International Journal of Social Economics

Emerald Article: A "human ecology economics" framework for Eastern Europe

Roy Allen, Norman Bedford, Andrs Margitay-Becht

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IJSE
38,3

A human ecology economics

framework for Eastern Europe
Roy Allen, Norman Bedford and Andras Margitay-Becht

192

Saint Marys College of California, Moraga, California, USA

Abstract
Purpose The purpose of this paper is to present a human ecology economics (HEE) framework for
understanding economic growth and development challenges in Eastern Europe.
Design/methodology/approach The HEE approach relies on evolutionary and complex systems
processes; it expands the field of ecological economics by incorporating interdisciplinary material from
the humanities; and it allows a long-run perspective with a focus on sustainability of human systems.
Using this framework and primary research from Hungary, Estonia, and Azerbaijan, challenges to
Eastern European development are identified.
Findings The main limit to Eastern European sustainable development is not production capital,
i.e. the availability of natural resources, fixed human-made capital, and intermediate consumption,
but instead shortages of transaction capital, i.e. social capital, informational capital, and financial
capital.
Research limitations/implications Rigorous analytical models of, and precise predictions of,
change in the human ecology are at present not possible using evolutionary and complex systems
approaches; however, Eastern Europe can be fruitfully studied through the HEE approach, and certain
simulation methods and lessons from recent history are suggested.
Practical implications Greater support for various kinds of transaction capital is recommended,
including for social and communication networks, for information exchange between small and medium
size businesses, for innovation and creative learning by doing, for financial intermediation, for better
inter-party cooperation at the national level, etc.
Social implications The need for greater social cooperation, including a reduction in discrimination
exercised by dominant individuals or groups, arises as a more important pre-condition for sustainable
economic growth than is commonly believed.
Originality/value Scholars, policymakers, and practitioners might appreciate the more
comprehensive interdisciplinary framework for understanding economic growth and development
challenges in Eastern Europe, especially the role played by intangible belief systems, social agreements,
and levels of cooperation.
Keywords Ecology, Economic growth, Sustainable development, Hungary, Estonia, Azerbaijan
Paper type Conceptual paper

International Journal of Social

Economics
Vol. 38 No. 3, 2011
pp. 192-208
q Emerald Group Publishing Limited
0306-8293
DOI 10.1108/03068291111105147

I. Introduction
Market-based reforms and democratization in Eastern Europe since the 1980s; dramatic
political change, a creative chaos of new social and technological networks; more rapid
development, transfer, and destruction of capital all require new political-economic
perspectives. This paper does not find convergence or conflict between centrally
administered socialist traditions and market-based globalization processes to be the
most useful perspective. As Ralf Dahrendorf argued in the famous transition year of
1990, there is no third way or convergence between these two systems, and as systems
each would fail in Eastern Europe. Instead, he argued that the only choice was between
open and closed systems, and furthermore that it may take more than 60 years before

the creative chaos of institutions and associations can reasonably assure that these
societies remain open (Dahrendorf, 1990).
During these transition decades for Eastern Europe perhaps through Dahrendorfs
60 years from 1990 until 2050 this paper finds a human ecology economics (HEE)
framework to be the most instructive. Compared to most other economics literature,
this approach privileges the important role played by less tangible belief systems, social
agreements, levels of cooperation and other group behaviors. Based upon primary
research from Estonia at the northern edge of Eastern Europe, from Azerbajan at the
southern edge, and Hungary and elsewhere in between, this paper concludes that Eastern
Europe has a long way to go before getting it right with regard to these intangibles.
Belief systems about getting it right must be defined within the HEE framework
the various definition(s) that can be adopted within Eastern Europe lead to different
system outcomes, and the definitions chosen by outside observers lead to different
assessments of success. In this regard, from within the HEE framework, Snyder (2008) has
contrasted the following belief system claims about economic opening/globalization
processes: free market, Marxian, localist, anarchist, and nationalist. Snyder concludes
that evidence is lacking to privilege the claims of either the more extreme pro-globalization
or anti-globalization groups; instead, he calls for a more open-minded pragmatism until
the relationships between globalization processes and growth, development, poverty, and
inequality, etc. are better identified. Siding with Snyders view, this paper provides an
inclusive conceptual framework for such discussions, and, it attempts to pragmatically
advance sustainable development as a minimum goal for this region in contrast to
economic system failure.
In the authors view, the main limit to Eastern European sustainable development,
however defined at the moment, is not production but transaction. The nature and role of
transaction, so basic to intra-species negotiation, coordination, learning and
adaptation in ecological models, is often ignored in mainstream and socialist models
with their emphasis on production. For example, in common literature, production
capital (composed of fixed human-made capital, natural capital, and intermediary
consumption) is central to development; whereas, in this paper, transaction capital
(defined by the authors as financial capital, social capital, and informational capital)
is central.
II. A HEE approach to development
HEE, as recently developed by one of the authors (Allen, 1991, 2008, 2009), provides a
formal framework for the importance of less tangible belief systems, social agreements,
and behaviors in economic development. Unlike traditional economics and other social
sciences, HEE:
(1) allows a very long run time perspective;
(2) it encourages use of the humanities;
(3) it allows everything to vary within the economic system including belief
systems, ways of being, and social behaviors in complex, co-evolutionary
ways;
(4) it emphasizes global systems; and
(5) it effectively juxtaposes sustainability and other interdisciplinary issues
alongside traditional economic issues.

HEE
framework

193

IJSE
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194

Each of (1-5) is needed, in the view of the authors, to best apprehend the creative chaos
of Eastern European economic growth and development.
HEE is similar to the relatively recent field of ecological economics (EE), which
was given impetus by the 1989 Journal of the International Society for Ecological
Economics, Ecological Economics, and subsequent textbooks (Costanza et al., 1997;
Daly and Farley, 2004). The emphasis on human ecology combined with economics
brings the humanities as well as the physical sciences-based field of ecology to the study
of economics, and the HEE framework is thus broader than EE, although occasional
articles in EE do draw attention to the systemic role of ideology and values (Soderbaum,
1999) and the importance of cultural capital (Berkes and Folke, 1993). Clearly, EE could
give greater attention to the role of intangible beliefs, values, and various social
behaviors (as opposed to its emphasis on entropic physical processes), and how these
less tangible conditions co-evolve with tangible resources and populations, as per
Norgaard (1994) but then what we would seem to have is HEE rather than EE.
Within HEE, unlike neoclassical or socialist economic models, the economy is a
complex adaptive system, and more behavior emanates from the actions of individual
agents: there is less influence of a global controller whether central government
or market equilibrium auctioneer to set parameters or behavior. Because agent
behaviors interact in non-linear ways, the macro result which emerges can have a life
of its own which is not obviously deducible from the properties of the agents: the whole
is not only greater than the sum of the parts, it is different as well. Positive feedback
loops often exist, which amplify the effects of small changes into large cascades with
significant influence. Complex systems are path-dependent, meaning that their present
state is determined by what happened to them in the past (history matters). They exhibit
perpetual novelty: new behaviors and structures constantly stimulate more of the same.
Compared to neoclassical or socialist economic models, the HEE and complex
systems approach is able to more effectively model open systems (those which take in
and give out matter, energy, and as per HEE emphasis information) and/or
transitions between closed and open systems. The opening of Eastern Europe since
the 1980s, often called globalization, is a catch phrase for many structural changes
allowing freer and more integrated exchanges between Eastern Europe and the rest
of the world for information, culture and human travel, and in an economics sense,
globalization of finance, trade, joint ventures, convertibility and shared currencies,
various interest rate and financial strategy alignments, price competitiveness across
industries as less restricted by national policy, etc. Neither centralized government
attempts to control these changes in Eastern Europe, nor neoclassical models of
equilibrium in trade or finance has predicted outcomes very well during what, in the
language of complex systems, have been important phase shifts for Eastern Europe.
This openness not only materialized towards the west, but also towards traditional
partners. The earlier trade agreements, enforced by the will of the Soviet Union, were
replaced by information-driven, business-oriented relationships in most cases
destroying the market for the goods produced in these regions (example: Hungarian bus
manufacturing). As we shall see, given the rapid pace of ecological change across
Eastern Europe, effective adaptation and necessary innovation was often lacking.
HEE proposes various structural components or building blocks of the human
ecology. Perhaps, the most fundamental components are human populations, belief
systems, social agreements, and physical environments and resources. From these basic

structural conditions other structural conditions emerge, such as organizations,

institutions, and for the purpose of this paper, economic systems i.e. the Eastern
European economic system. This structural identification or taxonomy is not meant to
be the only way to characterize the human ecology, but rather a helpful starting point for
discussion of the challenges and opportunities faced by Eastern Europe.
Figure 1 organizes the four basic structural conditions into quadrants. Belief systems
is shown in the upper left quadrant, which can be defined as ways of organizing alleged
truths and convictions examples include, but are not limited to mythologies, religions,
faiths, ideologies, philosophies, mathematics, science, and various academic fields. Social
agreements, shown in the upper right quadrant, can be defined as the structure that
humans impose on their interaction. Social agreements usually reduce uncertainty; they
are the formal and informal rules of the game. Examples include, but are not limited to
politics, law, use of money, communications, and norms of culture and etiquette. In the
lower right, quadrant is human populations with characteristics that include birth,
fertility, and death rates, population age structure, personality traits, and spatial
distribution. In the lower left, quadrant is physical environments and resources, which
includes land, air, water, energy, city and regional spatial arrangement, transportation and
other infrastructures both natural endowments as well as human built.
The four basic structural conditions in the human ecology can be combined with each
other to form new structural conditions. For example, as shown in Figure 1,
organizations can be defined as human populations bound together by common social
agreements examples include firms, trade unions, political parties, regulatory bodies,
etc. Of course, organizations use, and interact with, belief systems and physical
environments and resources, but these interactions are not generally necessarily in order
for organizations to exist as legal entities. In common usage, institutions are
sometimes closely synonymous with organizations, and sometimes more synonymous
with social agreements. A useful definition for human ecology (similar to social
agreements) from North (1997, p. 225) is:

Belief systems

Social agreements

Mythologies
religions, faiths
ideologies, philosophies
mathematics, science
various academic fields

Politics, law
use of money
communications
culture, etiquette

HEE
framework

195

Institutions
Organizations
Meso units
Physical environments
and resources
Land, air, water, energy
city/regional spatial arrangement
transportation, other infrastructure

Human populations
Birth, fertility, death rates
population age structure
migration
spatial distribution

Figure 1.
Structural conditions in
the human ecology

IJSE
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196

Institutions are the rules of the game both formal rules and informal constraints (conventions,
norms of behavior, and self-imposed codes of conduct) and their enforcement characteristics.

Also shown with organizations and institutions in Figure 1, from the language
of evolutionary economics, a meso unit is a rule or pattern that agents follow in their
everyday behavior, along with the people who actualize that rule. The micro-meso-macro
framework of Dopfer et al. (2004) centers around two novel concepts: rules and meso units.
A rule is a pattern that agents follow in their everyday economic behavior: it may be
cognitive, behavioral, technological, institutional, organizational, socio-cultural, etc. An
economic system (assumed to be complex adaptive) is a collection of meso units evolving
overtime. In the case studies of Eastern Europe below, evolution of this kind is discussed.
And, regarding sustainable development during the evolutionary process, given the
diversity of approaches to this topic in Eastern Europe, HEE suggests the following
starting point to academics and policymakers: within each of the four quadrants of Figure 1,
please indicate which structural conditions you would sustain and which you would
allow (or require in many cases) to change, so that your ecology is defined as sustainable.
III. The central role of transaction and cooperation
For the purposes of this paper, production capital, commonly defined as the aggregate of
natural capital, fixed human-made capital, and circulating intermediary consumption
generally accepted by the economics literature as productive is contrasted with other
forms of human-made transaction capital such as financial, informational, and social
capital which are not as generally accepted, at least by mainstream economics literature,
as productive. As we shall see, these forms of transaction capital are less tangible and less
materially measurable than production capital even invisible by comparison and they
require careful exposition given that mainstream economics literature including Marxism
(and indeed much of the sustainable development literature) is most comfortable with a
framework of philosophical materialism.
Social capital was articulated almost 100 years ago as:
[. . .] good will, fellowship, sympathy, and social intercourse among the individuals and
families who make up a social unit [. . .] The individual is helpless socially, if left to himself [. . .]
If he comes into contact with his neighbor, and they with other neighbors, there will be an
accumulation of social capital, which may immediately satisfy his social needs and which may
bear a social potentiality sufficient to the substantial improvement of living conditions in the
whole community. The community as a whole will benefit by the cooperation of all its parts,
while the individual will find in his associations the advantages of the help, the sympathy,
and the fellowship of his neighbors (Hanifan, 1916).

Of course, the values of community life including sympathy, fellowship, and cooperation
are discussed from the beginning of literary traditions, but it is worth noting that Smith
(1759) stressed the importance of innate sympathy as a basis both for helpful social acts
and for the sustainability of the social system. In the 1980s, the French sociologist Pierre
Bourdieu and the German Economist Ekkehart Schlicht elaborated their notions of
social capital to identify the social and economic resources embodied in social networks
(Bourdieu, 1984). Bourdieu, especially, clarified the term in contrast to cultural,
economic, and symbolic capital.
Flows of information, and acceptance of informational capital have been central to
recent Eastern European development. Quoted on his celebrated trip to the USA in 1989,

Lech Walesa pronounced: How did these reforms appear? Thats the result of
civilization of computers, satellite TV and other innovations which present alternative
solutions. Similarly, in The Open Society, Popper (1945) had predicted the economic
failure of administered communism, not the basis of moral or market forces
arguments, but because these state-centered societies interrupt the natural flow of
information.
Historically, physical labor and production capital were perceived to embody most of
Eastern Europes wealth because information turnover or the rate of depreciation of
informational capital was so slow. The same farming or manufacturing practices used
over and over seemed to give tangible resources value apart from the practices.
However, across Eastern Europe after the revolutions in 1989, the increased rate of
information turnover through exposure and networking with global society quickly
reduced the inherent-value-perception of tangible resources:
Nowadays, economic systems evolve as knowledge grows [. . .] the growth of knowledge and
the re-coordination of that knowledge systematically extends to all economic domains [. . .]
the growth of wealth is a consequence of the origination of novel ideas and their subsequent
adoption and retention by other agents through a process of market-based re-coordination
(Dopfer and Potts, 2008, p. xii).

Financial capital is assumed to be the aggregate of base money, domestic credit,

and foreign credit the full money and credit pyramid. In recent decades, until
the current crisis after 2007, with advances in information processing technology,
government deregulation of financial markets, and globalization, there was a dramatic
expansion of financial capital across the global economy.
The authors view is that sustainable development in Eastern Europe depends
crucially on the supply of circulating financial capital, assuming that it can be well
directed in support of social and informational capital. As stated in general by US
Federal Reserve Chairman Bernanke (2007):
[. . .] a central function of banks is to screen and monitor borrowers, thereby overcoming
information and incentive problems [because full information, no transactions costs
assumptions as often used in neo-classical economics are violated]. By developing expertise
in gathering relevant information, as well as by maintaining ongoing relationships with
customers, banks and similar intermediaries develop informational capital.

As stated by Levine in his exhaustive survey of financial development and economic

growth, existing theories have not yet assembled the links of the chain from the
functioning of stock [and other financial] markets, to information acquisition, and finally
to long-run economic growth (Levine, 1997, p. 695). However, it has long been accepted
that financial intermediaries can economize on the overall costs of processing
information about potential investments, selecting and coordinating the most promising
firms and managers, and perhaps even stimulating technological innovation:
The banker, therefore, is not so much primarily a middleman [. . .]. He authorizes
people, in the name of society as it were [. . .] [to innovate] (Schumpeter, 1912, p. 74).
To summarize, the four-quadrant HEE framework shows that financial,
informational, and social capital collectively called transaction capital have
many linking structural elements in common from each of the four quadrants (Figure 2),
whereas fixed human-made capital, natural capital, and intermediary consumption
collectively called production capital reside only in the physical environments

HEE
framework

197

IJSE
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198

Belief systems

Social agreements

Mythologies
religions, faiths
ideologies, philosophies
mathematics, science
various academic fields

Politics, law
use of money
communications
culture, etiquette

Transaction capital (examples)

Knowledge of the economy
ideology of innovation
communication infrastructures

Figure 2.
Structural conditions in
the human ecology:
financial, informational,
and social capital
collectively called
transaction capital

Physical environments
and resources
Land, air, water, energy
city/regional spatial arrangement
transportation, other infrastructure

Relationships, reputation,
money, networks, culture
innate social instinctsgood
will, fellowship, sympathy

Human populations
Birth, fertility, death rates
population age structure
migration
spatial distribution

and resources quadrant (Figure 3). Ecologists and systems theorists will recognize the
importance of this striking contrast: given that all four quadrants necessarily co-evolve
together, myopic over-reliance on production capital and only this one quadrant as
savior or driver of economic development (as per most traditional literature, historic
eastern bloc five-year plans, etc.) is an ontological fallacy and can easily lead to benign
neglect failure in the other quadrants and therefore the broader system.
For example, the powerful effect of changing social structures on the economy,
regardless of the initial stock of production capital, can be illustrated using an
agent-based simulation developed by Margitay-Becht (2008). In order to capture the
peculiarities of diverse groups and societies, an intricate multi-tier agent-based simulation
was created, that focuses on the interpersonal decision-making mechanisms, the
dominance of group-relationships as opposed to pure profit maximization, the availability
of self-employment in the so-called informal sector, the underdeveloped infrastructure
that gave rise to partially tradable goods in addition to the tradable and non-tradable
goods, the ability of the agents to learn and gain expertise, and probably most
importantly to get to know each other, and develop trust for each other, creating an
intermediate layer of social connections aside from their relations to group-peers and the
others. This approach not only connects micro- and macro-economic phenomena, but
also enables us to depict social capital as discussed by Hanifan: how the cooperation of the
individuals serves society.
The model contains a lot of basic worker agents, who work at one of the few firm
agents, which are in turn members of one of three strategic sectors. The workers can
differ in what they know, what they own, and whom they know, but the most prominent
feature is that they belong to one of two potentially hostile groups. The hostility

Belief systems

Social agreements

Mythologies
religions, faiths
ideologies, philosophies
mathematics, science
various academic fields

Politics, law
use of money
communications
culture, etiquette

HEE
framework

199

Production capital (examples)

Tools, factories, computers, fish,
biodiversity, water, soil, climate,
oil, office supplies

Physical environments
and resources
Land, air, water, energy
city/regional spatial arrangement
transportation, other infrastructure

Human populations
Birth, fertility, death rates
population age structure
migration
spatial distribution

of the groups is measured on a 0-1 scale, 1 being completely friendly (the agents treat
each other equally), while 0 is perfectly hostile (a member of one group will only hire or
purchase from a member of another group, if there are absolutely no offers from
members of their own group).
Using the above structure enables us to incorporate two components of transaction
capital into our analysis: the core of the model is an ever-evolving social network
symbolizing social capital, while the knowledge and trust accumulation of the agents are
a form of information capital. This model helps to analyze a wide range of anomalies
created by distortions in the social structure. It is possible to analyze wealth distribution
among agents, groups, and sectors, changes in the level of employment, official
employment and the structure of unemployment, inequality within the nation, perceived
utility distortions, etc. One of the most prominent early results showed that even if we
create a society that has perfectly equal wealth distribution, if the power among the
groups is not evenly distributed, then it takes less than a year for an automatic
redistribution of wealth towards the dominant group. An even more important result is
shown in Figure 4: intense distrust and hostility among groups and a sufficiently large
dominant group can lead to a huge drop in the overall productivity and output of a
nation. In simulated countries with intense hostility between the groups, if the dominant
group is large enough (30 percent of the population), the total output can be as much as
30 percent lower than in an unbiased society.
IV. Continuing challenges in Eastern Europe
A. Hungary
During the early 1990s, it was the general understanding that Hungary, alongside the
Czech Republic and Slovenia, was one of the most prosperous countries in the region.

Figure 3.
Structural conditions in
the human ecology:
fixed human-made capital,
natural capital
and intermediary
consumption
collectively called
production capital

IJSE
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440

400
380
360
340
1
0.8
0.6
0.4
0.2

320
300

Figure 4.
Changes in potential
output as a function of
social structure

280
100

0
90
80
70
60
50
40
30
20
10
1
The dominant groups proportion of the overall population (%)

Int
e
( r-g
1:h 0:per roup
om fec rel
a
t
og
eni ly ho tions
ou
s s stile
oci
ety
)

200

Output (arbitrary units/capital)

420

Both internal and external parties expected a relatively smooth transition from the
earlier mixed economy to a purely market-based approach (Kornai, 1992). These hopes
were not unfounded: the peculiar semi-market structure of the nation invited
investments, the population was familiar with the basics of entrepreneurship and
the country housed relevant research potential in both the information technology and
chemical industries. The reality in 2010 is a state with unsustainable public
infrastructure and low productivity, and at the center a corrupt and distrusted political
system (The Economist, 2009). Using the HEE approach, it will be shown that these
changes should have and could have been expected, and are deeply rooted in the nations
history.
Early economic transformations. The transformations of the Hungarian economic
system started relatively early, during the late 1960s. Because of the 1956 revolution and
the brutal reaction to it, the Soviet leadership was inclined to allow some economic
reform to go through. These changes were minor, and in the HEE approach, were mostly
constrained to small changes in the social agreements quadrant, barely touching on
the others. Before these reforms could have any great influence, the oil crisis suddenly
re-shaped the relationship between the Soviet Union and the neighboring countries,
leading to ever-increasing deficit spending in Hungary.
The second stage of the pre-1990 transformations happened in the early and
mid-1980s, with the introduction of so-called Goulash-communism (Csanadi, 2009).
These reforms created a brand new meso-structure in the nation: a series of privately
owned micro-businesses, frequently run during the owners free time, after they were
done with their official jobs. These changes had a far-reaching effect in the HEE
approach. First and foremost, the basic premise of the program privately owned
for-profit businesses meant a large change in the social agreements quadrant.
The original promise of the Marxist-socialist structure, that everyone will be able
to receive from the common pool based on their needs, was given up by this change:

more industrious, more successful businessmen had inherently greater access to

resources; thus even access ceased to exist even theoretically. These reforms also had
great impact in the human population quadrant, since these changes by definition
affected a large portion of the population: micro-businesses sprung up all around the
country, at times engaging in real competition, improving the quality of life to many. A
lesser, but maybe more important change appeared in the belief systems quadrant: the
changing social agreements loosened the predominance of the Marxist-Leninist
approach, giving way to traditionally oppressed beliefs. Starting from 1986, civil rights
movements gained strength and paved the way for the transformations to come (Szabo,
1998).
The 1990s. The free-market shock transition caused large-scale changes in all
quadrants some which were undesired, many that were unintended. The premise of
the free-market transition was a more competitive economy, balanced budget, and in the
longer run, better quality of life.
The initial changes were expected to happen in the belief systems quadrant. People
were expected to give up the none-too-embraced socialist-communist ideals,
and embrace the efficiency of the market. These changes in beliefs would underline,
explain and make bearable the unavoidable changes in the social agreements, which
would permeate all of society. Sadly, this is not what happened. The original, communist
social agreements were torn down, but no alternative was placed in their stead.
Healthcare, education and pension, crucial issues not just for the country but for all
nations, were left in a kind of halfway-state, where it is not always clear what one can and
will receive, and who finances it. For example, the relatively complex pension reform
(clearly analyzed in Palacios and Whitehouse, 1998) is constantly adjusted, 13th and
14th month pensions are given and then taken away, threatening the liquidity of the
government and keeping pensioners in uncertainty.
A further and unexpected change came in the form of the physical environment.
While borders of the nation remained unchanged, in 1991 the Comecon agreement was
abolished, thereby greatly changing the available resources and markets for the nation.
These problems did not arise despite the reforms in the 1980s, but greatly because of
them. The new social agreements, although on the surface closer to the market
mechanism, reinforced meso structures that are incompatible with capitalistic values.
The duality of the economy appeared in a duality of property, reinforcing the belief that
when one works for someone else, the best strategy is to conserve personal resources
while reallocating shared resources frequently facilitating the operation of the
privately owned businesses from the resources of the communal ones. The expected
paradigm-shift towards market-based values, therefore, was blocked by these unofficial
social agreements and parasitic meso-structures, undermining desirable changes in the
other quadrants as well.
Transformation since the transition. The most dominant change in the nation
happened in politics: as early as 1989 the nation split into two a split that became a rift
around the elections of 1994. Since 1996, the two dominant parties divided the nation into
two uncooperative halves, which alone would cause huge drops in productivity,
as explained earlier (Figure 4). One of the dominant groups is heavily religious, sacral
and social in nature and the other is technocratic and anti-religious. Both parties have a
fixed and roughly even following who place their allegiances mostly historically. This
split causes a ceiling to the potential social capital, since the two sides mostly avoid

HEE
framework

201

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contact with each other. Social agreements across the macro-economy do not progress,
thus limiting economic growth and development.
Results. The combined effect of these peculiarities in the belief-systems and
social-agreements quadrants of Figure 1 cause the following anomalies:
.
The government and the entire political culture lost credibility. The perceived
level of corruption stands out in the region (Treisman, 2000), and both starting a
business and doing business is relatively difficult. Although there is some
improvement, Hungarys overall rank is 41 in the world, according to the World
Banks Doing Business database its greatest competitor in the region, Slovakia is
36th (The World Bank, 2009).
.
The lack of support for the politicians opens another rift in the society:
not vertically but horizontally, between the political parties and the people, which
causes additional loss in social capital and output.
.
The government supports large international corporations over local firms in
many ways. Tax breaks are given to international corporations, whereas the local
firms suffer delays in receiving funds. The government is slow to distribute EU
funds, and the process is characterized by a lack of transparency (Kincsei, 2009).
These practices can cause severe insolvency issues sometimes firms have to
wait 12-18 months for payments to arrive.
.
The lack of appropriate change in the social agreements quadrant has meant the
previously state-controlled social structures (predominantly education and
healthcare) underwent a series of half-hearted changes that fail to touch on core
issues. These small changes frequently leave these systems worse off than before.
In higher education, for example, the forced attempt to fit into the Bologna
process caused universities to split their previously unified masters programs to
three-year bachelors and two-year masters degrees, without changing the
curriculum in a relevant fashion. Students receiving bachelors degrees from this
system lack the hands-on, ready-to-use skills that are characteristics of these
programs in Anglo-Saxon countries, since the traditional curriculum focused on
these skills in the last two years.
B. Estonia
In Estonia, like Lithuania and Slovakia, 80-100 percent of total bank assets are held by
foreign banks. In the Baltic States, 70 percent of household debt and 30 percent of
corporate debt is in foreign currency. These debt instruments are held by foreign
interests who have provided financial capital but little informational and social capital to
Estonia and the Baltics thus an over-reliance on one component of transaction capital
which is difficult to sustain without growth in the other two. Furthermore, with reduced
supply of foreign credit during the current global crisis, sustainable growth and
development has floundered.
Estonia embraced globalization and market models in the early 1990s. The
government approved the Concept of Basic Principles of Privatization in 1990, which
introduced two goals:
(1) integrate the new economy into the world economy; and
(2) attract foreign direct investment (FDI).

However, foreign banks primarily supported a real estate boom, which led to a
consumer boom and household savings plunged. Local knowledge and financial
capital were replaced by FDI. By 2001, almost 80 percent of gross domestic product
(GDP) was generated through the private sector. After independence was declared in
1991, entrepreneurs were encouraged to bring new ideas and new products to the
marketplace. However, since the start of the current global financial crisis, it has been
difficult to service the now historically high debt levels because they were incurred
without a corresponding build-up of other forms of sustainable domestic capital and
productivity.
Estonia struggles to evolve from its historic emphasis on production capital toward
social infrastructures that facilitate entrepreneurial innovation. In a 2007 government
document titled Knowledge-based Estonia: Estonian research and development and
innovation strategy, 2007-2013, Prime Minister Andrus Ansip portrays Estonias
weaknesses as low levels of R&D investments in the private sector, too few patent
applications, a small number of graduates in natural sciences and technology and only a
modest amount of high-tech export. He outlines three aims of his administration:
establish attractive conditions for doctoral studies, build a modern R&D structure,
and support high-tech entrepreneurship. The Ministries of Education and Research and
of Economic Affairs and Communications are now charged with achieving the following
objectives: development of human capital, organizing public sector research and
investment more efficiently, increasing innovation capabilities of companies, and policy
making directed toward the long-term development of Estonia. These objectives favor
the HEE approach advocating an emphasis on transaction capital.
There is also a need to reverse an increasing migration of skilled workers who have
taken informational and social capital to the more affluent EU countries where wages
are significantly higher (Eesti Pank, 2006). Political scientist Rein Toomla of Tartu
University indicates that unless wages in both the private and public sector are
addressed Estonia will be emptied out.
Despite a transparent privatization process and transformation from a command to a
market economy, Estonia is just one example of an Eastern European country that has
done little to motivate small- and medium-sized domestic entrepreneurs to experiment
with new products, processes and new forms of business and commercial organization
(Schumpeters 1912 definition of innovation) which are key to the sustainable HEE
agent-based domestic networks described earlier. Most value-added products are
imported. Estonias expenditure on R&D is 0.88 percent of GDP vs 1.9 percent in the EU.
Estonian research infrastructure is outdated as minimal funds have been expended in
this area, and labor productivity is approximately 60 percent that of the EU.
A build-up of domestic transaction capital per the charge given to the Ministries of
Education and Research and of Economic Affairs and Communications is vitally
important. Research, development, and innovation must be promoted (Postimees, 2007).
Young people must be motivated to enter this arena. Students, scholars, researchers,
engineers, and scientists from abroad must be enticed to study and work in Estonia as
well as traders, agents, and intermediaries of all kinds. Government support for
Estonian companies to create and innovate as well as pursue entrepreneurial,
risk-taking ventures must be made available. Otherwise, Estonias once competitive and
seemingly sustainable development will deteriorate (Bedford and Leimann, 2008).

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C. Azerbaijan
Azerbaijan has seemingly made strides to motivate entrepreneurs to experiment with
new products, processes, and forms of business and commercial organization per
Schumpeters (1912) definition of innovation. These initiatives meant changes in the
social agreements as well as the belief systems quadrants. As summarized in a recent
International Finance Corporation (IFC, 2008) report the country has enacted reforms to
help start businesses, employ workers, register property, obtain credit, protect investors,
pay taxes, and enforce contracts. These reforms reflect an emphasis on transaction
capital. However, the central government dominates the economy and the President
exercises strong control over economic decision making, which is often unpredictable.
Such action can disrupt improvements in informational and social capital. In a survey
dated 8 September 2008, the Baku-based Entrepreneurship Development Foundation
reported that only 40 percent of entrepreneurs expressed satisfaction with the business
climate, 51 percent said they felt compelled to skirt the law on occasion, and 30 percent
felt vulnerable to pressure from bureaucrats.
Potential investors in Azerbaijan are concerned over political uncertainties.
Exclusionary links between business and politics remains prevalent. Unstable regions
surround the country, including Chechnya, Armenia, and Iran to the south. Two-thirds
of the money invested in non-oil sectors has been derived from foreign assistance
projects. However, in Bedfords view, the projects have only mildly contributed to
spillover development of related economic enterprises.
To test the realities of Azerbaijans need to emphasize social and informational
capital; academic, political, and business personalities were interviewed by Bedford.
According to Professor Huseyin Baginov, Rector, Qerb University in Baku:
There are many entrepreneurs in Azerbaijan that have the ability to pursue a business model
but are restricted because of: 1) the continuing war with Armenia, 2) the complex legal system
and 3) the political situation. Entrepreneurs are frustrated and are leaving the country [taking
informational and social capital with them]. These students mainly learn in order to get a
certificate allowing them to earn more money and perhaps get a job with a multinational.

Ramiz Mahdiyev, Chief of the Presidential Executive Staff stated: The success of
national modernization, to a great extent, depends upon social activities of the youth.
They are often the authors of new ideas. However, there is concern amongst the youth
that social capital the goodwill, fellowship and social intercourse needed to promote
innovation is lacking in Azerbaijan.
Founder and Chancellor Hamlet Isaxali of Khazar University expressed
considerable interest in the initiatives to advance informational and social capital.
He indicated that there were many small businesses in Azerbaijan. However, he was
unable to identify a manufactured product from Azerbaijan in the global market an
indication of little import or export of social and informational capital, i.e. little
openness. Mohammed Nouriev, Dean at Khazar University admitted that no one
wants to pay taxes and thus reveal their figures to customs, thus there is little incentive
to manufacture and export. When Chancellor Isaxali was asked if he felt any of the
students were at Khazar University to develop creative and entrepreneurial skills to
start a company his response was, No. On the surface, it appeared that the students
were not prepared to change either belief systems or social agreements.
Izzet Rustamov, Deputy Prime Minister as well as Chancellor of Baku State
University felt that the major restriction to development in the country was the lack

of financial capital for domestic innovation. He acknowledged that the country must
look at how best to use local resources, i.e. address the physical environments and
resources of the HEE approach. He further noted that reforms are being carried out very
slowly because of the prolonged war with Armenia and the refugee problem (one million
refugees out of a population of seven-and-one-half million). He felt Azerbaijan has gone
through significant ideological changes over the past several years. Now, the country
has been going through privatization, which has presented its own set of problems
directly related to adjustments in belief systems and social agreements. According to an
Azerbaijani newspaper:
The state of affairs in the business and investment sectors is complex. As high level corruption
damages the formation of a competitive market foreign investors, except for speculators,
avoid investments in Azerbaijan. (Azadliq, 2008).

Shamseddin Hojiyev, Department Head of International Economic Relations at the

Azerbaijan Economic Institute suggested that the lack of adequate laws make social and
informational capital formation very difficult.
A sign of progress to improve transaction capital is that policymakers are
increasingly being asked to answer questions on TV. The internet is also beginning to
surface as an important medium for political communication. The use of both mediums
is a positive development toward networking and innovation.
Comments from business and economics students at the universities previously
mentioned include:
Local businessmen do not invest in the country because of the lack of laws and human rights;
I would not invest in our country; There is no political stability; The country is too corrupt for
manufacturing enterprises; Azerbaijan is a dictatorship and if you say what you think you
are in trouble; We do not have adequate technology and managers.

Bahram Khalilov, Head of Azerbaijans Civil Service Commission recently stated,

Further improvement is needed to enhance relationships between civil servants and the
public. (UNESCO, 2007). Ilham Saban, Director of the Center of Oil Research, in a 2008
interview with Baku-based news portal day.az stated, Azerbaijanis show themselves as
individuals who are not inclined to collective business management.
Although there are several reforms that would improve transaction capital within
the country there are also difficult hurdles and serious challenges, to wit: government
must partner and not hinder business enterprises. Laws need to be transparent.
Entrepreneurship has to be encouraged. Youth must be motivated to succeed. Domestic
credit needs to be made readily available. Corruption has to be addressed and the tax
system overhauled to allow manufacturing the ability to function in a just environment.
Such actions would significantly enhance the transaction capital required for
sustainable development within the country.
V. Conclusion
This paper has presented an HEE framework intended to guide definitions,
conversation, research and policymaking regarding economic growth and sustainable
development in Eastern Europe. Given the creative chaos of institutions and
associations since the 1980s that is expected to continue for decades as part of the
opening and globalization processes, this broad HEE framework is recommended over
traditional perspectives.

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This HEE approach recognizes the important role played by financial, informational,
and social capital as drivers of economic growth and development. In effect, it privileges
the physically intangible transaction capital against the physically tangible
production capital. The nature and role of transaction, so basic to intra-species
negotiation, coordination and behavior in ecological models, is too often ignored in
neo-classical and socialist economic models, and also in the practical policymaking of
Eastern Europe post-1989.
Effective transaction capital, as identified in Figure 2, is necessary to facilitate
economic growth and sustainable development across all dimensions of the human
ecology in complex and often intangible ways, including for social and communication
networks, for information exchange between small and medium size businesses, for
innovation and creative learning by doing, for financial intermediation, for better
inter-party cooperation at the national level, etc. In contrast, production capital resides
primarily within the dimension of physical environments and resources and its
accumulation does not tell us much about the evolution and rationalization of competing
belief systems and social agreements and behaviors an evolution that has been so
critically important for Eastern Europe post-1989.
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About the authors

Roy Allen, PhD, Professor of Economics, Saint Marys College of California, has most recently
published New thinking on the financial crisis (with Donald Snyder, 2009, in Critical Perspective
on International Business), Financial Crises and Recession in the Global Economy, Third Edition
(Edward Elgar Publishing, 2009), and as editor Human Ecology Economics: A New Framework for
Global Sustainability (Routledge, 2008). He was a member of the first large delegation of financial

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market professionals from the USA and Canada to visit the Soviet Union in the 1980s. Roy Allen is
the corresponding author and can be contacted at: rallen@stmarys-ca.edu
Norman Bedford, PhD, Professor of Business Administration, Saint Marys College of
California, is a global strategist and has written several articles relating to economic strategies
emerging that developing countries might pursue, and business strategies their corporations must
enact, to be globally competitive.
Andras Margitay-Becht, PhD, Lecturer in Economics, Saint Marys College of California, is a
systems analyst focusing on integrating the effects of incentives, sustainability and social
structures in complex systems. His work focuses mostly on the growth, development and financial
aid to developing nations, with an emphasis on education.

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