Value Chain Glossary: Social Capital
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Social Capital
The level of trust and/or obligation generated by operating within the norms and networks that govern market and non-market interactions between people. Examples include the trust generated by consistently meeting delivery and quality requirements, the trust and obligation between members of a family or ethnic group, the trust group members place in their leaders, or the ability of actors to secure benefits by virtue of membership in a social network. In the context of value chains, social networks can provide access to financial services, information about business opportunities, access to markets and/or employment opportunities.
In labor and commodity markets, ethnic or religious groups occupy a specific trade or occupation. In Indonesia, the production of traditional goods like gold jewelry, clothing, shoes, tofu and ice cream are all undertaken by specific ethnic groups. In India, rag pickers come from lower/secluded castes and comprise mostly women. Labor recruitment, skill development and market information are passed through these social networks by the mechanism of social capital.
Trust exists in social networks because obligations are enforceable, not through recourse to law or violence but through the power of the norms that have been established by the social network. Trust can benefit economic actors by:
- Reducing transaction costs: Transaction costs include costs incurred to search for the best price in the market, the best product, the cost of making a deal through socializing (e.g., eating or drinking tea or coffee together), developing contracts and establishing the terms of the sale. When trust is present, these costs are reduced considerably.
- Lessening the potential for moral hazard: Moral hazard occurs in a transaction when a party with more information about its actions or intentions has an incentive to behave inappropriately, and the party with less information has to pay for the negative consequences of the inappropriate actions. For example, one party could purchase crop insurance and then deliberately choose not to apply the proper amount of fertilizer to the crop because the purchase and application of the fertilizer would cost more than the insurance premium. By not applying the fertilizer, the crop will fail and the insurance company will be required to pay the insurance as a result of irresponsible behavior.
