Middle class, SMEs and Democracy

Sergey Guriev and Aleh Tsyvinski bundle them alogether to argue the ineluctable democratization of Russia: 

In short, the third main lesson of Russia’s transition is that state capitalism does not work (at least not without a strong meritocratic political party, as in China). Indeed, recent events have shown the system to be inherently unstable. As market reforms have brought substantial prosperity (average annual per capita GDP, at purchasing power parity, is now $17,000), a large middle class, based mostly in small and medium-size companies and the service sector, developed beyond the reach of the state-owned behemoths. Most of this middle class also lives in large cities – where the battle for Russia’s future is now taking place.

Hence the crucial importance of knowing more about how Russian SMEs are financed. Family  and friends are not sufficient, big Russian banks tend not to lend to SMEs. Foreign banks are supporting international commerce, small local bank are very inneficient. The lending technologies available in Russia are not manyfold, because their use depends on the institutional structure (courts, credit bureau) in place. It also depends on social relation. It has been proven that social relations help to reduce interest rate on loan, which is an advantage of relationship lending. However, little is known on how the social context structures creditors - lenders relationships in transition countries.

The financial transmission belt

Supposed to allocate capital is clearly broken. From the FT: 

The amounts of cash being deposited by eurozone banks at the European Central Bank increased further on Wednesday, just days after the ECB provided unprecedented levels of liquidity in an effort to reduce tension in the financial system.

 Happy 2012. 

Weberian thoughts on Orthodoxy and economic development

The Economist reviews the sacrosanct Weberian argument of the influence of religion on economic behavior. To cut a long story short (and this one is centuries old) the relationship is not direct. Linking prosperous economies with faith runs up against exceptions. The Greek example illustrates the issue rather nicely: 

Similarly, contemplating Greece’s economic woes, it is easy to dream up some theory that connects Orthodox Christianity (and its comparatively charitable attitude to human weakness) with corruption or cronyism. Orthodoxy has a less pessimistic view of “original sin” than the Christian West—and its prayers for the dead emphasise “no man lives who does not sin”. Does that imply winking at misdeeds? Possibly—but then try explaining why Greek-Americans, who are at least as devout as their motherland kin, do so very well in business, education and public service. The plausible reason lies in America’s institutions which make it easier to prosper in an honest way.

But institutions is not only formal rules. Institutions seen as encompassing worldviews and habit can then in turn be greatly influenced by religion. The Russian case offers a telling example. Its disrespect for the rule of law - and the economic consequences it implies - can be traced back to Orthodoxy. Newcity M. in "The rule of law and economic reform in Russia, edited by Sachs and Pistor" writes: 

Russia never developed a legalistic tradition. The reason for this is that is was Christianized by Byzantium instead of Rome. Western Europe did not receive Roman legal culture directly. It was transmitted and refracted primarily through the Roman Church, which fostered a legalistic, rather than mystical, world view drawn from Roman culture. This contrasts sharply with the world view fostered by the Russian Orthodox Church. The [Roman] Church was intent on establishing a universal body of ecclesiastical legal principles that would bind Western Christendom together regardless of secular divisions. The origins of the Western notion of law as an autonomous body of principles to which secular authorities are subject can be traced to this period. The Orthodox church, however, rejected the independence and supremacy of the papacy and remained an integral part od the state. In this way, Russia missed the most important foundations of the Western concept of the rule of law.

If faith can influence indirectly economic behavior. The way a religion is institutionalized (and its relationship with secular power) can have deep long-lasting influences on economic development.