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ECON 449/PHIL 442
Dr. Khalid Mir
14/5/2015
Social Capital and Economic Efficiency: A Theoretical Analysis of Credit and Labor
Markets
Sadeem Hameed Shaikh (15020380)
Sara Ahmed Farooqui (15020232)
Sarah Amin Ali (15020445)
TABLE OF CONTENTS Abstract------------------------------------------------------------------------------------------------3 Introduction-------------------------------------------------------------------------------------------3 Literature Review------------------------------------------------------------------------------------4 Defining Social Capital------------------------------------------------------------------------------6 Section 1: Trust, Networks and Efficiency-------------------------------------------------------8 Section II: Credit Markets and Social Capital--------------------------------------------------11 Section III: Labor Markets and Social Capital--------------------------------------------------13 Section IV: Contextualizing Social Capital in Pakistan---------------------------------------14 Limitations-------------------------------------------------------------------------------------------17 Findings and Conclusion---------------------------------------------------------------------------18 Bibliography-----------------------------------------------------------------------------------------20
ABSTRACT
A disproportionate part of economic theory is grounded on the notion that man is self-
interested. The literature on themes like rationality and self-interest leaves little room for the
inclusion of trust, networks and cooperation in traditional economic theory. This is problematic,
for this does not explain why people choose to rely on each other, help each other and work
together. The aim of this essay is to trace the relationship between social capital, trust and
economic development. In so doing, we try to move away from an individualistic approach to
one that involves group and cooperative behavior. Our paper will also focus on the positives and
negatives of having a trustworthy society, and it’s implications on the mechanisms of production
and economic prosperity.
INTRODUCTION
Economic theory has been ruled by the idea that the market is a zone free of normative
values like morals, cooperation and trust. The foundational ideal of economics is that man is self-
interested and utility maximizing. There is little room for the notion that trust and cooperation in
society can exist. However, in practice, one finds that economic theory underestimates the
influence of values, norms, and networks on human behavior. People develop personal
relationships and networks that improve the workings of economies.
For the purpose of this paper, social capital will be defined in terms of two of its major
components, trust and social networks. The paper will trace the effects of social capital on the
efficiency of an economy. Efficiency has been defined in terms of lowering of transaction costs
because of easier access to loans in the capital market and easier access to jobs in the labor
market. We theorize that social capital does, in fact lead to efficient economies. Finally, we aim
to relate the findings of this paper to Pakistan and its economy. We argue that social capital can
take a leading role in the development process of Pakistan if barriers to trust and the negative
consequences of networks and clubs are strategically tackled. A concluding remark is regarding
the nature of social capital, where we find that it can often be harmful for society. The limitations
of this debate are considered this way.
LITERATURE REVIEW
Based on the premise that a strong civic society leads to consolidated democracy, this
article explores the implications of the intrinsic decline of American civil society over the last
few decades. In definitional terms, the undying importance of social capital in the form of
associational trust is exercised proficiently, through Putnam’s own research on the effects of
having strong societal bonds of trust. With trust, people are less likely to cheat and are more able
to acquire mutual benefits and longstanding networks. 1
Putnam recognizes the strong and positive correlation between associational membership
and the amount of trust amongst citizens.2 Along similar lines, the costs and benefits of civic
engagement and societal groups must be recognized and weighed against each other.
Francois and Zabojnik stress on the intrinsic and deep-rooted importance of
trustworthiness among people to trade and engage in economic activities freely.3 One of the most
crucial pre-requisites for successful economic growth is an honest and mutually beneficial
relationship between agents and profit maximizing firms, in that the latter are to exercise
production in a way that leaves some margin for expropriation. It is only when a mutually
1Robert Putnam, "Bowling Alone: America's Declining Social Capital," Journal of Democracy 6, no.1 (Jan 1995): 67, URL: http://xroads.virginia.edu/~hyper/DETOC/assoc/bowling.html. 2 Ibid, 72. 3Patrick Francois and Jan Zabojnik, "Trust, Social Capital and Economic Development," Journal of the European Economic Association 3, no. 1 (2005): 53.
reliable relationship exists between agents and firms that lead to a facilitation of development
and production.4
The authors modify the conventional perception that small, interlocked and trust-bound
traditional societies feature high production.5 While this may be true, it is unlikely these societies
can grow on a larger scale as prescribed by modern Western communities. Business
relationships built on trust must be broader and more welcoming of new partners and agents to
ensure modernization and growth.
Basu’s article shifts claims that altruism, trust and cooperation guide human behavior.6
The aim of this paper is to track the consequences of this approach. When cooperation breaks
down in an economy, it leads to the failure of that economy. Basu illustrates these ideas using
simple game-theoretic constructs. There are many different kinds of games that are used to
understand the connection between trust, altruism and identity – most notably the Trust Game.
The article is relevant, for it focuses on trust as one of the guiding factors of human behavior and
how it can lead to progress. We aim to establish a connection between trust and progress, and in
so doing, this article sets the foundations for that.
Fukuyama defines social capital as an “instantiated informal norm that promotes co-
operation between individuals”.7 The article establishes that trust does not constitute social
capital, but is in fact a result of it. Fukuyama goes on to discuss the role it plays in society and
how it can be measured. Taking Fukuyama’s definition, we establish that there is a strong
4 Ibid. 5 Ibid, 55. 6 Kaushik Basu, "Identity, Trust and Altruism: Sociological Clues to Economics Development," (working paper, Department of Economics, Harvard University, U.S.A, 2006), http://papers.ssrn.com/sol3/papers.cfm?abstract_id=956080. 7 Francis Fukuyama, "Social Capital, Civil Society and Development," Third World Quarterly 22, no. 1 (2001): 7, doi: 10.1080/713701144
relationship between social capital and trust. We focus on how most groups that embody social
capital have a ‘radius of trust’, which can lead to positive externalities. 8
Finally, we will argue that social capital that leads to trust can have negative externalities,
as mentioned by Fukuyama. He refers to the radius of distrust as the negative impact of social
capital, for it produces enmity in society.9 Klu Klux Klan, the Nation of Islam and the Michigan
Militia are all examples of groups emerging out of social capital networks that have contributed
to society in a negative way.
DEFINING SOCIAL CAPITAL
With a plethora of definitions of social capital, there is no one correct understanding of it,
and its interpretation continues to elude economists. Therefore, there is no unitary meaning of the
term that captures what different researchers mean by it within a discipline, let alone across
fields.
This paper will begin by listing a number of definitions that have been proposed by some
of the most influential writers on social capital. According to Putnam, “social capital refers to
features of social organization such as networks, norms and social trust that facilitate
coordination and cooperation for mutual benefit".10 He believes that networks of civic
engagement foster sturdy norms of generalized reciprocity and encourage the emergence of
social trust. He further asserts that dense networks of interaction may even develop an
individual’s sense of self from the “I” into the “we” and thus, can improve the efficiency of
society.11
8 Ibid, 8. 9 Ibid, 14. 10 Putnam, “Bowling Alone,” 67.11 Ibid.
Coleman argues that the definition of social capital should result from its function. It is a
variety of entities which all have two common underlying features, that is they all constitute of
some aspect of social structure and they facilitate actions between actors in this structure. It is
then “social organization that constitutes social capital”. 12
Both definitions outline the importance of social capital in terms of its beneficial
outcomes on social aggregates and society. Social capital can then be thought of as a positive
group externality. While Coleman believes that this externality results from social organization,
Putnam is more specific and determines that it arises from certain informal forms of organization
such as trust and norms. 13 However, Fukyama contends that only certain shared norms and
values should be regarded as social capital claiming that,
“Not just any set of instantiated norms constitutes social capital; such norms must lead to co-operation in
groups and therefore are related to traditional virtues like honesty, the keeping of commitments, reliable
performance of duties, reciprocity, and the like." 14
Durlauf has proposed a three-tier definition of social capital which emphasizes that social
capital generates positive externalities for all members of a group; that these externalities are the
result of the effect of shared trust, values and norms on expectations and behavior. These
elements arise from informal forms of organizations based on social networks and associations.15
This paper will view trust and social networks as key components of social capital. Trust
and social capital can be seen to have a mutually reinforcing relationship whereas networks
facilitate cooperation and trust between individuals and vice versa.
12 James Coleman, "Social Capital in the Creation of Human Capital," The American Journal of Sociology 94, issue supp (1988): S98, URL: http://www.jstor.org/stable/2780243 13 Marcel Fafchamps and Steven Durlauf, "Social Capital," (working paper, National Bureau of Economic Research, Massachusetts, U.S.A, 2004), http://www.nber.org/papers/w10485. 14 Francis Fukuyama, "Social Capital and Civil Society," (paper presented at IMF Conference on Second Generation Reforms, Washington, D.C, October 1999), https://www.imf.org/external/pubs/ft/seminar/1999/reforms/fukuyama.htm. 15 Fafchamps and Durlauf, "Social Capital".
SECTION 1: TRUST, NETWORKS AND EFFICIENCY
As mentioned earlier, our explanation for development is in terms of economic
efficiency. To reiterate, we posit that the primary concern of this paper, which is social capital,
can lead to efficiency through lowered transaction costs in providing easier access to credit,
loans and jobs.
In the multi-faceted literature on firms so far, most researchers conclude that trust leads
to efficient and productive outcomes within the firm’s organizational setting. In their work on
trust and efficiency, Chami and Fullenkamp explain how trust in the form of altruistic behavior
and mutually reinforcing relationships encourages employees to put more effort in to their work.
This means that ‘employees at trusting firms have higher job satisfaction, and that these firms
enjoy lower labor cost and higher profits’.16 Through an effective explanation of the concept of
specialization, Chami and Fullenkamp stress on the importance of this phenomenon by weighing
it over ideas of ‘technology in production, financing, and distribution’.17 Each employee
specializes in a particular task, and in turn relies on others to put in their best efforts. In a sense,
one employee’s work depends just as much on the other. Moreover, Chami and Fullenkamp
consider doing away with the agency problem aligning and syncing the incentives of the
principal and agent. For example, by basing compensation on the ability of employees to attain a
particular benchmark of firm performance, this mechanism ensures hard work and trust between
the individual workers.18
16 Ralph Chami andConnel Fullenkamp, "Trust and Efficiency." Journal of Banking and Finance 26, no. 9 (2002): 1, doi:10.1016/S0378-4266(02)00191-7.17 Ibid, 3. 18 Ibid, 4.
Knack and Keefer apply a similar argument to the idea of lowered transaction costs,
saying that ‘economic activities that require some agents to rely on the future actions of others
are accomplished at lower cost in higher trust environments’.19 This statement becomes credible
when one observes how individuals in trustworthy relationships spend less time and resources
drawing written contracts, paying bribes or calling on private security services for protection.20
In labor markets, knowing the right people can be vital for success. Economists and
sociologists have studied the effects of social capital in labor markets and have concluded that it
benefits both the seeker of jobs and the employer. Stone, Gray and Hughes talk about how being
deeply embedded in a network of family, friends and institutional ties that support the normative
values of work can increase the employability of a person.21 However, for them, the most
important aspect of social capital in the labor market is job search. The process of looking for a
job is costly and time consuming. They quote Holzer’s (1988) work and argue that the two most
commonly used methods for job search are “friends and relatives”.22 Holzer also states that the
acceptance rate of job offers generated through friends and family is high. Not only does social
capital benefit the seeker of jobs, but it also caters to the needs of the employer. Employers
depend on referrals from current employees as a method for cheap and quick hiring. Social
capital makes the process of hiring easier by increasing and improving the flow of information
between the employer and the employee. Both have access to greater knowledge of the market
and the kinds of opportunities that are available. Mouw, in his paper reinforces the idea that
19 Stephen Knack and Phillip Keefer, "Does Social Capital Have An Economic Payoff? A Cross-Country Investigation." The Quarterly Journal of Economics 112, no. 4 (1997): 1252, URL: http://www.jstor.org/stable/2951271.20 Ibid. 21 Wendy Stone, Matthew Gray and Jody Hughes, "Social Capital at Work: How Family, Friends and Civic Ties Relate to Labor Market Outcomes," (working paper, Australian Institute of Family Studies, Melbourne, Australia, 2003), http://www.aifs.gov.au/institute/pubs/respaper/rp31.html. 22 Ibid, 7.
access to information increases through social capital, benefitting the one who has a better
network. 23
By the same token, the arguments for lowered transaction costs in the labor markets
apply well to credit markets. Provided that a growing number of poverty-ridden populations in
developing countries continue to grow poor due to lack of access to credit, a number of
researchers have tried to explain the importance of networks in gaining credit loans through
activities prescribing trust as a common ingredient. For example, Myroniuk, Desai, and
Vanneman study the importance of household social capital and its ties with loans in India. They
suggest that poor households, part of development groups and traditional groups such as local
business and caste associations have a higher chance of gaining loans.24 In a similar fashion,
Bastelaer explores the dimensions of the effect that social capital, in the form of trust, has on the
improved performance of credit delivery programs in the developing world. One problem that
drastically limits the ability of a successful borrower-lender relationship to persevere is that of
asymmetric information and constrained knowledge of the transacting parties. However, to
overcome this issue, various NGOs and microfinance organizations have used the idea of social
collateral to prescribe importance to the crucial element of trust. Here, the ‘borrower’s
reputation’ and that of the social network they belong to takes precedence and is seriously
affected if a borrowing party defaults on their loans.25 Through the mechanisms of rotating credit
and savings associations (ROSCAs) and group-based microfinance programs, lenders ensure
23 Ted Mouw, "Social Capital and Finding a Job: Do Contacts Matter?," American Sociological Review 68, no. 6 (2003): 868, URL: http://www.jstor.org/stable/1519749 24 Tyler Myroniuk, Sonalde Desai, and Reeve Vanneman, "Household Social Capital, Loans and Educational Achievement in India," (working paper, Department of Sociology and Maryland Population Research Center, University of Maryland, U.S.A), 2. 25 Thierry Bastelaer, "Imperfect Information, Social Capital and the Poor's Access to Credit," (working paper, Center on Institutional Reform and the Informal Sector, University of Maryland, U.S.A, 1999), pp.2, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=260058.
high repayment rates with minimal chances of opportunistic behavior.26 These mechanisms
functions so long as ‘individuals value the benefits of membership in the association (or the
absence of collective ostracism) more than the benefits of defaulting’. 27
SECTION II: CREDIT MARKETS AND SOCIAL CAPITAL
Financial transactions are bedeviled by market imperfections, such as asymmetric
information and transaction costs. Accessing credit becomes a major constraint to the
development and growth of small and micro enterprises, and to the talented poor. 28 Their
opportunities become limited as they are hindered by their lack of collateral, credit histories and
connections, thus inevitably leading to the persistence of inequality and slow growth. Lenders
are also unwilling to lend to them due to the dearth of information. However, social capital can
be seen to aid the problems of these people in accessing credit. According to a paper written by
Janvry et. al, a broad range of social capital-based lending mechanisms have emerged in recent
years to overcome the problems of market imperfections, helping more than a hundred million
previously unbanked borrowers enter credit markets over the past decade. 29
As aforementioned, Bastelaer has examined the relationship between social capital, that
is trust and the performance of credit delivery programs in the developing world.30 The main
focus is on rotating credit and saving associations (ROSCAs) and group-based microfinance
programs. A ROSCA is a group of individuals who contribute to a collective fund which is then
distributed randomly or by auction at regular intervals to any one of the group members.31 It
26 Ibid. 27 Ibid, 5. 28 Alain de Janvry, Craig McIntosh and Elisabeth Sadoulet, "The Supply- and Demand-Side Impacts of Credit Market Information," Journal of Developmental Economics (2009):1, URL: http://are.berkeley.edu/~esadoulet/papers/CreditInfoSept09-JDE.pdf 29 Ibid.30 Bastelaer, "Imperfect Information", 3 31 Ibid, 4.
crystalizes social relations in an informal but formally run system. As long as individuals value
the benefits of membership in the association more than the benefits of defaulting, ROSCAs
function.32 There is a high level of collective trust that is needed for this program to work, and as
Rutherford has pointed out, even if group members may not know each other at the beginning of
a cycle, the system creates high levels of trust enabling the system to work.33 Group members
begin to depend on each other, and anyone who may default runs the risk of ruining his/her
reputation in the group and larger circle of society. Thus, there is a reduction of opportunistic
behavior that results from peer pressure.
In addition, according to Bastelaer, the group-based microfinance program is based on
the assumption that the poor represent a much lower credit risk than the formal financial sector
generally assumes.34 One of the most successful group-based lending programs so far has been
that of the Grameen Bank in Bangladesh. Using the group lending methodology that requires
trust between members, the Bank has consistently reported repayment rates in excess of 95%.35
The success and smooth-functioning of these contracts and programs is not only aided by
peer pressure to not default, but also on a sense of moral duty rather than absolute rights. They
therefore, enable effective borrowing channels based on reputations and relationships and thus,
promote investments and support economic development.
SECTION III: LABOR MARKETS AND SOCIAL CAPITAL
The problem of asymmetric and partial information -plagues the labor markets as well. It
is also crucial to know that such an issue arises only in informal markets with no proper
32 Ibid, 5.33 Ibid.34 Ibid, 8.35 Ibid, 9.
institutions providing ‘accurate and up-to-date information about jobs and workers’.36 As
Fafchamps points out, formal institutions may be preferred over informal ones in societies with
established ‘organizational capacity’.37 Nonetheless, social capital in terms of informal networks
of associations circulating accurate information about jobs and working opportunities remains of
tremendous significance.
Fafchamps makes another interesting point regarding the role played by technological
change in facilitating job search through the lens of information sharing. Quoting the example of
Ebay, where ‘personal network exchange’ is replaced by ‘anonymous internet-based exchange’
the organizational capacity and reach of such technological mechanisms are far greater. 38 Such
informal institutions, in comparison to expensive formal stock exchanges as an example, reduce
transaction costs, thereby increasing efficiency. 39
This has obvious developmental implications for an array of people seeking employment,
as engagement in interaction about jobs search through networks can align individualistic
personalities and skills with the jobs best suited. A study conducted by Brook explains how
nearly 30 percent of people commencing employment in their fields of interest in 2004 had heard
of the job through familial contacts. 40 While the effect of social capital on labor market
outcomes is quite clear, the nature of networks are just as important to determine the kind of jobs
people manage to eventually secure. Moreover, labor market outcomes in turn have an adverse
effect on the nature of social capital one possesses. For example, the social exclusion literature
36 Marcel Fafchamps, "Development and Social Capital," (working paper, Global Poverty Research Group, Oxford University, U.K, 2005), pp.5, http://www.gprg.org/pubs/workingpapers/pdfs/gprg-wps-007.pdf. 37 Ibid. 38 Ibid, 5. 39 Ibid. 40 Keith Brook, "Labour Market Participation: The Influence of Social Capital," Labor Market Trends 113, no. 3 (2005): 117, URL: www.social-capital.net/docs/lm_social_capital.pdf
makes a distinct connection between long-term unemployment with poor social connections and
networks.41
SECTION IV: CONTEXTUALIZING SOCIAL CAPITAL IN PAKISTAN
Having established that social capital reduces transaction costs and improves efficiency,
these effects are however, not homogenous all over the world. Country-specific conditions
determine how and by how much social capital affects markets. The Pakistani capital and labor
markets have their own unique features and will be explained in this section.
Haris Gazder has studied rural labor conditions of Pakistan and discusses the link
between segmented labor markets and “social networks”.42 He states that labor transactions in
agriculture are rarely conducted between strangers. Caste, kinship and family are important
determinants of economic options for people.43 Social networks also play an important role in
contractual arrangements in Pakistan. These arrangements are limited to people with the right
connections. He gives the example of the kami landless caste of Punjab and how they do not
have access to tenancy contracts. The Hari system of sharecropping in Sindh, on the other hand,
allows those who are close to the landlord to gain access to different contracts.44
He goes on to discuss the labor relations in the construction sector. Pakistan's labor in
construction sector is risky because contract enforcement is weak. He states that even though the
labor market is relatively open, it is unstable since workers perceive a high risk of default on the
41 Ibid, 120. 42 Haris Gazder, "Labour Markets and in Pakistan: Institutional Arrangements and Policy" Collective for Social Science Research (2004): 25. 43Ibid. 44 Ibid.
part of employer/contractors.45 There are frequent instances of default on the part of the
contractors as a result of weak trust.
One of the main features of the Peshgi system in Pakistan is the asymmetry between the
parties involved, in the enforcement of contract.46 Both, the informal and the formal sector are
characterized by weak contract enforcement. The weakness of the state’s role in contract
enforcement (and in guaranteeing property rights) affects the functioning not only of the labor
market but of all markets including markets for commodities, land and credit. Again, this
reinforces the idea that Pakistani markets lack an environment of trust.
A common practice in the Pakistani labor market is the use of Sifarish to land a job. A
Sifarish is the reference from someone influential that enables a person to have an edge over
another person competing for the same opportunity. This enables a person with a stronger
sifarish but lower qualification to get the job. Social collateral is important for the employer even
in low skill casual jobs, for it reduces monitoring costs and the effort involved in running
background checks on applicants.47 Found in both rural and urban Pakistan, the practice of
sifarish is evidence for how strong and influential social groupings are in Pakistan.
As far as capital markets are concerned, Irfan Aleem claims that the Pakistani credit
market is characterized by asymmetric information.48 Aleem states that this is one of the major
reasons for high borrowing rates for the lender has little information about the ability of the
borrower to repay the loan. The lender has to use his resources to screen applicants and thus
45 Ibid, 26.46 Ibid, 30.47 Ibid, 33.48 Irfan Aleem, "Imperfect Information, Screening, and the Costs of Informal Lending: A Study of a Rural Credit Market in Pakistan" World Bank Econ Review (1990) 4(3): 329.
shifts the cost of screening onto the borrower.49 On the borrowers part, the lack of information is
in terms of `availability of loans and terms of the loan.
One of the major problems of the Pakistani rural economy is bonded labor. Bonded labor
prevails because of non-availability of loans for those who have no collateral or those who are
not well-connected. These people get caught in the vicious cycle of bonded labor, as they have
no access to loans and reliable information.
Aleem discusses how social capital affects the choice of borrower for the lender. Most
lenders make inquiries of the reputation of prospective borrowers in the market.50 Social capital
comes into play in this regard. When the lender makes an inquiry, if the borrower does not know
the right people or has a bad reputation, the chances of him receiving a loan will be much lower.
It can be established that social capital can affect the functioning of the rural economy of
Pakistan. Through the integration of socially marginalized groups in the larger networks of
society, they too can have access to economic opportunities in terms of jobs and capital. If they
know the right people, they will be able to get loans from formal institutions rather than having
to turn to landlords. However, one cannot completely rely on social capital to pull Pakistan out of
its problems. If contract enforcing agencies are not established, checks and balances are not
established and there is no accountability, the air of distrust will persevere. Strong government
institutions need to be formed that enforce laws against exploitative landlords.
LIMITATIONS
It is equally important to observe the negative effects of social capital on dev elopement.
As Fafchamps points out, the benefits of social capital often come at a grave cost, in the form of
49 Ibid.50 Ibid.
‘unequal distribution’ together with other ‘negative and positive externalities’.51 He restricts this
argument to personalized trust in clubs and networks, which relies on information sharing
amongst people who know each other for a long time. This ties in with the concept of crowding
out of certain social groups, and hence has major distributional and equity consequences.
Fafchamp’s concern lingers around clubs and networks which are economically beneficial to
their members, which is perhaps when non-members are penalized in terms of lesser benefits and
privileges.52 The crowding out hypothesis with regards to welfare states is important to note here.
Durlauf further documents the crowding out hypothesis in terms of group-based hostility where
in a social experiment, groups with ‘differing internal behavior norms’ showed tremendous
animosity towards each other.53
Another important limitation highlighted by Fafchamps relates to a pre-requisite for
social capital to promote efficiency. The argument here plays in to the need for strong, well-
functioning formal institutions that capture trust and honesty from the two transactional parties.
A community has productive and mutually beneficial social capital only if the institutions at
place ensure minimal or no defaulting or cheating. In poor countries with very few established
institutions, exchange depends on what Fafchamps describes as personalized trust, punishments
for thieves and ‘informal institutions’, mainly in the form of preserving reputation in the
community.54
FINDINGS AND CONCLUSION
51 Fafchamps, "Development", 1. 52 Ibid, 16. 53 Steven Durlauf, "The Case 'Against' Social Capital," Focus 30, no. 3 (1999): 2, www.irp.wisc.edu/publications/focus/pdfs/foc203.pdf 54 Fafchamps, "Development', 5
The aim of this essay was to trace the relationship between social capital and economic
development. Social capital was defined in terms of trust and social networks; the former can be
seen to have a mutually reinforcing relationship with the latter and vice versa. Economic
development in the context of this paper meant economic efficiency. Social capital could lead to
better economic efficiency in terms of lowered transaction costs by providing greater access to
credit, loans and jobs. It was observed that social networks increase access to information,
thereby benefitting individuals in the labor market who have better networks. A review of
Fafchamps’ work on social capital and labor markets also made explicit the immense influence
the former has on the job opportunities one gets.
With a burgeoning number of various NGO’s and microfinance organizations, the
positive effect of trust on increasing access to loans and credit was also noted. With a
comprehensive study of ROSCA’s and microfinance organizations, this indubitable relationship
between social capital and credit delivery programs in the developing world was ascertained.
In the next section, social capital and its relationship with economic development was
contextualized in terms of Pakistan. It became apparent that the degree and extent to which social
capital actually benefits the economic efficiency of the concerned markets is determined by
location specific conditions. For example, the practice of bonded labor cannot be stopped by just
increasing the social integration of those who do not have networks and connections; the state
has to intervene with implementation of laws to put an end to the exploitation.
In conclusion, social capital has a real and positive effect on economic development in
terms of efficiency in a society. At the same time, the debate on social capital must progress
while considering some of the limitations at hand as well.
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