Somewhere, right now, social capital is improving someone’s life. In Argentina, individuals are relying on family and community members to provide a social safety net that the government is unable to provide. In parts of Latin America, grassroots organizers are being trained to leverage opportunities to make an impact on their governments and their own lives. In Bangladesh, a woman is borrowing a small amount of money through a micro-credit facility to start a local business that will allow her to make and sell goods, and eventually, to better her family’s living standard. In the slums of all of the major cities throughout the developing world, millions of people are relying on social capital to serve as an informal social safety net, because the government’s services simply do not extend to them.

Social capital is transforming the lives of people all across the globe, but it is a concept that was not widely discussed until 10 years ago. The concept of social capital, introduced by Professor Robert Putnam of Harvard University in 1993, has generated both tremendous excitement and controversy. Putnam originally defined social capital as the norms, networks, and social trust that make society function more smoothly. He associated higher levels of social capital with increased socioeconomic development, as well as with more efficient and responsive local government.

Over the past decade, several alternative conceptions of social capital have emerged. Social capital has been explored in terms of its potential to reduce poverty and vulnerability among the poor and powerless in developing countries. This approach has been adopted by the World Bank—which has its own Social Capital Initiative—and by the Inter-American Development Bank (IADB), as well as by other multilateral development organizations. In addition, the governments of developing countries have incorporated components of this new definition of social capital into their own development programs.

According to development researchers and practitioners, social capital creates economic, social, and political benefits by increasing participation; raising citizens’ access to information, credit, and local officials; and providing a social safety net that allows individuals to take risks. Economic benefits seem to accrue on both the individual and societal levels with high levels of social capital having positive effects on national growth—one of the main goals of most development organizations. Bernardo Kliksberg, General Coordinator of the Inter-American Initiative on Social Capital, Ethics, and Development at the IADB, says, “Several studies have shown that the various dimensions of social capital can have a major impact on the income and welfare of the poor by improving the outcomes of activities and services that affect them. Social networks also play an important role in the reemployment of the long-term unemployed.”

There are several reasons for the positive effects that social capital exhibits on growth. These benefits of social capital can be seen as reinforcing many of the components of the Comprehensive Development Framework discussed above. First, social capital, in the form of trust, reduces transaction costs and increases accountability. By engaging in repeated interactions, individuals reduce the need for lawyers, written contracts, and other hurdles that stand in the way of efficiently conducting business. Second, trust in others, especially political leaders, creates greater political stability and faith in the future, which are both crucial to investment. A third reason for the economic payoff of social capital is that increased social capital serves to secure property rights. When an individual does not trust those around him, the incentive to innovate is reduced as the possibility of theft rises. On a more local level, social capital has been shown to increase the economic opportunities of the poor and to give the disenfranchised increased participation in government.

A Different Look at Development

The concepts of foreign development assistance and promoting international growth stretch back to the conclusion of World War II. Since then, many different development paradigms have gained attention, and most have failed. More people live below the international poverty line—just one US dollar per day—today than did in 1945. In the past, development organizations, especially the World Bank, focused on promoting large-scale industrial development projects that were supposed to have positive effects on an economy’s overall growth. Recently, the World Bank and other development organizations have revamped themselves. Under President James Wolfensohn, the World Bank has advanced poverty reduction as its primary goal. Wolfensohn has argued, “We have learned that poverty is about more than inadequate income or even low human development; it is also about lack of voice, lack of representation. It is about vulnerability to abuse and corruption. It is about violence against women, and fear of crime. It is about lack of self-esteem.”