Social Capital And Economic Development In A Large Multi-Ethnic Developing Country: Evidence From Indonesia

The role of social capital in economic development has been a subject of interest to both academics and practitioners of development for several decades. However, studies on social capital in developing countries context is still rare. This study explores empirically the relationships between social capital and economic development at district level in Indonesia.We find that the effects of social capital on economic development are complex. Hence, we cannot simply say that social capital is either good or bad for development. The relationships differ across development indicators, the forms of social capital, and the categories within each form of social capital. Nevertheless, the most important finding of this study indicates that trust among people across different ethnic groups is the most important social capital for Indonesia. Higher trust among ethnic groups reduces poverty, increases income per capita, and increases consumption per capita of all segments of the population. Since Indonesia hashighly diverse ethnic groups, maintaining trust among these ethnic groups is paramount to the success of economic development of the country.