CASE Ukraine Corruption in Ukraine: Behind and Beyond the Orange Revolution Vladimir Dubrovskiy

The 2004 Transparency International Corruption Perceptions Index CASE Ukraine 114.Rep. of Congo2.3 Ethiopia2.3 Honduras2.3 Moldova2.3 Sierra Leone2.3 Uzbekistan2.3 Venezuela2.3 Zimbabwe Bolivia2.2 Guatemala2.2 Kazakhstan2.2 Kyrgyzstan2.2 Niger2.2 Sudan Ukraine Cameroon2.1 Iraq2.1 Kenya2.1 Pakistan2.1 Out of 147 countries

CASE Ukraine 160Liberia Moldova Niger Pakistan Sierra leone Kenya Ukraine Indonesia Papua new guinea Belarus Georgia Libya Kyrgyz republic Togo Djibouti Venezuela-0.94 Control of Corruption (2004), Point Estimate Governance Matters IV: Governance Indicators for Daniel 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

CASE Ukraine 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 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: 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’ arbitrary, 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 deserve a right 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 (!) BUT

FACILITATES CASE Ukraine Legislation (flawed, ambiguous, impracticable) Corruption Discretion ENHANCES INTEREST Decreasing the demand for improvements ALLEVIATES

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 cost

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

Whither “captured state”: a dead end? Business: a “Milk caw” or a “Rent pump” for officials Administrative power: Provides protection and patronage for business Residual rights of control Public: a passive player Sources of rent; permissions Perceived totally corrupted Perceived totally rent- seeking

CASE Ukraine Public is not passive any more BUT 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

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