Study Overview
A new stylized fact in development economics is the importance of social capital in promoting economic growth. This paper examines the effect of social capital on industrialization in Indonesia. We analyze a rich set of social capital and social interaction measures, including voluntary associational activity and levels of trust and informal cooperation. The main finding is that initial social capital does not predict subsequent industrial development across 274 Indonesian districts. Though these findings are for only a single nation and may not apply everywhere, they call into question recent claims regarding social capital and economic development.
Study Results
This paper’s empirical results provide new insights into the current debate on the role of social capital in economic development. Using a unique data set of district-level data that we assembled, we find that the initial density of social networks does not predict subsequent industrial development in Indonesia, across a variety of econometric specifications and for multiple measures. This finding does not imply that social networks and social interactions can never affect industrial development; it merely shows that in the Indonesian case during the study period any benefits of dense social networks were counteracted by their costs, or that other local economic, institutional, or political factors were the prime drivers of industrial development.