Ukraine rebirth economic scenarios

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Ukraine rebirth economic scenarios

Hurnyak Ihor Lyubomyrovych PhD, Associate Professor of Department of International Economic Analysis and Finance, Ivan Franko National University of Lviv, Lviv

Kuzenko Nataliya Volodymyrivna PhD, Associate Professor of Department of International Economic Analysis and Finance, Ivan Franko National University of Lviv, Lviv



Abstract

The economic policies advocated by international organizations for transition countries (e.g., the Washington Consensus) have not always produced the promised results. A new approach (“post-Washington Consensus”) emphasizes flexibility for countries to experiment and find their own way. Weak institutions allowed a narrow circle of insiders who benefited from privatization. The absence of market institutions discouraged foreign investment. Commodity markets were almost completely monopolized. The lack of competition did not require capitalintensive investments. As a result, the Ukrainian economy became industrially impoverished and devastated. Institutions such as the stock market and the banking system did not perform the functions of providing external resources for the whole economy (especially SMEs).

In this publication we are modelling different economic scenarios of Ukraine's development in the postwar period. We recognize a change in the institutional environment as a necessary condition for economic growth in Ukraine. In the absence of institutional changes, a return to an oligarchic economy is inevitable. axelrod tournament institutional economy

Based on the methods of game theory and the interaction of the main economic policies, an attempt was made to analyze the development of economic scenarios in Ukraine in the post-war period. The critical necessity of carrying out thorough institutional reforms under the conditions of any of the mentioned approaches has been revealed. The need for reforming the banking system and the rebirth of the stock market (as institutions) as well as changes in the sectoral structure of the economy was emphasized. The emergence of new institutions in post-war Ukraine (military allies, volunteers, and former soldiers) is not a sufficient factor for fundamental changes without reformatting traditional institutions. Several packages of Python were used in the research.

Keywords: Axelrod tournament, institutional economy, Ukraine



Гурняк Ігор Любомирович кандидат економічних наук, доцент кафедри міжнародного економічного аналізу та фінансів, Львівський національний університет імені Івана Франка, м. Львів

Кузенко Наталія Володимирівна кандидат економічних наук, доцент кафедри міжнародного економічного аналізу та фінансів, Львівський національний університет імені Івана Франка, м. Львів

ЕКОНОМІЧНІ СЦЕНАРІЇ ВІДРОДЖЕННЯ УКРАЇНИ

Анотація. Економічна політика, яку міжнародні організації пропагували для країн з перехідною економікою (наприклад, Вашингтонський консенсус), не завжди давала обіцяні результати. Новий підхід ("пост-Вашингтонський консенсус") наголошує на гнучкості для країн, щоб вони могли експериментувати і знаходити свій власний шлях. Слабкі інституції дозволили вузькому колу інсайдерів отримати вигоду від приватизації. Відсутність ринкових інститутів стримувала іноземні інвестиції. Товарні ринки були майже повністю монополізовані. Відсутність конкуренції не вимагала капіталомістких інвестицій. Як наслідок, українська економіка стала промислово збіднілою та спустошеною. Такі інституції, як фондовий ринок та банківська система, не виконували функції забезпечення зовнішніх ресурсів для всієї економіки (особливо для МСП).

У цій публікації ми моделюємо різні економічні сценарії розвитку України у післявоєнний період. Ми визнаємо, що зміна інституційного середовища є необхідною умовою для економічного зростання в Україні. За відсутності інституційних змін повернення до олігархічної економіки є неминучим.

На основі методів теорії ігор та взаємодії основних економічних політик зроблено спробу проаналізувати розвиток економічних сценаріїв в Україні у післявоєнний період. Виявлено критичну необхідність проведення глибоких інституційних реформ за умов будь-якого із зазначених підходів. Наголошено на необхідності реформування банківської системи та відродження фондового ринку (як інститутів), а також змін у галузевій структурі економіки. Поява нових інститутів у післявоєнній Україні (військові союзники, волонтери, колишні солдати) не є достатнім фактором для фундаментальних змін без переформатування традиційних інститутів. У дослідженні використано кілька пакетів мови Python.

Ключові слова: турнір Аксельрода, інституційна економіка, Україна



Introduction

Considering the vicissitudes of the transformation of the Washington Consensus and the whole range of program documents proposed directly for Ukraine by international organizations, it is important to develop one's own vision of scenarios for the development of Ukraine's economy under modern conditions. Let's assume that the institutional factor quite often broke through macroeconomic stabilization in such recommendations, which ultimately, according to the authors, led to their complete failure (Williamson J., 2002). Only in recent years has this trend changed somewhat.

It goes on to outline a "post-Washington Consensus" that emerged out of growing dissatisfaction with the failures of the Washington Consensus. This approach emphasizes that countries should be allowed to experiment and explore alternatives; consider the balanced role of the state and the market and the strengthening of institutions, “almost every one of them”; and finally, success should not only be measured in terms of GDP but should also “consider distribution as well as social and environmental sustainability” (Stiglitz, J., 2008).

The lack of institutional reforms made it possible to carry out privatization in Ukraine within a narrow circle of authorized persons (mostly from the former communist nomenclature), and the lack of market institutions did not allow international business positively to influence the process of inefficient use of resources in the national economy. Foreign businesses that came to Ukraine quickly adapted to the new informal rules, accepted them, or left the Ukrainian market within a fairly short period of time. Commodity markets were almost completely monopolized. The lack of competition did not require capital-intensive investments. As a result, the Ukrainian economy became industrially impoverished and devastated. Institutions such as the stock market and the banking system did not perform the functions of providing external resources for the whole economy (especially SMEs) but solved the problems of oligarchic business in an opaque way.

Significant cash flows from the exploration of raw materials were not invested domestically but settled in offshore zones. This situation has changed somewhat due to the digitalization of the economy and the ability of the IT sector to work according to special rules. However, this did not significantly affect the general institutional environment. Today, another influencing factor was the war and the special new role of the domestic military industry. At the same time, there are no radical changes in market institutions.

The purpose of the publication is to model different economic scenarios of Ukraine's development in the postwar period. The main hypothesis: a change in the institutional environment is a necessary condition for economic growth in Ukraine. In the absence of institutional changes, a return to an oligarchic economy (based on lucrative government contracts, protectionist measures aimed at damaging economic competitors, etc.) is inevitable.

Literature review

In this paper, we take institutional theory as a basis. Institutional changes are crucial factors of economic development and changes. This approach is mainly represented in the work of D. North, O. Norgaard, M. Olson and others. Also, among the Ukrainian scientists valuable input in analysis of institutional factor in economic development of Central and Eastern Europe made Y. Bilenko.

The works of Douglas North examine the dependence of the efficiency of economic and social institutions on the value of transaction costs. On the other hand, constant institutional changes are a condition for the productive functioning of the economic system. D. North explains differences in economic development by differences in the institutional environment (North D., 2000).

D. Acemoglu, et al. defines institutions as “a cluster of social arrangements that include constitutional and social constraints on the power of politicians and elites, the rule of law, mediation of social groups, strong property rights, minimum equal opportunities, and relatively broad access to education, etc.” (Acemoglu, D. et al., 2003). A. Subramanian, F. Trebbi, D. Rodrik define institutions as the rules of the game in society and their promotion of desired economic behavior (Subramanian, A., et al., 2002). R. Hall, C. Jones defined as “institutions and government policies that improve the economic environment through which individuals and firms invest, create and transmit ideas, and produce goods and services” (Hall, R and Jones, C, 1999). The World Bank provides the following definition of institutions: “Institutions are rules and patterns of behavior that include the rule of law; organizations are entities composed of people acting collectively to achieve common goals” (World Bank, 1997).

However, it is often very difficult to achieve collective action in conditions of ineffective laws and weak institutions. M. Olson proposed his theory of collective action, which explains the logic and motives of people to unite in groups to act collectively, pursuing the same goal. M. Olson suggested that only a specific or "selective" incentive will cause a rational individual in a hidden group to act as the group does, i.e., only a benefit that is provided exclusively for group members will motivate an individual to join and contribute to the group. This means that people will act together to provide private goods, but not to provide public goods (Olson Jr, M., 1971).

M. Olson argues that if a group works to provide public goods, then individuals in that group pursuing collective action will have incentives to "live off others." But in groups that provide benefits only to active group members, this phenomenon will not be observed. Thus, without selective (individual) incentives to motivate participation or action, collective action is unlikely to occur, even when there are large groups of people with common interests.

In addition, large groups face the problem of relatively high costs in their attempts to organize for collective action, while small groups face relatively low costs. The benefits that individuals in large groups will receive from successful collective action will be smaller than those in small groups. Thus, in disincentive economies, the incentives to act collectively decrease with group size, so the ability of large groups to act in the common interest is less than that of small groups. It is often difficult for large groups with common interests to achieve collective action. Moreover, it is possible that a minority united by selective incentives dominates the majority.

M. Olson explains the periods of growth and decline in states, in fact, by the role of the so-called distributive coalitions. Over a certain period, there is a tendency in states to form small distributive coalitions that will have incentives to form lobbying groups and will influence state policy for their own benefit. Such groups can be formed by producers of certain products and trade unions.

Accordingly, a state that serves lobbying interests will pursue a protectionist policy in favor of lobbyists' interests and will not encourage technological development. Such actions will inevitably lead to negative trends in economic growth in the future. However, in such a society, there will be little or no public resistance if the benefits of such policies are selective incentives for a few coalition members and the costs are shared by the entire population. Over time, these distributive coalitions grow larger, and the nation that bears the burden imposed by these distributive coalitions suffers an economic downturn (Olson M., 1982, 1984, 2009).

О.Norgaard analyzes the impact of economic and political institutions on the economies of post-communist countries. He proves that there is an inextricable link between institutional transformation and the development of democracy. He believes that post-communist countries need to choose a strategy of institutional reform that combines the efficiency of the market system with the transparency of pluralistic democracy (Norgaard O., 2007).

О. Norgaard emphasizes three main approaches to institutional change in post-Soviet states. The first approach considers the political reaction of those who lose something at an early stage (a large group); the second approach focuses on the power and interests of those who win at this stage (a narrow group); the third one emphasizes the importance of political institutions as intermediaries between the interests of different participants in the process (Norgaard O., 2007, p. 146-149).

The first approach focuses on the social and political consequences of initial decisions. The social costs are crucial here. In all post-communist countries, inflation was experienced by people on fixed incomes, as well as those with large cash balances (savings) and inflexible spending. Enterprises with inelastic demand for their products (raw materials, energy) were much stronger than those without this advantage. So, disadvantaged groups use their newly acquired democratic powers to block or impede reforms. This expectation (and fear) prevailed in the early 1990s among supporters of the shock strategy, who saw it as the only way to introduce institutional changes before the victims of reforms formed political movements that would stop (or make difficult) further reforms (Norgaard O., 2007, p.147).

The second approach focuses on the role of economic, administrative, and political elites in policy choices in the initial period and in the future. The elites in the best position were harmed by the rapid reforms, but at the same time they were in the best position to benefit from the initial and subsequent deviations from equilibrium. From this perspective, continued inflation becomes a symptom of either political gridlock or rent seeking, or both. Under this approach, the old nomenclature elite (together with the new elites) uses the slowdown in liberalization and stabilization to their own advantage (Norgaard O., 2007, p. 148).

The third approach focuses on the role of political institutions and the influence of democratic institutions on institutional strategies. The essence of this approach is to explain how democratic institutions provide access to and influence competing group interests in conflicts over institutional strategies. Here, both elite interests and social reactions are part of the model of social and political interests' implementation into institutional strategy' choices. Institutions provide an intermediate structure that determines the power and influence of alternative groups in economic decision-making. The model does not exclude the situation when the elite simultaneously pursues a rent-seeking strategy. In those countries where the old political and administrative elites continued to exist, the development of democracy and market institutions was delayed (Norgaard O., 2007, p. 149).

So, it gives us very important point in understanding why institutional and economic reforms in Ukraine are not successful. O. Norgaard confirms that well- entrenched nomenclature elites are motivated either to stop reforms or to benefit from inflation if they remain in power. In such states, in most of the countries of the former Soviet Union, the old elite that remains in power can stop reforms and use its official position to obtain "rents" and reposition itself through privatization as the de jure owner of assets that it has been managing de facto.

Y. Bilenko emphasizes that the institutional theories complement the concept of endogenous growth. He considers the experience of institutional change in the post-socialist countries of Central and Eastern Europe “to be a kind of world-class socio-political experiment for analyzing the process of forming an effective institutional environment in the transition from one type of political and economic system to another” (Bilenko Y., 2012, p.274).

Institutional changes can be forced or imposed. Forced or spontaneously initiated institutional changes should be caused by profitable opportunities for income growth. Imposed institutional changes can occur only for the purpose of redistributing existing incomes among different groups of voters.

According to Y. Bilenko, for stable economic development it is necessary that macroeconomic equilibrium is complemented by institutional equilibrium. He also notes institutional divergence, not convergence, between the Central and Eastern European countries that joined the European Union and the European states of the Commonwealth of Independent States (Bilenko Y., 2012, p.277).

The mistakes in policy and “fragmentary reforms aiming at transition to a market economy ended up leading to the lack of genuine market economy agents”. The author concludes that “the first phase of reforms was associated with the structural adjustment of the financial and public sectors, as well as with achieving national currency convertibility for current transactions and a radical change of the direction and structure of export and import flows. These processes were accompanied by a decrease in industrial production, private and public consumption. The rapid transition of the economy to world prices both in export-import operations and in the domestic market did not create suitable conditions for increasing the monopoly power of export-oriented companies and the formation of financial oligarchic structures; neither did it increase their impact on governance and its subordination to their interests” (Bilenko, 2013, p.26).

Thus, the impossibility of implementation of economic and institutional reforms in the post-Soviet states, in particular Ukraine, is a consequence of the continuity of elites, the creation of oligarchies, lack of technologies, the stabilization of the economy with low incomes etc. Rapid privatization and liberalization led to even greater deformations, which these countries still cannot cope with.

Methodology

In our research, we had a need for methods that do not require verified statistical information. Under these conditions, the research in the first part is equipped with game theory methods.

Exactly game theory methods could be chosen as very helpful instruments for institutions and states interaction analysis. Robert Axelrod has proposed a tournament on the basis of The Prisoner's Dilemma (1980). This prompted the analysis of hundreds of different strategies. And here we are currently talking not only about the prisoner's dilemma but about a wide range of high-risk, integrative, one-time, and repetitive games. In the modern version of Tournament, manipulating the Python code allows for such calculations to be performed quickly and efficiently.

The use of theory models requires a clear interaction with behavioral economics. Lee Ch. and Lee Ch-H. (2023) underline that in human civilization, people cooperate with one another “even when it logically makes more sense to do otherwise at the time.” They looked at the prisoner's dilemma issue from a different angle, concentrating on the performance of the group as a whole. The goal was to maximize the group's overall benefit, regardless of how each player performed.

If we can determine the strategies of individual states or even institutions, then we can move on to the possibilities of implementing economic policies with the obvious application of these institutions.

A 1963 Stabilization Policy Paper outlined Mundell's contribution to what is commonly referred to as the Mundell-Fleming model (Mundell R., 1963). Boughton (2002) argued that it should really be called the Fleming-Mundell model--a similar paper by Fleming in 1962 was the first--and that much of the analysis can be found in earlier work by James Mead (Krugman P., 2021). But this confusion about authorship does not diminish the analytical abilities of the specified model.

Mundell's analysis suggests that monetary policy cannot be used at all under fixed rates, while it becomes over-effective under floating rates, acting not through traditional channels but through the exchange rate. Fiscal policy, on the contrary, is effective under a fixed exchange rate, but under a floating one - fiscal expansion crowds out net exports, nullifying any stimulating effect (Mundell R., 1971, 2000).

The Mundell-Fleming model allows us to argue that the economy cannot simultaneously maintain a fixed exchange rate, free movement of capital and an independent monetary policy. The economy can only support two of the three at the same time. This principle is called the "impossible trilemma".

0. Borzenko and A. Hlazova believe that this can be solved in the modern conditions of the digital environment. ICT is a tool to use the 3 fundamentals simultaneously, i.e. the government could support 2 of the 3, which are a fixed exchange rate and an independent monetary policy, while the free movement of capital can be ensured by digitization (Borzenko O. and Hlazova A., 2022).

The research was conducted on the basis of three approaches:

1. States interactions

2. Institutions interaction

3. Economic Policies interactions

The first and second approaches are based on Axelrod's tournament.

According to the first approach, strategies are chosen for individual states, according to the second, for individual institutions. As for the states, it was possible to identify them quite accurately based on their response to Russian aggression. As for institutions, their strategies are the result of the authors' observation of the functioning of these mechanisms in the conditions of Ukraine in the last three decades. Obviously, the choice of strategies may vary depending on the experience of the observer and the period of assessment. At the same time, the presence of the most aggressive strategies or the most inert allows you to make the net result of such models quite similar.

The third approach is implemented on the basis of the interaction of IS, LM and BP curves:

where c - marginal propensity to consume, T - level of taxation, Co - autonomous consumption, I = Io - b*i, Io - autonomous investment, Eo - autonomous component of the trade balance, m - marginal propensity to import, er - real exchange rate, у is the sensitivity of exports to changes in the exchange rate; F is the degree of capital mobility.

The authors chose the two most likely models of interaction of economic policies.



Research

In this study, we use three approaches: states interactions, institutions interactions, economic policies interactions. The first and second approaches are based on Axelrod's tournament and allow us to analyze different strategies of interaction between countries and institutions. The last one based on economic policies interaction (macro tools).

Approach 1. Let's identify the Axelrod tournament strategies that will most likely be involved in our analysis. It is described different Strategies in Table 1.

Table 1

Short descriptions of strategies

Now we are ready to define the appropriate strategies for each state and choose a high-risk game to determine the winning strategy. The choice of a high-risk game is explained precisely by the critical situation regarding warring Ukraine and the need to comply with sanctions against Russia in modern Europe. Regarding Ukraine and the USA, we will try two variants of strategies, since such a change is decisive for Ukraine's political and economic prospects.

As we noted above, the basis of this approach is the long-term interaction of individual strategies in pairs within the framework of the chosen game. Axelrod's competition allows us to determine the absolute winner of such interactions (at the top of the list in our right column, Tabl. 2). Questions may arise regarding the choice of individual strategies. At the same time, very often the winner's strategy depends on a narrow range of possible versions of individual players.



Table 2

The states strategies interaction

Strategies and model description	Ranking of winners
MODEL 1 List of strategies: EU - Collective.Strategy Ukraine - TitForTat Kazakhstan - HardTitForTat Hungary - CyclerDDC Poland - CyclerCCCDCD France - GTFT (generous TFT) Germany - Resurrection GB - ShakeHand India - BushMosteller USA - MemoryTwoPlayer China - CyclerCCCCCD Turkiye - Cooperator Russia - MemoryOnePlayer Tournament (players, game=chicken, turns = 600, noise = 0.05)	'Generic Memory Two Player', 'Cooperator', 'Cycler CCCCCD', 'Cycler CCCDCD', 'GTFT: 0.33', 'Bush Mosteller: 0.5, 0.5, 3.0, 0.5', 'Generic Memory One Player: C', 'Cycler DDC', 'Tit For Tat', 'Resurrection', 'Handshake', 'Collective Strategy', 'Hard Tit for Tat'
MODEL 2 Proposed change: Ukraine - Stalker Others the same Tournament (players, game=chicken, turns = 600, noise = 0.05)	'Stalker: (D,)', 'Generic Memory Two Player', 'Cooperator', 'Cycler CCCCCD', 'Cycler CCCDCD', 'Bush Mosteller: 0.5, 0.5, 3.0, 0.5', 'GTFT: 0.33', 'Generic Memory One Player: C', 'Cycler DDC', 'Resurrection', 'Handshake', 'Collective Strategy', 'Hard Tit for Tat'
MODEL 3 Proposed change: USA - Defector Hunter Ukraine - Adaptive TFT Tournament (players, game=chicken, turns = 600, noise = 0.05)	'Defector Hunter', 'Cooperator', 'Cycler CCCCCD', 'Cycler CCCDCD', 'GTFT: 0.33', 'Bush Mosteller: 0.5, 0.5, 3.0, 0.5', 'Generic Memory One Player: C', 'Cycler DDC', 'Adaptive Tit for Tat: 0.5', 'Resurrection', 'Handshake', 'Collective Strategy', 'Hard Tit for Tat'

Source of strategies list and types of code: https://axelrod.readthedocs.io

It is interesting that even quite significant fluctuations of the strategy on the part of the USA (from inter-party disputes to the return of the status of the world leader) do not deprive this country's strategy of the final victory in the case of a game with significant risk (the authors chose a game of chicken). The choice of cyclical strategies (CyclerDDC, CyclerCCCDCD or others) for a group of states is absolutely conscious, as this behavior is confirmed by their crisis management in recent years, particularly during the pandemic and war, communications inside of European institutions, balancing between the protection of the national producer and the terms of financing from EU funds.

The initial choice for Ukraine of absolutely passive behavior based on the TFT strategy is quite conscious for the period of recent years. Manipulating this strategy and its various versions does not change the situation. Ukraine did not have enough economic and political confidence, with the exception of the war years, to defend its own separate position. Even today, in some areas, it is forced to be restrained. The authors propose as one of the scenarios for the acquisition of entrepreneurial traits by the state strategy. In our opinion, such a strategy is a Stalker. We mean behavior (at least close to) as an owner, controller and innovator. Such a strategy is clearly a winning one, as evidenced by Axelrod's tournament in MODEL 2.

Approach 2. In the next case, we turn to the interaction of Ukrainian institutions (Tabl. 3). It is logical to assume that political and market institutions, on the basis of long years of operation, also produce their own individual strategies of behavior. This fact is quite easy to perceive by observing the work of the American stock market or the banking system of Switzerland, trade union-based societies or Asian paternalism.

In our case, we build two models. One model refers mainly to the pre-war period and partially affects the war period. Observing traditional institutions, we do not see significant changes that should be reflected in the list of strategies.

At the same time, in the post-war period, we see several new players and expect certain changes in the choice of strategies by individual institutions. In particular, the inflow of foreign investments into the country and external control over the course of reforms should have a significant impact on the institution of business functioning. Even minor positive changes in the state of the banking system and the stock market will force a business to take a decisive step from Backstabber to TFT, Tricky Cooperator and at least to Stalker. The controlling presence of former war allies will bring a player like Defector Hunter into this game.

In our opinion, in the absence of institutional transformations, as the first model shows (Tabl. 3, MODEL 1), after receiving the grumpy strategy as the winner, we do not achieve any positive changes. Let us remind that this is a strategy of increasing tendency to violate possible principles and agreements with each step.

Let's start with the fact that without changes in traditional social institutions, even the presence of new institutions does not allow to change the situation for the better. By traditional institutions we understand the judicial system, local selfgovernance, the institution of law enforcement, the election system and the institution of business functioning.

Table 3

The institutions	strategies interaction
MODEL 1	Ranking of winners:
Strategies:	'Grumpy: Nice, 10, -10',
Judiciary - Short Memory, Election system - Resurrection, Self - governance - Gambler, Business functioning - Backstabber, Law enforcement - Grumpy, War Allies - Punisher, oligarchy - Retaliate, post-military and volunteer individuals - Grudger and LookerUp Tournament (players, game=chicken, turns = 365, noise = 0.1)	'LookerUp', 'Gambler', 'ShortMem', 'Resurrection', 'Punisher', 'BackStabber: (D, D)', 'Retaliate: 0.1', 'Grudger'
MODEL 2	MODEL 3
Changed:	Changed: oligarchy - Defector,
Business functioning - Stalker	Law enforcement - DefectorHunter
Ranking of winners:	Ranking of winners:
'Stalker: (D,)',	'Defector Hunter',
'Grumpy: Nice, 10, -10',	'Gambler',
'LookerUp',	'LookerUp',
'Gambler',	'Resurrection',
'Resurrection',	'ShortMem',
'ShortMem',	'BackStabber: (D, D)',
'Punisher',	'Punisher',
'Retaliate: 0.1',	'Grudger',
'Grudger'	'Defector'

Source of strategies list and examples of code: https://axelrod.readthedocs.io

As was said, the most suitable institution of change or modernize is business functioning, which will immediately require a suitable environment (Tabl. 3, MOD. 2).

Approach 3. Based on economic policies interaction (macro tools).

Scenario 1. Monetary policy imperfect capital mobility

The institutions indicated in the previous approaches directly participate in the implementation of economic policies.

The first scenario consists in the possibilities of implementing monetary policy in the conditions of a floating exchange rate and imperfect capital mobility. In conditions of Mundell - Fleming model it means: LM1 ^ LM2.

In war or post-war conditions, due to the lack of investment resources (the infrastructure of the country has been completely destroyed, and the aid of the West was primarily of a military nature; the difficulty of obtaining frozen Russian assets) such a choice is considered sufficiently justified. As a result of this shift of the LM curve, we get: Yi\. In classical version of this situation we get capital outflow and BP - curve shift: BP1 ^ BP2.

The result of such actions is the devaluation of the national currency and export growth. The growth of exports causes the movement of the IS curve: IS1 ^ IS2. We find ourselves in a situation: Yf, if.

In the classical sense, such a scenario could be considered an effective monetary policy. But is it achievable in the conditions of Ukraine?

To realize the shift of the LM curve, it would be possible to use the money supply as a suitable tool. National statistics clearly show its growth during the war years. On the other hand, if such an expansionary policy were implemented through the banking system, it would not be successful due to the special rules of the game of national banks. It is enough to mention the capital investments of Ukrainian banks in high-yield foreign bonds directly in the last two years of war.

The National Bank, in the process of conducting on-site banking supervision of banks' activities, pays attention to the increase in the number of decisions made by state banks regarding the use of free currency liquidity in the purchase of securities of the G7 countries (NBU, 2023). In 2023, NBU certificates have supplanted almost all other money-making tools of banks.

Let's add to these record amounts of non performed loans, according to which the national banking system is the "leader" in the world. The excessively high level of the national bank's interest rate has been a deterrent to investment and credit activity in Ukraine for many years. Minor fluctuations in such instrument as official interest rate (which is essentially not a target value, formally decreased to 15% but still in fluctuations between 22 and 15) do not change its overall ineffectiveness. Such banking system is not an appropriate game changer at least to provoke economy growth.

There are significant questions regarding the impact of devaluation on export volumes. This is not only a matter of blocking sea transport (this issue has been partially resolved), constant protests by transporters and farmers of neighboring states trying to avoid competition from the Ukrainians (there not too justified logic is situated in opposition to Ukrainian oligarchic business), but also of Ukraine's ability to increase such exports. For several previous decades, Ukraine remained a raw materials supplier of the world economy. For such a group of goods, significant shifts in the market are quite problematic.

Ukrainian exporters of agricultural products have left about $3 billion in foreign exchange earnings abroad since the full-scale invasion of Russia into Ukraine, increasing the pressure on the country's foreign exchange reserves.

In an interview with Forbes Ukraine, the head of the NBU, Andrii Pyshnyi, stated that, in general, exporters did not return to the country about $8 billion in foreign exchange earnings. According to him, this greatly affects the economy of Ukraine; in particular, it increases the pressure on its foreign currency reserves (Forbes Ukraine, 2023).

There are still hopes for the military industry, the IT sphere and the transport industry. But this is clearly not enough to transform the national economy into an economy of added value and innovation, which is a common character of developed markets. Let us add that in Ukraine there is no single clearly defined methodology for calculating added value. Also, enterprises do not submit a value added statement.

With only the visible presence of the stock market and the concentration of the banking sector on activities outside the credit needs of business, it is rather difficult to rely on the innovative character of the post-war Ukrainian economy. There is quite a lot of talk about multibillion-dollar infusions into the economy from the military allies. At the same time, the institutional imperfection of the environment can create conditions for investment outflow in a rather short perspective.

Scenario 2. Fiscal restrictive policy

The next scenario is an attempt to implement a restrictive fiscal policy under conditions of a fixed exchange rate.

Its probability is quite high as a result of significant expenditures from the budget for the purchase of foreign weapons, massive voluntary donations of citizens to support the army. The latter can cause the well-known demand inflation in such situations. These steps shape the movement of the IS curve: IS1 ^ IS2.

Add to this the destruction of industrial facilities throughout Ukraine and the loss of a share of the economy that was formed in the temporarily occupied territories.

Fig.2. Theoretical illusion under fixed exchange rate

Money is withdrawn from the real economy and we cannot carry out the traditional for this model movement from LM1 to LM2 to at least restore the status quo.

Significant foreign aid largely bypasses traditional sectors of the economy and only partially contributes to its survival. In result: Yj, ij. It does not affect the flow of capital. This situation has been somewhat confirmed in the last two years. The surplus of the current account of the balance of payments in 2022 amounted to $8.0 billion (5.0% of GDP) compared to a deficit of USD $3.9 billion (1.9% of GDP) in 2021. In 2022, real gDp decreased by 29.1% (NBU, 2022).

This type of policy clearly did not seem appropriate under these conditions. It will not be relevant in the future. The government understood existed situation and returned to a float exchange rate (or close to it).

And what can it do? According to traditional Keynes' advice, the government should stimulate investments and public spending (works) even in war conditions.

But this workforce does not exist today due to mass emigration and will not return en masse in the post-war period. Therefore, it remains to emphasize capitalintensive modern productions with a minimum amount of labour. And this is a conversation about foreign investments, not the traditional oligarchic model that still functions in Ukraine. It is practically impossible to meet such needs without significant institutional changes.

From the point of view of the analysis of the case of Ukraine, it is interesting that the parallels with the present-day Poland are traced not from the period of the 90s, but from the post-war period of the 20s of the last century.

It was believed by current government that Poland could improve the state of its treasury on its own. Proposed measures included deep cuts in military spending, which was unacceptable for political reasons and a shift in education spending from central government to local governments, which was also unrealistic.

In January 1924 government received full powers to implement fiscal reform. Government plan was to stop the financing of public expenditures by the Polish Loan Bank, to introduce a property tax, and to increase the transport tariffs of the Polish state railways in order to achieve their financial self-sufficiency.

The value of the Polish zloty was supported by small but growing gold reserves, obtained in part from the liquidation of reserves of the Austro-Hungarian Bank, payments by Russia of compensations guaranteed by the Treaty of Riga, and in part from a loan from Italy and from voluntary contributions of Polish society.

From the point of view of reforming the Ukrainian banking system, the following experience is also significant. At that time, the subscription for shares of Bank Polski has started. According to the charter, it received the form of a joint- stock company. Industrial enterprise owners acquired 38.2 percent of Bank Polski shares, commercial banks--as we would call them today--acquired 13.7 percent, civil servants and military officers acquired 12.7 percent, state officials acquired 8 percent, and the rest was bought out cities, rural communities, cooperatives, municipal savings banks, etc.

At the beginning of 1925, a customs war began between Germany and Poland (the same Expectations between Poland and Ukraine for the post-war period). This led, among other things, to a sharp reduction in the export of coal, which was the main source of foreign currency in the Polish economy (Bien K., 2018).



Conclusions

Participation in international alliances based on existing strategies (both for the state as a whole and for individual institutions) seems not to be successful for Ukraine. Moreover, traditional strategies do not allow the full implementation of economic policies. But the change of such strategies, first of all in the direction of prevailing innovativeness and marketability, allows Ukraine to claim active positions in international alliances and competition. Implementation of economic reforms in Ukraine without serious institutional reforms is doomed to failure.

What policies can create proactive strategies in Ukrainian economy? Extended money supply, cheaper long-term loans conditions, innovation friendly taxation, and real value added accounting are among such steps. Existing institutional environment doesn't allow such type of resurrection.



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18. Mundell, R (1971). The dollar and the policy mix. Essays in International Finance, 85.

19. Mundell, R (2000). A reconsideration of the Twentieth Century. American Economic Review 90(3) 327-340.

20. Borzenko O., Hlazova A. (2022) The mundell-fleming model application in digital economy: case of Ukraine. Інтелект XXI, 2. DOI: https://doi.org/10.32782/2415-8801/2022-2.!.

21. Bien K. (2018) Building the strength of the Polish zloty. Available from: https://www. obserwatorfinansowy.pl/in-english/macroeconomics/building-the-strength-of-the-polish-zloty

22. The National Bank criticized state banks for investing in G7 government bonds instead of currency government bonds. Available from: https://www.epravda.com.ua/news/2023/10/27/705940/

23. Licenses are returned. The Cabinet of Ministers changed the rules for the export of agricultural products. Forbes Ukraine. Will it be possible to tame the "shadow"? Available from: https://forbes.ua/money/ne-za-kesh-ale-z-litsenziyami-kabmin-zminiv-pravila-eksportu-agroproduktsii- shcho-zminyuetsya-01112023-17018