What drives protests in the Ukraine? This time, it is institutions

Nauro F Campos, 22 December 2013

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Once more, mass political protests erupted in 2013, this time in Ukraine. Protests are starting to spread and swell (freezing temperatures notwithstanding), but so far they have been mostly concentrated in the capital city. Anti-government protestors have barricaded themselves in Kiev’s Independence Square (‘Maidan’) and, from the confines of the said square, have attracted considerable international attention (culminating, arguably, with the recent visit of two US senators – Democrat Chris Murphy and Republican John McCain).

What is the reason for these mass political protests?

  • The conventional wisdom so far has been that the so-called EuroMaidan protest is driven by grassroots dissatisfaction with an increasingly undemocratic and corrupt government, presiding over a rapidly contracting economy, that has rejected, at the last minute, a generous deal with the EU, and instead is turning to Moscow’s offer of a customs union with Belarus, Russia, and Kazakhstan.

This column argues that the reasons for EuroMaidan go deeper and the consequences of failing to address them this time around may be severe and long lasting.

  • The cause of these protests is in the extremely poor institutions that have taken root in Ukraine after the collapse of communism.

Economic research has a lot to say about this and below we introduce some of the main ideas. Next, I recall institutional failures in Ukraine in the 1990s and 2000s, argue that the main reason EU involvement is beneficial is not financial aid or market size, but an institutional anchor and, finally, note that failure to fully utilise this historical moment may result in slow but long-term collapse, for which the Argentinian experience provides illuminating, yet sobering, examples.

What can academic research teach about EuroMaidan?

The cause of the recent protests in Ukraine is the weak institutional framework that emerged after the collapse of socialism. Institutions have figured prominently in recent research (e.g. Acemoglu and Robinson 2006), and our understanding of how they work has benefited greatly from the experience of the transition from socialism. Indeed, one of the stylised facts of the transition is that it created an ‘institutional vaccum’ (Campos and Coricelli 2002).

  • The economic and political institutions that organised the socialist system were imposed upon the countries of central Europe.
  • Property rights were poorly enforced (state ownership was widespread) and the rule of law followed the (Communist) Party’s discretion (Roland and Verdier 2003).
  • Looting (asset stripping or tunnelling) was common and accepted.1

In such circumstance, how do you transit? How can a country go from institutions that ignore private property rights to ones that exist to protect and enforce them? Hoff and Stiglitz (2004) model the obstacles to the political demand for the rule of law in post-Communist countries. With Russia in mind, they identify a set of factors that may fit Ukraine even better: “a historical legacy of corruption, a corrupt privatisation, abundant natural resources, open capital markets, and a hyperinflation in 1992–1993 that by destroying private savings aggravated the consequences of imperfect capital markets and made asset stripping appear relatively more attractive” (p. 754.) Campos and Giovannoni (2006) put forward firm-level cross-country evidence on asset stripping in transition. They find that the use of stripped assets was significantly more extensive in Russia and Ukraine than in Poland, Slovakia, and Romania. An important lesson from the transition is that the establishment of inclusive economic and political institutions (those able to shore up growth, innovation, and peace, and to deter rent-seeking, asset stripping, and despotism) do take considerable time, especially if there is no available outside option. This option – an institutional anchor (Berglof and Roland 1997) – is a large part of the appeal of membership of the EU.

Ukraine: Then and then

‘Then and now’ would be a better sub-title, but ‘Then and then’ suggests that there has been little evolution, and little progress from then to now, and the latter still looks pretty much like the former. This may describe well the transition from centrally planned to market driven economy in Ukraine. In the 1990s, economists struggled to understand the nature and extent of the institutional vacuum. Familiar concepts, such as the informal sector and corruption, were rushed in. But these did not fit well – estimates pointed to extensive ‘informal economic activities’ (around 50% of Ukrainian GDP circa 1997) and anecdotal evidence pointed to ‘oil refining’ and ‘gas production’ as chief components. Of course, informal oil refining is not what first comes to mind when development economists think of the informal sector.

Economic and political institutions have not evolved smoothly since, and the Orange Revolution in 2004 signalled the extent of discontent. Like Argentina (Campos et al. 2012), Ukraine has enormous economic potential: decent infrastructure, an educated workforce, a diversified industrial structure, and abundant natural resources (not only hydrocarbons and minerals, but also productive agricultural land.) Yet, inclusive institutions have difficulty emerging not only because of substantial regional and linguistic differences (Constant et al. 2012), but also because of the entrenchment of powerful new economic elites that contributed to the lingering of the Soviet legacy. The press recently reported with excitement that during EuroMaidan a statue of Lenin was toppled in downtown Kiev, and Soviet stars were taken out from the city hall’s façade. Astonishment failed to register as to how and why such symbols are still on display two decades after the collapse of the Soviet Union. Despite the free and fair elections that brought President Yanukovych to power in 2010, the political situation deteriorated quickly (Havel et al. 2011.) Recently, a leading scholar singled out three main sources of embezzlement and presented estimates that these three sources as a whole “have probably generated $ 8 to10 billion a year to the ‘Yanukovych family’ during the last three years” (Aslund 2013).

Can the EU be the solution?

Rent-seeking of such depth and extent understandably divides Ukrainian economic elites. The more it goes on and the deeper it gets, the more members of this economic elite will be in favour of the strong protection of property rights the ‘EU anchor’ delivers (and one may suspect, the more they would be supportive of EuroMaidan.) It seems clear that full membership of the EU is not a realistic option in the medium term (say, the next five years), but the current debate is about the path of economic integration and, even on this respect, the EU offer of a free trade agreement is superior. Of course, members of the latter retain independence on setting external tariffs, while customs union members do not (see Hoekman et al. 2013 for a full discussion of the economic implications of this choice for Ukraine.)

What will happen next?

Anybody who knows anything about Ukraine would be a fool to try to predict what will happen in the next three weeks, or in the next six months. For the next six years, however, things are different. Like Ukraine, Argentina has huge economic potential. This is an historic moment for Ukraine, but Argentina shows that there can be an endless sequence of (unused) historic moments. It shows that a country can be very rich, full of potential, but faced with moments that become historic, ex post, for the wrong reasons – the failure to capitalise and to develop inclusive institutions. It is not violent political conflict per se that is detrimental to economic development, but it is the persistence (or redundancy) of conflict that is a key barrier. Such redundancy clearly indicates that good institutions are (still) not at work.

References

Aslund, A (2013), “Payback Time for the ‘Yanukovych Family’,” Peterson Institute for International Economics blog, December 11.

Acemoglu, D and J Robinson (2006), Economic Origins of Dictatorship and Democracy. Cambridge, UK: Cambridge University Press.

Berglöf, E and G Roland (1997), “The EU as an ‘Outside Anchor’ for Transition Reforms” in A Bigger and Better Europe? Final Report to the Swedish Government from the Committee on the Economic Effects of EU enlargement, Fritzes Stockholm, pp. 77-94.

Campos, N and F Coricelli (2002), “Growth in transition: What we know, what we don’t, and what we should,” Journal of Economic Literature XL, 793-836.

Campos, N and F Giovannoni (2006), “The Determinants of Asset Stripping:Theory and Evidence from Transition Economies,” Journal of Law and Economics 69: 681–706.

Campos N, M Karanasos and B Tan (2012), “Two to Tangle: Financial Development, Political Instability and Economic Growth in Argentina since 1890”, Journal of Banking and Finance 36(1), 290-304.

Constant, A, M Kahanec and K Zimmermann (2012), “The Russian–Ukrainian Earnings Divide,” Economics of Transition, 20: 1–35.

Havel, V, D Tutu and R von Weizsäcker (2011), “Ukraine Loses Its Way,” Project Syndicate, August 31.

Hoekman, B, J Jensen and D Tarr (2013), “Ukraine’s trade policy,” VoxEU.org, November 29.

Hoff, K and J Stiglitz (2004), “After the Big Bang? Obstacles to the Emergence of the Rule of Law in Post-Communist Societies,”American Economic Review 94 (3): 753-763.

Kornai, J (1992), The Socialist System: The Political Economy of Communism, Clarendon Press.

Roland, G and T Verdier (2003), “Law Enforcement and Transition.” European Economic Review 47:669–85.

Tiffin, A (2006), “Ukraine: The Cost of Weak Institutions.” IMF Working Paper WP/06/167.


1 To quote a famous Ukrainian: “You don’t know life. No one lives on wages alone. I remember in my youth we earned money by unloading railroad freight cars. So, what did we do? Three crates or bags unloaded and one for ourselves. That is how everybody lives in [our] country” (Leonid Brezhnev, quoted in Kornai, 1992.)

Topics: Europe's nations and regions, Institutions and economics
Tags: EU, protests, Ukraine, weak institutions

Professor of Economics and Finance at Brunel University and CEPR Research Affiliate