The aim of economic reform is to provide a framework of laws and institutions that can channel investment and production in competitive directions and support economic growth. Liberalization of markets, stabilization of the macro economy, and privatization of firms in Russia are vital steps in providing the incentives, information, and market discipline needed for improved economic performance. But until Russia extends property rights in land and acquires the administrative capacity to provide essential market-supporting institutions, newly privatized firms will not have the incentive to provide greater transparency or face the discipline of competitive markets.

Investment, structural change, and renewed economic growth will emerge if self-interested owners and investors are able to design self-enforcing institutions of corporate governance, build the legal institutions required to enforce contracts, and provide secure and transparent capital markets. The experience of Eastern European countries shows that a major redefinition of the role of the state and a minimum level of state capacity (to provide market infrastructure) are necessary to support market reform.

Alternatively, in the absence of market-supporting infrastructure, the Russian state itself could be "privatized" as the major source of economic rent. In this case, future Russian economic growth could be based on an interlocking network of large, well-connected conglomerates at the center and an insecure and rapidly changing periphery of small service firms. The resulting inequality of ownership and access would generate social discord and a high level of political uncertainty. Thus, if the state is unable to provide market-supporting legal, financial, and administrative infrastructure, the economic result is likely to become not market competition, but a system of "political capitalism."

Abarbanell, J., and A. Meyendorff in press Bank privatization in post-communist Russia: The case of Zhilsotsbank. Journal of Comparative Economics.

Blasi, J., M. Kroumova, and D. Kruse 1997 Kremlin Capitalism: Privatizing the Russian Economy. Ithaca, NY: Cornell University Press.

Boycko, M., A. Shleifer, and R. Vishny 1995 Privatizing Russia Cambridge, MA: MIT Press.

Brown, J.D. 1997 Asymmetric Information and Managerial Labor Market Inefficiency in Transition Economies. Paper presented at the Annual Convention of ASSA, January 4-6, New Orleans, LA.

Ericson, R. 1991 The classical Soviet-type economy: Nature of the system and implications for reform. Journal of Economic Perspectives 5(4): 11-27.