Events

State-Building and Intergovernmental Finance in Ukraine

April 20, 1999 // 12:00am

By Nancy Popson

Between 1991-97, social expenditure distribution in Ukraine has been remarkably even across regions despite significant high-level political turnover and economic instability, said Lucan Way, World Bank Consultant, at a Kennan Institute lecture on 20 April 1999. Way claimed that this illustrates the Ukrainian state's ability to implement policies that serve the public good rather than cater to powerful political and economic interests.

Way referred to various theories on the influences over state action in Ukraine, including politically powerful clans, wealthy groups or individuals, and concerns over secession of certain regions. However, Way's analysis of the distribution of tax revenues from the center to the regions in Ukraine illustrates that a different force is motivating state action in the area of social expenditures.

Social expenditures are largely the purview of the regional and local governments in Ukraine, and in 1998 totaled $4.5 billion. According to Way, were wealth, political power, or secession concerns the motivating factor determining policy on distributing this $4.5 billion, one would expect eastern Ukrainian regions to benefit. Economic wealth is more concentrated in the east, the majority of politicians in powerful posts in Kyiv come from those regions, and any perceived threat of secession would originate there.

Way's data shows, on the contrary, that the redistribution process in Ukraine tends to equalize the amount of resources given to regions for social expenditures. Tax revenues collected by the center from richer, "donor" regions are redistributed so that poorer regions benefit. The fact that funds are equitably distributed points to the precedence of institutional norms motivating policy, said Way.

This equalizing pattern of redistribution in Ukraine can be traced to the fact that the system strongly promotes the preservation of educational and health care facilities, Way explained. Despite the fact that in real terms revenues have gone down substantially since 1991, local governments have retained the same numbers of schools, teachers, doctors, and hospitals. He argued that the local governments' willingness to preserve facilities is reinforced by formal budgetary rules left over from the Soviet era.

First, budget transfers in Ukraine are still determined by gap-filling, said Way. Each year, the amount of funds to be transferred to a region is determined by subtracting expected expenditure commitments from expected revenues. Way noted that under this system, it is disadvantageous to close a school, as closure means the money allocated for that school is lost to the region.

Second, the Ukrainian system operates under cash-based budgeting--expenditure commitments are not taken into account, only expected cash outlays. According to Way, this leads to a situation where a municipality could receive the amount of cash budgeted for education but since that line item has no relation to the amount of teachers that need to be paid, arrears still accumulate.

Third, the budget process still leaves decisions on expenditure commitments and staffing to the sectoral ministries. Way noted that the motivation of the Education and Health Ministries is to keep commitments high rather than promote efficiency.

Way also pointed to informal norms--ways of thinking about financing the social sector that motivate preservation of facilities. Balancing budget revenues and expenditures is still considered secondary to fulfilling gross material output in Ukraine. Way recalled a Ministry of Finance official who had responded to questions about the need to cut the budget by saying, "Our job is to finance things, not to cut them." Way suggested that maintenance of old ideological norms is not surprising given that the same bureaucracy is undertaking the same task it had during the Soviet era.

The trend toward preservation of facilities means that each year the Ministry of Finance in Ukraine faces roughly the same budgetary requests from each oblast'. According to Way, it is at this point in the process that economic or political power can play a role in bargaining with the center. However, Way contends that overall it is the institutional norms that play a much more powerful role.

Way lamented that these results do not bode well for the success of reform efforts in Ukraine. While the Ministry of Finance is able to withstand political and economic forces in the narrow area of social expenditures, it has little capacity to change or increase efficiency. However, Way noted that research indicates that in certain key areas the Ukrainian state demonstrates a capacity to serve a public good rather than simply the narrow interests of powerful political and economic groups. While this limited capacity might not bring Ukraine much closer to economic reform, it is far better than no capacity at all.

What is worrisome, said Way, is that in ten years Western analysts might be looking back on this period with a certain amount of nostalgia for a time when the state was able to undertake basic public functions. He concluded that the key task for policy makers now is to be aware of this existing institutional capacity and try to design reform in a way that preserves this capacity while also increasing efficiency.

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