Crony Capitalism in Ukraine: Relationship between Political Connectedness and Firms' Performance

Oleksii Balabushko,Ruslan Piontkivsky,Veronika Movchan,Oleksandra Betliy,Mykola Ryzhenkov

doi:10.1596/1813-9450-8471

Oleksii Balabushko, Ruslan Piontkivsky + Show 3 more

Open Access

https://doi.org/10.1596/1813-9450-8471

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Abstract

This study combines firm-level data and data on politically exposed people to explore correlation between firms' political connectedness and their economic performance in Ukraine. First, it estimates the share of politically connected firms in Ukraine's economy. Second, the study looks at how different the performance of politically connected firms is from that of their nonconnected peers. The analysis finds that 2 percent of firms are politically connected, but they control over 20 percent of the total turnover and over 25 percent of the assets of all Ukrainian companies. Over the past two decades, politically connected firms used various channels to access economic rents: public procurement, subsidized loans, transfers from the budget, trade regulations that restrict imports, privileged access to state assets through privatizations, and beneficial tax regimes. There is a strong negative correlation between political connection and productivity. Politically connected firms are larger and employ more people, but they are less productive and grow slower in turnover and job creation. This may likely account for lower economic growth and less competitive economy.

Highlights

Ukraine scores closer to the world’s poorest economies on most measures of perceived corruption than it does to the European Union, which it aspires to join
Ukraine was ranked in the 20th percentile worldwide in the World Governance Indicators (WGI) Control of Corruption indicator in 2016, well below Poland, Romania, and averages for lower-middle-income countries and SubSaharan Africa
Rent seeking is the manipulation of public institutions to obtain economic rent – the portion of income paid to a factor of production in excess of what is needed to keep it employed in its current use – without the creation of new wealth

Summary

Introduction

Ukraine scores closer to the world’s poorest economies on most measures of perceived corruption than it does to the European Union, which it aspires to join. Crony capitalism allows politically connected businesses to enjoy benefits that other companies cannot access. The second approach identifies a firm as politically connected if a member of parliament belongs to a parliamentary group controlled by an oligarch and as such is likely to vote in favor of that business group’s interests.

Results

Conclusion