The Ties That Lead To Prosperity

The economic value of social bonds is only beginning to be measured

In small cities scattered across Lombardy and the Veneto, family-owned manufacturers making everything from textiles to brass fittings generate the highest per capita incomes in Italy. In certain villages in Tanzania, people with strong social ties have developed strong commercial ties, too, making their villages wealthier than neighboring towns with fewer social groupings. In the Chicago suburbs, families that moved out of segregated Chicago housing proj-ects are flourishing, while counterparts who left the projects but stayed in the city are still floundering economically.

What do these far-flung places and people have in common? They are all examples of a powerful, newly recognized economic force at work--social capital. In communities and neighborhoods across America and around the world, social ties have long been a subject of study for sociologists, psychologists, and political scientists. Now, economists are assessing how the social fabric affects individual choice and economic growth.

Once, economists studied physical capital--the bricks and mortar of economic life. Then, they studied investment capital--the financial resources that provide the wherewithal to build industry. More recently, economists have explored the role of human capital--the endowments of education and health that individuals possess.

Now, in belated recognition of the importance of group membership and social relationships, economists are studying social capital. They're still trying to answer age-old questions: How do regions grow? Why does income inequality persist? What accounts for different economic outcomes? But now, they are analyzing social relations to help answer those questions. "People have been looking around for a kind of handle on the problems of inequality and civic involvement, for which the social-capital concept is useful," says Boston University economist Glenn C. Loury.

DOUBLE-EDGED. Hard to measure and difficult to define, social capital comprises an intricate web of relationships, norms of behavior, values, obligations, and information channels. Within groups and regions, its presence may boost productivity and incomes, while its absence may hinder growth. But there can be bad social capital, too: In city slums, for instance, gangs may foster criminal behavior and insist on group loyalty, while in wealthy communities, gated entrances and discriminatory rules create exclusive enclaves.

The new research shows that the nature of social relationships in different places can influence schooling, jobs, and earnings--the very direction that people's lives take--as much as talent and initiative do. For economists, nailing down these effects is no mean feat--and early work is yielding only tentative conclusions. "The real onus on economists now is to take the notion of social capital, which is rather fuzzy, and try to describe exactly how it works in concrete situations," says economist George A. Akerlof of the Brookings Institution and the University of California at Berkeley.

Some economists are examining "neighborhood effects" on poor individuals. Others are trying to establish links between economic performance and measures of social capital--such as survey results on how much trust people have in others or the number of associations to which people belong. These proxies for social capital show a mixed picture in the U.S..

The essential qualities of social capital, as opposed to physical or human capital, are that it reflects a community or group and that it impinges on individuals regardless of their independent choices. That means that if community leaders toil to elevate the quality of life, reduce crime, and improve the schools in a neighborhood, all area residents get to enjoy the benefits. Similarly, the choices of individuals may be constrained by the social strictures of a group--pursuing a college degree may be atypical in some poor communities, for example.

SENSE OF PLACE. Researchers are showing the ways in which where a person lives--especially if poor--has an influence on that person's future health and welfare. Ichiro Kawachi and Bruce P. Kennedy at the Harvard School of Public Health argue, using data for 39 states, that lower levels of social capital are linked to higher levels of income inequality, poorer health, and higher mortality rates. And Harvard University economists David M. Cutler and Edward L. Glaeser, after analyzing 200 U.S. cities, conclude that educational attainment and earnings levels are worse for residents of more segregated cities than for those of less segregated cities. Reducing segregation by about 13% would wipe out one-third of the difference in success rates between whites and African-Americans, the authors say.

The most compelling proof that where you live affects who you become has emerged from studies of a multiyear program in Chicago and its suburbs. Since the late 1970s, more than 6,000 African-American families have been moved out of Chicago housing projects to comply with a 1976 consent decree after a discrimination suit. The Gautreaux program, named after plaintiff Dorothy Gautreaux, moved families randomly within a six-county region. About half relocated to housing in mostly white suburbs of Chicago, while the rest moved within the city.

Kids in the suburban locations were more likely to graduate from high school than kids who moved within the city, according to James E. Rosenbaum, a sociologist at Northwestern University. What's more, suburban high school grads had much higher college-attendance rates, while parents who moved to the suburbs were far likelier to have jobs than those who moved within Chicago. What made the difference? Safety, for one: With kids safe in and around their schools and neighborhoods, mothers were more likely to join the workforce. Meanwhile, links to school organizations and neighborhood resources also helped. The lessons of the Gautreaux program prompted the Housing & Urban Development Dept. to fund a five-year, multi-city program called Moving to Opportunity. Early results affirm that the safety and resources of new neighborhoods improve family prospects.

Obviously, moving is not an option for most poor inner-city residents. One alternative: Attempt to shore up social capital in places where it has eroded. In the Bronx, N.Y., a seven-year effort called the Comprehensive Community Revitalization Project (CCRP) is doing just that. The program targeted five neighborhoods for a grassroots effort that focuses on all aspects of a neighborhood--not just housing. CCRP encompassed the creation of health-care facilities, job training and referral services, school improvement, and neighborhood beautification, and addressed other "quality of life" issues such as community policing. About 300 new jobs were created, new child-care centers for more than 300 children opened, and one local school now houses late day, evening, and weekend programs for neighborhood families. Major foundations regard such initiatives as the wave of the future and are directing more money their way.

The preponderance of studies focusing on poor neighborhoods may appear to suggest that social capital is more important in poor locales than in prosperous ones. That's not necessarily the case, as the example of Lumezzane, a wealthy industrial town in northern Italy, shows.

DIM VIEW. The town typifies the success stories set forth in a groundbreaking 1993 book about Italy, Making Democracy Work, by Harvard political scientist Robert D. Putnam. That book and his subsequent work with University of British Columbia economist John F. Helliwell showed that relatively high levels of social capital in northern Italy during the 1970s and 1980s were associated with strong economic growth and effective local and regional institutions, while relatively lower levels in southern Italy were linked to weak economic performance and political institutions. Putnam has since extended his analysis to the U.S. in a controversial 1995 article in the Journal of Democracy entitled "Bowling Alone: America's Declining Social Capital." In it, he described an America of individuals disinclined to join traditional associations.

Other researchers, too, are finding that social capital is a concept with global applications. Some are linking growth rates with levels of trust, much as social scientist Francis Fukuyama did through historical analysis in his 1995 book Trust. Recently, a promising data set known as the World Values Index was collected by an international consortium of polling groups. One of the values measured is the extent to which people trust others. Economists are now using those results to correlate growth and trust systematically.

TRUST EDGE. Stephen Knack of American University and Philip Keefer of the World Bank found in a recent study of 29 countries that high levels of trust in the Netherlands, Norway, and Switzerland were associated with strong economic performance from 1980 to 1992, after adjusting for differences in other variables, such as education levels. More significantly, incentives to innovate and accumulate capital are stronger in countries that exhibit high trust, because business can operate with a high degree of confidence about the future. Japan, Norway, and Switzerland are high-trust nations with a high level of investment as a share of gross domestic product.

At the World Bank, researchers studying how to promote economic development are also focusing on social capital. Lant Pritchett, an economist at the bank, and World Bank social scientist Deepa Narayan recently looked for factors that distinguished people at various income levels in Tanzania. They found that families active in groups such as credit societies, churches, farmers' organizations, and burial societies were better off than families who were not joiners.

Moreover, the researchers found that the whole village was better off if such associations were plentiful. They estimated that if just one person in every two households joined one more group, average incomes in the entire village would rise 20% to 50%. By comparison, an additional three years of schooling per adult would raise income only 3% to 5%.

Economists have always known that intangible factors can affect growth. Stanford University economist and Nobel prize winner Kenneth Arrow wrote in 1972 that "virtually every commercial transaction has within itself an element of trust." But quantifying social capital as an economic variable is a challenge. Massachusetts Institute of Technology economist and Nobel prize winner Robert Solow says that early attempts to measure trust are promising. But he argues that cause and effect have yet to be proved--that is, it's possible that high measures of social capital are by-products of successful economies, not the other way around. Concludes Solow: "It's not yet an airtight case."

That's true. But as more and more economists focus on social dynamics, the nature of the interplay between social ties and economic performance will become clearer. Today, an inner-city kid probably has a better understanding of social capital than most academics. It's simple: You are where you live and who you know. By the same token, a job-seeker knows the value of networking. And an executive knows what makes a smooth-running operation: teamwork and cooperation. But in the economy at large, it's still a novel notion that social relations can be a powerful economic agent. The ties that bind families and communities do more than make people feel good--they make the economy go 'round. Gradually, a factor of growth that no one can measure in dollars is being seen to have great value.

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