social capital: at what point does it hurt.

….Continued referencing from the Manpower research; social capital has always existed and been the driver of economic prosperity. Some argue that it can not exist without the provision of certain rights that institutions provide. But was there not a period where there was no such institutions in place and we were forced to trade based on ‘trust’ or ‘social capital’?

“…In the Human Age, we have become all-day networks, able to act or respond immediately to many different situations. A business deal that begins in Tokyo on a Monday for a global corporation may continue uninterruptedly for days and involve employees and consultants from multiple time zones. Ideas may come from one-time economic outposts or collaborations between people who never meet but know each other virtually…”

A paper released (Social Capital: Implications for Development Theory, Research and Policy – Woolcock & Naraya 2000) has illustrated the importance of social capital in the context of economic development. We cannot deny that at some point in history, mankind had to trade without property rights and government institutions that provided enforceability. So what did we rely on? -Social Capital is a good bet. Social Capital can range from saying hello to a neighbour, building networks in your community and even the internet. Your LinkedIn Connections go beyond profile pictures on your screen. Social Capital can build strong economic ties and relationships that will smooth capital transfers and transactions between economic agents.

The graph illustrates that Social Capital can be a double edged sword as well. Think of Somalia and how they do not have appropriate governmental agencies to even provide safe transfer of funds between households or overseas. It then boils to answering exceptional questions, of which the answers are known to those from a certain clan or caste. Of course this method of transaction requires a ‘premium’ to be paid at each point of the transaction from one agent to the ‘end-user’ agent.

Looking at the graph, it is obvious that one’s welfare can grow depending on the level diversity in social capital. A LDC may have to first go through the stages of A-B-C and it then becomes a breaking point, where if proper institutions are not properly setup, the society runs the risk of back tracking and returning to a state of poverty. However in hindsight, if the community can build infrastructure, networks, property right laws and government regimes that are fair and just, the community can benefit from increased capital accumulation, specifically in technology and allow themselves to be more well connected to the world. Eventually moving to point E. Following to this, where do you think the community stands? First consider your local community, then your region, your state and then your country.

As we can see, if the society back tracks, it is visible that ‘Bonding’ levels of social capital sustains “defence” mechanism. It some sense, as no proper institutions are created, society is forced ‘defend’ themselves and sort out sustenance living. However, on the other spectrum, ‘Bridging’ levels of Social Capital creates more welfare at an exceptional rate. The following diagram presents the reader with an illustration of well functioning states with sound governance and ‘Bridging’ levels of social capital.

It would be easier to make a comparison to where you think your community stands. For example, a local in Adelaide, Australia would fall in the Top-Right quadrant, with good functions of governance and ‘Bridging’ levels of social capital. And thus, Adelaide is most definitely a place where there is economic and social well-being apparent in the community.

Social capital may be hard to quantify, at least not the extent of GDP. However, we cannot deny that in todays’ world, it is ‘who you know, not what you know…’

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