Social Capital in Transition

The cornerstone of the transformation of formerly socialist economies into market economies is the creation of a class of entrepreneurs who are willing to use markets and market institutions to support their transactions. These entrepreneurs must guide their firms through a process of restructuring, a process in which relationships formed under socialism must change to meet the demands of the market. The ability of entrepreneurs to effect such changes is inextricably linked to the composition of social capital in the economy.

Social capital consists of shared values and rules for social conduct, which enable a society to solve problems of collective action and to find cooperative solutions to difficult social and economic problems. Little is known about the creation of social capital, although it is believed to require habituation to the moral norms of society and to be transmitted by cultural mechanisms such as religion, tradition, or historical habit.

Two distinct and somewhat complementary aspects of social capital are especially relevant in transition economies--rule obedience and social trust. Rule obedience measures the tendency of people to comply with society's formal rules and use its formal institutions. Social trust refers to expectations of honest and cooperative behavior by others in the community, expectations based on commonly shared norms. The most useful kind of trust is often not the ability to work under formal authority, but the capacity to form new associations and to cooperate within the terms of reference they establish. Thus rule obedience can be usefully thought of as the willingness of individuals to accept institutions created from the top down, while trust can be thought of as contributing to the ability of individuals to create institutions from the bottom up. In the context of transition, then, social capital can work to solve problems inherent in restructuring by facilitating institution building, both from above and from below.

This project aims to identify the role of social capital in the creation and functioning of institutions to solve problems of contract enforcement in Mongolia. This transition economy is a fitting subject for research on social capital because it is in many respects a traditional society in which social arrangements can be expected to play an important economic role. But it is also a country aggressively pursuing economic reform and thus one in which firms are seeking ways to ease transactions with new trading partners. This suggests that Mongolian firms might have discovered innovative ways to use social capital to solve problems of contract enforcement.

The analysis will be based on a survey of 250 firms in the three largest cities in Mongolia--Ulaanbaatar, Darhan, and Erdenet--as well as in surrounding towns and villages for contrast.

Responsibility: Policy Research Department, Finance and Private Sector Development Division--Randi Ryterman (rryterman@worldbank.org). With Peter Murrell, University of Maryland.

Completion date: June 1999.

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