Property rights

Property rights refer to the exclusive rule regarding a property which secures the owners will using a property. It describes a clear boundary that the owner has on each property, provides permission on creating exclusive profit using their property, and offers the property transfer process acknowledged by others. Therefore, it defines ownership over the property in the society without worrying about loss by others.

Many economists have pointed out that the idea of property rights has become one of the most important institutions of the market economy and economic growth. By offering the autonomy of the property owner in the decision making and managing the usage, several characteristics have emerged that facilitate the impact on economic growth. First, it assigns clarity of allocation so that people can reliably plan for the most efficient usage of property resources. Otherwise, the ‘tragedy of commons’ may arise and promote excessive exploitation of resources may happen. Second, it offers protective rights over unapproved trespassing to give stability to the owner’s management. Third, it brought the principle that ownership should not violate other people’s property rights. Third, it allows the owner’s willingness to transfer the property to others. Finally, it lowers the transaction disputes between individuals and promotes owners to consider the long-run profits of their property. Therefore, property rights support the market economy as a significant micro-level institution.

It is important to build credible commitment to make the idea of ‘property rights’ work in the real world because it is based on a social agreement that everyone should have protected. Third-party enforcement such as states is required in the initial stage of building a credible commitment mechanism. States should organize, act, and enforce the idea of property rights in a fair stance. Moreover, states also should be limited in case of state fell in the dispute. Having balanced control of the third-party enforcement in property rights helps to build credible commitment and economic growth. Applying power limits to the government structure can be a good way to create balanced power and credible commitment. The empirical evidence of building credible commitment in a limited government scheme was found in history.

According to North and Weingast (1989: 803), the development of Britain’s modern economy depended on ‘secure property rights and the ‘elimination of confiscatory government’, which The Glorious Revolution followed in 1688. In addition, the government would honor the financial agreements after the Revolution. Thus, it facilitated the productive use of resources without worrying about the depredations either by individuals or the government.

Transition in property rights in Russia tells the importance of balanced enforcement of property rights and credible commitment to economic growth. Gans-Morse (2012) points out that the property rights are under threat earlier by the private extortion racket and later by the state. Although the Russian constitution legislated formal property rights, it was not effectively working due to the weak enforcement mechanisms. Russian oligarchs have commonly used private extortion rackets to protect their property in a lawless environment. Although they shifted to rely on formal legal institutions nowadays, the state’s enforcement power is unevenly strong. Accordingly, state violation of property rights increases by the state’s intended inspections for corporate raiding. This phenomenon describes the difficulty in building credible commitment in Russia. The economic performance of Russia is insufficient because of a serial threat to property rights.

Although both Russia and China experienced a transition period from collective ownership to individual property rights, the economic outcome is very different. China made it possible by having a credible commitment for investors, even though the legal framework and moral standard did not sufficiently back it up. It suggests that having a credible commitment to be effective in reality is crucial for property rights and the efficient use of resources.

It suggests challenging ideas for education subsidy practices in Korea since the university might be exposed to the lack of property rights over the educational equipment aided by the government. Korean government keeps controlling the educational equipment offered to the university in its purchase, usage, and depreciation to hold the accountability of government funds. Sometimes universities cannot use government-funded equipment without authorization even though it is given to the university. It could confuse the function of property rights and clarity of allocation and hinder the efficient usage of the fund itself. Therefore, it should be considered to have the other way to enhance the accountability of government funds and offer clarity of allocation for the efficient usage of resources.

Kim Junghyun

References:

Gans-Morse, J. (2012). Threats to property rights in Russia: From private coercion to state aggression. Post-Soviet Affairs, 28(3), 263-295.

North, D. C., & Weingast, B. R. (1989). Constitutions and commitment: the evolution of institutions governing public choice in seventeenth-century England. The journal of economic history, 49(4), 803-832