Creating a military sector in the Ukrainian economy: why is it worth investing?

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In the near future, the military-industrial sector has the potential to become one of the engines of economic growth, continuously increasing production and creating jobs.

This has very real prerequisites. Ukraine’s military budget is approximately $40 billion annually.which means that the country spends almost all its funds on the military-industrial complex and critical infrastructure.

However, there is not enough budget to launch a new project. Furthermore, concentrating military-industrial programs only in state-owned enterprises can lead to corruption risks and reduced efficiency of such programs.

That is why it is better to have effective private enterprises participate in the defense industry alongside systematic state-owned enterprises. An example of a successful private manufacturer producing weapons is Liwiska Bronetecnica.

However, companies’ own funds are clearly insufficient to launch projects that require large capital investments, so credit incentives must be used to stimulate private sector projects.

The topic of the so-called transition to Ukraine “War Economy” While before the war the issue of industrial development in this country was not very unpopular both in society and at the level of the political elite, it is now quite popular.

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The “grain and brain” concept of Ukraine’s development, first presented at the Davos conference before the full-scale war, did not include the development of industry itself.

This situation has not changed to this day, and the government has not yet adopted an industrial policy that would be the mainstay of industrial development. Including the military-industrial complex..

But more than 100 countries, accounting for almost 90% of global GDP, have such policies, according to the UNCTAD report. They can either expand vertically (build industrial power), develop horizontally (increase labor productivity and minimize the gap with the world’s leading countries), or adapt (adapt the economy to the sixth technological mode). ).

Ukraine faced the war during an active phase of industrial deindustrialization, symbolized by the conversion of the Arsenal factory in the city center into a fast-food restaurant. Whether it is necessary to manufacture military optics in the very heart of the capital is another question, but the symbol is not a semantic unit, but a symbolic unit.

In other words, the backbone of the economy is industry. The core of the industry is machine manufacturing. The outer contours of the industrial core are processing/manufacturing. This structure forms the outline of the military-industrial complex. Also science and vocational education.

This structure makes it clear that stimulating the military-industrial complex from the “end”, that is, from the last part of the technological chain, will not work. At most, a “driver” defense industry based on imported parts will be created. There will always be pressure from the supply chain for imported parts.

Therefore, the algorithm of action is very simple.

Vocational education + creation of innovation transfer centers in industrial clusters (from science and innovators to production) + development of processing manufacturing industry + development of mechanical engineering = competitive military industry.

So what should Ukraine do during the war, how should it adjust its economy to the details of martial law?

First of all, it is to accumulate revenues from the raw materials and services sector, responding to the need for incentives for technical education, science, innovation and the development of innovative industries, including the military-industrial complex. It is to allow the civilian economy to earn money to finance the necessary sectors of the military-industrial complex.

We need to understand that the military-industrial complex is not built in a vacuum. We need dual-purpose industries such as related industries, components, raw material processing, manufacturing, and engineering. This requires public investment at the expense of private revenues and private investment backed by state guarantees, thousands of highly skilled technical experts, increased labor productivity, and the creation of inventions. Relatively speaking, we need military-industrial clusters formed in the environment. Industrial development, technical education, and science are sacrificed at the expense of private income and profits from the export of raw materials.

Mobilization economics or military Keynesianism in the specific context of the 21st century is the creation of economic incentives by states to ensure victory in wars. As long as the state has appropriate policies, systematic conditions and incentives also mean harnessing the creative energies of entrepreneurs. Synergy between state incentives and entrepreneurial activity.

Industrial production increased by 2.4% in the January-September period of 2023.

In certain growth categories, indicators can be seen that disguise the development indicators of the domestic military-industrial complex.

This is the production growth for 2023. Finished metal products – 38%. Weapons and ammunition – 76.1%. Military vehicles – 97.3%. Metal processing – 56.8%; Mechanical engineering – 15.3%; Electrical engineering, optics – 56.1%; Electric motors – 19.6%; Wires, cables – 101.2%.

This means that, contrary to stereotypes, Ukrainian industry is restarting with an old industrial and human resources base and operating at the limits of its capabilities. (especially in situations where power sources are insufficient).

Direct military production has increased by 70-90%, and indirect industry has increased by 10-100%.

All this does not negate the expediency of building a more efficient military-industrial sector and an entire industrial core. However, efforts here must be systematic and consistent, and there must be no incitement, agitation, or economic illusions such as a “military economy.” The transition to a military economy, on the one hand, will only lead to the collapse of the civilian economy when the workshops do not work out. It would be built “in every house”, while eliminating the economy’s effective tertiary industry, which currently generates jobs and taxes the budget and GDP.

And one of the sources of this growth could be loans from international financial institutions, which could serve as an important incentive to start effective civilian arms production in Ukraine during the war. There is sex. In particular, loans from the EBRD and EIB.

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