The Problems of Institution Building in Ukraine

Essay, 2001
12 Pages, Grade: A-




In this paper I would like to stress the importance of institution building in Eastern Europe and the interaction between formal and informal rules as one of the possible explanators of encountered difficulties. It should be seen as an attempt to describe the general situation in Ukraine, as well as the banking system. It will be submitted that institution building is part of a more general picture of current and past events, and informal rules should be paid more attention in this process.

The collapse of the Soviet Union bloc created an institutional vacuum in the whole Eastern Europe. Institutional change was seen as a key factor in solving problems. Three crucial issues were on the agenda at the moment: what and how institutions should be chosen, and how quick this process should be, as there was no possibility at that time to identify alternative institutional arrangements and assess precisely their consequences. The transition from socialism to capitalism made institutional restructuring indispensable. After the expiration of the socialist legal framework, new stable rules were required for carrying out interactions. In the then absence of formal rules people fell back on customs and traditions.

The West perceived the end of the communist rule as a clear vote for the capitalism. But it also assumed existence of the rational utility maximizers who would easily identify new opportunities, assess their consequences and allocate scarce resources in the best possible way. In my view transitologists tended to focus on the future rather than the socialist past, but failures of institution building in Ukraine have proved these approaches to be unrealistic and inappropriate in tackling the restructuring of institutions in CEE because, given incomplete knowledge and uncertainty, the importance of transaction costs, was not paid adequate attention to. Transaction costs are costs of resources necessary for the transfer of property rights from one economic agent to another, they include costs of making exchange and maintaining institutional structure. The calculation of costs did not include the costs for convincing people that the legal system was credible and stable, the cost of new institution-building and the costs of making people understand why the institutional restructuring was necessary or what was required for it. Also, according to Bossak, the frequent changing of rules, insecure property rights and restrictions on asset trading also increased such costs.

I submit that the transition process introduced institutional changes, which were alien in nature to the Eastern Europeans, who lost a sense of orientation and were forced to accept a new set of institutions yet for another time. Thus Krasznai and Winiecki submit that the number of people convinced that all economic problems started in 1989 is quite large. Before, capitalism was seen as a rich supply of goods and services, and equally large incomes, but not as a way of life based on self-responsibility, self-determination, risk-taking, honesty and free-market competition. Ukrainians need time to learn that capitalism is not just an alternative mechanism for resource allocation but a way of life whereby individuals pursue their private ends collectively. Thus an appropriate culture has to be created to match the institutions and ensure their success; but in Ukraine nowadays we merely observe a clash between old and new traditions, which are not yet anchored in society.

The crucial function of the competitive markets is to encourage institutional innovations and adoptive behavior in an ever-lasting quest for efficiency through selection and trial. Successes should eventually get into an institutional framework. The hook in this process is how to make this mechanism self-sustaining. I hold that it should be made sensitive to the informal set of beliefs and practices held by the public; that can be done through making formal rules more flexible to allow for the change of constituent parts of the system. An example may be a German Grundgesetz, which is sensitively attuned to meet the changing needs of communities, whereby many of these needs take their origin in the fields of informal beliefs, practices, etc.


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The Problems of Institution Building in Ukraine
Lancaster University  (Political Economy)
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Extensive literature listing.
Problems, Institution, Building, Ukraine
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Oleksandr Svyetlov (Author), 2001, The Problems of Institution Building in Ukraine, Munich, GRIN Verlag,


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