Understanding Ties as Social Capital

SAWADA Yasuyuki
Faculty Fellow, RIETI

Against the backdrop of rising social problems such as the isolation of young people and the solitary deaths of the elderly poor, some observers say that Japan has become a "fragmented society" where human relationships are shallow and weak. On the other hand, following the Great East Japan Earthquake, strong ties and mutual help among people--symbolized by the Japanese term "kizuna" which translates to "ties" in English--have been attracting a great deal of attention as a driving force for the post-disaster reconstruction. This time, I would like to focus my discussion on social capital which I believe is the key to the proper understanding of kizuna.

Social capital typically refers to the structure of social relationships and networks or resulting outcomes of such structure, i.e., mutual trust, solidarity, implicit rules, and social norms. These include not only community-based ties--such as those observed within rural villages and companies or among school alumni--but also relationships formed via social network sites (SNS).

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In Social Capital: A Multifaceted Perspective, published by the World Bank in 1999, some contributing authors--including Professor Kenneth Arrow, Professor Robert Solow, and the late Professor Elinor Ostrom--criticized the ambiguity of the definition of "social capital" and a lack of rigorous research on the subject, but they all agreed that trust relationships are important to society.

Being a very broad concept, social capital has been studied in various approaches not only in economics but also in sociology, political science, and public health. In the sphere of economics, a 1977 paper written by Brown University Professor Glenn Loury is a pioneering work. He defined social capital as a set of intangible resources in families and communities, and plays a critical role in promoting the development of cognitive abilities and social skills among children and adolescents. This has influenced subsequent arguments on social capital significantly.

Robert Putnam, a political scientist and professor at Harvard University, popularized the concept of social capital. In his 1993 book, Making Democracy Work: Civic Traditions in Modern Italy, he examined differences in the quality of governance among the regional governments in Italy and pointed out that regions in the northern area, where significant stocks of social capital had been accumulated over the centuries, were more successful in both democracy and economic development than those in the southern area with a lesser accumulation. In Bowling Alone: The Collapse and Revival of American Community, published in 2000, he pointed to a decline in social capital in the United States, saying that American society has fallen into a situation where people are bowling alone and not in leagues.

James Coleman, late professor of the University of Chicago and a sociologist, also noted in his 1988 paper that social capital accumulated in Catholic communities in the United States helps enhance the level of education of youths. Likewise, Ichiro Kawachi, professor of social epidemiology at Harvard University, and some others have argued that social capital helps improve people's health.

Those research works have shown that social capital makes a significant contribution to the development of the economy and society. However, the late Professor Mancur Olson pointed out that social capital could have a negative impact on society as it works to strengthen solidarity within interest groups and may eventually turn into bondage and curse to further promote rent-seeking activities. In order to test these conflicting hypotheses, it is indispensable to measure the level of social capital accurately. This, however, is no easy task as social capital concerns intangible, social, and interpersonal relationships.

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In their 1997 paper, Dr. Stephen Knack and Dr. Philip Keefer of the World Bank quantified social capital using responses to surveys that asked subjective questions concerning trust and showed that the resulting values, an indicator of trust, are positively related to the rate of economic growth.

On the other hand, Harvard University Professor Edward Glaeser and others showed the limitation of subjective survey questions as a tool to measure trust in their 2000 paper, in which they closely examined problems with data based on such questions by using an experimental economics approach. Specifically, they conducted an economic experiment called the "trust game" (see the Keywords section), whereby they measured trust as deviations from the Nash equilibrium (see the Keywords section), a concept of game theory.

Subsequently, the efficacy of the experimental economics approach to quantify social capital was demonstrated by The College of William & Mary Professor Lisa Anderson in a paper published in 2004 as well as by Universidad de los Andes Colombia Professor Juan Camilo Cárdenas and Middlebury College Professor Jeffrey Carpenter in 2008. Today, it has become possible to measure social capital, an invisible phenomenon, quite accurately by means of an economic experiment.

Thanks to the development of measurement methods, various research findings on the role of social capital have begun to emerge in recent years. In a paper published in 2005, Yale University Professor Dean Karlan examined how the repayment behavior of borrowers in a Peruvian microcredit program is related with social capital, finding that the more trustworthy individuals--those who are more likely to respond to being trusted--are good borrowers in reality, repaying their loans properly.

This indicates that social capital helps overcome market failure in developing countries, where market mechanisms, laws, and regulations have not been fully developed. Oxford University Professor Marcel Fafchamps et al. also showed that agricultural traders with social capital are more profitable than those without in Madagascar.

Hirokazu Ishise, visiting assistant professor at the University of Iowa, and I found that social capital's contribution to gross domestic product (GDP)--i.e., aggregate return on social capital--has a strong negative correlation with the level of income per capita, and that while such return is particularly high in developing countries, social capital has more negative aspects than positive ones in advanced countries as pointed out by Professor Olson. We published our findings in 2009 (see the figure).

Figure: Social capital and income levelFigure: Social capital and income level
Source: Ishise and Sawada (2009)

Social capital does not necessarily accumulate simply because people gather. A 2012 paper written by Masahiro Shoji, associate professor at Seijo University, and others, based on a study conducted under the auspices of the JICA Research Institute, provides a detailed analysis of the social capital of residents in an irrigated area in southern Sri Lanka, developed with Japan's official development assistance (ODA) loans. It showed the existence of a "poverty trap," where not only a lack of social capital leads to poverty, but also poverty leads to a lack of social capital. Cárdenas and Carpenter (2008) also showed a strong negative correlation between the percentage of the population in poverty and the level of trust in others as observed in the results of an economic experiment.

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In order for people to be able to engage in social and economic activities in a sound and stable manner, the presence of supportive social relationships is indispensable, that is, in addition to income earning capabilities such as skills and good health as have been cited in economics. Indeed, such social relationships play a critical role in the reconstruction of disaster-hit areas. In his book published in 2012, Daniel Aldrich, associate professor at Purdue University, closely analyzed data on the Great Kanto Earthquake in 1923, the Great Hanshin-Awaji Earthquake in 1995, the Indian Ocean Tsunami in 2004, and Hurricane Katrina in 2005, finding that the level of social capital determined the speed of post-disaster recovery as a common feature observed in all of them.

As such, we may be able to accelerate a post-disaster recovery process by facilitating social capital accumulation while, at the same time, minimizing the Olsonian negative effects. The presence of high-level social capital is also the key to realizing a better and more assuring post-disaster society. Currently, reconstruction works--mostly infrastructure projects--are underway in quake and tsunami-hit areas in Tohoku. These, too, must be designed in such a way to enhance the level of social capital such as person-to-person, community-to-community, and community-to-government ties and connections.

>> Original text in Japanese

* Translated by RIETI.


  • [Trust game]
    An experiment involves two mutually anonymous players. First, the experimenter pays a sum of money to Player A and asks him to split it with Player B. Next, the experimenter pays to Player B an amount equal to three times the amount Player A has given to Player B, and asks Player B to return part of the money to Player A. Since the optimum strategy for Player B in this situation is not to return any money to Player A, the optimum strategy for Player A should have been not to give any money to Player B in the first place (Nash equilibrium). Therefore, the amount of money Player A gives to Player B can be interpreted as the degree of trust and the amount returned from Player B to Player A as the degree of trustworthiness.
  • [Nash equilibrium]
    This refers to a stable outcome or an "equilibrium" under strategic interactions among players without cooperation mechanisms as is the case in an arms race. The Nash equilibrium is defined as a situation where a player cannot expect any better results by changing its strategy unilaterally, and, as such, all of the other players have no incentive to change theirs. In other words, each player involved in the strategic interactions is maximizing his/her benefits unilaterally. This equilibrium, however, is not necessarily the optimum situation for society as a whole.

December 18, 2012 Nihon Keizai Shimbun

March 11, 2013

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