State Failure, Underdevelopment and Conflict: Lessons and Implications for Policy The Natural Resources Trap Regional Seminar for Excellence in Teaching Summer Session, 2010, September 5-18, Ukraine

opportunity mechanism (rational choice) - greed Re-distribution of criminal business related to illegal extortion of resources; political competition of resource elites; Secession – in case of location of resources at the periphery of the country external expansion (resource wars) grievance mechanism Deepening inequality as a result of unequal incomes; Social protests during the economic crisis; Social problems (migration, ecology, depressive cities, ect) weak state mechanism opportunity mechanism - to fund existent movements conf lict Mechanisms linking resources, export and conflict in developing countries

The Iraqi economy and its development in the period prior to the first Gulf War (1991) The economic developments during did produce a fairly developed economy and a central developmental state; (i) Investment comprised 10 per cent of GDP; (ii) Advanced petrochemical industry had been developed; (iii) The political climate was favourable to modernization; and (iv) a capital- output ratio of 4:1 had been reached and an abundance of loanable funds created;

Case study of Somalia The Somalia Republic ( ) constituted the former Italian colonies of South-central Somalia and the former British protectorate of Somaliland; The state collapsed in 1991; the country collapsed into a stateless existence, with Somaliland and Puntland as the two northern secessionists regions; US and international military intervention in the early 1990s; Military intervention by US and Ethiopia, ( were killed, 1,5 million refugees); Existence of minority groups, but Somali society is relatively homogenous linguistically (Somali) and religiously (Islam); Clan society (Darod, Dir, Issaq, Hawiye, and Rahanweyn); sub-clans and sub-sub-clans; UNDP estimates the population of Somalia as 6.8 millions in 2003

Economic policy and underdevelopment Resources are scarce (pastoral production and crop farming); Government was reliant on foreign assistance (the Soviet Union) during 1960s-1970s; Economic policy was highly inefficient during 1980s-1990s; After collapse the Somali economy was fared better than under centralized rule; among 42 other Sub-Saharan African countries, it had better level of progress in socio-economic development and welfare; there has been economic progress despite the destruction of all public infrastructure such as electricity production, the spread of violence, and the absence of central government or even a central bank; The collapse of the state led to regulations on urban commerce being lifted, and to the end of the negative effects of economic policies which had plagued Somalia in This allowed business in the cities to flourish, and pastoral and agricultural production to improve in rural areas

Theories to explain the continuing resilience of anarchy in Somalia Ambitions of the warlords for national domination; the inability of one group or alliance of groups to dominate; The benefits of anarchy: missing national resources in Somalia would not produce the public goods needed for state mobilization - benefits from central government in resource-poor Somalia would not create sufficiently greater material incentives for the warring factions to offset the huge costs of re-establishing central authorities after years of civil conflict.

Somali and Iraq: a comparison Iraq: conflicting groups have intrinsic interest in establishing central authority because it is vital for the production and export of oil resources; Somali: since resources are very scarce and are mainly pastoral and agricultural, their extraction by the state would actually lower the benefits to all, as has been witnessed during the socialist phase when the state supplanted the markets. Groups in direct control of resources weigh the high costs of establishing a central government in Somalia against the benefits of the existing stateless set-up. Anarchy in Somalia is a return to the pre-colonial era when traditional ties based on Islam and kinship had an economic counterpart: nomadism and peasant agriculture. All households had access to productive resources. No group in Somalia has an interest in the resurrection of central state authority

Institutions and rent-seeking behavior Long-run relationship between democracy and economic development is positive; it is governed by the design of specific institutions that prevent rent- seeking or violent behavior on the part of individuals or groups; The level of resource availability plays a role in formulating the desire of groups for setting up state authority; In Iraq, the government is being designed along the lines of a consociational democracy; where all ethnic groups are represented through a government of national unity, Iraqs abundance of resources makes this attempt tenable. However, the denominational politics generated by ethnic representation fails to produce stability because conflict over resources is compounded by geography, and is thus usurping all plans for a stable consociational democracy; In Somalia, on the other hand, the lack of resources, the direct access of producers to resources and the low productivity and re-distributional potential do not provide the various groups with adequate material incentive for the resurrection of central authority.

The country experiences introduced a central question with regard to the relationship between state failure, governance and economic development in fragile multi-ethnic states

NATURAL RESOURCES, EXTRA-LEGAL GROUPS AND CONFLICT IN UKRAINE: SCENARIOS OF ESCALATION

Zones of illegal extraction: clusters of negative social development Industry of illegal extraction: about employees, 6, illegal coal mining enterprises; location is subject for change; Annual illegal extraction: 8-9 million ton (10% of total market); Traumatic occupational death index: 7,0 persons for 1 million ton (highest in the world) – official statistics, which does not correspond to the real state of affairs; Average salary: EUR monthly; Average income of owner of one illegal coal- mining is EUR per month; Absence of social security for workers, measures for accidence prevention; Indexes of unemployment, criminalization, the HIV/AIDS rate, use of drugs, social tension, human trafficking, human insecurity are two or three times higher that average in Ukraine

Scheme of exploration coal bed (0,4-1,0 m) Pit-shaft (30 m at small coal- mining and up to 1000 m at big mining) surface drift

What are the driving forces of insecurity and risk in resource-rich territories? Economic factors and consequences of the crisis: Chaotic reforms of the economy and state institutions during the 1990s; Losses of traditional markets and trade links; wide-spread unemployment, impoverishment and marginalisation of large segments of the population; Ukraine suffered from a permanent crisis in its economy; real GDP decreased by 59,2% ( ); Among post-soviet states Ukraine, along with Moldova, Georgia and Tajikistan has minimal real GDP compared to 1991 (e.g. in 2007 real GDP of Ukraine is 75% of its GDP in 1991). Ukraines economy depends heavily on exports (46% of GDP). At the same time Ukraine also depends on imports of energy, especially Russian natural gas, to meet some 85% of its annual energy requirements New economic crisis. GDP decreased 15 % in 2009 Ukraine is in pre-default situation and has already lost its chance to reform economy and industry – experts say.

Economic factors and consequences of the crisis: small mono-industrial cities Illegal coal-mining are located at former small mono-industrial cities of Eastern Ukraine, in Russias immediate neighborhood; Unemployment has grown immensely local as core employers went out of business; The economies of these cities are completely dependent on illegal extraction, and the majority of the population is involved in this industry in various ways.

Contradictions in laws, state programs and implementation mechanisms; uncertainty of property rights Weak state mechanism: weak legal structures, uncertainty or absence of property rights; The Code of Ukraine About usage of treasure of the soil (1994): peoples ownership for resources and state management/control of extraction; No effective mechanisms of penalties for illegal extraction of resources; sum of penalty is miserable (20 EUR); Contradiction between obligation and power of public bodies responsible for control over extraction of resources; Main reasons: absence of political will; high profitability of illegal business and corruption

General criminal scheme of the extraction industry Formal coal- mining enterprise (state-owned) State budget Subsidy Illegal coal-mining enterprises Coal Electric power stations Resources, obtained both in legal and illegal way

Slavery Ukraine is one the leading countries, engaged in export of slaves (International Organisation for Migration: about people since 1991); Official statistics does not correspond to reality: (2 cases in 1998, 11 – 1999, 42 – 2000, , 169 – 2002, 289 – 2003, 415 – 2005, 376 – 2006, more than 400 – in 2008 and 2009); Development of domestic market of slaves along with development of illegal extraction; Human trafficking for illegal extraction industry (so-called labor slavery) is even more widespread and profitable in Ukraine than trafficking in women for sex-industry; Kids are widely engaged in slavery-like practice.

Criminalization and legitimization of violence Zones of illegal extractions are criminal leaders in Ukraine in a number of registered crimes: In total: 56,6 registered crimes on citizens; inc. drug traffic: 8,4; holdup: 0,99; armed clash between or within criminal groups: 2,0. 84% of criminals are unemployed. Legitimization of violence; violence as every day practice and component of local culture; Official statistics (Ministry of Internal Affairs), which cannot be compared with real state of affairs

Institutional exclusion and hour-glass society The institutional exclusion – the limited access of ordinary people to the legal system and the other state institutions and/or their unwillingness to rely on them when solving everyday problems. Ordinary people consciously minimize their contacts with the state and its representatives (de Soto assumes that people are always interested in getting their activities legalized and regularized), which lead Richard Rose and his fellows (1997) to compare the institutional structure in these countries with a hour-glass composed of two spheres – on the one hand, the state and its activities and, on the other hand, the everyday life of ordinary people – connected by a very narrow mid-point. Hour-glass society - sharp division of all spheres of social, economic and political life on formal and informal ones, thus making the life of ordinary citizens unofficial and disconnected with the formal rules and functioning of state organisations; The differentiation and deepening division between US (ordinary people) and THEM (everyone working for the state); Official/unofficial divide has destabilizing effects and, generally, corrupt people

Orange revolution as an attempt to break hour glass structure The so called Orange revolution can be interpreted as an attempt to change the hour-glass structure by broadening the mid-point: very diverse social groups that normally have conflicting interests – students, pensioners, businesspeople – all participated in mass-protests. However, five years later little has changed in this regard and elements of the hour-glass society continue to reproduce in Ukraine, which calls for an in-depth analysis of the problem and attempts to solve it by increasing awareness of public servants about its destabilizing effects.

Living outside the law: fragments of interviews with illegal miners Legalization of this business and legal work is unprofitable…you need to pass through public tender, to collect huge number of documents, pay social security and taxes…it is easier to bribe patrons for silence and work without registration (author: patrons - local authorities, inc. policemen) To get higher profit you have to employ drug addict and homeless persons – they are working for a meal or narcotic Many families send their kids to illegal coal- mining enterprises

Living outside the law: fragments of interviews with illegal miners To open new illegal coal-mining business you have to pay about EUR for permission – it is initial payment; 50% of your profit you have to give to your patron for protection; Some people from our town disappeared…people from socially vulnerable groups, e.g. homeless, orphans, women, illegal migrants are under particular threat Police has never registered occupational death at illegal coal mining enterprise as occupational death – it is registered as accident…So, any criminal investigations on this subject Last year moles (an animal and jargon term for illegal miners) undermined the gas pipe line; it was explosion, they all perished

Hour glass society and legitimacy of the state Profound contradiction between the formal rules, adopted by the state institutions and real practices of the citizens critically impacts the Ukrainian state in the way of strengthening corruption as a norm of every-day practice, and undermining of the states legitimacy, that further contributes to dissemination and recognition of alternative practices, e.g. alternative justice. Ukraine failed to establish itself fully as a functioning state and remains weakened by low state capacity, and constant political infighting; Core institutions of the state mutually paralyze each other in the content of serious domestic and external challenges and threats. Hour-glass society is a result of the state failure, the government cannot or will not deliver core functions for the majority of the people, but it is also a form of survival for the Ukrainians, the way, in which the poorest people sustain themselves.

Illegal extraction as an equilibrium Stakeholders interested in functioning of the illegal extraction industry: 1.Miners themselves: at least, minimal income, absence of alternative employment opportunities; 2.Illegal entrepreneurs (mediators): high profit, no tax payment to the budget, any social security payment; 3.Formal (state-owned) coal mining enterprises: subsidies from the state budget with minimal production activity; 4.Local authorities: bribes; 5.Central government: bribes, no headache with painful social problems/unpopular social policies on depressed territories.

Significant risk of violent conflict escalation 1.Explosions may cause large-scale ecological disasters; 2.Energy supplies to Western Europe may be disrupted (the level of deterioration of the transit infrastructure is about 85-90%); 3.Human security (further spread of slavery, illegal migration and range of selected risks); 4.Any response of Ukrainian government to an escalation of tension may cause ethnical Russian population (majority in this region) to appeal to Russia for support