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Daron Acemoglu

Daron Acemoglu

DARON ACEMOGLU

Ukraine’s legacy of serial oligopoly Add to ...

What’s been happening in Ukraine has been complicated by ethnic tensions, political corruption and leftover Cold War politics. But at the root of the situation is a legacy of political and economic institutions that have favoured elites at the expense of the majority of Ukrainians and have kept the country impoverished.

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The crisis reached a turning point on Feb. 22, when mass demonstrations, especially in Kiev’s central square, forced president Viktor Yanukovych out of power. But Moscow’s troops quickly occupied Crimea, supposedly in order to protect Russian naval bases and the largely Russian-speaking population.

There is a clear bifurcation in the economic and political trajectories of former Soviet republics and satellite countries. Some, such as Poland, the Czech Republic, Slovakia, Estonia, Latvia and Lithuania, have opened up their political systems, modernized their economies and achieved rapid growth over the past two decades. Others, such as Belarus, Turkmenistan, Uzbekistan, Azerbaijan and Russia itself have gone in the opposite direction.

Ukraine has been firmly in the second camp. As a consequence, it now has about one-third of the GDP per capita of neighbouring Poland. The reason for this is in its extractive economic and political institutions.

What do I mean by extractive institutions? It’s a term my co-author James A. Robinson and I use in our book Why Nations Fail. Most successful countries fall into the camp of inclusive societies, where political power and economic benefits are shared broadly among the population. Failed nations, on the other hand, tend to be extractive societies, where an elite controls the economic and political system and uses its power to extract wealth from the society at everyone else’s expense.

The former Soviet Union was an extractive society. The Communist Party consolidated political and economic power and decisions were made for the continued political dominance of those at the top. Even the rapid industrialization the Soviets made possible often came at the expense of broader populations. Ukraine itself suffered a massive famine as Soviet leaders expropriated food to feed the industrializing cities and weaken Ukrainian opposition.

After the collapse of the Soviet Union, there was a chance for the former Soviet republics and satellites to shed their extractive institutions and take steps toward inclusivity. But in many of them, including Russia, the political and economic reins were taken up by a new oligarchy, which created a new model of extraction.

This has happened in Ukraine, as well. The Orange Revolution of 2004 promised to usher in a more inclusive society, but the new leaders proved just as corrupt and self-serving as those they had toppled. With the most recent protests, the Ukrainian people have once again tried to overcome a corrupt elite. And once again, they are facing a backlash that threatens to halt reform.

This isn’t unusual. German sociologist Robert Michels called it the “iron law of oligarchy” – oligarchies will work hard to defend themselves, and if they are overthrown, it’s usually by new oligarchs who are as bad or worse.

The short-term situation in Ukraine depends a great deal on Russia’s actions. But in the long run, Ukraine’s best bet is to break with its past as quickly as possibly. It needs to move away from Russia, politically and economically, even if that means an end to the natural-gas subsidies Russia has used to keep it in the position of a client state.

Even more important is for Ukraine’s leaders to spread political power and economic benefits to the maximum number of its people, including Russian speakers.

Building inclusive institutions isn’t easy, as the Orange Revolution’s failure has demonstrated. But much can be done to distribute political power more broadly, reduce the distrust between Ukraine’s east and west, and bring up a new crop of politicians untainted by the corruption of the previous establishment.

A first step would be for Ukraine to decentralize and grant more political power to its constituent regions. This would be a partial guarantee that the federal government won’t dictate how people in the east or west live their lives, and create a pathway for regional politicians to gain experience for national office.

Ukraine’s path to long-term prosperity depends on forging inclusive institutions by extending political power beyond a narrow political elite and creating economic institutions that provide broad-based opportunity and incentives for people to innovate, invest and create.

There are formidable challenges facing Ukraine, not least because of its geopolitical situation. But inclusive institutions are hardly ever bestowed upon the people by their elites (or by Moscow), and the Ukrainian people have already proven that they know how to rise up against the repression of extractive regimes. Now they have to work on the harder task of building inclusive institutions.

Daron Acemoglu is a senior fellow at the Canadian Institute for Advanced Research and the Elizabeth and James Killian Professor of Economics at the Massachusetts Institute of Technology. He is co-author of Why Nations Fail: The Origins of Power, Prosperity and Poverty.

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