The Challenge of the Commons: Estonian Housing Privatization

By Scott, Charles E.; Derrick, Frederick W. et al. | International Advances in Economic Research, November 1999 | Go to article overview

The Challenge of the Commons: Estonian Housing Privatization


Scott, Charles E., Derrick, Frederick W., Kolbre, Ene, International Advances in Economic Research


CHARLES E. SCOTT [*], FREDERICK W. DERRICK [*] AND ENE KOLBRE [**]

Housing privatization directly affects each individual and raises Significant questions beyond those raised in business privatization. When businesses are privatized, the responsibilities are transferred with the ownership. Housing privatization transfers the ownership of and responsibility for the benefits and costs for the internal space of a flat. However, ownership of and responsibility for the common areas and systems in the large buildings--hallways, roofs, heating, lighting, or exterior walls--are not transferred. These buildings provide a classic scenario for the tragedy of the commons. Who gets the benefits and who pays the costs? How is the externality internalized and responsibility transferred? This paper evaluates the housing privatization process in Estonia with emphasis on the problems of maintenance and the formation of dwelling owners associations. Recommendations for resolution of the tragedy of the commons are provided. (JEL P00, H00, D7)

Introduction

As Estonia moves toward a market-oriented economy, its history plays a role with some current citizens having experienced property rights allocation under both a command and a market economy. The most recent precedent for a market economy followed the end of World War I when Estonia won its independence from both German and Russian domination. The Hitler-Stalin Pact of August 23, 1939 reestablished Russian domination of Estonia, and Estonia was declared the Estonian Soviet Socialist Republic on July 21, 1940. This ended Estonia's market economy as housing, industry, banks, and land were nationalized without compensation. Estonia remained a part of the Union of Soviet Socialist Republic until declaring its independence on August 20, 1991.

With independence, Estonia announced its return to a market economy. Under the Soviet system, there was no distinction between private property and public property since the state, in theory, was owned by the people. With independence, the government retained its ownership while the individual citizen's ownership of the collective property disappeared. This creates the need to transfer ownership of significant amounts of property from the government to private citizens since capitalism distinguishes between private and public ownership and relies on private incentives for its success.

This paper will address the issue of reestablishing housing property rights. This emphasis is in contrast to the majority of the literature that addresses enterprise and industry privatization. Housing privatization differs from enterprise and industry privatization in that ultimate ownership is far more widely distributed. It involves a greater number of transfers, directly affects each individual, may transfer only partial control, and transfers this control to new owners who are unlikely to be trained in property management.

Privatization of individual flats has progressed rapidly in Estonia, as discussed in the second section. However, these flats are typically located in multiunit housing structures with common areas and systems. This leaves the transfer of the responsibility incomplete and provides the real potential for the tragedy of the commons. The main focus of this paper lies in the third section. A critical issue is whether there will be a process for renovating and maintaining the common space and systems found in the multi-dwelling structures throughout Estonia. A crucial component of the legislative resolution of this externality problem is the formation of dwelling owners associations (DOAs). Without such associations, the property rights to the common areas remain uncertain and maintenance continues to be deferred. The fourth section includes a discussion of why DOAs can be slow to form and why the tragedy of the commons is expected to persist. Recommendations for resolving the tragedy of the commons and encouragi ng DOAs to obtain and exert property rights are presented in the fifth section. …

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