Microfinance, social capital formation and political development in Russia and eastern Europe: a...

Journal of International Development

J. Int. Dev. 16, 407–427 (2004)

Published online in Wiley InterScience (www.interscience.wiley.com). DOI: 10.1002/jid.1085

MICROFINANCE, SOCIAL CAPITALFORMATION AND POLITICAL

DEVELOPMENT IN RUSSIA ANDEASTERN EUROPE: A PILOT STUDY OFPROGRAMMES IN RUSSIA, SLOVAKIA

AND ROMANIA

PAUL MOSLEY,1* DANIELA OLEJAROVA2 and ELENA ALEXEEVA3

1University of Sheffield, Sheffield, UK2INTEGRA Foundation, Bratislava, Slovakia

3FORA Fund, Nizhni—Novgorod, Russia

Abstract: In recognition of the considerable importance given in the literature to social

capital as an instrument for both growth maximization and poverty reduction, this survey was

launched as a pilot attempt to assess the contribution of microfinance to community-building

and political participation, with a view to designing an instrument which might be useful for

the monitoring systems of microfinance organizations. Empirical work is carried out in

Russia, Slovakia and Romania through two NGOs: the INTEGRA Foundation and the FORA

Fund. We acknowledge at the beginning considerable problems of methodology: in particular

of causation between microfinance and social capital variables, and of definition of the social

capital variable itself. The contrast between ‘associational’ and ‘trust’ definitions of social

capital turns out to be particularly relevant in the present case.

Results: impact. In all countries examined, there appears from the questionnaires to be

relatively little impact of microfinance on associational membership; the main difference

between treatment and control samples appears to be a higher membership of church

associations, both in Slovakia and Russia, amongst borrowers. Interview data, however,

suggest a much stronger link than appears from the questionnaire, in particular an influence

from the provision of finance to informal political organization, beginning with extensions of

the solidarity group model, but also found among individual clients. These informal

organizations in turn are of three types, (i) bonding within groups for social or ‘political’

purposes, (ii) bonding between groups (called by Woolcock ‘bridging social capital’), (iii)

bonding between individuals or groups and higher-level hierarchical organizations such as

Copyright # 2004 John Wiley & Sons, Ltd.

*Correspondence to: P. Mosley, University of Sheffield, 9 Mappin Street, Sheffield S1 4DT, UK.E-mail: [email protected]

branches of local government or commercial banks. (i) was very important within solidarity

and trust groups, and was not classified by the questionnaire as associational membership.

There was a dramatic illustration of (ii) in Borisoglebsk, Russia, where some solidarity groups

had come together in a struggle against local authority corruption; (iii) was found in Slovakia

and also in Novgorod, Russia, and in general was found at higher levels of income and

confidence. There are also (in Slovakia, the only country so far examined) considerable

differences between microfinance clients and others in terms of perceptions of corruption and

its influence on their business. We are currently investigating the determinants of informal

association by regression methods, and speculate that as well as experience, leadership,

intragroup inequality, income and education may be very important.

Possibly stemming from these forms of association, there was also a significantly

higher level of trust (on average and in particular agencies) amongst microfinance customers

than the control group, particularly towards agencies of local government.1 Thus to

summarise microfinance scarcely influences formal associational membership, but

greatly influences informal behaviour patterns, thence trust, and thence informal political

participation.

There are three dimensions of this relationship which are particularly interesting. The first

is the influence of prior experience on trust: prior linkages bonded in the hard experience of

perestroika tended to survive and induce more trust than more recent and more ad hoc

associations. A second is the apparent ability of microfinance to increase trust by indirect

channels, notably through the making of contacts within government and other agencies. (But

some expected indirect routes, such as media exposure, turn out to be irrelevant.) A third is the

apparent ability of microfinance to reduce corruption: in Slovakia, the client group

experienced significantly less corruption than the control group, particularly in terms of

judicial procedure. A fourth factor is the ability of some microfinance groups to reproduce

themselves and extend social capital into related areas. In encouraging this process, leadership

and intra-group inequality appear to be important; sometimes, as in Poltar, Slovakia, the

leadership comes from outside the group.

Thus, microfinance does appear to help create social capital in Russia and eastern Europe,

but not homogeneously and through some unexpected channels. The following policy

implications would appear to emerge:

(i) in regions where corruption is serious e.g. Borisoglebsk, MF is particularly valued for its

ability to provide an bribe-free source of credit. In so doing, it creates trust which lowers

the rate of tax on business transactions—and thence the cost structure of small

enterprise.

(ii) one of the most important indirect effects of microfinance appears to be its ability to

induce greater trust in government officials. Exactly how this effect materialises is not

clear, but what is certain is the potential complementarity between NGO microfinance

organizations and state organizations in the construction of social capital.

(iii) microfinance interventions need to try and maximize the ‘social multiplier’ effects of

group organization. One particular channel by which this appears to be possible is by

reducing intragroup inequalities.

1Within these general tendencies, there are important differences in perception (for example of the extent ofcorruption and how to fight it) between individuals operating not only in the same region but in the same trade andindeed the same marketplace—as we discovered in Borisoglebsk.

408 P. Mosley et al.

Copyright # 2004 John Wiley & Sons, Ltd. J. Int. Dev. 16, 407–427 (2004)

(iv) Trust is the obverse of interpersonal risk, and in those cases where trust is low

complementary devices such as insurance supplied by the microfinance provider may

help reduce the risk of default. Copyright # 2004 John Wiley & Sons, Ltd.

1 INTRODUCTION

‘Social institutions’, the World Bank asserts in its 2000 World Development Report,

‘greatly affect poverty outcomes. They do so by affecting the productivity of economic

assets, the strategies for coping with risk, the capacities for new opportunities, and the

extent to which particular voices are heard when important decisions are made. Social

institutions can help poor people get by and get ahead.’ (World Bank, 2000, p. 117). The

idea that social institutions can be economically productive is frequently embodied in the

notion of social capital. The Bank defines this (2000a:ch7) as ‘the ability of individuals to

increase their well-being through involvement in social networks’. Such networks, on this

view, are an asset on which a return is expected, by analogy with physical and human

capital—‘one that can be enjoyed for its own sake, called on in a crisis, and leveraged for

material gain’ (Woolcock and Narayan, 1999, p. 226). Without this asset, these authors

agree, the prospects for escape from poverty are bleak: ‘a defining feature of being poor is

that one is not a member of—or may even be actively excluded from—certain social

networks and institutions that could be used to secure good jobs and decent housing’. As

we shall see, both the institutions examined in this study have espoused this conception of

the causes of poverty.

The return on this asset has the potential to be very handsome, as originally demon-

strated by Putnam’s study of Northern and Southern Italy (1993) and subsequently by a

range of cross-country econometric studies such as those by Temple and Johnson (1996);

Knack and Keefer (1997); and Whiteley (2000). The last of these discovered a degree of

correlation between social capital measures and growth ‘at least as strong as that of human

capital or education, catch-up, or the ability of poorer nations to adopt technological

innovations pioneered by their richer counterparts’ (Whiteley, 2000, p. 443). Moreover, in

relation to one of the countries studied here, Russia, ‘some associations have been found

between indicators of social capital (mistrust in government, crime, quality of work

relations, civic engagement in politics) and life expectancy, as well as mortality rates’

(Kennedy et al., 1998, p. 2029). In acknowledging that social capital is important, we also

have to acknowledge that altruism and reciprocal obligation within communities, and not

just the pursuit of individual gain, determine behaviour—and thus to make behavioural

assumptions which enlarge on most of conventional microeconomics (Bowles and

Gintis, 2002).

If it is now widely accepted that social capital is important, there is much less agreement

on how to create or develop it. Of the various instruments by which the social capital

objective may be promoted, microfinance—loans to very small businesses whose

operators are too poor to be able to put up collateral—is superficially one of the most

attractive, and indeed is discussed in considerable detail by the World Development

Report. It operates by using peer pressure to repay—pressure exerted by fellow-borrowers

or by members of the borrower’s community—as a substitute for collateral, which

supplements the pressure to repay coming from the bank. This peer pressure, substituting

for physical collateral, is often referred to as social collateral. In many countries it is

Microfinance in Russia and Eastern Europe 409


estimated to have achieved not only much higher repayment rates than those achieved by

commercial banks, but also a substantial reduction in poverty (Hulme and Mosley, 1996;

Morduch, 1999). Microfinance appeals to the political left by virtue of its redistributive

potential and to the political right by assisting in the creation of a class of ‘small

capitalists’ operating independently of any need for state support—a class which in many

developing countries has historically been subject to harassment, and which in Russia, one

of the subjects of this report, was illegal until 1992. The social costs of transition in Russia

and eastern Europe have been particularly severe, with poverty levels, in Russia, having

risen from insignificant levels pre-transition to between 10 and 40 per cent, depending on

which poverty measure is taken, at the turn of the millennium (Mosley and Kalyuzhnova,

2000) and inequality having risen, over the same period, from one of the lowest levels in

the world to a level greater than in the United States (Brainerd, 1998a). There is some

evidence that the human suffering taking place during the transition, and the potential for

political instability arising from it, is directly and not inversely associated with reform:

‘rapid and intense reformers—the Baltic republics in particular—have experienced even

sharper increases in mortality than some of the more gradual reformers’ (Brainerd, 1998b,

p. 2025). The strategies adopted by international financial institutions to correct this state

of affairs rely heavily on reforms in transparency and social inclusiveness, and within this

general heading the role assigned to microfinance is to overcome the social and political

exclusion of the poor, and specifically poor women; directly by attacking their financial

exclusion, and indirectly by creating a more open financial market at the bottom end which

limits the adverse impacts of corruption on business. These in turn, it is hoped, may

encourage broader-based political participation.

An environment therefore exists where there is great pressure on the ‘new’ anti-

poverty initiatives by reason of the trends just described, democracy and the small

business sector are fragile, and microfinance is expected in a loose sort of way to

buttress all three. What sort of way this might be has not been seriously discussed by the

literature to date. Since the main modus operandi of microfinance, as mentioned above,

is to substitute social collateral for missing physical collateral, there is a temptation to

elide the ‘social collateral’ which guarantees a particular microfinance loan into ‘social

capital’ and to assume that social capital is created in an automatic and mechanical

way by microfinance. But this would be a mistake. As many have argued (Hulme and

Mosley (1996) but see also Rankin (2002)) association within a microfinance group

may not create the trust needed to create such an asset (and specifically, richer members

of microfinance groups may, in time of economic stress, expel poorer members who

they fear will be unable to repay their loans); microfinance may not be an effective

agency of intervention. Indeed, the original analysis of Putnam (1993) suggests that

social capital resides in patterns of association in civil society which are relatively

immune to external intervention, by the state, NGOs or any other source. In other

words, microfinance NGOs face a challenge when seeking to create social capital.

There exists plenty of aspiration to create social capital and a more open society by

means of microfinance, plenty of warnings concerning the difficulty of doing so, but

little formal investigation of what social capital, in what form, microfinance institutions

have in practice been able to create. To do that in an experimental way, using two

Eastern European microfinance institutions as a test case, is the main purpose of

this paper.

The approach which we take is to examine, using both questionnaire and open-ended

interview methods, the main linkages between microfinance and different measures of



social capital as illustrated in Figure 1. The chain of causation illustrated in this diagram

begins from the economist’s idea of individuals seeking to optimise a portfolio of physical,

human and social capital assets (Glaeser et al., 2002; Chen and Dunn, 2002), which they

do within the central box of the diagram labelled ‘social capital indicators: association,

trust etc.). The focus, as discussed earlier, is on the ability of policy and microfinance

design features to influence these social capital indicators.2

The working hypothesis from which we begin is that microfinance influences social

capital through three channels,3 all indicated on the diagram:

(i) by encouraging mutual trust and dependence within borrower groups, in those cases

where that is the loan modality used;

(ii) by providing an alternative to existing and sometimes corrupt channels of supply of

financial services;

(iii) by setting up support services and organizations which encourage association

between citizens (including the financing of community resources such as child care,

Figure 1. Expected main elements in causal sequence

2Formally, therefore, the question is how much optimum social capital changes when policy or microfinancedesign also change.3It will be noted that each of these channels refers to a different type of social capital. Link (1) refers to what isknown as bonding social capital within the borrower’s immediate reference group; link (2) to bridging socialcapital between the microfinance client and an organization above him in the organizational hierarchy(here, a banker); link (3) mostly to linking social capital between the client’s immediate reference group andother groups.



transport, and legal/benefit advice centres), and in some cases explicit participation in

the political process.

The possibilities for social capital to be built from the top down by effective state action,

as well as from the bottom up through the spontaneous formation of localised affinity

groups, are relevant in this context, and have been emphasised by, for example, Maloney

et al. (2000) and Lowndes and Wilson (2001). Further, we speculate that the ability of

microfinance services to take advantage of these linkages depends on the policy

environment, in particular its ability to moderate perceived inequality(unfairness) and

reduce risk. We note that in the absence of any mechanism to do this during the transition

period, a multiplicity of informal networks, starting with family and friends and gradually

supplemented by new and reformed local authority agencies,4 emerged for the purpose,

and we shall argue empirically that the ability of microfinance to contribute to the process

of social capital formation (in its various forms) depended on its ability to cohere with this

evolving structure of networks.

Indeed, the proposition we shall argue is that microfinance, in the institutions we have

studied, does not so much directly create social capital between microfinance clients as

provide a catalyst by which pre-existing forms of social capital—either ‘bonding groups’

of existing associates or ‘bridging groups’ created by local authority initiative—are linked

with the previously scarce resource of access to financial markets. Some supplementary

social capital, in the sense of increased trust, is in addition created through collective

training, moral support, and linking with contacts especially in local government. Some of

the changes in trust produced by these influences were quite dramatic, notably in attitudes

to government officials, where the legacy of distrust in government described by,

especially, the Russian literature (Section 3 below) appears to have been fairly compre-

hensively dispelled in the case of microfinance clients, to the benefit of microfinance

impact. These gains in community-building then feed, in all the sample countries, into

some increase in political participation, often of an informal nature better picked up by the

interviews rather than by the formal questionnaire. Thus microfinance, explicitly created

in order to keep the state out of the supply side of financial markets at the bottom end, does

indeed seem to be playing a part in involving citizens on the demand side of the market for

political opportunity and influence.

2 INSTITUTIONS AND METHODOLOGY FOR THE PILOT SURVEY

2.1 Background

Through the whole of eastern Europe except for Poland the institutional environment has

been hostile to small business and to microcredit—indeed, in Russia the running of a

private small business in any sector counted as illegal black-market activity until 1992.5 In

the early nineties, this history of bureaucratic repression continued to cast a shadow and

even in the enlightened city of Novgorod, scene of one of modern Russia‘s first private-

enterprise economic miracles (Petro, 2001) ‘initially, entrepreneurs were hiding from

everyone—they didn’t want to admit what they were’6

4E.g. in Novgorod, Russia, see below.5Presentation by Elizabeth Wallace on Russian Small Business Fund, CSFI London, April 1998.6Interview, Novgorod State Fund for Support of Entrepreneurship, Veliki Novgorod, 10 September 2002.



Nonetheless, under the impetus of a number of international NGOs a number of micro-

lending initiatives have become established in Russia and eastern Europe in the course of the

1990s. The FORA Fund is sponsored by the international NGO Opportunity International

and the INTEGRA Foundation is an NGO initiated in Slovakia in 1995 with representation

in five other eastern European countries. Both organizations provide a mixture of individual

and group credit: in FORA, groups are not of fixed size and may expand organically to take

in new members—a process that, as we shall see, is often controversial. In terms of the overt

objectives stated in their publicity material, FORA puts more emphasis on quick, easily

accessible credit to the microbusiness sector and INTEGRA on the social objectives of

corruption control and credit to the socially excluded. Interviewees in Novgorod, one of the

most industrially developed of all Russian cities, expressed the view that within the district

FORA was almost unchallenged in occupying the border zone between the banks and

informal credit from relatives and the black market.7 INTEGRA’s rhetoric is redolent of a

social capital-building mission, and its exceptionally vivid and evocative publicity explicitly

commits it to ‘help people build their businesses so that they can become ‘islands of

integrity’ (such that) they can participate in the transformation of their communities’

(Integra Venture, 2000 brochure, front cover). It lends to both individuals and groups—

which significantly are known as ‘trust groups’. Especially the group lending is focussed on

lone mothers and other marginalized social groups. In addition to training programmes there

is a research programme focussed on developing ‘practical tools for small businesses

struggling within the corrupt and corrupting environment of Central and Eastern Europe’

(Integra Venture, Annual Report 2000, p. 5)

Table 1 gives further details of the two organizations.

Table 1. Organizations involved in the project

Country Organization Loan focus Average loan size($) Portfolio composition

Russia FORA Fund Individual and 19705 Percentage of

group loans. roubles¼ $624 women clients: 77%

Small businesses (Borisoglebsk) (Borisoglebsk)

mainly in service 21017 Percentage group loans:

sector; urban roubles¼ $666 78%(V. Novgorod)

emphasis (V. Novgorod) % retail trade¼ 91%

% manufacturing¼ 2%

%transport, services

etc¼ 7% (9/02)

Romania/ Integra Foundation, Individual and $926(women’s Percentage of women

Slovakia Microenterprise ‘trust group’ loans. microlending clients: 83%

Development Mainly urban small programme) Retail trade¼ 75%

Programme businesses: to empower Manufacturing¼ 5%

(294 clients) ‘women at risk’ and Other services¼ 20%

‘Coping with to provide coping (12/01)

Corruption’ strategies for SMEs

programme ‘struggling within

the corrupting

environment of CEE’

7Interview, Grigory Stepanov, Novgorod State Fund for Support of Entrepreneurship, Veliki Novgorod, 10September 2002.



In both organizations we applied a questionnaire to a clustered sample of borrowers

intended to be representative of the programme as a whole, and then conducted interviews

on individuals who either constituted ‘outliers’ from the standard pattern of results, or for

whatever reason appeared likely to yield interesting insights about patterns of causation.

Table 2 gives further details of the sampling procedure.

3. SOCIAL CAPITAL MEASURES AND THEIR INTERPRETATION

According to Rose (1998), the reaction against totalitarian efforts to mobilise

citizens resulted in the development of an ‘hour-glass society’ in Soviet Russia,

characterized by a rich social life at the base, consisting of strong informal networks

based on trust between friends, relatives and other face-to-face groups. At the top of the

hour-glass, there developed a separate political and social life, as elites of the nomenkla-

turas competed for power, wealth and prestige. Rose and colleagues go on to argue that in

this way the Soviet and, in a more muted way, the other former communist states of eastern

Europe left a double legacy: individual citizens are likely to have a high degree of trust in

their immediate social networks, and a high degree of distrust in the state, even the

reformed state. In support of this thesis, several social surveys conducted in post-

Communist Russia (such as the New Russia Barometer surveys) appear to confirm a

high degree of distrust in political and civic institutions.

In this climate, far more people rely on informal social capital than on formal

institutions of state to deal with their problems, in particular as a source of social security.

Two-thirds of Russians say that they have a friend who could lend them up to a week’s

wages if their household was short of money, and more than two-thirds know someone

who would help if they were ill (Rose, 1998). It is these informal networks which

microfinance seeks to complement and extend, particularly in the case of individuals who

are socially isolated and have no friends or relatives to fall back on.

We now examine this proposition and the potential of microfinance to change it.

In the first instance (Table 3) we find relatively small apparent impacts of microfinance

on formal associational membership. There are greater tendencies for microfinance clients

to be members of entrepreneurs’ associations8 and (in Slovakia especially) church

associations, but overall associational membership in all three countries is actually greater

Table 2. Sampling frame

Russia Slovakia Romania

Group Individual Control Group Individual Control Individual Controlloans loans sample loans loans sample loans sample

Male 36 10 9 8 9 8 15 9

Female 127 10 31 24 5 16 35 15

Total 163 20 40 32 14 24 50 24

8These are probably understated by the questionnaire. Some active members of entrepreneurs’ associations suchas R3 disclaimed any such membership in their questionnaire response.



in the control sample of newly enrolled entrepreneurs than it is amongst established small

businesses.

2.2 Varieties of Social Capital: from Bonding to Bridging

Within the associational forms we have examined, however, we do observe an evolution

from inward-looking to outward-looking forms of social capital, as portrayed by Wool-

cock and Narayan (1999). The evolution from inward-looking bonding to outward-looking

pursuit of links with government officials, customers and other solidarity groups was

clearly evident in Novgorod, Russia. Small traders such as the shoe trader R3 formed

principally inward-looking, bonding relationships with others in the same market; larger

operators such as the water-filter manufacturer R4 formed principally outward-looking,

‘linking’ relationships with contacts who could help him break into new markets.

Table 3. Measures of association

Quantitative evidence Russia Slovakia Romania

Treatment Control Treatment Control Treatment Controlgroup group group group group group

General involvement* 48.6 61 62 70.3 62 70.3

Associational membership:

Educational 1.7% 3% 13% 12.5% 6% 0

Church organizations 18.2% 39% 23.9% 12.5% 38% 37.5%

Sports clubs 15.3% 14.6% 2.2% 0 4% 0

Unions of entrepreneurs, 18.6% 4.9% 2.4% 4.2% 0 0

credit unions, cooperatives

Non-profit organizations 12.2% 25% 0 0

Other 0 0 0 4.2% 2% 0

Active participation:

Active member (educational) 1% (0.10) 0 13% 4.2% 0 0

Active member (sports clubs) 2% (0.15) 8% (0.27) 4.3% 0 2 0

Active member (unions of 2% (0.07) 0 2.4% 4.2% 0 0

entrepreneurs, credit unions

and cooperatives)

Active member (other) 0 0

Helps run business/provides

financial support

Educational

Helps run business provides 1% (0.11) 3% 26.1% 12.5% 12% 20.8%

financial support

Sports clubs

Helps run business provides 2% (0.15) 5% (0.22) 2.2% 0% 10% 0%

financial support

Non-profit organizations

Provides financial support 26.1% 25% 12% 16.7%

Unions of entrepreneurs, credit

unions and cooperatives

Helps run business provides 10% (0.30) 3%(0.16) 2.2% 0% 0% 0%

financial support

Church

Provides financial support 26.1% 12.5%

*Proportion of participants involved in at least one type of voluntary activit.



Frequently the trust which formed both types of relationships—particularly the first—had

been forged during the harsh years of the early perestroika period,9 when many were

forced, under the stress of a public sector decimated by exposure to the global market into

self-employment and networks of mutual support as a survival strategy, as we discuss

below. Groups R5 to R8 in Novgorod, all women who sold lingerie in the marketplace, had

formed an informal support group in 1991 when their husbands lost their jobs, and went to

FORA for a loan only much later when the group was already mature. By contrast

borrower R8, from Borisoglebsk, formed her group on divorce from her husband after she

lost her job in 1992. She thus related her survival strategy:

‘I went to Moscow, bought some second-hand clothes in the market and sold them

locally. In those days (c. 1993–94) it was much easier, because most local authority

staff had no idea how to regulate. I gathered a group around me, using as criterion

the people who had lasted in the market place for a long time. One group member

fell into arrears, others had to pay her share, she was eventually excluded from the

group. You can see in people’s eyes whether they can be trusted or not.’

2.3 Informal Ties: the Determinants of Cohesion

It quickly became apparent to us that the links which mattered were not so much

membership of the formal associations listed in Table 3, but rather the informal defensive

links within the community at the ‘bottom of the hourglass’ described by Rose et al. Links

within solidarity groups, as nurtured by both FORA and INTEGRA, are a special case of

these, but many informal ties were also formed by individual clients.

The outstanding local manager of the FORA office in Borisoglebsk, Elena Kocheleva,

argued that groups were of three kinds: those who were already friends, those who came

together for gain and those who came together for social action. As we saw earlier, several

of the first group had had their loyalties forged during the adversities of perestroika,

including one Chekhovian borrower group in Borisoglebsk who enjoyed each other’s

Table 4. Measures of association: group versus individual clients (Slovakia only; first priorityshaded)

Trust groups Individual clients All clients Control

General involvement

Very often/often 25 57.1 34.8 25

Very often/often/sometimes 68.8 85.7 73.9 66.7

Voluntary organizations

Educational 31.3 35.7 32.6 25

Church 15.6 71.4 32.6 16.7

Sport 3.1 7.1 4.3 0

Political 3.1 28.6 10.9 0

Commercial 0 7.1 2.2 4.2

Non-profit 34.4 35.7 34.8 50

Other 21.9 7.1 17.4 4.2

9During the period 1989–94 in Russia, poverty rates rose from under 10 to over 30 per cent, and inequality rosefrom one of the lowest levels in the world to a level exceeding that of the United States.



company so much that they ‘picknicked together each summer Sunday by the river’. She

believed the success of groups was gender-neutral; mixed groups were often the best. ‘One

of the best of all consists of one man and six women: the man is so protective of ‘his

women’ that he fills in the form for each person, standing in line for two hours for them’.

(interview, Borisoglebsk, 12 September 2002)

Thus historical experience of mutual interaction (in this case, especially the patterns of

loyalty which emerged from the hardships of perestroika) are important for cohesion. The

ability of individuals to manage their assets so as to protect against risk, as we saw from

the previous example, is also important. Finally, within networks leadership is crucial—

not only, as in some cases, to realise an idealistic vision of social action but simply to hold

together a network which is under threat. Client S9, who served as informal mentor for a

Slovak group, illustrates the way in which group networks can function to offset the

idiosyncratic risks affecting individual group members. An important message is that this

is achieved as much by providing moral support as by the emergency ad hoc financial

support that is the standard function of roscas:

When one group member, who ran a news-stand and bookstall, stopped attending

meetings and refused to answer the phone, we decide to intervene. It turned out that

she was a single parent who had been hit all at once by a whole series of shocks—

her mother had died, people at the licensing office were demanding bribes, trade had

collapsed. Other group members decided to meet outside of regular group meetings

to resolve this problem. In particular, they went to her home and offered her busi-

ness, which helped pull her enterprise round. They also helped her get her loan

rescheduled. (interview, Bratislava, 24 October 2002).

On quality of leadership, a different group commented:

There are tensions in any solidarity group. But if anyone oversteps a line, aggravat-

ing these tensions, this is dealt with collectively. Each of the group has a confidentialrelationship with the group organizer, and the fact of these confidences not being

broken strengthens the group’s cohesion. (Interview,Lucenec, Slovakia, group S3–

S7: 22 October 2002)

2.4 The Reproduction of Social Capital

An interesting design issue is to understand which groups are likely to grow, either in

terms of their financial turnover, or in terms of their potential for social action. In terms of

Elena Kocheleva’s terminology (see above) we would expect the third of her group types

to have the strongest potential for ‘reproducing itself’ into other fields. For example, one

Slovak client (S1), whose business was marketing holiday cottages in the Tatras

mountains, had formed a non-profit NGO to organize the isolated and exploitable farm

households into a tourist providers’ association. This was an act of political enterpreneur-

ship (conversion of a federation of trust groups into a trade association empowered to

negotiate with government authorities) as well as economic entrepreneurship (market

research, technical assistance and advice on pricing). On the evidence of our preliminary

interviews, such group reproduction is likely to occur not only where there is leadership of

this type, but where groups meet frequently and are relatively equal in social status.

External support may also be crucial, as we now discuss.



2.5 The State and the Creation of Social Capital in Eastern Europe

As first presented by Putnam (1993) social capital networks are created in civil society

outwith and in some cases in defiance of the state. A later literature, mainly related to

industrialised countries, has by contrast reaffirmed the role of the state in the construction

of socially integrative networks10 (Maloney et al., 2000; Lowndes and Wilson, 2001), and

we encountered considerable evidence of government operating in this role, typically in

the form of group training and mentoring offered by orthodox state funds for entrepre-

neurial development (which interacted, for example, with the Novgorod and Borisoglebsk

branches of FORA). Often the managers of such support agencies found themselves

frustrated by the inflexibility of the instruments available for their use,11 and responded in

unusual ways.

The Poltar region of central Slovakia experienced, during the Meciar period, a process

of corrupt and ruinous privatisation which decimated much of the local industrial and

employment base, leading to rates of unemployment of over 21 per cent at the last census,

and thereby creating a climate of anger which led to large communist gains, the largest in

the country, at the recent (2002) Slovak parliamentary elections. In this environment, the

director of the local labour office in Poltar, Slovakia, founded an NGO for the development

of the region while continuing in his civil service job.12 This provides market research,

loan and mentoring facilities for marginalized groups of local entrepreneurs—such as

Romany basket-making enterprises. Linking social capital was thus being set up in this

case, unusually, not by linkage with local civil society institutions but rather by actually

creating them.

In general, one of the important functions of microfinance was its role in establishing

and developing linkages between clients and government and other advisory bodies—the

provision of supportive social linkages with government in supplementation of intragroup

solidarity. Table 5 illustrates this function. The extraordinary figure of 54 per cent for the

Slovakia control group is to be noted—we interpret this as reflecting the success of

Table 5. Influence of microfinance on access to and relations with other organizations

Awareness of government Russia Slovakia Romaniasupport programmes


Does MF affect your access to other 4% 0 13% 54.2% 4 0

government organizations supporting

entrepreneurs?

Does your co-operation with MF 6% 15.2% 20.8% 42.0% 33%

organizations help you improve relations

with other organizations?

Source: Survey 2001, questions 29 and 30.

10For illustrations of the role of local government in the UK in supporting microenterprise see Mosley and Steel(2002).11The manager of the Novgorod State Fund for Support of Entrepreneurship, in particular, was keen to set up aone-stop shop for small business in the city but thought it would be ‘a long time in coming’. Interview, GrigoryStepanov, Novgorod, 10 September 2002.12Interview, Poltar, Slovakia, 22 October 2002.



induction programmes for new entrepreneurs in drawing attention to the existence of

potentially useful contacts at the beginning of the loan period, when they were

interviewed.

Thus, to summarize the story so far, microfinance has little impact on patterns of formal

association in our samples. It has substantial impact on patterns of informal association,

although what it does is often to provide financial support to social networks which are

already mature. These informal associations sometimes expand into supplementary forms

of social action, and into linkage with state organizations. One of the key functions of

microfinance turns out to be the indirect function of nurturing these links.

We now examine the linkage between microfinance, association and trust which, in

most social capital studies, is the key measure of the dividend provided by social ties. In

Table 6 we set out the ‘trust scores’ for microfinance clients and the control group in

relation to specified actors, when are then cumulated into an average trust score.

In Table 7 we illustrate (for Slovakia only) the manner in which the trust measure of

social capital changed over time and the apparent influence of microfinance on this. There

is markedly more trust in both central and local government officials among microfinance

clients than others—a finding which supports our earlier claim that the potential existed

for a collaborative relationship between government and microfinance organisations in

building social capital.

4 GOVERNANCE AND CORRUPTION

One important channel by which microfinance may influence trust and thence the cost of

doing business is through its influence on corruption: both directly by providing a graft-

free source of credit and indirectly by exposing the influence of corrupt practices and

illustrating corruption-free routes towards the expansion of business. Table 8 illustrates the

Table 6. Measures of trust (current levels)

Degree of trust* in Russia Romania Slovakia(5-point scale) (percentages (percentages

expressing expressingtrust in the trust in the

group named) group named)


Family 1.57 (0.50) 1.34 (0.65) 98.0 95.8 93.5 95.8

Customers 1.12* (0.37) 2.44 (1.28) 61.7 78.6 60.0 62.5

Government officials 2.14** (1.10) 4.51 (1.02)

Local government officials 34.1** 17.4 43.5** 17.4

Commercial banks 3.87 (1.36) 3.63 (1.79) 86.8 63.2 67.4 65.2

Police 3.09 (1.67) 3.46 (1.61) 48.9 29.2 30.4 25

Overall trust score 2.33* 3.08

Mean political participation score 0.33* 0.16

Source: Survey 2001, question 14.Notes: In Russia, trust is measured on a 5-point scale from 1 (‘trust the group named completely’) to 5 (‘don’ttrust them at all’). In Romania and Slovakia, it is measured as a percentage score.**denotes difference between sample means significant at the 1% level and *denotes difference significant at the5% level.



experience of corruption of our sampled businesses. For a substantial number of clients (a

majority in Romania) corruption was a part of their lives. Interview data made clear that it

affected much more strongly those clients which had grown big, and from whom large

bribes could be expected, than very small clients, although there were specific environ-

ments (such as Borisoglebsk, Russia) where corruption was all-pervasive even at the very

bottom of the scale, amongst individual market traders. In Slovakia, the client group

experienced significantly less corruption than the control group, particularly in terms of

(mainly small operators) judicial processes, winning public tenders and getting contracts

from large enterprises.

Several interviewees expressed the view that ‘corruption is only a small problem with

microenterprises because there are only very small pickings to be extracted from them’13

In all the countries studied, the problem and the need to find counteractive strategies grew

with the size of enterprise. Client R4, the ambitious water-filter manufacturer from

Novgorod, argued that ‘corruption could be managed by finding the right people within the

administration to deal with’. But in Borisoglebsk, the problem was serious even for small

businesses. Group R15–R18 reported ‘There are constant check-ups and fault-finding that

are formally in line with the law. But actually, the laws on trading rules are created for the

inspectors themselves; they are made deliberately complex to maximize the chance that an

infraction can be detected and a bribe extorted. It is quite deliberately made impossible for

entrepreneurs to accomplish the task of complying with them.’ As we shall see below, in

the one case where group solidarity was mustered to fight corruption in Borisoglebsk, the

ending was unhappy and the social capital which had been painfully built up was

dissipated.

Table 7. Trust dynamics (Slovakia only)

Trust score in relation to Treatment Control t-test Significanceparticular groups of people group group

Mean SD Mean SD

Central government officials

Before 3.11 1.11 3.62 0.92 �1.93 0.057*

Now 3.24 1.02 3.66 1.00 1.63 0.10

Local government officials

Before 2.69 1.00 3.39 0.94 � 2.76 0.007**

Now 2.89 1.1 3.34 1.02 � 1.66 0.102

People of a different religion

Before 2.11 0.69 2.37 0.77 1.43 0.16

Now 2.09 0.67 2.37 0.77 1.57 0.12

Foreigners

Before 2.35 0.84 2.80 0.81 2.07 0.042*

Now 2.35 0.81 2.71 0.78 1.71 0.093

Police

Before 2.97 1.10 2.95 1.80 2.20 0.033*

Now 3.21 1.15 3.33 1.05

Source: 2001 survey, question 22.Note: **denotes difference between treatment and control groups significant at 1% level; *denotes differencesignificant at 5% level.

13Interview R2, Veliki Novgorod.



Table 8. Role of corruption

Russia Slovakia1 Romania


Does corruption affect any part 23% 17% 13% 29% 52% 54.2%

of your life?

For which public services, in your

opinion, do

people need to give unofficial payments?

To get credit 2.07 2.21

(2.08) (1.86)

To get building permission 0.91 2.46

(2.50) (2.20)

To get electricity installed 0.82 1.08

(1.83) (1.44)

To get water installed 0.61 1.29

(1.73) (1.30)

To speed up the judicial process in court 1.96 3.08

(2.64) (2.20)

To register rights of ownership 0.85 1.58

(2.53) (2.44)

To pay less taxes

To win a public tender 1.91 3.13

(2.86) (2.54)

To register rights of ownership

To get contracts from large enterprises 2.15 3.50

(2.45) (2.02)

Qualitative interview data Small businesses;

problem seen as

minor in Novgorod,

(young, modernising

administration)

In Borisoglebsk

(traditional local

administration) ‘Corruption

is everywhere. Police

(milicja) and control

inspectorates create such

conditions that entrepreneurs

have no other choice than

to bribe them. When asked

what this money is allocated

to they either inore the

question or say the money

will be used to bribe officials

of a higher rank’ (group

R10–R14)

Note: 1These data have been transformed so as to correspond to the coding system used in Russia (5¼ very highcontact with corruption . . . 1¼ very low contact).



5 COMMUNICATION CHANNELS AND POLITICAL PARTICIPATION

Traditional democratic theory holds that in order to participate fully and intelligently

in government, citizens must understand both the institutions of government and the issues

of the day. They need a modicum of civic literacy. According to William Galston, ‘basic

civic knowledge is central to democratic citizenship’ (Galston, 2003, p. 53; Putnam, 1993).

Galston’s review of the civic knowledge literature leads him to suggest that civic

knowledge increases trust in government, increases support for democratic values, and

increases political participation. ‘The more knowledge citizens have of civic affairs,’ he

argues, ‘the less likely they are to experience a generalized mistrust of, or alienation from,

public life. Ignorance is the father of fear, and knowledge is the mother of trust.’ (Galston,

2003, p. 54) The more we know about the world, the less intimidating and opaque it

appears.

Further, the more people know about public affairs, the more moderate and coherent are

their political views. Putnam claims that attentive citizens are less vulnerable to

demagoguery (Putnam, 1993). And when high levels of newspaper readership are

combined with a vibrant, independent press, research has suggested that national levels

of corruption are reduced (Adsera, 2001).

In his review of the literature, Pierre Fournier argues that political knowledge is a

function of opportunity, ability, and motivation. (Fournier, 2002) While standard socio-

economic variables condition all three determinants of political knowledge, scholars

have noticed that in the developed democracies, political knowledge seems to be waning,

even when socioeconomic indicators are controlled for. Putnam and others discern a

generational decline in political knowledge and participation among Americans while

others argue that such declines are confined only to some developed democracies. In

Scandinavian countries, no precipitous declines are discernible.

Scholars seem to agree that what people watch and read affects the quality of their

citizenship. Putnam is clear on this point. Increases in television consumption correlate

strongly with reduced political knowledge and political engagement (Putnam, 1993). TV,

he suggests, takes up time that could be spent elsewhere, inculcates a pessimistic view of

human nature, and has adverse effects on children’s socialization processes. Milner also

claims that TV dependence reduces the quality and quantity of political information that

helps to inform the decision to vote (Milner, 2002).

But mere newspaper consumption is not unambiguously a positive influence on

citizenship. While there are more newspapers than ever, tabloid-like papers with reduced

public affairs content are doing well while established papers with relatively high levels of

public affairs content are increasingly in trouble. And here the trends are generational in

character too: young people spend less time reading newspapers and when they do, they

spend a smaller share of that time reading political news.

To sum up, political knowledge is an important factor influencing political participation.

Political knowledge is gained not only by conversation but also by consumption of

‘quality’ media including public affairs programming on TV and radio and political

coverage in newspapers. Our data (Table 9) suggest a slightly higher exposure to

the specialised pressure among microfinance borrowers in Russia and Slovakia, but in

general were unable to confirm the hypothesis that higher levels of trust and political

participation between our treatment and control groups were caused by higher levels of

media exposure, or that such differences in media exposure which existed were caused by

microfinance.



6 POLITICAL PARTICIPATION

Table 10 shows levels of formal political participation within our sample: this is every-

where low, but higher amongst clients than in the control sample.

However, the evidence of our interviews is that political participation was overwhel-

mingly of an informal nature, building on the informal linkages established at the bottom

of the social scale by and also independently of microfinance organizations. Such activity

is illustrated, in Slovakia, by client S1, who converted an incipient federation of

entrepreneurs (bridging social capital) into a political entity capable of negotiating with

government (linking social capital).

It is to be emphasized that many attempts to extend the scope of social capital were

unsuccessful, especially where they ran up against political opposition whose strength had

been underestimated. This occurred particularly when attempts were made to deploy

Table 9. Media exposure



Media exposure: Overall media

exposure index

Local press 71.8 87.5

Local press (daily) 19.6 20.8 82 87.5

Local press (weekly) 21.7 29.2 50 58.3

National press 53.9% 57.5%

National press (daily) 69.6 66.7 26 29.2

National press (weekly) 87 83.3 46 58.3

Specialised press 26.8 19.5 84.8 79.2 26 41.7

Press total 95.7 95.8 92 100

News on radio 61.8% 47.5% 91.3 91.7 80 100

News on TV 92.2% 95.8% 78.3 91.7 92 95.8

Internet 6.1% 17.1% 50 41.7 22 50

Source: 2001 survey, question 23.

Table 10. Political participation (percentages)



(microfinance (microfinance (microfinanceclients) clients) clients)

Political involvement:

Participation (any kind) 2.4 0 2 0

Party membership 4.3 0 2 0

Financial support 6.5 0 2 0

Mean political participation 3.3 1.6

score



group solidarity as an asset against the overriding local problem of corruption were often

unsuccessful. As we have seen, corruption in Borisoglebsk extended down to the lower

reaches of business. The more cohesive of the two groups (R10–R14) warned ‘no-one will

protect us in court, not even the Borisoglebsk Centre for the Support of Enterpreneurship’.

The other Borisoglebsk group provided painful evidence of this. They had collectively

refused to pay bribes to local authority staff who were demanding them in return for

trading licences. They formed common cause (‘bridging social capital’) with other groups

to reinforce their stand. The council decided to make an exemplar of the leader of the

‘dissident’ group and rescinded his trading licence; he is now seriously in debt. The group

did not stand by him and recruited a new member to replace him; when we interviewed,

this new member had been ‘working out his probation’ for two weeks. The group is now in

a fragile state and meets much less frequently than previously—social capital has been

dissipated by a miscalculation of political leverage.

7 CONCLUSIONS; IMPLICATIONS FOR POLICY, INSTITUTIONAL DESIGNAND FURTHER RESEARCH

We can now begin to summarize. Microfinance, in FORA and INTEGRA at least, appears

not to be associated with higher levels of formal associational membership in all of the

country groups we have examined, but is associated with the development of informal

associations, and thence trust, and thence political participation. Informal associations are

more cohesive (we provisionally find) where there is strong leadership and relatively low

perceived intragroup equality. Political participation itself, as revealed by the interviews,

tends most often to be of an informal nature rather than consisting of formal activism

within political parties. These relationships are all two-way: higher levels of prior

association (especially, in Slovakia, in church groups) appear to predispose towards

membership in microfinance groups, as well as microfinance causing closer association

between members whether or not in receipt of group loans. The correlation coefficients

between the variables in our original model are as set out in Figure 3.

There are four dimensions of the relationship between microfinance, social capital and

enterprise performance which are particularly interesting. The first is the influence of prior

experience on trust: prior linkages bonded in the hard experience of perestroika tended to

survive and induce more trust than more recent and more ad hoc associations, and what

microfinance was doing was often provide a catalyst to empower these prior groupings

rather than bring them into being. A second is the apparent ability of microfinance to

increase trust by an indirect route, notably through positive influences on trust in, and

relationship with, government officials. Another key indirect influence is through corrup-

tion: in Slovakia, the client group experienced significantly less corruption than the control

group, particularly in terms of judicial procedure, (in all cases in favour of the client

group) were observed in terms of judicial processes, winning public tenders and getting

contracts from large enterprises. (But some expected indirect routes, such as media

exposure, turn out to be irrelevant.) A third is the ability of some microfinance groups to

reproduce themselves and extend social capital into related areas. In encouraging this

process, leadership and intra-group inequality appear to be important; sometimes, as in

Poltar, Slovakia, the leadership comes from outside the group. Finally, there is some

evidence of a relationship from microfinance to political participation and thence to the

creation of a more open society; but often this participation is of an informal nature, e.g.



the group which unsuccessfully banded together against corruption in Borisoglebsk, or the

country-cottage company in Bratislava which successfully created a cottage-owners’

cartel from outside.

Thus, microfinance does appear to help create social capital in Russia and eastern

Europe, but not homogeneously and through some unexpected channels. The following

policy implications would appear to emerge:

(i) in regions where corruption is serious e.g. Borisoglebsk, microfinance is particularly

valued for its ability to provide a bribe-free source of credit. In so doing, it creates

trust which lowers the rate of tax on business transactions—and thence the cost

structure of small enterprise.

(ii) one of the most important indirect effects of microfinance appears to be its ability to

induce greater trust in government officials. Exactly how this effect materializes is

not clear but what is certain is the potential complementarity between NGO

microfinance organizations and state organizations in the construction of social

capital.

(iii) Trust is the obverse of interpersonal risk, and in those cases where trust is low

complementary devices such as insurance supplied by the microfinance provider may

help reduce the risk of default.

We believe that this is the first impact assessment study of microfinance in relation to

social capital; it has therefore needed to take an experimental approach to both

methodology and the specification of social capital variables. One of its basic objectives

is to help microfinance institutions understand better their ‘wider social impact’, and we

Figure 3. Expected main elements in causal sequence; correlation coefficients (Slovakia)



believe that the range of approaches presented here offer a possible method of estimating

them. But this in turn raises the,as yet unresolved, question of how to embed them into

management practice.

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