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Social capital

The World Bank (2006, p.xviii) defines social capital as "the degree of trust in a society and the ability of people to work together for common purposes". Other definitions include community characteristics, networks, norms, and institutions such as the rule of law and transparency of political processes (Statistics New Zealand, 2009). Like other types of capital, social capital can be accumulated over time and then drawn on for use in the future.

Treasury (2001a, p.6) has previously emphasised the importance of social capital for living standards: "when there are high levels of participation, interconnection and cohesion, there are correspondingly high levels of social capability; that is, a high level of the ability of various interests in society to co-operate towards common goals". Social capital is built on cooperation and trust at an institutional and interpersonal level, effective institutions and a strong sense of culture and social cohesion.

Effective public institutions underpin social capital, as they provide the framework within which the society and the economy function (Treasury, 2001a). Institutions have major affects the living standards of New Zealanders, both directly through opportunities for democratic participation and the protection of important individual freedoms and the rule of law, and indirectly through their impact on the functioning of society and the economy. The governance and effectiveness of institutions affects how well people can use their other resources, such as their physical, financial and human capital.[12]

Trust is an important element of social capital, which is strengthened when communities have shared values, low levels of social dysfunction and confidence in public institutions. High levels of trust can be developed through bonding - strong ties that emphasise a shared identity within a group such as a whānau - or bridging - weaker ties that help foster broader community links and information channels between separate groups (Putnam, 2000). However, bonding social capital may detract from bridging social capital. This can happen when strong in-group ties are exclusive and discourage the participation of people outside the group (Treasury, 2001a).[13]

There are important interactions between the above elements that help create an economically prosperous and socially cohesive society. For example, a transparent system of government gains the trust of the population, which reinforces the responsibility of institutions to the public. Aspects of social capital also have benefits for the economy, particularly in terms of decreasing transaction costs and encouraging cooperative behaviour (Australian Bureau of Statistics, 2002). For example, transaction costs may be lowered if people know others will honour contracts and can trust people they do not know well (Putnam, 2000; Fukuyama, 1996).

Rights and freedoms are an integral part of social capital and are inherently connected to an individual's relationship to the state and society. Freedom (economic, political and personal) is one of the main factors explaining differences in life satisfaction across nations (Veenhoven, 2006). Effective public institutions and the rule of law serve to protect individual freedom, but protecting freedom may also require limitations on the state's interference in people's lives.

Some of the rights and freedoms that institutions should protect can be considered absolute and should not be traded off for another person's wellbeing. For example, the United Nation's Universal Declaration of Human Rights (United Nations, 1948), to which New Zealand is a signatory, sets out rights that are intended to be inalienable and indivisible. Other rights are relative, and need to be balanced against other factors that affect living standards. For example, institutions that enforce property rights facilitate well-informed and secure contracting, which is a crucial driver of economic growth (Treasury, 2001a). However, the right to one's property is not an absolute right. For example, the government taxes property to provide other benefits, although decisions to do so should consider the reduction in freedom that taxes and regulation create.

An important role of public institutions is to provide security from harm. Feeling safe and secure is necessary for people to realise their capabilities. There are a variety of external factors that put people's security at risk: crime, accidents, terrorism, bio-security hazards and natural disasters (Stiglitz et al., 2009). These events have a disproportionate effect on people's lives and therefore require special attention. Public institutions such as the defence forces, police, courts, the prison system and civil defence, should strive to enhance community safety while respecting the rights of those they seek to protect. It is essential that these institutions have public support and confidence in order to work effectively.

Social capital exists within, and is shaped by, the cultural context. Cultural values and a sense of cultural identity, which are inherited from the previous generation and adapted by current members of the community, assist in building and transferring social capital. Cultural norms differ across groups within a society. For example, an analysis of social capital in a Māori society is likely to identify an important role for culture in establishing a sense of identity and belonging, along with other features such as the primary importance of extended family relationships (Statistics New Zealand, 2002). The extent to which cultural norms vary across society can influence the extent to which social capital is bonding or bridging. Strong bridging social capital is often more important in multicultural societies, as it helps build social cohesion across disparate groups.


  • [12]For a more detailed summary of the various linkages between good governance and living standards see Treasury (2001a) pp.79-81.
  • [13]For a more detailed summary of the linkages between shared values and living standards see Treasury (2001a) pp.81-82.
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