Ukraine’s Reconstruction: Supply Chain Futures and Romania’s Role

The Scrabble Theory of Economic Development: As outlined in Sourish Dutta’s A Simple Model of Global Value Chains, based on Hausmann et al. 2014, a country’s economic development in terms of trade can be simplified, at least in conceptual terms, to a game of Scrabble.

A set of unfinished materials and methods may be present, developed, or imported. Those materials, unfinished products, or rare commodities can be reorganized into a set of higher value-added products. In isolation, few countries outside of the United States would have the means to actually engage in the production of those higher value-added products, however fond one might be of French wine or Belgian chocolate. However, by integrating into global supply chains that country may gain new letters which enable it to actually fructify whatever is at hand up the value chain, roughly summarized as Import To Export (I2E).

This fairly basic line of thinking, while a simplification, does nevertheless have significant explanatory power in terms of many of the world’s economic success stories, be it the 1990s Germany or the 2000s China. It may also hold some value to decision-makers and businesspeople in another country that is finding itself at an inflection point in its history: Ukraine.

Ukraine’s Letters

Needless to say, a country need not attempt to integrate into every supply chain nor attempt to export everything and anything. The model assumes trade in value added(TIVA), which is to say that simply importing new letters at random will simply leave one with many random letters. Instead, one takes stock of available resources and integrates them into the supply chains which allows that particular country to turn them into the highest value words.

Formally, this is known as backward participation in global supply chains, roughly as measured by the degree to which exported words have imported letters in them – as opposed to forward participation, which measures the degree to which a country’s letters are involved in international trading activity to begin with (Wang et al., 2017).

Ukraine, after all, wishes to be a different sort of exporter than Saudi Arabia – at least lacking vast resources of crude oil. So, what are Ukraine’s letters, and what can be built with them?

• Low Costs: Ukraine offers a competitive cost advantage, including lower labor costs compared to many Western countries, particularly outside of a strict definition of solely focusing on the manufacturing processing trade. Doctors are cheaper, rental offices are cheaper, and getting permits is often cheaper. Furthermore, many companies would find the need for interpreters in this place similar to that required in Germany or France.
• Skilled Workforce: Ukraine enjoys a well-educated and skilled workforce, particularly in STEM (science, technology, engineering, and mathematics) fields. This makes it an ideal location for businesses seeking quite rare high-quality talent for R&D activities or employees who have the knowledge base to be trained in highly skilled sectors.
• Geography: Perhaps it is not brought into focus in the best way currently, but Ukraine enjoys brilliant geography. Ukraine’s strategic location facilitates efficient logistics and distribution, with multiple land routes, fairly well-developed ports and waterways. Needless to say, its proximity to major European markets reduces transportation costs and enhances supply chain agility.
• Reconstruction Funds: Final sums are still being discussed, but it suffices to say that very significant funds are heading Ukraine’s way. Corruption will play a significant role in how they will be utilized and the degree of their impact, but it is ultimately difficult to argue with hundreds of millions heading your way.
• Diaspora: The exodus of people following the Russian war in Ukraine has its upsides. Quite simply, Ukraine has found itself with a plethora of economic agents all across Europe, who are forming people-to-people bonds, learning foreign languages, and setting up businesses in European markets. It would be difficult to overestimate the potential for such a diaspora in catalyzing trade as well as the sort of sprawling supply and distribution chains any country would wish for.

How Romania Can Help

Ukraine’s letters may be enough to export new words – and if “GDP is simply the global value chain of a country”, then perhaps those words are enough for the country to write a new story for itself.

And Romania can help write that story.

If Laura Alfaro from the Harvard Business School is to be believed, we’re looking at a “Great Reallocation” in terms of global supply chains. There is significant sentiment lending credence to this: according to the Economist Intelligence Unit, 58.8% of managers surveyed agreed with the statement that significant changes would be needed over the coming year to manage supply chains.

That translates into an opportunity for countries such as Ukraine that have all of the right letters – bar just one or two to form the right words.

As a NATO member and a European Union member sharing land, waterway, and sea links with Ukraine, Romania stands ready to act as a Ukrainian business network hub for global supply chains. Stability and market access to most of Europe are self-evident benefits that Ukraine acutely lacks at the moment – and Romania is happy to lend. Furthermore, Romania is already home to one of the largest diaspora groups of Ukrainians in the world.

Takeaway

The shifts in global supply chains are providing Ukraine with the opportunity to re-write its economic story. It has all of the right letters to do so and could one day have one of the highest degrees of backward trade integration in Europe. It is however missing a few vital letters – and Romania stands ready to lend them and help write Ukraine’s new story.

The Black Sea, due to Ukrainian reconstruction efforts and associated logistics, must hold a significant place on the agendas of the EU, NATO, as well as Euro-Atlantic and global investors from a security perspective. Currently, with Finland’s NATO accession and potential future Swedish membership, the Baltic region is being secured.

Simultaneously, a combination of supply chain redesign, economic dynamics in Eastern Europe (including the role of Turkish companies), and the demographic landscape around the Black Sea underscores its ongoing strategic importance. And despite having fewer advocates than other regions and even though regional cooperation cannot be strictly confined to the EU’s economic logic, the economic and strategic potential of the region should not be underestimated.

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