Table 3.1: Government expenditure as a percentage of GDP,
                        1992-99
 

Year	92	93	94	95	96	97	98	99
Government Expenditure (%GDP)	45,0	46,5	59,7	48,0	43,2	49,6	41,7	38,1

                        Source: Ukrainian Economic Trends, December 1999

                        Obviously, the Ukrainian state is not a state in the traditional meaning of
                        the word. It is a disintegrating state, despite the appearance of it being
                        built up from scratch. Society and economy have increasingly become
                        ungovernable.

                        The weight of the state in the economy is still very important. Even
                        taking into account the growing role of the shadow, non-registered
                        part, of the economy, which now comprises more than half of
                        estimated GDP, government expenditures are considerable, compared
                        to countries at a similar level of development (Table 3.1).

                        Not only is the persistent high share of government expenditures as
                        share of GDP remarkable, but also the high fluctuations. More
                        important, but not reflected in these figures, is the pervasive state
                        control over the economic process. A defining characteristic of the
                        Ukrainian state is the continued depth and breadth of power exercised
                        by the state over every aspect of society and economy, being immune
                        from public scrutiny.

                        There seems to be a close cooperation between the political class and
                        the criminal world. This cooperation had already emerged in Soviet
                        times and was most visible in the centre, Moscow, as well as some
                        Central Asian and Kaukasus republics. There is evidence that as early
                        as 1988, members of the Soviet leadership had anticipated the
                        break-up of the Soviet Union and created an underground economy in
                        order to safeguard their economic interests after an eventual
                        break-up.62 Since 1987/88 cooperation between the political class
                        and organized crime included coordinated operations chiefly designed
                        to protect economic activity conducted on the orders or in the interests
                        of ruling elites. Here, private security guards played an important role.
                        Knabe (1998a) argues that instability and confusion in 1989-91 may
                        have been deliberately created in order to divert public attention from
                        the really important processes going on, particularly regarding the
                        transfer of property. A system-Mafia came into being.

                        This system-Mafia was most pronounced in Moscow, but less visible in
                        Ukraine. However, in 1996, according to a report written for President
                        Kuchma, organized crime had increasingly imposed its rule and begun
                        to pose a threat to the stability of the state (see also Chapter 10, page
                        179).63

                        Rather than a catalyst for social and economic development, the state
                        and its bureaucracy constitutes the most formidable obstacle to any
                        social and economic progress. The question is what strategy should be
                        used to overcome this obstacle and to what extent is it possible to
                        change the nature of state and bureaucracy.

                        There is ample experience in the developing world of attempts to
                        transform the state and public administration. Four to five decades of
                        post-colonial 'development administration' have provided a variety of
                        instruments for transforming public administration.64 Common to most
                        approaches is the view that the bureaucracy is a key instrument of
                        development. Only with the 'structural adjustment' approach, furthered
                        by the IMF and the World Bank since the early 1980s, has the
                        bureaucracy been seen as an obstacle rather than an instrument for
                        development. This view was based on the failure of attempts to
                        transform Third World bureaucracies. It appeared that few political
                        leaders in the Third World were willing to overhaul the bureaucracy:
                        'Having failed to turn the bureaucracy on its head, or to bypass,
                        decentralize or reorientate it, the new answer was (with structural
                        adjustment programs) to privatize it, or at least part of it'.65

                        International financial institutions often had the leverage to force
                        governments to downsize bureaucracies. According to Hirschmann the
                        structural adjustment programmes led, however, to uncertain and very
                        fragmented bureaucracies, to 'a depleted and demoralized civil service'.

                        Another approach is that of 'governance'. It is an attempt 'to make the
                        bureaucracy accountable, transparent, and even responsive to the
                        public; but the objective is not to achieve this outcome by supply (that
                        is it does not expect the state and the bureaucracy to become
                        accountable of its own account), but by demand (that is, civil society
                        builds the capacity and skills to press government to be accountable for
                        its actions'.66

                        Third World experience shows that there are no unequivocal successful
                        receipts for reforming public administration. The situation in Ukraine is
                        more complicated given the much more important role of the state in
                        public life, compared to typical Third World countries. While many
                        Third World countries have over-large states, which means employing
                        too many civil servants, they are not over-powerful, that is they do not
                        have too many powers of regulation and control. However, the
                        Ukrainian state is also over-powerful.

                        Downsizing the civil service, coupled with administrative reform, based
                        on transparency and avoiding overlapping competencies, should be a
                        focus of any reform programme. However, it seems that an efficient
                        and accountable public service is only feasible in conjunction with a
                        developed civil society, with its multiplicity of governance mechanisms.

                        In the developed market economies, governance structures beyond
                        state and market became increasingly important, especially since the
                        changeover to a knowledge-based economy. Messner (1997)
                        concludes that the most effective societies in economic, social and
                        ecological terms are not unleashed market economies, but active and
                        continuously learning societies that solve their problems on the basis of
                        a complex organizational and governance pluralism.67 Governance
                        refers to some forms of administrative or regulatory capacities.
                        Agencies, which either are not part of any government
                        (non-governmental organizations), or are transnational in character,
                        contribute to governance.68 Modern, post-industrial societies became
                        increasingly differentiated at the institutional level. A multiplicity of new
                        patterns of organization and governance has emerged alongside
                        hierarchical governance of society by the state. A new
                        socio-technological-organizational paradigm appears to be gaining
                        ground. Messner highlights especially the meso-level as the domain in
                        which new governance structures emerge. Countries at a lower
                        development level in particular have problems in developing
                        governance structures at the meso-level.

                        In Ukraine, actors at all levels are geared solely to lobbyist orientations
                        and are unable to develop any common problem-solving orientations.
                        Generally, Ukraine fails with respect to meeting the
                        institutional-organizational demands of modern society.

                        The lack of historical experience with methods of compromising,
                        conflict management and network structures tends to result in endless
                        disagreements. Also, a lack of due process of law is hampering the
                        formation of 'generalized trust' between actors, one of the important
                        conditions for the development of network governance. According to
                        Messner, international competitiveness, owing to the increasing
                        significance of industrial clusters, regional economic zones and network
                        structures between firms and their environment based on collective
                        efficiency, results from specific patterns of social organization and
                        governance. Social governance capacity is a condition for economic
                        efficiency and development. However, the blocked Ukrainian society is
                        characterized by a lack of governance capacity.

                        The character of elite networks

                        The previous chapter described how, since the reign of Brezhnev,
                        patronage-clientele networks operating on the borders of illegality have
                        gained in prominence.

                        Under communism, elite networks gradually acquired qualities
                        reminiscent of European feudalism.69 Loyalty towards the local chief
                        was primordial, less so competence. Secrecy was paramount.
                        Instructions were usually given orally, not in written form so as to avoid
                        problems with accountability. Informal dealings were crucial to the
                        functioning of the economy and gradually became more important.
                        There was no rule of law. Exertion of power was absolutist and
                        arbitrary, on all levels. Wheeling and dealing became crucial for survival
                        in all spheres of life. In this political tradition the Ukrainian polity
                        emerged.

                        The falling away of the party state did not unleash market forces, but
                        rather paved the way for the Nomenklatura networks to appropriate
                        the state for their private purposes. It was a transition from 'plan' to
                        'clan', rather than from 'plan' to 'market'.70

                        Elites operate primarily in the sphere of the state and its administration
                        because Ukraine remains largely a bureaucratically controlled
                        economy. The state and its administration set the parameters in which
                        the elite operates. As the rules of the polity are not clear and as there is
                        not a strong countervailing power, patronage-clientele networks
                        spread.71

                        Political patronage can be defined as an informal network of personal,
                        political relationships, which are at the same time both asymmetrical
                        and interdependent.72 Also, the relationship has to be tested over time.
                        It encompasses the mutual exchange of political goods, political
                        patronage can be found in all societies. It allows politicians to govern
                        more effectively. Typical of the Soviet Union was that political
                        patronage developed into a crucial mechanism for elite mobility, hardly
                        being checked by other mechanisms, such as open selection
                        procedures on the basis of meritocratic criteria. Therefore, political
                        loyalty to the party and the patron became of utmost importance.73
                        Formal decision-making procedures increasingly became a facade to
                        mask the decision-making by a set of coteries.74

                        When Ukraine became independent, loyalty of the elite to the state was
                        promoted by the fact that the state was the most lucrative feeding
                        ground and it gave elites the opportunity for career advancement and
                        self-enrichment. As Garnett suggested, the pursuit of self-interest may
                        have proven to be the most patent source of state building and nation
                        building in Ukraine.75 At the same time, elite parasitism was an
                        obstacle to social change. Motyl suggests that elite parasitism may
                        transform Ukraine into an Eastern European version of former Zaire. In
                        Pokhalo's view, 'The Ukrainian paradigm of state building today is but
                        the manifestation of creating... a state for its own sake, outside society
                        and above it'.76

                        Elite networks in Ukraine are characterized by secrecy and distrust
                        towards those not belonging to the inner circle of the clique. Important
                        lobbies are grouped around specific industries and related banks and,
                        above all, based in specific regions. For example, President Kuchma,
                        who came from Dnipropetrovsk, promoted many friends from his town
                        to influential positions in Kyiv. It has been estimated that up to 200
                        Dnipropetrovsk clan members were appointed to top executive
                        positions in Kuchma's government and administration.77 Clan leader
                        Lazarenko, then the Dnipropetrovsk province governor, was initially
                        appointed deputy prime minister in charge of energy. Other clan
                        members were given almost all the ministerial portfolios involving
                        industry. They included Valery Pustovoytenko, who became prime
                        minister in 1998. In May 1996 Lazarenko became prime minister. He
                        gave the clan's major company, United Energy Systems, half the
                        wholesale natural gas market, so helping it become the richest private
                        company in Ukraine.

                        The main competitors for natural gas profits came from the Donetsk
                        clan, which was organized around parliament member Volodomyr
                        Shcherban. That clan was swept aside with the assassination of another
                        member of the Donetsk clan, Yevhen Shcherban.

                        President Kuchma dismissed Lazarenko in mid-1997 without ever
                        explaining why. Perhaps Lazarenko's seizure of the gas supplies at the
                        expense of other clans became an embarrassment to Kuchma. The
                        Dnipropetrovsk clan split in two and open warfare ensued. Both clans
                        used the media. The Kuchma clan used the judiciary power to fight its
                        opponents. Newspapers from opposing clans were regularly closed.
                        Companies linked with opposing clans were fined.

                        The lobbies linked to the gas companies belong to the most powerful in
                        Kyiv, although Ukraine only produces 20 per cent of the gas it
                        consumes. Trading of gas is one of the most lucrative activities in
                        Ukraine. Particularly profitable are licences that allow companies to
                        buy gas in Russia and sell it on the Ukrainian market. In November
                        1998 seven deputies from the ruling People's Democratic Party (PDP)
                        quit the PDP faction in parliament, and since then the gas lobby has
                        been outside government.78

                        Unlike Russia, oligarchs have come less to the fore in Ukraine, partly
                        related to the less advanced state of privatization. Five oligarchs control
                        the bulk of the mass media and all support President Kuchma.79

                        [In his footnote, Hans van Zon names the five oligarchs as Ihor Bakai,
                        Viktor Pinchuk, Hryhory Surkis, Vadim Rabinovich and Oleksandr
                        Volkov.]

                        President Kuchma has fostered various corrupt clans in order to play
                        them off against each other and thereby stay in control. According to
                        the Kyiv Post he has done so by maintaining and even adding to
                        Ukraine's maze of arbitrary rules and corrupt officials 'which deters
                        most investment but is a gold mine for the brokers who can guarantee
                        safe passage through'.80

                        Power was mainly focused on redistributing the economic wealth of the
                        nation, less on creating new wealth. As the most influential lobbies
                        represented value-subtracting industries and declining regions, they
                        succeeded in squeezing substantial sums from the national budget.
                        However, the nature of the redistribution process changed, from direct
                        subsidies from the budget to hidden subsidies in the form of lax
                        exemptions, non-payment of the energy bill, etc. (see Chapter 4).

                        On the micro-level, redistribution mechanisms caused an enormous
                        income divide, a rapid impoverishment of the overwhelming majority of
                        the population and a fabulous enrichment of the ruling elite (sec
                        Chapter 9).

                        The new economic elite was mainly interested in short-term gains. The
                        short-term interests of the main lobbies also dominated the policy
                        agenda. Generally, one can see in the transition process that groups
                        who gain substantial rents in the early phase of transition, based on
                        distortions of the inherited economic structure, have a stake in
                        maintaining a partial reform equilibrium that generates high private gains
                        but at considerable social costs. The peculiarity of Ukraine is that,
                        unlike countries such as Hungary, the Czech Republic and Poland, this
                        partial reform equilibrium seems rather structural and stuck in the very
                        early phase of the 'reform process'. It seems that in Ukraine the ruling
                        elite has an interest in keeping the economy in limbo between a
                        centrally planned and a market economy in order to continue its
                        rent-seeking behaviour.

                        In Ukraine, the new economic and political elite emerged out of the old
                        Nomenklatura. Whereas in countries like Poland, the elite became
                        more diversified and the first post-socialist governments hardly counted
                        ex-communists, in Ukraine the old elite retained its power. It is telling
                        that the first president of independent Ukraine, Kravtchuk, was
                        responsible for ideological affairs in Kyiv under the old communist
                        regime.

                        Chapter 10: Path Dependency and Development Prospects (p.
                        179)

                        Criminalization of economy and state

                        According to a report written for President Kuchma in 1996, organized
                        crime poses an immediate threat for the stability of the state. The
                        criminal subculture has penetrated all levels of the state apparatus.
                        Organized crime has its parallel power structure and the population has
                        to pay for these structures. On average, organized crime makes
                        products 20 to 30 per cent more expensive.14 Few firms can escape
                        organized crime; about 90 per cent of firms are under its influence.15

                        [ . . . ]

                        The problem is that with the criminalization of the state, state power
                        becomes a function of private, often criminal, interests and that the
                        public good becomes subordinated to those private interests. It is
                        nowadays difficult to make a clear distinction between organized crime
                        and the state. It is not only that Mafias find protection by the state, as is
                        the case in many countries, but that organized crime can instrumentalize
                        the state.

                        It means that there is not anymore a 'raison d'etat'. The state as a
                        semi-autonomous institution has ceased to exist. The state has
                        transformed into an entity that is acting against the public good, in the
                        interests of a kleptomanic, criminalized elite.