Social capital and Growth in Brazilian Municipalities

According to the modern theory of social capital (see Coleman (1990), Putnam (1993), Fukuyama (1995)), widespread trust would influence the economic performances of a country through a) reduction of transactional costs (monitoring and preventive activities to protect themselves from being exploited in economic transactions) and legal disputes; b) higher percentage of time devoted to innovation in new products or processes; c) higher reliability of formal institutions like the government and the central bank which implies that people can adopt more appropriate horizons in making investment decisions and choose production technologies that are optimal over the long, rather than short, run; d) a stronger social cohesion due to the sharing of ethical norms which induces cooperative behaviours and organisational innovations. On the basis of these theories a large number of empirical contributions which confirm the existence of a positive relation between growth, efficiency and the level of trust has been produced. Following the seminal work by Knack et al. (ibidem), we try to explain growth in Brazil over the period 2000-2003 using indicators of social capital. We develop our analysis at the most detailed geographical level, considering all 5507 municipalities. This choice is motivated by the great heterogeneity inside every country in terms of growth rate. While we observe homogeneity in some countries, like Sergipe, in other countries, like Sao Paulo, we have huge differences. This forces us to consider the municipalities as unit of observation; otherwise the country level would force us to loose all the heterogeneity. In order to obtain good measures of social capital, we start from a set of objective measure, and then analyse then with factor component analysis. We find a robust evidence of the positive effect of social capital on growth rates of income per capita.