ECON 449/PHIL 442

Dr. Khalid Mir

14/5/2015

Social Capital and Economic Efficiency: A Theoretical Analysis of Credit and Labor

Markets

Sadeem Hameed Shaikh (15020380)

Sara Ahmed Farooqui (15020232)

Sarah Amin Ali (15020445)

TABLE OF CONTENTS Abstract------------------------------------------------------------------------------------------------3 Introduction-------------------------------------------------------------------------------------------3 Literature Review------------------------------------------------------------------------------------4 Defining Social Capital------------------------------------------------------------------------------6 Section 1: Trust, Networks and Efficiency-------------------------------------------------------8 Section II: Credit Markets and Social Capital--------------------------------------------------11 Section III: Labor Markets and Social Capital--------------------------------------------------13 Section IV: Contextualizing Social Capital in Pakistan---------------------------------------14 Limitations-------------------------------------------------------------------------------------------17 Findings and Conclusion---------------------------------------------------------------------------18 Bibliography-----------------------------------------------------------------------------------------20

ABSTRACT

A disproportionate part of economic theory is grounded on the notion that man is self-

interested. The literature on themes like rationality and self-interest leaves little room for the

inclusion of trust, networks and cooperation in traditional economic theory. This is problematic,

for this does not explain why people choose to rely on each other, help each other and work

together. The aim of this essay is to trace the relationship between social capital, trust and

economic development. In so doing, we try to move away from an individualistic approach to

one that involves group and cooperative behavior. Our paper will also focus on the positives and

negatives of having a trustworthy society, and it’s implications on the mechanisms of production

and economic prosperity.

INTRODUCTION

Economic theory has been ruled by the idea that the market is a zone free of normative

values like morals, cooperation and trust. The foundational ideal of economics is that man is self-

interested and utility maximizing. There is little room for the notion that trust and cooperation in

society can exist. However, in practice, one finds that economic theory underestimates the

influence of values, norms, and networks on human behavior. People develop personal

relationships and networks that improve the workings of economies.

For the purpose of this paper, social capital will be defined in terms of two of its major

components, trust and social networks. The paper will trace the effects of social capital on the

efficiency of an economy. Efficiency has been defined in terms of lowering of transaction costs

because of easier access to loans in the capital market and easier access to jobs in the labor

market. We theorize that social capital does, in fact lead to efficient economies. Finally, we aim

to relate the findings of this paper to Pakistan and its economy. We argue that social capital can

take a leading role in the development process of Pakistan if barriers to trust and the negative

consequences of networks and clubs are strategically tackled. A concluding remark is regarding

the nature of social capital, where we find that it can often be harmful for society. The limitations

of this debate are considered this way.

LITERATURE REVIEW

Based on the premise that a strong civic society leads to consolidated democracy, this

article explores the implications of the intrinsic decline of American civil society over the last

few decades. In definitional terms, the undying importance of social capital in the form of

associational trust is exercised proficiently, through Putnam’s own research on the effects of

having strong societal bonds of trust. With trust, people are less likely to cheat and are more able

to acquire mutual benefits and longstanding networks. 1

Putnam recognizes the strong and positive correlation between associational membership

and the amount of trust amongst citizens.2 Along similar lines, the costs and benefits of civic

engagement and societal groups must be recognized and weighed against each other.

Francois and Zabojnik stress on the intrinsic and deep-rooted importance of

trustworthiness among people to trade and engage in economic activities freely.3 One of the most

crucial pre-requisites for successful economic growth is an honest and mutually beneficial

relationship between agents and profit maximizing firms, in that the latter are to exercise

production in a way that leaves some margin for expropriation. It is only when a mutually

1Robert Putnam, "Bowling Alone: America's Declining Social Capital," Journal of Democracy 6, no.1 (Jan 1995): 67, URL: http://xroads.virginia.edu/~hyper/DETOC/assoc/bowling.html. 2 Ibid, 72. 3Patrick Francois and Jan Zabojnik, "Trust, Social Capital and Economic Development," Journal of the European Economic Association 3, no. 1 (2005): 53.

reliable relationship exists between agents and firms that lead to a facilitation of development

and production.4

The authors modify the conventional perception that small, interlocked and trust-bound

traditional societies feature high production.5 While this may be true, it is unlikely these societies

can grow on a larger scale as prescribed by modern Western communities. Business

relationships built on trust must be broader and more welcoming of new partners and agents to

ensure modernization and growth.

Basu’s article shifts claims that altruism, trust and cooperation guide human behavior.6

The aim of this paper is to track the consequences of this approach. When cooperation breaks

down in an economy, it leads to the failure of that economy. Basu illustrates these ideas using

simple game-theoretic constructs. There are many different kinds of games that are used to

understand the connection between trust, altruism and identity – most notably the Trust Game.

The article is relevant, for it focuses on trust as one of the guiding factors of human behavior and

how it can lead to progress. We aim to establish a connection between trust and progress, and in

so doing, this article sets the foundations for that.

Fukuyama defines social capital as an “instantiated informal norm that promotes co-

operation between individuals”.7 The article establishes that trust does not constitute social

capital, but is in fact a result of it. Fukuyama goes on to discuss the role it plays in society and

how it can be measured. Taking Fukuyama’s definition, we establish that there is a strong

4 Ibid. 5 Ibid, 55. 6 Kaushik Basu, "Identity, Trust and Altruism: Sociological Clues to Economics Development," (working paper, Department of Economics, Harvard University, U.S.A, 2006), http://papers.ssrn.com/sol3/papers.cfm?abstract_id=956080. 7 Francis Fukuyama, "Social Capital, Civil Society and Development," Third World Quarterly 22, no. 1 (2001): 7, doi: 10.1080/713701144

relationship between social capital and trust. We focus on how most groups that embody social

capital have a ‘radius of trust’, which can lead to positive externalities. 8

Finally, we will argue that social capital that leads to trust can have negative externalities,

as mentioned by Fukuyama. He refers to the radius of distrust as the negative impact of social

capital, for it produces enmity in society.9 Klu Klux Klan, the Nation of Islam and the Michigan

Militia are all examples of groups emerging out of social capital networks that have contributed

to society in a negative way.

DEFINING SOCIAL CAPITAL

With a plethora of definitions of social capital, there is no one correct understanding of it,

and its interpretation continues to elude economists. Therefore, there is no unitary meaning of the

term that captures what different researchers mean by it within a discipline, let alone across

fields.

This paper will begin by listing a number of definitions that have been proposed by some

of the most influential writers on social capital. According to Putnam, “social capital refers to

features of social organization such as networks, norms and social trust that facilitate

coordination and cooperation for mutual benefit".10 He believes that networks of civic

engagement foster sturdy norms of generalized reciprocity and encourage the emergence of

social trust. He further asserts that dense networks of interaction may even develop an

individual’s sense of self from the “I” into the “we” and thus, can improve the efficiency of

society.11

8 Ibid, 8. 9 Ibid, 14. 10 Putnam, “Bowling Alone,” 67.11 Ibid.

Coleman argues that the definition of social capital should result from its function. It is a

variety of entities which all have two common underlying features, that is they all constitute of

some aspect of social structure and they facilitate actions between actors in this structure. It is

then “social organization that constitutes social capital”. 12

Both definitions outline the importance of social capital in terms of its beneficial

outcomes on social aggregates and society. Social capital can then be thought of as a positive

group externality. While Coleman believes that this externality results from social organization,

Putnam is more specific and determines that it arises from certain informal forms of organization

such as trust and norms. 13 However, Fukyama contends that only certain shared norms and

values should be regarded as social capital claiming that,

“Not just any set of instantiated norms constitutes social capital; such norms must lead to co-operation in

groups and therefore are related to traditional virtues like honesty, the keeping of commitments, reliable

performance of duties, reciprocity, and the like." 14

Durlauf has proposed a three-tier definition of social capital which emphasizes that social

capital generates positive externalities for all members of a group; that these externalities are the

result of the effect of shared trust, values and norms on expectations and behavior. These

elements arise from informal forms of organizations based on social networks and associations.15

This paper will view trust and social networks as key components of social capital. Trust

and social capital can be seen to have a mutually reinforcing relationship whereas networks

facilitate cooperation and trust between individuals and vice versa.

12 James Coleman, "Social Capital in the Creation of Human Capital," The American Journal of Sociology 94, issue supp (1988): S98, URL: http://www.jstor.org/stable/2780243 13 Marcel Fafchamps and Steven Durlauf, "Social Capital," (working paper, National Bureau of Economic Research, Massachusetts, U.S.A, 2004), http://www.nber.org/papers/w10485. 14 Francis Fukuyama, "Social Capital and Civil Society," (paper presented at IMF Conference on Second Generation Reforms, Washington, D.C, October 1999), https://www.imf.org/external/pubs/ft/seminar/1999/reforms/fukuyama.htm. 15 Fafchamps and Durlauf, "Social Capital".

SECTION 1: TRUST, NETWORKS AND EFFICIENCY

As mentioned earlier, our explanation for development is in terms of economic

efficiency. To reiterate, we posit that the primary concern of this paper, which is social capital,

can lead to efficiency through lowered transaction costs in providing easier access to credit,

loans and jobs.

In the multi-faceted literature on firms so far, most researchers conclude that trust leads

to efficient and productive outcomes within the firm’s organizational setting. In their work on

trust and efficiency, Chami and Fullenkamp explain how trust in the form of altruistic behavior

and mutually reinforcing relationships encourages employees to put more effort in to their work.

This means that ‘employees at trusting firms have higher job satisfaction, and that these firms

enjoy lower labor cost and higher profits’.16 Through an effective explanation of the concept of

specialization, Chami and Fullenkamp stress on the importance of this phenomenon by weighing

it over ideas of ‘technology in production, financing, and distribution’.17 Each employee

specializes in a particular task, and in turn relies on others to put in their best efforts. In a sense,

one employee’s work depends just as much on the other. Moreover, Chami and Fullenkamp

consider doing away with the agency problem aligning and syncing the incentives of the

principal and agent. For example, by basing compensation on the ability of employees to attain a

particular benchmark of firm performance, this mechanism ensures hard work and trust between

the individual workers.18

16 Ralph Chami andConnel Fullenkamp, "Trust and Efficiency." Journal of Banking and Finance 26, no. 9 (2002): 1, doi:10.1016/S0378-4266(02)00191-7.17 Ibid, 3. 18 Ibid, 4.

Knack and Keefer apply a similar argument to the idea of lowered transaction costs,

saying that ‘economic activities that require some agents to rely on the future actions of others

are accomplished at lower cost in higher trust environments’.19 This statement becomes credible

when one observes how individuals in trustworthy relationships spend less time and resources

drawing written contracts, paying bribes or calling on private security services for protection.20

In labor markets, knowing the right people can be vital for success. Economists and

sociologists have studied the effects of social capital in labor markets and have concluded that it

benefits both the seeker of jobs and the employer. Stone, Gray and Hughes talk about how being

deeply embedded in a network of family, friends and institutional ties that support the normative

values of work can increase the employability of a person.21 However, for them, the most

important aspect of social capital in the labor market is job search. The process of looking for a

job is costly and time consuming. They quote Holzer’s (1988) work and argue that the two most

commonly used methods for job search are “friends and relatives”.22 Holzer also states that the

acceptance rate of job offers generated through friends and family is high. Not only does social

capital benefit the seeker of jobs, but it also caters to the needs of the employer. Employers

depend on referrals from current employees as a method for cheap and quick hiring. Social

capital makes the process of hiring easier by increasing and improving the flow of information

between the employer and the employee. Both have access to greater knowledge of the market

and the kinds of opportunities that are available. Mouw, in his paper reinforces the idea that

19 Stephen Knack and Phillip Keefer, "Does Social Capital Have An Economic Payoff? A Cross-Country Investigation." The Quarterly Journal of Economics 112, no. 4 (1997): 1252, URL: http://www.jstor.org/stable/2951271.20 Ibid. 21 Wendy Stone, Matthew Gray and Jody Hughes, "Social Capital at Work: How Family, Friends and Civic Ties Relate to Labor Market Outcomes," (working paper, Australian Institute of Family Studies, Melbourne, Australia, 2003), http://www.aifs.gov.au/institute/pubs/respaper/rp31.html. 22 Ibid, 7.

access to information increases through social capital, benefitting the one who has a better

network. 23

By the same token, the arguments for lowered transaction costs in the labor markets

apply well to credit markets. Provided that a growing number of poverty-ridden populations in

developing countries continue to grow poor due to lack of access to credit, a number of

researchers have tried to explain the importance of networks in gaining credit loans through

activities prescribing trust as a common ingredient. For example, Myroniuk, Desai, and

Vanneman study the importance of household social capital and its ties with loans in India. They

suggest that poor households, part of development groups and traditional groups such as local

business and caste associations have a higher chance of gaining loans.24 In a similar fashion,

Bastelaer explores the dimensions of the effect that social capital, in the form of trust, has on the

improved performance of credit delivery programs in the developing world. One problem that

drastically limits the ability of a successful borrower-lender relationship to persevere is that of

asymmetric information and constrained knowledge of the transacting parties. However, to

overcome this issue, various NGOs and microfinance organizations have used the idea of social

collateral to prescribe importance to the crucial element of trust. Here, the ‘borrower’s

reputation’ and that of the social network they belong to takes precedence and is seriously

affected if a borrowing party defaults on their loans.25 Through the mechanisms of rotating credit

and savings associations (ROSCAs) and group-based microfinance programs, lenders ensure

23 Ted Mouw, "Social Capital and Finding a Job: Do Contacts Matter?," American Sociological Review 68, no. 6 (2003): 868, URL: http://www.jstor.org/stable/1519749 24 Tyler Myroniuk, Sonalde Desai, and Reeve Vanneman, "Household Social Capital, Loans and Educational Achievement in India," (working paper, Department of Sociology and Maryland Population Research Center, University of Maryland, U.S.A), 2. 25 Thierry Bastelaer, "Imperfect Information, Social Capital and the Poor's Access to Credit," (working paper, Center on Institutional Reform and the Informal Sector, University of Maryland, U.S.A, 1999), pp.2, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=260058.

high repayment rates with minimal chances of opportunistic behavior.26 These mechanisms

functions so long as ‘individuals value the benefits of membership in the association (or the

absence of collective ostracism) more than the benefits of defaulting’. 27

SECTION II: CREDIT MARKETS AND SOCIAL CAPITAL

Financial transactions are bedeviled by market imperfections, such as asymmetric

information and transaction costs. Accessing credit becomes a major constraint to the

development and growth of small and micro enterprises, and to the talented poor. 28 Their

opportunities become limited as they are hindered by their lack of collateral, credit histories and

connections, thus inevitably leading to the persistence of inequality and slow growth. Lenders

are also unwilling to lend to them due to the dearth of information. However, social capital can

be seen to aid the problems of these people in accessing credit. According to a paper written by

Janvry et. al, a broad range of social capital-based lending mechanisms have emerged in recent

years to overcome the problems of market imperfections, helping more than a hundred million

previously unbanked borrowers enter credit markets over the past decade. 29

As aforementioned, Bastelaer has examined the relationship between social capital, that

is trust and the performance of credit delivery programs in the developing world.30 The main

focus is on rotating credit and saving associations (ROSCAs) and group-based microfinance

programs. A ROSCA is a group of individuals who contribute to a collective fund which is then

distributed randomly or by auction at regular intervals to any one of the group members.31 It

26 Ibid. 27 Ibid, 5. 28 Alain de Janvry, Craig McIntosh and Elisabeth Sadoulet, "The Supply- and Demand-Side Impacts of Credit Market Information," Journal of Developmental Economics (2009):1, URL: http://are.berkeley.edu/~esadoulet/papers/CreditInfoSept09-JDE.pdf 29 Ibid.30 Bastelaer, "Imperfect Information", 3 31 Ibid, 4.

crystalizes social relations in an informal but formally run system. As long as individuals value

the benefits of membership in the association more than the benefits of defaulting, ROSCAs

function.32 There is a high level of collective trust that is needed for this program to work, and as

Rutherford has pointed out, even if group members may not know each other at the beginning of

a cycle, the system creates high levels of trust enabling the system to work.33 Group members

begin to depend on each other, and anyone who may default runs the risk of ruining his/her

reputation in the group and larger circle of society. Thus, there is a reduction of opportunistic

behavior that results from peer pressure.

In addition, according to Bastelaer, the group-based microfinance program is based on

the assumption that the poor represent a much lower credit risk than the formal financial sector

generally assumes.34 One of the most successful group-based lending programs so far has been

that of the Grameen Bank in Bangladesh. Using the group lending methodology that requires

trust between members, the Bank has consistently reported repayment rates in excess of 95%.35

The success and smooth-functioning of these contracts and programs is not only aided by

peer pressure to not default, but also on a sense of moral duty rather than absolute rights. They

therefore, enable effective borrowing channels based on reputations and relationships and thus,

promote investments and support economic development.

SECTION III: LABOR MARKETS AND SOCIAL CAPITAL

The problem of asymmetric and partial information -plagues the labor markets as well. It

is also crucial to know that such an issue arises only in informal markets with no proper

32 Ibid, 5.33 Ibid.34 Ibid, 8.35 Ibid, 9.

institutions providing ‘accurate and up-to-date information about jobs and workers’.36 As

Fafchamps points out, formal institutions may be preferred over informal ones in societies with

established ‘organizational capacity’.37 Nonetheless, social capital in terms of informal networks

of associations circulating accurate information about jobs and working opportunities remains of

tremendous significance.

Fafchamps makes another interesting point regarding the role played by technological

change in facilitating job search through the lens of information sharing. Quoting the example of

Ebay, where ‘personal network exchange’ is replaced by ‘anonymous internet-based exchange’

the organizational capacity and reach of such technological mechanisms are far greater. 38 Such

informal institutions, in comparison to expensive formal stock exchanges as an example, reduce

transaction costs, thereby increasing efficiency. 39

This has obvious developmental implications for an array of people seeking employment,

as engagement in interaction about jobs search through networks can align individualistic

personalities and skills with the jobs best suited. A study conducted by Brook explains how

nearly 30 percent of people commencing employment in their fields of interest in 2004 had heard

of the job through familial contacts. 40 While the effect of social capital on labor market

outcomes is quite clear, the nature of networks are just as important to determine the kind of jobs

people manage to eventually secure. Moreover, labor market outcomes in turn have an adverse

effect on the nature of social capital one possesses. For example, the social exclusion literature

36 Marcel Fafchamps, "Development and Social Capital," (working paper, Global Poverty Research Group, Oxford University, U.K, 2005), pp.5, http://www.gprg.org/pubs/workingpapers/pdfs/gprg-wps-007.pdf. 37 Ibid. 38 Ibid, 5. 39 Ibid. 40 Keith Brook, "Labour Market Participation: The Influence of Social Capital," Labor Market Trends 113, no. 3 (2005): 117, URL: www.social-capital.net/docs/lm_social_capital.pdf

makes a distinct connection between long-term unemployment with poor social connections and

networks.41

SECTION IV: CONTEXTUALIZING SOCIAL CAPITAL IN PAKISTAN

Having established that social capital reduces transaction costs and improves efficiency,

these effects are however, not homogenous all over the world. Country-specific conditions

determine how and by how much social capital affects markets. The Pakistani capital and labor

markets have their own unique features and will be explained in this section.

Haris Gazder has studied rural labor conditions of Pakistan and discusses the link

between segmented labor markets and “social networks”.42 He states that labor transactions in

agriculture are rarely conducted between strangers. Caste, kinship and family are important

determinants of economic options for people.43 Social networks also play an important role in

contractual arrangements in Pakistan. These arrangements are limited to people with the right

connections. He gives the example of the kami landless caste of Punjab and how they do not

have access to tenancy contracts. The Hari system of sharecropping in Sindh, on the other hand,

allows those who are close to the landlord to gain access to different contracts.44

He goes on to discuss the labor relations in the construction sector. Pakistan's labor in

construction sector is risky because contract enforcement is weak. He states that even though the

labor market is relatively open, it is unstable since workers perceive a high risk of default on the

41 Ibid, 120. 42 Haris Gazder, "Labour Markets and in Pakistan: Institutional Arrangements and Policy" Collective for Social Science Research (2004): 25. 43Ibid. 44 Ibid.

part of employer/contractors.45 There are frequent instances of default on the part of the

contractors as a result of weak trust.

One of the main features of the Peshgi system in Pakistan is the asymmetry between the

parties involved, in the enforcement of contract.46 Both, the informal and the formal sector are

characterized by weak contract enforcement. The weakness of the state’s role in contract

enforcement (and in guaranteeing property rights) affects the functioning not only of the labor

market but of all markets including markets for commodities, land and credit. Again, this

reinforces the idea that Pakistani markets lack an environment of trust.

A common practice in the Pakistani labor market is the use of Sifarish to land a job. A

Sifarish is the reference from someone influential that enables a person to have an edge over

another person competing for the same opportunity. This enables a person with a stronger

sifarish but lower qualification to get the job. Social collateral is important for the employer even

in low skill casual jobs, for it reduces monitoring costs and the effort involved in running

background checks on applicants.47 Found in both rural and urban Pakistan, the practice of

sifarish is evidence for how strong and influential social groupings are in Pakistan.

As far as capital markets are concerned, Irfan Aleem claims that the Pakistani credit

market is characterized by asymmetric information.48 Aleem states that this is one of the major

reasons for high borrowing rates for the lender has little information about the ability of the

borrower to repay the loan. The lender has to use his resources to screen applicants and thus

45 Ibid, 26.46 Ibid, 30.47 Ibid, 33.48 Irfan Aleem, "Imperfect Information, Screening, and the Costs of Informal Lending: A Study of a Rural Credit Market in Pakistan" World Bank Econ Review (1990) 4(3): 329.

shifts the cost of screening onto the borrower.49 On the borrowers part, the lack of information is

in terms of `availability of loans and terms of the loan.

One of the major problems of the Pakistani rural economy is bonded labor. Bonded labor

prevails because of non-availability of loans for those who have no collateral or those who are

not well-connected. These people get caught in the vicious cycle of bonded labor, as they have

no access to loans and reliable information.

Aleem discusses how social capital affects the choice of borrower for the lender. Most

lenders make inquiries of the reputation of prospective borrowers in the market.50 Social capital

comes into play in this regard. When the lender makes an inquiry, if the borrower does not know

the right people or has a bad reputation, the chances of him receiving a loan will be much lower.

It can be established that social capital can affect the functioning of the rural economy of

Pakistan. Through the integration of socially marginalized groups in the larger networks of

society, they too can have access to economic opportunities in terms of jobs and capital. If they

know the right people, they will be able to get loans from formal institutions rather than having

to turn to landlords. However, one cannot completely rely on social capital to pull Pakistan out of

its problems. If contract enforcing agencies are not established, checks and balances are not

established and there is no accountability, the air of distrust will persevere. Strong government

institutions need to be formed that enforce laws against exploitative landlords.

LIMITATIONS

It is equally important to observe the negative effects of social capital on dev elopement.

As Fafchamps points out, the benefits of social capital often come at a grave cost, in the form of

49 Ibid.50 Ibid.

‘unequal distribution’ together with other ‘negative and positive externalities’.51 He restricts this

argument to personalized trust in clubs and networks, which relies on information sharing

amongst people who know each other for a long time. This ties in with the concept of crowding

out of certain social groups, and hence has major distributional and equity consequences.

Fafchamp’s concern lingers around clubs and networks which are economically beneficial to

their members, which is perhaps when non-members are penalized in terms of lesser benefits and

privileges.52 The crowding out hypothesis with regards to welfare states is important to note here.

Durlauf further documents the crowding out hypothesis in terms of group-based hostility where

in a social experiment, groups with ‘differing internal behavior norms’ showed tremendous

animosity towards each other.53

Another important limitation highlighted by Fafchamps relates to a pre-requisite for

social capital to promote efficiency. The argument here plays in to the need for strong, well-

functioning formal institutions that capture trust and honesty from the two transactional parties.

A community has productive and mutually beneficial social capital only if the institutions at

place ensure minimal or no defaulting or cheating. In poor countries with very few established

institutions, exchange depends on what Fafchamps describes as personalized trust, punishments

for thieves and ‘informal institutions’, mainly in the form of preserving reputation in the

community.54

FINDINGS AND CONCLUSION

51 Fafchamps, "Development", 1. 52 Ibid, 16. 53 Steven Durlauf, "The Case 'Against' Social Capital," Focus 30, no. 3 (1999): 2, www.irp.wisc.edu/publications/focus/pdfs/foc203.pdf 54 Fafchamps, "Development', 5

The aim of this essay was to trace the relationship between social capital and economic

development. Social capital was defined in terms of trust and social networks; the former can be

seen to have a mutually reinforcing relationship with the latter and vice versa. Economic

development in the context of this paper meant economic efficiency. Social capital could lead to

better economic efficiency in terms of lowered transaction costs by providing greater access to

credit, loans and jobs. It was observed that social networks increase access to information,

thereby benefitting individuals in the labor market who have better networks. A review of

Fafchamps’ work on social capital and labor markets also made explicit the immense influence

the former has on the job opportunities one gets.

With a burgeoning number of various NGO’s and microfinance organizations, the

positive effect of trust on increasing access to loans and credit was also noted. With a

comprehensive study of ROSCA’s and microfinance organizations, this indubitable relationship

between social capital and credit delivery programs in the developing world was ascertained.

In the next section, social capital and its relationship with economic development was

contextualized in terms of Pakistan. It became apparent that the degree and extent to which social

capital actually benefits the economic efficiency of the concerned markets is determined by

location specific conditions. For example, the practice of bonded labor cannot be stopped by just

increasing the social integration of those who do not have networks and connections; the state

has to intervene with implementation of laws to put an end to the exploitation.

In conclusion, social capital has a real and positive effect on economic development in

terms of efficiency in a society. At the same time, the debate on social capital must progress

while considering some of the limitations at hand as well.

BIBLIOGRAPHY

Aleem, Irfan. "Imperfect Information, Screening, and the Costs of Informal Lending: A Study of a Rural Credit Market in Pakistan." World Bank Econ Review (1990) 4, no. 3: 329-349.

Bastelaer, Thierry, "Imperfect Information, Social Capital and the Poor's Access to Credit." working paper, Center on Institutional Reform and the Informal Sector, University of Maryland, U.S.A, 1999. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=260058.

Basu, Kaushik " Identity, Trust and Altruism: Sociological Clues to Economics Development." working paper, Department of Economics, Harvard University, U.S.A, 2006. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=956080. .

Brook, Keith. "Labour Market Participation: The Influence of Social Capital." Labor Market Trends 113, no. 3 (2005): 113-22. www.social-capital.net/docs/lm_social_capital.pdf.

Chami, Ralph, and Connel Fullenkamp. "Trust and Efficiency." Journal of Banking & Finance 26, no. 9 (2002): 1785-809. doi:10.1016/S0378-4266(02)00191-7.

Coleman, James S. "Social Capital In The Creation Of Human Capital." American Journal of Sociology 94 (1988): S95-120. http://www.jstor.org/stable/2780243.

Durlauf, Steven. "The Case 'Against' Social Capital." Focus 30, no. 3 (1999): 1-5. www.irp.wisc.edu/publications/focus/pdfs/foc203.pdf.

Fafchamps, Marcel, and Steven Durlauf, "Social Capital." working paper, National Bureau of Economic Research, Massachusetts, U.S.A, 2004. http://www.nber.org/papers/w10485.

Fafchamps, Marcel, " Development and Social Capital." working paper, Global Poverty Research Group, Oxford University, U.K, 2005. http://www.gprg.org/pubs/workingpapers/pdfs/gprg-wps-007.pdf.

Francois, Patrick, and Jan Zabojnik. "Trust, Social Capital, and Economic Development." Journal of the European Economic Association 3, no. 1 (2005): 51-94. Doi: 10.1162/1542476053295304

Fukuyama, Francis. "Social Capital and Civil Society." Paper presented at IMF Conference on Second Generation Reforms, Washington, D.C, October 1999. https://www.imf.org/external/pubs/ft/seminar/1999/reforms/fukuyama.htm.

Fukuyama, Francis. "Social Capital, Civil Society And Development." Third World Quarterly 22, no. 1 (2001): 7-20. doi:10.1080/713701144.

Gazder, Haris. "Labour Markets and in Pakistan: Institutional Arrangements and Policy." Collective for Social Science Research (2004): 1-47.

Janvry, Alain De, Craig Mcintosh, and Elisabeth Sadoulet. "The Supply- and Demand-side Impacts of Credit Market Information." Journal of Development Economics, 2009, 173-88. http://are.berkeley.edu/~esadoulet/papers/CreditInfoSept09-JDE.pdf.

Knack, S., and P. Keefer. "Does Social Capital Have An Economic Payoff? A Cross-Country Investigation." The Quarterly Journal of Economics 112, no. 4 (1997): 1251-288. http://www.jstor.org/stable/2951271.

Mouw, Ted. "Social Capital and Finding a Job: Do Contacts Matter?" American Sociological Review 68, no. 6 (2003): 868-98. : http://www.jstor.org/stable/1519749.

Myroniuk, Tyler, Sonalde Desai, and Reeve Vanneman, " Household Social Capital, Loans and Educational Achievement in India." working paper, Department of Sociology and Maryland Population Research Center, University of Maryland, U.S.A. No URL.

Putnam, Robert. "Bowling Alone: America's Declining Social Capital." Journal of Democracy 6, no. 1 (1995): 65-78. http://xroads.virginia.edu/~hyper/DETOC/assoc/bowling.html.

Stone, Wendy, Matthew Gray and Jody Hughes, " Social Capital at Work: How Family, Friends and Civic Ties Relate to Labor Market Outcomes." working paper, Australian Institute of Family Studies, Melbourne, Australia, 2003. http://www.aifs.gov.au/institute/pubs/respaper/rp31.html