Table Of ContentCaucasus Research Resource Center (CRRC) – Armenia
This research has been implemented in the scope of CRRC-Armenia Research
Fellowship Program, financed by the Carnegie Corporation of New York.
______________________________________________
Grants to Support Social Science and
Policy- Oriented Research # R08
Trust, Institutions and Economic Growth in South Caucasus
By
Mariam Matevosyan
Yerevan
2013
1
Contents
Acknowledgments ...................................................................................................................... 4
Abstract...................................................................................................................................... 5
Introduction ................................................................................................................................ 5
Literature Review ....................................................................................................................... 7
Research Methodology and Data ............................................................................................... 9
Hypothesis and Research Questions ........................................................................................10
Findings ....................................................................................................................................11
Time dependency. .................................................................................................................11
Frequencies...........................................................................................................................11
Correlations ...........................................................................................................................14
Regression Analysis. .............................................................................................................15
Conclusions ..............................................................................................................................16
References ...............................................................................................................................16
Appendix 1. Frequencies ..........................................................................................................18
Appendix 2. Correlations. ..........................................................................................................27
Appendix 3 Model .....................................................................................................................29
Appendix 4 Frequencies of Dummies ........................................................................................32
Appendix 5 Model Based on Dummy Variables .........................................................................35
2
3
Acknowledgments
I would like to thank Jenny Paturyan, Valentina Gevorgyan and Anna Hakobyan for tolerating my
constant complaints about my work, to Ani Alekyan, Aleksandr Grigoryan and Hovhannes Galstyan for
their advice in econometrics and to CRRC team, especially to Anna Sarkisyan for their support
throughout the whole period of work.
4
Abstract
Numerous studies indicate that generalized public trust is beneficial for economic growth. (Beugelsdijk,
2006; Glaeser, La Porta, Lopez-de-Silanes, & Shleifer, 2004; Stephen Knack & Keefer, 1997) The paper
looks at a special subcategory of public trust that is at the level of public trust in core democratic
institutions hypothesizing that the latter positively relates to the rates of economic growth in three South
1
Caucasian countries. (Armenia, Azerbaijan and Georgia).Caucasus Barometer (2004 - 2012) is used to
estimate the level of public trust in core democratic institutions, while economic growth rates are
estimated based on International Monetary Fund’s (IMF) official data. The paper employs cross national
regression analysis to test the hypothesis.
Introduction
One group of economists has spoken in favor of alternative factors influencing core
economic institutions thus challenging the underlying philosophy of Washington Consensus.
(Acemoglu, Johnson and Robinson 2001; Easterly and Levine 2002 et al.) Others argue that
growth is a function of economic institutions and technological advancements (Solow 1957) or
physical endowments such as geography. (Gallup, Mellinger and Sachs 2000, Sachs 2003). In
this study I critically examine both views and take a slightly different perspective on the
problem. I claim that a specific subcategory of public trust that is public trust in core democratic
institutions has its effect on rates of economic growth in three South Caucasian countries.
Scholars have profitably defined trust as basic evaluative orientation toward the
government (Stokes 1962) based on how well the government is operating according to people’s
normative expectations (A. Miller 1974). In this paper I am inclined to give an operational
definition to the term ‘public trust in core democratic institutions’ meaning that it refers to the
rates of effective communication and transmission of publicly significant information in between
and inside those institutions. It is hypothesized that this efficient transmission positively relates
to the level of public trust in core democratic institutions. Thus the paper particularly will be
looking at the dynamics of public trust (trust in institutions and interpersonal trust) in three south
Caucasian countries and examine its’ relationship with the level of development of basic
democratic institutions, economic growth in the region for the period of past 9 years. Caucasus
Barometer 2004-12 data is used to estimate the level of public trust in core democratic
institutions and International Monetary Fund’s (IMF) official statistical data is taken to estimate
1
The Caucasus Barometer survey runs annually in Armenia, Azerbaijan, and Georgia based on the same
methodological approach and the same survey instrument. The 2004 survey was carried out only in the three capital
cities; the 2005 survey also included one region in each country. Since 2006, the survey has been carried out based
on a representative nationwide sample excluding territories affected by military conflicts. See
http://www.crrccenters.org/caucasusbarometer/overview/ for more detail.
5
the levels of economic growth in Armenia, Azerbaijan and Georgia. Regression analysis is
conducted to test the hypothesis.
6
Literature Review
Typical models of economic growth usually take a representative economy implying that
economies follow a shared path of economic development. In the framework of endogenous
growth models long term growth is fueled by technological innovation. (Romer, 1986) Empirical
evidence is also supporting the endogenous growth framework. After decades of growth
accounting in selected countries (Solow, 1957) it became clear that the long term fuel of
economic growth in the leading economies has been technological advance spurred by the
growth of income. However it is also argued that endogenous growth is not a general pattern to
characterize growth in all economies. (Sachs, 2003, p. 215) Instead, it is found in countries with
only about one-sixth of the world’s population. Thus, neoclassical models didn’t take into
account differences, assuming that developing countries sooner or later will follow the same
logic as technological advancements are accessible to everybody. Nevertheless practice shows
that so called developing countries do not haste to follow the logic.
Eggertsson is amongst those economists who stress out the importance of discussing and
redefining the concept of ‘technology’. While answering to the question “Why some countries
are poorer than others?” he says that per capita output of a given economy depends on country’s
ability to implement two complementary types of technologies: social technologies and
2
production technologies . Social technologies describe methods or mechanisms whereas social
institutions create patterns of behavior, production technologies describe methods for
transforming inputs into outputs, but production processes are effective only within appropriate
institutional frameworks. (Eggertsson, 2005) Eggertsson’s analysis of social institutions is
backed by new institutional economics and, with some modifications, uses its frameworks,
concepts and theoretical insights. (Eggertsson & Eggertsson, 1990; Libecap, 1989; North, 1990;
Williamson, 1987) Eggertsson (2005) argues that analytically it is essential to make a distinction
between production technologies and social technologies because production technologies have
characteristics of public goods, whereas social technologies do not travel well. Moreover,
modern production technologies are not productive unless complemented by social technologies
of a minimum quality. (Eggertsson, 2005, p. 12) Reasoning along these lines Eggertsson
concludes that financial and engineering issues are not the ultimate cause of poverty in
2 Italics by the author.
7
developing countries, but rather the social and political factors associated with imperfect
institutions are. (Eggertsson, 2005)
In political economy growth theory social factors and particularly social trust have been
examined and are reflected in such measures as social capability, social infrastructure, social
capital and growth, including trust. (S. Knack & Keefer, 1997; S. Knack, 2003) Putnam (Putnam
& Leonardi, 1993a, p. 157) writes "Economics does not predict civics, but civics does predict
economics, better than economics itself". He stresses on what he has calls 'civicness,' or a sense
3
of civic community . This community in turn may be characterized as a dense network of social
associations, where trust facilitates the workings of the society as a whole . (Putnam & Leonardi,
1993a, p. 167) Lipset ( 1994) finds a strong correlation between indices of modernization and
democratization. And if democratization in turn is related with the level of public trust as many
scholars show (Norris, 1999; Putnam & Leonardi, 1993b) th en it may be claimed that public trust
in democratic institutions is a factor that affects economic growth.
Besides trust in democratic institutions interpersonal trust is also an important factor for
the economic growth of the country in general and particularly for the growth of personal
income. Zak and Knack ( 2001) argue that even in growing economies, interpersonal trust is a
powerful economic stimulan t: a 15 percentage point increase in the proportion of people who
report that others in their country are trustworthy raises per capita output growth by 1% for every
year thereafter. Further, economic growth initiates a virtuous circle as income gains enha nce
interpersonal trust. Model developed by Zak & Knack ( 2001) shows that trust emerges
endogenously among economic actors in order to reduce transactions costs driven by asymmetric
and costly information. North ( 1990, p. 54) takes a more political ec onomic stance going from
institutions to trust emphasizing their capacity to build trust.
Based on the analysis of main trends in literature today and the questions that come out of
those , the logic of my argument is the following: public trust is a gener al normative term for
various types of mechanisms that actors use to cope with uncertainty and complexity in social
environments. Effective working of core democratic institutions is based on those normative
structures one of which is the level of public t rust in those institutions, acting as an exogenous
variable in this study. Accordingly, economic policy making models , and ref orms are possible to
successfully implement only in case there is public trust in core democratic institutions.
3 More on this see Almond G.; Verba S. (1963)
8
Previous cross-national regression studies conclude that policy of economic liberalization affects
positively and significantly growth in post-communist countries (Christoffersen & Doyle, 2000;
Hernández-Catá, 1997) Fischer, et al (Fischer, Sahay, & Végh, 1996) Economic liberalization
policy and macroeconomic stability were positively associated with growth in pooled cross-
section and time-series of 25 post-communist countries in 1992-1995. Selowsky and Martin
(Selowsky & Martin, 1997) note that the effect of economic reform policy on output becomes
positive with a time lag. Causality elaborated in this research is such that economic liberalization
policies and their effective implementation is possible only in the existence of strong democratic
institutions, the working of which in turn is heavily dependent upon the level of public trust in
those institutions.
Research Methodology and Data
The paper employs cross national regression analysis to determine the influence of trust
in several democratic institutions on GDP growth in three South Caucasian countries.
Caucasus Barometer (2004-12) is viewed as a main primary data source on measuring the levels
of trust in core democratic institutions in three South Caucasian countries. Total of seven
variables measuring trust in Courts, local NGO’s, Parliament, Executive Government, President,
4
Media and Ombudsman were chosen as exogenous variables. GDP data for three South
Caucasia n countries is estimated from IMF World Economic Outlook Database 2013. Gross
5
Domestic Product (GDP) current prices, US dollar was taken as an endogenous variable . Linear
regression models are used to explain dependent var iable. A joint database by years has been
6
developed based on initial variables . F requencies were run based on the joint database.
Pearson’s correlations were studied before the linear regression model was constructed. The CB
data has also been analyzed from a binary perspective. Dummy variables were constructed to
build new models. Negative answers (fully distrust, rather distrust) have been coded as 0 and
positive answers (rather trust, fully trust) as 1. For Frequencies of dummy variables see
Appendix 3.
4
Variables were further coded as follows: Courts-X1; local NGO’s-X2; Parliament-X3; Executive Government-X4;
Media-X5; Ombudsman-X6; President-X7
5
See IMF report for more detail:
http://www.imf.org/external/pubs/ft/weo/2013/01/weodata/weorept.aspx?pr.x=44&pr.y=11&sy=2004&ey=2012&scsm=1&ssd=
1&sort=country&ds=.&br=1&c=911%2C912%2C915&s=NGDP%2CNGDPD&grp=0&a=
6
An aggregate database based on means wasn’t convenient to use and didn’t generate allowable models .
9
Regression equation is
Hypothesis and Research Questions
RQ 1: Is there a relationship between trust in core democratic institutions and economic growth
in Armenia, Georgia and Azerbaijan (2008-2012)?
RQ 2: Is there a difference between the level of trust in core democratic institutions and
economic growth based on country?
H: In Armenia, Georgia and Azerbaijan economic growth positively relates to the level of public
trust in core democratic institutions.
10
