Trust thy neighbour

Trust thy neighbour
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First Published: Tue, Jan 29 2008. 11 29 PM IST
Updated: Tue, Jan 29 2008. 11 29 PM IST
There is now mounting evidence that corrupt officials and local political bosses have hijacked the government’s rural jobs scheme. Rahul Gandhi claimed during a recent rally in Uttar Pradesh that barely 5 paise out of every rupee spent by the government reach the rural poor. The other 95 paise are pilfered. Of course, the young scion was trying to score points off Mayawati. He has since reiterated his old demand that the rural jobs scheme should be expanded as soon as possible.
This column is not about the contradiction in Gandhi’s stance. Nor is it about the fact that the critics who warned that the scheme would fall into a cesspool of corruption are being proved right. The issue here is the lack of social trust in India.
Just as an economy needs physical capital (tools), financial capital (money) and human capital (skills) to grow, it also needs social capital (trust). Economist Kenneth Arrow once said that virtually “every commercial transaction has within itself an element of trust, certainly any transaction conducted over a period of time. It can be plausibly argued that much of economic backwardness in the world can be explained by the lack of mutual confidence.”
The problem in the rural employment guarantee scheme is all about the misuse of benefits. But there are several other indications that India still has very low levels of social capital. Economists have tried to construct global social capital indexes, based in commonsense questions asked to respondents. Do you cheat on your taxes? Have you avoided paying fares when using public transport? Have you failed to report the damage done by you to a parked vehicle? And, of course, have you claimed benefits that you are not entitled to?
In a new paper for the National Bureau of Economic Research (NBER), Luigi Guiso of the European University Institute, Luigi Zingales of NBER and Paola Sapienza of the Kellogg School of Management define social capital as “the set of beliefs and values that foster cooperation.” Families transmit these values down the generations. The three economists say that some communities can get trapped in “low-trust equilibriums” that harm their growth and development. They do not, however, address the policy issue —what can be done to break this trap —saying that will be part of their future research agenda.
Many economists have delved into these issues over the past 15 years, and showed how countries with low levels of social capital tend to fall behind in the development race, something that the Arrow quote used earlier also alludes to. In 1996, for example, Stephen Knack and Philip Keefer asked whether social capital has an economic pay-off. They found that economic growth and investment activity is higher in countries that had higher levels of interpersonal trust and greater civic cooperation.
What applies to countries also applies to regions within a single country. The income gap between north and south Italy has sometimes been explained by the fact that the prosperous north has higher levels of social capital, partly because of the fact that there were free city states in northern Italy some 500 years ago. (This is also an indication that social capital gets built over decades and centuries. There is no quick fix.)
Similarly, Matthew Morris of the Institute of Development Studies showed that different levels of social capital could explain differences in poverty reduction in states across India. The extent to which poverty drops in a particular state depends on the number of newspapers and the extent to which they are read, membership of voluntary organizations, the status of women, voting patterns, etc. I suppose a similar framework can be used to ask why microfinance and self-help groups (which are anchored in social trust) tend to be more successful in states such as Andhra Pradesh than in states such as Bihar.
The analysis of social capital and economic development is a new area of research. But its preliminary results give us some important clues. First, we should not be dismissing surveys of corruption and values as mere homage to middle-class notions of morality. Second, low levels of social trust can persist over centuries and countries need a shock to break out of these low-trust equilibriums. This means we need to take our historical wrongs based on caste and gender far more seriously. Third, wealth based on oligopolies and government protection will only decrease the level of public trust in Indian capitalism. India needs a more open and competitive economy, because the lack of trust usually prevents cooperation and risk-taking.
Markets cannot function well without high levels of social capital. There is a far deeper link between the rampant misuse of government funds, a doctor pumping his patient with unnecessary but expensive medicines, travelling ticketless in a train, and mass poverty than most of us realize.
Your comments are welcome at cafeeconomics@livemint.com
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First Published: Tue, Jan 29 2008. 11 29 PM IST