Ukraine’s real problem, in four graphs
Which way will Ukraine turn? With Russia’s recent military aggression taking so much of the spotlight, it’s easy to forget that Ukraine’s political unrest this year began with domestic protests over a question key to the future of its 45 million people: whether to tie their fortunes more closely to Russia, or to Western Europe.
As a former Soviet republic with many Russian speakers, Ukraine has obvious and important links to the east. But Europe’s more dynamic economy and open societies strike many Ukrainians as a better bet over the long term—so much so that the Parliament ousted the previous president for pulling too close to Russia. In a recent vote, Ukrainians took a major step by electing businessman Petro Poroshenko, who wants to move forward quickly with a new European treaty agreement.
To Western observers and analysts, the choice of Europe might seem obvious. But making such a pivot is never easy, and a close look at Ukraine’s economy shows that such a decision may be far harder, and more costly, than most political commentators tend to allow.
The charts here come from our research on economic complexity at Harvard’s Center for International Development, led by Ricardo Hausmann, based on trade data from the United Nations. More than 20 years after independence, it shows, Ukraine is still poorly integrated with Western Europe. Its main export partner is Russia; it exports to that one nation almost double what it exports to the entire European Union. So any turn away from Russia will have obvious, immediate costs—especially if Russia, as feared, punishes Ukraine by clamping down on imports.
But even that imbalance doesn’t tell the whole story. The deeper problem for Ukraine lies in just what it sells to Russia compared to what it sells to Europe. The crucial issue here is “complexity.” Our research shows that a country grows as its economy diversifies and moves towards more complex products. Simple products like agriculture and natural resources can raise cash, but they use capabilities not easily redeployable in other industries, and thus provide few opportunities for economic diversification.
Unfortunately for Ukraine’s pro-European contingent, it turns out that the products Ukraine currently exports to Russia are much more strategic for its growth prospects than those it exports to Western Europe. Russia buys a diverse range of complex products from Ukraine—steam turbines, for instance—while Western Europe buys relatively simple ones, such as honey.
If Ukraine abruptly turns away from the Russian market—or, more likely, is abruptly shut out—it will be its most advanced and valuable industries that suffer most. The decision to turn toward Western Europe and away from the Russian market isn’t just an ideological choice: It’s a gamble on whether Ukraine’s complex industries would recover and retool in a way that makes them globally competitive. Can a country with political instability and heavy debt have the guts to take such a risk? Will the West be willing to commit the high costs involved in a successful transition? These are the real questions Ukrainians face.
The above visualization shows the country’s full “export basket,” and Ukraine’s is fairly simple: Its main exports are farming products (corn and soybeans) and metals (iron and steel products). To diversify and enjoy better prospects for the future, Ukraine will need to build on its recent growth in the more complex product categories seen here, like machinery and transportation, which includes products such as railway cars, aircraft parts, and car parts.
Italy is Ukraine’s biggest export market in Western Europe, so here it stands in for other Western economies. Ukraine exports a fairly small number of simple goods to Italy, such as metals, food, minerals, and wood. Ukraine’s machinery and more sophisticated manufactured goods barely even show up on this chart. In blunt terms, Europe simply doesn’t want what Ukraine manufactures.
Russia is a big buyer of Ukraine’s key export, metals. But even more important is how wide a variety of Ukrainian goods it buys. It’s a crucial market for Ukrainian manufactured goods, for instance, buying $3.5 billion worth of its machinery and electrical products, and another $3.5 billion of transportation products.
This is a “product space” map, which groups different families of goods according to how much know-how they share. Products that require similar capabilities are close to each other. The dense, central part of the graph is composed of complex products that provide many options for industrial expansion; on the edges are simple products that tend to be dead ends for economic development. The colored circles are products exported by Ukraine.
Marcela Escobari is executive director of Harvard’s Center for International Development (CID). Sarah Hopkinson contributed to this article. Ricardo Hausmann is the coauthor of The Atlas of Economic Complexity, whose second edition was published this year.