Social Capital and Privatization in Regions of Ukraine

Ivan Katchanovski, ABD

School of Public Policy

George Mason University

4400 University Drive

Fairfax, Virginia 22030

Tel. (703) 352-7129

Fax (703) 993-2284

ikatcha1@gmu.edu

Paper prepared for presentation at the Annual World Convention of the Association for the

Study of the Nationalities, Columbia University, New York, April 5-7, 2001.

Revised March 19, 2001

This paper is based on a chapter of my dissertation, Regional Political and Policy

Divisions in Ukraine and Moldova. I am thankful to Francis Fukuyama and Seymour

Martin Lipset and for their comments and suggestions. I would like to acknowledge Hans

Klingemann from Wissenschaftszentrum Berlin for providing the World Values Survey

dataset, and Peter Craumer from Florida International University and Vicki Hesli from the

University of Iowa for supplying the census data on education. Responsibility for any

remaining mistakes remains my own.

1

This paper analyzes the role of different forms of social capital in privatization in regions

of Ukraine. Several recent studies linked regional government performance and economic

development in Italy, Germany, Poland, and other countries to social capital, which is

associated with different historical experiences. In post-communist Ukraine, regional

political cleavages are also often traced to historical divisions. This paper examines

whether different historical experiences in two groups of regions, those which were under

Russian and then Soviet rule, and those which were under Austro-Hungarian, Polish,

Romanian, and Czechoslovak rule until World War II, contributed to variations in the rate

and quality of privatization. This study distinguishes between quantitative and qualitative

aspects of social capital and privatization in industry and agriculture in Ukrainian regions.

Statistical analysis of the 1995 World Values Survey data and aggregate data are used to

analyze effects of historical experience and other direct and indirect measures of social

capital, such as membership in voluntary organizations, interpersonal trust, importance of

family and friends, and crime and divorce rates, on privatization in Ukraine. The role of

social capital in privatization is compared to the role of other factors including economic

policy, industrial structure, human capital, and ethnic cleavages.

2

Social Capital and Privatization in Regions of Ukraine

Several studies have linked regional government performance and economic

development to social capital associated with different historical experiences. Putnam

(1993) argues that the institutional performance in Italian regions is strongly affected by

the civic traditions traced to different histories of the South and the North. In the North, a

dense network of civic and business associations has evolved, while family ties become

much more important in the South. The civic traditions also affect the economic

development of Italian regions (Helliwell & Putnam, 1995, Putnam, 1993).

The local government performance in Poland is associated with their location in

historical regions. A Northern and Western parts of Poland, which belonged to Germany

until World War II, exhibit the best performance. They are followed by regions, which

were parts of the German Empire and the Austro-Hungarian Empire until World War I.

The region, which belonged to the Russian Empire until World War I, demonstrates the

weakest performance. (Gorzelak, 1998, pp. 124-126). Location in the former Eastern

Germany has significant negative effect citizen satisfaction with local government

performance in Germany (Cusack, 1997).

Like Italy, Poland and Germany, Ukraine includes regions, which belonged to

different states for significant historical periods. This paper analyzes the role of social

capital in privatization in different groups of regions in Ukraine: those under a long history

of Russian and then Soviet rule, and those under the Austro-Hungarian, Polish, Romanian,

and Czechoslovak rule until World War II. The first group is called Western Ukraine, and

the second group is called Eastern Ukraine. The role of other factors, such as policy,

economic structure, human capital and ethnic cleavages, in the regional variations in

3

privatization is also examined. This study attempts to distinguish between qualitative and

quantitative effects of social capital on privatization in Ukraine.

Literature review and the research question

Neoclassical economics focuses on instrumentally rational types of action and the

economic efficiency of privatization. Neoclassical economists emphasize general

economic equilibrium and incentives which determine behavior of utility maximizing

individuals and profit maximizing firms. A standard neoclassical interpretation of the

Coase (1960) theorem is that initial distribution of property does not matter in the absence

of transaction costs. The market will redistribute property in an economically efficient

manner. The Coase theorem applied to privatization policy in the former communist

countries implies that it is largely irrelevant who gets the privatized property initially.

Privatization programs in many post-communist countries explicitly or implicitly

incorporated this theorem (See Boettke, 1998, p. 11, Rapaczynski, 1996).

Since neoclassical economists assume that individuals are instrumentally rational

and treat tastes and preferences as given, they attribute regional variation in privatization to

differences in policy, initial economic conditions, and structural factors. A market-oriented

policy would have more positive effect on privatization than a statist policy. Initial

economic conditions refer to the level of economic development, human capital, and

natural resources at the start of the reforms. Structural factors affecting privatization

include industrial structure of production and occupational structure of employment.

Studies of privatization in Ukraine, like in other post-communist countries, focus on

government privatization policy and legislation dealing with privatization, property rights,

and securities, etc. (See Cramon-Taubadel, 1997, Frydman, Rapaczynski, and Earle, 1993,

4

Drum, 1997, Kaufmann, 1997, Lieberman, 1997, Lundell, 1997). However, the question is

as to why the extent and the character of privatization differ among countries and regions

where the same or similar privatization programs were adopted.

The privatization policy in Ukraine has been in the hands of the central authorities.

The government of Ukraine implemented mass privatization programs and adopted joint-

stock companies laws, securities and competition laws by 1997 (EBRD, 1997, p. 14-19,

Webb, 1997, p. 33). However, there are significant regional variations in the level and

quality of privatization. For example, peasant households, on average, produced 59 percent

of the agricultural output in Western regions of Ukraine in 1994 compared with 38 percent

in Eastern regions. (Table 1).

This paper tests a hypothesis that social capital linked to differences in historical

experience affects the privatization in Ukraine’s regions. Social capital refers to commonly

shared values and norms which enable cooperation among individuals within different

groups and organizations (Coleman, 1988, p. 98, Fukuyama, 1999, p. 16). The shared

values and norms include religious values or norms of friendship. As studies of Italy,

Poland and Germany show, historical development is another source of social capital.

Different historical experience is a major factor of variation in political attitudes and

behavior in regions of Ukraine, which has been reported in many studies (See Birch, 2000,

Katchanovski, 2001). Similarly, the historical experience affected economic norms and

values in regions of Ukraine. A less statist policy and a more developed rule of law in the

Ukrainian regions in the Austro-Hungarian Empire, Poland, Romania, and Czechoslovakia

compared with the Ukrainian regions of the Russian Empire and then the Soviet Union

before World War II, led to the development of less statist and more law oriented norms

5

and values in Western Ukraine. However, these norms and values were not fully market-

oriented because ethnic Ukrainians were predominantly serfs and, after the abolition of

serfdom in the 19th

century and before the Soviet collectivization, subsistence farmers.

(Katchanovski, 2001, Subtelny, 1988).

Social capital cannot be simply aggregated because it includes heterogeneous

elements which lack a common denominator. Even aggregate measures of physical capital,

expressed in terms of money, face similar problems in dealing with heterogeneous

structures and composition of capital, which ultimately reflects subjective valuations of

individuals. (Lachmann, 1958/1978). Because of the difficulty of measuring and its

heterogeneous character, the whole concept of social capital is often rejected by

neoclassical economists (See Manski, 2000, pp. 122-123). Like entrepreneurs whose

actions are difficult to incorporate in a neoclassical mathematical framework, social capital

is ignored in most studies of privatization in Ukraine and other post-communist countries.1

One has to distinguish between trust in family and friends and trust in strangers.

Family and friendship relationships involve expectations of cooperation and help which are

essential for their maintenance. Trust in family is beneficial for family-based businesses.

However, it can also lead to nepotism and corruption when a family member or a friend

receives a preferential treatment without regard to his or her merit in the economic sphere

or public sphere (Tanzi, 1995). In contrast, trust in strangers helps to extend economic

exchange beyond a circle of family and friends and promote development of large private

enterprises by reducing uncertainty and opportunistic behavior (Fukuyama, 1995, 2000,

Raiser, 1999). This form of social capital, which involves wide radius trust, is closely

related to the concept of civil society (Brehm and Rahn, 1997). Civil society refers to a

6

network of associations and organizations which are not state-based or family-based. Trust

in strangers enables individuals to successfully solve collective action problems and form

such associations. In this sense, one can view private businesses as a part of civil society

(Fukuyama, 1995, pp. 4-5).

Focus groups and case studies conducted in Western and Eastern regions indicate

that non-communitarian forms of social capital, e.g. based on family ties or networks of

friends, are dominant in both historical parts of Ukraine (Arberg, 2000, p. 312, Zon, 1998).

O’Loughlin and Bell (1999) found no strong and consistent regional cleavages in Ukraine

in civil society development, but they report that the ratio of NGOs was one of the highest

in the former Austro-Hungarian province of Galicia and the election turnout rate was

largest in Western regions. Survey results reported by Arberg (2000, pp. 301-302) show a

low rate of membership in civic organizations in Ukraine, although it is somewhat higher

in Lviv, the main city in Western Ukraine, than in Donetsk, the largest city in Eastern

Ukraine.

O’Loughlin and Bell (1999) report that support for free market, compared with

support for central planning, is weakest is Eastern regions of Ukraine, with the exception

of the capital city of Kiev, and strongest in Western regions. However, Kubichek (2000)

found that the effect of region on free market attitudes is not as significant as effects of

age, education and changes in household income. The analysis of the University of Iowa

Post-Soviet Citizen surveys in Ukraine produced similar results regarding region (Miller,

et. al., 2000). However, the definition of West and East is based on geographical location

of regions and differs substantially from the historical definition.

7

Some studies of privatization in Ukraine include regional factors. For example, two

recent surveys of Ukrainian enterprises after privatization found that regional variables do

not affect significantly and consistently their economic performance and restructuring

(Akimova and Schwodiauer, 2000, Estrin and Rosevear, 1999). However, regional

dummies in these studies were employed primarily to represent differences in regional

policy and economic structure and ignored historically-based social capital.

Religion represents one of the sources of shared values and norms in social capital

(Fukuyama, 1995, 1999). Weber (1904-1905/1958) argued that the Protestant ethic

fostered entrepreneurship, in contrast to Catholicism and other religions. Lal (1998, pp. 95-

97) maintains that differences between the Orthodox Christian ethic the Western Christian

ethics can affect economic development. Huntington (1996, pp. 165-166) argues that

Ukraine is divided into the Western cultural civilization, which he identifies with the

Ukrainian Greek Catholic Church, and the Orthodox civilization. In contrast to the

Orthodox civilization, the Western civilization is based on individualism and the rule of

law.

However, a study of economic growth divergence in post-communist countries

raises questions about including the Ukrainian Greek Catholic Church into Western culture

(Katchanovski, 2000, p. 76). The Ukrainian Greek Catholic Church preserves Eastern

Orthodox rites and customs. The affect of changes in Catholic culture and the doctrine of

Vatican in the post-World War II period was not as strong in Ukraine as in other Catholic

countries because the Greeks Catholics church was prohibited during the Soviet rule.

Ethnic, religious, and other types of cleavages analyzed by Lipset and Rokkan

(1967) can influence social capital by affecting the radius of trust. These cleavages often

8

prevent members of different ethnic or religious groups from sharing values and norms

which enable mutual cooperation. Ethnic heterogeneity of the regional population can be

detrimental to privatization by limiting the radius of trust among individuals from various

ethnic groups. For example, high degree of inter-personal trust in Germany and Japan does

not often extend to foreigners (Fukuyama, 1995, p. 210).

Many studies of privatization focus exclusively on quantitative measures. They rely

on such quantitative indicators as the share of the private sector in the GDP, the

proportions of privatized enterprises and their output to characterize the privatization

process. However, these indicators do not take into account a qualitative side of

privatization. A combination of statistical and interpretative methods will help us to answer

both aspects of the research question. Statistical methods are traditionally used in analysis

of the extent of privatization. Interpretative methods, based on thick description, are more

appropriate for analyzing structure of social capital and character of privatization. (See

Fukuyama, 1995, pp. 33-38, Lavoie and Chamlee-Wright, 1999).

This paper utilizes the 1995 World Values Survey data on social capital and

attitudes towards privatization in Ukraine. Academic studies, newspaper and magazine

reports, field research, government publications, and the World Bank reports provide data

on the character and extent of privatization in different regions of Ukraine.

Rate and Character of Privatization in Ukrainian Regions

Before the collapse of the Soviet Union in 1991, the state owned the majority of

enterprises in Ukraine. Since adoption of Stalin’s policy of central planning,

industrialization, and mass collectivization at the end of the 1920s in Eastern Ukraine and

in the 1940s in Western Ukraine, non-state ownership was limited. Until the introduction

9

of economic reforms during Gorbachev’s perestroika in the end of the 1980s, non-state

ownership was confined to individually owned property, like passenger cars,

summerhouses of urban residents, and private housing and livestock of rural residents, and

underground economy. In the end of the 1980s, state enterprises accounted for almost 100

percent of industrial production in all regions of Soviet Ukraine. State and collective farms,

controlled by the state, produced most of the agricultural output. The rest was produced by

peasant households, which were allotted small plots of land.

Privatization and restructuring of ownership of industrial enterprises and collective

and state farms in Ukraine have led to the emergence of a sizable non-state sector. Judging

by the official statistics, most of industrial enterprises in Ukraine were no longer owned by

the state by the end of the 1990s. The proportion of non-state industrial enterprises is

generally higher in Western regions of Ukraine (85-91 percent) than in Eastern Ukraine

(65-90 percent).2 Agricultural privatization led to the emergence of private farms and a

significant expansion of individual household plots. The proportion of agricultural outputs

produced by non-state enterprises and peasant households is higher in Western part of

Ukraine. (Table 1).

Mass privatization programs in Ukraine provided every citizen with a claim to a part

of state-owned property. Privatization certificates were supposed to be converted into

shares of privatized companies (Drum, 1997). Another form of the privatization involved

transfer of ownership of state enterprises and collective and state farms to their employees

and management. The rest of state enterprises were sold for cash in auctions.

However, the transformation of most state enterprises and collective and state farms

into joint-stock companies and cooperatives did not led to the establishment of well-

10

defined property rights. Even though they are included in the private sector by government

officials and World Bank economists, most of the privatized enterprises formally have a

collective form of the ownership (See D’Anieri, Kravchuk, and Kuzio, 1999, p. 186,

Estrin and Rosevear, 1999, pp. 448-49, Zon, Batako and Kreslavska, 1998, pp. 23-24).

Privately–owned enterprises produced only 1 percent of industrial production in both

Western and Eastern Ukraine in 1998. (Table 1).

Managers of privatized enterprises and farms, a significant segment of whom

remains from the Soviet days, often run these companies for their own benefit (Aslund,

1999). The nominal owners of joint-stock companies or cooperatives, many of whom are

also employed at these firms, often do not receive any dividends, wages are delayed or

paid in kind. Restructuring of production, supplies, sales, management, and labor in many

privatized enterprises has been limited (See Akimova and Schwodiauer, 2000, Estrin and

Rosevear, 1999, Filatotchev, Buck, and Zhukov, 2000). A large proportion of these

companies and farms officially do not make any profit, hide sales, face a non-payment

problem and use barter (Estrin and Rosevear, 1999, Johnson, Kaufmann, McMillan, and

Woodruff, 1999, Carlin, Fries, Schaffer, and Seabright, 2000, Hellman, Jones, Kaufmann,

and Schankerman, 2000).

The involvement of organized crime characterize privatization in Ukraine. It

includes both extortion and direct ownership of privatized companies (See Shelley 1994,

1998). For example, 87 percent of managers of privatized firms in Ukraine surveyed in

1997 said that firms in their industry pay for “protection” of their activity (Johnson, et. all,

p. 7). Corruption is another feature of privatization in Ukraine (See Hellman, et. al., 2000).

11

Newspaper reports and academic studies have noted numerous cases when enterprises

were sold without transparency and for noncompetitive prices.

Social Capital and Other Factors of Privatization in Ukraine

The character and rates of privatization in Ukraine can be linked to the structure

and level of social capital in its historical regions. One would expect that involvement of

organized crime in privatization and corruption are higher in Eastern Ukraine compared

with Western Ukraine. The historical experience in different regions is likely to affect

support for private ownership and privatization in agriculture and industry. A relatively

strong family would be associated with the development of family-based forms of private

enterprise.

An analysis of media reports and academic studies suggests that the involvement of

the organized crime in privatization is more common in Eastern regions of Ukraine (See

Lieven, 1999, pp. 84-86, Shelley, 1998,). For instance, assassinations of Hetman, the head

of a stock exchange in Kiev and the former head of the National Bank of Ukraine, Yevhen

Shcherban, an owner of a large group of companies in Donetsk and the leader of a

parliamentary faction in the Ukrainian parliament, and a number of leading businessmen in

Odessa and Crimea, as well as assassination attempts against Pavlo Lazarenko, prime-

minister of Ukraine, who controlled through his associates a number of large companies in

Dnipropetrovsk region, and the first deputy prime minister of the Crimean Republic, all

occurred in Eastern regions (See Lieven, 1999, pp. 84-86, 119-120).

Similarly, interpretative analysis indicates that corruption is more widespread in

Eastern regions. The public perception of corruption is somewhat higher in Eastern

Ukraine than in Western regions. Ninety one percent of respondents in Eastern regions said

12

that bribe taking and corruption involves most or almost all public officials compared with

83 percent in Western Ukraine. Main oligarchs who used their political influence, personal

and family connections to gain control over large parts of industry were all born in Eastern

Ukraine or Russia. For instance, the fact that the disproportional number of the oligarchs,

as well as top government officials, came from Dnipropetrovsk region, is explained to a

large extent by their personal or family connections with president Leonid Kuchma, who

started his career in this region. Recordings, secretly made in the office of the president by

an officer from his guard, implicate Kuchma and his associates from regions of Eastern

Ukraine in large-scale corruption.3 (See Tyler, 2001).

It is noteworthy that a peasant household not a private farm has become the

dominant organizational form in non-state agriculture in Ukraine. Peasant households

accounted for 31-78 percent of the agricultural output in different regions in 1994. Private

farms held on average only 3 percent of land in Eastern Ukraine and 1 percent in Western

Ukraine in 1998. (Table 1). A typical peasant household in Ukraine cultivates a small plot

of land. Its average size is .5 ha. (Csaki and Lerman, 1997, p. 6). This type of production

involves almost no specialization. Most of the food produced by household plots is

consumed within families. The involvement in the market activity in the form of selling its

output or hiring labor is limited. The work in peasant household is typically carried out by

a nuclear family with occasional help from relatives, friends, and neighbors. For example,

the average family size in peasant household in Ukraine is 3.6. (Csaki and Lerman, 1997,

p. 45). The weak development of private farms and the predominance of family-based and

largely non-market peasant form of agricultural production is consistent with structure of

13

social capital in Ukraine. Trust has a narrow radius, and family ties are stronger than civil

society in Ukraine.

Conventional indicators of different types of social capital derived from the 1995

World Values Survey do not show consistent significant differences between Western and

Eastern Ukraine. A third, 32 percent of respondents from Eastern Ukraine, and 27 percent

of respondents from Western regions say that most people can be trusted. However, this

question does not differentiate between various types of trust. The exactly same

proportions of Western and Eastern Ukrainians say that family (98 percent) and friends (89

percent) are important in their lives and that “regardless of what the qualities and faults of

one's parents are, one must always love and respect them” (90 percent). Active

membership in voluntary organizations is low in both historical parts of Ukraine. (Table 2).

Indirect indicators of social capital, such as divorce and crime rate are lower and the

election turnout rate is higher in the Western regions than in Eastern Ukraine. The

unweighted average divorce rate per 1,000 of the total population in 1997 was 4.0 in

Eastern regions compared with 2.5 in Western Ukraine. In 1996, the regional average of

crime rate per 100,000 of the total population was 1290 in Eastern Ukraine compared with

632 in Western regions. Unweighted regional average of the election turnout rate in the

first round of the 1999 presidential elections was 74 percent in Western Ukraine compared

with 70 percent in Eastern Ukraine.4 (Table 2).

Factor and correlation analysis demonstrates that various direct measures of social

capital discussed in this paper, are not strongly associated with each other, which makes it

impossible to combine them into one reliable scale. For example, correlation coefficients

between Western region dummy variable, which is used as a proxy for the effect of

14

historical experience, and active membership in voluntary organizations in Ukraine is .03

on the individual level and .09 on the regional level. Unconditional respect for parents is

negatively correlated with membership in voluntary associations on both individual and

aggregate levels in Ukraine (-.03, -.43). This is consistent with the heterogeneous nature of

social capital. However, measurement problems are also likely to play their role, because it

is difficult to quantify social capital.

Statistical analysis shows that different types of social capital have different effects

on privatization in Ukraine. The dummy variable, which represents historical regions, has

significant effect on support for increase of private ownership among the respondents of

the 1995 World Values Survey. The average respondent from Western Ukraine is much

more likely to support increase in private ownership than the average respondent from

Eastern Ukraine. This variable has the largest standardized coefficient and is statistically

significant at .001. (Table 3).

Keeping other variables constant, trust affects positively and significantly (at .001)

support for privatization in Ukraine. Membership in voluntary organizations, unconditional

respect for parents, importance of friends, and Greek Catholic religion have no significant

effect on support for increase in private ownership. (See Table 3).

As one would expect, income and education are positively associated with support

of privatization in Ukraine. These variables are statistically significant at.01. Class level

also has a positive effect. Age is negatively associated with support for increase in private

ownership. Ethnicity has no significant effect. The average male expresses much stronger

approval of private ownership than the average female. The relationship is statistically

significant at .001. (Table 3).

15

Regression analysis shows that the Western region dummy has the strongest and

most statistically significant (at .01) effect on the proportion of peasant household output

in the total agricultural output but has no significant effect on the proportion of non-state

enterprises in the total number of enterprises in Ukrainian regions. Unconditional respect

for parents, which is a proxy for family-based social capital, has a positive and statistically

significant (at .10) effect on the proportion of peasant household output in the total

agricultural output. Regional membership in voluntary organizations, which is a proxy for

civil society, has no significant effect. Both these variables do not significantly affect the

proportion of non-state enterprises in the total number of enterprises in regions of Ukraine.

The proportion of Greek Catholics in the population is not statistically significant in both

regressions. (Table 4).

However, the Western region dummy in this case captures not only different

historical experience but also policy differences. Although the privatization policy in

Ukraine is centralized, regional authorities influence its implementation. Regional

governments in Ukraine are formed by both regional governors which are appointed by the

president and regional legislatures which are elected by the popular vote. However, the

regional differences in privatization policy are also linked to historical experience.

Support for the Communist parties which oppose large-scale privatization and private

ownership of land is significantly stronger in Eastern Ukraine than in Western regions

(Katchanovski, 2001). As noted, Eastern regions experienced the Soviet rule for much

longer time than Western Ukraine. The deputies from the Western regions are much more

likely to support economic reform and privatization legislation than the deputies from

Eastern Ukraine (Kubicek, 2000, pp. 288-289).

16

Economic and structural variables also affect privatization in Ukrainian regions.

Regional education level which serves as a proxy for human capital and the urbanization

rate are negatively associated with the proportion of peasant household output in the total

agricultural output. These variables are statistically significant at .10. (Table 4). Because

the education level and the urbanization rate are highly correlated (.85), separate

regressions are estimated with each of them to avoid multicollinearity problem. Keeping

other variables constant, the education level has positive and statistically significant (at

.05) effect on the proportion of non-state enterprises in the total number of enterprises in

Ukrainian regions.

The proportion of industrial enterprises subordinated to the union and or union-

republic ministries before the collapse of the Soviet Union has the largest and statistically

significant (at .01) negative effect on the level of privatization in the Ukrainian industry.

This variable reflects structural factors, such as enterprise size and type, because most

large enterprises in the heavy and defense-oriented industries in Soviet Ukraine were

subordinated to the union and union-republic ministries. The proportion of ethnic

Ukrainians in the regional populations is positively associated with the privatization rate in

industry. (See Table 4).

Conclusion

The analysis of the privatization in Ukrainian regions shows that social capital is

one of the major factors, in addition to economic, structural, and policy factors, affecting

the character and the rate of privatization. The structure of social capital in Ukraine is

characterized by narrow radius of trust confined to nuclear family and close relatives and

friends. Social capital manifested in trust in strangers and civil society is much less

17

prevalent. This structure of social capital is associated with the weak development of

market-oriented private industrial enterprises and agricultural farms, corruption, and

involvement of the organized crime in the privatization. A peasant household, based on

narrow family ties, has emerged as the dominant form of the agricultural production in

privatized sector in Ukraine.

A less statist policy and a more developed rule of law in the Ukrainian regions in

the Austro-Hungarian Empire, Poland, Romania, and Czechoslovakia compared with the

Ukrainian regions of the Russian Empire and then the Soviet Union before World War II,

led to the development of less statist and more law oriented norms and values in Western

Ukraine. This study shows that the historical experience in Western regions positively

affects support for private ownership and the role of peasant households in the agricultural

production. The level of privatization in industry has no statistically significant association

with historical experience and other forms of social capital. However, the interpretative

analysis indicates that regional variations in corruption and the involvement of organized

crime in privatization, which are more prevalent in Eastern Ukraine than in Western

regions, reflect historical differences in social capital.

18

Notes 1 See Kirzner (1973) and Lachmann (1977, 1971) on the neglect of entrepreneurship in

neoclassical economics.

2 The official statistics on industrial output is not very reliable because many enterprises do

not report large proportion of their output.

3 Corruption in post-communist Ukraine is often attributed to the Soviet legacy (See Rose

(1998/1999). Personal networks, which utilized local knowledge and were referred as blat,

compensated for inefficiency of Soviet planning. (Ledeneva (1998). However, personal

networks and corruption existed in various forms not only in the Soviet times but also in

the Russian Empire. Before the Bolshevik revolution, the term blat referred to a petty

criminal activity such as theft (See Ledeneva, 1998, p. 12). The common element in both

definitions of blat is obtaining goods by illegal means. It is noteworthy that privatization

after the collapse of Soviet communism is often called by Ukrainians prichvatizatia, which

means obtaining property by illegal means.

4 The crime, divorce, and election turnout rates also reflect the influence of other factors.

For example, crime is much more common in urban areas, and Eastern regions are more

urbanized than Western regions. The level of urbanization has statistical and highly

significant (at .001 percent) effects on regional crime and divorce rates. However, when we

keep the rate of urbanization constant, the average region in Western Ukraine still has

much lower crime and divorce rates than the average Eastern region. Urbanization is

negatively associated with the turnout rate. Keeping the urbanization rate constant, the

election turnout in the average Western region does not differ significantly from the

average Eastern region.

19

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Table 1. Privatization rates in regions of Ukraine, percent

Region Proportion

of non-

state

industrial

enterprises,

1998

Proportion

of private

industrial

enterprises,

1998

Proportion of agricul-

tural cooperatives,

private farms &

peasant households

in agricultural

production, 1996

Proportion

of peasant

households

in agricultu-

ral produc-

tion, 1994

Proporti-

on of

private

farm land

in 1998

Western Ukraine

Chernivtsi 89 2.4 69 56 0.7

Ivano-Frankivsk 91 1.7 82 69 1.5

Lviv 86 1.2 74 61 1.8

Ternopil 87 0.0 58 45 1.5

Rivne 91 0.4 64 53 1.0

Volyn 89 0.6 65 51 0.8

Transcarpathia 85 1.9 86 78 1.2

Eastern Ukraine

Cherkassy 85 0.6 43 36 1.0

Chernyhiv 89 0.8 55 43 0.8

Kiev region 88 0.9 56 47 1.6

Kirovograd 80 1.6 47 35 4.8

Khmelnytsky 84 0.0 47 40 1.2

Poltava 86 0.8 41 34 2.3

Sumy 85 0.3 46 36 1.7

Vynnytsya 86 0.9 51 43 1.1

Zhytomyr 89 0.7 58 48 0.5

Dnipropetrovsk 82 1.5 48 38 2.9

Donetsk 75 1.1 50 34 1.9

Kharkiv 82 1.1 44 35 3.9

Zaporizhzhia 90 0.9 44 39 3.5

Luhansk 65 0.6 50 31 5.0

Kherson 85 0.9 39 38 5.1

Mykolayiv 88 0.0 48 44 3.1

Odessa 85 1.4 48 37 1.3

Crimea 85 1.1 44 36 4.1

Kiev City 88 0.5

Sources: Statisticnnyi (1998, pp. 129, 310, 483), Pro Khid (1999), Shepotko, et al. (1997,

p. 78), Silske (1995, p. 84).

27

Table 2. Indicators of social capital in regions of Ukraine, percent

Region Historical

experience

(Western

Ukraine

=1)

Turnout rate

1999 presi-

dential elec-

tions,1-st

round,

percent

Divorce

rate per

1,000 in

1997

Crime

rate per

100,000

in 1996

Active

membership

in voluntary

organizati-

ons, 1995

WVS

Uncondi-

tional

respect for

parents,

1995

WVS

Trust,

1995

WVS

Chernivtsi 1 67.4 3.1 563 22 69 16

Ivano-Frankivsk 1 77.7 2.5 600 5 98 16

Lviv 1 77.6 2.6 880 4 95 27

Rivne 1 76.7 2.6 587 8 89 23

Ternopil 1 82 2.2 546 1 95 44

Volyn 1 77.7 2.5 690 20 82 24

Transcarpathia 1 60.3 1.9 559 15 95 41

Cherkassy 0 75.2 3.9 872 18 83 28

Chernyhiv 0 78 3.5 878 4 92 41

Kiev region 0 74.2 4 809 7 95 25

Kirovograd 0 73.7 3.8 1007 31 92 35

Khmelnytsky 0 77.6 3.1 661 2 96 21

Poltava 0 76.9 3.8 1137 1 87 27

Sumy 0 79.6 3.6 1148 8 92 16

Vynnytsya 0 76.3 3.2 816 5 84 43

Zhytomyr 0 75.9 3.4 967 11 89 36

Donetsk 0 65.6 3.8 1140 5 90 39

Kharkiv 0 66.3 4.2 1552 4 96 25

Zaporizhzhia 0 66.5 4.2 1569 8 92 33

Luhansk 0 66.7 4.2 1684 9 89 28

Kherson 0 67.5 4 1315 5 89 41

Mykolayiv 0 66.9 4.5 1607 3 85 50

Odessa 0 58.1 3.8 1313 18 86 25

Crimea 0 57.9 4.7 1477 9 86 28

Dnipropetrovsk 0 67.3 4.2 2123 9 91 42

Kiev City 0 63 4.8 1190 19 90 29

Sources: CVK (2000), Inglehart, et. al. (2000), Statisticnnyi (1997).

28

Table 3. Determinants of support for increase of private ownership in Ukraine, the 1995

World Values Survey1

Coefficient Standard error Beta coefficient

Voluntary Organizations -0.230 0.171 -0.029

Importance of Friends 0.177 0.098 0.039

Respect for Parents -0.321 0.208 -0.033

Trust 0.470 *** 0.138 0.073

Ethnic Russian -0.341 0.238 -0.032

Other ethnic minority 0.101 0.151 0.015

Class 0.222* 0.087 0.060

Education 0.107** 0.035 0.072

Income 0.088** 0.030 0.069

Age -0.025*** 0.005 -0.128

Male -0.743*** 0.130 -0.123

Greek Catholic 0.367 0.284 0.031

Western region 2.13*** 0.183 0.291

Constant 5.110*** 0.609

Adjusted R square .18

N 1809

(*** denotes significance at .001, ** denotes significance at .01, * denotes significance at

.05).

1 The question is as follows: “Private ownership of business and industry should be

increased, government ownership of business and industry should be increased.”

29

Table 4. Determinants of regional levels of privatization in Ukraine.

Proportion of peasant households in

agricultural production, 1994

Proportion of non-

state industrial

enterprises, 1998

Coefficient

(standard

error)

Beta

coeffi-

cient

Coefficient

(standard

error)

Beta

coeffi-

cient

Coefficient

(standard

error)

Beta

coeffi-

cient

Respect for

Parents

.549*

(.311)

.289 .627*

(.318)

.330 .017

(.198)

.020

Voluntary

Organizations

.189

(.220)

.121 .147

(.218)

.094 -.224

(.134)

-.314

Ethnic Ukrainian -.213

(.136)

-.326 -.195

(.123)

-.298 .125*

(.067)

.406

Western region

dummy

19.6***

(5.16)

.770 19.2***

(5.13)

.753 4.70

(3.11)

.395

Greek Catholic -.006

(.133)

-.009 -.071

(.134)

-.111 -.122

(.083)

-.409

Education -.102*

(.056)

-.380 .051**

(.020)

.578

Urbanization rate

-.330*

(.168)

-.417

Union or and

union-republican

subordination

-.221***

(.077)

-.688

Constant 32.2

(32.1)

16.6

(28.1)

71.4***

(17.2.)

Adjusted R

square

.65 .65 .39

N

25 25 26

(*** denotes significance at .01, ** denotes significance at .05, * denotes significance at

.10)