Privatization in Eastern Europe: The Impact on Economic Development through the Protection of Property Rights

The transitional economies of Eastern Europe are in the long process of making the switch of a planned economy to a more capitalist economy. An important aspect of a capitalist economy, if not the most important aspect that characterizes the degree of capitalism, is the protection of private property rights. It is well documented that a weak protection of private property rights will lead to fewer investments, in particular in real estate, given the fact that real estate is very illiquid. On the other hand investments in real estate are essential for the economic development of a country, given its importance as a capital good. Building on earlier research, the author will explore the success of privatization legislation in some Eastern European countries. Using data on real estate investment returns and variables proven to indicate protection of private property rights, the author examines the impact of the separate privatization legislation. Indeed, in a previous paper it was found that legal institutions are an important factor in explaining investment returns. Given the fact that different countries in Eastern Europe have passed different privatization laws, it is time to try to identify which one has been the most effective. In the previous study the following model was used: Returns = É(Institutional Variables). Although it is not claimed that institutional variables explain returns alone, it is expected that there is a significant relationship. From this analysis it will hopefully become possible to make a qualitative judgement on the future success of these transitional economies and to make suggestions for changes that some countries will need to make.