COMMENT: In Ukraine, property rights for me but not for thee

COMMENT: In Ukraine, property rights for me but not for thee
/ Photo by CC
By Christopher A. Hartwell of the Center for Social and Economic Research (CASE) October 19, 2016

In October the Ukrainian government missed another chance to substantially advance free market reforms in the country, renewing a moratorium on sales of agricultural land until January 2018.

The moratorium, in place since the adoption of the post-Communist Land Code of 2001 and renewed periodically every few years, was originally put in place as a temporary measure to somehow aid the development of the land market in Ukraine and “prevent monopolization”. In reality, the moratorium has been used precisely to stymie such a market and ensure that land, Ukraine’s greatest resource, can only be obtained via the favours of politicians. Rather than striking a blow against corruption and enabling the freedom to trade, the Verkhova Rada has instead chosen to ignore the lessons of Ukraine’s history and undermine the one freedom that underpins all others – that of property rights.

Property rights encompass many different facets, including the right to own, manage, alter and, most importantly, transfer a possession. Without such rights (and their protection in law), the threat of expropriation by the “grabbing hand” of the state is very real; indeed, the right to own property makes someone less dependent on the largesse of government, which is why communism sought to extinguish property (and property owners) from the outset.

In such an environment of weak-but-acknowledged property rights, long-term planning by business is very difficult, with economic activity reduced to short-term tactical moves, a game played with bureaucrats to avoid appearing too successful. This political marketplace redirects resources that could be used competing in the actual marketplace, making businesses compete to satisfy bureaucrats rather than the customer. At a social level weak property rights also engenders mistrust, limiting transactions to close associates and smaller networks, rather than enabling commerce with people across the country.

This idea of property rights being the underlying basis for the capitalist economy is not just a philosophical exercise, but also an empirical fact: as I showed in earlier research on the transition process in Central and Eastern Europe, property rights were the biggest determinant of a successful transition, growth, investment and a myriad of other metrics of success.

However, property rights development in many countries stalled during the transition from communism, mainly because the radical changes needed to move away from a state-centred conception of rights to an individual conception were not put in place quickly enough. By not taking advantage of the early transition period, normal politics and the predations of the state returned quickly enough (no politician wants to willingly give up power). And in much of the post-Soviet sphere, where political change was also halting (if it occurred at all), there was little incentive for a Karimov or a Nazarbayev to willingly cede economic power. Where property rights did develop, they were small-scale and generally accrued only to the wealthy, who were able to safeguard their assets. Once this had been assured, as scholar Konstantin Sonin has noted, there was no reason for the rich to agitate for further, broad-based property rights.

In the Ukrainian context, the path to property rights was developed much later than in other transition economies (especially in its neighbour Poland), and the country has not nearly gone as far. Nowhere is this more apparent than the land sale moratorium, which prohibits the transfer of agricultural land, its reclassification, or any contribution of this land to the capital of a commercial company.

The effects of the moratorium have been devastating on Ukraine’s agriculture, keeping farm sizes small and preventing the use of land as a collateral for lending. Even more damaging, the moratorium reflects a long-standing belief throughout Ukraine’s history, namely that “peasants” cannot think for themselves and thus they need enlightened leaders (either in Kyiv or Moscow) to look out for their best interests. This has been a consistent theme over the past 362 years in Ukraine (since the Cossack rebellion against Poland), with successive waves of politicians denying property rights to the masses while enjoying such spoils as Viktor Yanukovych’s stately palace at Mezhyhirya. The implication of the behaviour of Ukraine’s leaders, up to and including current President Petro Poroshenko, appears to be “property rights for me, but not for thee.”

Never the right time

Sadly, this too is the thinking behind the extension of the land sale moratorium. The continuous mantra in Kyiv over the past decade and a half is that “the time is not right” for free and open land sales, that “the conditions have not been met” for broad-based property rights, or some excuse that Ukraine does not the institutions necessary for an open land market. Even faux-populist Yulia Tymoshenko, who had her own property rights terminated by Viktor Yanukovych (and thus should know better), has hopped on this bandwagon, arguing that there would be large-scale protests by farmers if they should suddenly be allowed to sell their land.

However, these same arguments are demonstrably false, as years of the moratorium have not contributed one iota to the development of the proper institutions for a land market; indeed, these institutions can only come about in a free property rights regime, and can’t be designed from above.

While there may be some trepidation at the small landholder level about the consequences of being able to sell their land, they are the same issues that come with selling one’s labour or buying food at the corner market. The continued paternalism displayed by Kyiv both strips Ukrainians of their natural rights while treating them like children.

Two years after the Euromaidan revolution, Ukraine has made some impressive strides in dismantling the hybrid Soviet economy that still has its tentacles throughout the country. But the refusal to acknowledge the property rights of Ukrainian citizens means that every single one of its reforms are threatened. And the experience of over 350 years of restricted property rights has shown that this approach does not lead to growth or improved standards of living for Ukrainians. It only leads to enriched politicians, enjoying the rights they deny to others.

Christopher A. Hartwell is President of the Center for Social and Economic Research (CASE) in Warsaw, Poland, and the author of “Two Roads Diverge: The Transition Experience of Poland and Ukraine” (Cambridge University Press, 2016).

The economic situation of Ukraine will be discussed during the discussion panel ‘Ukraine, Poland, and Divergence in Transition‘  at the CASE 25 Anniversary Conference The Future of Europe, which will be held from the 17th to the 18th of November, 2016 in Warsaw, Poland. bne IntelliNews is a media partner of the Conference. Click here to register for the Conference.