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ISET Economist Blog

A blog about economics in the South Caucasus.

Yes, We Trust!

Until the 1960s, Japan was an amazing place to live. One did not have to lock one’s house, car, or bicycle, as nobody was going to steal anything. Theft, burglary, and cheating were virtually non-existent in the Japanese society of those days. Imagine how much resources this saved, as Japanese did not have to employ guards, they did not have to install alarm systems, they even did not need to buy locks.

Moreover, they needed less police and prisons, and Japanese firms did not have to install complex control mechanisms for making sure that employees did not misbehave. In contrast, today in many shops in Japan and elsewhere a camera is directed at the cash register for making sure that the person receiving the money does not pocket it privately.

Imagine, to the contrary, a society where nobody trusts each other. Every simple transaction becomes difficult – you have to count the change you get when you purchase something, you have to thoroughly read the terms of conditions of every single contract you conclude, and you have to negotiate the price in advance whenever you purchase a service, like a taxi ride.

The role of trust for the prosperity of a society was recognized by economists and sociologists a long time ago. In his 1995 book “Trust: Social Virtues and the Creation of Prosperity”, the eminent Harvard political scientist Francis Fukuyama writes: “Widespread distrust in a society […] imposes a kind of a tax on all forms of economic activity, a tax that high-trust societies do not have to pay.”

Trust not only dramatically reduces transaction costs, it is also one of the foremost sources of bridging social capital. The idea behind the concept of social capital is that the ability of people to cooperate with one another can be considered an economic asset, i.e. a kind of capital. Harvard political scientist Robert D. Putnam introduced the distinction between binding and bonding social capital. While bonding social capital refers to the ability to cooperate within a group (like family, clan, or ethnic subgroup), bridging social capital describes the readiness of people to cooperate if they belong to different groups. As it turned out, well-functioning societies are rich in bridging social capital, and heavily depend on it, while bonding social capital can also be found in backward and underdeveloped societies. The Camorra in Southern Italy abounds with bonding social capital, as do many gangs in South American slums, with no benefit whatsoever for the society as a whole. Indeed, the impact of bonding social capital is highly ambiguous. Many countries in Africa are crippled by nepotism and tribalism, which are just forms of bonding social capital. However, the capacity to deal with strangers and members of other groups, i.e. bridging social capital, is clearly beneficial to a society.

The Legatum Prosperity Index measures social capital as one of its subcategories, and Georgia is doing really badly in that section. In 2012, Georgia ranked 140 among 142 surveyed nations. This is in stark contrast to the experience many people make when coming to Georgia. Foreigners are often stunned by the honesty of Georgians, who reject tips and never give out wrong change (Florian Biermann’s article “Georgian Decency as a Competitive Advantage”, bears testimony to this experience). When going with a taxi in Georgia, one does not have to negotiate the price in advance, as few taxi drivers charge unreasonable prices in the end.

This apparent riddle disappears if one looks at the questions asked by the Legatum Institute for determining the level of social capital in a country. The answer to the question “Are you married?” reveals nothing about bridging social capital in a society, and it even does not capture bonding social capital, as the marriage rate is primarily governed by socio-cultural norms whose connection with social capital is all but clear. Similarly, the question “Have you attended a place of worship in the last week?” will help to learn something about the religiosity of a society, but not about its (bridging) social capital. And a question like “Can you rely on friends and family for help?” only measures the economically less relevant bonding social capital.

So, it is safe to say that one can dismiss the measurement of social capital according to the Legatum Prosperity Index due to heavy methodological flaws. The question is then, however, what the true state of social capital is in Georgia.


The importance of faith was known also to Renaissance people. The etching reads

The importance of faith was known also to Renaissance people. The etching reads "Ditat Servata Fides", meaning "Keeping faith enriches". Then follows the verse "Ut praestes videas, si quid promittis amico, nam servata fides ditat et auget opes", translated by George Wither (1588-1667) as "The safest Riches, hee shall gaine Who alwayes Faithfull doth remaine." The etching is from a 1617 book by Gabriel Rollenhagen (1583-1619), which is very beautiful and can be downloaded here.

 

DO YOU TRUST YOUR FELLOW GEORGIAN?

The Caucasus Barometer of the Caucasus Research Resource Centers (CRRC) provides information that lets us infer about the endowment of our society with trust. The survey has many questions related to institutional trust, like trust towards different governmental organization, media, and church institutions (the answers to which are relevant for bridging social capital), yet I want to focus on two questions that directly touch on interpersonal trust: “Generally speaking, would you say that you can trust most people in the country, or that you can’t be too careful in dealing with people?” and “Do you approve or disapprove of people of your ethnicity doing business with other nationalities?”

The 2013 results for the first question are presented in the chart below. As CRRC is active in Armenia, Azerbaijan, and Georgia, we know the percentages of people answering affirmatively to the questions in these three countries (people who responded 4 and 5 on a five-point scale). If it was true that Georgia was a society with little trust and bridging social capital, we would expect that Armenians and Azeris have higher approval rates for these questions. Yet what we can see is the opposite. Georgia is on top of the three countries when it comes to general trust. 29% of Georgians answer the question with 4 or 5 on the 5-point scale, while these numbers for Armenia and Azerbaijan are 15% and 26%, respectively.

march24-2014-1

 

WOULD YOU DEAL WITH AN OSSETIAN?

More specific is the question to what extent Georgians trust members of other ethnic groups. Let us first look at more “neutral” groups, i.e. those with whom there is no ongoing political conflict. The next chart displays how many percent of the respondents approved of members of their own group doing business with Europeans, Iranians, Jews, and Americans. As it turns out, Georgians again have the highest approval rates for all groups except for Iranians, where they are topped by the Azeris. However, one should take into account that Iran and Azerbaijan are both Shiite Muslim countries, they are culturally and ethnically closely related, and hence the other group may not be perceived to be that different from their own. Similarly, the low trust rates of Azeris towards Europeans and Americans may be explained by a particularly large cultural difference, mainly due to different religions.

march24-2014-2

Again, these data do not suggest in any way that Georgians have a particularly low trust level. The data rather point towards the opposite.

Most telling, however, may be the attitude towards nations with whom there is a military dispute.  Only 1% of Azerbaijani citizens approve of doing business with Armenians, and only 22% of Armenians would approve their fellow citizens to deal with Azeris. The picture could not be more different for Georgia! 72% of Georgians find it acceptable to make business with Ossetians, and the number are 73% and 80% with regard to Abkhazians and Russians, respectively. It seems that Georgians do not discriminate against those ethnicities with whom they have political conflicts, as the approval rates are virtually the same as with “neutral” nationalities. The openness of Georgians to do business with other ethnicities does not depend on politics, and this distinguishes us from our Caucasian neighbors.

To sum up, according to the reliable data we have, trust and bridging social capital seems to be more abundant in Georgia than elsewhere in this region of the world. Of course, one cannot make far-reaching conclusions based on the answers to a couple of questions, but in this respect my analysis does not differ from the one of the Legatum Institute. The Legatum Prosperity Index may be measuring something, but not bridging social capital, and so the CRRC data are the best estimates we have. According to this estimate, Georgia is not a society that lacks trust and social capital, but it is relatively well-endowed with it.

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Guest - Eric on Tuesday, 25 March 2014 02:48

If we trust our neighbors, what prevents us from making peace with them?

A couple of days ago, a Facebook friend of mine posted a wonderful twit by Nassim Taleb: “You do not achieve peace through politicians, diplomats, negotiators, "thinkers" & other BS artists; you get it through business & commerce.” And today I am reading Maka's blog in which she uses CRRC data to show that Georgia is exceptional in its willingness to embrace its supposed enemies as business partners. According to Maka: Only 1% of Azerbaijani citizens approve of doing business with Armenians, and only 22% of Armenians would approve of dealing with Azeris. The picture could not be more different for Georgia! 72% of Georgians find it acceptable to make business with Ossetians; 73% and 80% approve of Abkhazians and Russians as business partners.

One has to be blind not to see the policy implications...

If we trust our neighbors, what prevents us from making peace with them? A couple of days ago, a Facebook friend of mine posted a wonderful twit by Nassim Taleb: “You do not achieve peace through politicians, diplomats, negotiators, "thinkers" & other BS artists; you get it through business & commerce.” And today I am reading Maka's blog in which she uses CRRC data to show that Georgia is exceptional in its willingness to embrace its supposed enemies as business partners. According to Maka: Only 1% of Azerbaijani citizens approve of doing business with Armenians, and only 22% of Armenians would approve of dealing with Azeris. The picture could not be more different for Georgia! 72% of Georgians find it acceptable to make business with Ossetians; 73% and 80% approve of Abkhazians and Russians as business partners. One has to be blind not to see the policy implications...
Guest - Georgi Shengelia on Tuesday, 25 March 2014 03:01

One American said: "If my neighbor will be rich, I can sell my product in higher prices and I will become richer". I like this philosophy.

One American said: "If my neighbor will be rich, I can sell my product in higher prices and I will become richer". I like this philosophy.
Guest - Randy on Tuesday, 25 March 2014 06:11

You say "Only 1% of Azerbaijani citizens approve of doing business with Armenians, and only 22% of Armenians would approve their fellow citizens to deal with Azeris. The picture could not be more different for Georgia! 72% of Georgians find it acceptable to make business with Ossetians, and the number are 73% with regard to Abkhazians." Am I missing something here? Ossetians and Abkhazians ARE GEORGIANS (i.e. they live in the same country even if in an occupied part. What would you get about asking Armenians if they would do business with Azeris WHO LIVE IN ARMENIA?

You say "Only 1% of Azerbaijani citizens approve of doing business with Armenians, and only 22% of Armenians would approve their fellow citizens to deal with Azeris. The picture could not be more different for Georgia! 72% of Georgians find it acceptable to make business with Ossetians, and the number are 73% with regard to Abkhazians." Am I missing something here? Ossetians and Abkhazians ARE GEORGIANS (i.e. they live in the same country even if in an occupied part. What would you get about asking Armenians if they would do business with Azeris WHO LIVE IN ARMENIA?
Guest - Eric on Wednesday, 26 March 2014 09:53

You are not quoting correctly, Randy. There are also 80% in favor of doing business with Russians.

You are not quoting correctly, Randy. There are also 80% in favor of doing business with Russians.
Guest - Randy on Thursday, 27 March 2014 01:42

Yes, the part about Russians was omitted from my response because it's inclusion was misleading in the original post since no data was presented about the willingness of Armenians or Azeris to do business with Russians, which might be higher OR lower than that for Georgians

Yes, the part about Russians was omitted from my response because it's inclusion was misleading in the original post since no data was presented about the willingness of Armenians or Azeris to do business with Russians, which might be higher OR lower than that for Georgians
Guest - makachitanava on Thursday, 27 March 2014 02:38

Dear Randy, I think we are talking about different things. The main point of the blog was to discuss how the Georgians deal with people they had a military conflict with, which includes Russians and other “people” whom we consider to be Georgian citizens but who are not Georgian by ethnicity, such as the Abkhaz and Ossetians. There are significant differences among us in terms of language and traditions. I know that anybody born on the US soil is automatically considered to be an “American” (citizen or national). That’s not the case in our part of the world, however. Here nation is defined as union of people with the same (or relative, similar) language, traditions and cultural area.

As for the willingness of Armenians or Azeris to do business with Russians is the following: 89% for Armenia and 86% for Azerbaijan. I did not include these numbers in the blog, because these countries did not had military conflict with Russians.

Dear Randy, I think we are talking about different things. The main point of the blog was to discuss how the Georgians deal with people they had a military conflict with, which includes Russians and other “people” whom we consider to be Georgian citizens but who are not Georgian by ethnicity, such as the Abkhaz and Ossetians. There are significant differences among us in terms of language and traditions. I know that anybody born on the US soil is automatically considered to be an “American” (citizen or national). That’s not the case in our part of the world, however. Here nation is defined as union of people with the same (or relative, similar) language, traditions and cultural area. As for the willingness of Armenians or Azeris to do business with Russians is the following: 89% for Armenia and 86% for Azerbaijan. I did not include these numbers in the blog, because these countries did not had military conflict with Russians.
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