Economic liberalism and security preferences: A comparative case study of Russia and Ukraine in the 1990s

Demokratizatsiya, Summer 2001 by Goldsmith, Benjamin E

The privatization of major industrial assets represents a fundamental economic policy choice. The decision to allow foreign capital to participate in this process represents a fundamental foreign policy choice, one that I believe is framed largely by decision makers' preferences regarding economic security.

In this article I seek to explain what seems a puzzling fact: Since the fall of the USSR, Russia has had a greater preference than Ukraine for foreign ownership of large enterprises, including "strategic" enterprises designated as important for national security. This is contrary to reasonable expectations based on military threat or perception of threat (i.e., Ukraine's desire to build relationships with other powers to balance the perceived threat from Russia; traditional hostility between Russia and the West) and economic interests (i.e., Russia's greater capacity for selfsufficiency). I advance an explanation for this based on psychological factors including the effect of formative events and schematic learning. I am especially interested in the role of imitation or observational learning in foreign policy.'

Ukraine and Russia are appropriate for comparison on this issue because of their similarity across a number of important variables. They have similar levels of industrial development and structure,2 a similar history within the Soviet planned economic system, political and economic elites with similar education and professional experience,3 similar post-Soviet economic crises, and similar levels of corruption.' Russia and Ukraine also contain the bulk of the former Soviet military-industrial complex. The Ural Mountains area, St. Petersburg and Leningrad region, Moscow and Moscow region, and other parts of European Russia were home to most Soviet defense enterprises (69 percent by one estimate).' But Ukraine contained about 25 percent of the USSR's military industry;6 Kyiv, Kharkiv, Dnipropetrovsk, L'viv, and Mikolaiv regions were major centers of military production of aircraft, tanks, ships, missiles, radar, and military computers.'

These similarities allow for a degree of quasi-experimental control that in practice is rare in comparative case studies.8 Variation in policies between Ukraine and Russia must be due to factors other than these constants, such as, perhaps, differences in military-strategic capabilities and threats, size, economic resources (such as Russia's greater self-sufficiency, especially in energy), domestic political dynamics and institutions, and historical experience. I will therefore investigate the extent to which economic security preferences are influenced by military threat, perceptions of threat, economic interests and resources, domestic politics, and lessons of historical experience.

Following George and McKeown's guidelines for "structured, focused comparison,"9 I ask questions about the privatization process in each case, paying particular attention to how the list of strategic large enterprises exempt from privatization was defined and revised. I also examine related issues of government-led marketing efforts to attract foreign investment and the creation of a legal and institutional infrastructure to facilitate foreign investment. These factors comprise the dependent variable. Data on the process of large-enterprise privatization, related economic and security interests, leaders' views, and policy arguments serve as independent variables. I also question whether my preferred causal argument is spurious. Can the dependent and independent variables be explained by differences in constitutional power-sharing provisions, as some authors have suggested?

During the period in question, the decade of 1990-99, neither state received much foreign investment. Poland attracted higher absolute levels of foreign direct investment than Ukraine and Russia combined for the years 1993-96 and 1998. Nevertheless, there were considerable differences between Ukrainian and Russian policies and investment levels. Ukraine received slightly less than half the per capita foreign direct investment that Russia did in 1993-98 (table 1).

The Politics of Privatization and Foreign Investment

The "privatization" of state-owned enterprises has become a common aspect of public policy around the world. Foreign direct investment has also been growing rapidly in the wake of a global trend of liberalization.10 The Thatcher government in the United Kingdom is usually considered the originator of the privatization trend, although Chile was also an early practitioner. In the United States, privatization often has meant running state-owned bureaucracies as if they were private enterprises (such as the U.S. Postal Service) or devolving government functions to private contractors. In more statist economies, privatization involves the sale of state-owned enterprises to private buyers. The latter process is the type of privatization examined here.

Such privatization necessarily presents the state with a dilemma, or tradeoff, involving important national security questions. Many states have faced the "guns or butter" choice between military security and economic efficiency. That choice is usually framed as one between control of important assets, often necessary for military production or the functioning of society, and the vital need for productive, efficient use of resources in a competitive world.