CASE CASE UkraineUkraine

www.case-ukraine.kiev.ua

The Political-Economic and Institutional The Political-Economic and Institutional Framework for Assessing the Business Framework for Assessing the Business

Environment in UkraineEnvironment in Ukraine

Vladimir DubrovskiyVladimir Dubrovskiy

CASE Ukraine

Keywords for the framework

Blat networks of interpersonal exchange with favors

Discretionary rule; selective law implementation (enforcement)The nachal’niks as opposite to bureaucrats

The “vicious triangle” of legislation-corruption-discretionRent seeking, overappropriation, and “arbiter-client” relationsPaternalism and its consequences“State capture” by corrupt networks

Societal structures:

Institutions:

Political economy

Some notions concerning the institutional changes

Some examples

In place of conclusions

“The severity of the Russian laws is alleviated only by discretion in their enforcement” “… just this disorder makes life in Russia

possible”

Institutional legacy of the former empire: Institutional legacy of the former empire:

Legislation is designed (intentionally?) in such a way that almost EVERYONE must become a lawbreaker

Discretion is the only resort from such a “total guilt”

Every business is subject to the authorities’ Every business is subject to the authorities’ arbitrary, arbitrary, discretionarydiscretionary power power

CASE Ukraine

“Who are the boss, we or the law?”

“Laws are written for the fools”

Karamsin, 19th century Russian historian

Gertzen, 19th century Russian social thinker

Keywords: DiscretionDiscretionary ruleary rule

Uncontrolled and mostly affiliated with business

Strictly controlled and separated from business

Possesses the political power to magnify ambiguity and non-transparency in legislation

No decision-making power

Clear separation of “powers” from branches of State

Controls politicians rather than vice versa. Tries to control mass-media to avoid public scrutiny

Operates under constant public scrutiny and political oversight

Poorly-paid and dependent upon administrative rents (in money or barter)

Relies upon discretionary power and vague and arbitrary informal rules

Highly-paid professional public servants facilitating rational processes of control.

Implements legislation in a strictly formal (impersonal) way

Administrative power in Ukraine

Bureaucracy (by Weber)

Nachal’niksNachal’niks: not the bureaucrats!

FACILITATES

CASE Ukraine

Legislation (flawed,

ambiguous, impracticable)

Corruption

Discretion

ENHANCES

INTEREST INTEREST

Decreasing the demand for improvements

ALLEVIATESALLEVIATES

CASE Ukraine

Keywords: Blat Blat networksnetworks

Reputation-based informal networks of interpersonal mutual exchange with “favors of access” (blat)

Emerge to facilitate the illegal transactions of all kinds

““One has to One has to deservedeserve a a rightright to pay a bribe” to pay a bribe”

No contract enforcement was officially available

Normal economic activities were considered illegal

Forced modernization, especially the Communist regime:

Legislation violated the natural law

Ledeneva, 1998

Weak rule of law

Litwak, 1991 (!) while

Usually requires a coercive force to arrange appropriation and/or prevent overappropriation (“tragedy of the commons”, overfishing)

CASE Ukraine

Keywords: The The RentRent Seeking SeekingProfit seeking

Creation of the value apprised by a competitive market

Appropriation of a value created by others or already existed

A positive-sum game (“cooking a pie”) increases the public wealth

A zero- or negative-sum game (“cutting a pie”) usually decreases the public wealth

Rent seeking

Players can agree on certain mutually-beneficial rules and enforce them

Manufacturing, trading, financial operations, etc. – if conducted under the fair competition and an even “playing field”

Robbing, fraud, racketeering, and ANY economic activities, to the extent they involve privileges, abuses of competition (like protectionism), etc.

A renewable rent source(as a state

budget)

A renewable rent source(as a state

budget)

CASE Ukraine

player player

playerplayer

Rent as an exhaustible common resource

Authoritarian arbiter

Restrains the devastating competition by force,

based on his discretionary power…

… but instead extorts the rent himself

client client

clientclient

Monopoly rent

CASE Ukraine

player player

playerplayer

InIncrease in the social wealth

DeDecrease in the social wealth

Competitive market sector

Rent seeking sector

Effects of an authoritarian rule

Paternalism towards the enterprises Enterprises’ rents depend primarily on the arbiter’s discretion

client

client

client

client

CASE Ukraine

Rents Rents for the nachal’niks and oligarchs at the expense of the population; deadweight loses

Credit emission

The government commits to “support a domestic producer”

“support of the

effective demand”

Tolerating arrears

Protectionism Direct subsidies

monetary emission

Soft crediting

monopolism Forced crediting

Fiscal deficit

Tolerating barter

Price growth out of control

Paternalism Paternalism results in crises

CASE Ukraine

Size of the rent-seeking sector is determined by the

balance between amount of rents available for an

arbiter and his costs of control and coordination of

the rent seekers

The rent seeking is costly for a society

It takes certain cost of an arbiter to coordinate and control the rent seekers

The rent seeking contracts

With exhausting of the available rents, and

complicating of control and coordination

Evolution:

A tacit social contract:

“We” do not bother

“them”, “they” do not

bother “us”

BlatBlat

Whither “captured statecaptured state”: a dead end?

Business:

a “Milk caw” or

a “Rent pump” for officials

Administrative power:

Provides protection and patronage for

business

Property rights, rents

Public

Sources of rents

Perceived totally corrupted

Perceived totally rent-

seeking

PASSIVE PLAYER

PASSIVE PLAYER

Perceived Perceived manipulatedmanipulated

Threat of populism and paternalism towards large groups of population

CASE Ukraine

Public is not passive anymore, it became a “principal” of the politicians

The oligarchs are not the main players anymore

Executive power officials have lesser impact on the legislature

As a result of the revolution:

Political market emerges

Politicians appeal to the broad groups of population

Public consciousness is still immature:

while

does not properly distinguish profits from rentssupports redistributive activities (as “re-privatization”)supports “coordination and control” (e.g. price regulation)

CASE Ukraine

“captured” by the directors and bureaucrats

Still controlled by the directors and bureaucrats by the means of

paternalism

Property rights

Time

The title property rights

The residual rights of control

Formal and actual institutional changes

CASE Ukraine

Evolution of the informal property rights

0

20

40

60

80

100

120

1994 1995 1996 1997 1998 1999 2000 2001 2002

0

5

10

15

20

25

30

% of entities privatized by the moment in the total number of privatized entities

ACTUAL percentage of the total labor force working at the private sector

PERCEIVED working in the private sector (IS NAS survey)

Depletion of the rent sources

Market imbalances

Financial instability

Cheap energy and credit

«intermediate winners»«intermediate winners»

Sources of Sources of RentRent

1988 - 19941988 - 1994

Dependence on government's re-distributive power

Stripping of the fixed assets (“end game”)

Sources of RentSources of Rent1995 – 1995 – 2004???2004???

Subsidies and government contracts

Close collaboration of business and officials based on blatblat

Thanks for Thanks for your attentionyour attention!!