Written by Rafael Karapetian - University of Cambridge, BA Economics
Social capital is first introduced when Granovetter was considering that growth models do not account enough for social structure, relations, and the general glue between Solow’s factors of production. This consequently introduced the following equation: economic growth = natural capital + physical capital + human capital + social capital + ε. There is not a single definition to encapsulate the concept of social capital. It can be summarised as networks and the associated norms of reciprocity which have value, or in simpler terms the way in which economic agents interact. According to Putnam social capital is the horizontal associations that can be positive or negative, and it is characterised by strength of relationships, attitudes and values governing interaction among people. However it is defined, it certainly has an effect on the development of an economy. For a variety of reasons, life is easier in a community blessed with a substantial stock of social capital (Putnam). It is measured by looking at the participation rates of people in organisations, and surveys conducted that evaluate the levels of trust in the society. In fact, its effects on trust in a society, “the subjective probability with which an agent assesses that another agent or group of agents will perform a particular action” (Gambetta), is the way in which it most has an effect on an economy. A one standard deviation increase in country-level trust increases economic growth by more than one-half of a standard deviation (Knack and Keefer) by influencing innovation, participation in the stock market and trade, and firm productivity. Looking at trust; it is not just an exogenous variable, people can develop trust because of the quality of the legal system or as a result of strategic interactions (Axelrod). However, it is not only the levels of trust that a government can influence, there are several ways in which a government can alter social capital and, therefore, the development of an economy primarily through the education system, the strengths of institutions and other channels.
Figure 1 - MindManager
If there is higher social capital, or higher trust in an economy, there is improved adaptation of newly introduced policies and provision of public goods. Bison and Verdier introduce the idea that when new institutions or laws are introduced to increase economic growth, their effect depends on how the appropriate social capital and cultural traits, develop to support it. This is why North Italy is more developed than the South. In 1970s Italy the government set up 15 regional governments, but not all performed as well as each other. This was because beginning from the 12th century, the different regions experienced different levels of freedom. Those that had historically more freedom, in the North, had higher levels of trust, participation, and cooperation and so when the same policy would be introduced, it was reacted to better in the North, making its adaptation more effective. This is where culture links into social capital. Culture is defined as “those customary beliefs and values that ethnic, religious, and social groups transmit fairly unchanged from generation to generation” (Guiso, Sapienza, and Zingales), and is what carries social capital over from generation to generation. In this passing of beliefs, the consequences of one’s actions are defined. This also has a direct impact on the development of an economy. It partly determines the rates of criminality. As a result they influence how much governments have to spend on the police, and inner defence and how much of the budget goes on the development of education or healthcare. Moreover, the development of a country is defined as the gross national income per capita, the expected years of schooling, and life expectancy at birth. With a lower criminality rate, it could be expected that life expectancy would increase.
Moreover, in more trusting societies, there is a greater provision of public goods. Michael Woolcock states that social trust is not part of the definition of social capital but it is certainly a close consequence, and therefore could be easily thought of as a proxy. The stronger the social capital, the higher the social trust, the better is the provision of public goods. Across the 35 countries in a WVS survey, social trust and civic engagement are strongly correlated; the greater the density of associational membership in a society, the more trusting its citizens. If there is more discrimination, if there is a more heterogenous society, there is less participation in volunteering which effects the provision of public goods because there is increased need to sign an explicit contract. Padró, Miguel, Qian, and Yao studied the effect of social capital in determining the provision of public goods in Chinese villages and they conclude that villages are more effective at choosing politicians who provide more public goods are those where social capital is higher. The main result is that elections have very little effect in villages with low social capital and a big effect in villages with high social capital.
Religion, another aspect of social capital, is integral to a country’s level of development. Weber explains that the Norther European, Protestant countries have historically been more developed. This is because in the Protestant religion, more emphasis is put on the Bible, the whole population was encouraged to read it, so those countries had higher literacy rates. Moreover, the Protestant link between man and God encouraged self-improvement, diligence, discipline, which in turn promoted entrepreneurship, and savings. This partly explains why the Great Divergence happened in Britain. Increases in some religious beliefs, in particular the belief in heaven and hell and afterlife tend to increase economic performance (Barro & McCleary). Moreover, religions as well as culture define the consequences of people’s actions which as discussed previously can increase the development of a country. This is partly because increased religiousness is associated with higher levels of presence of children, and education (Barro & McCleary). On the other hand it is negatively associated with urbanisation and as countries become more developed a reversal process occurs where religion becomes less prominent in the country. Although religion promotes some values which are beneficial to development, can also be used as a political tool. It can be manipulated to favour certain parties in elections. Religious riots in India make voters more polarised, and the vote share of BJP increases by 6.5%. Although such an effect does normally last a year, this nevertheless highlights the risks that come with religion being used as a manipulative tool that could get not the most efficient party into power (Iyer).
There are certain policies that governments could implement to increase social capital, for example, being more accountable and more integral to the correct values. Olken investigated the impact of increased use of television and radio on social capital in 600 villages in Indonesia. Increased signal led to more time spent watching the TV and radio, which resulted in a falling level of social capital, and people’s participation in a range of village activities. This was because the general level of trust fell. In Namibia, a similar case had occurred. People’s social trust levels fell when they started watching more independent TV and saw that they were not wealthy, that they were not living the life of the characters in the movies and their resentment towards the government grew for swindling the population from this. The solution to all this would not be to reduce the level of transparency, and media in the country, so that people are watching less TV. With how widespread and free information has become, especially with social media in today’s world, this would be almost impossible to bring about. Nowadays, a larger share of the population will be aware of government’s actions and be able to criticise it. Therefore, the government needs to act in an uncorrupt manner, to promote social trust. Otherwise, if the government opts to try control its reputation by controlling the media, even if they are successful at convincing a large proportion of the population, as they have done in Russia, the most intelligent would still be aware of what is really going on in the country. That is why the country has suffered from brain drain. In fact a lot of the immigrants end up achieving major success abroad, and the country’s development would have been much better off if they stayed.
Figure 2 - Outreach Magazine
The government promoting communities to be more respectful towards diversity would also increase levels of social capital. Research in the US shows that communities which have racial fragmentation, tend to have lower participation in volunteering communities, as the discriminated tend to prefer to become social cast outs. The government could try to resolve this problem early on, in the education systems It provides. In fact social capital is very much linked with the process of acquiring human capital. When studying, going to school or university, we learn how to operate in a society, and therefore, social capital ends up being the positive externality that one receives. As the government designs an education system, syllabus, rules for schools, it could consider the values they may want their society to have, and try to promote them from a young age. One of those could be having no discrimination, another might be to try promote trust for the current government in power.
To conclude, it is useful to consider the following idea, “importing cultural elements will make economic discourse richer, better able to capture the nuances of the real world, and ultimately more useful” (Guiso, Sapienza and Zingales 2006, p.46). Although, social capital may not be the primary factor to describe a country’s level of development, it does heavily contribute to it, partly explaining how efficiently an introduced policy will be adopted, how much public goods are provided, and because of religion how educated and ambitious a society is. There are certain policies a government could implement to promote social capital, acting responsibly and promoting the views of the population, to set a trustworthy example of how agents should act, and it could adapt the education system to promote trust and other ways in which people should try to interact, to overall increase the development of the country.
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