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Two Roads Diverge: The Transition Experience of Poland and Ukraine

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Abstract

The dramatic events of Maidan in February 2014 shone a spotlight on the immense problems facing Ukraine. At the same time that Ukraine was undergoing turmoil, its western neighbor Poland was celebrating twenty-five years of post-communism with a rosy economic outlook and projections of continued growth. How could two countries who shared similar linguistic, cultural, economic and political heritages diverge so wildly in economic performance in such a short span of time? The main argument of this book is that institutions, and more specifically the evolution or neglect of the particular institutions needed for a market economy, explain the economic divergence between Ukraine and Poland. This book discusses the evolution of key institutions such as property rights, trade, and the role of the executive branch of government to explain the recent relative performance of the two countries.
... Indeed, as Havrylyshyn (2006: 226) notes, 'Estonia [at the outset of transformation] had little in terms of its own legislative heritage and experience to draw upon'. These stark differences notwithstanding, it is important to note the influence of the German legal tradition on both countries, an influence which operated through different channels: in the case of Poland, geographical vicinity seemed to have played a key role, as the Magdeburg Law was widely used as a basis for commercial contracting (Hartwell, 2016). In Estonia, the historical presence of German nobles on its territory resulted in partial cultural (and legal) 'trickling down' (Taylor, 2018), perhaps the reason why 'Estonia's legal reform starting in 1991 drew on the laws of Germany, Austria, the Netherlands and Denmark' (Havrylyshyn, 2006: 226). ...
... In Estonia, the historical presence of German nobles on its territory resulted in partial cultural (and legal) 'trickling down' (Taylor, 2018), perhaps the reason why 'Estonia's legal reform starting in 1991 drew on the laws of Germany, Austria, the Netherlands and Denmark' (Havrylyshyn, 2006: 226). Furthermore, both countries were under Soviet rule (directly in case of Estonia and indirectly in case of Poland) for approximately 45 years, in contrast to virtually all other non-Baltic Soviet republics (who were subjected to Sovietization for much longer), allowing the memory of the past institutional systems to be kept alive in both countries (Hartwell, 2016;O'Connor, 2015). This was one of the main reasons why the transitions of Estonia, as well as Latvia and Lithuania, resembled to a great extent the transition of the other CEE countries such as Poland, Czechoslovakia and Hungary, as opposed to other former USSR republics (Raun, 2010). ...
... Nevertheless, the subsequent partitions of Poland, as well as the authoritarian coup of 1926 point to the complexity and multi-dimensionality of the Polish political and legal heritage. For a detailed discussion, see Hartwell (2016). 10 According to O'Donnell (1996), democracy, although necessary, is by no means a sufficient condition for the establishment of the rule of law. ...
Article
The economic literature is clear that transparent and impartial rule of law is crucial for successful economic outcomes. However, how does one guarantee rule of law? This paper uses the idea of ‘self-reinforcing’ institutions to show how political institutions may derail rule of law if associated judicial institutions are not self-reinforcing. We illustrate this using the contrasting examples of Estonia and Poland to frame the importance of institutional context in determining both rule of law and the path of legal institutions. Although starting tabula rasa for a legal system is difficult, it worked well for rule of law in Estonia in the post-communist transition. Alternately, Poland pursued a much more gradualist strategy of reform of formal legal institutions; this approach meant that justice institutions, slow to shed their legacy and connection with the past, were relatively weak and susceptible to attack from more powerful (political) ones. We conclude that legal institutions can protect the rule of law but only if they are in line with political institutions, using their self-reinforcing nature as a shield from political whims of the day.
... The long genesis of Poland's institutions during the Polish-Lithuanian Commonwealth (from 1386 to approximately 1654) appeared to be shaped by Downloaded by [Christopher Hartwell] at 01:48 31 October 2017 utility considerations rather than strict identity ones; indeed, as argued elsewhere (Hartwell, 2016a), the theories of Douglass North (1979) furnished an accurate description of the development of property rights in Poland, with the development of the institution owing more to economic considerations rather than one of identity. However, this was mainly due to an important factor, mainly the reality that a "Polish" identity was still being formed from the various local identities prevalent at the time, not least amongst the Polish nobility (the szlachta), who were very focused on their own narrow geographic interests (Hartwell, 2016b). Zientara (1974) notes that the identity of Poles was very fluid in the preceding and early years of the Commonwealth, mainly due to the open-door policy of the Kingdom and the large exposure to foreigners, making Poland a mishmash of cultural influences; Tazbir (1982, p. 47) gives further evidence to this effect, stating that "up to the sixteenth century, the Polish nation was still conceived as a community inhabiting the same territory." ...
... These local and narrowly geographic identities began to shift in the mid-seventeenth century, mainly due to the external threat which Poland as a country faced (Hartwell, 2016b). Almost-continuous war in the seventeenth century, with occupation by the Swedes and a rebellion from the Cossacks to the East, provoked an existential crisis in the Commonwealth, forging a true national identity and, thus, the development of country-level institutions around this identity. ...
... In fact, the preservation of national identity was the overriding goal of Poland during the Partitions, and formed the basis of the development of informal institutions on the territory of Poland during these 123 years. When besieged from outside, for example, by the Kulturkampf from Prussia which aimed to "de-polonise" the country and force Poles off their lands, Poles instead banded together in "self-help" organizations and locally operated credit unions (Hartwell, 2016b). As Blanke (1974, p. 552) noted, "In some ways the Kulturkampf experience actually aided the Polish cause, e.g. by mobilizing previously apolitical sections of the population in a joint national-religious cause and burying an incipient liberal-clerical conflict under a single banner." ...
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This paper advances a logical, if possibly controversial, thesis: institutional design is inherently a product of identity, at both the individual and group level. Building on recent advances in identity economics and new institutional economics, this research shows how identity can be used to explain institutional genesis and the persistence of “inefficient” institutions. Applying this model to Poland in the 19th and early 20th centuries, it is evident that the identity-based institutional building which had served individuals so well under occupation in Poland resulted in “inefficient” institutions, unsuited for the changing external environment. Only taking an identity lens to the Polish experience can we see a satisfactory explanation for the failure of institutions in interwar Poland. http://www.tandfonline.com/eprint/hzsnK3grn7Mb6hI7VqV5/full
... The methodological aspects of capturing a country's institutional development have been subject to discussions since the relevant research has remained undecided as to the use of subjective and objective measures (e.g. Glaeser et al. 2004;Voigt 2013;Hartwell 2016). As empirical studies more often resort to the former, one may argue that (despite their non-standarised construction), they still reflect the actual state of institutions more precisely. ...
... Nonetheless, we argue that evolution of financial systems, emerging or advanced, is a slow process which could be observed over decades and not necessarily years. While imperfect, CIM remains one of the best objective de facto property rights metrics available to be used in econometric modelling (Clague et al 1996, Hartwell 2013, 2016, and Hartwell and Malinowska 2018a, 2018b. changes in capitalisation of the domestic equity market and development of the banking system (captured respectively by the shifts in the domestic firm market value and amount of credit available to nonfinancial entities scaled by GDP). ...
Article
Despite significant advances in economic literature on the relationship between graft and economic growth, the consensus in nowhere in sight. The current paper enriches the extant literature on the subject by: 1) extending econometric techniques in an attempt to quantify and model institutional development; 2) providing novel results on the dynamics between non-standarised and standarised institutional metrics. Utilising a new dataset compiled for 423 publicly quoted non-financial companies with macroeconomic and institutional metrics we fashion a dynamic model approximating the interactions between the country’s institutional development and firm profits as well as examining the relationship between the Czech corruption and the national institutional framework in the years 2007-2016. The economic property rights appear to contribute to firm accounting profits- and cash flow-based profitability metrics. As regards anti-corruption policies, the study outcomes indicate that improvement in economic property rights could have propelled the positive impact of lax anti-corruption government action and inefficient judiciary on firm profits.
... Other institutions within the system were not so kind for transaction costs, however, and the persistence of feudal relations and particularly serfdom continued to constrain labor mobility and the ability of individuals to partake in independent economic relations. Moreover, as noted above, the history of the Polish state in the fifteenth through eighteenth centuries was of an executive continually trying to transfer power from the szlachta (the landed nobility) to himself; the competition that this created led to periodic rebellions and foreign adventurism, both of which handicapped the development of economic institutions within the country (Hartwell 2016b). The total effect of the sclerosis induced by serfdom and the institutional rot effected by continuous war was a collapse of the Polish state and partition, with parts of Poland absorbed into its three neighboring empires (Russia, Prussia, and Austria-Hungary). ...
... This section is based on material found inHartwell (2016b). ...
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Complexity theory allows for a non-equilibrist approach to the economy, an approach that is shared by new institutional economics. Drawing on lessons from both schools of thought, this paper examines institutions as their own complex adaptive systems, even as they are nested in larger institutional systems and the broader economy. Tracing the evolution of an economy as the sum of its institutional parts, I examine the idea of development as the improvement of institutions. The key finding of this examination is that some aspects of complexity theory, relying on institutional and Austrian approaches, actually come full circle to a neoclassical prescription of laissez-faire in regard to institution-building. Given the complexity of both institutions and institutional systems, it is may be more important to remove political and other barriers from the path of institutional development than to actively engage in institution-building in order to encourage development. This too, unfortunately, faces challenges as a result of complexity.
... They analyzed the effects of administrative reforms in 1996-2007 in Bulgaria, Croatia, Czechia, Macedonia, Romania and Slovakia. Conclusions from that study were considered as a valid reference point for the 2014-2020 period in Ukraine, as the Ukrainian state has long delays in introducing actual reforms (Aslund, 2012;Dabrowski, 2014;Hartwell, 2016). Based on the conducted research, Neshkova and Konstadinova (2012) stated that (1) in post-communist countries, the existence of reforms of the civil service systematically correlates with lower levels of corruption in the public sector, and (2) more competent and predictable bureaucracies should be created to facilitate doing business in these countries (the results indicate a sharp and steady growth of the FDI after the reforms). ...
Article
raine is one of the last post-communist countries where implementation of administrative reforms has started in practice. The aim of the study is to analyze the local-level results of the main stage of the administrative reform in Ukraine which was carried out in 2014–2020. The analysis concerns Ukrainian local government units equivalent to LAU 1 and LAU 2. When collecting data, the so-called triangulation of sources was applied. The SWOT method was used in the analysis, and Neshkova and Konstadinova’s publication (2012) constitutes the reference point. The decentralization of power and finance has led to the creation of amalgamated territorial communities (ATCs), better able to deliver public services. Thus, in this respect, the effects of the administrative reform in Ukraine so far have been similar to those diagnosed by Neshkova and Konstadinova (2012) in other post-communist countries. Admittedly, corruption in Ukraine has decreased, but only slightly. Therefore, Neshkova and Konstadinova’s (2012) assumption about the positive impact of administrative reforms on reducing corruption in post-communist countries was not confirmed in Ukraine. Referring to the detailed results of the SWOT analysis, the greatest strengths of this reform included the partial success of financial decentralization and the establishment of the State Regional Development Fund (SRDF) to support the development of local governments. The quality of public services has also improved. However, there were also weaknesses in the form of still too small funds received by the new ATCs and irregularities in the functioning of the SRDF. International support for this reform and the intensification of the activities of non-governmental organizations were considered to be the greatest opportunities. The still existing strongest threat of an endogenous nature is (despite its decline) the level of corruption, and the exogenous one is a threat from Russia. In addition, the negative impact of the COVID-19 pandemic can be seen at the end of the implementation of the reform.
... Until 2014, Ukraine was counted in this category. As I related in my book (Hartwell 2016), Ukraine has a long and proud history as a sovereign nation but squandered its independence from Moscow in the 1990s and early 2000s to reverse reforms and bicker about politics rather than enact the reforms needed to grow. The Orange Revolution of 2004-05 was a first attempt to break from this quagmire, but even then, a fractured opposition-turned-leadership meant that the necessary reforms still did not have the political will. ...
... This seems to be a direct consequence of stark differences in how the privatization processes were implemented in Poland and Ukraine. In Ukraine, privatization was dominated by insiders, former members of the nomenklatura or politically-connected oligarchs, while in Poland the process was much more transparent, controlled and inclusive (see, e.g., Hartwell 2016). On the other hand, Markus and Charnysh (2017) showed that political connections in the form of holding government position or financing political parties are not associated with a higher wealth of Ukrainian oligarchs. ...
... This seems to be a direct consequence of stark differences in how the privatization processes were implemented in Poland and Ukraine. In Ukraine, privatization was dominated by insiders, former members of the nomenklatura or politically-connected oligarchs, while in Poland the process was much more transparent, controlled and inclusive (see, e.g., Hartwell 2016). On the other hand, Markus and Charnysh (2017) showed that political connections in the form of holding government position or financing political parties are not associated with a higher wealth of Ukrainian oligarchs. ...
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We use newly collected original panel data on the super-wealthy individuals in Poland (observed over 2002-2018) to study the impact of the rich’s political connections on their wealth level, mobility among the rich and the risk of dropping off the rich list. The multimillionaires are classified as politically connected if we find reliable news stories linking their wealth to political contacts or questionable licenses, or if a person was formerly an informant of communist Security Service or member of the communist party, or when the origins of wealth are connected to the privatization process. We find that political connections are not associated with the wealth level of Polish multimillionaires, but that they are linked to the 20-30% lower probability of upward mobility in the ranking of the rich. Moreover, being a former member of the communist party or secret police informant increases the risk of dropping off the Polish rich list by 79%. Taken together, our results show that, contrary to some other post-socialist countries such as Russia or Ukraine, there is little evidence that the Polish economy suffers from crony capitalism.
... 6 The application of a purely financial indicator to capture institutional development of a country may be perceived as misguided, and Williams and Siddique (2008) remarked that CIM could better proxy for the state of a country's financial system as opposed to property rights. However, as noted in Hartwell (2014Hartwell ( , 2016, the financial system of any country is slow-changing and the application of high-frequency data to calculate CIM allows to capture shifts in realized property rights rather than financial sector development. Moreover. ...
Article
Research on the effects of the institutional environment on firm valuation have tended to concentrate on formal institutions and in particular legal frameworks. However, formal institutional changes in an economy may have little to no effect on business if the distance of the reform from the practices of informal institutions is too great. Using the example of property rights and performing an econometric analysis on firm valuation in Poland, our results confirm this hypothesis: not only do formal and informal institutions diverge, but we also show that changes in informal institutions actually matter more for firm worth.
... Broad social support and shared vision of the country's future were 'central ingredient(s) to Polish reform's success' (De Menil, 2003, p. 283). There was also a broad consensus among Polish elites on the future economic and political institutions (Hartwell, 2016). Such breadth and plurality of social representation at a critical juncture is an important prerequisite for the emergence of inclusive institutions (Acemoglu and Robinson, 2012). ...
Article
We explain a lack of civic culture in today's Russia, closely related to a democratic deficit in the country, by a path dependency which has originated at the critical juncture of transition to market economy. Suppression of democracy in the early 1990s to expedite unpopular reform exposed the new institutional order to oligarchic capture and set in motion a vicious circle of extractive economic and political institutions. The latter have been shaping views and attitudes in the society via institutional learning, continuously suppressing civic culture and solidifying social foundations for extractive institutions. We present evidence from the World Values Survey supporting the above conclusions.
... At the start of transition, estimated per capita income (in PPP terms) was quite close to that of Poland, and it is now well under one-third of the Polish level (World Bank data for the period 1990-2015). Relatively speaking, therefore, the country has slipped badly backwards, while a very small elite has become seriously rich (for much more detail, see Hartwell, 2016). 3. ...
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From modest beginnings in 1957, the EU has since evolved both by deepening – adding new tasks and responsibilities to the Commission’s remit – and by widening – adding new members in a series of accessions, to arrive at the present 28 member states. A new complication was the UK’s referendum in June 2016 that opted for Brexit. The EU’s evolution by enlargement is examined, followed by an outline of the major EU institutions and the links between them. This includes EU engagement with the wider world via trade deals and aid. The suitability of the EU’s acquis for applicant states and countries in the EU neighbourhood is reviewed, followed by an assessment of the overall EU ‘Model’. Having appeared to function well and deliver significant benefits to the member states, the ‘Model’ has performed far less well since the 2007–2009 financial crisis, revealing major weaknesses in the Union’s capabilities. The EU needs new, more flexible economic models, as well as new modes of engagement, both internally and with its various partners. In addition, the EU’s political model needs reform, both to deal with the democratic deficit and to provide for more effective decision-making.
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The article examines the causes, nature and consequences of institutional dysfunctions that arise in the process of market transformations of post-socialist economies, as well as how they affect the institutional development of these countries. A comparative analysis was conducted on the conceptual and methodological basis of modern economic transitology and new institutional economics using such statistical methods as comparison of averages, graphical, correlation analysis, and clustering. The results of the analysis revealed the convergent-divergent nature of the institutional dysfunctions impact on institutional development of post-socialist countries. In particular, the similarity of changes in averages of such development indicators was observed, which indicates the existence of a cluster (convergent-divergent) relationship between 19 analyzed post-socialist countries during the second decade of the XXI century. The convergence of institutional development trends is determined both by the general strategic orientation of systemic market reforms and by the geopolitical, territorial proximity of countries, their membership in regional associations. Clustering of countries through the use of Euclidean distance found that due to differences in institutional development rates of post-socialist economies over the past ten years, the number of clusters has increased, indicating the divergent institutional development of these countries. It is due to the degree of congruence of the prevailing informal institutional environment in countries with the implemented institutional modernizations, which creates various complicating, inhibitory and contradictory institutional dysfunctions or traps that should become an object of further institutional reform.
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The rule of law is not just a necessary condition for a modern liberal society but also an important prerequisite for a stable, effective and sustainable market economy. However, relevant legal norms may be more or less successful depending on their social reception within a particular country. This study explores the connection between the rule of law, especially in terms of how it is viewed socially, and the functioning of market economy in the examples of two geographically contiguous yet often-diverging countries, namely Germany and Poland. We utilise two approaches to examine this issue, first studying societal perceptions of the various dimensions of the rule of law by way of standardized surveys and in-depth interviews conducted in both countries to determine the de facto state of the rule of law in the economic context. Secondly, we measure the effect of the de jure and de facto rule of law on economic outcomes using a multivariate panel analysis. Combining new institutional economics and sociology of law, our analysis finds that Polish firms perceive the rule of law and its execution by the state in a restrictive perspective, contributing to insecurity. German interviewees, however, showcase the supportive and transaction cost-reducing properties of the rule of law, displaying higher trust in the state. These findings are supported by an econometric analysis of the drivers of rule of law in both Poland and Germany, which shows the importance of rule of law in terms of a level playing field contributing to higher levels of investment.
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Using a new quarterly panel of corporate, institutional, and macroeconomic data, we investigate the impact of economic property rights, stock market returns and stock market realized volatility as well as macroeconomic controls on corporate profitability and investment capacities for a sample of 238 firms quoted on the Warsaw Stock Exchange between 2007–2015. The obtained results indicated that both economic property rights and equity market realized volatility impacted firm profits and investment capacities in a negative fashion. Furthermore, we identified detrimental effects of domestic economic growth and global crisis, both of which dwarfed the beneficial effects of firm size and stock returns in the period under consideration. Given Polish public companies limited international engagement, they were isolated from long-term interest rate changes in the euro area. On the other hand, the domestic banking sector and foreign direct investment flows appear to have mitigated Polish firms’ business performance and growth.
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North (1994) famously remarked that ‘it is the polity that defines and enforces property rights’. This paper traces the development of property rights in Poland and Ukraine and explores their divergence over the past three centuries using North's framework of economic calculation. In each country, the distribution of political power and political institutions had a profound impact on property rights. Indeed, while it was the Polish polity that defined the evolution of property rights from 1386 to 1795 and then from 1989 onward, due to diffusion of power, it was Ukrainian politicians that controlled the destiny of property rights for most of Ukraine's history. This situation has not changed despite the Maidan revolution in Ukraine, and recent moves in Poland show how tenuous property rights are in the face of political opposition.
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