Ukraine's Postwar Economy May Become a Potent Hybrid of the Polish and Israeli Models
Let Them Beat Their Ploughshares Into Swords to Harness the War That’s Defining a Nation
As I made clear in a post late last month, the EU in general, and Germany in particular, see Ukraine – even in its current state of full-scale war and mass refugee exodus – as a grand prize to be bolted on to the bloc’s eastern flank. Hell, the EU has thought that for over a decade, even laying out the EU cooperation plan for Ukraine that was left unsigned in late 2013 and led to the Maidan protests. But the Ukraine that will eventually join the EU will be almost unrecognizable from that of 10 years ago, and in one specific economic sense, it will allow both Ukraine and its partners to build an entire local industry that will shape global defense products and weaponized AI and robotics in the decades to come.
Ukraine will be a prize for the EU with relatively cheaper labor, cheaper land for factories and logistics hubs, and new consumers. That’s congruent with the model for the EU’s past expansions to the east this century, and I’m thinking specifically of Poland, Romania and Bulgaria. But what the broader Western world will find in whatever part of Ukraine that it can wrest from Russia is a technological and industrial petri dish for developing and testing the newest tools that have already been and will be cast from being in a constant state of war for nearly all of the past decade. What’s more, due to the high number of STEM-literate local workers/citizen-soldiers, there will be at least the building blocks of a workforce to develop weapons, software and hardware that incorporates the lessons learned since the 2014 Russian invasion and occupation. Commensurately, Ukraine will then end up with a big chunk of its economy looking more like Israel than Poland. Let’s walk through some background scenery to see how Ukraine’s future might fit.
Israel’s defense technology sectors have been cultivated for decades, and they got their big break almost 50 years ago when Israel and Egypt got paid by the U.S. to stop fighting. Israel was allowed to keep its assistance money to fund its own defense sector – as opposed to using U.S. aid to turn around and buy U.S. military tech. That’s been great for Israel’s nonfarm economy, except for the fact that Israel hasn’t fought any mass-scale ground/air wars since, by some rubrics, the early 1980s. That key detail reflected in the well-known products that Israel has perfected through the present day. Iron Dome air defense system. Best-in-class surveillance/identification/population-monitoring tech startups for the blurring of those pesky national-defense-versus-insurrection-suppression questions. The famous Desert Eagle handguns used to be made in Israel, and currently anti-drone defenses are famous exports – but there is only so much one can perfect without the data and experience that comes from fighting hot wars against well-armed adversaries, either on defense or offense. That’s where Ukraine can come to resemble and possibly rival Israel. Ukraine is ad-libbing, jury-rigging and developing new technologies on the fly as it fights for its collective life. Moreover, it’s building its defense tech sector using its large and capable software engineering and general STEM-literate population who have been thrust into military roles. Ground warfare from trenches and treelines, house-to-house kicking in doors in urban areas, tank battles, armed and unarmed aerial drones, artillery and surface-to-surface missiles, and littoral sea warfare in the Black Sea – you name it, and Ukraine is building to fight and building a body of work in all of it in real time. To think that the top brass at companies like Palantir, Boston Dynamics, Ghost Robotics, Raytheon, General Dynamics, French drone maker Parrot won’t be looking hard at Ukraine for a place to set up shop when and where there is peace is to fail to grasp the direction of global tech commerce. Whether they plan to sell the tech to illiberal governments to use against their own populations or sell to China’s neighbors, Ukraine will be probably be making that tech – and relatively cheaply.
There’s another component to Ukraine’s future landscape that we also can’t ignore. That’s derived from the broader West’s and the EU’s desire to turn Ukraine into a low-cost source of whatever they need, from civilian IT workers, to factory and construction workers, miners and farmers, nurses and middle management. That resembles Poland’s path of growth within the EU when it joined in May 2004, and the capitalist core of the richer EU countries like Germany, France, the Netherlands, Spain and Italy may push to simply replace Poland and its eastern EU peer economies Romania and Bulgaria with an even cheaper point on the cost curve. Poland’s current economy is pretty well-balanced by sector, but it’s also gotten markedly more expensive this century vs the heady times of the early 2000s. Will Ukraine be steered towards that trajectory with investment, loans, grants, and advisory – possibly at the cost of its new AI, 5G and robotics defense technologies sector? It will be a key battle for Ukraine’s postwar economy and national brands – and it will all play out with possibly a much smaller workforce than Ukraine had in 2020, as there is a risk that the country could lose over one-third of its population (from 44mln to 28mln by one calculation). A key factor that Ukraine has going for it is the ubiquitousness that tech and IT had in the economy before the war, with companies like Luxoft and EPAM Systems working the market alongside smaller local players and the likes of Google and SAP. Mixing Ukraine’s experience in the sector with the literally battle-hardened workforce and international linkages from the war – all set on a stage that will be characterized by a state of continuing militarization – means that the legacy sectors will have to make way for a growing global moneymaker.