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Ukraine’s path to oligarchy: Lessons for the U.S.?

Yuriy Gorodnichenko, associate professor of economics | April 22, 2014

The New York Times just posted a debate on whether there is oligarchy in the U.S. Because countries’ political systems tend to develop only gradually, it can be difficult to draw a hard line that identifies country X as a particular regime. There have, however, been some instances in which countries have turned into oligarchies quickly and these unusually rapid evolutions can teach us about the workings of the process as well as symptoms. Ukraine, my home country, is a showcase in this respect.

After the collapse of the Soviet planned system, Ukraine’s new government was looking for ways to set up a market-oriented economy. A key element of this effort was a mass privatization of state assets, which ultimately concentrated wealth in the hands of a few well-connected individuals.

At first, these individuals probably played a positive role, since they could re-integrate production chains and enforce contracts in an economy characterized by weak property rights (see some analysis here). However, it also became clear to these individuals that they could convert their economic leverage into political power and extract rents, subsidies and quotas from the government by limiting competition or denying outsiders the ability to bid for government contracts.

To achieve preferential treatment, would-be oligarchs initially relied on the blatant bribing of government officials. But they soon realized that a cheaper alternative was to set up a party, get elected, and run a public office directly. Given their almost total control of the media, winning elections was feasible even for odious and incompetent but loyal personalities.

Being in the government proved to be a lucrative business in its own right and the next objective was to avoid political competition to perpetuate the status quo. This was easy to accomplish by consolidating the power of the central government and by the ability to write laws and to choose judges who made the “right” rulings.

An important ingredient in covering up this exercise was to focus policy discussions on polarizing issues (religious beliefs, gay rights, and the language of instruction in schools) without actually solving them, so that the “debate” could continue indefinitely. Once the public’s attention was anchored on these issues, nobody paid much attention to the fact that a handful of people controlled the economic, political and social life of the country.

In short, huge economic inequality, a merger of the business world and the government, and control of the media created an environment in which no force in the country could challenge the establishment.

One may draw parallels between the U.S. and Ukraine but frankly, relative to Ukraine, the U.S. seems far from an oligarchy. However, certain recent developments do make me somewhat concerned. For example, income inequality has been rising rapidly over the last three decades; the influence of the rich and of corporations on electoral outcomes appears to be increasing; and the political process strikes me as increasingly dysfunctional.

But the U.S.’s history of fighting corruption and the tradition of a free and oppositional press are powerful counterforces to oligarchy. Or so I hope.

Cross-posted from Vox Ukraine.

Comments to “Ukraine’s path to oligarchy: Lessons for the U.S.?

  1. This is an interesting piece, thank you. One thing I would add–which seems to me important in the process you’ve described–is the undermining of the right to organize a union and to strike; that is, the broadly recognized labor rights that were originally codified in the U.S. in 1934 under the National Labor Relations Act.

    As Robert Reich and many others have described, unionization has declined from about 33% in the 1950s and 60s to about 8% today. My own experience as a union organizer and officer was that organizing a union and negotiating a first contract is an enormously difficult challenge here in the U.S., true to the findings of the Dunlop Commission report.

    The right to organize is the vehicle to gaining and holding power by workers — marginal as it is — but we’ve simply seen it erode in the U.S., alongside the rise of inequality and corporate influence in government. This is a dangerous trend in the U.S. that leaves workers disempowered, struggling with infighting, and unable to mount a serious challenge to the rise of an oligarchy, as you’ve described it here.

    What is the status of labor rights in the Ukraine, and do you think this has had an influence on the developments you describe?

    Thank you,
    Mike Wilson

  2. Actually, you have just described the political system in the United States, although it masques itself as a democracy. There is the illusion of a free, oppositional press in the large scale. In actuality, corporations own and/or economically and politically control the marjority of the media in this country. There is the government that we see and formally appeal to, and then the ‘secret’ government that exists through arms that were created originally as oversight committees or government protection agencies. And there is the debaucle that exists within the banks and corporations legitimately able to list themselves as “individuals”.

    Despite exposure and investigation into high-level corporate fraud, and promises by the government, the corporations receive a slap on the wrist and continue to operate as before. Meanwhile, as in the Ukraine, policy discussions continue on social issues and crime, while the dysfunction continues. The privileged few continue to get richer, massive unemployment continues while business and trade with 3rd-world countries continues to dominate our economy.

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