Any form of capital – material or non material – represents an asset or a class of assets that produces a stream of benefits. The stream of benefits from social capital- or the channels through which it affects development – includes several related elements, such as information sharing and mutually beneficial collective action and decision making as well as reduction of opportunistic behavior. Collier, (1998) suggested that social capital is economically beneficial because social interaction generates at least one of three externalities. It facilitates the transmission of knowledge about the behavior of others and this reduces the problem of opportunism. It facilitates the transmission of knowledge about technology and markets and this reduces market failures in information. Finally it reduces the problem of free riding and so facilitates collective action.
Participation by individuals in social networks increases the availability of information and lowers its cost. The information, especially if it relates to such things as crop prices, location of new markets, sources of credit, or how to deal with livestock disease, can play a critical role in increasing the returns from agriculture and trading.
Participation in local networks and attitudes of mutual trust makes it easier for any group to reach collective decision and implement collective action. Social capital is seen in the context of the contributions it makes to sustain development. Sustainable development refers to a process whereby future generations receive as much or more capital per capita as the current generation has available (Serageldin, 1996). Traditionally, these include natural capital, physical or produced capital and human capital, the wealth of nations on which economic development and growth is based. It is now recognized that these three types of capital determine only partially the process of economic growth because they overlook the way in which the economic actors interact and organize themselves to generate growth and development. Fafchamps and Minten (1999) in their study of agricultural traders in Madagascar observed that better connected traders have better information on prices and on credibility of clients, and they enjoy larger sales and gross margins on their transaction as a result. In addition to acting as fora for information exchange, networks and associations facilitate collective action and decision making by increasing the benefits of compliance with expected behavior or by increasing the costs of non – compliance. The literature has identified a number of channels by which social
capital improves efficiency. Most of these channels fall under one or a combination of the following three categories:
Information Sharing: It is a common feature that human beings derive satisfaction from interacting with others. Socializing often involves the transfer of information, even if the purpose of socialization is not to transfer this information. The sharing of information is then a by-product of social interaction, a Marshallian externality. To the extent that the shared information is economically useful, socialization generates a positive externality. In practice, three conditions must be satisfied for social capital to raise Pareto efficiency through the sharing of information: (1) imperfect information must be the source of inefficiency; (2) there are disincentives to spread erroneous information; (3) there are no obstacles to Pareto efficiency other than imperfect information. Even if social capital satisfies the first condition, it may not satisfy the other two. It is also important to recognize that the information sharing benefits generated by social capital can always be obtained in another way. For instance, information sharing can be explicitly organized and budgeted within a large organization, whether public or private (enterprise, NGO). To empirically test the effect of social capital, one should control for the possible presence of such organizations.
Group identity and modification of preferences: One claim often made in the literature is the idea that social capital favours altruism and raises concerns for the common good – the ‗touchy – feely‖ side of social capital. The relationship between altruism and social capital probably has to do with group identity (Akerlof and Kranton 2000). If identification with a group is necessary for preferences to become altruistic and better aligned with common good, efforts to foster a sense of community may naturally be seen as an essential component of social capital by many researchers. This probably explains why community building is often construed as a way to foster social capital. By circulating information, social capital can magnify reputational sanctions. Group identification can also raise guilt for acting against the group‘s common interest.
Coordination and Leadership: Good leaders may impose efficiency by using the levels of social capital – e.g. by fostering altruistic preference and concern for the common good;
favouring group identification; preaching good behavior and making free-riders feel guilty; encouraging mimicking of good behavior through role model and the manipulation of group symbols and representations. (e.g. religion, ideology). This is what practitioners in the field call ‗building social capital‘. Purposeful coordination can also be obtained through formal rules by which decisions are made and deviance penalized.
2.2.6 Measurement of Social Capital
Like human capital, social capital is difficult, if not impossible, to measure directly; for empirical purposes the use of proxy indicators is necessary. Years of education and years of work experience have a long tradition as proxies for human capital and have proven their value in numerous empirical studies. No such acquired consensus yet exists for the study of social capital, and the search for the best proxy indicator continues. Researchers have used counts of associations or associational memberships, on the one hand, and survey data on levels of trust and civic engagement, on the other.
Researchers have also drawn on a number of data sources, including the National Opinion Research Council, General Social Survey and the University of Michigan‘s World Values Survey. These surveys ask questions about individuals‘ associational membership, attitudes about trust, and political participation. Glaeser et al (2000) raise questions about the reliability of survey data measuring social capital. In a laboratory setting they found that subjects who reported that they are trusting did not cooperate in a standard trust game.
A general criticism of survey methods is that survey responses vary according to the manner in which questions are phrased, and who is asking them. Among other measures, researchers have also used crime rates, voter turnout, volunteering, car-pooling and charitable-giving as measures of social capital. These measures have been used with varying degrees of success, but we contend that a single measure that captures completely a concept with complex and multiple dimensions, such as social capital, may not exist.
The approach of this study in dealing with measurement issue follows from the argument that one form of social capital manifests itself in individuals through their participation in associational activities. Researchers have argued that social capital is enhanced when people belong to voluntary groups and organizations.
In particular, Putnam (1993) maintains that participation in political and social activities and collective organizations is the primary means of civic engagement, and credits the economic success of northern Italy, relative to that of southern Italy. He claims that individuals‘ participation in social and political organizations ―instill(s) in their members habits of economic cooperation, solidarity, and public spiritedness‖ (Putnam, 1993). From an economist‘s point of view, cooperation and information sharing are facilitated when individuals have the opportunity to interact within organizations. Such activities facilitate information-sharing through repeated interactions and these interactions promote reciprocity. People who belong to such groups tend to trust others who belong to the same group, and they are therefore more likely to cooperate.
Social Capital Initiatives studies revealed that these social capital indicators differ both geographically and sectorally, e.g., measures of membership in associations were found to be relevant indicator in Indonesia, Kenya, and countries of the Andean region, but not in India and Russia where informal networks are more important. Krishna and Uphoff (1999) relied primarily on membership in networks as a measure of structural social capital.
Fafchamps and Minten (2000) used the number and type of relations among traders as their main indicator. Paragal, Hug and Gillgan (1999) used a combination of indicators for structural and cognitive social capital. Structural capital is proxied by associational activity; cognitive social capital is proxied by measures of trust and strength of the norms of reciprocity and sharing.
Due to the strong contextual nature of social capital, it is unlikely that it will ever be possible to identify a few ―best‖ indicators that can be used everywhere. Obtaining, a single, true measure of social capital is probably not possible for several reasons, first, the most comprehensive definitions of social capital are multidimensional, incorporating different levels and units of analysis. Second, the nature and forms of social capital change overtime, as the balance shift between informal organizations and formal institution. And third, because no long standing cross country surveys were initially designed to measure social capital, contemporary researcher have had to compile indexes from a range of approximate items (Measures of trust, confidence in government, social mobility etc.).
Rose (1999) separates the analysis of social capital into three alternative approaches.
Situational Themes: Social capital is defined in situational and instrumental terms, i.e. it varies from person to another and from situation to situation. This again implies that social capital cannot be reduced to a single unit of account and then aggregated into a summary statistic characterizing the whole of society (Coleman, 1997).
Social psychological approach: Social capital is a set of cultural beliefs and norms.
Supporters of this approach argue that voluntary organizations emerge as a consequence of trust, rather than the reverse i.e. social capital is in essence equal to trust. Social capital varies from person to person but it is situationally consistent (Inglehart, 1997)
Culture theory: Culture is the source of trust and cooperation. Social capital is homogeneous among individuals belonging to the same culture (society), as well as consistent from situation to situation. This implies that it should be very simple to identify social capital for a specific country (Fukuyama, 1995)..
Babb (2005) identifies five main aspects for measuring social capital namely: civic participation (propensity to vote, to take action on local or national issues), social
networks and support (such as contact with friends and relatives), social participation (involvement in groups and voluntary activities), reciprocity and trust (which include giving and receiving favour, as well as trusting other people and institutions) and views about the area (the analysis and interpretation of the social capital measures, and it includes satisfaction with living in the area and problems in the area).