America’s twenty-year involvement in Iraq and Afghanistan demonstrated that nation building is often more expensive, prone to failure, and politically unpopular than expected at the outset. The State Department’s Afghan Stabilization Assistance Review acknowledged the difficulties nation building poses and found that there was no appetite in the American public for such ventures in the future. Yet today, less than two years after the Afghan withdrawal, the United States and its European allies are faced with a nation building exercise more expensive and at least as extensive as those of the past two decades.
NATO’s pursuit of the long war risks pushing Ukraine past a tipping point beyond which it’s economy may never recover. Revitalization of the Ukrainian economy would even have been difficult had the war ended in 2022. Continuation of the fighting and the introduction of more destructive and lethal Western arms risks making Ukraine a permanent economic vassal state of the United States and the EU.
Even the hawkish Rand Corporation in their review of the costs and benefits of the long war acknowledged the tradeoff between continued fighting and the additional cost and difficulty to revitalize the Ukrainian economy post-war.
Existing estimates of reconstruction costs are enormous. The National Recovery Plan that Ukraine’s National Recovery Council put forth in July 2022 carried a $750 billion price tag. In January 2023, Ukraine President Zelensky put the cost to rebuild Ukraine at $1 trillion. These estimates are several times that of the $150 billion in all forms of aid that the West has extended to date. They also exceed by a factor of five or more the size of the post-World War II Marshall Plan, $150-160 billion in today’s dollars, and the $145 billion that the U.S. government spent on rebuilding efforts in Afghanistan.
Existing estimates significantly understate actual reconstruction costs. Understatement of costs and overstatement of benefits makes it easier to sell donor nations, their publics and NGOs on participation in reconstruction schemes. Low-balling costs also makes it easier for self-serving bureaucrats to achieve buy-in within their agencies. The report of the Special Inspector General for Afghanistan Reconstruction found that US aid programs routinely underestimated the time and resources projects required and prioritized political preferences over what could realistically be achieved.
In addition to cost, reconstruction efforts will have to deal address Ukraine’s declining demographics, it’s outdated industrial base, and limitations on the EU’s ability to implement or oversee the implementation of structural reforms.
Ukraine lacks the single most important ingredient for its economic recovery: young people. Reconstruction is a lot of work and a young population willing to invest in the future of the nation is essential. One reason for the rapid economic revitalization of Germany and Japan following World War II is that both countries had a young population. In 1950, 46 percent of the German population was under the age of 30 (compared to 39 percent in the United States today). A growing labor force allowed for the expansion of industrial production and exports while also rebuilding its infrastructure. Foreign exchange earnings from exports allowed West Germany to self-finance its reconstruction efforts without further aid.
Post-World War II Japan was even younger than Germany. Despite enormous losses during the war, the population of Japan increased by 10 million between 1940 and 1950. In 1950, 63 percent of the Japanese population was under the age of 30.
In contrast, pre-war Ukraine was rapidly becoming a nation of pensioners. Ukraine’s working age population peaked in 1992 and declined by 5 million by 2021. Ukraine’s birth rate collapsed following the breakup of the Soviet Union falling from 13 per thousand in 1990 to 8 in 2000. Only 31 percent of the population of Ukraine before the war was 30 or younger.
The war has accelerated Ukraine’s demographic decline. Ukrainian refugees tend to be younger than the population as a whole. A survey of Ukrainian refugees by the German government found that only a third planned to return to Ukraine immediately after the war ended. Moreover, once Ukraine lifts the ban on men between 18 and 60 from leaving the country, many will leave to join family and friends, to find jobs, or to avoid the possibility of being pressed into service should the war resume.
Ukraine’s prewar economy was stuck in the Soviet era. The country’s largest exports were commodities: agricultural products, metals and minerals. There’s a vast disconnect between the structure of the existing Ukrainian economy and that envisioned in reconstruction plans. The National Recovery Plan envisions a green economy consistent with the EU’s Green Deal and growing the information technology sector. These items may be titillating to the ears of potential donor nations and NGOs. However, such a transformation would require not only the creation of new industries but also scrapping much of Ukraine’s existing industrial base. Ukraine’s economy is highly energy intensive. According to the International Energy Agency, prewar Ukraine used more energy per dollar of GDP (at purchasing power parity) than any European nation. Plans to develop knowledge industries run headlong into Ukraine’s demographics. Knowledge industry workers tend to be young and adaptable. Ukraine’s labor force is aging and shrinking.
Finally, plans need to recognize the inherent difficulties with nation building. To put it mildly, past efforts have fallen far short of expectations. Afghan reconstruction efforts began with high aspirations. In the end, even George W. Bush acknowledged in his memoir, Decision Points, that nation building "turned out to be even more daunting than I anticipated."
The inability of the EU to revitalize the Greek economy following that country’s debt crisis should give Western leaders pause. By any measure, revitalizing Greece should have been a far easier task than that facing the EU and United States in Ukraine. Unlike Ukraine, Greece is familiar territory for the EU. Greece had been an EU member since 1981. The extent of assistance for Greece was more limited. Greece only required financial assistance and institutional reform, not new infrastructure. Greek infrastructure was not only intact at the time of the debt crisis but much of it was new. The debt crisis arose in part due to excessive government borrowing for public-sector infrastructure projects.
Despite multiple rounds of financial assistance since 2010 and twelve years of EU oversight the Greek economy still underperforms. Labor productivity has been stagnant over the past decade. Greek government debt to GDP has risen by 50 percentage points since the crisis Youth unemployment hovers around 30 percent. Evidence the Greek economy has become more competitive is scant. The Fraser Institute ranked Greece 63rd among the nations of the world in 2010. In its most recent report Greece was in 85th place.
Widespread corruption is a major impediment to economic development in Ukraine. The Greek experience illustrates practical limitations to the EU’s ability to address corruption. Corruption remains a significant problem in Greece. A European Commission survey in 2022 found that 98 percent of Greek respondents felt that corruption was widespread in their country, the highest percentage for any EU nation.
Given Ukraine challenging demographics, Soviet-era economy and the EU’s own track record at structural reform, revitalization of the Ukrainian economy would be challenging in the best of circumstances. Further fighting will make revitalization even more difficult and costly to achieve.
The neocon dream for Ukraine is that it serves as NATO’s eastern bulwark against Russia’s alleged expansionist tendencies. Realization of that dream requires postwar revitalization of that country’s economy.
Continued escalation of the war will further decimate the country’s infrastructure and make rebuilding ever more difficult by turning large numbers of young Ukrainians that could have invested their lives in rebuilding the country into wartime casualties. Paradoxically, the longer the war continues, the more likely that postwar Ukraine not be an independent nation, but instead a long-term dependent on the West for the military and economic aid necessary for its survival.
Western leaders need to be upfront with their publics on the obvious tradeoffs between the pursuit of NATO’s military goals, such as pushing Russia back to pre-2014 borders, and the increased likelihood that achievement of those goals will make it impossible to put Ukraine back together again after the shooting stops.
James Bohn is an economist and risk analyst with thirty years of experience in business, government, and academia. Most recently he was an officer in the supervision function at the Federal Reserve Bank of Boston. He has a Ph.D. in Business Economics from Harvard University.
