Abstract
Conventional wisdom in new institutional economics suggests that property rights become more secure following sovereign commitment. The article tests this axiom in the crucial case of the 2004 Orange Revolution in Ukraine. I show that despite the wide-ranging constraints imposed after the Revolution on the upper executive, the security of property rights declined. Theoretically, the article argues that the link between sovereign commitment and secure ownership hinges on vertical accountability in the state apparatus. While institutionalizing commitment by the presidency, the Revolution simultaneously exacerbated principal-agent dilemmas within the bureaucracy. Methodologically, the article contributes by triangulating available historical narratives and cross-national quantitative studies. Instead, the focus on one contemporary developing country and the use of qualitative process tracing dissects sovereign commitment and shows the mechanisms through which it can be subverted at lower administrative levels. Sixty-four semi-structured interviews with entrepreneurs and government officials from six Ukrainian regions, as well as analysis of the local media, provide the data.
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Notes
“Property rights” are defined as a bundle of rights containing (1) the right to derive income from assets, (2) the right to use and manage assets, and (3) the right to transfer the assets to someone else (Barzel 1997).
Furthermore, a severe problem with causal inference arises when such ratings are used to support theories of sovereign commitment. Since the formal constraints on the executive are taken into account by experts rating the economic freedoms of a country, the use of the resulting indices as an outcome variable by theorists of sovereign commitment comes dangerously close to a tautology.
While the literature has recognized that petty corruption, which merely targets the entrepreneurs’ income rights, can be prevalent among unaccountable state agents, the more substantial threats to PR security, which also target the rights to manage and transfer assets, are modeled as being systemically organized on behalf of the state principal (Acemoglu & Johnson 2005; De Mesquita, Smith, Siverson, & Morrow 2003; Levi 1981; Shleifer & Vishny 1993). Accordingly, property rights are violated by “the strong kleptocrat [who] runs a brutal but efficient state limited only by his own inability to make credible commitments, ‘while’ corrupt low-level officials ‘merely’ introduce inefficiencies in the form of additional delays and red tape and cross-agency interference (Rose-Ackerman 1999, pp. 119–121).”
I am grateful to Dan Slater for this metaphor.
The ontological status of the 2004 breakthrough in Ukraine has been rightly questioned. Still, even critics of the liberal revolution perspective admit that “popular opinion played a key role in deciding a contest… in favor of an opposition network.” (Hale 2015, p. 180). More importantly, it matters little for the argument of this article whether the breakthrough was a “revolution” in social-scientific terms. What matters instead is whether the constraints on the executive, which the (putative) revolution generated, constituted “commitment” as per literature.
Particularly useful among these events were (1) business forum “AntiReider” in Kyiv, March 2007, bringing together top Ukrainian policy-makers, Russian anti-raiding specialists, and a wide sampling of mid-size business executives, and (2) “Council on Entrepreneurship Annual Meeting” in Kyiv, November 2006, gathering representatives of small business from across Ukraine and Rada deputies responsible for promoting SME growth.
First, I emphasized that the use of a recording device and by-name citations are optional. While many interviewees agreed to being recorded, they typically requested anonymity. Second, I established my credentials in advance by providing a link to my website and the invitation to confirm my identity with my home institution. Third, I used well-known approaches to the phrasing of sensitive questions (normalization of wrongdoing, third-party perspective, etc.). Finally, I made an effort to triangulate responses by asking multiple interviewees the same question.
Elections to the Rada became fully proportional (before, half of the seats were elected in single-mandate districts), while Rada’s term was extended from 4 to 5 years. The law had the desired effect of strengthening the party system by reducing the previously bewildering number of parties and elevating the importance of coalitions.
In essence, the law declared the cabinet of ministers as the top executive organ accountable to both the Rada and the president. In 2008, a new version of the law was passed further eviscerating the presidential mandate.
The data refers to the civil servants of categories 1–4.
In 2005, Ukraine was for the first time in its history—and as the only post-Soviet state outside of the Baltics—rated “free” on civil and political rights by the Freedom House.
Presidential Decree Nr. 1648/2005. Full text available at: http://zakon4.rada.gov.ua/laws/show/1648/2005
Law N 1160-IV, “On Principles of State Regulatory Policy in the Sphere of Business Activity.”
Presidential Decree Nr. 901/2005 “On Liberalization of Entrepreneurial Activity and State Support of Entrepreneurship.” Full text available at http://uspishnaukraina.com.ua/news/372.html
The policy of re-privatization would temporarily nationalize largest firms whose privatization involved legal violations, after which the government would privatize them again in a transparent fashion. Besides restoring “justice,” it was also hoped that re-privatization would help fill the budget. The policy was aborted almost immediately, and only one firm—Krivorozhstal’—was officially re-privatized. Still, at the local level, bureaucrats used the slogan of “re-privatization” as a pretext to expropriate informally for private profit. “Every region had its own Krivorozhstal’, down to the level of Culture Houses [formerly state-owned entertainment centers] that would be contested following the change of regional government… there were plenty of destabilizing attempts” (author’s interview with a senior manager overseeing regional portfolios at a Ukrainian investment bank, 2006).
In 2000, Yekhanurov helped push through Ukraine’s most successful economic reform to date, a simplified taxation system for small entrepreneurs that led circa 1 million entrepreneurs out of the shadow economy into the legal sphere. Yekhanurov had also established the Coordinating Expert Center of Entrepreneurs’ Unions in December 1998 and presided over the Association of Small, Medium, and Privatized Enterprises of Ukraine.
Earlier rounds of BEEPS used a 0–3 scale. For the entire analysis here, variables were re-scaled across survey rounds to 0–4 when necessary for consistency.
Between 2002 and 2008, the severity of threats (0–4 scale) based on “licensing and permits” fell from 1.65 to 1.59, “tax administration” fell from 2.26 to 1.9, and “corruption” increased from 2.01 to 2.45.
Assuming a 10 % rate of profitability and a 30 % effective tax rate, more than two thirds of post-tax profits are lost to bribery at this threshold.
Shleifer and Vishny (1993) showed that bribe levels rise when corruption is less coordinated by the state principal.
Shapoval was promoted out of the DSO in 2003 to become the chief of staff for the Minister of the Interior.
Higher democratic accountability of the state principal did not per se cause the collapse of administrative accountability in the executive. Rather, this collapse followed from post-revolutionary instability that, as Beissinger (2013, p. 590) argues, may be intrinsic to urban civic revolutions such as Ukraine’s, due to their “reliance… on a rapidly convened negative coalition of hundreds of thousands [that] fosters… fractured elites, [and] lack of consensus over fundamental policy issues.”
See also Popova’s (2012) excellent study of declining judicial quality in Ukraine as a result of enhanced political competition.
Consider also the brutal murder and beheading of a judge and his family in Kharkiv in December 2012: the lynching was linked to the judge’s property holdings and celebrated on the social websites throughout Ukraine as a warning to the rapacious officials.
One of the widely shared “manifestos” on social media in Ukraine in the run-up to Yanukovych’s ouster directly linked low-level state predation to systemic fragility, calling upon the readers to exploit the situation. The author, based on his work experience in a regional administration, describes with great humor a typical state takeover of a private kiosk which pits multiple state agencies against each other. “The moral of the story is: there is no unity whatsoever in the System. Parts of the System are in a brutal combat for black cash, and they absolutely hate each other… This pertains not only to the [administrative] horizontal [relations] – but above all to the vertical [ones]… The basis for our struggle… must be the mutual framing [vzaimnaia podstava] of the bureaucrats along the horizontal and vertical [administrative dimensions] as they fight for uncontrolled resources… [T]his system… [will] unravel like wet paper in your hands” (Arestovych 2013).
A series of investigative articles by Dzerkalo Tyzhnia uncovered multiple predatory schemes perpetrated by the Ministry of Defense employees which systematically plundered the defense budget throughout the late 2000s.
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Acknowledgments
The author gratefully acknowledges invaluable feedback by two anonymous referees, Paul D’Anieri, Philip Roeder, Randall Calvert, and Daniel Esser, as well as the participants at the panels of the American Political Science Association, the Society for the Advancement of Socio-Economics, and the colloquia at UCSD Political Science Department and the Haas School of Business. The usual caveats apply.
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Markus, S. Sovereign Commitment and Property Rights: the Case of Ukraine’s Orange Revolution. St Comp Int Dev 51, 411–433 (2016). https://doi.org/10.1007/s12116-015-9188-0
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DOI: https://doi.org/10.1007/s12116-015-9188-0