Social capital and institutional environment

Social capital is the result of many relationships between people. It gives a significant economic effect under certain circumstances and problems for society in others. What is the difference, where is the line that separates the effect from the same phenomenon?

First of all, social capital allows for the formation of trust between people. And it is important to distinguish between people's trust in a small social group and in society as a whole. The economic effect arises precisely with the increase of trust between people at the scale of the whole society as a whole, when strangers do not see the risks of communication, concluding deals among themselves.

The fact is that distrust generates an entire infrastructure to reduce risks, which increases costs. Numerous lawyers and accountants are beginning to participate in transactions, citizens are beginning to use security structures to accompany the implementation of contracts.

All this diverts a lot of resources from the economy and makes many business projects inappropriate because of the excess of risks over possible profits. Social capital creates an environment of mutual trust and reduces the costs of business.

Historically, social capital arises along with a multitude of institutions, in some cases as an addition to them, in others it occupies segments of public life from which the state regulator has retired. An example of the tremendous effect of social capital can be Sweden, where according to the world opinion poll 74% of people tend to trust others. Thanks to this social environment, social capital reduces costs in Sweden and is a tangible incentive for economic growth. A bad example is Russia.

Only 23% of people there trust the people around according to the world opinion poll. A low level of trust in society pushes people to create a multitude of protective mechanisms. They hire accountants, lawyers and security guards to accompany transactions, medium and large businesses are forced either to turn to the siloviki behind the roof or to integrate into power and government structures.

As a result, the effect of quasi-public ownership and conditional private property appeared. Business, hanging in dependence on the siloviki, loses control over the assets and begins to depend on them. How did the difference in social capital in different countries become possible? In Sweden, inclusive institutions were established, the operation of which is supported by democratic mechanisms. One person or group of persons can not seize power and property in the country.

Private property is not only protected from encroachment, but is distributed among a multitude of owners who are political actors. As a result, a positive feedback is created between economic and political institutions. Citizens as owners are interested in preserving their property status and choose politicians who guarantee property rights. Any attempt by a group of people to carry out laws that destroy the institution of private property is blocked by the principle of the distribution of power.

It is not possible to create a mechanism for racketeering and seizing property. This creates a favorable institutional environment for sustained and sustained economic growth. As a result, there is an incentive to invest in technological capital.

Any investment in human capital, primarily in education, leads to the development of social capital. The growth of trust in society creates an additional effect of economic growth. Another mechanism of action of social capital is pronounced in post-communist countries. There, during the time of the socialist camp, the property was state property. Moreover, the socialist regimes tried to control the entire social life with the help of the state and the party apparatus. Needless to say, it was impossible. Any control and monitoring system ceases to work as a result of increasing scale.

This led to the creation of a multitude of segments where state and party regulation could not be reached.In them, the absence of the state allowed the accumulation of social capital, very often in extremely ugly forms. For example, the system of blat. Since all products and consumer goods are distributed through state bases and shops without market regulation, there is an incentive to make many acquaintances and distribute scarce goods to their acquaintances. Such communities were formed around the centers of state distribution of goods, they were of a stable nature and were closed.

During the Gorbachev period, the rebuilding of the blat community began to open slightly and trade in scarce goods at speculative prices. So began to appear the first Soviet millionaires. Then the cooperative movement began, and new closed communities emerged.

The director of the enterprise created a co-operative from the chiefs, who used the resources of the enterprise from the state budget for the production of goods and services, and the members of the community appropriated the proceeds from the sale themselves. This rather effective mechanism for the socialization of losses and the appropriation of profits accelerated the collapse of the Soviet economy.

So in the post-Soviet space there was an interesting situation. State property, extremely concentrated under the party control of the Communist parties, began to creep through various communities in a concentrated form. The lack of a legal environment in post-communist countries, life by concepts contributed to the creation of a legal vacuum.

Old legal institutions lagged behind a rapidly changing life, but were suitable for racketeering. New institutions that were supposed to protect private property and distribute power over a multitude of decision-making centers were not created.

This set of factors: social capital in the form of many closed groups that have passed through the blat, cooperative movement and are of a sustainable nature, an undeveloped extractive institutional environment, life according to concepts, and not according to the law and formal rules, have allowed Mafia states to appear in many post-Soviet countries.

This happened through beneficial feedback for corrupt officials and criminal communities. Having earned money on the blat, cooperative movement and criminal activity, the groups invested in political capital, bribing politicians or buying posts for their people.

The seized management positions due to the lack of inclusive institutions allowed to influence various decisions in favor of the incomes of corrupt officials and criminal groups. The extracted assets were immediately invested in political capital and so on until the mafia groups came to power in a number of post-Soviet countries. Since in Soviet times state ownership was heavily concentrated, the new mafia groups could easily, by means of siloviki and racketeers, put all assets in their countries under control.

The entire legal system in these countries - the courts, the investigation, the siloviki - are working for these mafia clans. Due to this, conditional-private ownership and quasi-public ownership appeared in them. For example, public corporations in Russia should formally work in favor of the state budget, but all decisions in them are made in favor of private individuals.

Private companies should work for shareholders and investors, but decisions are made in favor of the security forces controlling them. In both cases, decisions are made extremely inefficient and this affects the slowdown in economic growth.

So social capital in the case of Sweden contributed to economic growth, and in the case of Russia, Romania, Hungary and others led to a slowdown in economic development in comparison with the developed countries. What is the difference? Where is the point leading to a significant difference? Everything depends on economic incentives, and they are determined by the institutional environment.

In Sweden, individual groups could not influence the political process and seize power due to sustainable democratic procedures.This blocked the opportunity to enrich through the redistribution of resources, the only way to ensure welfare was creative work.

In this case, social capital, trust between people reduced costs for entrepreneurs. This was reflected in the additional participation of social capital for sustained sustained economic growth. In post-Soviet countries, the initial incentive was the redistribution of state resources first, and then private assets. This brought more income than creative work.

The lack of inclusive institutions and democratic mechanisms opened the door to mafia groups for power. The seizure of power in turn made it possible to put all the assets under control. So the difference in the institutional environment had significant long-term effects in different countries.