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Corruption is the main obstacle to Ukraine’s economic growth

Dr Marc Berenson is Senior Lecturer at King's Russia Institute.

Prior to joining King’s Russia Institute in September 2013 as Senior Lecturer, Dr Marc P. Berenson was serving, since 2007, as a research fellow on the Governance Team at the Institute of Development Studies at the University of Sussex in Brighton. His projects on governance, public administration, state capacity and state-society relations in Russia, Ukraine and Poland have been empirically, conceptually and methodologically ground-breaking, with a particular (and particularly important) focus on the ways in which citizens’ interactions with the bureaucracy shapes and is shaped by their perceptions of the state and the meaning of their own citizenship. His book – Taxes and Trust: Transitioning from Coercion to Compliance in Poland, Russia and Ukraine – was published in 2018 by Cambridge University Press, and his articles have appeared in Comparative Political Studies, the Journal of Communist Studies and Transition Politics and elsewhere. Previously, Dr Berenson worked as a research analyst for the American Bar Association, the EastWest Institute, The Carter Center and the Strengthening Democratic Institutions Project at Harvard's Kennedy School of Government. He also has undertaken several consultancies, for, among others, the World Bank in Russia and the OECD’s Tax and Development Programme.

1. Ukraine has had all prerequisites for economic growth after the collapse of the Soviet Union in 1991. Why our political elites have failed so badly to transform our country into a prosperous one in almost three decades?

Without a doubt, Ukraine today has been blessed with some of the globe’s most talented, creative and educated citizens as well as with incredible agricultural soil and a hospitable geographic location. Yet, despite these valuable ingredients for economic growth, Ukraine throughout its nearly thirty-year independence – amidst its struggles between presidents and parliaments, oligarchs and outsiders – has never truly reformed its state. For corruption – the main obstacle to Ukraine’s economic growth – to decrease, citizens must trust that their state has eliminated the limited access order, inherited from the Soviet system and from past modes of governance, to establish the rule of law while state elites, having benefited from privileged access to state goods in the past, must trust that society’s efforts to open up the system will still protect them and their gains.

The reasons for the decades-long inertia in re-creating the post-communist Ukrainian state into a professional, lean organisation trusted by both elites and ordinary citizens are multi-fold and, perhaps, over-determined, as I detail in my recent book, Taxes and Trust: From Coercion to Compliance in Poland, Russia, and Ukraine (Cambridge University Press). First, Ukraine had a limited pre-Soviet legacy upon which to draw such that there was no clearly identifiable governance model for the bureaucracy, as there was for other states, in the 1990s. Second, Ukraine’s independence was achieved by a compromise between the nationalists and the older communist elites, who viewed a large state apparatus as indicative of a strong state with a large state role maintained by an unorganized bureaucratic monolith. Third, there was a lack of vision on almost everything economic at the top of the political system, muddling the imperative for administrative reform and not allowing a larger debate in society as to what the role of the state should be. By seeking out, but not yet coalescing around, an economic reform program in the 1990s, the need for a reform of the bureaucracy – and how it could assist in economic reform – was put off as well. Fourth, while power became concentrated within the presidency from the late 1990s up until the 2004 Orange Revolution, the parliament and the president vied over the constitutional distribution of power throughout this period. And, when the Constitution did arrive in 1996, it did not resolve who was in control, as it stated that the government was ‘“responsible to the President of Ukraine and [ . . . ] under the control of and accountable to the Verkhovna Rada” (Art. 113). The government thus had two masters seeking to control it.

Fifth, as the economy collapsed in the first half-decade after the Soviet Union collapsed (and even today Ukraine remains one of the very, very few countries in the world that have not yet reached their own 1989 levels in growth per capita), the structure of the Communist Party of Ukraine was dissolved, and few strong political parties came forth (although a re-emerged Communist Party commanded the largest parliamentary factions from 1994 to 2002), the state was held together by ‘networks’ of former Communists. Sixth, Ukraine retained very little fiscal experience from the Soviet days and did not inherit a full set of financial and fiscal institutions or any state organizations involved in planning and budgeting, as those tasks had been carried out in Moscow prior to 1991. Finally, unlike in other countries, Ukraine’s Accounting Chamber was weak, unable to monitor budget revenues, only budget expenditures. In short, Ukraine entered the post-communist era without engaging in much soul-searching regarding its legacies bequeathed to the state, and, instead, opted by default for a continued Soviet-like monolithic bureaucracy that led to disarray by avoiding serious economic reform in any direction.

2. How can Ukrainians make politicians and the bureaucracy more accountable? Do you think there has been any substantial progress in this direction since 2014?

For reforms to advance, civil society actors must be prepared to engage politically and new relationships between state and society must be formed. And, society must understand the connections between lower, petty corruption and large-scale corruption. In short, society’s trust in the state begins only when society believes it is one with the state. In other words, only when governing elites begin to trust society to protect their wealth and other gains would they begin to share or give up rule (by ‘limited access order’ or ‘patrimonialism’), open up economic markets and reduce barriers to enter parliament as well as decrease the use of any means of coercion formerly employed. Of course, elites are not a homogenous group, and if any elite actors recognise that they can survive and prosper in an open-access order, then they will break off on their own from their peers. Trust in society can only be created when elites’ fears are lessened.

A complementary route to building public-elite trust focuses on whether a collaboration between a well-organised domestic civil society and international actors encountering an entrenched political elite can bring both anti-corruption reform success and long-term domestic trust. Such efforts, known as a “pro-reform sandwich strategy,” have been deemed to have worked at times in Georgia, Poland, Romania, and Ukraine.

Here, external actors, donors, or controls can substitute for lack of domestic trust (or lack of resolution in a prolonged balance of power conflict between the legislative and the executive branches that can contribute to corruption). Undoubtedly, this route has helped bring in substantial progress with reforms, including those undertaken in the Zelensky era. However, the question remains whether such collaboration can provide greater trust levels in the long run.

3. Do you think that President Zelensky and his team have been moving Ukraine in a positive direction?

The enormous popularity that propelled Volodymyr Zelensky into the presidency in 2019 led to expectations far and wide that the president would enact thorough reforms, including those that are difficult and necessary, such as overhauling the state itself, in order to seize the moment and to make good use of his unprecedented electoral mandate. Yet, several events regarding the president’s leading officials in 2020 have fostered great scrutiny and doubt, both in the country and abroad, about the prospects for true reform. These include the March dismissal of the prime minister, finance minister, economic minister and prosecutor-general – who had been viewed widely as reformers, the July resignation of the governor of the independent National Bank of Ukraine (NBU) after disagreements on monetary policy as well as the prosecutor general’s choice to investigate former President Petro Poroshenko, Zelensky’s former electoral opponent. This, coupled with the view that Zelensky is reluctant to let his Cabinet make economic policy decisions on its own, has led to questioning the style and judgment of the political neophyte turned president.

Meanwhile, of course, some key reforms have been adopted in the last year, including the land sales law, the break-up of state-owned Naftogaz into separate production and distribution organisations, the introduction of proportional representation into the elections for the Rada, and legislative efforts to prevent oligarch Ihor Kolomoisky from re-taking PrivatBank. In short, a year and a half into a five-year term makes it too early to say that no additional major reforms will be forthcoming, but consistent stewardship is needed.

4. What do you think the future holds for Ukraine? What should Ukraine do to preserve its sovereignty and build a more prosperous democracy?

Transitional states like Ukraine must find ways to create and to build up levels of trust on the part of citizens in their state and to focus on “procedural fairness” in order to improve compliance with state activity. My book, Taxes and Trust, examines how well taxpayers were willing to obey the law in the future based on how they were satisfied by their previous interactions with tax bureaucrats in the past – both in terms of resolving outcomes and the behaviour on display.

I view Ukraine and its neighbours to the East and West as on a J-curve pathway of sorts: Poland, up to the Law and Justice era, was, in many ways, the ideal type which countries in that part of the world should have wanted to become by enjoying higher levels of trust in the state and citizens acting based on such trust such that real reforms – and economic growth – were achieved. An effective state is also one that provokes some fear —all states need to provoke some fear in order to get people to obey the law, for example — as a higher authority, but not with extreme coercion that limits state effectiveness in the long run. Russia is at that sub-optimal level, with a state evoking more fear than trust, while Ukraine is at the bottom of the trough, trying to transition, if you will, from Russia to Poland.

What Ukraine has now is nearly three decades of not focusing on building the state itself. The state has been privatized for corrupt interest, and when it has tried at times to be coercive, the population knows that there are ways of getting around the state. I have found in my Taxpayer Compliance Attitudinal Surveys, which I have conducted with the Razumkov Center for Political Research several times from 2005 to 2020, that roughly only 9 to 10 percent of Ukrainians can trust the state to do what was right, to fulfil its obligations to the public or to treat all citizens equally and fairly – very, very low, worrying and consistent numbers.

The question is: can Ukraine get out of this trough? If it does and moves towards building a rule of law that is as respected and trusted, then it will have even greater advantages than the Russian state in terms of being effective. In the last chapter of my book, I offer a set of policy recommendations on how the state can recreate itself to build trust in Ukraine and other countries transitioning to the rule of law.

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