Monday, November 12, 2012

Martin Sirakov on Social Capital's Overlooked Influence

The World Bank Group defines social capital as "the institutions, relationships, and norms that shape the quality and quantity of a society's social interactions. Increasing evidence shows that social cohesion is critical for societies to prosper economically and for development to be sustainable. Social capital is not just the sum of the institutions which underpin a society – it is the glue that holds them together."  World Bank, What is Social Capital. Francis Fukuyama, understands "social capital is an instantiated informal norm that promotes cooperation between two or more individuals. The norms that constitute social capital can range from a norm of reciprocity between two friends, all the way up to complex and elaborately articulated doctrines like Christianity or Confucianism. They must be instantiated in an actual human relationship." Francis Fukuyama, Social Capital and Civil Society, Prepared for delivery at the IMF Conference on Second Generation Reforms (Oct. 1, 1999).

(Pix (c) Larry Catá Backer 2012)

My former student and research assistant, Martin Sirakov, has written a nice essay on social capital.  He has consented to write a summary of the essay as a guest post.  That summary follows. The paper may be accessed HERE.

Social Capital’s Overlooked Influence
Martin Sirakov

This post is an outgrowth of my work entitled “Leaders and Losers:A Comparative Study of Social Capital and Sustainability Trends in Bulgaria and Sweden.”

Trust between unrelated members of society and towards their institutional constructs is a hallmark of social integration and organization. Current study in this area falls under the purview of economics and political science and has been termed social capital, which has been closely related to economic and political processes at least since the 1970’s. Most recently, it has been championed as an important ingredient in forming free and inclusive societies in the transcultural sense of these ideas by Francis Fukuyama in his series of books on the issue and in Daron Acemoglu and James Robinson’s latest masterpiece “Why Nations Fail.” While the evidence is strong and plenty that positive social capital trends lead to beneficial political and economic gains, which are equitable and sustainable, it has not been examined in light of one of the greatest challenges of our time - sustainable development.

In my work, I have sought to study the relationship between social capital trends and sustainable development practices. Most recently, I completed a comparative study between the EU’s leader in sustainable development praxis and it’s worst offender - Sweden and Bulgaria, respectively.

What I found was very telling and perhaps a little intuitive. But before we go there, a little background.

Sweden and Bulgaria have very similar demographic profiles in terms of age distribution and ethnic composition, with similar total population figures as well. However, Bulgaria is about a third of the size of Sweden, with a much more favorable climate and many more sources of natural resources of better quality and yield. Until 1953, Bulgaria’s GDP and its growth were both higher than Sweden’s. Then, in the 1950’s something amazing happened. Sweden’s indicators started climbing dramatically and lead to a dramatic expansion of the economic base for the next 25 years. There are several factors that led to this, but the largest share can be attributed to Sweden’s manufacturing of vital products used in Europe’s post-war rebuilding. This industrial revolution didn’t happen in Bulgaria. Around the same time, the communist regime in Bulgaria became firmly established after years of political repressions and ideological cleansing. There was a push for industrialization, which was parallel to what was happening elsewhere in the Soviet/Communist universe and in Europe. However, Bulgaria was forced to export at uncompetitive prices, as a result of its political and ideological choices and allegiances. GDP would never recover, and even after the fall of Communism in Europe, Bulgaria’s GDP growth would be meagre and unsustainable.

So what about social capital? One would expect that Europe would have a significant dividend in social capital as a result of the EU and associated ideology pervading the continent. One would also expect that while regional differences will exist, the general trend would be upward. That is true of the continent as a whole. Of the 27 EU members, 26 have growing social capital, while Western and North Europe and parts of Southern Europe have high social capital as a result of decades of growth. Central Europe has medium high social capital with more recent growth. Eastern Europe has by far the lowest social capital measure. Do you know which of the 27 EU members is the exception to the growth rule? Bulgaria.

It’s hard to explain why this is the case, but for the past 20 years, since consistent studies have been made, Bulgaria’s social capital has been declining - a rare honor it shares with Albania on the continent. Many would argue this trend is a remnant of communist policies, and I examine some of that in my work, but it cannot explain the persistence of the negative trends. Moreover, in other post-communist states, the negative trends, if such existed, have been very obviously reversed, even if social capital is still not optimally high. This is something that warrants further research and I will not address here. The fact is Bulgaria has comparatively low social capital and it continues to decline in sharp contrast to the rest of the continent and the EU.

As many of you would have guessed by now, these trends translate in very inefficient economy and exclusive political institutions. Those of you familiar with Fukuyama’s work would also intuit that the size of the firm in Bulgaria is small and that the business climate is relatively poor. You would be correct for the most part. The opposite would be true of Sweden given its social capital dynamics.

How does all this affect sustainable development? That is what I set out to find out. As mentioned, Bulgaria has better natural resource deposits and more favorable climate than Sweden. It stands to reason that given such a fertile environment, Bulgaria would be eager to maintain it and benefit from its associated industry and economic activity. Well, that is simply not the case. During the communist regime and just as much after it, Bulgaria has treated its natural resources and the economic opportunities they afford with almost complete disregard. Large swaths of fertile land were developed into industrial and housing zones bringing associated pollution and environmental degradation. Urban sprawl, especially around the five largest cities, contributed additionally to this degradation. Similarly, resources were exploited in the dirtiest and most inefficient manners, just like in much of the Soviet Union.

After the fall of the Berlin Wall and the end of communism, Bulgaria reformed. It privatized all its state owned business, usually at laughable prices. These businesses were then restructured and resold. Today, only a small fraction of the resource-based industries that existed before 1989 continue to operate. What is even more telling is that with about twice the rate of employment in industry, Bulgaria produces about the same value added as a percentage of GDP in that sector as Sweden. Lastly, no innovation in sustainable development takes place in Bulgaria. It doesn’t even adopt the best practices available, or anything close to it, as it is encouraged to do by the EU’s institutions.

Sweden, with its limited resources, has maintained its industrial base since the 80’s. During that decade, Sweden was forced to restructure and cut back due to the oil embargoes in the preceding decade. Nevertheless, the emergent industry was even more competitive and efficient than its predecessor. Moreover, the productivity rose dramatically over the following 20 years, as evidenced by the decline of the rate of employment in the sector, but the steady value added as a percent of GDP during the period. Furthermore, Sweden is a pioneer in sustainable development practices and innovation, being the source of many inventions in that sector (like the world’s first sustainable community, just south of Stockholm.)

These trends reinforce the established link between high social capital and increases in productivity, organization, efficiency and economic growth. In Bulgaria’s case, the developments mentioned took place over a period of low and declining social capital. In Sweden’s case, the developments accompanied a period of high and growing social capital. I will leave the causation proof to Fukuyama, Acemoglu and Robinson, but the correlation is strong and obvious. High social capital begets higher economic productivity, gains in efficiency, a higher impetus for organization and a better attitude towards environmental stewardship. These in turn beget better sustainability practices. Bulgaria and Sweden illustrate this perfectly. For further details on the specific data for both countries and their sustainability records, please refer to my work referenced at the beginning of this post.

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