Prepared for the Ronald Coase Institute's Workshop in
Institutional Analysis
Barcelona, Spain, September 2005
amended with use of the comments and feedback from faculty and participants
Driving Forces for the Unwanted Reforms:
Can the rent seekers curb the rent seeking?
The case of UKRAINE
Vladimir Dubrovskiy
joint work with Janusz Szyrmer, and William Graves III
as a part of the country study within the Global Research Project of
Understanding Reforms
arranged and funded by GDN
www.gdnet.org
CASE Ukraine
www.case-ukraine.kiev.ua
Reforms in transition
CASE Ukraine
Initial (naïve) approach:
benevolent government
SHOULD pursue the reforms
How to minimize the cost of
reforms?
“Standard” approach:
“mandated” reforms, based
How to get a political support for
the reforms (make them
popular)?
on the political support of a
resulting political force
There may be a “bad”
equilibrium, in which
prevailing rent-seeking
becomes self-supporting
A state “captured” with rentseeking vested interests is
not supposed to complete the
reforms at all
Sonin (2003), Hoff and Stiglitz (2002, Hellman (1998), Hellman, Jones, and
2004), Polishchuk and Savvateev
Kaufmann (2000)
(2002);
CASE Ukraine
Understanding reforms in Ukraine
The reforms (passive or reactive) occurred nonetheless the
state was “captured”, and the rent seeking dominated
Stylized facts:
The major reforms were undertaken irrelevant to the position of the
population,
and often even against the dominating vested interests
No program of reforms has ever got a public mandate
Collective actions were rare and unimportant
A majority was always against privatization of the large enterprises, and so
were their directors that dominated in politics those times
Monetary stabilization was started without any mandate and continued
despite the political defeat of its initiators.
Paternalism towards the enterprises was contracted despite the growing
public sentiment in its support, and against vested interests of all major players
CASE Ukraine
The model-based analytical narrative
Going to explain:
How a rent-seeking society can
transform itself?
UKRAINE
Why did the reforms (particularly the ones of
2000-2001) NEVERTHELESS happen?
Why did not these reforms happen earlier?
How did they eventually lead to the Orange
Revolution?
Escaping from a “capture” trap
CASE Ukraine
Tornell (1998):
a “reform from within”, when the rent seekers
themselves restrain the rent seeking, can occur
under the threat of a crisis, if such a reform is a
“second best” for at least one of the interest
groups.
Requires a collective action at least within this interest
group
Historically was not the case in Ukraine
Escaping from a “capture” trap
CASE Ukraine
Dixit, Grossman, and Helpman (1997):
a government can have sufficient political choice, if:
•It is a common agent of many diverse lobbyists acting as principals
•The pool of rent is fixed
•A norm for sharing of the rent between principals and agent is uniform and
strictly defined (e.g. by a competitive market)
Olson (1980); Olson and McGuire (1997):
a rational encompassing rent seeking ruler (or group)
has vested interest in efficient institutions, hence
curbing the rent seeking
Main questions:
CASE Ukraine
Why, despite these convincing reasons, the
rent-seeking societies exist at all?
Why and how they finally
transform themselves?
Our contribution:
CASE Ukraine
•Explaining in which way the evolution of societal norms and
technologies eventually can break a “bad” equilibrium, thus
•drive a country out of the “capture trap”
•through altering the balance between rent seeking and
profit-seeking activities.
Main ideas:
•The rent seeking requires control and coordination to
prevent from “the tragedy of the commons”
•Increase in transaction costs of control and coordination
brought about by technological and societal evolution
eventually drives the contraction in rent seeking – regardless
to the special interests!
Rent seeking vs. profit seeking
CASE Ukraine
Profit seeking
Rent seeking
Creation of the value voluntary
apprised by competitive market
Appropriation of already existing value,
e.g. created by others
A positive-sum game (“cooking a pie”) A zero- or negative-sum game
increases the public wealth
(“cutting a pie”) usually decreases the
public wealth
Players can establish certain efficient
In many cases players fail to establish
institutions, primarily, the property
the efficient institutions.
rights by a voluntary agreement
Sonin (2003), Hoff and Stiglitz
(2002, 2004), Polishchuk and
Savvateev (2002):
A coercive force is required to arrange
appropriation while preventing the
overappropriation
Rent seeking requires FORCED coordination and
control that can only be arranged by
AUTHORITARIAN POWER
CASE Ukraine
A model of the rent-seeking society of
Ukraine
Departures from Dixit, Grossman, and Helpman (1997):
• Pool of rent: no more fixed, but a common resource
vulnerable to overappropriation
State budget, renewable natural resources, poorly controlled state-owned
enterprises, monopoly rent
•Multi-agent instead of multi-principal
Arbiter Coercive force Abilities of extracting the rent from it’s source
Abilities of extracting the rent from
Clients Coercive force
it’s source
•Proportion of rent sharing is subject to bargaining
CASE Ukraine
Arbiter-clients model: how it works
Authoritarian arbiter
player
client
client
player
Rent
source
player
client
player
client
… but instead extorts the rent himself, or trades it for loyalty
CASE Ukraine
An arbiter:
In effect, “owns” a source of rent
Has an incentive to extract the rent
(share the players’ rents)
Looks as “captured” with vested interests
Crowds out and suppresses any other ways of preventing the overappropriation
Asymmetry: The players can motivate their arbiter with a “carrot”, but not
threaten to him  irresponsibility
players are clients of their arbiter
Interested in using his discretionary power for further weakening the clients’
residual rights of control
Arbiters:
Rent-maximizing ≡ authoritarian, plutocratic
Power-maximizing ≡ totalitarian
Arbiters and clients form a hierarchy
CASE Ukraine
Effects of authoritarian rule
Rent seeking sector
Profit seeking
(competitive) sector
player
client
Monopoly
rent
client
player
Increase in the social
wealth
client
player
client
player
Decrease in the social
wealth
Firms earn their incomes mostly as rents depending primarily on
the arbiter’s discretion
Paternalism (clietnelism) and corruption
Problem of an authoritarian arbiter
CASE Ukraine
Rent seeking
CONTRACTS!
Rent-seeking sector
Profit-seeking sector
The rent seeking
Systemic
A residualreform
remains!
UNSUSTAINABLE!
proliferates
EQUILIBRIUM
Marginal cost of
control and
coordination
Marginal
rent
Technology
SOCIETAL NORMS
Problem of a totalitarian arbiter
CASE Ukraine
TOTALitarian arbiter
Profit-seeking sector
Rent-seeking sector
SMALLER residual
TOTAL cost of
TOTAL rent
control and
coordination
EQUILIBRIUM
Technology
SOCIETAL NORMS
Transition from a rent-seeking society:
Evolution and REvolution?
Rent-seeking sector
CASE Ukraine
Profit-seeking sector
Politically responsible
government
REVOLUTION?
Profit-seeking
sector
Rent-seeking
sector
Technology
SOCIETAL NORMS
“Standard”
approach
applies
In the case of Ukraine:
CASE Ukraine
Totalitarian power based on societal norms determined by
Communist ideology have been eroding during several decades
after Stalin’s death
The systemic crisis hit in the end of 1980th, because the whole
system of control and coordination became unaffordable and
crashed
Adjustments were done by authoritarian arbiter (President
Kuchma) in two main waves of reforms (1995-96 and 2000-2001),
each brought about by a crisis
As a result, the rent-seeking sector has been contracted so much
that made the Orange Revolution possible (???)
CASE Ukraine
Implications
Only valid in a long run!
Testable hypotheses:
•Democracy should be negatively correlated with rent seeking
•Long-term reversals in modernization should be rarely
observable, unless induced by increase in the rent flows
•Reforms are often brought about by crises of overappropriation
(Drazen and Easterly, 2001)
UKRAINE
•The Orange Revolution was mostly driven by the interest groups
representing the profit-seeking sector
•Political support of Kuchma/Yanukovich stem mostly from the
rent-seeking sector
•As a result of Orange Revolution, the rent seeking sector should
contract further
Prescriptions:
CASE Ukraine
Standard approach and respective policy prescriptions are
productive when the profit sector already dominates and a
politically responsible government is in place. Otherwise they can
be counterproductive!
Before this moment, the aid strategy should be focused on
educating of the population and stimulating of profit-seeking sector.
Assistance in improving of control and coordination rather harms
than helps.
In any case, abstain from providing the potentially rent seeking
authoritarian and quasi-authoritarian regimes with rents, even for
the sake of preventing of crises
Thanks for
your attention!