Social Capital and Economic Growth

It is argued in order to explain large differences in the level of the development and the growth of economies cannot be adequately explained only by looking the traditional inputs of labour, capital and natural resources. The hypothesis is that also the role of social capital needs to be taken into account. First the concept of social capital is defined and discussed. Then the role of social capital in the development process is explained. Empirical test based on the cross-country data of 27 countries indicates that trust as a component of social capital is an important factor in explaining the differences in the rate of economic growth in this set of countries. This supports the idea that the role of the trust to rules of the economic behaviour has indeed an important role to play in good economic performance. On the contrary the participation index is not statistically significant. This is in contrast with some other, usually micro-based studies where participation has proved to be important in improving the performance of the development projects. The report is part of a VATT research project "Human Capital and Entrepreunership".