The political venture capitalists of Ukraine

28 Feb

Imagine that you are a political entrepreneur in a poor country with a population that is internally divided and has a high discount rate (is very short-sighted). What is your optimal strategy? We deliberately did not say “politician”, because that may give the wrong idea. Serving the country and all that shit. We are not talking about Nelson Mandelas here. Think rather “Prince” – not the artist formerly called, but as in Machiavelli. Or think of Ukraine.

You know that when you are out of power, you probably have to flee, and the more money you have the better your chances of doing so. So for this reason alone, you need to have a lot of money… But of course you like money and power anyway, otherwise you would not put up with what goes for politics in a poor country with a short-sighted population…

yanukovich-palace-_2831718d[1]The ungrateful bastards have a look in…Image source:

Your optimal strategy is to amass as much money as you can. You maximize the following simple function: time spent in power times the theft rate while staying in power. Time spent in power can be prolonged by tossing a few crumbs to the population – but that reduces what you can steal. You want to maximize the overall amount of money you control, so that you can both steal and pay for the bread and circus for the population.

It is a given that you borrow as much as you can and you print money and confiscate foreign investment – but you have to be careful with these as inflation and default can cut short your stay in power. Foreign aid or oil money is welcome, but this is largely beyond your control.  However, fortunately you can also create additional opportunities to skim off money. You can introduce heavy-handed business regulation, and only exempt those who pay you or are your friends (of course friends will pay you too, the distinction between these two is a bit artificial anyway). This is not very good for long-term growth, but it is good for you, so you don’t care.

From time to time you promise to the IMF or the EU to scrap these restrictions in exchange for more money – you have learned to call it “structural reforms” in exchange for “loans”. You never completely understood why again and again they seem to believe these promises, but that is their problem…Of course they cannot seriously expect you to undermine your own business model. Or pay back the “loans”.

YanukYou know, my friends are happy, I am happy…Image source:

Also, you can introduce foreign currency controls, and only those who you deem deserving will get currency at the controlled rate – a great way to promote your friends or, thinking about it, yourself. It cannot be that hard to sell that hard currency on the black market… And you can also keep energy prices below costs, which is useful for staying in power – the short-sighted population will love it, even if they have a sense that all this may not end well. And your business friends can be very competitive abroad with subsidized energy. If your friends are happy, you are also happy! Others may prefer subsidized food prices, it depends on the exact circumstances.

If you don’t steal it, someone else will

Because you spend as much as you can, sooner or later you run out of money and foreigners to cajole and blackmail and borrow from, so the whole game will end in a big bang. Without money to throw at them, people will not tolerate you any more, there was no sustainable economic growth to speak of, and the logical end is that your looted country will go bankrupt. If you are clever, you know that, but you tell yourself that with a short-sighted population, you cannot really be that visionary – they will get what they deserve, the stupid bastards…And anyway, if you don’t steal it, someone else will, better if you do it…

The above description perfectly fits Ukraine (and many other underdeveloped countries). Business regulation is suffocating (but for the well-connected few), the exchange rate was controlled (and now is in a free-fall) and energy prices are below cost for both households and industrial users, if they care to pay.

Captured people…

Maybe its leaders were not thinking in exactly these terms – they probably did not think of “taking money” as stealing, for example – but if we look at their behavior, we can model it along these lines. Ukraine has been in a bad equilibrium ever since its independence. If everyone around you is short-sighted and selfish, it does not pay to be any different. Ukraine went into default and/or hyperinflation with a numbing regularity of every 5 to 10 years, depending on the circumstances. The state has been captured by oligarchs, and the 2004 “Orange Revolution” petered out without changing anything significantly, but discrediting another bunch of politicians

…fighting back

But then something snapped. People on Maidan decided that they will stay, despite the snipers and the looming mass attack by the security forces. Desperate, mistaken or heroic, you are entitled to your opinion – but certainly not short-sighted or selfish. And after you have stared death in the face, you may not put up with stealing political entrepreneurs anymore. You had the taste of what it is like when people organize their defense lines and field hospitals and PR department, and do it a lot better than the clowns in government ever did. Ukrainian MPs certainly had an inkling of the mood: they voted through everything that Maidan demanded. Oligarchs signed up for the revolution. Everything seems possible right now…

field hospitalImprovised, but organized. A birth of a European nation? Image source:

There are two possibilities. We may go back to “normal” in Ukraine, or even worse. This revolution may peter out as well – the average Ukrainian may prove to be different than those on Maidan. The country is divided and may end up with a civil war and break into two. The economy is thoroughly looted. Bad equilibrium is difficult to break out from. There are bad guys among the revolutionaries as well. You could go on. The political entrepreneurs may be back soon, and they may even be profiting from war supplies. Unfortunately this seems to be the more likely scenario at the moment.

But this may also be the birth of a nation with the majority of people thinking on the long term: they want their children to live in a European country. You get the government you deserve. The people of Maidan deserve something much better than political entrepreneurs. Ukraine as a whole will not become a totally different country overnight. But something fundamental may have started. I wish them good luck, they will need it…

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