Chapter 3

Measuring Social Capital—How Communities Affect Growth

A fundamental law of human beings is interdependence. A person is a person through other persons.

Desmond Tutu

A proper community, we should remember also, is a commonwealth: a place, a resource, an economy. It answers the needs, practical as well as social and spiritual, of its members—among them the need to need one another. The answer to the present alignment of political power with wealth is the restoration of the identity of community and economy.

Wendell Berry, The Art of the Commonplace

Just as we plant crops infertile soil, we want to establish our business in a fertile social environment.

Paul Michaels, former CEO, Mars, Incorporated

Social capital, as we define it in a business context, is expressed at the community level rather than at the individual level, and is the second component, along with human capital, of how we can value people as an asset. Just as human capital provides benefits to business performance when it is at a high enough level, and can drag on performance when it is too low, the “social fertility” of communities—what we call social capital—can also have a positive or negative impact on business performance. As we will explain in this chapter, several business experiments have revealed that social capital is, in fact, a key driver for business and community prosperity and economic performance. Maybe not surprisingly, when there is sufficient trust, social cohesiveness, and capacity to work collectively toward a common end in a given community, such communities have the necessary social fertility to grow and sustain quality of life increases. And greater quality of life of communities, especially in commodity-growing areas that tend to be impoverished, in turn, yields greater economic output, as we will explain.

The question we set for ourselves and for our academic partners (Professor Peter Berger, Boston University, Professor Alain Desdoigts, Paris-Sorbonne University, and their teams) in looking at how to comprehend and then to measure social capital (in a simple, actionable, but accurate way) revolved around the level of impact a particular community had on the success of a business and vice versa. In particular, we wanted to know how much influence a community had on the level of economic output.

How we approached the concept of social capital

Working in a company that is commodities-based and imports a significant proportion of its crops from tropical countries (cocoa and coffee), we were motivated to focus our initial research on small cocoa and coffee farmers. This was in part because farmers of these commodities remain largely impoverished, thereby constituting the weakest link in the value chain and one of the most important pain points in the ecosystem. They are, therefore, beyond just the moral imperative to intervene, because farmers are leaving farming or switching to other crops. This creates powerful business incentives to intervene to increase the supply of commodities such as cocoa because supply projections do not meet demand expectations over the longer term.

The inefficiency of foreign aid in Africa—pouring in money alone does not work

As American economist William Easterly observed in his paper “Can Foreign Aid Buy Growth?”, massive international aid has had little impact on economic development in Africa over the last several decades. Despite overseas aid to Africa rising from just over 5 percent of GDP to 17 percent of GDP over the last thirty years of the twentieth century, per capita growth of aid recipient communities fell from around 2 percent per annum to zero (or below zero in the late 1980s and early 1990s). The solution to impoverished farmers in the tropics cannot therefore be found in investing only in traditional proximate sources of growth, such as physical capital (e.g., machines, tools, equipment, technology) or human capital (e.g., education, health).

Armed with this knowledge, we began to consider whether social capital could be the ultimate source and ensure enduring benefits. What we discovered was that the institutional arrangements (mostly informal) in a particular community had a marked effect on the level of investment in machinery, education, or health, which in turn impacted growth. We therefore wanted to understand whether taking into account the social capital dimension and traditionally omitted factors like trust, norms of reciprocity, networks, and forms might have any bearing, and whether there was a method of analyzing how the money invested via international aid might be better invested in the future. This was the starting point of our research, and the very first step was to agree on a definition of what social capital actually is.

What is social capital? Different definitions¹

In 1924, the sociologist and anthropologist Marcel Mauss introduced the concept of social capital in his essay, “The Gift: The Form and Reason for Exchange in Archaic Societies.”² He writes: “Everything intermingles in them, everything constituting the strictly social life of societies that have preceded our own, even those going back to protohistory. In these ‘total’ social phenomena, as we propose calling them, all kinds of institutions are given expression at one and the same time—religious, judicial, and moral, which relate to both politics and the family; likewise economic ones, which suppose special forms of production and consumption, or rather, of performing total services and of distribution . . .” A highly complicated definition.

In 1986, the sociologist Pierre Bourdieu defined social capital as “the sum of the resources, actual or virtual, that accrue to an individual or a group by virtue of possessing a durable network of more or less institutionalized relationships of mutual acquaintance and recognition [. . .] The volume of social capital possessed by an agent depends in particular on the size of the network of connections the agent can actually mobilise and the volume of capital (economic, cultural or symbolic) personally owned by those with whom the agent is connected.”³

In 2000, the American philosopher and economist Francis Fukuyama stated that “social capital can be defined simply as an instantiated set of informal values or norms shared among members of a group that permits them to cooperate with one another. If members of the group come to expect that others will behave reliably and honestly, then they will come to trust one another. Trust acts like a lubricant that makes any group or organization run more efficiently.”⁴ This definition, which was also used by Professors Steven Durlauf and Marcel Fafchamps, makes it possible to simplify the definition and identify many of the key components structuring social capital (which we will describe later on).

In 1996, within the framework of the growing interest in social capital, the World Bank proceeded to undertake a large-scale qualitative and quantitative data-gathering program in small rural and urban communities in tropical areas, with the objective to develop social capital measurements. The integrated questionnaire initially designed by Ghent University’s Christiaan Grootaert and colleagues in 2004 that resulted from this effort⁵ has both a qualitative and quantitative dimension, with a questionnaire targeted on households in the surveyed community making a distinction between two forms of social capital: cognitive social capital (inherently subjective) and structural social capital—which we will be calling upon later in this chapter.

Table 3.1 is a succinct summary of some of the most relevant definitions and interpretations of social capital.

As the observations listed under the heading a “club good” (below) would suggest, while social capital has some similarities to financial capital—it can be accumulated, earns a return, can depreciate, and allows you to prevent others from using it—it is also dissimilar in the sense that it cannot be owned or traded. Although there are varying definitions and interpretations, and it has historically been difficult to measure social capital, these descriptions taken together would appear to translate into something like the benefits that accrue to a specific community on the basis of the formal and informal arrangements that community makes for its interactions.

In addition, Nobel laureate Robert Solow noted in 1995 that “if social capital is to be more than a buzzword [. . .] [it] should somehow be measurable even inexactly.” Eight years later, effective measurement was still far from a reality, with American political economist and Nobel laureate Elinor Ostrom commenting that “social capital [. . .] does exhibit serious problems of measurement.” Nevertheless, Ostrom was of the opinion that “it would not be wise at all to dismiss the concept [of social capital utility] on the grounds that it is difficult to measure.” That is the issue we sought to address in our new business model program, and we have found a pragmatic way to measure social capital that is proving to be good enough for business and actionable in a business context.

Table 3.1 Summary of the Most Relevant Social Capital Definitions

Measurement challenge

One of the main challenges in measuring social capital up to now has been the assumption that it would be too complex to measure for practical use, leaving it to academics to address more theoretically. Because the academic literature suggests there are dozens of variables—upwards of sixty or more, in fact—that together can comprehensively describe a given social capital space, those who might be motivated to use social capital measurement in an applied sense have largely shied away from it, especially in business.

Yet, social capital is noticeable when a high degree of informal support and encouragement is present within a community. And unlike academia, business has the advantage of being able to act on data and findings that are “good enough” rather than only when we are “as close to perfect as we can get,” as one would do in engineering or academia, for example. This reality significantly lowers the bar for just how much of the social capital space we truly need to understand to begin drawing reasonable conclusions that enable business to begin taking tangible, impactful actions. The question about social capital for business is how this form of value can be harnessed to drive business growth, while also growing those positive social benefits within communities that make a community more cohesive, collaborative, and resilient.

The answer comes in the form of creating a methodology that combines two types of measurement: qualitative and quantitative. In creating this methodology, we based our approach in part on the basic guidelines laid down by the World Bank (noted in table 3.1 as a measure of the quality and quantity of a community’s social interactions), making use of a quantitative social capital survey instrument the bank itself designed but does not appear to have used in any meaningful way we have as yet discovered. We looked to both improve on what the bank started and to qualitatively calibrate the findings from the survey tool using deep anthropological and sociological expertise.

The first measure (qualitative) is rooted in ethnography. We commissioned several teams of anthropologists who were highly skilled and locally very experienced. Our aim was to try to unearth the factors driving social capital to get a baseline for the geographies of our experiments from which we could utilize more business-friendly and simple quantitative survey techniques used in development economics, i.e., those that typically are “good enough” for business in terms of accuracy, but not so academically precise that the time and resources needed to do this would be excessive, making it impractical. The descriptions (qualitative) of the social capital spaces where we experimented were quite involved and also helped us properly calibrate the survey questions we later used to ensure that those surveyed would properly understand our questions and that we would properly understand their answers. For example, in Papua New Guinea we found that among the nine hundred or so dialects spoken in the country, there is not a single word that translates precisely the English word “trust.”

The second measure (quantitative) used extensive survey questionnaires (deploying a modified version of the World Bank’s Social Capital Assessment Tool). The aim here was to measure the key variables of social capital and the effects of social capital on business success.

To look at the qualitative research in more detail, we interviewed on the supply side coffee farmers in multiple communities in Papua New Guinea and Tanzania, and cocoa farmers in multiple communities in Côte d’Ivoire, with the goal of identifying the key markers of social capital. On the demand side, we interviewed micro-distributors in Vietnam, Kenya, and the Philippines. Soon, we will be adding interviews of entrepreneurs in China and India and, on the supply side, of cocoa farmers in Côte d’Ivoire, possibly in Indonesia (Sulawesi), and of coffee farmers in Uganda and possibly in Costa Rica.

We chose Papua New Guinea and Tanzania for the early social capital experiments because they were nearly identical to one another in terms of coffee farmer impoverishment, yet they were very different in terms of culture, language, and geography. And they were also two countries where the sponsoring coffee segment sourced coffee beans. As soon as possible thereafter, we selected Côte d’Ivoire to add a third geography of impoverished farmers, but of a different crop—cocoa, which is core to our business. And we also selected Vietnam, Kenya, the Philippines, and China soon after to add a new business situation (demand), a new sociological dimension (impoverished urban communities), and new geographies. The purpose was to determine whether social capital measurement could be a diagnostic tool to identify weak points in the distribution channels that could then be addressed through business interventions.

Table 3.2 is a succinct summary of social capital projects undertaken between 2009 and 2015.

Quantitatively, we used the World Bank’s Social Capital Assessment Tool (modified and calibrated for our purposes) to isolate factors that could be measured in a replicable fashion and that provided maximum leverage. Broadly speaking, we wanted to be able to identify the degree to which communities relied on formal legal institutions and whether the degree of decentralization had an impact. At a more granular level, we wanted to understand the influence of cognitive aspects, like trust, and structural components that include the way the groups are organized (see figure 2).

Table 3.2. Summary of Our Social Capital Projects, 2009–2015

Breaking these elements down, the cognitive components are more informal and based on expectations of past events: a reliance on being able to trust people to lend and borrow, the reassurance generated by people volunteering and making donations, and the idea that people are not only responsible for their own actions but they will either address their own moral transgressions or their community will hold them informally responsible.

The structural components comprise five elements that focus on the way individuals are accepted or excluded by the group, how involved the community is in decision making, how power is exercised, and how the community is structured demographically.

Figure 2. Breaking Down the Elements of Social Capital

The result of this analysis then led us to break these elements into two groups that can be analyzed and measured: behavioral variables and identity variables. The behavioral variables include three of the cognitive components (trust, solidarity, behavior and attitudes) and two of the structural components (exclusion and collective actions).

Table 3.3. Cognitive Social Capital

Key results

What became apparent in the field research and piloting was that social capital was a crucially important driver of prosperity and economic performance—a significant breakthrough discovery. Those communities surveyed that had more social capital performed consistently better economically than communities with less social capital. What’s more, after testing more than sixty variables with 7,500 households in thirty-four regions or villages across six countries, we were able to isolate just three variables that explain 75 percent or more of the variations across the social capital space. These are:

1. Social division or cohesion

2. Trust

3. Capacity for collective actions and behavioral attitudes

This discovery suggests a universal nature of mankind in the context of community interaction that is both simple and scalable. Again, this is because the same three variables together consistently account for enough of the social capital space to be practically used in business settings, although the three are weighted differently depending on the situation. By reducing from more than sixty to just three the number of variables businesses can use in any market, culture, or crop, on the supply or demand side—whatever—to decipher, measure, and monitor social capital, what was once considered far too complex for business to use is transformed into an efficient and effective business tool. Such a tool has many possible business uses, most of which are only just beginning to be unearthed and tested.

Where supply is ample, business units can use social capital to determine where enough “social fertility” exists in a supplier community to sustain quality of life increases in that community, so that supply chain partners can prosper alongside the business. In this way, supply chains can become more secure. Similarly, by assessing social capital in advance of a business activity, companies can if they so choose bypass supplier communities where there is insufficient social capital for those communities to flourish as part of the firm’s supply chain. When demand for a commodity exceeds available supply, however, the business can choose to intentionally craft business interventions to help grow social capital in supplier communities where it is too low, thereby enhancing the trust, social cohesion, and capacity for collective action that together lead to greater prosperity for all stakeholders.

For example, cocoa farmers in Ghana were engaged by one of our NGO partners, Opportunity International (OI), in a group microlending program that facilitated good agricultural practices (GAP), including application of fertilizer to previously unfertilized cocoa trees. In OI’s program, each borrower guaranteed the loans of the other farmers, and this (in the estimation of OI) delivered increased trust, social cohesion, and capacity to work collectively, as the farmers together became more productive by collaborating and sharing the risk. Although OI did not have the means to measure social capital at that time, they shared with us the fact that, with much of the surrounding community watching the farmers in the program prosper, other farmers became more willing to join it and guarantee one another’s microloans. This is just one example of how social capital can be intentionally enhanced through a relatively straightforward intervention. Should businesses working with us in the future deploy interventions that could grow social capital, we will seek to measure and track the social capital of recipient communities to understand this dynamic more granularly.

One business leader in our company, when first exposed to our social capital measurement technique, asked if our team could do social capital surveys of communities around sites being considered for new factories. His rationale, based on what he was learning from our team about social capital, was that this could be another important factor to consider, along with cost of land acquisition, access to transportation, electricity costs, tax structure, local infrastructure, and so on, in making the choice of where to put future factories. Another business leader asked if we could assess the impoverished community surrounding one of our factories to determine whether we should invest in growing social capital as a potential means to reverse the surrounding community’s decline in quality of life so that it could prosper alongside our facility.

On the demand side, we are using social capital, along with human capital, as a diagnostic tool to help identify pain points (the most pressing needs of others) in distribution that we may be able to address. The poor among our micro-entrepreneur recruits, for example, may not have the financial capital needed to purchase a bicycle with a basket in which they can move our product more efficiently (a real example). By partnering with a microfinance lender, this pain point might be mitigated. Once we have mapped the pain points of the key stakeholders, we can then hold managers and partners—in the pilot businesses used to test the model—accountable for delivering more social (and human) capital rather than focusing first on delivering more sales and revenues. We are finding that more sales and revenues are coming as a result of this counterintuitive approach of putting the needs of the others first, suggesting that if you don’t chase the money, the money will find you, as we will illustrate in a specific case study later in this book.

Table 3.5. Social Capital Landscape across Various Pilots

Note: % indicates proportion of total social capital of 100% explained by specific variable (i.e., the three emerging dimensions—social cohesion, trust and behavior, capacity for collection action—explaining about 75% of the total variance in the survey).

Human capital and social capital

At this point, then, we have isolated eight variables in total that are measurable and impact the economic performance of a business, in addition to being relevant to the communities and individuals involved in the economic activity: three for social capital and five for human capital. The next phase of our work considered whether similar key variables could be isolated in a third area: natural capital.

Summary of key social capital findings

Social capital has an impact on economic development.
Social capital drives prosperity and economic performance, although it is often ignored and omitted from consideration, possibly due to its perceived complexity or simple ignorance of its significance, e.g., you cannot take a picture of it, like you might a road, school, or well in a typical development project. Like any form of capital, however, social capital can be used, created, and wasted. It can also be intentionally grown through business interventions.

It is measurable in a stable, scalable way, making it business relevant. Just three simple component variables—trust, social cohesion, capacity for collective action—account for enough of what constitutes social capital that all of the other variables need not be considered by business, unless of course one is undertaking a purely academic exercise. Social capital, moreover, is stable across varied geographies, and data collection is scalable.

It is actionable in business operations. Using social capital, we can assess the fertility of the socioeconomic environment where we and others operate. And we can diagnose and track the impact of targeted actions/interventions by the business.