Douglass North has famously defined institutions as “the rules of the game,” but in reality, they are much more than that, especially in a transition context. Institutions are the semi-permanent manifestations of rules or guidelines that shape human action, operating in either a political, economic, or social sphere. The arrangement of institutions in an economy both influences and is influenced by the operations of that economy, but (formal) institutions are often first defined by their legal and administrative framework. Informal institutions are also defined by a rule-based framework, but this is, as the name implies, much more informal, and are often amongst the most stubborn to change (think culture or social norms).
The transition from communism to capitalism was thus, at its heart, all about changing these formal economic and political institutions, from those that planned an economy to those that facilitate the market. Without building the necessary institutions such as private property, an independent judiciary, and other clear rules of the game, a country was not really transitioning to capitalism so much as stagnating in statism or some capitalist/socialist hybrid. Changing the laws was often the first step towards changing the mindset of the populace and harnessing the power of the market, drastically altering formal in. Unfortunately, for too much of the former Soviet Union, the laws were not changed, or, if they were, they were done so very late in the game in a manner to advantage the ruling cliques. Property rights for me, but not for thee.
Nowhere was this more apparent than in Ukraine. It is perhaps ironic that the historical experience of the “Potemkin village,” or an illusion constructed to fool political leaders, came about from the visit of Catherine the Great to Crimea, then (and now) part of Russia. For it is in Crimea where the Potemkin institutions of the Ukrainian nation began to unravel, exposing the fact that there was nothing behind the grand gestures, the institutional “reforms,” and the millions of dollars in donor funds that had gone to Kiev over the years.
The history of Ukraine’s “transition” is not a happy one, as even its macroeconomic stabilization was delayed, to say nothing of its institutional reforms. Its first President, Leonid Kravchuk, was also the head of state for the Ukrainian SSR and remained in power until 1994, governing what was still basically a Soviet economy; reversals in basic stabilization policies meant that, by the end of his term, Ukraine had not transitioned in the least either politically or economically. His successor, Leonid Kravchuk, began the process of macroeconomic stabilization, but the political system remained a tightly closed apparatus that dispensed favors instead of moving the country forward. By structuring the political system around himself, Kravchuk not only retarded the development of market institutions, he created a crony quasi-capitalism in which political connections were the key to getting ahead.
A glimpse of hope came about with the “Orange Revolution” in 2005, as people power appeared to finally ensure a sustainable political change that, with time, could lead to the building of the necessary institutional apparatus for capitalism. However, the failures of Yuschenko and Tymoshenko, driven by their own petty squabbles, opened the door for Viktor Yanukovych to restore the patronage system and close out any real hope of economic (much less political) reform. The failure of the Orange Revolution was probably the greatest disappointment for modern Ukraine, as it sent the signal that, perhaps, the ascendance of the market was not inevitable and politics would always triumph.
In such a stagnant political environment, the economic institutions necessary for growth did not take root. Property rights were neglected as an inconvenience to the ruling class, while the judiciary became notoriously corrupt and far too pliable to become an effective balance to the executive branch. Indeed, as the events of the past few months show, even the most basic institutions became perverted: the police, for example, fashioned as the guarantor of law and order, has deteriorated to the point that it is plain to see there is no law and no order. In the new, post-Soviet Ukraine, it is unclear who the police are serving, and whom they are protecting, other than themselves. The police have been noted in survey after survey as the most corrupt institution in Ukraine; in the memorable words of Sanja Ivković, they were not there to “protect and serve,” but to “serve and collect.” As pro-Russian militants or even Russian servicemen flooded the Donbass region, uniformed police aided and abetted the militants or, at the very least, stood aside. The first line of defense became the last line of defense that the country could rely on.
Ukraine shows that, when pressure is applied, Potemkin institutions reveal themselves for what they really are. The lessons for countries in the neighborhood, most of all Russia, should be apparent, as, although there are major differences between Ukraine and its anxious neighbor, at the most fundamental levels, the institutional stagnation is the same. Russia made great strides in the 1990s towards becoming a market economy, but never quite established the regular political processes that are needed in a market democracy. For too often, the country has relied on the “big man” approach to governance, with a strong leader imposing his will over a fractured (or even marginalized) legislature. In this system, policy is driven by the leader more or less unchecked, fashioning neither democracy nor oligarchy; instead, it is a “whimocracy,” rule by whim of the leader. And again, with such a centralization of power, the business environment becomes about who you know, rather than what.
Ukraine shows that this approach is not sustainable, more likely to bring the populace to explode in a paroxysm of repressed anger (see: Romania in 1989) rather than in a managed and orderly political change as in Poland or the Czech Republic and Slovakia. And while Vladimir Putin has used foreign adventurism when Russia’s economy is in dire straits (Chechnya in 1999, Georgia in 2008, Ukraine today), each excursion has left the economy a little bit weaker, a little more dependent upon hydrocarbons, and a little less diversified. Property rights are still neglected, the judiciary is becoming more politicized, and it is difficult to see how the institutional environment has progressed. Russia is not a market economy, it most definitely is not a market democracy, nor has its prospects improved by annexing the Soviet edifice of Crimea.
This is perhaps the true lesson, and the tragedy, of Ukraine, one that Russia should heed: lacking substance and solid foundations, Potemkin villages do not need much of a push in order to collapse.