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Prepared for the East Jour Fixe Ukraine : Shifting E conomic H orizons and I nterlinkages OENB , Vienna , January 20, 200 6. Ukraine One Year After the Orange Revolution: Economic Policy Challenges and Goals. Vladimir Dubrovskiy. CASE Ukraine www.case-ukraine.kiev.ua. - PowerPoint PPT PresentationTRANSCRIPT
CASE UkraineCASE Ukraine
www.case-ukraine.kiev.ua
Ukraine One Year After the Orange Revolution: Ukraine One Year After the Orange Revolution: Economic Policy Challenges and GoalsEconomic Policy Challenges and Goals
Vladimir DubrovskiyVladimir Dubrovskiy
Prepared for the East Jour Fixe
Ukraine: Shifting Economic Horizons and InterlinkagesOENB, Vienna, January 20, 2006
In many cases players fail to establish the efficient institutions.
CASE Ukraine
Rent seeking vs. profit seeking
Profit seekingCreation of the value voluntary apprised by competitive market
Appropriation of already existing value, e.g. created by others
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 establish certain efficient institutions, primarily, the property rights by a voluntary agreement
A coercive force is required to arrange appropriation while preventing the overappropriation
Rent seeking requires FORCED coordination and Rent seeking requires FORCED coordination and control that can only be arranged by control that can only be arranged by
AUTHORITARIAN POWERAUTHORITARIAN POWER
Sonin (2003), Hoff and Stiglitz (2002, 2004), Polishchuk and
Savvateev (2002):
playerclient Rent source
CASE Ukraine
player
playerplayer
Arbiter-clients model: how it works
Authoritarian arbiter
Distributes the quotas for rent appropriation arbitrarily,arbitrarily, and enforces
them in order to restrain the devastating competition
client
clientclient
… … but instead extorts the rent himself, or trades it for loyaltybut instead extorts the rent himself, or trades it for loyalty
Rent source
Profit seeking (competitive) sector
Rent seeking sector
Monopoly rent
CASE Ukraine
player player
playerplayer
InIncrease in the social wealth
DeDecrease in the social wealth
Effects of authoritarian rule
Paternalism (clietnelism) and corruptionPaternalism (clietnelism) and corruption
Firms earn their incomes mostly as rents depending primarily on the arbiter’s discretion
client
client client
client
CASE Ukraine
An arbiter:CASE Ukraine
Has an incentive to extract the rent (share the players’ rents)
Looks as “captured” with vested interests
Asymmetry: The players can motivate their arbiter with a “carrot”, but not threaten to him irresponsibility
players are clients of their arbiter
In effect, “owns” a source of rent
Interested in using his discretionary power for further weakening the clients’ residual rights of control
Arbiters and clients form a hierarchy
Crowds out and suppresses any other ways of preventing the overappropriation
Rent-maximizing
Power-maximizing totalitarian
authoritarian, plutocraticArbiters: Arbiters:
≡≡
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
“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
“Soft” rule of law
FACILITATES
CASE Ukraine
Legislation (flawed,
ambiguous, impracticable)
Corruption
Discretion
ENHANCES
INTEREST INTEREST
Decreasing the demand for improvements
ALLEVIATESALLEVIATES
CASE Ukraine
Blat networks
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
A tacit social contract:
“We” do not bother
“them”, “they” do not
bother “us”
Informal Informal networks of networks of
interpersonal interpersonal exchange (exchange (BlatBlat))
Whither “captured statecaptured state”: a dead end?
Business:
a “Milk cow” 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
Profit-seeking sectorRent-seeking sector
Technology Technology
SOCIETAL NORMSSOCIETAL NORMS
CASE Ukraine
REVOLUTION?REVOLUTION?
Rent-seeking sector
Profit-seeking sector
“Standard” approach applies
Transition from a rent-seeking society: Evolution and REvolution?
Politically responsible government
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
Overappropriation of state budget and enterprises’ fixed assets
“Overappropriation” of creditors’ trust
Sources of RentSources of Rent1995 – 1995 – 20020000??????
Subsidies and government contracts
Close collaboration of business and officials based on blatblat
CASE Ukraine
-80
-70
-60
-50
-40
-30
-20
-10
0
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
0
0.5
1
1.5
2
2.5
3
self-reliance
satisfaction with socialstatus
SATISFACTION with own SOCIAL STATUS (score
of maximum 5, right axis), and SELF-RELIANCE (percentage of respondents agreed that their life success depends on themselves, net of the percentage of respondents agreed that it is determined mostly by the external conditions – left axis).
source: National Academy’s Institute of Sociology’s survey (Panina, 2005)
CASE Ukraine
0%
10%
20%
30%
40%
50%
60%
70%
80%
2000 2001 2002 2003
Intolerance to corruption in the state-business relationships grew up before the Orange Revolution
Percentage of entrepreneurs reported corruption as substantial impediment source: IFC annual business surveys
CASE Ukraine
50.38
43.4
31
0
10
20
30
40
50
60
200420032002
… as well as corruption as such
Percentage of respondents reported they had to pay bribes during the last year source: Partnership for a Transparent Society household survey
A tacit social contract:
“We” do not bother
“them”, “they” do not
bother “us”
Informal Informal networks of networks of
interpersonal interpersonal exchange (exchange (BlatBlat))
Whither “captured statecaptured state”: a dead end?
Business:
a “Milk cow” 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 Threat of populism and paternalism towards large groups of population 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
0 1 2 3 4 5 6
1998
1999
2000
2001
2002
2003
2004
2005
2005
Ku
chm
aY
ush
che
nko
The peoples’ evaluation of two presidents
(for Yushchenko – on Apr. 2005)
source: National Academy’s Institute of Sociology’s survey (Panina, 2005)
CASE Ukraine
Upsurge in the social protection
30%
Partly due to fair but Partly due to fair but awkwardly made awkwardly made elimination of elimination of privileges privileges
pension expenditures
69%social budget expenditures
>60%tax revenues
Has overgrown the Has overgrown the “national economy” by “national economy” by >7% - for the first time>7% - for the first time!!
dramatic decrease in the current dramatic decrease in the current account surplus, and two-digit inflationaccount surplus, and two-digit inflation
Share of transfers in Share of transfers in household incomes household incomes overgrew the share of overgrew the share of wages for 9 monthwages for 9 month
CASE Ukraine
0
10
20
30
40
50
60
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
rather negative
rather positive
People's attitude to the privatization of large-scale enterprises
source: National Academy’s Institute of Sociology’s surveys (Panina, 2005)
CASE Ukraine
Re-privatization
quarrel between members of Orange team in September, 2005
“every district’s leader will have his own Krivorizhstal’” (Paskhaver)
Yushchenko: “Krivorizhstal’ was stolen!”
Finally re-privatized and sold for good price
but
Price six times lower than was paid later at the transparent and open auction
Revenues actually spent for bribing the voters for Yanukovich
Decrease in investments
Populist attitudes proliferated
CASE Ukraine
-20.0%
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
Balance of attitudes to land privatization
source: National Academy’s Institute of Sociology’s surveys (Panina, 2005)
CASE Ukraine
Combating the corruption
Rated 107 (out of 158) by the Transparency International in 2005 with a score of 2.6 (out of 10)
“CONTRABANDA-STOP” Increase in prices
Improved since 2004 (122 out of 145, score 2.2)
butGiving to the systemic role that corruption plays,
punitive strategies solely cannot eliminate it, and
even their modest success may be harmful !
bankruptcies while
Increasing demand for improvement of the Increasing demand for improvement of the formal (legislative!) rules formal (legislative!) rules
CASE Ukraine
Attempts of administrative price regulations (meat, gasoline, sugar…)
Sudden shift in the exchange rate
Obvious mistakes
Attempt of partial abolishment of simplified taxation for SME
Procrastination of major systemic reforms (tax system, courts, public administration, health care and education, etc.)
“the period of extraordinary politics” (Balczerovich)
374 parliamentary votes out of 450 supporting the Cabinet
WASTEDWASTED
CASE Ukraine
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
1 2 3 4 5 6 7 8 9 10 11 12
2004
2005
Real GDP growth (cumulatively, yoy)
CASE Ukraine
drop in investments by 2% due to political instability and further weakening of the property rights FDI increased twofoldFDI increased twofold
economic growth of just 2.4%, the lowest since 2000
Slowdown of growth started due Slowdown of growth started due to other factors before the to other factors before the revolution revolution
two-digit inflation
household real incomes went up household real incomes went up by 20%,by 20%,
are the positive developments really are the positive developments really sustainable, and the negative ones just sustainable, and the negative ones just
transitorytransitory ??
dramatic decrease in trade balance
balance was unsustainably high balance was unsustainably high and partly fake and partly fake still lower than it was still lower than it was in 2004in 2004
Macroeconomic results of 2005: mixed outcomes and excuses
CASE Ukraine
Threats and risksratings of both leaders of the Orange team have decreased four times
possible defeat at the Parliamentary elections of 2006
Yushchenko’sYushchenko’s current rating is current rating is lowerlower than it used to be for the than it used to be for the few years before the Orange few years before the Orange Revolution; “Revolution; “Our UkraineOur Ukraine” is ” is even less popular; but for even less popular; but for TimoshenkoTimoshenko it is still it is still higherhigher
Timoshenko can Timoshenko can possibly become an possibly become an “arbiter” of a new kind “arbiter” of a new kind – the populist dictator – the populist dictator
Increasing tensions between Increasing tensions between East and West aggravated by East and West aggravated by the Russian political the Russian political technologiststechnologists
Too Too DANGEROUSDANGEROUS to assessto assess
CASE Ukraine
““revelation of the revelation of the entrepreneurial potential entrepreneurial potential
of Ukrainian nation”of Ukrainian nation”
new and more capable elite may be needed that new and more capable elite may be needed that would be able to respond to these challengeswould be able to respond to these challenges
Current economic structure: reveals mostly the Russian competitive advantages of cheap energy
The strategic challenges
getting rid of getting rid of dependence on cheap dependence on cheap
Russian energyRussian energy
Relatively high human capital is a real competitive advantage
Relatively high innovation rate Relatively high innovation rate
remains unrevealed due to the
poor business climate
Low domestic demand for innovations Low capacity to adopt them
Will hardly sustain unless supported in some wayWill hardly sustain unless supported in some way
Thanks for Thanks for your attention!your attention!