Ukraine’s Economic Reform: Not Learning the Lessons of History
Written by: Christopher A. Hartwell
Drawing on his extensive experience in transition economies, Christopher A. Hartwell explains the current economic divergence between Ukraine and Poland.
Last month, Ukraine pledged to renew its economic reform efforts, mainly to help ease the passage of a long-delayed $1 billion tranche of support from the International Monetary Fund (IMF). While much of the reforms promised by the Ukrainian government focuses on education or pensions, there is also a realization that anti-corruption efforts need to be front and center. However, even with the government claiming that political will exists to tackle the pervasive corruption in the country, the new emphasis on fighting corruption fails to address the root cause of the problem. Simply put, corruption persists in the country mainly because there are far too many opportunities for corruption, too much government involvement in the economy, and subsequently too many chances for rent-seeking. Without vitiating the power of the government across all sectors except perhaps defense, the opportunities for corruption will remain. This lesson is one that Ukraine’s neighbor Poland learned quickly during its own transition, but is something that Ukraine still hasn’t quite grasped.
Unfortunately, this is not a new story in Ukraine’s history. As detailed in my new book from Cambridge University Press, the development of Ukrainian institutions over the past seven centuries, unlike Poland, has been predicated on few checks on the executive and a cavalier disregard for property rights. Indeed, an example of how Ukraine’s government is too involved in the Ukrainian economy can be found in a follow-on article of mine in the Journal of Institutional Economics, which traces the development of property rights in Poland and Ukraine over the past 632 years using the framework of Douglass North. Both the broader treatment of Ukraine in my book and the more specific treatment in the journal article find that the key constraint in property rights development in Ukraine was the continual meddling of politicians. In particular, as Douglass North predicted, broad-based property rights in Ukraine were never seen as more desirable than the alternative, namely narrowly-circumscribed rights accruing to the elite via the apparatus of government. Even today, Ukraine continues to cling to a land sale moratorium, refusing the sale of agricultural land under some ill-defined notion of “security.” The effect of this moratorium has been to lock up productive land and deny citizens their basic right of disposal of property. Throughout Ukraine’s history, as I detail throughout the book, this disdain by elites for property rights has kept power centralized in Kyiv, meaning a creation of opportunities for corruption.
While property rights are the most egregious area where Ukrainian politicians have failed the populace, one may find many such examples throughout the past 700 years. Even the right to trade across borders, a right which has expanded throughout Europe with the EU lowering barriers, has never been assured in Ukraine. At various times in just the past ten years, the Ukrainian government has played with export quotas, licenses, and a number of other restrictions; such mechanisms increase the frequency of interactions between the private sector and the public sector, transferring decision-making from the market to politicians. Under such an eventuality, the opportunities for corruption grow exponentially and only lead to more distortionary economic outcomes (which then, naturally, necessitate more intervention).
With a low-level conflict still ongoing in the east, aided and actively participated in by Russia, Ukraine cannot afford to waste its precious energies on issues peripheral to its national interest. As I wrote 12 years ago in a different context, government has a key function to address, namely the protection of its citizens; splitting its focus on interventionist economic policies only harms the economy while taking the eye off of the goal of protecting the country. In order to eliminate the scourge of corruption from the Ukrainian body politic, such interventions should be done away with, much as they were in Poland in the early years of transition. This will in turn help build a stronger economy, capable of resisting predations from Ukraine’s own neighbor to the east.