CASE CASE UkraineUkraine

www.case-ukraine.kiev.ua

Corruption in Ukraine: Behind and Corruption in Ukraine: Behind and Beyond the Orange RevolutionBeyond the Orange Revolution

Vladimir DubrovskiyVladimir Dubrovskiy

The 2004 Transparency International Corruption Perceptions Index

CASE Ukraine

114. Rep. of Congo 2.3  Ethiopia 2.3  Honduras 2.3  Moldova 2.3  Sierra Leone 2.3  Uzbekistan 2.3  Venezuela 2.3  Zimbabwe 2.3122. Bolivia 2.2  Guatemala 2.2  Kazakhstan 2.2  Kyrgyzstan 2.2  Niger 2.2  Sudan 2.2

128 Ukraine 2.2129. Cameroon 2.1  Iraq 2.1  Kenya 2.1  Pakistan 2.1 http://www.infoplease.com/ipa/A0781359.html

Out of 147 countries

CASE Ukraine

160 Liberia -0.86

161 Moldova -0.86

162 Niger -0.87

163 Pakistan -0.87

164 Sierra leone -0.88

165 Kenya -0.89

166 Ukraine -0.89

167 Indonesia -0.90

168 Papua new guinea -0.90

169 Belarus -0.91

170 Georgia -0.91

171 Libya -0.91

172 Kyrgyz republic -0.92

173 Togo -0.92

174 Djibouti -0.94

175 Venezuela -0.94

Control of Corruption (2004), Point Estimate

Governance Matters IV:Governance Indicators for 1996-2004Daniel Kaufmann, Aart Kraay, and Massimo Mastruzzi

The World Bank, May 2005

Out of 204 countries

CASE Ukraine

Petty corruption: medicine, education, traffic enforcement ….

Corruption in state-business relations

Embezzlement and abuses of procurement

Extortion

Just increase the salaries and improve the control

Improve the transparency and control

Bribing

“State Capture” by Corrupt Networks

Collusion Karklins,

2002

Hellman,1998;Hellman, Jones, and Kaufmann, 2000

CASE Ukraine

Revenues typically paid to officials to "get things done" (% of sales)

0.00 1.00 2.00 3.00 4.00 5.00 6.00

CambodiaKyrgyzstan

RomaniaBangladesh

UkraineKazakhstan

PakistanBulgaria

ChinaSlovakia

RussiaPoland

SloveniaLithuania

Is it the “bribe tax” that makes a difference?

Investment Climate Assessments survey. IFC, 2002

CASE Ukraine

“Business Environment in Ukraine”. IFC, Septamber, 2003

CASE Ukraine

“Business Environment in Ukraine”. IFC, December, 2004

Corruption itself is perceived as a serious impediment for doing business…

… while the other impediments are connected to it

Institutional legacy (following North; Putnam)

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

possible”

Institutional memory of the former empire: Institutional memory 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, discretionary powerarbitrary, discretionary 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

CASE Ukraine

Corruption is embedded into the structure of post-Soviet society

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 is officially available

Normal economic activities are considered illegal

Forced modernization, especially the Communist regime:

Legislation violates the natural law

Ledeneva, 1998

Weak rule of law

Litwak, 1991 (!) while

FACILITATES

CASE Ukraine

Legislation (flawed,

ambiguous, impracticable)

Corruption

Discretion

ENHANCES

INTEREST INTEREST

Decreasing the demand for improvements

ALLEVIATESALLEVIATES

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 (Weber)

Officials: not a bureaucracy

CASE Ukraine

Consequences

Inhibited business selection through the entry and exit

Suppressed entrepreneurship and FDI

Distorted political representation

Poor governance

Misuse and misallocation of resources

High social costHigh social cost

CASE Ukraine

“Business Environment in Ukraine”. IFC, December, 2004

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

CASE Ukraine

Public is not passive any more

Societal structures are persistent

Authorities are committed to fight corruption seriously

Legislation did not change significantly

Executive power officials have lesser impact on the legislature

As a result of the revolution:

Political market emerges

“While we’re numerous, we’re invincible!”

Without a truly systemic and well-designed anti-corruption

policy, the loses from corruption increase whenever a

government tries to fight it

Further closing of corrupt networks

but

Thanks for Thanks for your attentionyour attention!!