Decentralization reform as the origin of Ukraine’s resilience

In February 2022, Russia escalated its war against Ukraine, yet for almost two years, Ukraine has demonstrated unprecedented resilience. Observers argue that the decentralization reform initiated in 2014 played a pivotal role in fostering such resilience by limiting the central government's control over regional institutional decision-making. Under this reform, local communities were granted the right to retain a portion of the taxes paid by residents and businesses, leading to a notable increase in their financial autonomy. Additionally, citizens gained the ability to elect representatives to local governing bodies. The subsequent Russian invasion of Ukraine, as well as the preceding COVID-19 pandemic, showcased Ukrainians' remarkable capacity to efficiently organize and collaborate at the local community level. The aim of the research is to investigate the connection between decentralization reform and the resilience of Ukrainians to crises. To this end, we first estimate the economic and social effects of decentralization reform and then examine the link between these effects and community resilience. The primary hypothesis posits that the transfer of power to local communities significantly enhances the financial and social empowerment of communities, consequently fostering resilience in the face of crises. To investigate this, the study employs a comprehensive empirical strategy utilizing fixed effects estimations using data from nearly 1500 communities in Ukraine as well as at the regional level. The main empirical findings suggest that the decentralized governance model yields significant positive effects on socio-economic and financial outcomes at the local level, including household finances, business activity, employment, and socially responsible expenditures. Furthermore, we show both empirically and theoretically that these positive outcomes contribute to the greater resilience of Ukrainian communities through three main channels. First, by strengthening Ukraine's local governments, augmenting their ability to provide public services and bolstering their legitimacy through increased public engagement. Second, by increasing the budgetary autonomy of communities, enabling them to better fulfill duties such as healthcare, education, and infrastructure investments. And third, by providing more experience in local democracy and accountability, preparing them to defend their communities against invasion.