In November 2013, the suspension by the Ukrainian government of an association agreement with the EU triggered strong protests in the region of Kiev. The so-called ‘Euromaïdan’ gathered up to 500,000 protesters and led to the departure of President Yanukovych three months later. The fall of the government had negative economic consequences for Ukraine as it led to the annexion of Crimea by Russia and to a war in Donbass from March to April 2014.

The new administration, confronted both to a conflict in the East and to the aggressiveness of the Russian Federation, has been struggling to maintain economic viability. GDP fell by 6.8% in 2014 and the ratio of debt to GDP rose to 71.2% as compared to 40.7% in 2013 largely because military expenditures have risen extensively due to the conflict in Donbass. Moreover, Russian gas supply has become increasingly expensive, as a consequence of the deteriorated relations with Russia.

In this context, the systemic corruption that has long prevailed in the country can no longer be considered as acceptable. In fact, a potential adhesion to the EU will be conditional on severe reforms. The Copenhagen criteria request the independence of the judiciary and an uncorrupted administration, which is far from the Ukrainian reality. Moreover, an adhesion to the Single Market would be incompatible with their prevalent protected monopolies. The path to the West requires a fight against corruption.

The Transparency International’s Corruption Perceptions Index (CPI) ranks countries and territories based on how corrupt their public sector is perceived to be. It scales from 0 (highly corrupt) to 100 (very clean). Ukraine‘s score has remained extremely low over the years, around 26 between 2012 and 2014. In 2014, the country ranked 142nd out of 174. In contrast, Romania ranked 69th with a score of 43 and Kazakhstan 126th. This index must still be considered with precaution as it may depend on cultural perceptions.

Oligarchs

In 2013, the Ukrainian journalist Sergeï Leschenko distinguished clearly three main “clans” sharing power in Ukraine.

According to him, the first one was led by Oleksandr Yanukovytch, the former president’s son. Now living in Russia, his fortune is estimated to over $500 million. The second “clan” is managed by Rinat Akhmetov with a fortune that could sum up to $10 billion. His company, System Capital Management, is present in almost all sectors in Ukraine (mining, telecommunications, finance, oil, …). Finally, the former oil company Ros-Ukr-Energo run by Firtach and Levochkin used to control the entire distribution of gas. Through Yanukovytch’s Party of Regions, these oligarchs used to control the entire political system. Nowadays, their power remains large despite the fall of the regime.

This few men’s hegemony over Ukraine’s economy and politics raise doubts about the country’s sustainability over the long run. Economic and political theory confirms the common idea that a corrupt State is generally a failed State.

Corruption

Corruption is defined in economics as ‘the abuse of public office for “private gain”. A lot of research in economics has focused on the efficiency issues of corruption and its effects on economic growth. Surprisingly, short-term efficiency may be improved by corruption since the agent with the highest bribe can possibly be the most efficient one.

However, in the long run, a distortion of the type and number of contracts may occur as well as the speed at which public servants do their work. Another negative consequence is the delay of macroeconomic reforms and reduced inequalities, through for instance the by-pass of bad regulation. In the case of Ukraine, where reforms are particularly needed, this could be a dramatic issue.

There is also evidence that unstable public institutions constitute obstacles to private investment and growth. In general, corruption is considered by investors as an extra cost and hence lowers the attractiveness of an economy. That being said, Foreign Direct Investment may still occur in corrupted countries if bribes are affordable and the results predictable, thanks to low production costs for instance.

Finally, corruption has strong social consequences and is a driver of inequalities. Poorer segments are generally excluded from access to public services as they become conditional on transfer payments. Moreover, their lack of political influence makes the bribe potentially higher, resulting in a form of regressive taxation. In a country where social appeasement is crucial, this is particularly relevant.

It appears clearly that corruption is a vector of economic, social and political issues, that any country cannot afford at such high level. Because of that, it appears necessary to build transparent and accountable systems of governance and to strengthen the capacity of civil society. For example, Transparency International suggests the adoption of a Law on “Access to Public Information”. Another important legislative mechanism would be a law to ensure integrity in public service. It is also necessary to strengthen institutional capacity of the higher body for financial control – the Accounting Chamber. Finally, other legislative mechanisms should ensure integrity in public services.

As such, there are many viable solutions but passiveness is not an option. The actual President Petro Porochenko seems resolved in his fight against corruption. In the end, his success will probably determine whether Ukraine will plunge or not into chaos.

Photo credit: Dieter Zirnig; http://bit.ly/1NIzO7H

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