraine. Poland’s export ratio grew steadily after 1995, while that of Ukraine fluctuated substantially but remained broadly unchanged. About three-quarters of Poland’s exports go to EU countries, while China is Ukraine’s largest foreign trade partner, followed by Germany, Poland, and Russia. Import restrictions were phased out in Poland as required by EU membership, while Ukraine retains significant restrictions, including some remnants of currency control.
Exports from Poland are less concentrated and more diversified than exports from Ukraine. This matters because economic diversification as an insurance strategy against macroeconomic risk is good for growth. Lower concentration signals more competition among exporters, just as greater diversification signals more pluralism among trade partners. Competition and pluralism are good for growth.
Human capital is also good for growth and this factor, including net secondary school enrolment and internet use, favours Poland, not Ukraine. According to UNESCO, school life expectancy is 16 years in Poland compared with 15 years in Ukraine. Ukraine does have more students enrolled at the university level but, with education as with exports, both level and composition matter. Specifically, the ratio of law students to science students in Ukraine is much higher than in Poland, presumably a reflection of excessive rent-seeking in Ukraine at the expense of science.
Democracy and governance
Both Poland and Ukraine have a complex relationship with democracy, notwithstanding the fact that the Polity IV project, the industry standard for democracy metrics, awarded Poland a full score of 10 during 2002-2018 on a scale from -10 to 10.
More recently, the University of Gothenburg’s Institute for Democracy (V-Dem Institute) awarded Poland a liberal democracy grade of 0.41 on a scale from 0 to 1 for 2021, down from about 0.8 in 1992-2015, ranking Poland in 80th place out 179 countries. Ukraine’s liberal democracy grade was 0.32 in 2021, about the same as in 1991-1992, corresponding to a rank of 90 in 2021.
Both countries face significant challenges concerning the rule of law. In Poland, the government has been credibly accused of failing to adhere to European and Polish constitutional law since 2015, creating a conflict – at home as well as vis-à-vis the EU – that remains unresolved. In Ukraine, reorganisation of the military, the Ministry of Finance, and the central bank has moved those institutions outside the sphere of influence of the old elites, which in the past earned the country a reputation for pervasive corruption. In the judicial system, however, much remains to be done, also in the face of the continuing war.
Summary and conclusion
We have looked for explanations for the threefold difference between Poland and Ukraine in terms of per capita GDP at purchasing power parity in 2021. Investment was about the same in both countries relative to GDP, but too low in view of the need that had built up, owing to the poor quality of investments under central planning. Unlike Ukraine, however, Poland had growing and well-diversified exports and few restrictions on imports, having spent half the period since 1989 as a member of the EU. Thus, trade – rather than investment – seems likely to have contributed significantly to the growth differential between the two countries. We surmise that the rest of the growth differential must lie in differences in the evolution of human and social capital, as well as economic structure. In particular, Poland started from more favourable initial conditions, having made preparations during the 1980s for its economic transformation after 1990. Poland has greater democracy, less corruption, better governance, a freer press, less agriculture, more manufacturing, lower inflation, and greater financial development. Against all this, Ukraine has had more equality and less unemployment, as well as a lower initial level of income from 1993 onwards, which should have encouraged growth.
Ukraine was hampered by political divisions, corruption, poor governance, halting democracy, and an inconsistent stance on human rights. The political events of 2014 and the first Russian invasion of Ukraine triggered a new wave of institutional revival and economic policy reforms. In February 2022 they were thwarted by a full-scale Russian invasion. Ukraine’s success in its fight for survival, the chance for a swift EU rapprochement including a relatively fast EU accession will also have a deep and sustained positive impact on institutions and economic structures.
References
Åslund, A (2015), Ukraine: What Went Wrong and How to Fix It, Peterson Institute for International Economics.
Gylfason, T., E. Hochreiter, and T. Kowalski (2022), “Different Choices, Divergent Paths: Poland and Ukraine,” wiiw Research Report 465.
Kowalski, T (2013), Globalization and Transformation in Central European Countries: The Case of Poland, Poznan University of Economics Press.
Sachs, J (1993), Poland’s Jump to the Market Economy, MIT Press.
