Sustainable economic growth in the midst of suboptimal institutions in Ukraine

This contrasts sharply with the diagnosis of foreign observers and international financial institutions (IFIs) that Ukraine’s institutions are simply weak. Foreign observers often focus only on Ukraine’s visible problems, such as corruption and oligarchic influence. However, these issues are symptoms of a much broader problem: a virtually nonexistent rule of law that has been replaced by a system of patronalism. This problem has deep historical roots, perpetuated by a system of feedback loops that create a path-dependent “bad equilibrium”.

Informal networks, or customary law, often overshadow formal written rules in Ukraine’s dysfunctional RoL. Sometimes customary law is consistent with written rules. This leads foreign observers to perceive Ukrainian institutions as functioning effectively. In most cases, however, there is a discrepancy between customary law and formal legislation. In these situations, the rule of law fails, and citizens resort to paying bribes to government officials to continue their traditional practices, which deviate from what is prescribed by written rules. There is no effective way to enforce compliance with written rules when they conflict with customary law due to the dysfunction of law enforcement agencies. Moreover, the same informal networks overshadowing the formal state institutions constitute actual mechanism for state’s governance.

According to the World Bank’s Rule of Law Index, Ukraine fares much better in terms of its fundamental institutions than clearly failed states such as Afghanistan. But it is significantly worse off than even the weakest countries in Eastern Europe, such as Bulgaria and Romania. In the modern history, no EU member state has ever been confronted with such a significant institutional gap as Ukraine faces now.

The current state of a nearly defunct RoL system in Ukraine is not a temporary situation. Nor is it caused solely by corruption. It requires a decade-long, intensive reform process. Ukraine’s “bad equilibrium” stems from its more than 300-year history as part of the Russian Empire and later the Soviet Union. Although Poland and the Baltic states were also under the Russian Empire for a long time, they never fully adopted the Russian institutions, which were characterized by patronalism and arbitrary application of the law, as deeply as they have been integrated into Ukraine. This means that the unique challenges Ukraine faces in its efforts to break free from the negative legacy of its past cannot be fully addressed by the success stories of Eastern European countries in transforming their institutions.

There are no examples of successful breakaway from the deeply entrenched patronalism resulting solely from the conventional recommendations that are typically made by IFIs in the countries of Eastern Europe or anywhere else in the world. The only example of a successful dismantling of the Russian/Soviet-style discretionary institutional relationship was observed in Georgia. This success story, in contrast to the advice given to the country by the IFIs, was achieved thanks to unconventional and even innovative approaches.

To break the cycle of “bad equilibrium”, economic policies in Ukraine should prioritize simplicity, straightforwardness, and liberalization in the context of an unreliable RoL.

Thanks to its long history as part of European civilization, Ukraine has favorable conditions for such a rapid transformation. There is also a strong public demand for the RoL: about two-thirds of the respondents in public opinion polls consistently express their dismay at the lack of respect for the law. For Ukraine’s vibrant and influential civil society, RoL is also a top priority. Combined with appropriate approaches, these factors provide a solid foundation for a potential breakthrough. Such a success story could, in turn, be an inspiration to future reformers, civil society activists, and ordinary citizens throughout the post-Soviet region.

This publication was created with support from the Center for International Private Enterprise (CIPE). The content of this publication represents the opinions and analysis of the authors and does not necessarily reflect those of CIPE or any of its employees.  The Center for International Private Enterprise (CIPE) is a global organization that works to strengthen democracy and build competitive markets in many of the world’s most challenging environments. Working alongside local partners and tomorrow’s leaders, CIPE advances the voice of business in policymaking, promotes opportunity, and develops resilient and inclusive economies.