Unlike its successful neighbor Poland, Ukraine never underwent a rapid and sustained transformation that allowed these institutions to grow. One of the most important institutions that Ukraine has been missing for far too long is that of secure property rights, the basis for a free-market economy.
As the coalition talks drag on in Kyiv, it is becoming increasingly apparent that a key centerpiece of any reform effort should be a renewed focus on property rights. In particular, there needs to be an immediate repeal of the antiquated land sale moratorium.
Protection of property rights in the basis of the market economy, and the fact that it has been delayed for so long in Ukraine is another sad reminder of the country’s incomplete transition. The moratorium on the sale of agricultural land accompanied the introduction of the Land Code in 2001 and remains in place today, being extended in 2005, 2008, and 2012 by the Verkhovna Rada.
This legislative order means that a farmer cannot finance his business by collateralizing his land; in essence, this is the old land practices of serfdom under the Russian Empire, where the farmer is bound to his land. Despite 74 percentof all land being “private,” these restrictions make it much more difficult to exercise one of the most fundamental aspects of property rights, the right to dispose of as the owner sees fit.
Ominously, the recent coalition agreement that was published by the Poroshenko bloc seemed to agree that this moratorium should be extended through 2018, a troubling sign for Ukraine’s moribund economy.
This move keeps the Ukrainian economy firmly in the Russian camp, following outmoded Soviet- and Russian-style legislative moves to keep the economy small and controlled. Indeed, Ukraine’s large neighbor Russia has also decided to eschew property rights protection in favor of a principally state-determined approach. Security of one’s property is not guaranteed in Russia if the state needs or wants it, with rampant manipulation of laws and the vast bureaucratic apparatus ensuring that rights are bypassed.
Even beyond the extra-judicial process (including levies, or, to put it more bluntly, corruption), the system in Russia almost requires infringements of property rights: hyper-legalism and an adherence to the letter (rather than the spirit) of the myriad of laws makes infringements of property rights more likely even for a law-abiding citizen. This means more pretenses for the state to intervene.
While the land sale moratorium identifies Ukraine with its Russian past, from a more sober policy analytical perspective it is difficult to see why the moratorium is kept. By any metric of success, the policy has been a failure.
It has lowered agricultural productivity, kept agricultural sector growth to a minimum, allowed for the aggrandizing of land in the hand of state-owned corporations, and, most importantly, it not protected the land.
In fact, if the reason behind the moratorium was a worry of Russian oligarchs purchasing all of the land of the east, this has been alleviated by the Russian army instead just taking it, with no compensation due to Kyiv.
In fact, Ukraine might have been better off if it were just able to sell the Donbas to Russia.
One attribute is clear from years of economic research, and that is that countries that lack property rights grow more slowly (if at all) compared to those with better protections. Ukraine has thus far avoided important reforms that would grow this key economic institution, but time has come to lay the fundamental foundation of a market economy. Repealing the land sale moratorium would be a first, and long overdue, step to planting the seeds of growth.
Christopher A. Hartwell is President of CASE – Center for Social and Economic Research and Associate Professor at Kozminski University, both in Warsaw.
