American Journal of Scientific Research ISSN 1450-223X Issue 16 (2011), pp.106-115 EuroJournals Publishing, Inc. 2011 http://www.eurojournals.com/ajsr.

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Effects of Social Capital on Economic Growth (International Comparison)

Maysam Musai Associate Professor, University of Tehran E-mail: mousaaei@ut.ac.ir Tel: 09123583246; +98-61117888 Marzieh Fatemi Abhari MD Pediatrician, University of Karaj Saeid Garshasbi Fakhr Instructor, Ayatollah Broojerdi University Abstract In this article, we seek to study relationship between social capital and economic growth. For this reason, we studied information relating to Iran and 75 countries in the world in 2008 and with use of endogenous growth model. In this model, we considered gross domestic product on the basis of Cubb-Doglas form, social capital, physical capital and labor force function. Estimated elasticity of gross domestic product relative to social capital, physical capital and labor force was determined to be 0.28, 0.856 and 0.05 respectively. They had high statistically significance. These results indicate positive effect of social capital on economic growth. On the other hand, increase of social capital causes to increase gross domestic product. One of the other results of this research is positive effect of physical capital and labor force on gross domestic product. Keywords: Social Capital, Physical Capital, Manpower, Endogenous Growth Model, Economic Growth JEL Classification Codes: Z19, P36, R11, O40, Z13

1. Introduction
In this article, we seek to study effect of social capital on economic growth. Economic growth means continual increase of per capita national product in a country as a criterion for testing economic performance of a society and increase of its rate leads to improvement of social welfare. In recent years, economists observe increasing interest in role of social capital regarding economic development. In new theory of growth, traditional inputs of physical capital and manpower and the indices which are indicative of institutional and sociological differences between countries have been complemented. Very important question which has occupied minds of economists and other policy makers is why some countries have high economic growth and some others have low economic growth? Why some countries are rich and some others are poor? In recent years, growth models have been changed and some other factors such as social capital have been included it them.

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Most of the economists emphasize on physical capital and human capital as main determining factor of economic growth and development. Capital is one of the most important determining factors of economic growth which increases improved quality of tools and machines, labor force productivity through which welfare is improved but capital has not only physical aspect , human capital which is realized as skills, education and training is an important part of production and productivity. Manner and skill in business technology are of the other aspect of capital. Social structure is one of the determining factors of economic activities productivity promotion. Relations between individuals, norms and traditions help facilitate coordination and cooperation which increases productivity. The recent type of capital is called social capital for which Hanifen applied word capital in 1916 (for clarifying importance of social structure for the persons who enter economic and business relations). This question that why social capital as general trust and participatory activity are effective on economic growth has not been answered. At present, there is little knowledge about social capital, its performance and effect on economic growth for formulizing clear political implications. From the political point of view, it is important to find experimental evidence for social capital role in economic development. Goal of the present research is to study effect of social capital on economic growth in Iran and other 75 countries in 2008. Main question of the research is: is there positive and significant relationship between social capital and economic growth? On this basis, this article has been composed of 7 sections. In the second section, we explain social capital and definitions and concepts which are common. In the third section, we mention manner of calculation and measurement of social capital in this article. The fourth section deals with experimental local and foreign studies which have been done in this field. The fifth section explains theoretical fundamentals and model used in this article. Seventh section discusses data and experimental finding of the article and finally, the eighth section mentions summery of final conclusion.

2. Concept of Social Capital and its Measurement

There are different definitions for social capital but it is emphasized in all definitions that social capital is a means for achieving goals and personal and group benefits of society. Social capital is defined as definite set of informal norms or values to which members of the groups among which cooperation is permissible contribute. Putnam et al define social capital: some combinations of social organizations such as trust, norms, and networks which can improve efficiency of society by facilitating coordinated activities. World Bank uses similar definition. With regard to this definition, social capital means norms and networks which permit collective activity. This definition results from organizations, communication and norms which form quality and quantity of social interactions of a society. As clear in definition of social capital by Putnam et al (1993), it seems that trust and networks are of the important elements of social capital while Putnam et al (1993) emphasize on formation of social capital. Fukoyama (1995) emphasizes on formation of social capital. Fukoyama (1995) mentions that social capital emerges as trust out of the family or public trust and it is important for success of advanced economies. Social capital is defined as norms and networks which provide opportunity for participation in collective actions in order to obtain profit. This concept is measured with social reliability level and membership in formal and informal associations. Social capital is a combined concept which promotes stock or rate of these norms in a society. On the basis of studies and works, it is mentioned that social capital can be effective on efficiency of different sections and associations of society by reducing exchange cost and helping stabilize property rights and other different aspects. Social capital can cause to increase accumulation of human capital , financial development and investment, increase innovation and creativity , increase efficiency of the government and the policies imposed by the government and many other results. As referred above, one can say that social capital has been defined in different ways by the different researchers and one can regard social capital as a set of networks, norms, values and

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understanding which facilitate intra-group and inter-group cooperation for obtaining mutual benefits. This capital is expressed with rate of participation of persons in collective life and reliability among them. Since social capital has quality aspect, then, it is difficult to measure. Measurement of social capital relates to some subjects such as reliability, voluntary participation in associations and charity institutes, membership in organizations and clubs and others. In fact, social capital describes space of relations between persons in district and city, workplace, relations between government and people and it is difficult to measure. It is evident that there is no suitable statistical information in these fields. With regard to the mentioned cases, we used calculations and estimates of a valid British research institute called Legatum Institute in order to obtain statistics and information relating to social capital which is the most important part of this research and its related calculations which are difficult. This institute calculates some indices for called the Legatum Prosperity index for most countries. One of the variables which are considered for calculation of these indices is social capital. In this institute, social capital is calculated with use of variables for each country and rank between 0 and 100 is considered for each country on the basis of the performed calculations. Every country which has higher rank will have stronger social capital. On the basis of these calculations, the country has the highest social capital and the country has the lowest social capital as given in table 1. In order to calculate the social capital index which is one of the sub-indices for obtaining achievement index, 12 variables have been used: 1. Reliability of others: on the basis of this variable, it is studied whether you have relatives or friends who live in another country and can help you when you need help? 2. Importance of friends: this variable shows the importance which your friends have in your life and whether one can this subject is important or not. 3. Trustworthiness of others: this variable shows whether one can say that most people are trustworthy or you should be carful while meeting the people? 4. Membership of Arts Organization: on the basis of this variable, it is specified whether you are member of any art organization? 5. Membership of sports organization: this variable mentions whether you are member of any sports organization? 6. Membership of Environmental Organization: this variable shows whether you are member of any Environmental organization? 7. Membership of Religious Organization: this variable shows whether you are active member of church or any other religious organizations? 8. Donations: this variable mentions whether you have done activities relating to donations in the last month? What about helping a charity institute? 9. Importance of religion: on the basis of this variable, it is specified whether religion is an important part of your routine life? Whether you have participated in a temple or the place which gives religious services in the last seven days? Whether you believe in such matters? What about religious organizations? 10. Helping strangers: on the basis of this variable, it is specified whether you have helped strangers in the last month? How you have helped a stranger or the person you didnt know? 11. Marital status: on the basis of this variable of marital status, it is specified that whether the interviewed persons are married or not? 12. Volunteering: did you have any voluntary activity in the last month? Did you voluntarily spend your time for an organization? Each one of the mentioned variables has defined weights and their average weight gives a number which is indicative of social capital index for the related country. Since no unit is considered for mentioning social capital, therefore, the obtained numbers show social capital comparisons between the countries and the obtained numbers are between 0 and 100 and any country which has higher social capital, calculated index for that country will be larger and number 100 is allocated to a country which

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has the highest social capital and number 0 is allocated to a country which has the lowest social capital among the mentioned countries. Final results relating to calculations of this index are given in table 1.
Table 1:
Country Spain Bangladesh Taiwan Czech Republic Colombia Singapore Arabic Emirates Zionist regime Kuwait Uzbekistan The Philippines Iran Jordan Russia Chile Yemen Kazakhstan Macedonia Ukraine Lebanon Morocco Hungary Moldavia Estonia Algeria Tunisia Zimbabwe Belarus Latvia Egypt Bulgaria Romani Turkey Peru Cameroon

Calculation of social capital on the basis of 12 defined variables

Social capital 29.396 28.544 27.98 27.241 26.28 25.66 25.023 23.567 22.304 22.228 20.139 19.4 19.094 18.267 17.54 16.756 16.272 15.155 15.141 13.978 13.802 13.043 11.257 9.961 9.544 9.098 7.066 6.582 6.476 5.663 5.2 3.142 2.503 0 47.097 Country Pakistan Italy Southeast Africa Central Africa Tanzania Japan Mongolia Arabia Slovenia Mexico Croatia Costa Rica France Guatemala Panama Greece Malaysia Paraguay Venezuela Honduras Argentina Nicaragua Belize El Salvador Uruguay Jamaica Brazil Vietnam Portugal Ecuador Bolivia Cambodia Poland Slovakia China Social capital 46.608 46.351 45.847 44.162 43.128 43.128 42.6 42.422 42.357 42.111 41.705 41.597 41.547 40.764 40.739 40.291 38.673 38.606 38.52 38.518 37.219 36.725 36.259 36.257 36.253 36.071 34.434 33.831 32.602 32.314 32.56 31.541 31.013 30.264 29.402 Country New Zealand Switzerland Sydney Australia Netherlands India Finland United States Canada Norway England Ireland Denmark Indonesia Mali Nigeria Sri Lanka Nepal Germany Dominican Zamia Thailand Austria Kana Kenya Belgium Namibia Senegal Botswana South Africa South Korea Sudan Hong Kong Trinidad Social capital 100 95.985 94.185 91.509 90.724 90.724 87.297 84.977 80.267 79.832 79.82 77.969 77.854 77.515 77.342 77.318 74.635 72.246 67.924 67.547 65.006 61.3 59.392 55.355 54.923 54.288 51.395 50.872 50.268 50.256 49.799 49.602 47.473 47.245

Major part of relationship between social capital and economic development has been discussed by Putnam, Leronardi and Nanty in 1993 and in a book called ''Making Democracy Work ''. These

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authors study regions of Italy and find that social capital plays important role in explanation of regional differences of economy and institutional performances (governmental). In fact, Putnam et al considered social capital as importance factor for explanation of economic achievements in addition to economic standard variables and showed that difference in economic performance and performance of institutions in northern and southern regions of Italy can result from differences in social capital. Generally, although many studies have been done on social capital, experimental studies which confirm that theory of Putnam and his research results can be generalized are rarely found especially studied inside the country. In any way, we refer to other local and foreign studies. Chou (2006) suggests three models in his article for relationship between social capital and economic growth in which different attitudes of social capital and experimental evidences have been gathered. In these models, social capital has intensive effect on economic growth. On the basis of this study, social capital helps accumulate human capital and is affective on financial development through its effects on collective trustworthiness and social norms and by facilitating communication network between companies which result in creation and publication of business and technological innovations. On the basis of this research, difference in social capital of different countries can be explained with difference in governmental policies. Steven et al (2005) study the relationship between social capital and economic growth in post communist Russia. On the basis of results of his article, there is forged and incorrect communication between social capital and economic growth in regions and districts of post communist Russia. In fact, this study rejects general hypothesis of Putnam regarding socials capital as one of the reason for economic growth. The information given in this article shows that individual behaviors as entrepreneurship are prerequisite for growth in post communist Russia while social capital may expedite or slow economic growth but that was not the reason. In this article, it is concluded that social capital can not serve economic development without entrepreneurship. In fact, social capital can not create wealth but entrepreneurs can create wealth in society. Beugelsdijk et al (2005) in his article study relationship between economic growth and social capital in Euro district. In this article, they studied sectional data of 54 European districts. The main question in this research is that whether regional differences of economic growth in Europe are related to social capital? Index used for social capital in this research is public trust and participatory activities. In this research, some evidences are presented by reliance on the strong tests regarding the fact that growth differences in European regions are positively dependent on social capital measured on the basis of participatory activities. For this reason, results of this research suggest that thesis of Putnam et al in 1993 can be generalized in European districts. Results of this analysis show that only network relations can not stimulate economic growth but active participation in these relations stimulate economic growth. Akcomak et al (2009) in their article tried to study interactions between social capital, innovation and growth of annual income in Euro regions. On the basis of the modeling which they did, it was recognized that innovation and creativity change social capital as an important mechanism in higher income levels. Akcomak et al gathered their data on the basis of 102 European regions and in period of 1990-2002 and showed that innovative and creative activity led to growth of per capita income and social capital had direct effect on this economic growth by increasing innovation. In fact, on the basis of estimates obtained from this research, social capital has no direct role in expediting growth of per capita income in the studied sample of the Euro countries. Ahlerup et al (2009) in their article tried to answer this question that whether social capital is a substitute or complement for formal associations to achieve economic growth? Although most of the major studies show that social capital is an unconditional factor for growth, some recent studies show that interpersonal trust is considerably effective on the economic performance when judicial associations are relatively weak. In fact, key attitude of Ahlerup et al in this article is that social capital has the largest effect on prosperity and economic improvement in lower levels of institutional and organizational power and effect of social capital disappears when institutions are very strong. In comparison among the interstate growth factors in this article, it has been concluded that final effect of

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social capital as interpersonal trust is reduced when the organizations and institutions are stronger. For example, results of this article indicate that an increase in social capital in Nigeria which is institutionally weak increases economic growth by 1.8% while the same increase in social capital in Canada which is institutionally strong increases economic growth only by 0.3%. Dearman et al (2009) studied communication between social trust and economic development in their article and using panel data. Results of this article confirm the previous sectional studies regarding the fact that trust is a significant factor in development. It is shown in this article that trust has significant effect on investment in human and physical capital. Neira et al (2009) in their article study relationship between social and human capital in Europe. Data used in this research relates to 14 economically advanced countries and relates to time period of 1980-2000. In this article, a review of literature of social capital has been done and then potential relationship between human capital and social capital has been discussed. This article uses econometric model of panel data and this causes to obtain strong results with regard to type of capital such as human or social capital and its effect on economic growth. Soori (2005) studies social capital and its effect on economic performance of Iran in an article and information used in this article relates to data of time series of 1959-2000. Soori in this research considers two variables of economic growth and private investment as variables which can be affected by social capital. In order to calculate social capital, per capital bad cheques index is used as criterion for reducing social capital. The obtained results show that there is negative relationship between social capital decrease and variables relating to economic activities level. Per capita production without oil has negative and significant relationship with social capital decrease of which elasticity is about -0.05. There is also negative and significant relationship between pet capita production growth without oil and social capital decrease rate of which coefficient is about -0.13. In this research, growth residual has negative and significant relationship with social capital decrease. Amiri et al (2006) in their article studied effect of these two variables on economic growth of 28 provinces during 2000-2003 by dividing social capital into two intra-group social capital and extragroup social capital. For measurement of intra-group social capital index, average variables such as transportation and communication with family and friends and neighbors have been used and for calculations of extra-group social capital index, the per capita of organizations and associations in capitals of each province as well as average percentage of membership in these associations and groups have been used. Results of this research show negative relationship between intra-group and extragroup social Capital. It has been concluded that extra-group social capital has positive and significant effect on economic growth and intra-group social capital. Elmi et al (2005) in their article studied six possible solutions through which social capital can be effective on economy including effect of social capital on financial development, economic growth, information flow and prevention from market failure , making and accumulating social capital , innovation , efficiency of government. In this research, all types of concepts and classifications of social capital have been mentioned and effects of social capital on economic performances have been studied without statistical and experimental references. Review of literature in most cases confirms positive relationship between social capital and economic growth, though, this relationship has not been confirmed in rare cases. The specification of the present research is updating and extensive statistical population which it studies so that it compares Iran with 75 countries in the world and on the basis of data of 2008.

3. Econometric Model
Importance of human capital generally and education particularly has been emphasized in theories of growth in 1980s and 1990s in endogenous growth models and developed neoclassic growth model (MRW). In developed neoclassic growth model, human capital enters the model as additional data and the countries which have rapid educational growth will have more economic growth rate and more

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inform. In endogenous growth models, education is regarded as a process which changes production technology and facilitates conformity with foreign technology or facilitates transfer of resources with the most dynamic and technologic sections. One of the methods of quantity estimation of such researches is use of production function and this subject is necessary for estimation of benefits of costs spent for education and increase of human capital, however, there is no specified way for application of human capital variable in production function. We consider production function as Cubb-doglas function in which actual production is subject to labor force, physical capital and social capital stock: Yi = AK i L S i i In this production function, Yi is gross domestic product, Li is labor force , Ki is physical capital and Hi is social capital of ith country. A is technology parameter and reflects production technology of each country and how each country can convert inputs to outputs. , and are indicative of production elasticity relative to physical capital , labor force and social capital and are obtained as followed: dY K K Ki EYi ,Ki = i i = AK i 1L S i i = AK i 1L S i = i i dK i Yi Yi AK i Li Si dY L L Li EYi ,Li = i i = AK i L 1Si i = AK i L 1Si = i i dLi Yi Yi AK i Li S i dY S S Si = EYi ,Si = i i = AK i L Si 1 i = AK i 1L Si i i dSi Yi Yi AK i Li Si Estimation of production elasticity has very useful implications for us and is indicative of effect of the related production inputs on production and as a result, economic growth. But Cubb-Doglas function is not a linear function and we should convert it to a linear function, for this purpose, we take logarithm on both sides of this function: LogYi = LogA + LogKi + LogLi + LogSi In this case, our production function is converted to a linear function and estimation of its coefficients is possible with use of Ordinary Least Squares method (OLS). Estimated coefficients are production elasticity of different production inputs.

4. Research Data and Finding

In the present research, library method has been used for gathering statistics and figures of historical documents and the used statistics is set of sectional data relating to Iran and other 75 countries for 2008. All statistics except social capital has been taken from World Bank website. Statistics relating to social capital has been obtained from studies and researches of Legatum Institute which has been described above. For selection of these 76 countries, we tried to select among all districts and continents, large and small countries, developed, developing and underdeveloped countries so that better and more documentary comparison can be made. The most important limitation which is imposed on selection of the countries is accessibility and availability of statistics relating to these countries. Among 104 countries of which social capital statistics is given in table 1, only 76 countries were studied because there were no statistics and information relating to other variables mentioned in the model for other countries. Starting point of our econometric analysis which has been formed on the basis of theoretical and experimental fundamentals is the following model: LogGDP = LogAi + LogGFCi + LogEPi + LogSCi i Where variables include: GDPi , gross domestic production which is indicative of production of a country and shows value of end products inside each country in fixed prices of 2000.

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GFCi is gross fixed capital which indicates stock of physical capital and value of plants, machinery, building, equipment for purchase and construction and other substructures in fixed prices of 2000. EPi shows labor force and shows total employed population of a country. SCi which is index relating to social capital of each country. Ct is perturbation sentence. The estimated coefficients can be interpreted as production elasticity that is these coefficients show percentage of change in gross domestic production rate due to a unit of change in each one of the explained variables. The results obtained from estimation of the model are shown in table 2 on the basis of ordinary least squares method. As specified in this table, all of the estimated coefficients are statistically significant and estimated equation is obtained as follows: LogGDPi = 3 / 242 + 0 / 856LogGFCi + 0 / 055LogEPi + 0 / 280LogSCi On the basis of estimated coefficients, we can rewrite Cubb-Doglas function on the basis of data of this study:

Yi = AK i0 / 856 L0 / 055 S i0 / 280 i

As specified in this function, production elasticity of production inputs is positive. On this basis, production elasticity of physical capital is 0.856 and it means that 1% increase in employed population causes 0.055% increase in gross domestic production and finally production elasticity of social capital is 0.280 and it means that 1% increase in public expenses spent for education caused 0.28% increase in gross domestic production. On the other hand, increase of human capital has positive effect on economic growth and this result confirms theoretical fundamentals of this research.
Table 2: Estimated coefficients
Estimated coefficients 3.2427 0.8564 0.280 0.050 F=1896.46 Independent variables Ci GFCi SCi EPi R2=0.98

Calculated statistic t 3.974 18.14 5.429 1.0009 D-W=1.80 Taken from research finding

F test (regression general significance test) indicates significance of the model in 95% level. Coefficient level of R2 equals to 98%. This coefficient level indicates that about 98% of changes in gross domestic product can be explained by variables introduced in the model. Durbin Watson statistic( D-W) which indicates presence or absence of autocorrelation has suitable condition and the obtained number indicates that there is no autocorrelation in the related model.

5. Conclusion
In this article, we seek to find relationship between economic growth and social capital in interstate comparison and with use of endogenous growth model. The obtained results show that there is significant relationship between social capital and economic growth and with increase of social capital; economic growth will increase so that economic growth increases by 0.28% for each 15 increase in social capital. The obtained results show that with increase in physical capital and employed population, economic growth rate increases so that 1% increase in physical capital causes to increase gross domestic product by 0.856% and 1% increases in employed population causes to increase gross domestic product by 0.055%. On the other hand, production elasticity of human capital, physicals capital and labor force is 0.28%, 0.856% and 0.055% respectively. Coefficient level of R2 equals to

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98%. This coefficient level indicates that about 98% of gross domestic product changes can be explained with variables introduced in the model. Results of this research are obtained from most studies which have been done out of the country and mentioned in literature in terms of positive significant relationship between social capital and economic growth and experimental finding confirms theoretical fundamentals which have been used in this research. In comparison with local studies, one can say that results of this study are similar to those of these studies but specification of this research is study of statistics of 76 countries in the world and 12 indices have been used as criterion for calculation of social capital index. Research results show that economic policymakers of the country should pay special attention to social capital and its expansion while considering physical capital and employment and regard the performed activities as a useful investment in order to improve and promote social relations and public trust and social capital resulting in increase of economic growth and society prosperity.

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