Institutional and economic reforms in post-communist countries were influenced by the development of civil society during late communism. Countries in Central Europe generally had more frequent but smaller civil society protests met with decreasing repression, mapping onto more thorough market reforms. The former Soviet Union saw less frequent but larger protests faced with stronger repression, associated with slower reform. A study found data on late-1980s civil society and government actions predicted later institutional and economic changes.

1. SESS0019: Emerging market economies:
Lecture 6, Tutorial 5
UCLSSEES, Tues November 12th 2019
Teacher: David Dalton
email: david.Dalton.17@ucl.ac.uk
Office: Thursday 12-1, room 336 of SSEES
Lecture:
• institutions and democracy;
• illustrations of themes from wks 1-5.
Looking at:
• Institutional prosperity theory from Why Nations Fail;
• Ukraine’s economic transition: performance, oligarchy, privatisation & wealth.
• Paper: the effect of late Soviet public protest on later institutions: Bruszt et al.
In tutorial: preparation for the summative assessment; feedback on the formative
assessment.

2. Institutional prosperity theory: Acemoglu and Robinson (2012)
Why are some countries rich and some
poor?
• Institutions key factor, not geography,
culture.
Inclusive politics encourages inclusive
economics:
• centralised pluralism: stability and
constraint
• secure private property
• unbiased legal system
• inclusive markets, low barriers to entry
• financial support for entrepreneurship
• foreign hooks-ups allowed
Create conditions for creative destruction.
Extractive politics encourages extractive
economics:
• unconstrained authority allows elites to
set economic rules
• resource expropriation
• limited competition & barriers to entry
favour monopoly
Fear of theft, expropriation, high taxes
undercut incentives to work hard and invest
Critical assessment
• Institutionally embedded free markets
plus Schumpeterian innovation.
• What about inequality within rich
countries?
• “Inclusive” private property?
• Anachronism: projects institutions specific
to capitalism back into the ancient past?

3. Soviet growth record: surge then stagnation
• Basic point: In extractive systems,
centralised state may stimulate
some growth, but this won’t last
without incentives to develop
technology: the case of the USSR
WNF explanation
1930s: industrialisation:
• capital accumulation: collectivisation to tax
agriculture & fund industrial investment
• reallocation of labour from low to high
productivity sectors: agriculture to industry
• use of existing technology
Side effects of incentives:
• Monthly bonus system: disincentivises tech
change cos uses resources from production,
threatening output levels
Politics as the main problem:
• unconstrained authority of the party setting
economic rules
• methods by which extractive growth was
achieved could not sustain it
Gorbachev moves from extractive institutions,
communist power crumbles
Estimates of Soviet growth rates based on Maddison project
GDP per head
1929-38 4.87
1940s n/a
1950-73 3.6
1973-84 0.93
1985-1991 -1.3
Description
• 1930s: industrialisation produces fast GDP
per head growth
• Respectable rates in the 1950s-60s
• Growth slows from the 1970s, then fall
under perestroika

4. Whither China? The limits of authoritarian growth
• China’s growth since reforms of Deng
Xiaoping in the late 1970s constitute
the greatest poverty reduction
programme of all time.
• China’s catch-up based on cheap
labour and access to foreign markets,
capital, technology: import tech,
export low-end manufactures.
• Despite some inclusive economics,
political institutions still extractive:
control of state, extensive monitoring,
occasional expropriation. Political
power unchecked by popular inputs.
• China’s growth likely to run out of
steam: Schumpeterian innovation
inhibited plus base effects.
• Questions: How long is long term? What impact
on the world economy if this analysis is right?

5. Ukraine: economic performance: GDP 1
Periodisation
• 91-99: output collapse
• 2000-2007: recovery & boom
• 2008-09: global financial crisis
• 2010-13: recovery & stagnation
• 2014-15: revolt, war, recession, financial crisis
• 2016-17: low-level conflict, weak recovery
Observations
• Economic performance worse than CE, often
worse that FSU
• One of the steepest output falls: GDP/hd:
53% 1991-99
• One of the latest recoveries: 2000

6. Ukraine: economic performance: GDP 2
• Ukraine has one of the weakest
transition growth records: real GDP
per head still 20% below 1991.
• Polish economy almost 3X up,
Romanian 2.5X
• 2017: one of lowest output/ incomes
per head in Europe.

7. Ukraine: economic performance: FDI
Another indicator of economic
underperformance:
• Source of demand
• Source of future supply:
production capacity
• External assessment, associated
with business environment
Link of investment and business
environment to A&R’s prosperity
conditions, K’s technological
innovation.

8. Ukraine: economic performance: HDI
Human Development Index: broader
development indicator than GDP:
income (GNI), health and education
• Contra gradualists, those who
reformed fastest had least social
pain
Ukraine’s HDI falls in transition
recession: above 1991, but lagging
Poland

9. Ukraine: economic performance: assessment: poor GDP, poor
FDI, weak HDI
Why such poor economic performance?
• EBRD indicators of factors that lay groundwork
for growth: Ukrainian reforms lag
• Institutional reforms lag everywhere
• Liberalisation lags in Ukraine (not much reform
until 1994); catches up with better FSU by 2010
• Not much institutional reform until end of
1990s: surpass best FSU, but far below CE
Were EE output falls really so bad?
• Havrylyshyn: NMP vs GDP problematic.
• Informal sector: Friedman et al
• Aslund: 8 points
Even if Ukraine’s 1990s fall half as bad as
recorded, still grew just 25% in 26 years—
less than 1% per year, which is weak.

10. Ukrainian oligarchs and oligarchy: why did reforms lag?
Lags in reform: an explanation in need of an explanation:
• Reformist Rukh movement made a deal with Kravchuk’s
“nationalising” communists: not many economic reforms b4 1994.
• Rent-seeking opportunities of partial reform allows rise of Ukrainian
oligarchs, who perpetuate “partial reform equilibrium” from which
they benefit (Hellman).
• Weak economy/ living standards and the survival of the oligarchy are
two sides of the same coin: extractive political institutions >
extractive economic institutions (A&R).

11. Ukrainian oligarchs and oligarchy: definitions and rise
Who is an oligarch and what is the oligarchy?
• Theory: the rich few & self-interested rule
of the rich few
• Oligarchs in Ukraine: super-rich individuals
heading business conglomerates; involved
in politics to protect their wealth.
• Oligarchy in Ukraine: a system of informal
political and economic practices that
connects holders of great wealth with
successful politicians and holders of high
state office.
What is the origin of the oligarchs?
Structural conditions:
• Overemphasis on military-industrial leaves
consumers under-served: apparatchiks turn
to the black-market to meet plan targets: the
“political-criminal nexus”
• Gorbachev’s more “inclusive” economic
reforms respond to Soviet slowdown: co-op
laws and limited private property rights
• Delayed reforms under Kravchuk produce
opportunities for connected people
Who was connected?
• State officials
• Red directors
• Komsomol & students at leading economic/
educational institutions
• Mafia: the criminal part of the nexus.

12. Ukrainian oligarchs and oligarchy: political and economic
schemes: the oligarchy is what it does.
Two “classic” arbitrage schemes
Export rents: 1992-93
• prices liberalised in Russian and Poland
• key commodity prices in Ukraine still state-
controlled subsidised
• connected insiders buy goods cheaply and
sell at higher prices abroad
Gas trade: from mid-1990s
• gas imported from Russia at low/ subsidised
prices by private Ukrainian intermediaries,
under state guarantee
• sold at higher price in Ukraine
• Ukrainian state covers unpaid private debt to
Russia, eg for energy infrastructure
The case of Dymtro Firtash: Reuters’
investigation, Nov 2014.
https://www.reuters.com/article/russia-
capitalism-gas-special-report-pix/special-
report-putins-allies-channelled-billions-to-
ukraine-oligarch-idUSL3N0TF4QD20141126

13. Oligarchic political and economic schemes
Extractive politics
Oligarchs:
• hold government posts
• hold seats in parliament
• dominate important economic sectors
• pay to get representatives to on party lists
• “sponsor” MPs to gain legislative influence
• sit on/chair key parliamentary committees
• fund politicians’ elections campaigns
• dominate TV channels
Politicians:
• need support of local business in frontline areas
• ensure associates are appointed to committees, state
enterprises, top posts in state
Extractive economics
• Commodity arbitrage
• Gas trade arbitrage
• Subsidised credits
• Transfer pricing
• Insider privatisations
• State procurement contracts
• Hostile business takeovers
• Military supplies contracts
Source: Adapted from Havrylyshyn
(2017), Ch10, Kindle location 3755-3761

14. Ukrainian oligarchs and oligarchy: theory of rent-seeking
• Ukrainian oligarchs can be capitalists.
• BUT characteristic wealth-enhancing
schemes of the Ukrainian oligarchy are
of indirect financial extraction by way of
political ties to the state: rent-seeking.
What is rent-seeking?
• In short: something for nothing
• More formally: income distribution
explained by market-determined
relative prices:
• capital income/ returns to capital: from
market-determined valued to wealth-
contributing services
• rent-seeking: gain wealth or wealth-
enhancing income without contributing
to wealth-creating activities
• Recap: The means of political
influence that the Ukrainian rich
use to protect and enhance their
wealth encourages the
persistence of behavioural and
institutional norms that inhibit
the development of the
behavioural and institutional
norms associated with broader
economic prosperity.

15. Ukraine: privatisation
• 92-94: 12,000 firms sold, mostly
management buyout
• 95-98: voucher or mass
privatisation: 50,000 SOEs sold,
but state retains stake in 70%
• Amid economic crisis,
intermediaries hoover up
vouchers: red directors and
oligarchs benefit
• As a result, popularity of
privatisation falls
• Basic point: If growth is one
outcome of privatisation in CE,
in Ukraine and Russia, main
result is wealth concentration.

16. Piketty et al: wealth concentration & returns to capital
• Wealth concentration falls after WWI, climbs from
1980s
• r < g for most 20th C; now r > g
• Why: weaker unions; in US, CEOs award their own
pay; in Ukraine and Russia, privatisation.

17. Piketty: trends in capital and labour income
• Growing returns to capital, falling returns to labour
• Wealth inequality as key factor accentuating income inequality.

18. Piketty et al & Russia
Piketty & team sets standard for modern
approaches to national wealth/ income.
• Capital in the Twenty First Century. The World
Inequality Report 2018. World inequality
database.
Global trends:
• Private wealth has risen as a share of national
wealth and national income—especially in the
US & Russia.
Russian trends:
• After about 2000, top 10% of Russians take 45-
50% of national income (red) & hold 65-70% of
private wealth (blue).
• In 2000-09 (right bar) the top 0.01% of Russians
held more than 12% of household wealth, more
than half of it offshore (green part of bar).
BUT: their data doesn’t cover Ukraine.

19. Ukraine and Russia: wealth inequality
If wealth is the source of oligarchs’ power, how
rich are they?
First, what is wealth?
• Property plus financial assets of households,
firms and governments.
• BUT different methodologies: eg some
measure only a portion of the country’s total
wealth, at market exchange rates (Credit
Suisse).
Despite difference in economic size, b4 onset of
war in 2014 Ukraine and Russia had similar
wealth-income profiles: similar kinds of
economy.
Domestically held wealth is highly concentrated
in both, reflecting similar processes of wealth
accumulation, and privatisation, in the 1990s.
Wealth inequality in Ukraine and Russia among
the highest in Europe.

20. Ukraine: wealth dynamics
Some findings:
• Wealth of the Ukrainian super rich fell
between 2010-13 and 2014-17. Started
under Yanukovych.
• Might point to a reduction in material
power of the elite since the Maidan, and
so political influence.
• Mighty reflect the improved effectiveness
of wealth-defence strategies.
• The association of wealth and longevity
on the Focus-100 rich lists supports
theory of wealth defence; also perhaps
“circular and cumulative causation”.
• In 2006-17 the “core rich”—lasting more
than ten years on rich list and in the top
quartile of average annual business
wealth—are 30 people: a small minority
within a small minority.

21. This week’s economics paper: effect of civil society on
institutional development: Bruszt et al
Key terms and concepts
• Civil society: organised actors independent of the state ready to
push for political change.
Main takeaway and sub-findings
• Development of civil society in late communism conditions later
institutional and economic reform
• CE: More frequent, but smaller CS actions, with decreasing
government repression, maps onto parliamentary systems and more
thorough market reforms
• FSU: Less frequent but larger CS actions, with stronger government
repression associated with (unchecked?) presidencies and slow
market reform.
Evidence and methods
• Quant/qual database of CS/ govt actions for 85-89 from Open
Society/RFE; charts to stylise pre-89 dynamics; regressions to test
association with later reforms.
Strengths and weaknesses
• Econometrics identification of overlooked causative links.
• High level explanation: perhaps requires detailed comparative
research to identify specific causative links.