Do Social Networks Substitute Formal Institutions? Evidence From Rural Armenia

The first step of reforms directed towards the formation of a market structure in Armenia was the privatisation of land, which started in February 1991 with the adoption of the Land Code and the Law on Peasant and Peasant Collective Household, and finished in April 1993 (Spoor, 2005). As a result of the land privatisation, almost 333 thousand peasant farms were created in contrast to the 860 Soviet-type kolkhoz/sovkhozes before (CFOA, Armenia Country Paper, 2003, Lerman and Mirzakhanian, 2001). Yet, the lack of adequate institutions, particularly financial institutions, supporting productivity increasing agricultural activities under private ownership, has remained one of the most serious deficits (Spoor, 2005). With the transition, the government rightly stopped previous costly programmes of directed agricultural credit. At the same time, Armenian commercial banks apart from the Agricultural Cooperative Bank of Armenia (ACBA), were not interested and had no experience in providing credit to smallscale private farmers (Ministry of Agriculture of Armenia, 2002). The paper is organised as follows: The theoretical link between social capital and access to resources is discussed in Section 2. Section 3 presents the data and methodology used in the analysis. The findings are summarized in Section 4 and Section 5 concludes the paper.