State Capture, Political Risks and International Business: Cases From Black Sea Region Countries by Johannes Leitner & Hannes Meissner

Author:Johannes Leitner & Hannes Meissner [Leitner, Johannes & Meissner, Hannes]
Language: eng
Format: epub
ISBN: 9781138233775
Google: mh5LDQEACAAJ
Goodreads: 31020528
Publisher: Routledge
Published: 2016-11-22T00:00:00+00:00

7  Corruption among Ukrainian businesses

Do firm size, industry and region matter?

Elena Denisova-Schmidt, Martin Huber and Yaroslav Prytula

Introduction

Ukraine is one of the few post-Soviet countries that did not show progress in economic development after becoming independent in 1991, in spite of the fact that Ukraine’s economic potential was very close to or even higher than its neighbors. During that time, income per capita, measured in constant 2005 US dollars, has fallen by 19 percent: from USD 2,641 in 1990 to USD 2,138 in 2013 (World Development Indicators). Åslund argues that, to a large degree, this is the result of poorly executed or incomplete transformational reforms from the early stages of independence (Åslund, 2009). The political choice of gradual reformation rather than shock therapy resulted in a kind of chaotic pluralism (Balcerowicz, 1995), which has had long-lasting implications on the formation of Ukraine’s economy and business environment.

Delays in the necessary economic reforms at the initial stage of independence led to hyperinflation and deep economic recession in mid 1990s. Only in 2000, after implementing several important reforms (namely, financial stabilization, mass privatization and partial price liberalization) did Ukraine’s economy start to grow. Indeed, in 2004, Ukraine showed one of the world’s highest rates of economic growth. However, the lack of necessary reforms resulted in widespread rent-seeking activity, creating an oligarchy economy.

The ‘Big Bang privatization’, as Hoff and Stiglitz named the rapid mass privatization of state enterprises, was one of the most important elements of the economic reforms in Ukraine aimed to foster the building of a market economy and the creation of a new business class (Hoff & Stiglitz, 2004). However, it did not have the desired outcomes. Social inertia and institutionalized rent seeking reduced the effectiveness of the reforms, enabling the nomenklatura, red directors and a few parvenus to become owners of the most lucrative enterprises and in turn giving them the incentive to oppose the establishment of the rule of law and property rights (Sonin, 2002; Hoff & Stiglitz, 2004).

Ukraine fell into the institutional trap (Polterovich, 2007) that resulted in ‘bad’ long-term equilibrium characterized by low economic growth, increasing inequality, and the spread of rent-seeking behavior within society. In the rent-seeking societies, people view market interactions as a zero-sum game; hence, they prefer individual-level solutions that induce corruption. This happened when formal institutions lagged behind the actual social practices that persisted in Ukraine from the Soviet era. During independence, the gap between formal and informal institutions increased, opening room for society-wide corruption practices. Corruption emerged as a rational reaction to these institutional failures. Moreover, corruption became a self-sustaining mechanism. As Dubrovskiy pointed out, “… corruption [in Ukraine] forms specific social structures that persist over time and not only conduct the corrupt practices but also resist changes which could diminish corruptive incentives” (Dubrovskiy, 2006).

Figure 7.1 Corruption Perception Index and Percentage of Countries with Higher Index Scores Than Ukraine

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