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Introduction

Many researchers have written about the economic transition of the former Communist countries of Eastern Europe and the former Soviet Union.(1) The experiences of these countries have been compared and contrasted in an attempt to identify the best policies for economic transition. While commentators have varying views as to what factors have contributed to the success or lack of success in certain regimes, one factor stands out as being an irrefutable obstacle in the path of market reform--the absence of well defined property rights.(2)

Not everyone has recognized the importance of well-defined property rights in this process. Indeed, much of the literature on market reform has focused on privatization as providing the impetus for the development of Western-style economies. However, privatization is simply the transfer of property rights from the state to others; for these property rights to be "well defined" they need to be protected by institutional arrangements in the economy. While several papers have dealt with this aspect of property rights,(3) its importance has frequently been subordinated to other issues surrounding transitional economies.(4) Furthermore, the interaction between property rights questions and other aspects of transition have not always been examined explicitly. The objective of this article is to provide a framework for understanding the important role that well-defined property rights plays in economic transition and development. This framework will then be applied to the experience in Russia in an attempt to determine how privatization affects economic efficiency when property rights are ill defined.

The first part of the article examines the nature and importance of property rights for the functioning of a market economy. It then goes on to examine the transition from a centrally planned system to a market economy, and highlights the role played by property rights in this transition. The final substantive section applies what we have learned about property rights and transition to the case in Russia, with the view to offering some insights into the connection between property rights, privatization and economic efficiency.

II. Well-defined property rights

Understanding property rights is fundamental to understanding how an economy functions. Property rights may be defined in a variety of ways, but essentially they refer to the rights of economic agents to the benefits that flow from assets. These rights embody several characteristics, of which three are particularly notable: exclusivity, transferability and quality of title.(5) Before the state or an individual is said to have a property right over some asset, it (he or she) must be confident that others can be excluded from using the asset. The concept of ownership of an asset typically entails the ability to transfer it, and the ability to transfer an asset depends largely on the quality of the title to the asset.

Property rights need to be well defined before individuals, firms, or states ("economic agents") will make any decisions concerning their property. For this to occur, who owns the asset must be clear and the right must be protected by some sort of rule of law ...