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Beyond Official Statistics: Re-classifying “Informality” in Ukraine

“Informality” in its many forms – from outright corruption to showing gratitude for going above and beyond the call of duty – has something to teach us, and could even serve as a feedback mechanism for public policy.

by Abel Polese 11 December 2018

When talking about corruption – or, more generally, about practices that are considered illegal or unlawful according to some international standards – the normative positions of state, society, and other main stakeholders do not always fully overlap. Indeed, not all practices considered harmful by international organizations are necessarily noxious, nor are they perceived as such by state or society. By the same token, not all practices which are considered good ones – according to international standards or some other normative position – bring about the desired results.

 

In several years of research on Ukraine, I have seen the word “informality” applied to a growing range of phenomena with a variety of outcomes, from harming the state but not society, or harming both, to even benefiting both state and society. As an example, one can take the Samson-like effort by Alena Ledeneva, an academic specializing in corruption and informal practices, to collect and explain a virtually endless variety of such practices across the globe

 

As a result, “informality” is now used to explain such a variety of situations that I feel it is necessary to establish some sort of table of classifications, which might help us to understand possible positive and negative aspects of different kinds of “informality” when applied to the country, and the region as a whole.

 

Informality and Governance

 

Take a set of political institutions that – in theory – are unlikely to function properly, and you may find, to your great wonder, that they produce much better results than they are supposed to.

 

This can help to explain at least two things in Ukraine today. First, the fact that political institutions – not to say the entire country – seem to be constantly on the verge of collapse, and yet do not collapse. Second, external actors – implanted into the system in the hope that they will not be sucked into existing dynamics – are not likely to make sense of the dynamics, nor to know what strings to pull to perform their tasks effectively.

 

The Ukrainian parliament: not exactly a paragon of efficiency. Image via Verkhovna Rada.

 

This is the lesson that it seems we can learn from the appointment of foreign nationals in government, such as Alexander Kvitashvili, named minister of health, or Aivaras Abromavicius, appointed minister of economy and trade.

 

The initial hope was that, having no real interest in favoring this or that person, these outsiders were guaranteed to be neutral and effective. However, they both quit shortly after being appointed, stating that they could simply not manage to change anything.

 

A system (sistema) that works when it is not supposed to, and does not function in the way it is in theory intended to, is a source of great wonder to scholars and practitioners. How is it possible that an apparently ineffective and extensively corrupt environment produces any results at all, let alone decent ones?

 

This idiosyncrasy is at the very heart of the definition of informal governance, and, some have suggested, is the very principle that allows international organizations (including the European Commission and the United Nations) to somehow function.

 

This may mean that, if radical reform should ever be attempted in Ukraine, it would perhaps be worthwhile to try to preserve some of the knowledge and the synergies that made the parliament work, rather than trying to liquidate everything and reconstruct from zero.

 

Classic” Informality: the Shadow Economy and Informal Labor

 

In Ukraine, just as in many other parts of the world, some companies “forget” to register, and some salaries are paid, at least partly, in a white envelope handed to the employee. This practice is nothing trivial; in fact, German economist Friedrich Schneider has estimated the level of shadow transactions in the country to be almost half of the national GDP.

 

There are several reasons for this, including excessive regulation that makes it more convenient to pay off tax inspectors once a year, or to use “fly-by-night” companies (firma babochka), rather than comply with official requirements. The will to pay taxes is also tempered by many Ukrainians' belief that that their state is not doing enough for them. Many do not trust that their taxes will be invested in social welfare.

 

In a survey my colleagues and I conducted in December 2015, more than 80 percent of the respondents did not think that their state was acting in their interests, and 78.7 percent also disagreed that the government was doing what was best for the country.

 

Naturally, there are tax inspections and other forms of coercion intended to ensure compliance, and Ukraine is in no way unique. Across the world, revenues are concealed, workers are employed without a formal contract, and the informal sector accounts for almost two-thirds of national economies, on average. Research into this aspect of “informality” is relatively advanced, with a variety of data available.

 

“Popular” informality is perhaps the widest, and thus the most confusing, category of informality. Virtually any exchange between two or more actors can be classified as a bribe: an extra payment to a nurse or a doctor, for service or to reduce waiting time in a public hospital; a payment to a police officer to avoid a fine, or to a university teacher, to pass an exam.

 

The problem with the amalgamation of all informal payments in one category is that this category may then include wildly differing transactions: from a payment of several million to a politician to get a multi-million contract, to a fistful of euros paid to a doctor to thank them for a service they gave you for free. In addition, researchers have shown that the same gesture may have different connotations, from extortion to spontaneous gratitude, depending on the dynamics of the exchange and the power relations between those involved.

 

There is a need for extra scrutiny, to examine transactions on the borderline between gift-giving and bribing, or transactions with a social meaning, to distinguish them from those with a more purely economic purpose. This has been central to many studies and debates about Ukraine and the wider region, and has made me look at corruption as a sub-category of informality, where monetization of exchanges and the long-term consequences of a transaction should be taken into account.

 

Emerging” Informality: Informality and Policy-Making

 

Imagine a citizen behaving in a way that is not in line with the country's rules and laws. In a standard situation, the person might be considered a deviant or, in extreme cases, a criminal. Multiply this situation by a thousand and apply it to a large number of citizens, and you have what American political scientists James C Scott has defined as “infrapolitics.” The accumulation of petty acts of resistance, repeated millions of times, may have massive effects on policy-making in a country.

 

In a recent study, we looked at competition between languages in Ukraine. Although Ukrainian has gained momentum over the past 10-15 years, the situation is far from the quasi-total monolingualism implied by the 1996 constitution.

 

When one single citizen prioritizes the use of Russian, this may be regarded as an exception. But when a substantial number of citizens regularly “make an exception,” we might be witnessing resistance to – even a de facto subversion of – state instructions.

 

This is an angle on informality on which there is still marginal research, but which is well worth exploring. Non-compliance may mean that a policy has failed or would benefit from being promoted through different channels. Could we use “informality” as a feedback mechanism and policy tool?

 

The possibility of approaching “informality” in such new and even positive ways is exciting, but we must first deal with the problem of classification. The term “informality” has been applied to many (perhaps too many) different situations, contexts, and dynamics, to the point that it has become impossible to define it in standard dichotomies – such as good/bad, harmful/harmless, useful/ useless.

 

From the point of view of public policy, it would be “useful” to make a decision based on a given situation, after taking into account all possible advantages and disadvantages of a given type of “informality” in a given sphere. The table below can be regarded as a first attempt to do this.

 

Flavors of Informality and Their Advantages/Disadvantages


 

Legal

 perception

 

Social perception

Pluses

Minuses

Informal governance and sistema

 

Reciprocity may be treated as nepotism or corruption, but no legal framework to deal with the situation where everyone has something to hide.

Ranges from “necessary evil” to get things done to “evidence of advanced degradation of a country and its society.”

Avoids collapse. A last minute or ad-personam solution is usually found.

No development perspective. Effectiveness depends on individuals. When they change, everything starts from zero again.

Shadow economy and informal labor           

Tax non-compliance and failure to register a company is illegal.

Hard to find someone openly condemning it. It is usually “us”             against the (bad) state and is usually justified or perceived as an understandable attitude by those not directly harmed by it.              

Allows a large amount of people to survive. Can be used as a starting point to think of tax and other reforms.

Takes away revenues from state budget; casts the country in a negative light with regard to business environment; represents an             additional cost to secure compliance.

Informal payments and corruption

 

Some transactions are formally illegal and punishable.

            Framework to deal with non-monetary transactions is largely             absent.

Understanding, even empathy, is visible in some categories and cases (doctors, teachers) more than in others (police, tax             inspectors). Overall, however, such payments            contribute to the perception of the country as underdeveloped.

Allows many people to “get things done” in the face of obstacles and de facto limitations to their basic rights as citizens.

Makes the system unpredictable and difficult to understand (especially for external actors and newcomers); makes it easier to abuse authority and (access to) power.

Informality and policy-making           

There is virtually no debate or awareness.

Little reflection. It is treated as an exception to a usually widely accepted rule or behavior.

People who are unable to meet state requirements or act as expected can still “live with the rule” and need not take     action, protest, or challenge the state.

Generates a gap between policy-makers (setting impossible             objectives) and the people (especially those who cannot live with these objectives).

Dr. Abel Polese is a senior research fellow with Dublin City University’s Institute for International Conflict Resolution and Reconstruction. He is the author of The Scopus Diaries and the (Il)logics of Academic Survival, a book helping academics to critically reflect on the requirements of academic careers nowadays and co-editor of Studies of Transition States and Societies (STSS), an open-access journal focusing on governance and social issues in the non-Western world.

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