Possible problems with institutional harmonization and suggested ways of overcoming them

1
Prepared for the seminar Frontiers of European
Integration Behind Political Slogans Kyiv 26
January 2009
Possible problems with institutional
harmonization and suggested ways of overcoming
them
Vladimir Dubrovskiy
CASE Ukraine www.case-ukraine.com.ua
2
Contemporary social orders By North, Wallis, and
Weingast (2005, 2006)
Based on the rent seeking
Limited access
Ruling elites limit access in order to preserve
rents
Violation destroys rents
Clientism
Buy security and peace for rents
Fundamentally incompatible with competition
CIS countries
Open access
Based on the OPEN COMPETITION in the politic and
economic domains
EU Member States
3
importing of the modern Western institutions
(understood mostly as formal rules,
organizational structures, and so forth)
augmented with capacity building and extensive
advisory aid will make the democracy and markets
work
4
Main features of the limited access order
Interpersonal exchange
Hierarchy, patronage
The state serves to elites, not the population as
a whole
effectively protects only the elites rights
effectively protects only the elites
organizations
Resists the implementation of the modern
institutions
5
The institutional trap
Real harmonization
Formal harmonization
new rules and practices that have not grown up
within the society suddenly get imposed
formal norms
Interests, practices
previously punishable practices become legalized
while still perceived by many people as
illegitimate
Interests, practices
Informal institutions
the practices that were tolerated or even prized
suddenly become persecuted
6
institutional harmonisation transition from
one order to another
Particular factors of risk
Weak civil society
Crowded out by patronage (Putnam, 1993)
Self-regulation, self-governance, civil checks do
not work properly
Soft rule of law
Characteristic, although not unique for CIS
Formal rules are selectively enforced, in respect
to bureaucrats too
Blat networks
Specific for the former USSR, but akin to other
kinds of reputation networks
Allow for circumventing of any kind of
legislative barriers
Attempts of implementation of exogenously
designed formal institutions may be
counter-productive if they create or amplify the
gap between formal and informal institutions, or
facilitate limitations of access
7
Soft rule of law
The pales of law can be
loose
tight so hard to keep within the law!
and SOFT no way to fully keep within the law!
but
There is only a block of concrete that really
means NO ROAD. The rest of prohibitions mean
just TOLL ROAD
For the state officials too
8
Soft rule of law
Karamsin, 19th century Russian historian
The severity of the Russian laws is alleviated
only by discretion in their enforcement just
this disorder makes life in Russia possible
Gertzen, 19th century Russian social thinker
Authoritarian modernization law contradicts to
practices
Everybody is a lawbreaker
The law applies to all
Laws are written for the fools
Because they are applied at the discretion of a
nachalnik
Who are the boss, we or the law?
personal vlast of NACHALNIKS
Preconditions for extortion
EXTORTION under enforcement of the law
9
Nachalniks not the bureaucrats!
Administrative power in Ukraine
Bureaucracy (by Weber)
Poorly-paid and dependent upon administrative
rents (in money or barter) Relies upon
discretionary power and vague and arbitrary
informal rules
Highly-paid professional public servants
facilitating rational processes of control.
Implements legislation in a strictly formal
(impersonal) way
Controls politicians rather than vice versa.
Tries to control mass-media to avoid public
scrutiny
Operates under constant public scrutiny and
political oversight
Possesses the political power to magnify
ambiguity and non-transparency in legislation
No decision-making power Clear separation of
powers from branches of State
Uncontrolled and mostly affiliated with business
Strictly controlled and separated from business
10
Blat networks
Authoritarian modernization, especially under
Communists law contradicts to practices
Normal economic activities were considered
illegal
No contract enforcement was officially available
Ledeneva, 1998
Reputation-based informal networks of
interpersonal mutual exchange with favors of
access (blat) Emerge to facilitate the illegal
transactions of all kinds
Litwak, 1991 (!)
One has to deserve a right to pay a bribe
while
Weak rule of law
11
Possible adverse effects of imposed formal
institutions
Increase in inequality and privileges
Tax reform in Ukraine (1997)
Package broken down
Pierced with hundreds of privileges
The most important pieces skipped
Emergence or further solidification of
inefficient informal institutions
Bolshevik policies
Blat networks
Overall deterioration in enforcement and
implementation of the law, increase in corruption
Petrovian reforms in 18 century
The soft rule of law
Tax reform in Ukraine (1997)
Tax arrears
12
Tax arrears in Ukraine after the reform of 1997
Source World Bank
13
Particular challenges to institutional
harmonization with the EU
Customs 2002-2005
harmonization of customs valuation rules with WTO
standards
"single window" at the borders
introduction of electronic customs declarations
average time to claim imports
average time to clear exports
21
46
Trade in goods 2007
Abolishment of ban for import for cars older than
8 years
Prohibitive registration fee
Regulatory policy 2003, 2005
Law on State regulatory system
Poorly enforced
Law of Ukraine on the licensing system
Company law and establishment
Only 22 of all joint stock companies duly
disclosed their information in 2004
14
Recommendations
Encourage economic and political competition. Do
not let to use the harmonization for the further
limitation of access. Particularly, make sure
that a regulation will not become subject to
discretionary enforcement and selective
implementation

Avoid abrupt changes in institutions. Start with
things that are acceptable by the existing order.
If introduction of a particular institution is
likely to create too many victims, then it is
sometimes better to refuse its implementation or
postpone it for a while.
BUT
In order to avoid the partial reform trap, make
sure that state institutions are able to credibly
commit to obeying a schedule of gradual reforming.
15
Recommendations
Start with harmonization of organizations, and
proceed to laws and regulations later. The way
in which a bureaucracy and law enforcement
operates should be given a priority against the
particular regulations
To the extent possible eliminate all kinds of
opaqueness, discretion opportunities,
complications, and other potential corruption
vulnerabilities from the proposed legislation
even at the expense of its flexibility and other
theoretically desirable features
Make sure that remaining discretion opportunities
are well checked with transparency and
responsibility. The respective counter-pressure
and civil society control should be developed
simultaneously.
16
Thanks for your attention!