Silicon madness of Ukraine

This word is so enigmatic that it drives minds of business people and government officials crazy across the globe. Everyone wants to have a piece of it - if not a valley, then maybe a rout, a town, or a roundabout. The billions of money units and zillions of brain cells are spent on bringing the wonderful plans into life, either successfully or unsuccessfully. And all this because it worked in one place on the planet, in sunny California, and worked pretty well. The main thing majority of devoted followers are forgetting is that it happened without exciting government programmes and state funds. Silicon is the magic word.

Ukraine is jumping on this bang wagon later rather than sooner, and with the idea that seems to be equally exciting and horrendous.  Last week one of Vice Prime ministers has revealed the idea of creating Silicon valley outside the capital city of Kyiv - technological park with offices, universities and research institutes, as well as accommodation on 140 hectares of virgin land. It should become magic place where cool ideas could be married with sound business plans and generous funding. I say 'astounding'. Especially as there are no signs of high intellectual activities or any technology-related economic activities in the surrounding and you will be building expensive hi-tech-toy complex with no doubt significant sum of state money.

And I can understand his ambition - it's cool idea. You look at Skolkovo in Russia and your hands are getting itchy to try to do a similar miracle, albeit with less billions available due to lack of natural gas and oil reserves in Ukraine (though if you read not only official news your excitement about Russian silicon village is evaporating quite quickly). Also I can understand him personally - it's difficult to forget all these exciting technology-related conversations which he no doubt has around family dinner table, since his wife is one of the most famous and influential venture capital funders in Ukraine. But wait a minute, is it the reason to splash budget money on the project which has no basic grounding and cost-benefit analysis? I believe not.

I am not an expert in establishing and funding high-tech and innovative businesses. But I am expert in spatial aspects of socio-economic development and thus aware of fundamental rules which underpin success or lack of it in business location decisions. Basic textbooks will tell you that putting high-tech incubator in the middle of nowhere, even if this nowhere is only 20-30 kilometers away from the capital city, but without any major roads connecting it to the metropolis and without basic infrastructure to sustain it, is waste of money. Unless business sees it as an opportunity and ready to locate there, and there should be good reason for this (why would they do it now?). Ukrainian decision makers are traditionally ignorant of spatial organisation of economic activities and for the last 20 years didn't manage to figure out what policies are needed in order to improve competitiveness of certain territory. This silicon madness is just another proof of such total lack of understanding.

So instead of spoiling agriculture paradise of Kyiv region why not to invest some money in existing intellectual hot spots - such as Kyiv and Lviv Polytechnics, Kharkiv with its amazing cluster of highly competitive inventive institutes which have big portfolio for commercialisation. Why don't you build technopark on the campus (or very near) of university with high-class graduates and inventive staff? Why not to build your innovative cluster (if you need to call it that!) on top of existing essential infrastructure - knowledge/skills and municipal infrastructure - and instead bank it all for another white elephant?

The news about Kyiv silicon valley came almost simultaneously with another exciting news - Ukraine is number 152 in World Bank Doing Business Report, 3 places down from marvelous record of last year So, you would be absolutely right to ask why the country which has one of the worst investment and regulatory environments in the world is busy not with improving the basic conditions for local and foreign companies, but engages in ambitious, expensive and by all means looking useless projects? Well, the simple answer would be as it's easier to gain political and popular support by pushing through large project rather than by meticulous work that doesn't grab first pages of the broadsheets. And that's what politicians are really interested in.The more difficult answer would be the complete lack of vision and understanding what the country needs for successful economic breakthrough and shift from resource-based low-value-added economy to competitive economy that is built on brains and skills of its 46 million population. And this is really bad news, if your country's leadership has no clue where to go next...

So for those who are excited about Ukrainian silicon plan I would advise to go and read success story of Israel - the start-up nation - who from humble desert agriculture producer turned into one of the most innovative economies of the world, that produces highest share of knowledge-intensive products and services. I would also urge them to go back to Ukrainian power houses of ideas, which are many but dispersed and completely lack any business spirit or risk-taking ambitions. Which should be seen as an opportunity, not a barrier.

Or simply go and see what's people presenting at IDCEE - Kyiv based event for investors interested in Internet businesses across CEE - which is initiated by above mentioned venture capitalist (and where above mentioned official is keynote speaker) and see where good ideas are located across the country. I am sure you will notice interesting spatial pattern. And then just follow these businesses, create beneficial conditions for them to thrive and grow into big companies. Don't make them relocate to distant glass and steel castles surrounded by beautiful countryside which might soon turn into dilapidated dream factories.

Relevant posts (in Ukrainian):
1. Про ступені і про дослідників в Україні
2. Проект Х для Росії - прогрес у Сколково
3. Наука і бізнес - наближення
4. Ще одна Силіконова долина?

P.S.: Picture from http://gamespics.com/wp-content/uploads/2011/03/idea-lamp.jpg

Конференція RSA: українські презентації

Як і обіцяла, публікую деякі презентації українських колег із нещодавньої конференції RSA у Ньюкаслі, яка була присвячена різним аспектам регіонального розвитку і регіональної політики в Європі та світі.

Теми досить різноманітні і дуже актуальні - від механізмів фінансування регіональної політики і місцевого розвитку у посткризовий період, особливостей інноваційної політики України, до траекторій розвитку міста Києва за останні роки. Також представлена презентація на більш "регіональну тему" - регіональні асиметрії на східному кордоні ЄС.

Презентації англійською мовою. Можливо незабаром на акцентах з'явиться ще декілька українських презентацій з конференції - я чекаю на відповіді колег.

Отож чотири презентації:

1. Olga Mrinska 'The economic crisis as an opportunity: the case of Kyiv'
2. Victor Chuzhykov and Oleksander Fedirko 'Comparative analysis of regional asymmetries of the EU Eastern periphery'
3. Olga Shevchenko 'New requirements for financing regional development in post-crisis Ukraine'
4. Tetiana Korneyeva 'Innovation policy and related trends in Ukraine'

Сподіваюся вам сподобається.

Kyiv economy: free fall

I am now finishing presentation for RSA conference in Newcastle. Since over the last year I was fascinated by cities and their development I've decided to bring up the case of my home city. So I am going to talk about Kyiv and its transformations in the wake of the global crisis. This paper is only one element of a wider research I am doing on economy and governance of Kyiv and how it evolved over the last decade.

While preparing for the conference I was digging out some statistics to illustrate how badly Ukrainian regions were wounded by the crisis. We all know that Ukraine was one of the greatest victims of the crisis: in 2009 it lost 15% of its GDP comparing to 2008. With recently released data on Gross Regional Product in 2009 from State Statistics Service of Ukraine we can now see how various regions performed. The news are bad, especially for industrial centres and... Kyiv.

The thing is that despite its economy being very diversified and not dependent on 'classic' Ukrainian export staff (you know, metal, chemicals, agricultural products) the capital city's GRP has plummeted by 18.3%. Only 2 other regions performed worse - industrial strongholds of Donetsk and Zaporizhzia. Traditionally Kyiv was performing better than national economy - the growth rate over the last decade was always 2-4 percentage points higher (or even 12 pp in 2007). But when the national economy has experienced harsh recession Kyiv was the one in free fall.

But why? Services constitute 87% of Kyiv GRP and they are quite diversified. Though if we look closer we could see that city economy is dependent on retail, real estate/rent, and financial services that are responsible for more than half of GVA. Their expansion was fueled by rising personal incomes rather than business needs. And they were key ingredients in Kyiv property bubble, that burst so dramatically in 2008 (since then prices dropped by 50%). At the same time people's drive for shopping that made retail so important ingredient of the economy was undermined by falling incomes and devaluated Hryvnia.

So the diagnosis is harsh and simple; Kyiv relies too much on services that produce very little add value and are volatile. Financial sector was dependent on international borrowings that dried up as soon as liquidity crisis struck. Property market and construction were dependent on relaxed mortgages in foreign currency. Hryvnia lost 60% of its value at the end of 2008 so did people's real income.

Kyiv service industry is mainly built around satisfying personal needs rather than business needs. It uses too much borrowed money and not enough of locally available intellect and skills.

It is too early to say whether crisis has taught us a lesson. Preliminary estimations show modest 4% growth of GRP in 2010. But there are very few indications that the structure of city economy is changing. And there are definitely no indications that municipal government is doing meaningful steps to change the situation. To be frank, there was no city leadership at all from when the crisis has struck till summer 2010. Current mayor is complete failure and the whole governance structure is a mess.

But this is too interesting topic that deserves post on its own. So, to be continued :-)

P.S.: Logo by http://www.kiev.superheroes.ua/

Regional policy in Ukraine - changes without effect

It will never stop to amaze me, the way Ukrainian regional policy is always a victim of political battles, broken electoral promises, concepts that have been misunderstood and legislation that has not been implemented.

It is not even exciting anymore when President (or Prime Minister) makes announcement that the development of regions and regional governance is going to be their number one priority for this (next) year. That's happened so many times already and still we have system of half-baked, half-broken instruments that try to inject modern approaches to regional development in the old-style centralised bureaucratic system. That is why recent announcement of President Yanukovych at the Council of Regions that reform of regional governance is going to be his priority in 2011 has not stirred my emotions.

Instead I am looking at facts of life. 4 months since launch of major administrative reform and not a single ministry has approved new structure, list of functions and payroll. Ministry of Construction and Regional Development is being literally swallowed by new functions of communal housing which were transfered from late Ministry of communal housing. And once again my dear regional policy will be lost in the list of 30 key functions of newly created behemoth. It is only if it is not yet again transferred to the Ministry of Economic Development (where it was housed till very recently), which in itself is even bigger monster that sucked in functions of dozens liquidated ministries and agencies. Though admittedly MinEcon's analytical capacity and mandate are much stronger and thus there are greater chances for policy to be effectively developed and implemented (after of course transferring back the backbone of Regional Policy Department from Ministry of Construction etc).

It seems like the new structure of central government will be based not on the principles of efficiency and complementarity of functions, but on the principles of power - the strongest minister will get the biggest portfolio.

At the same time all talks of decentralisation and giving regions and localities more say in the issues of socio-economic development are dimmed to remain slogans as president and his administration are back as masters and commanders after recent constitutional changes. They sack and appoint people in oblasts and rayons, usually without engaging local leaders, they liquidate local councils in one day (as it happened in Kyiv), change legislation in one week and channel funding as they see fit. All this without proper public consultations.

Though of course,  there are many experts who would confirm that public 'does not care' and is more interested in stability and predictability. But the question is have we tried enough?

Well, there is stability in everything but regional policy in Ukraine!