The “Strong Hand” Curse: Why Ukrainians Do Not Like Capitalism

To destroy reputation of market economy in citizens’ minds, you do not need left-wing ideologies. Corruption and lawlessness are just enough.

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In 2013 one third of Ukrainians supported return to the planned economy. Over 60% of citizens consider that privatized land and big enterprises should be returned to the state again. During 20 years of market economy only 15% of citizens trusted private entrepreneurs. Though economists persuade that a quality model of market economy and democracy is the right way to success, Ukrainian public does not share it. As well as the politicians, who promise to extend the role of the corrupted state and cancel the range of reforms implemented in previous years. To prevent this, the advocates of constructive approach should review their priorities. Without solving corruption problem Ukraine’s way to success may remain closed.

Market vs Plan: What Ukrainians do Support

In 2016 37% of Ukrainian citizens supported market economy. Almost the same number – 36% – answered in favour of the planned one. During the previous six years the number of the latter has increased by 4 percentage points.

Source: Life in Transition Survey. *Percentage of respondents that support a market economy versus a planned economy. Excluding those who answered: “Does not matter”.

 

While support of market economy by Ukrainians reaches the average for transition countries, the support of democracy is even more disturbing.  In 2010-2016 42% of citizens supported democracy, but at the same time the number of authoritarianism supporters was growing. 36% of citizens in favour of authoritarianism in 2016 – it is 7 percentage points higher than the average for transition countries, many of which are already authoritarian. Let us say, Western Europe countries have half as much supporters of authoritarianism than Ukraine does, and more than twice as much supporters of democracy.

Democracy vs Authoritarianism

Source: Life in Transition Survey. *Percentage of respondents that support democracy versus authoritarianism. Excluding those who answered: “Does not matter”

 

National surveys show similar picture regarding Ukrainians’ attitudes toward market economy. Though majority of citizens support the combination of state regulation with market methods, 31,5% still support returning to a planned system with full government control. It is almost the same number as it was at the beginning of the 2000’s.

What part should the state take in the management of the economy?

Source: Institute of Sociology (Ukrainian National Academy of Sciences), author’s calculations. *Percentage of respondents who made up their mind about the answer

 

Politicians Reflect Citizens

Following the citizens’ attitudes, Ukrainian political rhetoric does not work for market economy and democracy as well. The analysis of the main presidential candidates’ rhetoric made by Vox Ukraine shows that all of them fall into one ideological spectrum, where left-wing economic policy is combined with a substantial state’s role in citizens’ lives.

Some candidates promote active intervention in the economy and cancelling a variety of reforms implemented in the last years. Some spread the idea of a “powerful hand” to solve concerning social problems disregarding human rights and democratic checks on political power. Others promise generous social benefits without explaining their sources, support for local business by the taxpayers’ money, active regulation of markets and prices.

It is easier to understand why politicians come with predictably destructive suggestions. Usually they respond to incentives coming from different interest groups. Not least – from an ordinary voter. But why do citizens support the extension of the government officials’ authority, considering how corrupted they are? Why do they support strengthening of the state’s role, facing its inefficiency on everyday basis? Why do they oppose market economy, having poor evidence that the previous planned system was better?

Corrupted Market Gives Way to the “Powerful Hand”

In 2010 economists Rafael di Tella and Robert MacCulloch published a research: “Why Doesn’t Capitalism Flow to Poor Countries?” They noticed that outside a small group of rich countries, heavy regulation of business, left-wing rhetoric, and interventionist beliefs are widely spread. Ideas of a market economy face strong electoral opposition in countries which may need them most. In these countries citizens support higher taxes, more state-owned property, more intense state intervention in business.

In the post-Soviet countries, the main suspect was the Soviet past with its policy and ideology. But capitalist ideas face opposition not only in post-Socialist countries. Di Tella and MacCulloch showed that it is not only the ideologies that matter, but also corruption. Corruption can influence people’s beliefs about whether the system is fair and deserves to be supported.

Economist often emphasize the connection between business regulation and corruption. If a state intervenes in an economy too much, its effectiveness falls and corruption rises. Di Tella and MacCulloch find an opposite connection – from corruption to regulation. Corruption may influence people’s beliefs about how much the state should regulate business. If citizens believe that the system is corrupted and unfair, they support less market economy and more state intervention (Di Tella, MacCulloch 2009).

Which logic do citizens follow, considering that the expansion of corrupted state creates even bigger field for corruption?

Unfair business is punished by regulation

The point is that in a highly corrupted environment people see not just corrupted officials but also dishonest entrepreneurs who give bribes to get better opportunities. Thus, they may think that business is dishonest, do not deserves its wealth and should not act without intensive supervision. People are often persuaded that this problem of dishonesty should be solved through additional intervention of the state. Though economists warn that it can make the situation even worse.

According to a Di Tella and MacCulloch, the widespread corruption correlates with widespread anger felt by the population. While regulation, which makes business’s life harder, makes this correlation weaker. That may imply that voters get angry when they see businessmen, involved in corruption. That is why they more actively vote for politicians who promise more business regulation.

How many heads of Ukrainian enterprises are involved in corruption?

Source: Life in Transition Survey

 

Because corruption influences in whose favour political power is used, it becomes a symbol of unequal opportunities, a proof of system’s injustice and a reason for political distrust. And the decrease of trust, again, increases demand for state intervention and redistribution policy.

This is showed in another research by a French economist Philippe Aghion and his co-authors: high distrust in society creates demand for state regulation. If citizens lose trust to each other, business and politicians, they want more state intervention, even realizing that the state is very corrupt (Aghion et al. 2010).

When Ukrainians are asked if they trust their fellow citizens, 50% answer that usually or completely trust. When they are asked whether they trust private entrepreneurs, only 17% completely or usually trust (completely trust only 1.1%).

How Ukrainians Trust Business and Fellow Citizens

Source: Institute of Sociology (Ukrainian National Academy of Sciences), author’s calculations. *Data about distrust – is a percentage of respondents who answered “do not trust” / “mainly do not trust”, it is taken with a minus for illustrative purposes.

 

However, distrust to entrepreneurs does not necessarily mean that the citizens oppose private business as such and do not want to do it themselves. If Ukrainians are asked about their attitude towards the development of private business in the country, 61% answer that completely support or rather support (2014). And only 15% had negative attitude. When the citizens are asked if a possibility of entrepreneurial activity is important for them – like creation of private enterprises or farming – 63% respond that very important or rather important (2016). And only 14% answer that it is not important.

In their research Philippe Aghion with co-authors indicate a vicious circle between corruption, distrust and a state’s dominance over business. In overly corrupted and regulated environment the most corrupted entrepreneurs win, while moral principles, business skills and reputation are practically worthless. Success highly depends on relations with government officials, so business does not invest in people and reputation, and citizens do not trust business. In citizens’ minds the entrepreneurs who give bribes are not better than the officials who take them. That is why people vote for state intervention, even knowing that the state is very ineffective and corrupt.

Both mentioned research draw attention to citizens’ belief about corruption prevalence, and not on corruption prevalence itself. It is corruption as people see it possess a political problem creating demand for the state intervention.

According to the IMF report on results of twenty-five years of post-Soviet transition, estimation of corruption by Ukraine’s citizens significantly worsened. In 2013 it reached the lowest level among all viewed post-Soviet countries.

Source:  IMF 2014, 25 Years of Transition

 

Corruption decreases support for market reforms

Corruption can not only increase attraction of a state’s intervention into economy, but also decrease support for market reforms. From the beginning of the 2000’s the Ukrainian index of corruption perception has been constantly growing, while people’s support towards a range of market reforms moved in opposite direction.

Corruption Perception and Support for Market Reforms

Source: Transparency International, Institute of Sociology (Ukrainian National Academy of Sciences), author’s calculations. *Arithmetic average of percentage of those respondents that support transfer of land, small and large enterprises to private ownership.

 

All else being equal, citizens with better entrepreneurial skills and higher qualification support economic liberalization more. Those without skills useful for market economy support it less. High corruption nullify this difference. The more state government captured by the elite and used for private gains, the more all groups of citizens oppose market reforms. Even those who could benefit the most (Denisova 2016).

Corruption signals that success does not depend on work and skills and the system works according to other – not meritocratic, rules. It disrupts incentives to support economic liberalization.

If Wealth is Considered Unfair, Citizens Want to Redistribute It

The feeling that the system injust can persuade citizens that state should increase income redistribution. If citizens believe that income is defined by individual efforts, they support lower taxes and redistribution. In such a society people are motivated to put more efforts to get success, while a role of luck is limited. But if people think that wealth and success depend on luck, origin, connections or corruption, they tend to support higher taxes and redistribution (Alesina, Angeletos 2005).

As part of  Life in Transition Survey citizens from different countries were asked if they think that income in a country should be redistributed in a more equal way, or, vice versa, there is a need for a bigger income disparity in order to stimulate more competition and personal effort.

Thus, majority of Ukrainians lean to the left side – supporting bigger “levelling” of income. From 2010 to 2016 their percentage noticeably increased. If to compare with Germany, majority of citizens are more concentrated around the center – which means that citizens are less supportive of additional income redistribution. And during 2010-2016 their position became even more moderate.

Ukrainians are More Demanding than Germans in Terms of Income Redistribution

Source: Life in Transition Survey. *How to read the graph: higher columns closer to one – more citizens think that income in a country should be redistributed in a more equal way. Higher columns closer to ten – more citizens believe that higher difference in income is needed. Higher columns in the middle – citizens’ opinion is somewhere in the middle.

 

Local surveys show similar results. 91% of Ukrainians answer that the absence of significant differentiation between the rich and the poor is important or very important for them.

How the absence of significant social differentiation between the rich-the poor, higher-lower layers of society is important for you?

Source: Institute of Sociology (Ukrainian National Academy of Sciences), author’s calculations. *Percentage of respondents who made up their mind about the answer

 

In the question of income distribution it is not equality that people care about, but the fairness. Inequality is considered unfair, if it is associated with poverty, unfavorable social condition, violation of democratic principles, dependence of income on origin and status, rather than on skills and efforts. This exact “unfair inequality” increases demand for redistribution (Starmans et al. 2017).

Demand for income levelling. But even higher demand for opportunities levelling

Among those who made up their mind, 97% of Ukrainian citizens answer that creation of equal opportunities in the society is important or very important for them.

How Much Creation of Equal Opportunities in the Society is Important for You?

Source: Institute of Sociology (Ukrainian National Academy of Sciences), author’s calculations. *Percentage of respondents who made up their mind about the answer

 

On the other hand, surveys show significant demand from Ukrainians for the rule of law. In a question, whether everybody should follow the law without exceptions or can violate it having a good excuse, Ukrainian citizens are far more demanding than German.

Source: Life in Transition Survey

 

Anti-Corruption Fight and Rule of Law as a Chance to Finish Reforms

To build a successful market economy the means of economic liberalization are important, but they are not sufficient. Without reforms that change unfair status quo, traditional market reforms and market economy only lose support.

Resistance to change depends on its legitimacy. Political strategies that rely on pushing through economic reforms have limited support if institutional environment is weak or corrupt. Good institutional environment, vice versa – helps to share potential benefits of reforms in a more equal way. That is why citizens support more pro-market politicians and reforms, if they believe that corruption decreases (Denisova 2016).

If people believe that there is less corruption they feel more justice and increase the support of governments. And when you trust government, you support market economy and democracy. Belief in corruption decline increases trust to government, even if the effects of personal unemployment and income are considered. So, when we talk about support of government, a question of corruption is even more important for citizens than their personal economic condition (Guriev 2017; Transition Report 2016-17).

In 2018, 91% of Ukrainians considered corruption a serious problem. 61% consider it the biggest problem which prevents the country from development (a year ago 44% of citizens had such opinion). In 2016, 89% of Ukrainians answered that equality of all citizens before the law in not not provided at an adequate level. Until these problems are solved in a reassuring for majority of citizens way, a market economy, democracy and economic reforms will only lose their legitimacy.

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