Why industry has become a burden on the domestic economy

Author

Oleksandr Tsyganok

The decline in industry in 2020 by 5.2% was accompanied by the growth of several other industries and became a decisive factor in the deceleration of the economy as a whole by 4.2%.

Deceleration elements

For five quarters in a row, industry has been holding the Ukrainian economy back. It is the recession in the domestic industry that leads to the fact that the country's GDP during all this time loses from 0.6% to 2.6% quarterly (compared to the corresponding quarter of the previous year). Even in the last quarter of 2020, when the Ukrainian economy as a whole had almost reached last year's level, industry, according to the National Bank's estimates, was the only one of the six main sectors that made a negative contribution to the overall change in GDP.

Construction and agriculture, despite the coronavirus crisis, even ended 2020 with growth. And the industry has become exactly the sector that formed almost half of the decline in GDP in 2020, the Ministry of Economy notes.

It is sad to admit, but such a dragging of industry behind the economy began even before the coronavirus crisis, back in 2019. Now the industrial sector continues to decline and lose its gains. Thus, in general, the index of industrial production in 2020 amounted to only 94.8% of the previous year level. Moreover, in many of the leading areas of production, the situation is generally catastrophic.

In particular, the production of footwear, bricks, and motor vehicles fell by about 20% over the year. The volume of assembly of metal structures, electric motors, transformers, and weapons decreased by a quarter. The output of metal-working machines and steam boilers, sugar, and grape wines fell by a third. And only half of the 2019 figure remained from the production of railway rolling stock.

The volume of products sales in monetary terms is also decreasing—in 2020 they declined in the industry as a whole by 1.5 billion UAH. And five extremely important sectors—coal mining, oil and gas production, metallurgy, mechanical engineering, and coke industry—suffered the greatest losses. Over the past year, they together conditionally were shot of 112 billion UAH (against 2019).

In the first two of them, the decline in sales was "indecent"—the sectors lost 30% of the previous year earnings. And in some segments of mechanical engineering, in particular, in such as the production of railway locomotives and cars, or the production of steam boilers, the "losses" of funds reached a shocking 43-44%.

The production capacities utilization of industrial enterprises, unfortunately, continues to decrease; at the beginning of 2021, it decreased in the sector as a whole to 63.8%. Enterprises in January of this year were provided with orders for an average of only 4.3 months of work, and producers of coke and petroleum products, as well as woodworking enterprises—for a period of less than 2 months, the State Statistics Service reports.

And already in January of this year, according to the operational data of Ukrmetallurgprom, the production of, for example, rolled products decreased by 20,000 tons (compared to January 2020). It is difficult to predict the volumes of product consumption for 2021 in the domestic market, and it is generally impossible to do this for a long period, the pipe-and-wheel company Interpipe publicly admits.

Short-sightedness

The Ukrainian industry has fallen back into such a sad state not only as a result of the coronavirus crisis. There are many more factors, and they have arisen much earlier. This is a lack of investment and worn out equipment, and too slow modernization of production, and a delay in the introduction of innovations in the industry.

As a result, the Ukrainian industry lags behind other countries every year in terms of the added value created per worker in the sector. Neighboring Belarus is already 2 times ahead of our country in this figure, and Poland and Turkey—6-8 times, according to the Center for Economic Recovery.

The development of domestic industry was also affected by the lack of a strategic vision for the future of the sector that provides jobs for 2 million Ukrainians, as well as the lack of effective support from the state. For example, during the presentation of the main reforms in the country's economy, the Prime Minister did not find anything to say about at least some projects in the domestic industry during the Forum "Ukraine 30", let alone a long-term strategy for its development.

The industrial sector was simply lost among the pension, stock and other reforms presented to them. The industry is also not visible in foreign government presentations on key priorities and areas of activity of the Ukrainian state. In these presentations, the domestic industry hid behind a "green deal", gender equality, digitalization and so on.

However, in the plans of the Cabinet of Ministers to publicly discuss developments for the National Economic Strategy-2030, thematic events on industry (in combination with transport and infrastructure) have recently appeared. Without waiting for government generalizations of this discussion, economists and managers are already announcing that the industrial block of the project Strategy-2030 requires substantial revision.

In particular, the Ukrainian Union of Industrialists and Entrepreneurs proposes to supplement the document with the task of revision and implementing the sectoral Strategy for the Industrial Development of Ukraine. And the Federation of Employers of Ukraine considers it necessary to include the tasks of localizing Ukrainian industries in this project.

By the way, the Parliament approved the draft law No. 3739 on localization in the first reading back in July 2020. But more than 2 thousand amendments have already been submitted for consideration in the second reading, and the fate of the draft bill remains unresolved. Experts note that certain of its provisions violate Ukraine's international obligations in the field of European integration.