The Transition Process in Postcommunist Societies: Toward a Political Economy of Property Rights

Economists have long recognized that institutions shape incentives and therefore have an enormous influence on economic growth, but economists have only recently been concerned with understanding the forces that may hinder the emergence of efficient institutions. Because of a lack of secure property rights—the rule of law—many countries remain poor. This paper addresses one issue pertinent to institutional change: the obstacles to the demand for the rule of law in the transition economies.1 After the collapse of communism and the mass privatization in 1992–94 of state assets in Russia (the so-called big bang), the market in Russia could fairly be characterized as a “‘wild’ market outside the law” (Rose 1993, p. 430). Many argued that out of this wild market, a political constituency for the rule of law would emerge (for example, Boycko, Shleifer, and Vishny 1995), that is, those to whom state assets had been transferred would become that political constituency. Mass privatization would initiate a demand-driven evolution of institutions toward the rule of law. This did not happen. Despite the eventual passage of a blizzard of laws, most observers agree that a strong constituency for their enforcement, or for the rule of law, has not yet emerged in Russia and many other transition economies (see, for example, Black, Kraakman, and Tarassova 2000; Gray and Hendley 1997; Pistor 1999). In Russia, the last 10 years have witnessed not the hoped-for burst of entrepreneurship, but a massive stripping of assets. Russia has become a net capital exporter. Capital flight from Russia averaged, depending on the measure used, more than US$15 billion to US$20 billion per year during 1995–2001, or 5 percent of gross domestic product (Loungani and Mauro 2001; Reuters February 20, 2002). What explains the gap between what emerged in the 1990s and what the reformers hoped would emerge? In earlier work (Hoff and Stiglitz 2003, forthcoming), we provided an explanation based on simple models in which individuals make both