THE ROLE OF SOCIAL CAPITAL IN ECONOMIC DEVELOPMENT OF TRANSITION COUNTRIES

Current interest in the concept of social capital in the field of economic development stems from the limitations of prevailing economic approach toward the achievement of the basic developmental goals - sustained growth, equity, and democracy. The purpose of the current study is to analyse the effects of social capital and related institutional factors on the development process. Both theoretical and empirical findings suggest that these effects could be different in transition countries, compared to mature market economies.


Introduction
The concept of social capital is attracting increasing interest within the empirical research on economic growth and development. When studying differences in the levels of income and development among the peoples and countries, it appears that these enormous differences (which are growing all the time) cannot be explained by traditional theories of economic growth (Solow neoclassical model, convergence theories, etc). Although the neoclassical growth theory, including more recent versions of endogenous growth theory (Lucas 1988, Barrow 1991, Romer 1990, has proved to be an extremely useful approach for studying economic growth, it appears entirely inadequate as an explanation for present differences in countries' levels of development. The basic 62 problem of the growth and productivity models mentioned above is that they do not assign any role or explanatory power to differences in the social factors and institutions of different societies (Hjerppe 2000).
In short, social capital refers to the internal social and cultural coherence of society, the norms and values that govern interactions among people and the institutions in which they are embedded. Social capital is like the glue that holds societies together and without which there cannot be economic growth or human well-being. Increasing empirical evidence shows that social capital is critical for sustainable human and economic development, and also for poverty alleviation. The discussion on the role of social capital in economic development is of particular importance in the case of post-communist transition countries, as many of the problems of transition can be seen as a deterioration of the rules, norms and trust -i.e. social capital.
The purpose of the current study is to analyse the effects of social capital and institutional factors on the development process, with a special focus on European post-communist transition countries. First, a brief overview of the concept of social capital is presented. The second part of the paper analyses alternative channels through which different elements of social capital could influence development outcomes. The third part deals with the question why many theoretical findings about the relations between social capital and development do not hold in the sample of transition countries. A proposal for further research on the current topic concludes the paper.

The Concept of Social Capital
The active research of the concept of social capital started in the late 1990s, when there was a resurge of interest in the social and institutional dimensions of economic development. Work in this field was pioneered by Hirschman (1956) and Adelman and Morris (1967), but in general the issues they raised were crowded out until the late 1980s. The turnaround in the 1990s was influenced mainly by the fall of communism, the ostensible difficulties of creating market institutions in transition economies, the financial crises in Latin America and East Asia, and the enduring scourge of poverty in the developing world  -orthodox theories had neither anticipated these difficulties nor offered a safe passage through them.
The concept of social capital is used differently by sociologists, political scientists, and economists. Much of the controversy surroun-ding the concept has to do with (1) its application to problems at different levels of abstraction and (2) its use in theories involving different units of analysis (Portes 2000). Its contemporary systematic development by the French sociologist Bourdieu (1979Bourdieu ( , 1980 and American sociologist Coleman (1988Coleman ( , 1990 centred on individuals or small groups as the units of analysis. Both scholars focused on the benefits accruing to individuals or families by virtue of their ties with others. This kind of social capital was in the literature referred as "informal". Most of the subsequent literature was also focusing on the types of resources that persons receive through their social ties. Particularly in sociology, social capital became defined as a source of social control, family-mediated benefits and other resources mediated by non-family networks (access to jobs, market tips, or loans). The general framework for studying social capital by sociologists is presented in the Figure 1.
When the concept of social capital was exported to other disciplines (political sciences and economics), it became an attribute of the community itself. In this interpretation, the benefits of social capital accrued not so much to individuals as to the community in the form of reduced crime rates, lower official corruption, and better governance (Portes 2000: 535). This kind of social capital is usually referred as "formal". Social capital as a property of communities (nations) is qualitatively distinct from its individual version, and this distinction explains why the respective literature has become divergent.
The most famous advocate for this approach is Putnam (1993Putnam ( , 2000. In his interpretation, social capital is defined as a cultural phenomenon denoting the extent of civic mindedness of members of society, the existence of social norms promoting collective action and Structural aspects of social capital (sources of social capital)

Network approach
Cultural aspects of social capital (outcomes of social capital) n Attitudinal approach Figure 1. Components o/social capital the degree of trust in public institutions. Like other political scientists, Putnam focuses on the connection between social capital and the development of the political institutions that establish and uphold the rule of law and thus greatly facilitate economic exchange (Raiser 2001: 2).
A third and most encompassing view of social capital includes the social and political environment that enables norms to develop and shapes the social structure. In addition to the largely informal, and often local, horizontal and hierarchical relationships of the first two concepts, this view also includes the more formalized institutional relationships and structures, such as government, the political regime, the rule of law, the court system, and civil and political liberties. This focus on institutions was drawn on by North (1990) and Olson (1982), who have argued that such institutions have an important effect on the rate and pattern of economic development. According to a new institutional theory (North 1990), for economic efficiency it is not sufficient simply to study the price system: for a price system to function effectively, it is also necessary to have the right institutions. Olson has also stressed the negative aspect of social capital, showing how 64 strong lobbying organizations can benefit their own members, but can have adverse impacts on economic development through a special interest group influence on policymaking.
The three views of social capital broaden the concept from mostly informal and local horizontal associations to include hierarchical associations and formalized national structures. Yet they share several common features (Grootaert 1998): • all link the economic, social, and political spheres. They share the belief that social relationships affect economic outcomes and are affected by them • all recognize the potential created by social relationships for improving development outcomes, but also recognize the danger of negative effects. Which outcome prevails depends on the nature of the relationship (horizontal versus hierarchical) and the wider legal and political context • all focus on relationships among economic agents and how the formal or informal organization of those can improve the efficiency of economic activities • all imply that "desirable" social rela-tionships and institutions have positive externalities. Since these cannot be appropriated by anyone individual, each agent has a tendency to underinvest in social capital; hence, there is a role for public support of social capital building. Different perspectives of social capital described above are taken to be complementary rather than alternative, each offering a different view of the institutions and process at work. Such a multi-dimensional perspective is seen to be an aid to better understanding the role of social capital in development. As such, different combinations of these dimensions might yield different outcomes. For example, while poor may possess some forms of social capital (usually "bonding" social capital), they may well be lacking in others, particularly those providing access to formal institutions. Further, the less the civil (horizontal) social capital, the greater is the need for governmental (vertical) social capital.
Different components of social capital might be significant in different societies in different ways. The inter-relationship between civil and government social capital vary as the development process evolves over time. It is quite usual to think that economic development and increasing government social capital "crowds out" civil social capital. Therefore, at different phases of development, there are different optimum combinations of civil and government social capital (Meier 2002). This implies that comparative empirical research on social capital would be more useful among countries with similar development levels. Some authors, however, argue for synergy. The idea of synergy implies that civic engagement strengthens state institutions and effective state institutions create an environment in which civic engagement is more likely to thrive (Evans 1996).

Empirical Findings about the Relationship between Social Capital and Development
Although it is widely agreed that social capital is relevant to development, there is no agreement about the particular ways in which social capital aids the development process, how it can be generated and used, or how it can be operationalized and empirically studied. Regardless of the complication of conceptualising and measuring social capital, numerous studies have tried to reveal the impact of social capitalon economic growth and welfare. For instance, the World Bank formed the credibility index as a measure of social capital, which was positively related to a higher level of economic growth and investment (World Bank 1997).
Hjerppe (2000) based on data of 27 countries and found trust as a component of social capital to be positively correlated with GDP per capita. An empirical study of Rodrik (1997) showed that the index of institutional quality explains well the rank ordering of East Asian countries according to their growth performance. Woolcock, Printchett and Isham (2000) have analyzed data on 90 developing countries for the years 1955-1997 and found that per capila growth rates positively correlate with a more equal income distribution, higher levels of civil and political liberties, and better governance. Kaldaru et al. (2004) have studied the effect of social capital on welfare based on the European Union member countries and transition countries. They have found that both institutional environment and the equality of income distribution have a positive impact on the welfare, and it has also appeared that social capital works better for highly developed countries. The last result is also supported by Raiser et al. (2001), who argue that social capital can be created more easily in prosperous economies, and it is therefore difficult to distinguish between the causes and effects on the link between social capital and growth. When investigating the link between social capital and growth during transition, Raiser et al. (ibid.) have also found that unlike in market economies, in transition countries generalised trust is not positively related to growth, while participation in civic organisations shows a positive correlation.
However, as different authors use quite different sets of indicators of social capital in their empirical research, comparisons of the results are rather difficult. While the World Bank is currently trying to develop a complex and exhaustive index of social capital, several authors have started again to disaggregate social capital, both conceptually and empirically. Advocates of the disaggregated approach (Paxton 1999, Stolle and Rochon 1998, Knack and Keefer 1997, Knack 2002 emphasize, first, a basic distinction between associational life and its potential effects on generalised trust and reciprocity and, second, heterogeneity among groups (Knack 2002: 772). As we will see in the empirical part of the current paper, these distinctions are extremely useful in the case of transition countries. In general, the aspects of social capital that are conceptually identified with generalized reciprocity are associated with a better governmental performance and development outcomes. In contrast, aspects of social capital identified with civic engagement are usually unrelated to performance (ibid.).
When attempting to apply the concept of social capital to problems of economic development, the basic distinction should be made between correlation and causation. One must be cautious in assessing the role of social capital as an independent causal factor in development or in generalising from successful examples. For today, quite a large number of both positive and negative examples have been documented in the literature. Yet the question remains about the generalis ability of these cases, or the possibility of creating similar bonds in places where they do not exist. In my opinion, some generalisation would be possible, but the transmitting of positive cases into other settings would not, as the context matters a lot. As Portes (2000: 537) pointes out, "instances of successful developmental outcomes driven by social capital have been preceded by protracted and unique historical processes requiring an evolution of years or decades". The same opinion is supported by the Putnam's extensive study on institutional development in Italian regions (Putnam 1993).
One should also keep in mind that social capital consists only of the ability to channel resources through social networks, but not of the resources themselves. Contrary to the expectations of some policy-makers, social capital is not a substitute for the provision of credit, material infrastructure, and education -although it can increase the yield of such resources (Portes and Landolt 2000: 547).

Theoretical Mechanisms of Influence
What is the actual mechanism behind the links between social capital and economic prosperity? There are several possible explanations. Both in Putnam's and Coleman's interpretations, social capital facilitates economic exchange, although the mechanisms through which this is achieved differ fundamentally. According to Putnam (2000), the social networks generated through participation in local associations, voluntary organisations and groups open up channels for the flow of philanthropy and altruism, which, in turn, foster norms of individual and general reciprocity. In Bourdieu's and Coleman's view, social capital may facilitate economic transactions between individuals, but this may often happen at the expense of excluding others. Similarly, it is not clear whether a high degree of social capital at the local level translates into a benefit for the wider society (Raiser 2001). For that reason, many authors distinguish between different types of organisations, arguing that "bridging" networks are more likely having positive externalities to the society as a whole, compared to the "bonding" ones (for definitions of "bridging" and "bonding" social ties, see, for example, Franklin 2003: 350).
In economic development literature, it is argued that social capital contributes to development outcomes in a manner analogous to other types of production factors (physical capital, labour, technology and human capital), and it also influences the rate of accumulation and quality of these other types of capital, especially human capital (Meier 2002). First, social capital complements the market in its allocation and distribution functions. Most significantly, social capital can raise total factor productivity, because the quantity and quality of social capital affect managerial capability in both the private and public sectors. Managerial capability improves when social capital reduces infonnation costs, transaction costs, and risk, and helps to avoid moral hazard and adverse selection (Meier 2002). But, ironically, the efficiency of markets itself may also undermine the existence of networks in the long term. If the development path is supported by a solid court system and contract enforcement, large anonymous markets can be more efficient than networks, with gains for all participating economic agents (Grootaert 1998). Relations between social capital and productivity are unfortunately not much empirically studied. However, one example in this field is the study of Cherchye and Moesen (2003), which analyzes the relationship between institutional infrastructure and overall country productivity for a sample of 57 countries, including 26 DECD members. Second, civil social capital affects the accumulation of human capital. Social capital is like a filter through which human and financial capital flow from the parents and the community to the child, producing better educational outcomes (for literature overview, see Parts 2003). Several studies have shown that schools are more effective when parents and local citizens are actively involved. Also, doctors and nurses are more likely to show up for work and to perform their duties attentively where their actions are supported and monitored by citizen groups (http://www.worldbank.org/). Still, it should be mentioned that the historically and cross-sectionally strong correlation between human capital acquisition and the levels of development has not yet been demonstrated empirically for social capital. No country has achieved sustained economic growth without high levels of education, but some highly developed economies have low and arguably declining levels of social capital-measured, for example, through rising crime rates, declining family and kinship cohesion, and falling trust in institutions (Grootaert 1998).
Third, social capital is also important for poverty alleviation. Securing access to markets is a crucial step along the path to economic advancement for the poor. However, poverty reduction policies will not succeed when they fail to address social and economic isolation, where individuals have few connections to networks and resources that would help in finding employment. In this view, social capital is complementary to formal institutions in supporting a complex division of labour (Raiser 2001: 2).
Fourth, poverty alleviation is closely related to the problem of income distribution and social cohesion. The work of Rodrik (1999) and Easterly (1999) has shown that economic growth in general, and the ability to manage shocks in particular, is the twin product of coherent public institutions and societies' ability to generate the so-called "middle-class consensus", the latter one defined as a higher share of income for the middle class and a low degree of ethnic polarization (Easterly 1999). Ritzen, Easterly, and Woolcook (2000) argue that key development outcomes are more likely to be associated with countries that are both socially cohesive and governed by effective public institutions. Social cohesion is essential for generating the trust needed to implement refonns. Citizens have to trust that the short-term losses that inevitably arise from reform will be more than offset by long-term gains. If there is low trust and weak communication, society is divided into several groups with conflicting aims, whose cooperation is rather difficult. The better-organized segments of society may well succeed in affecting economic policy to their Objective structural factors ----t Stronger links --~ Weaker links own advantage and to the detriment of other groups or even to society at large. An additional possible impact channel from social capital to economic development goes through institutional environment and the quality of governance. First, social capital can broaden government accountability (e.g., by preventing state capture and corruption)._ Second, social capital may facilitate agreement where political preferences are polarized, which can be particularly important where policy innovation in the face of new challenges (e.g., transition from communism to democracy and market economy) or crises is required (Knack 2002: 773). Higher institutional performance, in turn, means lower risks to investors, increasing therefore foreign investments and growth.

Generalised Structure for Further Research
Taking into account both theoretical and empirical findings described above, I have developed the following framework for the further analysis (see Figure 2). Sources of social capital are defined through a dimensional ap- proach and include civicness, participation in informal networks and voluntary organisations, generalized trust and norms of reciprocity. Basic dimensions of governance (institutional environment) are voice and accountability, political stability, government effectiveness, regulatory quality, rule of law, and corruption control (Kaufmann and Kraay 2002). Indicators of economic development include, besides per capita GNI levels and growth rates, also several socio-economic measurements like HDI, income inequality, and others. Most important objective structural factors are education, geographical concentration, state size, history (e.g., communist past), polarization of society, etc. (Portes and Landolt 2000: 537).
One problem with this framework is that many elements in this system are simultaneously both sources and outcomes. As discussed already above, causes and effects of social capital are not well disentangled at community level, giving rise to much of circular reasoning. For example, collective social capital or "civicness" is said to lead to a better governance and its existence is simultaneously inferred from the same outcomes. However, this is the reality, which probably cannot be overcome without losing any important information about the research object. The following empirical analysis will investigate some of the relations presented in Figure 2.

Social Capital in Post-Communist Transition Economies
Several researchers (Hjerppe 2000, Raiser et al., 2001, and others) have noted that the level of social capital in post-communist countries is low and this could be an important development obstacle. Lack of social capital has been claimed to be the main reason for slow GDP growth in post-socialist countries, given the amount of physical and human capital available at the start of the transition. It has been argued that the old communist regimes built physical and human capital, but destroyed social capital. If social capital is a substantial factor of production, and if the elasticities of substitutions between social capital and other factors of production are limited, then the low level of social capital leads also to low GDP growth rates (Paldam 2000). Further, the output collapse in post-communist countries has partly been linked to destruction of the old state-sector middle class, before a new middle class could be established. However, unequal income distribution has a negative effect on social cohesion, the latter influencing economic growth and society's ability to manage shocks.
Data from the World Values Survey show that the degree of trust and civic participation as basic indicators of social capital are significantly lower in transition countries compared to the OEeD average. Rose (1995) explains these low trust levels as a result of an "hourglass society" in which the population was divided into two groups -ordinary people and privileged "nomenclature" -both having strong internal ties at the level of family and close friends within the group ("bonding" ties), but little interaction with other groups ("bridging" ties) (Raiser et al. 2001: 10). Therefore the social circles in transition economies would seem to be smaller and more closed than in market economies, where the positive association between social networks and generalised trust is higher (ibid.).
A similar explanation holds for low levels of organisational membership. Howard (2003: 109) argues that as a result of the institutional experience of communism, with its forced mobilization and strict separation of public and private spheres, there are three main causal factors responsible for the low levels of organizational membership in post-communist Europe: 1) people's prior experiences with organizations, and particularly the legacy of mistrust in fonnal organizations, which results from the forced participation in communist organizations; 2) the persistence of informal private networks, which function as a substitute or alternative for formal and public organizations; 3) the disappointment with the new democratic and capitalist system today, which has led many people to avoid the public sphere. Together, these three factors present an account of the causal link between people's interpretations of their prior experiences and their social behavior and activities today.
An alternative explanation for social capital decline is that transformation societies are becoming more individualized and more interested in the "quest for the ideal self'. Background factors here are the breakdown of traditional family life and the isolation of individuals in society. These factors coincide with the ones prevailing in the developed world (see Putnam's (2000) argument for social capital decline in V.S.).
The low level of social capital in post-communist countries is also associated with widespread negative social capital measured by corruption and capture indexes and crime rates. The communist system needed a set of grey/ black networks to give it the necessary flexibility. These networks were tolerated, but controlled. When the communist regime ceased, the official organizations collapsed and so did most of the control systems. This allowed a 70 flourishing of the grey/black networks, which can be harmful to the operations of a market economy (Paldam 2000). Further, post-communist transition, especially in its early phase, resulted in a rapid destruction of the dominant values (ideological monism, egalitarianism, and collective property) and habits. In such a situation, a fast development of the culture of cynism and opportunism is possible, which stimulates the criminal entrepreneurship and creates negative social capital (Stulhofer 2000).

Preliminary Results of Correlation and Factor Analysis
Data used in the empirical analysis include traditional components of social capital, indicators of institutional environment and measurements of economic development. The first set of indicators (including generalized trust and special trust in different public institutions, participation in different types of organisations and civic mindedness) is taken from World Values Survey 1990-1995 (data refer to the year 1995), EBRD (2002) and HDR (2002). The second set of indicators measures institutional environment, as measured by following variables: voice and accountability, political stability, government effectiveness, regulatory quality, rule of law, corruption control (for precise definitions and composition of these indexes, see Kaufmann and Kraay 2003). Negative social capital is approximated by the state capture and administrative capture indexes (variables 21-28 in Appendix table), drawn from Hellman et al. (2000). Data of economic development used in correlation analysis are reflecting income levels and growth rate, investment risk rating, the level of poverty and inequality. These indicators originate from mixed sources, including Human Development Report 2002, World Development Report 2002and World Development Indicators 2000/2001. The sample includes 19 post-communist transition countries from Central and Eastern Europe and Former Soviet Union.
From the methodological point of view, correlation analysis and factor analysis are used for getting a preliminary evidence on the composition of social capital in transition countries, and also on the relationship between social capital and development indicators.
Results of the correlation analysis suggest that generalized trust is not related to other indicators of social capital and economic development in the sample of transition countries. This important measure of social capital correlates only with the trust in the European Union. Participation in type 1 organisations correlates negatively with civicness and trust in the media, but positively with governance and GNI per capita. At the same time, participation in type 2 organisations correlates positively with trust in implementing institutions, but unlike type 1 participation is unrelated to governance. These results justify distinguishing between different types of organisations and show also that governance influences development both directly and through social capital (type 1 participation).
In order to generalise the set of social capital indicators, factor analysis was implemented. While using the method of principal components, eight main components were distinguished out of 28 initial indicators. The results are presented in Appendix table. All components together describe 89.1 % of the whole variation in individual indicators. The components were interpreted as follows (% ofvariance described by each factor is presented in parentheses ): F1 (27.9%) -trust in representative institutions (13 variables) F2 (18.8%) -trust in the media and order institutions (6 variables) F3 (9.8%) -voter turnout and type 1 participation (2 variables) F4 (9.1 %) -contract enforcement (2 variables) F5 (7.6%) -civic mindness and trust in church (2 variables) F6 (6.6%) -? (0 variables) F7 (5.3%) -generalized trust and trust in EU (2 variables) F8 (4.0%) -trust in army (1 variable) Based on the content of factors and previous theoretical and empirical findings, it seems reasonable to exclude factors 6-8 from further analysis, the results of which will be presented in an updated version of the paper. In this case, the remaining 5 factors are still describing about 73.2% of the whole variation in individual indicators.

Conclusions
The differences in the speed of economic development among countries with similar production technologies and level of development called for introduction of new factors of economic development in the last decade of the 20th century. As economic activities are largely linked to different kinds of networks, economists have recently focused on the contribution of social capital to economic growth. At the microeconomic level this is seen primarily through the ways social capital improves the functioning of markets. At the macroeconomic level, the role of institutions, legal frameworks and the government in the organization of production are regarded as affecting macroeconomic performance.
While certain forms of social capital can have strong positive effects on economic growth and development, warning has been given that an inappropriate path of development can destroy social capital, setting off a vicious circle of social and economic decline. There is thus clearly a role for government in promoting "desirable" forms of social capita\. The public goods nature of social capital further underlines this role, as does the fact that the functioning of government itself is part of social capital in its broadest sense. However, in some respect it could be reasonable to keep social capital and institutions as alternative development factors separated. This separation allows us to make a better use of the results of case studies and micro-level experiments of sociologists. Also, in this way it is easier to distinguish between the sources and outcomes of social development factors.
Both the empirical literature and the preliminary results of the current study suggest that the relationship between different components of social capital and outcomes of economic development are not always the same in transition economies and developed market economies. Basically, generalized trust is not related to other indicators of social capital and economic development in the sample of transition countries. Income level is also unrelated to ot-her indicators of special trust, while there is a weak positive correlation with participation in typel organisations, governance, country risk rating and income distribution. Governance is positively related both to social capital (type 1 participation) and development, as suggested by theory. Also, as factor analysis separates type 1 and type 2 organisations into different factors, this result justifies disaggregating organisational membership.
In further research on the social and institutional factors of economic development, the causality problem should be addressed more seriously. In addition, as the complexity of these relations is very sophisticated and inconsistent, other empirical methods besides simple correlations and regressions should be considered. For example, factor analysis could be useful for reducing the overwhelming set of alternative social capital indicators, and structural equation modelling could be a basis for the testing of reciprocal causality. In further research, it is also important to consider in more detail the other related factors (besides different forms of capital) that could influence a country's path of economic development. First of all, these would include objective structural factors such as education, geographical concentration, history, polarization of society, state size, population density and others. Notes. This paper is prepared with the help of financial support from Estonian Sciense Foundation, grant No. 5369. As the initial component matrix was easier to interpret than the rotated matrix (rotation method: varimax with Kaiser normalization), these results base on the initial matrix. Coefficients in the table show the correlation of the individual variable and the component.