Based on the experience in my own country, Croatia, I would say that we have unfortunately somewhat neglected the development of human capital in the last ten years of transition. b)  Social capital  New literature is trying to explain the complexities of various phenomena by social capital (Collier, 1998, Fukuyama, 2000). It is clear that for growth we need not only physical and human capital, but quality social capital as well. Social capital can be described as features of social organisation, such as norms, trust, networks, etc., that facilitate coordination and cooperation among the group for the mutual benefit of the group. A group can be anything from a household to the nation. In the production process it is an addition to physical capital (machines, tools) and human capital (accumulated knowledge). Social capital can enhance the benefits of both investments in physical and human capital. One may distinguish between government social capital and civil social capital. Government social capital encompasses government institutions that influence people’s ability to cooperate and get mutual benefit out of it. Examples are: the rule of law, enforceability of contracts, civil liberties. Civil  2  The original Latin saying is: Navigare necesse est, vivere non necesse est. BIS Review 43/2000  4  social capital includes: common norms, values, informal groups or networks that influence the ability of people to work together. Both of them resolve, i.e. overcome the collective action problem (the prisoner’s dilemma). Trust, as promoted by social capital, reduces uncertainty and thus reduces transaction costs.
Therefore it seems reasonable to  3  BIS Review 43/2000  argue that transition economies should pay special attention to formal education, and other forms of training and research. As the empirical evidence suggests (Flanagan, 1998), return to schooling began to rise rapidly during the transition. Relatively soon, they approximated those in many market economies. Under central planning, the main distortions in human capital formation were the overvaluation of vocational training and the undervaluing of university education. However, the transition process has quickly started to correct this shortcoming of socialism. Formal schooling need not be the main factor in developing human capital. Let me just mention that according to Lucas (1993), the most central feature of human capital accumulation for growth is learning on the job (learning by doing). For this to happen, we need both managers and workers to be constantly exposed to new challenges, to move up on the “quality ladder”. In the globalized world of today it seems that one of the best ways to be exposed to new challenges is by exporting. An old Latin saying could be paraphrased into: “Exportare necesse est, vivere non necesse est”.2 By opening up the economy, we are promoting human capital, which in turn is essential to growth. A similar approach can be used to argue for more foreign direct investments (FDI) in transition economies. FDIs bring not only physical capital, but: new organization, know-how, etc which then increase “domestic” human capital.