Corruption’s effect on State building: Ukraine vs Japan

Corruption’s effect on State building: Ukrainevs Japan

INTL 5580 Politics of Development Spring I

By

Whitney MooreDaniel AngsterPhillip Freiberg

List of Acronyms:

USSR-Union of Soviet Socialistic RepublicsCPSU-Communist Party of the Soviet unionWWII-World War IIFDI- Foreign Direct Investment GDP-Gross Domestic Product

– List of Tables and Figures:Natural Population Growth of Ukraine (Wikipedia)Transparency International and World Bank ChartReligions in Ukraine (Wikipedia)

Objective:

To achieve this paper’s research objective of highlighting

corruption as a factor detrimental to development, we will

compare two cases. The Ukraine will highlight the example of

widespread corruption, while the counter example will deal with

Japan in its post-WWII development. This paper will examine first

the culture of corruption, the political effects and practices of

corruption, and finally the economic impact.

Introduction

In 1991 independent Ukraine, endowed with natural resources,

arable land, access to sea and educated population, according to

Deutche Bank1, had the best chances among the former Soviet

republics to develop into an advanced functioning state.

Nevertheless for the next nine years its economy lost 40% of its

capacity, condemning 35% of its population to life below the

poverty line. Since then, natural population growth is -4%,

500,000 women were trafficked as sex slaves, 12,000 women are

prostitutes, and HIV/AIDS and alcoholism are at record highs. All

marking signs of struggling development. If that was not enough,

just recently the ex-prime minister of Ukraine Yulia Timoshenko

has been charged with mismanagement of government funds. As

independent Ukraine struggles in the process of building an

effective and just state, it faces many problems, such as

negative natural population growth, stagnant economy and constant

1 Hans Van Zon. (2000) The Political Economy of Independent Ukraine. Contributors. St. Martin's Press. New York.

political havoc. But

one particular issue

is ever present and

in our view holds a

key to Ukraine’s

future - the

elimination of corruption.

Tackling this problem will determine whether the country

will be able to move from a failed state with a ‘closed insider

economy’ to a robust developing state where everyone has equal

opportunities both economically and socially.

Corruption and State-building

Oxford dictionary defines corruption as ―dishonest or

fraudulent conduct by those in power. ‘A recent evaluation of

anti-corruption assistance, commissioned by Norad and written by

Scanteam, suggests a widening of current definitions to include

“the abuse of entrusted authority for illicit gain”, which covers

the systemic dimension of corruption.’2 Besides being bad for

2 Hussmann, K. (2009). Integrity in Statebuilding: Anti-Corruption with a Statebuilding Lens, OECD DAC Network on Gernance-Anti-Corruption Task Team.

state-building, corruption has dire consequences for the very

future of the country. If corrupt leaders will continue

plundering the budget under the banner of ‘democracy’, the

general population will despise any true democratic reforms and

the rule of law. As a consequence, the people will choose a

radical or dictatorial regime. Without effective measures taken

to combat corruption, a shadow economy will continue to be 50% of

GDP and will stop any economic reform in its track; the economy

will decline while the general population will continue to

diminish setting stage for future calamities. As the management

sage Peter Drucker said, ‘“Demography is the future that already

happened.’”

It is a proven fact that countries prone to corruption have

less FDI, and little incentive to develop new technologies or

policies. The empirical data provided by Transparency

International and the World Bank in the graphs bellow illustrates

that countries high in corruption have lower GDP per capita than

countries that have little corruption.

place3

Countryname

GDP per capita4 USD place

Country name

GDP/per capita USD

143 Nepal 440 1New Zealand 26830

146Cameroon 1170 2 Denmark 58930

146 Ecuador 3920 3Singapore 37220

146 Kenya 770 3 Sweden 48930

146 Russia 9370 5Switzerland 56370

146Sierra Leone 340 6 Finland 45680

146Timor -Leste 2460 6

Netherlands 49350

146 Ukraine 2800 8Australia 43770

146Zimbabwe 8 Canada 42170

3 Transperancy internationall 20094 World bank 2009

In introducing the UNITED NATIONS CONVENTION AGAINST

CORRUPTION, Kofi A. Annan said “...in the developing world that

its effects are most destructive. Corruption hurts the poor

disproportionately by diverting funds intended for development,

undermining a Government’s ability to provide basic services,

feeding inequality and injustice and discouraging foreign aid

and investment. Corruption is a key element in economic

underperformance and a major obstacle to poverty alleviation

and development.”

Ukraine vs Japan

This paper will juxtapose two examples of state-building -

Ukraine and Japan. Although one can hardly find two countries

that would be farther situated from one another both

geographically and culturally, Japan could teach Ukraine how to

succeed in state-building, for “Japan of today has advanced a

long way from the... state that lay in ruins in 1945.”

Japan acts as an indicator that helps us uncover the secret

of Ukraine’s failure to develop. In our view, Soviet

Ukraine could be compared to Japan since they both “share the

experience of modern war in a manner unfamiliar to the United

States.” The Ukraine and Japan are centuries old, and both

cultures the people exist together as a whole. The US, on the

other hand, is a young country filled with the spirit of

individualism with little history to confuse the present in

search of the future.

To correctly understand the problems the Ukraine faces

today, we have to remember that Ukraine’s Kiev was the cradle of

the Slavic Civilization, and shares with Russia 1000 years of

history, religion, culture and language. Thus it is no surprise

that when it comes to social problems these two countries are

very similar. In independent Russia, according to TRACE

International, a non-profit organization, "corruption is a solid

block. There is bribery at all levels...There appears to be a

sense of near-complete impunity, a sense of entitlement ... there

is no sympathetic low level management, no sympathetic mid-level

management, or sympathy at the top (for anti-bribery efforts)." 5

Common religion between Russia

and Ukraine is worth mentioning, too.

In both countries it is predominantly

“Russian” Orthodox Christianity. In

the opinion of Valdimir Pozner, a

famous Russian TV host, Orthodox

Church is one of the stumbling blocks

5 Reuters Alexandra Wrage

in the way of development of all

orthodox countries. "I think that one of the greatest tragedies for Russia is conversion to

Orthodoxy,"6 Pozner said. He argues that countries (i.e., Russia, Ukraine, Bulgaria and Greece)

that have this branch of Christianity that did not dominate during the renaissance are worse off

today than protestant and even catholic countries. ‘In the mid 1970s “The Russians,” a famous

book by the American journalist Hedrick Smith, gave a vivid description of the Russians living in

the Soviet Union as generous, mystical, emotional, and essentially irrational and impulsive, despite

the constant ideological pressure “the builder of the communist society” was subjected to.’7

‘For Japan, the emphasis is rather on harmony, the nation as

a family. Related values include a comfort with hierarchy,

respect, and a sense of Confucian order, [while] to the American

ideology and experience were commitments to liberty,

individualism and equality. …they regard it as “self-evident”

6 22.07.201 www.newsland.ru7 A S I A P R O G R A M S P E C I A L R E P O R T March 2003 No.109 Building a Democratic State in Postwar Japan Donald L. Robinson

that all men are created equal.’8

Apart from religion, industries, education and bureaucracy

of Ukraine for the most part were formed during the Soviet era.

In the USSR, though not as rampant, corruption still was ever

present as a heritage from Tsarist Russia. Due to the lack of

transparency under the CPSU rule, corruption could exist at all

levels from a fruit stand to ministers. Perhaps a good

illustration would be the 1983 Soviet movie “Blondinka za Uglom”.

In this movie, the director of a grocery store who can ‘get’

deficit food items in exchange for other deficit non-food items

enjoys the best lifestyle. In the meantime, a geophysicist and a

schoolteacher cannot find basic goods. Over the years, the

Russian and Soviet republic had been conditioned to accept

corruption and even participate in it. “In many countries there

is a significant section of the population who do not regard

corruption as being simply the result of poverty or disorder, but

rather view it as being something that is appropriate or at least


tolerable (Reno, 2008).”9 At the time of the breakdown of the

USSR it was impossible to separate Ukrainian corruption from a

Russian one-it was the same. Thus it would not be an

overstatement to say that Ukraine gained independence with the

notion that the Soviet Union was impeding its progress without

even realizing that there was anything wrong with its society.

Japan, on the other hand, just like Germany ‘fostered an almost

visceral receptivity to the post-defeat ideal of creating a more

open, anti-militaristic society that would never permit such

horrors to be repeated.’ Also, the ‘[ Japanese] appear to have

made a decision to “embrace” defeat, to accept American

guidance.’10

Ukraine, unlike Japan, jumped into democracy feet first with

little or no preparation or guidance. On the other hand, 1945

Japan had “... little need ... to translate the classic corpus

of Western liberal and revolutionary thought; rather, [it] simply

needed to bring back into print all the translations the

9 A S I A P R O G R A M S P E C I A L R E P O R T March 2003 No.109 Building a Democratic State in Postwar Japan Donald L. Robinson10 A S I A P R O G R A M S P E C I A L R E P O R T March 2003 No.109 Buildinga Democratic State in Postwar Japan Donald L. Robinson

militarists of the 1930s had suppressed.” Needless to say that

democracy can not exist in a corrupt society.

Robinson (2003) singled out several factors that helped

post-war Japan rise to its feet: “First, the Japanese were

literate, well educated people. They had a habit of respect for

authority.”11 In contrast, it has been said about the Ukraine

that “[a]lthough human skills, in terms of educational levels,

are considerable, organizational capital is at a very low level.

The low level of self-organization of society allowed a predatory

state to develop and a parasitic bureaucracy to act with

impunity. Deep social divisions were able to develop due to the

passivity of the general population.”12

Politics

Political corruption is important to monitor in state-

building because it can marginalize government legitimacy, human

rights, and economic opportunities. All of these factors are

essential measurements of development. Most importantly,

11 Hans Van Zon. (2000) The Political Economy of Independent Ukraine. Contributors. St. Martin's Press. New York.


corruption adds to the instability of states. “Little or no

legitimacy is a major factor in state fragility because it

implies a government has no popular support. It prohibits the

formation of a political community or identity, and prevents the

state from efficient management of the country regarding the

social and financial costs of its actions”13.

The culture of corruption in the Ukraine is best illustrated

in their politics. Ever since their independence in 1991,

political leaders and state institutions have been linked to

corruption, undermining the legitimacy of their state. The

general population is not only used to the illegal practices of

government, they perceive it to be necessary to participate in

corrupt practices in order to benefit from state services. Bribes

are seen as a regular political tool 14.

The citizens of the Ukraine view their government as weak on

fraudulent practices, with 63% of those polled saying the state

does nothing to fight corruption 15. In fact, this percentage

13 Cabelkova, Inna (2004). "The power of negative thinking: corruption perception and willingness to bribe in Ukraine." Applied Economics 36: pg 396.14 Cabelkova, pg 38915 Gessen, M. (2001). "Crackup of Crackdown?" U.S News & World Reports 130(12).

increases among populations who have more direct contact with

state and local officials. Few leaders are exempt from

accusations or evidence of unethical practices. All of the

presidents since independence have been tied to corruption.

Their crimes range in category from voter manipulation, bribes,

intimidation of media, to constitutional manipulation.

Leonid Kuchma may be the best example of toxic Ukrainian

leaders. Serving as president from 1994 to 2005, his term in

office was often accused of election tampering, and was marked by

his implication in the murder of an opposition journalist. 16

These practices prevented development by undermining the

diplomatic process directly, and undermining the peoples ability

to express critical opinion via the press and advocate for a more

transparent government. Kuchma’s practices of corruption were

not bound to domestic issues, but also lead him to make secret

deals that would hurt his country’s standing in the eyes of both

Russia and the West.

Working deals with both great powers at the same time kept

16 Wines, M. (2002). Report of Arms Sale by Ukraine to Iraq Causes Consternation. The New York Times.

the Ukraine from becoming overly dominated by either nation, and

prevented them from having a full ally. Loose negotiations on,

and interest in NATO membership kept Russia from providing full

economic support in the form of possible price opportunities for

the Ukraine during the beginning stages of development. Kuchma’s

2002 diplomatic gaffe, which found him to have sold radar system

to Iraq radar weapons systems, seriously strained relations with

the United States and NATO as a whole.17

Even after the 2004 Orange Revolution forced the Ukraine to

recognize election fraud, the new leadership was quick to return

to the common corrupt practices. It has become a systemic

problem. In current politics, the anti-corruption campaign is

used as a tool to marginalize opposition parties and consolidate

power. This has allowed leaders who have been implicated in the

past to return to participation if they aligned with the right

party. Nikolai Azarov, an expert in the fraudulent tax laws he

established while serving under Kuchma, has been allowed to serve

as the current Prime Minister.18

17 The Economist, “Care Takers”, March 12, 2010. 18 The Economist, 2010

His appointment is typical of current president Yanukovich’s

hypocritical policies. His election platform emphasized an

attempt to curb the corruption that undermines the stability of

the Ukrainian state. However, this policy has turned into a

practice of identifying corruption only among opposition party

members. He has used the example of corruption as a reason why he

must consolidate presidential powers, leaving many feeling uneasy

about the stability of the Ukrainian democracy.19

While it is clear that no government, whether developing or

developed, is free from corruption, others have shown more

success in marginalizing its spread and impact. The political

situation of Japan post-WWII provides an alternative example of

corruption and state-building. One major factor in determining

the successes and failures between these two countries is the

political distance covered in their early development years. That

is to say, how far their ideological shifts were in their new

administrations.

While the Ukraine had to transition from communist rule all

19 Dower, J. (2003). Durable Democracy: Building the Japanese State, Woodrow Wilson International Center for Scholars.

the way to democratic free market society, Japan was already

moving towards a parliamentary democracy before the war.20 This

fact made it far easier for the Japanese to build a stable and

legitimate government in a shorter period of time. The Ukrainians

had to learn the new game, but were using the same players from

the communist era. The transition from a secret one party system

to a more transparent and competitive democracy allowed the high

level of corruption to become immediately visible.

The political impact of the US in Japanese democratization

and overall development is often seen as a ‘transplant’ enforced

by occupation. While this is partly true, there are arguments

that say Japan was ready for a change after surviving such

terrible losses of WWII.21 The occupation remains a major factor

and difference between the development of each country. The

Ukraine had no hands on guidance to lead them into democracy as

Japan did. This guidance not only affected how politics would be

handled in Japan, but more importantly, it would define economic

20 Dower, 200321 Simai, Mihaly. The Democratic Process and the Market: Challenges of the Transition. New York: United Nations University 1999. pg. 102.

policy in the region as well. With the Ukraine’s political scene

facing such a paradigm shift in ideology, the economic market was

left open to the destabilizing factors of corruption.

Economy

During the soviet era, Ukraine was an economic stronghold.

Ukraine had the largest economy in the Soviet Union only after

Russia. Ukraine generated four times the production of the next

highest producing state in the union. Sadly, their economic

strength has waned in the region since the breakup of the Soviet

Union. Ukraine is no longer the economic leader that it once

was. Their economy has struggled and continues to do so during

this process of state-building. Some factors contributing to

Ukraine’s economic woes in the past two decades include poor

governance, slow privatization and especially corruption. These

factors have had negative effects on the economic growth of

Ukraine and will continue to do so until things change.

Although the dissolution of the Soviet Union has

influenced the democratization of Ukraine in positive ways,

remnants of soviet totalitarian rule still remain and interfere

at times.22 It is a mindset that has been difficult to throw off

after so many years as a communist nation. One example of this

mindset is within agriculture. This industry deteriorated

drastically after independence due partly to land ownership

reform, which has been slow, but also because the cooperatives

were still being run by communist-party functionaries, managing

things the old way.23

More evidence of the communist mindset that still lingers in

Ukraine is the lack to aggressively privatize industries in

Ukraine. Since its independence, Ukraine had plans in place to

privatize state owned enterprises. However, implementation of

these plans has been slow, the slowest of all the Eastern

European countries. Katrin Elborgh-Woytek and Mark Lewis

attribute this slow transition in privatization to lack of

commitment from leaders and political decisions that prevent the

ongoing privatization operations.24 When, however, privatization

22 Ibid, pg.96.23 “Privatization in Ukraine: Challenges or Assessment and Coverage in Fund Conditionality” IMF Policy Discussion Paper. May 2002. pp. 4,6.24 Dubrovskiy, Vladimir; Paskhaver, Alexander; Verkhovodova, Lidia; and Blaszczyk, Barbara. “Conditions of Resuming and Completing Privatization in

has occurred, it is often times accompanied by corruption.

According to a 2007 analytical report about privatization in

Ukraine, it stated that between 2003 and 2005, some of Ukraine’s

most lucrative assets were bought by persons associated with the

authorities at prices far below market value or without even

following privatization procedures.25 In 2005, privatization was

brought to a complete stop due to these less than ideal

transactions taking place.26

Political decisions and reversal of decisions contribute

greatly to the economic growth, or lack of, in Ukraine,

especially in regards to foreign investment. In1997, Motorola, a

United States based company, abandoned a $500 million joint

venture that would provide cellular service in Ukraine because

the government kept changing the terms. South Korean

industrialists had similar experiences with the Ukraine

government.27 At times the government has been impossible to

deal with and have scared off potential business ventures that Ukraine.” Center for Social and Economic Research. 2007. pg. 4.25 Ibid, pg. 13.26 Economist. June 28, 1997. 343: 8023, pg. 72.27 Mankiw, N. Gregory. “Ukraine: How Not To Run an Economy.” Fortune.06/12/2000. Vol. 141, Issue 12.

would boost the economy. In an interview in Fortune, one

Ukrainian that assists western businesses in establishing

themselves in Ukraine says that 20% to 30% of an investment

project’s budget needs to be set aside for the purpose of

bribes.28 It is for reasons like these that Ukraine is ranked

146th out of 180 countries in regards to freedom from corruption.

The 2011 Index of Economic Freedom finds that corruption in

Ukraine in all levels of society and government is far above the

world average and among the worst in the world.29

The combination of some Ukrainians being set in their old

communist ways, corruption at all levels of government, and slow

privatization all make for an unfavorable foreign investment

climate. Other indicators from the 2011 Index of Economic

Freedom that make the Ukraine less attractive to foreign

investment include the inefficient regulation of commercial

transactions, extremely high inflation, and weak protection of

property rights. But the greatest difficulty for foreign

investors in Ukraine is the bureaucratic legal and regulatory

28 http://www.heritage.org/index/country/Ukraine#property-rights29 ibid

requirements. The courts do not always uphold legal contracts.

Restrictions may be applied to foreign exchange accounts.30

Ukrainian industry needs operating capital, which the government

cannot provide because they have no money. However, Ukraine has

done little to attract foreign investors.31 Ukraine will need to

make many reforms in order to acquire the needed foreign capital

to boost their economy.

In contrast, Japan’s process of state-building had a

different result. Before World War II, Japan had a fairly strong

economy, however, it did not have many natural resources.

Japan’s entrance into World War II was related to its policy of

expansionism in search of natural resources. After Japan’s

defeat, the country had to start over again. Most of their

industrial sites had been destroyed. They lost all the territory

they had gained during the war meaning they lost their access to

many of the natural resources they had acquired. However, their

state-building process turned them into a world economic power.32

30 Simai, pg. 96.31 https://www.cia.gov/library/publications/the-world-factbook/geos/ja.html#top32 Simai, pg. 96

Unlike Ukraine, the success of Japan’s economy during its

state-building process can be attributed to the United States’

occupation of Japan and the Japanese government’s intense focus

on the economy. Japan was occupied by the United States until

1952. The United States believed that a strong economy would

help democratize Japan, so during the post-war years, the United

States invested a significant amount of money in Japan’s economy.

Japan had a favorable investing climate. Japan’s Ministry of

International Trade and Industry oversaw cooperation between both

the Japanese government and private industry. Regulations and

rules did not waver back and forth like they have in Ukraine.

Foreign investment was welcome and occurred with little to no

bureaucratic complications.

During the United States’ occupation, they oversaw the

democratization of Japan. Japan’s quick and successful

democratization helped prevent corruption. Because the Japanese

government had stabilized and was transparent, it did not suffer

from the blatant corruption that Ukraine has over the past two

decades.

Mihaly Simai, quoting an assessment by the Harvard Institute

for International Development, says that slow privatization and

slow deregulation are a vicious circle that ‘“has emerged in

which, due to slow reforms, a declining economy generates less

and less real income and results in further sluggishness of

reforms, which leads to a further decrease of incomes, and so

on.”’33 As the situation currently is in Ukraine, the economy

will only get progressively worse until privatization and

regulation reforms take place.

Conclusion:

More than 17 percent of Ukrainian population is ethnic

Russians. So in many respects, things said about the Russians

could be applied to the Ukrainian population as well. Writing

about Russia, La Stampa34 journalist Mark Franketti, observed

that with the advent of the Internet homo sovieticus is gradually

33 www.lastampa.it 10.05.10

34vvhttp://en.rian.ru/analysis/20100706/159709502.html

evolving into a member of civil society. “The country is

certainly not on the verge of a revolution but everyday there are

individual fights (in cyberspace) with the corrupt government.

Even 10 years ago such discontent with the government was born

and died in the kitchen conversations, but today blog posts can

influence the whole society.” Perhaps Ukraine will be heading in

the same direction. The recent social changes in Tunis and Egypt

are good examples of what may happen. As they say in Ukraine-

“life will show.”

Either way the Ukraine decides to steer their development,

it is certain that reduction of corruption is necessary. This

paper has shown how cultural practices can pave the way for

illegal activity. This impact shows up most clearly in politics,

and is felt most harshly in the economy. The Japanese benefited

from occupation and tight control, a closer starting point to

their democratic end, and were able to produce an ‘economic

miracle’. While corruption is unavoidable in state-building,

without close observation it has the potential to derail an

entire nation’s development.

Bibliography

Cabelkova, Inna (2004). "The power of negative thinking: corruption perception and willingness to bribe in Ukraine." Applied Economics 36: pg 396.

Dower, J. (2003). Durable Democracy: Building the Japanse State,Woodrow Wilson International Center for Scholars.

Dubrovskiy, Vladimir; Paskhaver, Alexander; Verkhovodova, Lidia;

and Blaszczyk, Barbara. “Conditions of Resuming and Completing Privatization in Ukraine.” Center for Social and Economic Research. 2007. pg. 4.

The Economist, “Care Takers”, March 12, 2010.

Hussmann, K. (2009). Integrity in Statebuilding: Anti-Corruption with a Statebuilding Lens, OECD DAC Network on Gernance-Anti-Corruption Task Team.

Mankiw, N. Gregory. “Ukraine: How Not To Run an Economy.”Fortune. 06/12/2000. Vol. 141, Issue 12.

Simai, Mihaly. The Democratic Process and the Market: Challengesof the Transition. New York: United Nations University 1999. pg. 102.

“Privatization in Ukraine: Challenges or Assessment and Coverage in Fund Conditionality” IMF Policy Discussion Paper. May 2002.pp. 4,6.

http://www.heritage.org/index/country/Ukraine#property-rights

https://www.cia.gov/library/publications/the-world-factbook/geos/ja.html#topHans Van Zon. (2000) The Political Economy of Independent Ukraine. Contributors. St. Martin's Press. New York.

Corruption’s effect on State building: Ukraine vs Japan

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