How Political Turnover Affects Economic Performance

John S. Earle and Scott Gehlbach summarize their article “The Productivity Consequences of Political Turnover: Firm-Level Evidence from Ukraine’s Orange Revolution” here:

Recent events have illustrated the winner-take-all nature of politics in contemporary Ukraine. When Viktor Yanukovych fled the presidential palace in February, he was accompanied by a coterie of officials overwhemlingly drawn from the country’s Russian-speaking east, including Yanukovych’s home region of Donetsk. The governors who ran Ukraine’s regions under Yanukovych fared no better. Oleksandr Turchynov, who served as acting president from February to June, did what all Ukrainian presidents do: he fired the existing governors and replaced them with figures friendly to the new regime.

Much the same happened in 2004, when Yanukovych was forced by street protests and allegations of electoral fraud into a do-over presidential election. In “The Productivity Consequences of Political Turnover: Firm-Level Evidence from Ukraine’s Orange Revolution,” we explore the impact of these events on the economic performance of enterprises in regions more or less supportive of Viktor Yushchenko, who emerged the winner in this earlier contest for power. To do so, we use data on over 7,000 manufacturing enterprises that we track over many years, both before and after the Orange Revolution.

Our primary finding is that the productivity of firms in regions that supported Viktor Yushchenko in 2004 increased after Yushchenko took power, relative to the productivity of firms in regions that supported Viktor Yanukovych (and, implicitly, his patron Leonid Kuchma, whom Yushchenko succeeded as president). This effect is most pronounced among firms that had the most to gain or lose from presidential turnover: firms in sectors that rely on government contracts; private enterprises, given Ukraine’s appallingly weak property rights; and large enterprises. Other measures of economic performance suggest that these results are driven by favorable treatment of particular firms, either before or after the Orange Revolution, rather than by broad changes in economic policy.

Political turnover is often desirable. Nonetheless, our results suggest the distributional consequences can be profound when institutions are weak, that is, when access to those in power is the primary guarantee of market access, contract enforcement, and property-rights protection. Oscillation of privilege from one region or sector to another is inefficient, as firms initiate or postpone restructuring based on who is in power. The optimal solution, of course, is not to restrict turnover, but to make turnover safe for economic activity. This requires that institutions be reformed to guarantee equal treatment for all economic actors—a difficult process that has barely begun in post-Yanukovych Ukraine.

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The American Journal of Political Science (AJPS) is the flagship journal of the Midwest Political Science Association and is published by Wiley.

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