Human well-being effects of institutions and social capital.(Report)

I. INTRODUCTION

Studying the determinants of human well-being (HWB) at the macro level is a very important endeavor. Unfortunately, it is at best an extremely complicated task. Thus, most scholars focus on some aspects of HWB. In this article, we attempt to assess the effects of income, institutions, and social capital on HWB in Africa using panel data, with particular emphasis on the role of social capital. We use two indicators of HWB: a measure of access to knowledge represented by adult literacy and a measure of health represented by life expectancy. Following Sen's (1990) Capability Approach, we view HWB in terms of the capabilities an individual achieves. Capabilities are considered ends, while the means to these ends may, for example, include income, democracy, property rights, and social capital (derived mainly from social networks, trust, societal norms, and values). Putnam (1993) views social capital as "those features of social organization, such as networks of individuals or households, and the associated norms and values that create externalities for the community as a whole." Coleman (1990) provides a definition of social capital that emphasizes the function of social capital and describes it as "some aspect of social structure that enables the achievement of certain ends that would not be attainable in its absence." (1) Viewed in this light, social capital is akin to Sen's "functionings," while the term ends is similar to "capabilities." It is in this sense that our research perceives social capital and its effect on well-being. We view social capital as a means that would enable a capability, such as being healthy or being educated. While one may argue that part of being healthy and educated ensures getting a job, for example, and hence education and health could be viewed as functionings, we follow Sen (1990) and Baliamoune-Lutz (2006) and posit that for the major part, being healthy and literate constitutes an end or a capability in its own right.

Social capital may affect output directly by reducing cost and increasing efficiency and indirectly through its effect on human capital (Coleman, 1988) and access to resources, for example, access to credit (Fafchamps, 2000; Fafchamps and Minten, 1999, 2002; Fukuyama, 2001). Social capital affects economic outcomes (income) primarily by allowing more mutually beneficial trades, lowering monitoring and transaction costs, enhancing information flows, and resolving collective action problems (Knowles, 2005). A widely used indicator of social capital in cross-sectional studies is the concept of trust. (2) Trust may derive from good institutional environments, as it may be the product of societal norms and values. The main question we try to investigate in this article is whether social capital (in the form of trust) has direct effects on literacy and life expectancy (two important dimensions of HWB) after controlling for income and institutional quality. The empirical results we obtain show that social capital does not have a direct effect on life expectancy (beyond its indirect effect through income). Arellano-Bond generalized method of moments (GMM) estimates show that low corruption (strong social capital) enhances the effectiveness of institutions in promoting literacy. However, this effect is not monotonic; improvements in the corruption index within the high corruption range reduce the effectiveness of institutions, while continuous improvement within the low corruption range enhances it. Similarly, there is statistical evidence that lowering ethnic tensions (our second proxy for social capital) improves the effectiveness of institutions. The results suggest that social capital and institutions are complements and underscore the important role of social capital in enhancing the effectiveness of institutions in Africa.

The main contribution of our work is that we use of a set of regressors that are often used as dependent variables, as in the case of income, or ignored when focusing on HWB (as in the case of institutions and social capital) and examine how they affect HWB. Examining the effects of institutions and social capital on literacy and life expectancy may also allow us to explore whether these deep determinants of income (Glaeser et al., 2004; Knowles, 2005) affect income through their impact on human capital (and the production function). In addition, we hope to contribute to the literature on social capital by identifying suitable proxies for social capital at the macro level.

Knowles (2005) argues that "[i]f social capital is to be modeled as a deep determinant, the most obvious dependent variable is income per capita, but it would also be of interest to examine the effect of social capital variables on differences in health and education levels across countries, given that economic development is a broader concept than income per capita" (p. 34). Knowles adds that the only article in the cross-country literature to examine the effects of social capital on education and health outcomes is La Porta et al. (1997). The present article tries to fill this gap in the empirical literature on social capital.

The remainder of the article is organized as follows. In the next section, we briefly review the literature on institutions and social capital and their implications for economic development. Section III describes the variables and methodology employed. In Section IV, we discuss the empirical results. We provide concluding comments in Section V.

II. INSTITUTIONS, SOCIAL CAPITAL, AND DEVELOPMENT