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Local Level Institutions
Working Paper No. 10
Local Level Institutions
DOES SOCIAL CAPITAL
HELP THE POOR?
A SYNTHESIS OF FINDINGS
FROM THE LOCAL LEVEL
INSTITUTIONS STUDIES IN
BOLIVIA, BURKINA FASO
AND INDONESIA
Christiaan Grootaert
The World Bank
Social Development Family
Environmentally and Socially
Sustainable Development Network
June 2001
LOCAL LEVEL INSTITUTIONS WORKING PAPER SERIES
#1 The Local Level Institutions Study: Overview and Program Description
(also available in Spanish and French)
#2 The Local Level Institutions Study: Program Description and Prototype Questionmaires
#3 Estudio Sobre Las Instituciones Locales En Bolivia: Panorama General Y Descripcion, Muestreo Y
Recoleccion De Datos, Y Encuestas (by Godofredo Sand6val, Julio Cordova, Beatriz Ascarrunz, Alfredo
Balboa, Griselda Gonzales, and Gloria Velasques) (only available in Spanish)
#4 Grassroots Organizations and Local Development in Bolivia: A Study of the Municipalities of
Tiahuanacu, Mizque, Villa Serrano, and Charagua (by Godofredo Sand6val, Julio Cordova, Beatriz
Ascarrunz, Alfredo Balboa, Griselda Gonzales, and Gloria Velasques) (also available in Spanish)
#5 Local Institutions and Service Delivery in Indonesia (by Christiaan Grootaert)
#6 Social Capital, Household Welfare and Poverty in Indonesia (by Christiaan Grootaert)
#7 Social Capital and Development Outcomes in Burkina Faso
(by Christiaan Grootaert, Gi-Taik Oh, and Anand Swamy)
#8 Local Institutions and Service Delivery in Burkina Faso
(by Anand Swamy, Christiaan Grootaert, and Gi-Taik Oh)
#9 Local Institutions, Poverty and Household Welfare in Bolivia
(by Christiaan Grootaert and Deepa Narayan)
#10 Does Social Capital Help The Poor? A Synthesis of Findings from the Local Level Institutions
Studies in Bolivia, Burkina Faso and Indonesia (by Christiaan Grootaert)
Working papers can be viewed at http://www.worldbank.or2/socialdevelopment,
or obtained from:
The World Bank
Social Development Department
Social Capital Working Paper Series
Attention Ms. Gracie M. Ochieng
1818 H Street, NW, Room MC 5-410
Washington, DC 20433, USA
Tel: (202) 473-1123
Fax: (202) 522-3247
Email: Rochieng(aworldbank.org
or:
The World Bank
Social Development Department Publications
1818 H Street, NW, Room MC 5-232
Washington, DC 20433, USA
Fax: (202) 522-3247
Email: sdpublications(3worldbank.org
Papers in the Local Level Institutions Working Paper Series are not formal publications of the World Bank. They
are published informally and circulated to encourage discussion and comment within the development
community. The findings, interpretations, judgments, and conclusions expressed in this paper are those of the
author(s) and should not be attributed to the World Bank, to its affiliated organizations, or to members of the
Board of Executive Directors or the governments they represent.
TABLE OF CONTENTS
Page
Acknowledgment ....................................... iii
1. Introduction: Local Institutions and Social Capital ........................................1
2. The Local Level Institutions Study ........................................4
Bolivia ..............................................................5..... ............. ...... 5
Burkina Faso ...................7.............................................................. ...... 7
Indonesia .......8.......................................... ......... ...... 8
3. Local Associations and their Characteristics .................................. 10
4. Social Capital and Household Welfare .................................. 16
5. Social Capital and the Poor .................................. 21
6. The Effects of Social Capital: Asset Accumulation, Access to Credit,
Collective Action ................... 24
7. Summary and Conclusion ................... 28
References ..31
i
ii
ACKNOWLEDGMENT
The Local Level Institutions (LLI) study was conducted under the leadership of
Gloria Davis, Director, Social Development Department. In the initial phase, task
managers were Anthony Bebbington (July 1995-June 1996) and Christiaan Grootaert
(July 1996-December 1997). The final phase of the study was undertaken as a joint
venture between the ESSD and PREM Networks and co-managed by Christiaan Grootaert
and Deepa Narayan. The study received financial support from the Government of
Norway.
The Bolivia country-study was undertaken by a team from the consulting firm
Sinergia. Coordinator was Godofredo Sand6val and the research team consisted of Julio
Cordova, Beatriz Ascarrunz, Afredo Balboa, Griselda Gonzales, and Gloria Velasquez.
The Burkina Faso country-study was coordinated by Paula Donnelly-Roark. The
field work was undertaken under the auspices of the Commission Nationale pour la
D6centralisation.
The Indonesia country-study was coordinated by Scott Guggenheim and the
research team consisted of Kamala Chandrakirana, Pieter Evers, Sjari Manaf and Silvia
Werner.
The processing and management of the data files was the responsibility of Gi-Taik
Oh and Kalpana Mehra. General research assistance was provided by Susan Assaf. Staff
assistants for the study were Gracie Ochieng and Anju Sachdeva.
. .
Al
1. LNTRODUCTION: LOCAL INSTITUTIONS AND SOCIAL CAPITAL
There is a growing recognition that differences in economic outcomes, whether at the
level of the individual or household or at the level of the state, cannot be explained fully
by differences in "traditional" inputs such as labor, land, and physical capital. Growing
attention is given to the role of "social capital" in affecting the well-being of households
and the level of development of communities and nations.
The recognition that social capital is an input in a household's or a nation's
production function has major implications for development policy and project design. It
suggests that the acquisition of human capital and the establishment of a physical
infrastructure needs to be complemented by institutional development, at the local and the
national level, in order to reap the full benefits of these investments. For example, a well
functioning parent-teacher association may be a necessary complement to building
schools and training teachers. The promotion of social interaction among poor farmers
may need to complement the provision of seeds and fertilizer.
While there are many definitions and interpretations of the concept of social
capital, there is a growing consensus that "social capital stands for the ability of actors to
secure benefits by virtue of membership in social networks or other social structures"
(Portes, 1998, p. 6). If one takes a broad view of what is comprised by these "other social
structures," then social capital is a relevant concept at the micro, meso, and macro levels. I
At the macro level, social capital includes institutions such as government, the rule of
law, civil and political liberties, etc. There is overwhelming evidence that such macro-
level social capital has a measurable impact on national economic performance (Knack,
1999). At the micro and meso levels, social capital refers to the networks and norms that
govern interactions among individuals, households and communities. Such networks are
often (but not necessarily) given structure through the creation of local associations or
local institutions.2
Reviews of the social capital literature can be found in Grootaert (1997), Portes (1998), Woolcock
(1998) and Narayan and Woolcock (2000). On the role of social capital in sustainable development,
see Serageldin (1996).
2 We use the term "local institution" interchangeably with "local association" or "local organization".
This follows the practice of most social science literature (Uphoff, 1993), but there is a subtle
distinction between the two concepts. Uphoff (1993) defines institutions as "complexes of norms and
behaviors that persist over time by serving collectively valued purposes" (p. 614), while organizations
are "structures of recognized and accepted roles" (p. 614). Examples of institutions are money, the
law, marriage. Organizations are PTAs, workers' unions, rotating credit associations. In some cases,
the two terms overlap: the army is an institution as well as a group of soldiers, the parliament is a law-
making institution as well as an association of law makers. As Uphoff (1993) argues, the distinction is
a matter of degree, and organizations can become more or less "institutional" over time.
1
Putnam's (1993) seminal analysis of civic traditions in Italy focused primarily on
"horizontal" associations in which members relate to each other on an equal basis, but
Coleman (1988, 1990) has argued that social capital can include "vertical" associations as
well, characterized by hierarchical relationships and unequal power distribution among
members.
The literature contains an impressive and still growing number of case studies
which document that local associations play a key role in the success and sustainability of
development projects. This has been demonstrated in almost all parts of the world and in
sectoral settings ranging from irrigation and water supply, to management of forests and
wildlife resources, to the provision of credit to the poor, and the implementation of health
service programs.3 The way local associations perform their useful role is centered
around three mechanisms: the sharing of information among association members, the
reduction of opportunistic behavior, and the facilitation of collective decision making
(Grootaert, 1997; Collier, 1998).
At the level of the community, local associations can be a manifestation of social
capital. However, it must be emphasized that social capital and local associations are not
synonyms. Social capital can and does exist outside the context of local institutions
(whether formal or informal). For example, a group of friends or relatives who help each
other in times of trouble have social capital but may never embody their bond in an
association. Vice versa, the mere presence of an association does not prove the existence
of social capital. Local branches of political parties, with mandatory membership, are
associations which may display little or no social capital. For that reason, it is important
to look at membership conditions (voluntary or not, payment of fees, etc.) and the degree
of effective participation in associations before inferring social capital effects.
While the literature on social capital has amply demonstrated the importance of
social capital in the context of development projects and the provision of various
services, it has not yet demonstrated what the implications of the presence of social
capital are for the welfare of households and whether social capital helps the poor.
A notable exception is a recent study by Narayan and Pritchett (1997) which
demonstrated econometrically that the ownership of social capital by households in
Tanzania has strong effects on households' welfare. The study found that the magnitude
of the estimated effect exceeds by far that of education and physical assets owned by the
household. However, this study did not address whether social capital is an asset which
primarily helps the poor. Indeed, the distribution of social capital, like other forms of
capital, could well be skewed in favor of the rich.
3 Many case studies are cited by Uphoff (1993), Narayan (1995), Grootaert (1997), Krishna et al (1997),
Uphoff et al (1998), and Woolcock (1998).
2
The Local Level Institutions Study (LLIS) was designed to investigate more
systematically the role of local associations in the provision of services to households and
to examine the extent to which such associations help households, especially the poor,
increase their welfare. This paper provides a synthesis of the main findings for the three
countries of the study: Bolivia, Burkina Faso and Indonesia.4
In the next section we describe briefly the data collection of the study. Section 3
discusses the density of local associational life in the three countries, and the main
characteristics of associations. Sections 4 and 5 synthesize the findings of the impact of
local associations on household welfare and poverty. In Section 6, evidence is given on
the role of associations in the accumulation of assets, access to credit and the organization
of collective action. A final section proposes a set of policy recommendations.
4 This synthesis paper is based primarily on five papers which have analyzed the LLIS data:
* "Local Institutions, Poverty and Household Welfare in Bolivia" (Christiaan Grootaert and Deepa
Narayan), LLIS Working Paper No. 9.
* "Local Institutions and Service Delivery in Burkina Faso" (Anand Swamy, Christiaan Grootaert
and Gi-Taik Oh), LLIS Working Paper No. 8.
* "Social Capital and Development Outcomes in Burkina Faso" (Christiaan Grootaert, Gi-Taik Oh
and Anand Swamy), LLIS Working Paper No. 7.
* "Local Institutions and Service Delivery in Indonesia" (Christiaan Grootaert), LLIS Working
Paper No. 5.
* "Social Capital, Household Welfare and Poverty in Indonesia" (Christiaan Grootaert), LLIS
Working Paper No. 6.
The full list of LLIS papers can be found on the inside cover of this paper.
3
2. THE LocAL LEVEL INSTITUTIONS STUDY
The Local Level Institutions Study (LLIS) was a comparative study of three countries-
Bolivia, Burkina Faso and Indonesia-that aimed to investigate the role of local
institutions in providing service delivery and in affecting welfare and poverty outcomes.5
Data were collected at the level of the community, the district and the household.
At the level of the community, interviews with focus groups of households and
with community leaders were held to establish a map of functioning institutions in the
community. Three instruments were used:
* Information on community services was obtained through interviews with key
informants such as the village chief, teacher, health provider, etc. This was
supplemented with information on the local economy (infrastructure and
distance to markets), local society (ethnic/religious composition) and local
institutions.
3 Community services were also discussed with groups of households, with the
objective of learning the community's perspective on the quality of service, its
experience with collective action, and its views on local institutions and
development projects.
3 For the most important local institutions, interviews were held with leaders
and members, as well as with non-members, in order to get a balanced view of
the role of the institutions in the village, their development over time, their
main activities, relations with other institutions and government, and their
main strengths and weaknesses.
At the district level (defined as the administrative level above the village or
comnmunity), data were collected about the extent of service coverage and the institutional
arrangements for the provision of services. Information was also obtained about the
general functioning of the district administration and its relation with civic organizations,
through interviews with general and sectoral managers at the district level.
The third and critical part of the data collection was a household survey that aimed
to capture households' actual participation in local institutions, their use of services, and
information that identifies the welfare level of households and their coping strategies.
The questionnaire consisted of six sections:
5 The objective of the Local Level Institutions Study and the questionnaires are further discussed in
World Bank (1998).
4
* demographic information on household members
* participation in local institutions
* characteristics of the most important groups
* service provision profiles
* perceptions of community trust and collaboration
* household economy and coping strategies.
The limited resources available did not make possible a sampling framework such
that the studies would be representative of the countries at the national level. Instead,
three or four areas were selected in each country (municipalities in Bolivia, provinces in
Burkina Faso and Indonesia), which represent different economic, social and institutional
environments.
Bolivia
In the case of Bolivia, the collected data cover four municipalities ("municipios"):
Charagua, Mizque, Tiahuanacu and Villa Serrano.6 Bolivia is a country with a strong
geographical and cultural heterogeneity. Climate, ecology and altitude vary significantly,
ranging from the eastern plains at about 1,000 meters above sea level, to the highlands at
altitudes approaching 4,000 meters above sea level. Bolivia is also a multi-ethnic and
multi-lingual country. The three most important indigenous groups are the Aymara who
live in the highlands, the Quechua who inhabit the valleys, and the Guarani in the eastern
lowlands. It is estimated that 70% of the Bolivian population is of indigenous origin.
The four selected municipalities cover the four main ecological zones of Bolivia as well
as its principal indigenous groups.
Mizque is located in Bolivia's central valleys at about 2,200 meters above sea
level. The climate is hot and the area is subject to periods of draught. It is inhabited by
the Quechua, who farm intensively on small parcels of land. Agriculture, irrigated and
unirrigated, is the most important economic activity. Most land tenure has its origin in
the adjudication of expropriated haciendas, but in most cases, land ownership has still not
been legalized. Mizque experiences seasonal migration to Chapare, where young men
work as day laborers in the production and processing of coca leaf, and to Cochabamba,
where young women work as domestic servants. Mizque has a trunk road that connects
the municipal capital with Cochabamba, 180 kilometers away.
6 The description of the four municipalities is based on Sandoval et al (1998).
5
Table 1: Selected Socio-Economic Characteristics of the
Four Study Areas in Bolivia
Charagua ] Mizque Tiahuanacu Villa T Bolivia
l ___________________________ l___________ I [ Serrano l
Region Chaco Plain Central Andean Southern
Valleys Valleys
Altitude (meters above sea level) 980 2,225 3,870 2,378
Population 18,769 20,170 13,151 12,616 8 rnln.
Rural population (%) 71 96 92 80 54
% of communities with primary 79 22 100 61 n.av.
school
Number of health centers and 16 11 6 7 n.av.
hospitals
% of heads of household who are 56 73 69 62 65Y
farmers
Household expenditure per 1,857 2,503 1,768 1,502 1,9072'
capita (Bolivianos/year)-1'
Gini-coefficient 0.39 0.36 0.33 0.35 0.372
1/ At the time of the data collection $1 = Bs. 4.8.
2/ Based on the four study areas only.
Source: Sandoval et al (1998); authors' calculations.
Tiahuanacu is located in the highlands just an hour away from the city of La Paz.
An asphalt road connects it to the Bolivian capital. Tiahuanacu has the best developed
road system of the four provinces with secondary roads passable throughout the year.
Cold and arid, Tiahuanacu is located at an altitude of 3,900 meters above sea level. It is
inhabited by the Aymara, who engage in subsistence farming and dairy production. Land
reform did result in breaking up of haciendas in this area. Life in Tiahuanacu is
dominated by the proximity to La Paz. Seasonal and permanent migration among the
young to La Paz is a fact of life and is reflected in the fact that 41% of household heads
are over 56 years of age, compared to approximately 20% in the other three
municipalities.
Charagua is located on the plains of Eastem Bolivia at an altitude of about 1,000
meters. It is populated by the Guarani, who live side by side with hacienda owners
engaged in raising livestock and the exploitation of forests. Local power is concentrated
in the hands of timber companies and cattle ranchers. It is an 8 hour road trip to the south
to the city of Santa Cruz. Unlike the other municipalities, Charagua has experienced
population growth because of immigration to help with the cotton harvest.
Villa Serrano is located in the valleys of southern Bolivia at about 2,400 meters
above sea level. It is 155 miles away from the city of Sucre. Its varied climate is typical
of the many different micro-climates found in the mountainous Andean countryside. Its
6
population, although original Quechua, has been largely hispanicized and practices
subsistence farming. Haciendas still exist in this part of the country and control local
power. The small population is dispersed over large areas which leads to migration and
poor social service coverage. In Villa Serrano, the population has declined because of
out-migration, primarily to the more prosperous Santa Cruz department.
Within each municipality, nine rural communities were selected randomly. The
capital of the municipality was included to represent the urban areas. In each of these
sampling units, 25 households were selected randomly for a total sample of 1,000
households.7
Burkina Faso
In the case of Burkina Faso, the data collection covered the rural areas of four provinces:
Yatenga, Saimatenga, Houet and Sissili.8 Yatenga and Sanmatenga provinces are
situated in the North of Burkina Faso, and are predominantly populated by the Mossi.
Yatenga is the traditional seat of the Mossi Kingdom. Mossi social organization is quite
hierarchical in a formal sense, but flexible in terms of daily practice. Both provinces have
relatively high population density. Both provinces suffer from low rainfall, which
reduces the productivity of agriculture. Livestock raising is prominent.
Table 2: Selected Socio-Economic Indicators of the
Four Study Areas in Burkina Faso
Houet Sissili Sanmatenga Yatenga Burkina
888320 Faso
Populzaion 153,627 469,684 443,935 1 1 m.
Rate of Urbanization 46% 12% 10% 12% 30%
Literacy rate n.av. n.av. 10% 16% 9%
% ofheads of household who 76 85 94 91 86k'
are farmers
Household expenditure per 69,768 71,686 60,886 58,712 65,265 a'
capita (CFAF/year)
Gini-coefficient 0.33 0.27 0.26 0.40 0.32"1
1/ Based on the four study areas only
Sources: Donnelly-Roark et al (1999) ; authors' calculations.
Houet, which lies to the West, is culturally and ethnically diverse. The dominant
ethnic groups have non-hierarchical and flexible elders' councils. Houet is a high rainfall
area and is often called the granary of Burkina Faso. Human development is at a
7 For further details on the sampling procedure and the survey field work, see Sandoval et al (1998).
8 Descriptions of the provinces are based on CND (1998) and Donnelly-Roark et al (1999).
7
relatively high level. Houet draws immigrants, both farmers and herdsmen, from the
North. Farmer-herder relations can involve conflict, with disputes arising over land and
water.
Sissili, which lies to the south-east, is the home of the Gourounsi. Like in Houet,
non-hierarchical and flexible elders' councils are active; in Sissili these councils have
promoted various development initiatives. Due to high levels of rainfall Sissili is able to
grow a variety of agricultural products, and attracts Mossi from Yatenga and Sanmatenga
who are in search of arable land.
Within each province, one administrative department was selected for the data
collection (in Houet, two departments were selected). In each province, twelve villages
were chosen purposively based on four criteria: organizational level, economic situation,
cultural diversity, and proximity of services. Within each village, 20 households were
selected randomly to participate in the survey, leading to a total sample of 960 households
(CND, 1998).
Indonesia
In the case of Indonesia, the collected data cover the rural areas of three provinces:
Jambi, Jawa Tengah, and Nusa Tenggara Timur (NTT). Jambi is located on the island of
Sumatra. It is a tropical forest area which was only recently colonized and is still an
agricultural frontier zone. It is characterized by low population density and its socio-
economic indicators are close to Indonesian averages or slightly below. Among the three
provinces, Jambi has the lowest level of inequality in the distribution of household
expenditure.
Jawa Tengah is in the center of the island of Java, about 500 kms away from
Jakarta. It has a very high population density (867 people/lan2) and is the most urbanized
of the three provinces. It has also the highest income level and the best access to
education and health services and to housing amenities. The population of both Jambi
and Jawa Tengah is 99% Muslim.
NTT consists of a series of islands in the eastern part of Indonesia (about
2500 kms and two time zones away from Jambi) and is the poorest and least urbanized of
the three study areas. It relies heavily on traditional agriculture and fewer than 5% of its
economically active population have wage-jobs. The population is almost entirely
Christian, evenly divided between Catholics and Protestants.
8
Table 3: Selected Socio-economic Indicators of the Three Study Areas in Indonesia
Jambi Jawa Nusa Indonesia
l ~~~~~~~~~~~~~~~ ~ ~~Tengah Tenggaral
Population ('000) 2,370 29,653 3,577 194,755
|Area ('000 krn2) 44.8 34.2 47.9 1,919.3 |
| Population density (people/kn2) 53 867 75 101
% Urbanized 27.2 31.9 13.9 35.9
% of Households with access to electricity 30.5 71.1 14.5 57.2
Gross primary enrollment ratio (%) 95 97 91 95
Gross secondary enrollment ratio (%) 47 58 44 56
% of heads of household who are farmers 71 67 92 771'
Household expenditure per capita ('000 Rupiahbyear)21 575.3 612.4 453.8 547.11'
Gini-coefficient 0.29 0.36 0.37 0.351|
1 Based on the three study areas only.
2. At the time of data collection (Fall 1996) the exchange rate was in the range of $1 = 2,300-2,400 Rupiah.
Sources: Statistical Yearbook of Indonesia 1995; Statistik Pendidikan 1994/95; Penduduk Indonesia, Jambi, Jawa
Tengah, NTT-Hasil Survei Penduduk Antar Sensus 1995; author's calculations.
Within each province two districts (kabupaten) were selected to participate in the
study, and within each district two sub-districts (kecamatan) were selected. These units
were selected purposively so as to represent a range of social, economic and institutional
situations. Within each sub-district, four villages were selected based on location criteria
(upland/lowland and near/far to growth center). Within each of the 48 villages,
25 households were selected randomly to participate in the household survey, for a total
sample of 1,200 households.9
9 The data were collected in the fall of 1996, i.e. prior to the recent social and economic crisis in
Indonesia.
9
3. LOCAL ASSOCIATIONS AND THEIR CHARACTERISTICS
The results of the Local Level Institutions Study show a rich and varied local
associational life in each of the three countries. In Indonesia, an average household
belongs to 5.5 local associations. In Burkina Faso, each household participates actively in
the affairs of almost two associations.10 Associational life in Bolivia is dominated by one
organization, the Agrarian Syndicate (Sindicato Campesino) of which two-thirds of
households are members. In addition, the average Bolivian household is member of
slightly less than one association. The patterns of these memberships are, of course, very
different in the three countries and the map of local institutions is described in detail in
the case study papers cited in Footnote 4.
In Indonesia, the most important type of local association is social service groups,
accounting for 27.3% of all memberships. This is followed by finance and credit groups,
religious groups, and governmental affairs groups which each represent slightly less than
20% of memberships. The most important government group is the "RT/RW' structure,
which consists of a series of neighborhood groups put in place by the government to
manage local affairs. Among the finance and credit groups, the most important local
institution is IDT, which provides assistance to poor villages. Among social service
groups, PKK, a national organization for Indonesian housewives, is most important.
These are all structures that were set up by the government and of which membership is
mandatory. It is to be expected that following the social and economic crisis in Indonesia
and the change in government, the relative importance of various local organizations may
well have changed drastically in recent years.
In Bolivia, as mentioned, the dominant local association is the agrarian syndicate,
representing 45% of all memberships. Agrarian syndicates date back to 1952 when they
were originally created by the state as a mechanism for political control. They have since
evolved to an organization of local self-government that has legitimized the status of
farmers as participants in the political and planning process. The Popular Participation
Law of 1994 gave the syndicates a formal status as channels of communication with
municipal governments. In Charagua, agrarian syndicates are very weak and their role is
assumed by the Regional Assembly of the Guarani People. In addition to the agrarian
syndicates, households in Bolivia are primarily members of productive groups and groups
that were created by NGOs. Each of these categories accounts for 12% to 14% of
memberships.
'� One characteristic of associational life in Burkina Faso is that households are members of many
associations (an average of about 6), but they do not actively participate. Many such memberships are
primarily driven by traditional or customary considerations. For details, see Donnelly-Roark et al
(1999).
10
In Burkina Faso, the vast majority of memberships are in associations that are
directly related to farming activities. Such associations account for more than 80% of all
memberships. Religious groups and mutual help groups are a distant second with 6% to
7% of memberships each. The most important associations are village-based farmer
groups ("groupements villageois") which were originally created under government
sponsorship, mostly in the period 1974 to 1980, and deal with a wide variety of issues,
such as credit, reforestation, erosion control, adult literacy, and training. This includes
the traditional Naam groups in Yatenga, whose primary objective is to introduce young
people to the social life of the village (for details, see the discussion in CND, 1998).
The effectiveness of local associations is a function of many features of the
association reflecting its structure, membership, and functioning. Table 4 shows some
figures on five characteristics of associations: their internal heterogeneity, the extent of
meeting attendance, the extent to which members participate actively in decision making,
the amount of contributions made by members in cash or in kind, and the extent of
community initiation.
The heterogeneity index measures, on a scale from 0 to 100, the extent through
which membership of an association is internally diversified. This is based on nine
criteria: neighborhood, kin group, occupation, economic status, religion, gender, age,
level of education, and political affiliation."' The results indicate that the majority of
associations in the three countries are quite heterogeneous. The index ranges from 53 in
Indonesia to 77 in Burkina Faso. However, a certain amount of caution is necessary in
comparing this index across countries because the extent of variations which exists along
the nine dimensions is not the same in each country. For example, Indonesia displays
more educational variation than Burkina Faso. Thus, the index is more useful to show
differences within countries. For example, it is noteworthy in Indonesia that
heterogeneity in Jambi is much lower than in the two other provinces. Likewise, in
Bolivia, associations in Tiahuanacu and Villa Serrano show a much higher internal
diversity than those in Charagua and Mizque.
It is not immediately obvious whether a high degree of internal heterogeneity is a
positive or negative factor from the point of view of social capital. On the one hand,
heterogeneity could be a sign of inclusiveness, and the presence of members with
different background opens up more opportunities for gain from exchanging information
and knowledge. On the other hand, an internally homogeneous association might make it
easier for members to trust each other and to reach decisions.
" In the case of Indonesia, the heterogeneity index excludes political affiliation. It was deemed too
sensitive to ask questions about this issue.
11
Table 4: Local Associations and their Characteristics
% of Households Memberships Index of Meeting Index of Cash Work Community
who are Members Heterogeneity Attendance Participation Contribution Contribution Orientation
in Sindicatos in Decision Score Score
Campesinos Making l
Bolivia
Charagua 17.6 1.0I 56.8 6.6 85.7 5.82 - 56.4
Mizque 90.4 0.31/ 52.3 5.4 88.3 4.82- - 76.7
Tiahuanacu 88.0 0.8"' 73.8 3.7 86.7 4.72/ - 73.3
Villa Serrano 57.2 0.9", 72.7 5.4 77.7 1.72/ - 64.5
All 63.3 0.8", 64.1 5.2 84.9 4.32/ 68.5
Burkina Faso
Yatenga _ 1.6 73.9 3.0 72.3 1.8 7.2 85.1
Sanmatenga - 1.7 86.7 2.4 82.8 3.7 6.0 77.2
Houet - 1.9 72.8 3.0 81.0 2.3 9.5 76.6
Sissili - 2.2 77.0 4.1 84.2 6.9 20.3 94.0
All _ 1.8 77.0 3.2 79.7 3.6 10.9 83.7
Indonesia
Jambi _ 3.7 38.9 6.8 63.5 1.9 0.2 62.2
Jawa Tengah - 6.0 57.6 6.0 55.6 1.9 2.9 48.0
NTT - 6.5 61.6 5.2 71.4 1.7 13.3 49.5
All _ 5.5 53.3 6.0 63.5 1.9 5.7 52.9
1/ Number of memberships, excluding agrarian syndicates.
2/ Index of combined cash and work contributions.
Note: Variable definitions are:
* Memberships: average number of active memberships per household.
* Index of heterogeneity: scale (0 to 100) of internal heterogeneity of the three most important groups, according to eight criteria.
* Meeting attendance: average number of times a household member attended a group meeting in the last three months, normalized for the number of
memberships.
* Index of participation in decision making: scale (0 to 100) of extent of active participation in decision making in the three most important groups.
* Cash contribution: score (0 to 100) of fees paid for memberships in the three most important groups.
* Work contribution: score (0 to 100) of number of days worked per year as membership contribution in the three most important groups.
* Community orientation: percent of memberships in organizations which are community-initiated.
12
The literature on local associations has argued that the benefits from such
associations are related to the extent of active participation of the members in the
business of the association. This active participation can be measured in a number of
ways. In the LLIS data set, this can be achieved by looking at the number of times people
attend association meetings, the extent of active involvement in the decision making
process, and the making of contributions either through fees or through work. In Bolivia
and Indonesia, households attend meetings on average about twice a month. In Burkina
Faso this is only half as much. Again, it is noteworthy that there is a significant degree of
variation within each country. Active involvement in the decision making process is
quite high in each of the three countries, but especially in Bolivia and Burkina Faso where
the index measuring this participation is 80 or higher.
In none of the countries in the study do households make large cash contributions.
This is not surprising given that the study areas were all relatively poor rural areas. The
low values of the contribution scores in Table 4 reflect therefore primarily the large
number of households who pay no fees at all or who make no in-kind contributions. In
Bolivia, only 20% of associations charge fees, which on average amount to 6.6
Bolivianos per year. However, almost two-thirds of memberships in associations require
a labor contribution, which on average amounts to 19 days per year. In Burkina Faso,
about one-third of memberships require the payment of a fee which on average is less
than 100 CFAF per month. Slightly more than half of memberships require a
contribution in the form of work in order to remain an active member. The majority of
cases require work during 1 to 4 days per month; this is hence not a negligible
contribution. A similar situation exists in Indonesia, where about 30% of memberships
require payment of fees, which on average amount to 2,427 Rupiahs per month. In
addition, about 30% of households provide a labor contribution. However, this practice
is largely confined to the NTT province, where the required contribution is very high, on
average 68 days per year.
Many case studies on the functioning of local associations have argued that
voluntary organizations that find their roots in the community are more effective than
externally imposed and/or mandated groups (Uphoff, 1992; Narayan, 1995; Ostrom,
1995). In Indonesia, only about half of local organizations in which households are
members were perceived to be set up by the community. This reflects the active role
which the Indonesian Government has taken for many years in the organization of local
associations, both for governance purposes and for the purpose of providing social
services. In the two other countries, households perceive their associations to be much
more community-oriented: 68% in Bolivia and 84% in Burkina Faso. Yet, historically,
the predominant associations in both countries-the agrarian syndicates in Bolivia and
the village groups in Burkina Faso-were set up by the government. Over time, though,
these associations have come to be accepted by their members to the point that the
majority of them are now being perceived as locally initiated organizations. This is a
remarkable contrast with Indonesia, where this process of creating local ownership of
associations has not taken place.
13
Local associations can serve a wide variety of functions in the life of a
community. They can play an important role in the management of the community and/or
they can play a role in the provision of social services, such as education and health, and
in the provision of infrastructure services, such as water and electricity. They can also
help the household obtain access to credit and help farmers manage irrigation and
improve access to agricultural inputs. Table 5 shows the extent to which the local
associations in the three countries under study are involved in these activities. The
pattem is very different in the three countries. In Bolivia, local associations play a
predominant role in the provision of education and health and in agricultural services,
much more so than in the two other countries. This is primarily to be explained by the
predominant role of the agrarian syndicates in Bolivia, which indeed have a role
extending beyond agricultural activities and including the provision of social services. In
contrast, the role of local associations in the provision of financial services is very small
in Bolivia. This is the exact opposite of the situation in Indonesia, where financial
services are one of the prime functions of local associations. In part this is related to the
long tradition of rotating saving and credit associations ("arisan"), especially in Java.
However, local associations in Indonesia play only a marginal role in the provision of
other services (except education).
Table 5: Involvement of Local Associations in Service Provision
% of Membershipsin Groups Active in ] Bolivia Burkina Faso I Indonesia
Education 59.8 38.5 40.2
Health 38.2 20.7 7.9
Water supply and sanitation 41.9 29.7 3.8
Electricity 24.3 0.4 0.3
Credit 9.3 21.4 27.9
Savings 4.8 7.9 27.1
Agricultural inputs/technology 20.6 29.8 7.2
Irrigation 20.5 2.5 2.4
Land, forestry, water rights 30.1 15.0 4.9
It is remarkable that in Burkina Faso, the country with the lowest education level,
local associations are less involved in the provision of education than in the other two
countries. One of the case study papers for Burkina Faso found that social capital as
reflected in parents' participation in parent-teacher association meetings has a positive
impact on school attendance by children. The low involvement of local associations in
education can therefore be seen as a missed opportunity, and further stimulation of this
input should be part of the country's overall policy towards improving education.
The role which local associations play in service provision is influenced by the
extent to which other institutions, such as local or central government or NGOs, are
14
active in the provision of these services. The case studies have repeatedly highlighted the
substitution that occurs between the provision of services by local institutions and other
entities. For example, in Jambi, the traditional village structure ("Lembaga Adat") is very
strong and this implies that there is less need for other voluntary associations to address
the provision of specific services. This in part explains why the density of local
associations is lower in Jambi than in other Indonesian provinces. In Bolivia, the agrarian
syndicates are very effective in the municipality of Mizque, which explains why the
density of other local organizations is much lower there. In contrast, in Charagua, where
the syndicates are least effective, the density of other voluntary organizations is highest.
15
4. SOCIAL CAPITAL AND HOUSEHOLD WELFARE
The basic question to be addressed is: Are households with higher levels of social capital
better off? More specifically, taking into account the asset endowments of the
households, can one empirically identify whether social capital makes an additional
contribution to the welfare of households and, if so, by how much? To answer this
question, we estimated a reduced-form model of household welfare which explicitly
recognizes the existence of social capital as a household asset.
The customary reduced-form model of household welfare relates the level of
household expenditure (as money-metric indicator of welfare) directly to the exogenous
asset endowments of the household and variables describing the social and economic
environment in which the household makes decisions.12
inEi = a + ,M + yHC, +60C; + EXi + qZi + ui (1)
Where Ei = household expenditure per capita of household i
SCi = household endowment of social capital
HCi = household endowment of human capital
oCi = household endowment of other assets
Xi = a vector of household characteristics
Zi = a vector of village/region characteristics
ui = error term
The key feature of this model is the assumption that social capital is truly
"capital" i.e. a stock, which generates a measurable return (flow of income) to the
household. Social capital has many "capital" features: it requires resources (especially
time) to be produced and it is subject to accumulation and destruction.13 Social capital
can be acquired in formal or informal settings, just like human capital (e.g., schools
versus learning-by-doing). Much social capital is built during interactions that occur for
social, religious, or cultural reasons. The key assumption is that the networks built
through these interactions have measurable benefits to the participating individuals, and
lead, directly or indirectly, to a higher level of well-being. This is the proposition that the
case studies tested empirically by means of equation (1).
12 This reduced-form model was also the basis for the earlier cited study by Narayan and Pritchett (1997)
on social capital in Tanzania.
13 Events in transition economies such as Russia and former Yugoslavia are powerful evidence of the
effects of the destruction of social capital (Rose, 1995).
16
If equation (1) is estimated over households, there is an implicit assumption that
social capital is embodied in the members of the household. This conformns to the
position advocated by Portes (1998), who highlights that, although the source of social
capital is the relationships among a group of individuals, the capital itself is an individual
asset. This is in contrast to, e.g., the position of Putnam (1993), who sees social capital as
a collective asset.
The social capital variable in equation (1), SCi, can be expressed as a single index
or as a series of variables capturing the different dimensions discussed in the previous
section. Following Narayan and Pritchett (1997), we first constructed a multiplicative
index of the three social capital dimensions which the literature has most often shown to
matter: density of associations, internal heterogeneity, and active participation in
decision making.14
Table 6: Effect of Social Capital on Household Welfare
Bolivia | Burkina Faso Indonesia
Coefficient Point Coefficient Point Coefficient Point
Elasticity Elasticity Elasticity
Social Capital Index n.s. - 0.0045 0.09 0.0069 0.12
Number of Memberships 0.1153 0.07 0.0712 0.13 0.0146 0.08
0.05291/ 0.04"
Heterogeneity Index n.s. - 0.0036 0.28 0.0031 0.17
Number of Meeting n.s. - n.s. - n.s. -
Attendance
Index of Participation in -0.0021 -0.16 n.s. - 0.0025 0.16
Decision Making
Cash Contribution Score 0.00681/ 0.03k 0.0042 0.02 n.s. -
Work Contribution Score - - 0.0039 0.04 n.s. -
Community Initiation 0.0013 0.08 n.s. - n.s. -
Years of Education 0.0453 0.18 0.0938 0.07 0.0343 0.16
Agrarian syndicates and other associations, respectively.
2' Cash and work contribution combined.
n.s. = not significant
Equation (1) was estimated over the LLIS data sets of each of the three countries
and the first line of Table 6 shows the results for the multiplicative social capital index.
In order to make comparisons easier, the results have also been expressed as point
14 The use of a multiplicative index implies that the three dimensions interact with one another. For
example, heterogeneity may have different effects depending upon the number of associations of which
the household is a member.
17
elasticities.15 For comparison, the elasticities showing the effect of education are also
shown. In Burkina Faso and Indonesia, the social capital index had a positive and
significant effect on household welfare. Perhaps the most important observation is that
the magnitude of the elasticity (0.09 to 0.12) is similar to that observed from years of
education (0.07 to 0.16). In Indonesia the effect of social capital is slightly less than that
of education, but in Burkina Faso it is slightly higher. This could be because the level of
education in Burkina Faso is extremely low-the average adult household member has
less than one year of education. In Bolivia, the multiplicative index was not significant,
but an additive index with the same three components yielded an elasticity of 0.13.
Again, this is in the same order of magnitude of the elasticity of years of education (0.18).
The conclusion from these findings is that, even after controlling for ownership of
human and physical capital and other relevant exogenous household characteristics, the
presence of social capital as measured by the membership in local associations and their
key characteristics, exerts an additional positive effect on household welfare.
As an altemative to a single social capital index, one can use a series of social
capital variables in the equation, representing the different dimensions discussed earlier.
This assumes that each social capital dimension acts independently, and that the effects
are additive (with weights determined by the regression). The conceptual literature on
social capital has not advanced to the stage that theoretical arguments can be put forth to
select one approach over the other. The results of this exercise are also reported in
Table 6, and show that the number of memberships and the heterogeneity index are the
two most important characteristics. However, the magnitude of these effects differ a
great deal from one country to the other. An additional membership in a local association
increases household welfare from 1.5% in Indonesia to 7.1% in Burkina Faso. In Bolivia,
membership in the agrarian syndicate corresponds to an increase in household welfare of
11.5% and membership in another association increases household welfare by 5.3%. The
elasticities associated with the heterogeneity index are particularly large.16 An increase in
the heterogeneity index by 10% would add 1.7% to 2.8% in household welfare.
Meeting attendance was not significant in any of the three countries, suggesting
that this is a poor indicator of active participation in local associations. The results for
the index of participation in decision making are puzzling at first sight. The coefficients
are significant and positive in Indonesia, but negative in Bolivia. A further investigation
revealed that this latter result is primarily due to the situation in Charagua and Mizque,
where households in the lowest three quintiles have a particularly high degree of decision
making in participation as opposed to richer households.
15 The point elasticity shows the percentage effect on household welfare (as measured by household
expenditure per capita) of a 1% increase in the endowment of social capital. For example, an elasticity
of 0.1 rmeans that a 1% increase in the endowment of social capital increases household welfare by one-
tenth of a percent.
16 The heterogeneity index is significant only in Burkina Faso and Indonesia, but it has to be pointed out
that the data did not consider heterogeneity by ethnic group which is of particular importance in
Bolivia.
18
Cash or work contributions as a measure of active involvement in an association
are significant in two of the three countries, Bolivia and Burkina Faso, but the effects are
very small. Likewise, community initiation was generally insignificant, except in Bolivia.
This result at first sight goes against claims in the literature that grassroots organizations
are more effective than those that are imposed by governments. However, in the case of
Indonesia, the results indicate that while there is no direct effect from community
initiation on household welfare, active participation in community-initiated organizations
is much greater than in government-initiated organizations-hence there is an indirect
effect. Also, as we explained earlier, many of the local associations in Bolivia and
Burkina Faso were in fact initiated by the government many years ago and have over time
come to be perceived as community-initiated by households. Hence, the variable picks
up perception more than historical fact.
In the context of the model underlying equation (1), the coefficients of the social
capital variables shown in Table 6 can be interpreted as the economic returns to
memberships in local associations. There is in fact a close parallel between the
interpretation of these coefficients and the interpretation of the coefficient of human
capital. The latter represents the return to years of investment in education through
school attendance. In the case of social capital, the main input is also time and the
coefficient measures the return to the time spent in developing networks and participating
in associations. This time can indeed be spread over many years and add up to a
significant time investment.
However, one has to consider the possibility of reverse causation. High income
households could have a higher demand for associational life, perhaps because they have
more leisure (although the opportunity cost of their time is also higher). The same is true
of course for education, which is also in more demand by higher-income households.
One can certainly argue that associational life has a consumption value and is not sought
merely for its economic benefits. This is related to the type of association: participating
in church choir may have more consumption value than joining a farmers' cooperative.
The LLIS country case studies have each taken a similar and two-pronged
approach to addressing this possibility. The first approach consists of instrumental
variable estimation. As discussed in Section 2, the data collection for the LLIS took place
at different levels-households, community, and district-and the community variables
provide independent measures of village characteristics which can be used as potential
instruments to test whether social capital is exogenous in the household welfare model.
The case studies found that village variables such as ethnic and religious diversity,
institutional effectiveness, institutional density, democratic functioning of associations,
and the extent of community involvement in creating associations, are effective
instrumental variables which passed standard econometric test procedures. In all cases,
the instrumental variable methods led to higher coefficients for the social capital index
than in the OLS model (as reported in Table 6) indicating that the prime direction of
19
causality is from social capital to household welfare. This strengthens the case for
viewing social capital as an input in the household's production function.
The second approach to testing for direction of causality is to move away from a
reduced-form model and attempt to estimate structural equations which show the direct
effect of social capital on intermediate variables in the production of household welfare.
This approach is further addressed in Section 6.
In the case of Indonesia, a third approach was possible because the data files
contained information on past community involvement in major development projects
that took place within the villages in the past ten years. Strong community involvement
in projects is a good indicator of social capital because it requires the community to get
together, to jointly organize activities, to raise finds, and to reach collective decisions.
An indicator of such historical stock of social capital is clearly exogenous to current
household welfare, and reverse causality is obviously impossible. When we added this
indicator (together with a series of village control variables, including the number of
development projects undertaken) to equation (1), the indicator showed a large positive
coefficient. Adding the community social capital indicator changed the coefficients of
the household-level social capital variables only slightly and did not alter their
significance pattem. This leads to the conclusion that past community activity, and the
social capital it built, exerts a positive effect on household welfare over and above that
stemming from the household's direct involvement in associations.17
7 Since the regression controls for the number of development projects, the past-community-involvement
variable does not measure the impact of these projects on household income, but only the additional
benefit from the community's active involvement in the projects.
20
5. SOCIAL CAPITAL AND THE POOR
So far, we have provided evidence that social capital has positive effects on household
welfare. However, since equation (1) imposes constant parameters over the entire
distribution, the results do not say whether social capital helps the poor to the same
degree as the rich, and whether investment in social capital can help in the escape from
poverty. In this context, it is important to note that the ownership of social capital (as
measured by the interactive social capital index) is fairly equally distributed. In
Indonesia, e.g., the social capital index for the richest quintile is only about 30% higher
than for the poorest quintile-about the same degree of inequality as for years of
education (Table 7). Land and physical assets are distributed much more unequally. In
Bolivia and Burkina Faso, land and physical assets were also found to be distributed
much more unequally than social capital.
Table 7: Ownership of Assets, by Quintile of Household Expenditure per Capita
(Indonesia)
Quintiles
(Poores1 2 3 4 S All
Social Capital Index 14.99 16.65 16.65 18.00 19.89 17.23
Years of Education 4.32 4.64 4.59 5.04 5.65 4.85
Land Ownership (hectares) 1.45 1.28 1.96 3.90 2.52 2.17
Household Durables (number) 1.25 ( 1.76 2.13 2.69 3.07 2.18
Relatively, poor households have thus accumulated more social capital than other
assets, and the question is whether this is rational, in the sense that it provides poor
households with relatively higher returns than other assets.
The country case studies addressed this question in three different ways. First, a
probit model was estimated of the likelihood to be poor. The results for all three
countries were consistent and indicated that social capital does indeed significantly
reduce the probability to be poor. Consistent with the findings reported in Table 6, the
main variables were found to be the number of memberships and the internal
heterogeneity of the association. A further investigation of different dimensions of
heterogeneity indicated that the economic dimensions, such as differences in economic
status, education, and occupation dominated the results. This suggests that the
mechanisms at work are primarily those of exchanging information and knowledge and
perhaps also the pooling of risks over households who have different sources of income.
21
Quantile regressions are a further way to explore differences in the role of social
capital between the poor and the rich. Quantile regressions estimate the regression line
through given points on the distribution of the dependent variable (whilst an OLS
regression line goes through the mean) and can assess whether certain explanatory factors
are weaker or stronger in different parts of the distribution. However, the estimation is
conditional upon the values of the independent variables and hence coefficients from
quantile regressions are not comparable with those of OLS regressions.'8
Quantile regression were estimated at the 90 percentile and at the 10th percentile
and Table 8 shows the ratios of the coefficients of the social and human capital variables.
The results indicate that in each country the returns to social capital are higher for the
poor than for the rich. In Indonesia, e.g., the return to social capital at the 10th percentile
of the welfare distribution is twice as high as at the 90th percentile. The returns to
education follow an opposite pattern and are generally higher for the rich. Hence, in
terms of relative returns, one can indeed say that social capital is the capital of the poor:
although the poor have less social capital than the rich, as is true for all types of capital,
social capital is relatively more important in the portfolio of assets of poor households,
and it gives them a relatively higher return.
A further investigation of the factors that contribute to this finding suggests that in
the case of Indonesia the result is primarily influenced by the index of participation in
decision making. This suggests that the poorest households in Indonesia benefit the most
from a high level participation in the decision making of associations. Furthermore, the
cash contribution score was only significant at the 90th percentile suggesting that the rich
"buy" their way into social capital. The pattern of the coefficients of the work
contribution score was the exact opposite, suggesting that the poor have to work their way
into social capital.
Table 8: Ratios of Returns to Social and Human Capital
Between Richest and Poorest
Bolivia Burkina Faso Indonesia
Social capital 0.75 0.05 0.51
Human capital 0.91 1.18 1.82
Note: Entries are ratios of quantile regression coefficients at the 90th percentile over
those at the 10th percentile of the distribution of household expenditure per capita.
A third way to investigate whether there are differential returns to social capital
between the poor and the non-poor is to split the sample according the amount of land
18 Specifically, the coefficients show the effect of a mnarginal change in an explanatory variable on the xth
conditional quantile of the dependent variable (Buchinsky, 1998).
22
held by households (Table 9). In the rural settings of the three study countries, land is
obviously a key asset. The results for each country indicate that the returns to social
capital are larger for smallholders than for households with higher amounts of land.
Table 9: Returns to Social Capital, by Size of Landholding
Bolivia I Burkina Faso Indonesia
Smallholders 0.0071 0.0031 0.0067
Others 0.0039 0.0026 0.0059
In summary, the results of this section indicate that memberships in local
associations reduce the probability to be poor. Returns to social capital are generally
higher for households in the lower half of the distribution, whether by expenditure per
capita or land ownership. Investing in social capital is hence a rational and effective
strategy for poor households.
23
6. THE EFFECTS OF SOCIAL CAPITAL: ASSET ACCUMULATION,
ACCESS TO CREDIT, COLLECTIVE ACTION
In this section we step away from the reduced-form approach to estimating the impact of
social capital on household welfare and poverty outcomes, to investigate more directly
some of the processes that contribute to this result. In a poor rural setting, a prime
consideration for households is to develop coping strategies to deal with the risk of
income fluctuations. This involves accumulating assets which can be sold in time of need
and/or arranging access to credit. In order to see whether social capital is effective in
contributing to asset accumulation, we estimated a model with the same regressors as
equation (1) but with various indicators of asset accumulation and access to credit on the
left hand side. Specifically, we constructed indexes (with various weights) of household
ownership of durable goods and a binary indicator whether the household had been able
to increase its savings over the past year. We also have information on whether the
household was able to obtain credit and the amount of such credit. Household coping
strategies also rely on the community at large. The LLIS data indicate the number of
times per year the household participated in collective action, which is often organized to
maintain or improve infrastructure and hence also provides an indirect benefit to the
household.
Table 10 indicates which social capital variables were significant in which
countries. The overall observation is that, even after controlling for other household
characteristics, social capital makes a significant contribution to asset accumulation,
access to credit, and collective action. Consistent with previous findings, the number of
memberships and the heterogeneity index were most consistently significant in the
different models. More diverse associations contribute more to asset and saving
accumulation and to access to credit than those that are more internally homogenous.
This is perhaps a surprising result in the case of Indonesia where credit and saving
associations are traditionally separated by gender, especially on the island of Java.
Nevertheless, a further analysis indicated that associations which consisted of both men
and women resulted in better access to credit for its members than the traditional
associations.
24
Table 10: Effects of Social Capital on Asset Accumulation,
Access to Credit, Collective Action
Asset/Saving Credit | Collective Action
Accumulation I
Number of memberships B, BF, I BF, I B, I
Heterogeneity index BF, I BF, I (B), BF, (l)
Meeting attendance B, I B, BF
Participation in decision making (B), I I
Cash/Work contribution BF BF BF, I
Community initiation (BF), (I)
Note: Symbols indicate country case studies where variables were significant. Symbols in parentheses
indicate negative coefficient
B = Bolivia
BF = Burkina Faso
I = Indonesia
A noteworthy result is that in the case of collective action, the effect of internal
diversity of an association works in the negative direction. The highest participation in
collective action comes from members of internally more homogeneous organizations.
Further analysis in the case of Indonesia indicated that kin group and religion were the
key dimensions. In other words, collective action is easiest organized in associations
which bring together people from within the same kin group and/or religion. The
importance of this. factor has in fact been documented elsewhere. Kaihkonen (1999)
reports that homogeneity of kinship, caste and ethnic background aids collective action
for water supply.
The role of these social and demographic factors is a noteworthy contrast with the
role of the economic factors, such as education, occupation, and economic status which
were the key contributing factors to increasing household welfare. Clearly, a different
mechanism is at work. The benefits to household welfare come primarily from
exchanges in knowledge and the pooling of risk in the case of credit, while the ability to
organize collective action is more a function of trust and a shared perception of a
common good. It is plausible that this is more readily achieved among people who are
kin or share religious convictions.
The regressions underlying Table 10 showed that the effects of an additional
membership in an association were in the same order of magnitude or in some cases even
larger than the effects of years of education. This attests again to the important role of the
networks implied by memberships in local associations in accumulating assets and
obtaining credit, as ways to smoothen income fluctuations and to cope with economic
shocks to the household.
25
The empirical results also made it clear that the type of association matters a lot in
achieving these effects. In that context, we note the negative sign of the community
initiation variable on access to credit in the case of Burkina Faso and Indonesia. This
suggests that the financial associations which are set up by outside entities (government,
NGO) may well be more effective in providing credit to villagers than associations which
are set up from within the community. This may be due to the greater access to financial
resources by outside associations, since the grassroots financial associations are typically
of the rotating credit variety, whose resources are limited to those that can be brought in
by the members themselves.
In the case of Indonesia, we were also able to make a distinction between
memberships in associations whose prime objective was financial and those with other
objectives. A noteworthy finding was that memberships in non-financial associations
also contribute to improving access to credit. This is one sense in which social capital is
truly "social", in that the building of networks and trust among members in the context of
a social setting spills over into the financial arena. This interpretation of social capital
has been proposed by several authors, such as Putnam (1993), Dasgupta (1988), and
Fukuyarna (1995). Our finding is also consistent with the results of Sharma and Zeller
(1997) who report that the number of self-help groups in communities in Bangladesh has
a positive spillover effect on the performance of credit groups.
The presence of spillover effects between activities undertaken for social purposes
into the economic arena-a key feature of social capital-was also documented in the
Indonesia case study in a different way. The study distinguished three types of
associations: government-supported groups, religious groups, and genuine grassroots
associations. The latter were further differentiated between production associations and
social associations, the key distinction being that production associations aim primarily to
generate direct economic benefits for their members, while social associations do not.
Social associations pursue health and education benefits, mutual support for ceremonies
or recreation purposes. Yet, the analysis revealed that the largest effect on household
welfare came from memberships in social groups. This lends support to the view that the
economic benefits of social capital are an externality to the pursuit of social interaction
and the resulting build-up of trust. One is reminded of the famous choral societies and
bowling leagues discussed by Putnam (1993, 1995). Given the efforts which the
Indonesian governnent has put in the creation of a nationwide network of local
associations, it is sobering to note that membership in these government-sponsored
groups had no measurable effect on the welfare level of households.19 Of course, the
19 There is a silver lining to this finding. The recent crisis in Indonesia, and the change in government,
has likely led to a weakening of the network of government-supported local associations. Our results
suggest that this may not have contributed to lowering the welfare level of households. Furthermore,
the voluntary production and social associations could well take over some of the functions previously
handled through government-sponsored associations, which would be to the benefit of households. It
has been observed before in Indonesia, that in areas where government associations are weak, voluntary
associations step in to fill the void (Werner, 1997).
26
govemment had also other objectives in mind when establishing these local associations
(see e.g. Evers, 1998; Werner, 1998).
In summary, in this section we attempted to get closer to the structural equations
which underlie the reduced-form model of equation (1) by estimating the impact of social
capital on variables portraying the ways in which social capital contributes to household
welfare. We found that households with high social capital are better able to accumulate
physical assets and savings and obtain credit. This should help households cope better
with the risk of income fluctuations. The number of memberships and the internal
heterogeneity of associations were the key dimensions. These findings, in combination
with the econometric results from instrumental variable estimation discussed earlier
(section 4) provide strong evidence for the impact of social capital on the welfare of
households and support the view of treating social capital as an asset which households
seek to acquire for similar reasons as the acquisition of human and physical capital.
27
7. SUMMARY AND CONCLUSION
Social capital can be analyzed in a variety of ways: from qualitative to quantitative
methods, from case studies to formal econometric methods. The empirical literature on
social capital consists primarily of case studies which have investigated the impact of
certain types of associations on the outcome of development projects. The unit of
analysis has typically been the community and the geographic study area has been limited
(see for example, Krishna et al, 1997 and Uphoff et al, 1998). Very few studies have
focused on the distributional impact of social capital and have used the household as unit
of analysis. For that reason, the data collection underlying the Local Level Institutions
Study covered multiple units of analysis-the household, the community, and the
district-and the analysis summarized in this paper has focused on the household.
The results reported in this synthesis paper were primarily derived from
quantitative analytic methods, mainly formal econometric models. However, this
analysis is part of an integrated qualitative/quantitative approach. The interpretation of
the econometric results would not have been possible without prior qualitative analysis of
the data collected at the community and district levels. These analyses were summarized
in the reports by Sandoval et al (1998) for Bolivia, CND (1998) and Donnelly-Roark et al
(1999) for Burkina Faso, and Werner (1998) and Evers (1998) for Indonesia. These
qualitative studies brought out a number of salient institutional and historical features that
have a bearing on the effectiveness of local associations.
The contribution of the econometric studies synthesized in this paper is the
estimation of the magnitude of the impact of social capital after controlling for other
relevant household assets and characteristics. They indicate that social capital cannot
simply be seen as a good which exists at the community level and which benefits all
households in the community equally. There are significant distributional effects and
certain attributes of local associations benefit the poor more than others. The quantitative
studies also documented that the returns to social capital are relatively higher for the poor
than for the rich and that hence investments in social capital should be considered as part
of a poverty alleviation strategy. While there are spillover effects at the community level,
individual household actions are needed to obtain the maximum benefit from membership
in local associations. Active participation in association decision making is especially
important.
A major finding which the quantitative studies have documented is that the
composition of membership makes a big difference in the results of the association.
Specifically, heterogeneous associations bestow larger benefits on their members than
less diversified ones. In the majority of cases, the key dimensions were the economic
characteristics of the members, such as education, economic status, and occupation.
Diversification along this criteria promotes fruitful exchanges of knowledge and
information and permits the pooling of different risks associated with different sources of
28
income. This is especially important in securing access to credit. In contrast, in the case
of activities that primarily benefit the community as whole, such as collective action,
homogeneity of demographic and social characteristics, such as kinship and religion
proved to be more important.
The use of quantitative analytic methods also made it possible to investigate in a
formal way the question of causality. Does social capital cause higher incomes or do
higher incomes lead to a better acquisition of social capital? This question is similar to
the one that has been asked for a long time regarding human capital. Our findings
suggest that the effect of social capital on income predominates. We derived this
conclusion from instrumental variables estimation, the use of historical data (in the case
of Indonesia), and by focusing on some of the structural equations which capture directly
the way in which memberships in local associations lead to higher incomes. These
venues include accumulation of assets, increased savings, and access to credit. At the
level of the community they include improved collective action. These factors all
contribute directly or indirectly to higher incomes and reduced poverty for households.
To the extent that these studies have indeed made a compelling case that social capital
increases household welfare and reduces poverty, the obvious policy implication is that
investments should be made in social capital. The key questions are by whom and how?
Investing in social capital differs from investing in human capital: education is
embodied in one individual and can be acquired by one individual regardless of what
other people do. By definition, social capital can only be acquired by a group of people
and requires a form of cooperation among them (although, as our results have shown, the
extent to which different members of a group capture the benefits does depend upon their
individual actions, especially the extent of active participation). This gives social capital
an inevitable public good character and this has implications for its production (Coleman,
1988, 1990). In particular, like all public goods, it will tend to be underproduced relative
to the social optimum, unless the group responsible for its production can fully internalize
the externality involved (Collier, 1998).20 Which group is best suited to producing social
capital thus depends largely on the scope of the created externality and this determines the
size of the group needed to internalize it effectively and avoid free rides. For example, in
the case of rotating savings association, the scope is local; in the case of the rule of law, it
is national and the central government needs to play the essential role.
To the extent that a population with high levels of social interaction, trust, and
abidance to norms and laws generates countrywide benefits, it may justify a role for
government. This role would not necessarily consist of setting up a series of government-
sponsored associations (as the Indonesian govermnent did), but primarily in creating a
supportive environment for the emergence of voluntary local associations. The
Indonesian results suggest indeed that the returns to members are larger from voluntary
associations. However, the results for Bolivia and Burkina Faso also indicate that
20 This assumes that the externalities are positive. If social capital generates negative externalities, e.g.
through crime syndicates, it will of course be overproduced relative to the social optimum (which is
presumably zero in this example).
29
organizations which were originally set up by government can over time become adopted
by the local population and be perceived as community associations. Either way,
government, especially local government, can play a role in ensuring that the poor
participate in local associations. Our results indicate that the benefits from membership
and active participation are greater for the poor than for the population at large.
Finally, we must reiterate that the micro-institutional focus on local associations,
which was embodied in the Local Level Institutions Study, pertains to only one
component of social capital. Social capital is a much broader concept which relates also
to the macro level. Further analysis will have to pay attention to the interaction between
social capital at the micro and macro levels. Local associations are good vehicles to
implement national policies at the local level and as such they can strengthen macro-level
institutions, but by the same token actions of the latter are needed to empower local
associations. Current tendencies toward decentralization is one framework within which
this can occur. Considering the role which local associations play in promoting the
welfare of households, it is clear that strengthening their role would be a key element in a
decentralization policy, and would complement efforts to strengthen the capacities of
local governments.
30
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