Follow the evolution of the Ukrainian economy

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youUkraine’s economy is in tatters. On a more pessimistic view, the World Bank estimates that the war could cause its economy to shrink by 45% this year. The IMF and the Central Bank of Ukraine both predict a drop of about a third of the pre-war level GDP. But economic forecasters are rarely war economists. There are also no well-founded data on the current state of the Ukrainian economy, let alone reliable indications of its future development. Economists must therefore be creative, both to assess the overall impact on the Ukrainian economy but also the variations within the country. (See chart.) In the past, to supplement spotty official data, they have used satellite images of nighttime lights as proxy indicators of economic activity. But a new study on VoxEU, a research site, says the use of nighttime illuminations in wartime for security reasons makes it an unreliable economic indicator. Something else is needed.

The night-light equivalent of the digital age is a tweet or a Google search. Calibrating a model based on past correlations between these digital “lights” and economic activity allows researchers to estimate where Ukraine’s war-torn economy stands. It shows a 45% contraction in March (compared to March 2021), followed by a rebound that left economic activity in April 15% lower than a year earlier.

The regional breakdown of the data highlights that the global blow is only part of the story. After the invasion, economic activity shifted from the eastern and southern regions of Ukraine to the safer central and western regions (the researchers’ data excludes the occupied Donbass region). Here, production actually increased in March. The researchers credit internal migration – there are around 7 million internally displaced people – and business relocation, which the government actively encourages, with the economic gains. More recently, citizens have returned to Kyiv, boosting the capital’s economy.

The future remains difficult to predict. Ukraine’s candidacy for EU membership and pledges of Western funds for reconstruction should aid recovery once the war is over. Until then, Ukraine has to go to war with far less money to pay for it. Ukraine remains dependent on Western funding to hold Russia back.

Christi C. Elwood