2. North's approach and the genesis of property rights

The large body of work in institutions, and in particular on property rights, that Douglass North left behind offers a coherent and structured framework for understanding how property rights come to be and why they persist. North's approach (along with Demsetz, (Reference Demsetz1967; Cheung, 1969) distinguished itself from other explanatory theories of property rights by focusing on the creation of property rights as a political response to economic problems, mainly society-wide transaction costs. Unlike the ‘historical approach’, which treated property rights as the by-product of events in the distant past (Acemoglu et al., Reference Acemoglu, Johnson and Robinson2001; Yoo and Steckel, Reference Yoo and Steckel2010), or the cultural approach, which ascribed institutional variation to differences in the beliefs of political leaders about which institutions are good for society (Landes, Reference Landes1999), North's economic approach, typified in his 1979 paper and his work from the late 1980s onward, was more closely related to the ‘political approach’ school of thought (Acemoglu et al., Reference Acemoglu, Johnson and Robinson2005; Sonin, Reference Sonin2003). The political approach asserted that property rights are chosen by the individuals who control political power to maximize their personal payoffs, rather than what is good for society.Footnote ³ However, the political approach somewhat ignored the influence of supporting or other institutions within a society, focusing solely on political institutions as the determinant of the level of property rights rather than the legal and other institutions necessary for rights (Hodgson, Reference Hodgson2015a).Footnote ⁴ Moreover, as noted in North and Weingast (Reference North and Weingast1989), if the political system is sufficiently open, the political system itself may be a restraint on property rights infringements, given that the party in power will not always be at the reins; thus, total maximization of personal payoffs would only be possible in a closed political system or a system where the costs of collective action in deposing the ruler were sufficiently high (Acemoglu, Reference Acemoglu2003), leaving little sense of how this approach would operate in a relatively open system where change is more frequent.

The contribution of Douglass North to this debate (which, as we can see, is ongoing) in many ways synthesized these previous approaches, but applied an economic lens to institutional creation, building on the political approach by recognizing the reality of transaction costs in institutional change (North, Reference North1979, Reference North1990a). In particular, the economic approach posits that property rights are created when the benefits of their creation exceed their costs, a theory first advanced by Demsetz (Reference Demsetz1967) but taken up in North (Reference North1971) and subsequently forming the gradually evolving basis of North's approach to property rights in general. Under this conception, the adoption of property rights is not necessarily limited to the thoughts of the sovereign or the calculations of the powers-that-be but results from repeated interactions between political and cultural institutions, societal calculations of long time-horizons, and iterative relative price movements of both factors of production and alternate institutional arrangements. Property rights at the informal level (economic rights) emerged from ‘voluntary organizations devising institutional arrangements to solve problems of impersonal exchange over time, first in a specific community but gradually evolving to support such exchange over both time and space’, a process where the polity ‘played little or no role’ (North, Reference North1993a, p. 19). At the formal and legislative level, legal property rights protections represented both a scaling-up of these informal, economic rights and a cost-benefit calculation between the cost of reducing uncertainty and the benefits reaped by this reduction across all strata of society.

The classic derivation of the economic viewpoint comes from North's (Reference North1979) paper on the state, where he creates a model of the state as a discriminating monopolist that provides services to lessen transaction costs in an economy, while at the same time attempting to maximize revenue. Under this model, the service that is provided is that of a third-party enforcement mechanism to reduce transaction costs and ensure commitment amongst contracting parties, a goal which requires ‘an elaborate structure of law and its enforcement’ (North, Reference North1984a, p. 259).Footnote ⁵ This structure can differ widely in its actual implementation but has the same effect in guaranteeing property rights and somewhat restricting the leadership; Mantzavinos et al. (Reference Mantzavinos, North and Shariq2004) note that the Moroccan suq has the ability to coordinate the knowledge of market participants, although at a higher level of transaction costs than other institutions in the West. Regardless of its form, this body of legislation is designed to provide a means to remove uncertainty in transactions, allowing for commerce and, as North (Reference North1979, p. 252) notes, resulting in ‘the provision of a set of public (or semipublic) goods and services designed to lower the cost of specifying, negotiating, and enforcing contracts which underlie economic exchange’. From society's viewpoint, the reduction of uncertainty results in increased commerce and higher utility, while from the ruler's viewpoint, the expansion of commerce creates a longer-term source of rents to extract via taxation.

However, while this appears to be a straightforward calculation in favor of ever-expanding property rights, the sovereign has other objectives to maximize, as too many property rights undercut his own power and can allow for the challenge of rivals. Thus, under this economic approach, there exists a constant and ‘persistent tension between the ownership structure which maximized the rents to the ruler (and his group) and an efficient system that reduced transaction costs and encouraged economic growth’ (North, Reference North1979, p. 253). Such tension is not limited to the immediate present, but persists over time in an iterated game theoretic framework, as every period brings the temptation for the sovereign to defect and maximize his own rents at the expense of society. North asserts that this tension is precisely the reason why such rights are rare at the formal/legal level throughout history, as the ability to choose when to bestow property rights means that there is also an ability to deny those said rights if the calculation is not in favor of the rulers. For the most of human history, fear of loss of power is greater than promise of increased rents.

The challenge thus for economic growth becomes the need for credible commitment to bind sovereigns to reducing transaction costs and preserving property rights in the future as well as today while removing the incentive to restrict rights (North, Reference North1993a). In practice, that has meant limiting the power of the government from the side of the people, enmeshing impersonal rules regarding property in a framework that was (for the most part) unassailable by political whim (North, Reference North1978). Unfortunately, getting the sovereign to this point is also not an easy task, as, much like Acemoglu's (Reference Acemoglu2003) assertion regarding collective action, North (Reference North1984a, p. 260) noted that ‘a change in constraints comes from a change in the relative bargaining power of rulers versus constituents (or rulers versus rulers), and, broadly speaking, changes arise because of major, persistent changes in relative prices’.Footnote ⁶ These changes in relative prices could either be short-term, as in price levels, or could be a longer-term shift which, as North and Thomas (Reference North and Thomas1970) described, would thus drive long-term institutional change as well. This is not to say that relative changes in factor prices are the only source of institutional change, as constraints and the cost of various institutional paths are determined by other attributes of a society; indeed, the example given in North and Thomas (Reference North and Thomas1970) of feudalism merely shows that changes in relative factor prices may contribute to eradication of institutions which are based solely on relative price relationships (i.e., labor versus land). Also, as noted by Stanfield (Reference Stanfield1995), relative prices are also endogenous to political institutions, as power structures can influence utilization of resources and even technological choices (accepting, of course, that these power structures also have their own transaction costs in action).

Instead, what is more important to take from this conception of institutional change is that countries and their institutions may see small shifts in relative bargaining power which can occur over time. These shifts in the relative price of different institutional paths (rather than just factors of production) can come about from accrual of economic power, gridlock or change in political institutions, or exogenous forces (e.g., invasion and occupation). The cumulative effect of these shifts can be enough to alter the calculation of rulers, creating a change in the relative prices of different institutional paths, which would thus filter through to the political system.

In fact, these constraints and shifts in power may then result in a new set of ‘rules of the game’, leading to the creation of a constitution which lays out self-enforcing mechanisms that incentivize all parties to adhere to the system (North and Weingast (Reference North and Weingast1989) use the example of the Glorious Revolution of 1688, although Hodgson (Reference Hodgson2015b) disagrees on the timing of the actual mechanisms to alter property rights). In this manner, changes in the relative price of different institutions are captured in the political system, while still protecting the appropriate distribution of benefits that will keep the institutional innovation intact (North and Thomas, Reference North and Thomas1970). And through the fashioning of appropriate political institutions in the constitutional process, a country may avoid a situation where ‘conflicting groups (propertied or property-less), given access to political restructuring of property rights. . . redistribute wealth and income at the expense of others and at the expense of the viability of the system’ (North, Reference North1978, p. 967).

Of course, this procedure puts enormous pressure on ‘getting the fundamentals’ of the constitution right, and is no guarantee against future erosion or backsliding, especially if relative prices of the factors of production or of alternative institutional paths once again change; North (Reference North1978, p. 971) notes that ‘forms of market competition can only survive under the highly restrictive assumption that the costs of using the political system to alter the market structure are prohibitive’. In fact, it has been pointed out by Vahabi (Reference Vahabi2011, p. 247) that ‘an efficient predatory state is theoretically conceivable, but the problem is that it does not necessarily predate when the predation is efficient’. Put another way, while a ‘political Coase theorem’ as advocated by Cheung (Reference Cheung1970) or North (Reference North1990a) may assume rationality in political decision-making, there is scarce evidence that political markets are efficient or even rational (especially given rent-seeking behavior by political participants, as noted in North, Reference North and Colander1984b). In fact, as Vahabi (Reference Vahabi2011) rightly notes, the costs of using coercive power for a government are entirely separate from transaction costs in a voluntary exchange, and thus they may alter the calculus of a sovereign in deciding to protect or discard property rights in a different manner than garden variety transaction costs of the market. Rent-seeking activities within the government may also play into this calculus, as the sovereign may have to balance the various factions within a government (often mollified with economic rents). Removing these rents via broader-based property rights may be a political cost that outweighs the reduction of uncertainty that such a creation of rights would bring.Footnote ⁷

However, these points do not invalidate the basic tenets of North's (Reference North1981, Reference North1990a) theory, in that he assumes that calculation of costs to institutional change by political actors may drive the persistence of inefficient institutions; these costs would presumably include both the costs of coercion and that of transaction, as noted above. Political markets need not be efficient in order to explain the genesis of property rights (the size of political transaction costs just alters the exact point at which benefits outweigh costs, not the actual calculation mechanism), and indeed North (Reference North1990b) notes that it is ‘gridlock’ (i.e., political stasis) that may produce change. North et al. (Reference North, Wallis and Weingast2009) also call attention to the possible existence of an equilibrium of politically active interests, which could work to limit transaction costs of institutional change due to the dispersion of political power across interests. Seen in this light, the basic concept of a shifting balance between benefits and costs to reducing uncertainty remains correct, even if the actual calculation of these costs is open to some debate.

Another key issue underpinning the assumed impartiality of the political system is directly related to the administration of the rules of the game, encompassed in the transaction costs of bureaucracy and especially the costs incurred in ensuring that property rights are protected. While private adjudication services could operate at a large scale and on a voluntary basis (see the Law Merchant detailed in Milgrom and North, Reference Milgrom and North1990), supplanting these locally-based rules with universal formal law meant that new formal institutions needed to be built to perform the same contracting function. Put another way, ensuring that a body of laws representing the rules of the game actually decreased transaction costs required supporting institutions such as an independent judiciary to enforce the rules. This additional layer of complexity has also stymied the development of property rights. In fact, the saga of developing countries in the 20th century and into the 21st century has been related to this precise point, as legislation that may have been well-intentioned (or even supported by foreign donors such as the World Bank or USAID) was lost in translation on the way to administration. Bureaucracy may follow its own internal incentives or even be utilized politically as a way to circumvent legislation, and a dependent judiciary may continue to rule in favor of the sovereign even when the law and the facts are against him. Even when malevolent ends are not present, the lack of capacity may mean that access to property rights is only attainable for an elite, keeping exchange at a de facto level personal (North et al., Reference North, Wallis, Webb and Weingast2013). Such a scenario will vitiate property rights even in the presence of a well-fashioned constitution and favorable relative prices.

Finally, this conception of property rights formation and evolution, even where credible commitment can be fashioned, is still no guarantee that a high level of property rights protection will exist. In his later work (North, Reference North and Sjostrand1993b; North et al., Reference North, Wallis and Weingast2009), North takes care to remind us that revolutionary change is generally never as drastic as its rhetoric would imply, as he believed that informal constraints would act as a binding agent on revolutionary changes, resulting in an equilibrium that was more in line with cultural tenets of a country rather than any new revolutionary institutional order (North, Reference North and Sjostrand1993b).Footnote ⁸ Revolutions, North asserted, only ever endeavored to change formal institutions, but the reality of informality (i.e., economic rights) made bargaining positions still more important than social conflict or revolutions. But what happens if cultural constraints, North's informal institutions, are against property rights in the first instance? Such a reality may mean that revolutionary change in favor of broad-based property rights may fail without the cultural underpinnings necessary for property rights to survive; this state of affairs would also let the sovereign off the hook, with informal rights remaining small-scale and larger-scale rights avoided. As North (Reference North1993a, p. 23) mentioned, ‘it takes much longer to evolve norms of behavior than it does to create formal rules and for those economies without a heritage of such norms the reconstruction process is necessarily going to be long and the outcome very uncertain’. Expanding on this point, North (Reference North, Frieden and Lake2000, p. 50) correctly pointed out that ‘rulers can seldom afford efficient property rights, since such rights can offend many of their constituents and hence jeopardize the security of others’ rights’. In this scenario, his (1994) assertion that the polity defines and enforces property rights can be taken as literal truth, with the polity restricting the growth of broad-based property rights and offering the sovereign an easy calculation about the extension of said rights. Following on this reality, any constitution that may emerge as defining the rules of the game will also create caveats to effective exercise of property rights, loopholes that are then filled by secondary legislation to tighten the noose on such rights even further (also involving the bureaucracy, as just noted). In this situation, where even the polity is not knowledgeable about the benefits conferred by property rights, there is no incentive for the sovereign to educate them.

In short, even the economic approach as typified in the early writings of Douglass North shows the difficulties in establishing property rights (and, by extension, seeing sustained economic growth). Indeed, given all of the contingencies and obstacles, it is a wonder that rights exist at all, and yet, they do exist in many countries in a form that engenders economic growth.Footnote ⁹ North and Weingast (Reference North and Weingast1989, p. 804) detail the changes in England after the Glorious Revolution and how supporting political institutions were able to exert control over ‘the exercise of arbitrary and confiscatory power by the Crown’, in their retelling of the Revolution, they point to the creation of ‘an explicit set of multiple veto points along with the primacy of the common law courts over economic affairs’ (North and Weingast, Reference North and Weingast1989, p. 829), allowing for a diffusion of power in the matter of property rights. North (Reference North1978) also makes this point in the context of the early American Republic, with particular reference to Madisonian democracy and the diffusion of economic policy via checks and balances. This dispersal of political power in turn helped to fuel economic growth in the immediate aftermath of the Revolution in England and in the early 19th century in the United States.

Thus, a key lesson learned from North's writings, as well as subsequent research, is that diffusion of all political power, dispersed rather than necessarily constrained at a central source, made it much easier for the threat of expropriation to subside and overall contracting costs to decline.Footnote ¹⁰ To return to Vahabi's (Reference Vahabi2011) point above, diffuse power also substantially increased the costs to coercive action, meaning a shift in the calculus for the sovereign against expending resources to maintain the status quo (Vira, Reference Vira1997). As noted above and in North and Weingast (Reference North and Weingast1989), the prospect of competition within the political marketplace may also help to act as a diffuser of power while simultaneously forcing political institutions to adapt in order to survive (North, Reference North1993a). Although a constitution may provide the ground rules for the diffusion of power, technological change, exogenous forces, and results of previous policies can all combine to actually change the bargaining power of parties to the political system. This in turn may help a country transition from a ‘limited access order’, where political elites resolve societal conflict via tight control and distribution of economic rents, to an ‘open access’ one, substantially removing the power to fundamentally transform property rights from government and vesting it back within society via open access and competition (North et al., Reference North, Wallis and Weingast2009, Reference North, Wallis, Webb and Weingast2013). The story of England in the 17th century and the American republic in the 19th century follows this pattern, as does more recent success stories such as Singapore, Estonia, or Taiwan, where political institutions also evolved to cede power to the economic sphere.

3. Poland and Ukraine: diverging rights to property

This overview of the economic approach to property rights brings us to a fascinating test case for North's theories of institutional change, namely the tale of Poland and Ukraine. Sharing a border, a similar language (mutually intelligible if spoken slowly), a long history of overlapping experiences and institutions, and even substantially the same political institutional make-up post-1989, the two countries have emphatically not shared the same experience of property rights. Indeed, from the end of transition through 2014, there has been a marked divergence in their levels of and approach to property rights, as shown in Figures 1 and 2. These figures utilize two separate quantitative indicators for property rights common in the literature, one objective and one subjective.Footnote ¹¹ Figure 1 expresses property rights as ‘contract-intensive money’, the proportion of money held outside the formal banking sector, as detailed in Clague et al. (Reference Clague, Keefer, Knack and Olson1999) and utilized in a transition context in Hartwell (Reference Hartwell2013).Footnote ¹² As can be seen, Poland's level of property rights has been consistently higher than Ukraine's, as well as consistently level since EU accession. Figure 2 uses another commonly-utilized measure for property rights, the International Country Risk Guide (ICRG) measure of ‘investor protection’, to show the same tale. The ICRG index encapsulates risk of expropriation and is calculated on a scale from zero to 12, with higher numbers representing greater property rights.Footnote ¹³ Under this additional metric, Poland also has continually scored well above Ukraine, if not as consistently high as the property rights expressed under contract-intensive money.

Source: Author's calculations from IMF and central bank data.

Figure 1. Property rights in Poland and Ukraine, contract-intensive money.

Source: International Country Risk Guide.

Figure 2. Property rights in Poland and Ukraine, ICRG investor protection index.

Given such similarities in the shared history of the two countries, this divergence may be seen as somewhat puzzling, given that is occurred quite dramatically in such a short period of time (and after a long spell under the same political and economic system). However, using North's framework as described above may help us to understand this divergence; in particular, an examination of the political ‘institutional matrix’ (North, Reference North1994) that each country faced over the past 27 years can offer clues as to the development of this crucial economic institution. But in order to properly understand the story of property rights in these two countries, we must widen our examination of the development of political institutions beyond merely the transition era or even the communist past, and encompass instead hundreds of years of political and economic institutional changes. With a deeper appreciation of the development of political institutions and their attitude towards property rights, only then does the divergence of since 1989 make sense.

Space does not permit a retelling of the long saga of property rights in each country (see Hartwell, Reference Hartwell, Hölscher and Tomann2016, for an in-depth examination of this history), but a few salient points stand out immediately in regards to each country. In the first instance, relative price movements did not play a major role as a motivator for institutional change in Poland and Ukraine, unless one considers the Partitions of the two countries which made land relatively scarce (or non-existent). For the most part, due to feudalism, demographics, and the geography of Poland, wages for labor remained fairly consistent over 1386–1795 (Allen, Reference Allen2000) and land prices fell during the 15th and 16th centuries due to improved contracting institutions (Guzowski, Reference Guzowski, Béaur, Schofield, Chevet and Perez-Picazo2013). Indeed, the only point where a major relative price shift can be seen is in relation to the closing of the Ukrainian frontier to Polish nobles after the Cossack rebellion of 1654. Whereas land remained relatively abundant in Poland for its entire history, it was commonplace for Polish nobility to migrate to the Ukrainian frontier lands of Volhynia if they were dissatisfied with the political governance in the Commonwealth. The inability to migrate after Ukraine attained a modicum of independence meant that these unsatisfied nobles stayed in the country, and thereby voiced their frustrations within the prevailing institutional structure, somewhat paralyzing it due to the principle of unanimity needed in the legislature (Heinberg, Reference Heinberg1926). Apart from this shift in the relative ‘price’ of land (through diminution of its supply), there were a few large-scale relative price movements in Poland or Ukraine over the past 600 years.

Much more important, as the Douglass North of the 1980s onward would have predicted, was the structure of the political system in each country and the incentives that the rulers of Poland and Ukraine faced in regards to instituting broad-based property rights. Starting with Poland, we can see that the diffusion of power (especially regarding the oversight of property rights) was a cornerstone of the Polish political system during the height of the Polish–Lithuanian Commonwealth. In particular, the presence of the nobility (the szlachta) established a precedent of protection of property from expropriation, as King Jagiełło, needing the military services of the nobility, was forced to pledge in 1422 ‘not to confiscate property of a member of the szlachta without prior judicial determination, thus establishing a right to private property’ (Brzezinski, Reference Brzezinski1991, p. 53). Although the nobility was determined to preserve their own rights, the competition between the szlachta in the Parliament (the Sejm) and the King meant that self-organized contracting institutions began to arise, with ‘Poland–Lithuania's long tradition of decentralized, local control’ (Murphy, Reference Murphy2012, p. 388) ensuring healthy competition of such property rights arrangements. Utilizing sanctions such as a community responsibility system, which imposed damages on individuals if they violated property rights in an inter-community (-town or -village) transaction, the local institutions allowed for property rights protection to become tangible (Greif, Reference Greif2006). And the development of the judiciary as an ‘independent, inter-provincial legal system’ (Brzezinski, Reference Brzezinski1991, p. 56) created legitimacy that enforcement would be impartial and mostly free of political interference. As Guzowski (Reference Guzowski2014) shows, these local-level enforcement mechanisms and their implementing institutions (such as village courts) became an effective means for securing transactions, and these small-scale contracting and protection institutions in Poland were, unlike England around the same time, driven from below rather than from above by the gentry. The sum total of these innovations meant that as early as 1348, ‘a peasant. . . had full rights of ownership of movable property, and in some cases he could buy, sell, and bequeath land’ (Kamiński, Reference Kamiński1975, p. 267).

The balance of power in Poland began to tip in the 17th century, however, as a continuous series of wars against Russia, Sweden, and others, threatened property rights at both the local and central levels. In a grand bargain, the King was increasingly reliant on the szlachta to finance military adventures, which meant the szlachta were given a relatively free hand ‘to gradually expropriate rights from the peasants’ (Greif, Reference Greif and Helpman2009, p. 32). Mainly this was conducted via the re-enserfment of peasants, but the expansion of private towns over this time frame also allowed the szlachta to control the urban landscape, as well as the rural. The cooperation extracted from the King by the szlachta continued to alter the calculus of the benefit of broad-based property rights for the nobility, delaying them even further. The concomitant decline in Poland over this period, weakened by conflict, made it ripe for external takeover, culminating in the three Partitions of 1772, 1793, and 1795.

The Partitions made a difference in reinforcing the decentralized nature of property rights, mainly by setting up such rights as a form of protest to the occupying powers that be; with no home-grown rents to be captured and no power to oversee the country politically, Poles were free to agitate in favor of reduced uncertainty rather than sovereign power. Economic property rights, built around a shared national identity for a country that no longer existed and cared for by the individual rather than the state, helped to resist occupation and provide some continuity with the past. Of course, the Partition of the country amongst the Russian, Prussian, and Austro-Hungarian Empires also meant that formal property rights were exogenously created, determined in Vienna, St. Petersburg, and Berlin. Each Partition had its own, different approach to the political granting of such rights:

1. (1) The Austro-Hungarian portion of the Partition, in Galicia, remained more liberal towards property rights protection than elsewhere in partitioned Poland, backing Polish tradition with a rule of law secured by Austrian force of arms (Kuninski, Reference Kuninski1997);

2. (2) The Prussian administration, on the other hand, observed legal property rights for Poles in the early years of the Partition, but the continuous increase in the number of Poles soon led to the creation of a Settlement Commission to purchase Polish land for German settlers; ironically, this approach ended up restricting the turnover of land transactions in the German-occupied lands, as Polish landowners created a boycott of sales to the Commission, in order to keep the lands in Polish hands (Eddie, Reference Eddie, Engerman and Metzger2004). This resistance in turn then led to more draconian measures, including restricting any rights of sale to blood relatives, creating a series of permits to keep new building restricted via bureaucratic means, and in 1908 authorization for outright expropriation of 70,000 hectares of land (Kaczmarczyk, Reference Kaczmarczyk1945);

3. (3) Finally, in the Russian partition, property rights were highly restricted, although, as Murphy (Reference Murphy2011) noted, Russia's move towards centralization meant placating and assimilating the nobility, and in order to do this their property rights needed to be upheld (Murphy also notes that in a battle between noble property rights and town autonomy, property rights won the day, with the practice of town ownership effectively ended by 1867). At the other end of the class ladder, and in another political ploy to win back the peasantry after the 1863 Uprising, peasants were also given full property rights to their land via an emancipation decree in 1864, hoping to pacify the large peasant population of the Lands of the Vistula (Wandycz, Reference Wandycz1974).

The legacy of the Partitions, as well as global acceptance of socialist tenets in the late 19th century, weighed heavily on property rights in the newly independent Poland after the First World War, as the government began a comprehensive land reform process as early as 1919 (implemented beginning in July 1920), in an effort to minimize social conflict regarding the concentration of large-sized land holdings (Pronin, Reference Pronin1949).Footnote ¹⁴ The land reform limited property ownership, capping the maximum holding size of any one piece of land at 300 hectares in the eastern provinces, while industrial areas had maxima set between 60 and 180 hectares (Zawojska, Reference Zawojska2004). Additional reforms were introduced in 1925 and 1927 which somewhat relaxed these restrictions, increasing the maximum size of allowable holdings; however, these changes were accompanied by a requirement for ‘the distribution of a minimum of 500,000 acres annually over a period of 10 years (Pronin, Reference Pronin1949, p. 136), threats to owners of compulsory expropriation if they did not sell, and compensation regulations that limited sales prices to 50% of its market value (Zawojska, Reference Zawojska2004).

The destruction of the Second World War led directly to the Soviet installment of a Communist government, which quickly rendered the concept of property rights traitorous for the Polish mind. The application of such Marxist ideology to Poland meant the Soviets extending the very same ‘agrarian reform’ that they had carried out between 1939 and 1941 in the eastern portions of the country (now parts of Soviet Belarus and Ukraine) to the rest of Poland, resulting in deportations, executions, arrests, and, mildest of all, confiscation (Pronin, Reference Pronin1949). As with the earlier, pre-War regulations, maximum landholdings were set and land was redistributed from large landowners to smaller ones, with some large (formerly German) estates remaining intact to be used by state agricultural enterprises (Zawojska, Reference Zawojska2004). Throughout the entire economy, private ownership was denigrated in favor of state-owned and collective enterprises, ‘subject to centralized, complex, and highly politicized control’ (Wellisz and Iwanek, Reference Wellisz and Iwanek1993, p. 345). Property in the Polish People's Republic became a matter of property for the ‘state,’ where only the government had the right of exclusion, although a fruitful literature sprang up trying to explain the property rights that were held on the factory floor by managers under socialism (Furubotn and Pejovich, Reference Furubotn and Pejovich1972).

Given the direct opposition of communist ideology and the machines of government to property rights, it was not until the mid-1980s, after decades of stagnation, that popular and elite attitudes towards broad-based private ownership had begun to turn favorable (Tarkowski, Reference Tarkowski1990). One of the major factors for this informal change was the emergence of additional informal institutions as rivals to the communist monopoly, a challenge which helped to lessen the bargaining power of the formal political institutions which were inimical to these rights. In particular, Solidarity, an indigenous movement of workers opposed to a system supposedly devised for workers, agitated for smaller-scale property rights linked to the factors of production, creating a credible counter-institution to the Party.Footnote ¹⁵ Aided by the Catholic Church, itself concerned with winning back its own rights of property, these two social movements were to coalesce informal institutions against communism and, at the same time, created a safe space for a debate on property rights. With the fall of the communist government in free and fair elections in 1989, the stage was set for a massive formal shift in favor of legalization of property rights, but the groundwork had already been laid informally. Thus, the challenge for Poland's transition would be to secure the benefits of property rights but avoid the difficulties seen during the years of the Commonwealth and in the Second Republic, where unconstrained executives at various levels had the ability to threaten these rights.

It appeared that Poland solved this conundrum at an early stage by removing the government as much as possible from commerce. The basis for property rights in post-communist Poland began as part and parcel of the economic transition even before the political transition began, with the passage of the Economic Activity Act in December 1988 putting private sector firms on ‘firmer legal footing’, guaranteeing equal legal treatment of all forms of ownership, setting the basis for privatizing state assets, and, most importantly, enshrining the concept that ‘everything not explicitly prohibited is permitted’ (Slay, Reference Slay2014, p. 78). These early moves in institutional reform were accompanied by building supporting institutions, most notably a judicial system that was fiercely independent of the government, as codified in the 1997 Constitution, which removed the Sejm's ability to override the decisions of the Constitutional Tribunal (Schwartz, Reference Schwartz1998).

The experience of Poland gives ample evidence for North's framework of property rights, as expansion of legal property rights came in response to a perceived gain on the part of the ruling elite, whether they were Polish or foreign, vis-à-vis the rest of society. In fact, constitutionalism was for the most part a small factor in property rights, as the Constitutions that Poland enacted over its history reflected the underlying balance of power rather than providing the ability to constrain executives on their own. As Greif (Reference Greif and Helpman2009, p. 32) noted in a different context, the ‘constitutional institutions benefitting the elite can be socially harmful exactly because they are “good” at fostering intra-elite cooperation’, in the Polish case, only the Constitution of 1791 protected the rights garnered by the szlachta in Article II and pledged to ‘preserve sacred and intact the rights to personal security, to personal liberty, and to property, landed and movable’. Coming as it did on the heels of one Partition and facing two more, the 1791 Constitution more expressed hope than reality. The Constitution of 1921 in Article 99 claimed that private property was ‘one of the most important bases of social organization and legal order’, but Piłsudski's military coup and the 1935 Constitution placed ‘social solidarity’ as a priority over individual rights. With the Soviet takeover and the rewriting of the Polish Constitution in 1952, even the vestiges of Article 99 from earlier Constitutions were removed, including any mention of a right to property (Cholewinski, Reference Cholewinski1998), with ‘social justice’ instead inserted as the guiding principle of the People's Republic. It was not until the new Constitution in 1997 that the already-existing acceptance of property rights was codified, a fact that solidified the development of supporting institutions.

In contrast to Poland, Ukraine never cultivated a diffusion of political power; the history of Ukraine from the 12th century onward is one of continued centralization of power in the hands of the executive, whether Ukrainian or foreign, leading to lack of political competition and a manifest removal of veto points in the determination of property rights. The rule of Yarolsav the Wise in the Kievan Rus’ era is associated with the first codification of law in eastern Slavdom (the Rus'ka Pravda), seen in retrospect as the high point of both political competition and property rights in Ukrainian lands (Blum, Reference Blum1964). But with the Mongol invasion and the gradual absorption of modern-day Ukraine into the Polish–Lithuanian Commonwealth from the 14th century onward, the political competition that existed under the Rus’ disappeared suddenly. In particular, the adhesion of Ukrainian lands to the Commonwealth meant that Poland extended its own estate system of rigid socio-economic stratification amongst classes (nobility, burghers, and peasants); but where Poland may have used this system to create a balance of power, with a myriad of interests struggling to retain political power (thus ensuring that property rights were always at the top of the agenda), no such reality was extended to the lands of Ukraine. Indeed, the Ukrainian lands of Volhynia were mostly treated as occupied territory rather than incorporated as new administrative divisions of Poland. Thus, indigenous nobility was on its way to assimilation into the Polish–Lithuanian structures but remained treated as second-class citizens (Magocsi, Reference Magocsi2010), meaning the lack of an effective veto point for property in Ukraine.

With a series of rebellions in the early 1600s underscoring the growing power of the frontier-land dwelling Cossacks and their popularity amongst the peasantry, the major Cossack rebellion of 1648 upended the Polish control of the estate system and threatened the largest Ukrainian land-owners who de facto ruled over the Ukrainian lands (Kamiński, Reference Kamiński1977). In the short-term, the Cossack rebellion was seen as a victory for property rights across the whole spectrum of society, as they immediately restored the rights of land transfer to the peasantry and removed the labor obligations that had been imposed (Subtelny, Reference Subtelny2009). But in reality, the establishment of the Cossack Hetmanate merely swapped out one set of elites for another, changing the ownership of the state monopoly but effecting little change in the political structure. In fact, the Cossack leadership was able to arbitrarily grant estates to Cossack noblemen as a reward for faithful service, as well as to codify various rights of inheritance of property (Myronenko, Reference Myronenko2013).

Moreover, the Cossack rebellion succeeded through assistance from the Russian Empire, a deal which was to have long-term consequences for property rights in the country: absorption by the Russian Empire after the Treaty of Pereyaslav and the de facto split of Ukrainian lands after 1667 led to a steady loss of property rights across every class in the new Ukraine. Indeed, the new Russian administration wholeheartedly supported the Cossack nobility's moves to circumscribe the property rights of the peasantry (Subtelny, Reference Subtelny2009), including the reforms of 1786, where the Cossack hierarchy defined perpetual grants to land and blocked off large swathes of Ukrainian estates from ever being disposed of. Throughout the 19th century, the Tsar also used property rights as a way to buy-off incipient political opposition, as the abolition of serfdom in 1861 was used to buy the loyalty of the peasantry vis-à-vis the Polish nobility who still tended to dominate economically, granting more power to the peasants to counterbalance the enemies of the Tsar (Volin, Reference Volin1943). However, as North (Reference North1979) would have predicted, the extension of property rights was tightly reined in so that competition did not arise, as Tsarist authorities emphasized the idea of ‘communal property rights’, where land was allotted to communities rather than households (Nafziger, Reference Nafziger2015).

A further impediment to property rights enforcement in Russian Ukraine in the 19th century was to be a consistent issue in Ukrainian history, namely the weakness of the judiciary as a supporting institution. There was little tradition in Russia of the concept of a Rechtsstaat, with an independent judiciary constituted to protect citizens against infringements on their property or liberties, and it was not until the Judicial Statutes of 1864 that ‘independent public courts, an oral adversary procedure, and the jury system’ were allowed as a way to limit ‘the tyranny of the police’ (Wortman, Reference Wortman2011, p. 2). However, even this momentous change in legislation was of limited usefulness in the area of property rights, as special ‘peasant’ (volost) courts were exempted from the new regulations, meaning that the vast claims of former serfs were held in these courts under different (and less transparent) procedures (Plank, Reference Plank1996). For non-Russian nationalities such as Ukrainians, access to the new independent courts was even more difficult, meaning that property claims were adjudicated in a ‘business as usual’ manner in Kyiv.

The turn of the 20th century saw the institution of a right to individual property ownership in 1906, a consequence of the revolution of 1905 in Russia. Introduced as part of the Stolpyin reforms to revitalize the agrarian sector in Russia (of which Ukraine was an integral part), the codification of property rights rolled out slowly, being first introduced by a ukaz from the Tsar in November 1906, confirmed in a statute four years later, and further elaborated in an additional statute in May 1911. The reforms introduced a land titling process that greatly undermined the communal property approach, shifting the Russian Empire over a period of nine years to a title-based system. In Ukraine, this meant a large change in the Left Bank of the Dnieper River, as by 1914 communal property was prevalent only in Kherson and Kharkiv (Guthier, Reference Guthier1979).

Unfortunately, the arrival of property rights in Russia only lasted for a mere 11 years, as the Bolshevik revolution of 1917 destroyed all forms of private property and reverted Ukraine (and the rest of the Soviet Union) to communal property. With the Holodomor and the following Great Terror and purges of the population, private property in the Ukrainian SSR was driven far into the underground, with any small-scale private enterprise in the 1930s punishable by death or deportation. And despite the re-acceptance of some private ownership during the Second World War and in the months immediately following (Hessler, Reference Hessler1998), the tightening of Stalinist policies, in tandem with the expansion of communism throughout Central and Eastern Europe, meant that both large-scale formal and small-scale economic property rights had indeed been eradicated in Ukraine. The Soviets were able to complete collectivization by 1951, with nearly all of the region's 1.5 million peasants concentrated on 7,000 collective farms (Subtelny, Reference Subtelny2009). It was only at the upper echelons of the Party that anything resembling property rights based on personal interest existed, where the rights of the nomenklatura allowed them to maximize their rents at the expense of the property and liberties rest of the country (Winiecki, Reference Winiecki1990).

The fact that Ukraine was actually a part of the administrative apparatus of the Soviet Union, and with a 25-year head start on Poland in implementing communism, also meant that Ukraine had much less experience with economic or informal property rights and contracting. However, the gradual thawing of economic control in the 1980s weakened Moscow's control of the economy and brought a measure of political decentralization. Informal institutions rushed to fill the void left by the retreat of the Communist Party throughout the Soviet Union; in particular, with knowledge that the system was to change but no sense of its timing, firms and especially collective farms were able to use informal contracts to create deals in anticipation of a restitution of full property rights (Mathijs and Swinnen, Reference Mathijs and Swinnen1998). But the longer it took toward a dramatic reform by the elites, the more the informal contracting arrangements became entrenched in Ukraine and elsewhere throughout the Union.

The dissolution of the Soviet Union and Ukraine's independence in late 1991 should have provided the political impetus for economic reform, but unfortunately, the history of modern Ukraine has been one of a consistent link with history in regards to political centralization. Much as Poland showed that centralization of power did not necessarily mean the executive (as power became centralized in the nobility), the same occurred with Ukraine in the post-communist era; power remained centralized in the parliament (the Verkhovna Rada), which remained a bastion of Communists opposed to reform until 1994, as new President Leonid Kravchuk declined to dissolve the Rada and hold new elections. Without a ‘political equilibrium of interests’, as North et al. (Reference North, Wallis and Weingast2009) termed it, and concentration of powers in one institution, Ukraine continued to see the control of rents predominate decision-making to the exclusion of broader-based property rights reform. This reality led to a delay of institution-building just at the moment it was needed most, with the Communist-dominated Rada creating new legislation clarifying types of land ownership and laying out a framework for privatizing land (both from 1992) which did not depart dramatically from the Soviet or Russian model (in particular by focusing on Tsarist-era ‘communal rights’).

This hesitancy against a quick move to broad-based property rights continued in the creation of Ukraine's new Constitution, with ‘the drafters intend[ing] to give the Constitution some rigidity. . . by additions restricting forms of property and human rights’ (Ludwikowski, Reference Ludwikowski1996, p. 90). Early drafts of the Constitution from 1992 noted that ‘the exercise of the right of ownership must not contradict the interests of society as a whole or of individual natural persons and legal entities’, while additional drafts in 1993 not only retained these provisions but also envisioned additional administrative mechanisms consistent with limited property rights; as Ludwikowski (Reference Ludwikowski1993, p. 183) noted, the retention of special economic courts ‘confirms that the drafters still anticipate that the state will administer a vast area of public property’. Article 41 of the final Constitution in 1996 eliminated the most egregious references to socialism, but, although the Article begins with the assertion that ‘everyone shall have the right to own, use, or dispose of his property and the results of his intellectual or creative activities’, the rest of the Article and elsewhere in the Constitution contains caveats, exclusions, and, most importantly, the threat of revocation.

The constriction of the right to private property in Ukraine has been encapsulated most thoroughly in the treatment of rural and agricultural land, where there may have been a theoretical right to property but legislative obstacles and constraints made the exercise of this right nearly impossible. The most egregious restriction placed on property was a (at first) six-year moratorium on land sales enacted in 1992 (Krasnozhon, Reference Krasnozhon2011). The land sale moratorium was structured to prohibit a farmer trading or selling any land that was deemed ‘arable’ under the Code, with the sale and purchase or transfer of privately-owned land explicitly prohibited if used for commercial agricultural production or individual farming activity. Not only did this restriction remove the incentive for landowners to improve the land, much less the ability to transfer it, it also made Ukrainian farmers incredibly disadvantaged vis-à-vis larger (and sometimes politically-connected) agricultural concerns. Instead of a land market, Ukrainian farmers saw ‘land grabs’ carried out under fraudulent means but with the full complicity of Ukrainian politicians (Visser and Spoor, Reference Visser and Spoor2011). Thus, farmers were simultaneously denied of their full complement of property rights whereas corruption could render these rights useless at any time. This land sale moratorium, touted as temporary, was still in place at the time of this writing.

The shift in political centralization in Ukraine shifted from 1994 to 2005, as President Leonid Kuchma was able to aggrandize power in his own hands during his two presidential terms. While Ukraine underwent a long-delayed macroeconomic stabilization, the shift of power did not create a balance, and instead property rights continued to suffer (as shown in Figures 1 and 2). Only the brief interruption of the ‘Orange Revolution’ from 2005 to 2009 slowed the tide of centralization in the executive, but moves by new President Yushchenko actually handicapped the forces of Westernization, as he acquiesced to transferring the executive power obtained by Kuchma back to the Rada as part of a Constitutional bargain. The election of President Viktor Yanukovych in 2010 reversed this bargain and instead resulted in a wholesale transfer of property rights from society and even the state to the executive. Yanukovych utilized the powers of his office to directly expropriate businesses and threaten property rights, ‘usurp[ing] all power, accumulate[ing] gargantuan resources via corruption schemes, destroy[ing] the court system, encroach[ing] thoroughly on civil liberties and violat[ing] human rights’ (Riabchuk and Lushnycky, Reference Riabchuk, Lushnycky, Stepanenko and Pylynskyi2015, p. 48)

More egregiously, Yanukovych bypassed the state mechanism to favor political insiders, nicknamed ‘the Family’ and consisting of political insiders from the Donbas. As North (Reference North1979, p. 256) predicted, where powerful interests can compete politically, ‘the ruler will avoid offending powerful constituents. If the wealth or income of groups with close access to alternative rulers is adversely affected by property rights, the ruler will be threatened. Accordingly, he will agree to a property rights structure favorable to those groups, regardless of its effects upon efficiency’. This was precisely the case in Yanukovych's Ukraine, where ‘the conditions necessary for this rapid concentration of wealth by those who exercised political power meant that there could be no reliable legal mechanisms to protect individual rights, including property rights’ (Satter, Reference Satter2014, p. 7). The extent of official corruption under Yanukovych created great resentment in Ukrainian society, also as North predicted: ‘if, however, growth is destabilizing, so is no growth’ (North, Reference North1979, p. 257). In particular, the withdrawal from the EU Association Agreement in November 2013 provided the impetus for demonstrations on Maidan, which eventually led to Yanukovych fleeing to a welcoming Russia in February 2014.

Unfortunately for Ukraine, the situation regarding property rights has not changed despite the Maidan revolution. Whereas there may be more competition from civil society, real diffusion of power remains difficult to envision as a reality, and property rights remain a low priority for the new government. This can be seen in the extension of the ‘temporary’ land sale moratorium through 2017, meaning that a true market remains out of reach in agricultural land. Similarly, many of the same elites who were active prior to the revolution are once again in power, and Ukrainian oligarchs have been successful in continuing to exert pressure on the government to resist broad-based property rights. In sum, Ukraine's move toward property rights remains on hold as the political system continues to be shaken up from inside.