Dissertation Regional Economic Growth and International Capital Flows The Case of Ukraine Olena Bogdan This document was submitted as a dissertation in September 2017 in partial fulfillment of the requirements of the doctoral degree in public policy analysis at the Pardee RAND Graduate School. The faculty committee that supervised and approved the dissertation consisted of Charles Wolf, Jr. (Chair), James Hosek (Chair), F. Stephen Larrabee, and Edward Keating. Svitlana Kobzar of Vesalius College in Brussels, Belgium, was the external reader for the dissertation. PARDEE RAND GRADUATE SCHOOL For more information on this publication, visit http://www.rand.org/pubs/rgs_dissertations/RGSD403.html Published 2018 by the RAND Corporation, Santa Monica, Calif. R® is a registered trademark Limited Print and Electronic Distribution Rights This document and trademark(s) contained herein are protected by law. This representation of RAND intellectual property is provided for noncommercial use only. 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Support RAND Make a tax-deductible charitable contribution at www.rand.org/giving/contribute www.rand.org In eternal memory of Dr. Charles Wolf, Jr., my mentor and the original Chair of my dissertation committee. iii In many countries, poorer regions are growing faster than richer regions, and provinces are converging over time. In other countries, however, regional economic differences have persisted over many years and income gaps are widening. It is important to understand why enduring regional socio-economic disparities exist within countries, what factors drive them, and what can be done to reconcile these differences. Recently, a policy community in Europe, Asia and the United States has become more interested in finding answers to these complex questions. This research examines divergent economic paths between regions in several countries. Based on the case studies of China, Italy, and the United States, I find that regional economic differences are common, even as countries have unlike history, culture, and socio-economic systems. Regional disparities are primarily attributed to local geography, human and social capital, institutional quality, infrastructure, public policies, and clustering of economic activities. Across all case studies, the most prosperous regions are also those with the largest international capital inflows. Because prosperous localities amass thriving businesses, next I focus on the role of foreign capital in regional economies. Using Ukraine as a case, I analyze data on its local socio- economic indicators and international capital inflows of various types between 2001 and 2013 and find not only substantial regional differences, but also a systematic, simultaneous, positive relationship between regional economic growth and international capital flows. This nexus is particularly distinct for Ukraine’s West where, if compared to other regions, any small increase in international capital, either public or private, would create a more than twice larger positive effect on local economic development. Based on my analysis, I recommend specific steps for Ukraine’s regional and overall economic policy. iv Abstract ........................................................................................................................................... v Figures.......................................................................................................................................... viii Tables .............................................................................................................................................. x Acknowledgments ......................................................................................................................... xii Abbreviations ............................................................................................................................... xiii Chapter 1. Introduction ................................................................................................................... 1 1.1. Motivation and Objectives .................................................................................................................1 1.2. Hypothesis and Research Questions ...................................................................................................3 1.3. Outline of Dissertation .......................................................................................................................3 Chapter 2. Background: Ukraine .................................................................................................... 4 Chapter 3. Overview of Existing Studies ...................................................................................... 10 3.1. Growth Modeling Literature .............................................................................................................10 3.2. Factors Behind Economic Growth ...................................................................................................11 3.3. Literature on Differential Regional Growth .....................................................................................16 Summary .................................................................................................................................................17 Chapter 4. Case Studies of Countries with Differential Regional Growth ................................... 19 4.1. China ................................................................................................................................................19 4.2. Italy ...................................................................................................................................................30 4.3. United States .....................................................................................................................................40 Summary .................................................................................................................................................50 Chapter 5. Ukraine's Regional Data .............................................................................................. 52 5.1. Socio-economic Indicators ...............................................................................................................52 5.2. International Capital Flows ..............................................................................................................60 Summary .................................................................................................................................................73 Chapter 6. Analysis and Results ................................................................................................... 75 6.1. Model of Regional Economic Growth and International Capital Flows ..........................................75 6.2. Empirical Approach and Results ......................................................................................................78 6.3. Supplemental Analyses ....................................................................................................................88 Summary .................................................................................................................................................92 Chapter 7. Conclusion and Policy Implications ............................................................................ 94 7.1 Key Findings .....................................................................................................................................94 7.2. Policy Implications: Ukraine ............................................................................................................97 7.3. Overall Policy Implications ..............................................................................................................99 Future Research .....................................................................................................................................101 v Appendix A: Case Studies Maps ................................................................................................ 102 Appendix B: Oblast Variations in Socio-Economic Indicators .................................................. 105 Appendix C: Detailed Model Estimates ..................................................................................... 106 References ....................................................................................................................................137 vi 2.1. Administrative Map of Ukraine .............................................................................................. 4 2.2. Pre-war Ukraine’s Regional Economic Growth ....................................................................