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Unit 4 Macro: Social Capital, Social Networks and Economic Development

Friday, July 27, 2012
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There is increasing interest in the roles that social capital and social networks can play both in economic development and also as part of effective development policies.The sociologist Robert Putnam has defined social capital as “connections among individuals – social networks and the norms of reciprocity and trustworthiness that arise from them.”

Trust and Growth

“Being able to trust people might seem like a pleasant luxury, but economists are starting to believe that it’s rather more important than that. Trust is about more than whether you can leave your house unlocked; it is responsible for the difference between the richest countries and the poorest.” (Tim Harford)

  • Social capital focuses on the value of social networks in improving productivity in an economy.
  • Social networks can be used to spread beneficial ideas, causing individuals and society to simultaneously progress.

There are different types of social capital

  1. Bonding capital – i.e. social networks among homogeneous groups “getting by” (family, close friends)
  2. Bridging capital - social networks among heterogeneous groups “getting ahead” (professional acquaintances, classmates)
  3. Linking – these are deeper links between people in dissimilar situations, outside of the community; “getting to the next level” (political parties, trade unions, parents groups, sports clubs, student unions)
How can social networks promote growth and development?

The key effect of strong social capital is in building trust within and between people in a nation

  • Trust helps to make markets work e.g. the willingness of people to trade and to agree contracts
  • Respect for democratic public institutions and the rule of law
  • Participation in democracy, holding people is authority to account
  • Willingness to pay taxes and help fund the provision of public goods
  • Willingness to engage in collective action / community action to solve development problems such as community resilience to the effects of climate change, self help groups in poorer communities. An example might be when a farmer adopts a new technology
  • Trust to share ideas – collaboration to promote innovation
  • Learning externalities in technology adoption
  • Learning externalities as students engage in social learning
  • Trust in sending remittances (domestic and international) and in agreeing to make informal loans

Social capital can also have downsides including political favouritism, corruption, tribalism and ethnic politics – these are examples of negative social capital.

Key points:

  • Rapid take up of mobile technology especially in Africa might accelerate social network effects
  • Trust is the key feature of social capital – when trust is high, countries tend to spend less on defensive services such as insurance, policing
  • Growing interest in behavioural economics is important – especially herd behaviour

Supporting Videos on Social Capital

Marginal Revolution - The Importance of Trust

Social Networks and Economic Development

Professor Matthew Jackson of Stanford University explains that social networks are important even in developing countries

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