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An Inquiry into the Empirics of
Social Capital and Economic Development

Fabio Sabatini

PhD Programme in Economics
University of Rome La Sapienza, Department of Public Economics

Internal Advisor: Prof. Claudio Gnesutta (University of Rome La Sapienza). External Advisor: Prof. Pier Luigi Sacco (IUAV University of Venice)

June 2006

I. Preface
From a theoretical point of view, modern political economy has developed depriving economic interactions of their social content. A typical example of this trend is given by the economy’s working framework implied by Walrasian general equilibrium models. In this context, market interactions are reduced to the transmission of coded information through the auctioneer’s agency. Agents never meet: they simply pass on to the auctioner their purchase and selling proposals (Gui, 2002). However, the economic activity is deeply embedded in the social structure, and agents’ decisions are always influenced by a wide range of social and cultural factors. For example, most case studies show that enterprises devote an ever more relevant part of their financial resources to activities which are not directly related to production processes. Nurturing a cooperative climate inside the workforce and building trustworthy relationships with external partners generally constitute a key task for management. On the other side, workers’ satisfaction is ever more affected by the quality of human relationships among colleagues, and not only by traditional factors like wage and job’s conditions. According to Gui (2000), such relational assets contribute to firms’ economic performance just like new machineries and warehouses. Growing attention has thus been devoted to the role that social norms, the diffusion of trust and logics of reciprocity play in shaping different kinds of transactions (Kahneman and Tversky, 1979, Arnott and Stiglitz, 1991, Berg, Dickaut and McCabe, 1995, Fehr, Gatcher and Kirchsteiger, 1997, Frey, 1997, Bowles and Gintis, 1999, Fehr and Gatcher, 2000, Sugden, 2000). The growth literature is now pervaded by studies addressing the relationship between the economy’s social and institutional fabric, the economic performance and development patterns (Kormendi and Meguire, 1985, Bénabou, 1996, Barro, 1996, Collier and Gunning, 1997, Knack and Keefer, 1997, Johnson and Temple, 1998, Whytely, 2000, Zak and Knack, 2001, Gradstein and Justman, 2002). Such voluminous strands of the literature may be interpreted as the sign of the emerging need to fill the gap that, in economics, still separates society from the economy. The economic and sociological literature on social capital is another symptom of such need. In 1993, Robert Putnam tried to explain the different institutional and economic performance of the Italian regions as the result of the influence exerted by some aspects of the social structure, summarized into the multidimensional concept of “social capital”. This study has received wide criticism in in the social science debate of the 90s: ‘It has been subject to a number of what can only be described as devastating critiques, not least from scholars of Italian history’ (Fine, 2001, 86). However, it posed a milestone for social capital theory, which registered an explosive development in the following decade, rapidly involving the attention of economists. As pointed out by Isham, Kelly and Ramaswamy (2002), a “keyword” search in all journals in EconLit, the most frequently used database of references in economics, shows that citations for “social capital” have grown rapidly over the last decade, doubling each year since the late 1990s. In 2000, social capital had about a quarter of the absolute number of citations. Putnam’s (1993) work on Italy has been pronounced by the editor of the mainstream Quarterly Journal of Economics as the most cited contribution across the social sciences in the 1990s (Fine, 2001, 83). During last ten years, the concept of social capital has been invoked almost in every field of social science research, and has been used to explain an immense range of phenomena, from political participation to the institutional performance, from health to corruption, from the efficiency of public services to the economic success of countries.

II. Motivation and outline of the thesis
However, despite the immense amount of research on it, social capital’s definition remains elusive and, also due to the chronic lack of suitable data, there is neither an universal measurement method, nor a single underlying indicator commonly accepted by the literature.
From a historical perspective, one could argue that social capital is not a concept but a praxis, a code word used to federate disparate but interrelated research interests and to facilitate the cross-fertilization of ideas across disciplinary boundaries (Durlauf and Fafchamps, 2004). Even if conceptual vagueness may have promoted the use of the term among social sciences, it also has been an impediment to both theoretical and empirical research of phenomena in which social capital may play a role.
This thesis carries out an inquiry into the empirics of social capital and economic development, with the aims to provide an operational definition of the concept, to build a new framework for measurement, and to shed light on the nature and form of causal relationships connecting social capital to its supposed outcomes. The outline of the thesis is as follows:

chapter 1 reviews the empirical literature on social capital and economic development in a critical perspective. The survey points out five main weaknesses affecting existing social capital’s measurement methods. Empirical studies are then assessed through an evaluation of their (in)ability to overcome such weaknesses. A critical shortcoming is the widespread tendency to measure social capital through “indirect” indicators, not directly related to the concept’s key components as identified by the theoretical literature. This practice has caused a considerable confusion about what social capital is, as distinct from its outcomes, and what the relationship between social capital and its outcomes may be. Research reliant upon an outcome of social capital as an indicator of it will necessarily find social capital to be related to that outcome. The survey in chapter 1 suggests to focus the empirical research firstly on the “structural” aspects of the concept, stressing the advisability to focus on social networks, rather than on measures of perceived trust or on hazardous “indirect” indicators. Concluding remarks propose an operational definition of social capital as networks of interpersonal relations as a suitable point of departure for the empirical research. This definition includes both strong and weak ties connecting familiars, friends, acquaintances, members in voluntary organizations and, more in general, every group of agents having some interests in common and sharing definite values and beliefs. The adoption of such definition, however, must be qualified by the acknowledgement of the existence of different types of social networks. Some of them do not necessarily play a positive role in the process of economic development and, at the micro level, in the agents’ everyday life.

Chapter 2 builds a new framework for the measurement of social capital in Italy. The analysis is based on a dataset collected by the author including about two hundred indicators of five main social capital dimensions: strong family ties, weak informal ties, voluntary organizations, civic awareness, and political participation. Rough data are drawn from a set of multipurpose surveys carried out by the Italian National Bureau of Statistics (Istat) on a sample of 20 thousand households between 1998 and 2002. 51 key variables are selected to perform principal component analyses both on each of the five groups and on the entire dataset, in order to build latent indicators for every single social capital’s dimension and for the concept as a whole. Finally, a multiple factor analysis is performed on the entire dataset, in search of a single, synthetic, indicator measuring global social capital’s endowments. A clear distinction between two types of networks emerges. The former is shaped by strong family ties, and corresponds to what the theoretical literature generally calls bonding social capital. The latter is shaped both by weak ties among friends and neighbours and by formal ties linking together people coming from different social backgrounds within the boundaries of voluntary organizations. Such networks, corresponding to what the literature often terms “bridging” and “linking” social capital, tend to juxtapose each other in the Italian regions. The main shortcoming of the study is the impossibility of building a panel, allowing us to analyze social capital’s dynamics. However, the analysis is based on indicators that the Istat is going to measure also in next years, thus tracing an ideal pathway for new longitudinal investigations to be carried out in the future. On this regard, it is noteworthy that several other national bureaus of statistics have started building panels for the measurement of social capital and that, in most cases, such sets of data include items very similar to those adopted in this analysis. The contribution of the chapter to the social capital literature is threefold. Firstly, the methodological framework offers the possibility to carry out reliable and precise international comparisons. Secondly, the analysis provides synthetic indicators for four different social capital’s dimensions, posing the bases to deepen the study of the multifaceted relationship connecting social capital to its supposed outcomes. Finally, a new synthetic indicator for the concept as a whole is proposed. Such measure captures that particular configuration of social capital which the theoretical literature generally associates with positive economic outcomes.

Starting from the assumption that both social capital and economic development are multidimensional concepts, chapter 3 carries out an empirical assessment of the relationship between the four social capital’s structural dimensions measured in the previous chapter and the “quality of economic development” in Italy. The quality of development is measured through human development and indicators of the state of health of urban ecosystems, public services, social protection, gender equality, and labour markets. The analysis provides a first empirical testing of the widespread idea that bonding and bridging social capital exert different and conflicting effects on the process of economic development. Bonding social capital exhibits a strongly negative correlation with human development and social well-being. On the contrary, bridging and linking social capital are positively associated with such outcomes. Overall, the empirical investigation carried out in this chapter contributes to the literature providing further evidence of the very multidimensionality of the social capital concept. However, besides the already cited difficulty of bulding a panel, the analysis carried out in this chapter suffers from its exploratory nature, that does not allow us to shed light on the causal direction of the positive relationship between social capital and economic development.

Chaper 4 investigates the intensity and direction of causal relationships linking social capital to its outcomes, by means of structural equations models. This technique has grown up in psychometrics at the beginning of the 70s and, althought its application is a novelty for economic studies, it proves to be particularly suitable for the investigation of multidimensional phenomena like social capital and economic development. The analysis substantially confirms relationships emerging from previous PCAs, but also points out some notable exceptions and poses the need to make important specifications and to carry out further researches.

Chapter 5 carries out a first, explorative, attempt to shed light on the transmission mechanisms allowing weak ties to exert a positive influence on development. The analysis focuses on the relationship between social capital and labour productivity in small and medium enterprises (SMEs) in Italy. The importance of SMEs and their contribution to economic growth, social cohesion, employment, regional and local development is widely recognized. Particularly, SMEs are of great importance for the Italian model of development. Chapter 6 presents some concluding remarks and guidelines for further researches.

Information on the author
Fabio Sabatini holds a PhD in Economics from the University of Rome La Sapienza and is currently Research Fellow at the Department of Economics of the University of Cassino and at the SPES Development Studies Research Centre of the University of Rome La Sapienza.
He teaches Economics of European Integration at the Università Telematica Guglielmo Marconi and Social Capital Theory at the PhD Programme in Development Economics of the University of Cassino and at the Master Programme in Rural Development of the University of Rome La Sapienza. He is the editor of the Social Capital Gateway and volunteers for the RePEc Project as the editor of two NEP Reports on Social Norms and Social Capital and on Human Capital and Human Resource Management.
His research interests include social capital, the social aspects of economic growth and development, the welfare state, and topics related to the fight against poverty and inequalities.

Contact details
Dr Fabio Sabatini
Department of Public Economics
via del Castro Laurenziano 9 00161 Rome (Italy)
Phone: +39 0649766843
E-mail Fabio.Sabatini@uniroma1.it

Download the thesis
An Inquiry into the Empirics of Social Capital and Economic Development (Pdf file, 1,20 Mb)

Additional information
This thesis is listed also in sections Economics and English.

Related works

See the complete list of Fabio Sabatini's papers here.

• Sabatini, Fabio (2006), The Role of Social Capital in Economic Development. Investigating the Causal Nexus through Structural Equations Models, Paper presented at the Conference Social Capital, Sustainability and Socio-economic Cohesion within the EU MLG structure in development policy, hosted by the London School of Economics, London, June 29 & 30, 2006.

• Sabatini, Fabio (2006), Does Social Capital Improve Labour Productivity in Small and Medium Enterprises?, Working Paper No. 92, University of Rome La Sapienza, Department of Public Economics. Click here to download the paper from the web site of the University of Rome La Sapienza.

A revised version of this paper has been included also in the FEEM Working Paper series with the title Social Capital and Labour Productivity in Italy, FEEM Working Paper 30.06, Eni Enrico Mattei Foundation, Milan. Click here to download the paper from the FEEM's web site.

• Sabatini, Fabio (2006), Social Capital, Public Spending and the
Quality of Economic Development: the Case of Italy, FEEM Working Paper 14.06, Eni Enrico Mattei Foundation, Milan, January 2006. Click here to download the paper from the FEEM's web site.

• Sabatini, Fabio (2006), Social capital, labour precariousness and the economic performance. An empirical assessment of the strength of weak ties in Italy, Third Sector and Civil Economy Working Paper Series, No. 26, January 2006, University of Bologna, Faculty of Economics. Click here to download the paper from the web site of the University of Bologna.

• Sabatini, Fabio (2006), The Empirics of Social Capital and Economic Development: A Critical Perspective, FEEM Working Paper 15.06, January 2006, Eni Enrico Mattei Foundation, Milan. Click here to download the paper from the FEEM's web site.

• Sabatini, Fabio (2005), Social Capital as Social Networks. A New Framework for Measurement, Working Paper No. 83, University of Rome La Sapienza, Department of Public Economics. Click here to download the paper from the web site of the University of Rome La Sapienza.
Paper presented at the 3rd Annual Meeting of young researchers organized by the Italian Sociological Association, Naples, Italy, 6 October, 2005.

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