Inclusive Growth Through Creation of Human and Social Capital

MPRA Munic Personal RePEc Arcive Inclusive Growt Troug Creation of Human and Social Capital Soumyananda Dinda Sido Kano Birsa University, Purulia, India August 2011 Online at ttp://mpra.ub.uni-muencen.de/63953/ MPRA Paper No. 63953, posted 2. May 2015 06:57 UTC

INCLUSIVE GROWTH THROUGH CREATION OF HUMAN AND SOCIAL CAPITAL Soumyananda Dinda Sido Kano Birsa University, Purulia, India Email: sdinda2000@yaoo.co.in August 30, 2013 Abstract Tis paper analyses inclusive growt tat focuses on te creation of opportunities for all. Inclusive growt allows people to contribute to and benefit from economic growt, wile propoor growt approaces focusing on welfare of te poor only to reduce inequality. Recently, economics literature incorporates social capital for explaining regional disparities. Economic development of country depends on te impact of social capital wic includes social culture, norms and regulations tat promote economic reforms and development activities. Social capital forms wit te development of uman capital troug scooling. Educated individuals are interested in dialogue and conversation. Interaction enables people to build trust, confidence and cooperation, to commit temselves to eac oter (i.e. reciprocity), and tereby to knit te social fabric. Tis study deals wit te formation of social capital troug development of uman capital tat is created troug improvement of scooling and/or social inclusion. Creation of uman and social capital is te basis for inclusive growt. Te predictions of te model are examined empirically for a cross-section of countries and findings support te model. JEL Classifications: Z130, J240, O150. I25, I28, O4, C2 Key Words: Human Capital, Inclusive Growt, Pro-poor Growt, Social Capital, Social network, Productive Consumption, Scooling, Social Inclusion, Co-operation, Reciprocity, Economic growt, Economic Development. 1. Introduction Tis paper focuses on socio-economic factors tat determine economic prosperity of a nation. National prosperity includes all; none can be excluded from benefit of economic growt. Tis study analyses inclusive growt tat refers to te pace and pattern of growt, and investigates te socio-economic determinants of growt. Policy makers of

developing economy are now muc more interested on inclusive growt approac tan te earlier pro-poor growt approac. Te prime aim of te inclusive growt approac is to create opportunities for all and te benefit sould reac all sections of te society. Inclusive growt approac is a long run perspective focusing on increasing productive employment opportunities for all, not on direct income redistribution as means of increasing income for excluded groups. Inclusive growt is a broad-based empasizing on policies tat remove constraints to growt and create a level playing field for investment suc tat it allows people to contribute to and benefit from economic growt (Ali (2007), Ali and Son (2007), Ali and Yao (2004), Ali and Zuang (2007), Fernando (2008), Lin (2004), McKinley (2010), Zuang (2008)). Inclusive growt is concerned wit te overall welfare of te society. Inclusive growt empasizes te idea of equality of opportunity in terms of access to markets, resources and regulatory bodies for business and individuals. Inclusive growt approac is different from te earlier pro-poor growt approac tat is interested in te welfare of te poor only. In te relative definition, growt is pro-poor if and only if te incomes of poor people grow faster tan te rest of te population, wic suggests tat inequality declines; provided income growt of te rest remains same or grows lower rate tan tat of pro-poor (Kakwani and Pernia (2000), Kraay (2004), World Bank (2005), Bird (2008)). Pro-poor growt literature as traditionally focused on measuring te impact of growt on poverty reduction by tracking various poverty measures (Eastwood and Lipton (2002), Ravallion and Cen (2003), Ravallion (2004), Lopez ((2010, 2011), McKinley (2010)). Long experiences suggest tat pro-poor growt approac is ineffective and as some drawbacks also (Kakwani and Pernia 2000). 1

Actually pro-poor growt approac creates a systematic inequality of opportunity and tere is a probability to derail te growt process troug possible social conflicts. Tis analysis focuses on ways to raise te pace of growt by creating productive labour force tat fully excluded from growt process. In tis context few questions arise: Is tere any social constraint for economic growt? Wat are te social determinants of economic growt? Wat are te micro and macro determinants of growt? Is tere any link between micro and macro determinants of growt? Tis paper identifies and prioritizes te factor of inclusive growt. Paper suggests removing social constraints for inclusive growt, wic creates possible opportunities for all groups troug relevant social dimension wic promotes economic growt and development. Earlier economic analysis as given less empasis to te social aspects suc as social culture, norms and regulations tat promote economic reforms and development. Economic development of country/region depends on te wider impact of social culture. Recently, economists become more and more interested in te role of social culture as an explanation for wy some regions/countries are ric and oters remain poor toug tey ave nearly same levels of pysical and uman capital. Several studies ave investigated te impact of social culture, wic includes social structure based on trust, norms, cooperation and networks. Bourdieu (1980, 1986), Coleman (1988, 1990) and Putnam (1993, 1995) introduced and popularized te concept of social capital 1 in te 1980s and 1 Bourdieu (1986) introduced social capital to explain ow social and economic forces create and maintain capitalist culture. According to Bourdieu (1986) economic, cultural and social capitals togeter sape te permissible actions in any particular field of operation. Cultural capital knows ow to acieve one s goals and social capital knows people wo could elp one to do so. Coleman (1988) defines social capital by its function. It is not a single entity, but a variety of different entities, wit two elements in common: tey all consist in some aspect of social structures, and tey facilitate certain actions of actors witin te structure. Putnam (1993) introduces te idea of social capital in terms of relations or interdependence between individuals: social capital refers to connections among individuals social networks and te norms of reciprocity and trustwortiness tat arise from tem. Social capital is a type of positive group externality 2

1990s. Social capital is a broad term containing te social norms and networks tat generate sared understandings, trust and reciprocity, wic underpin co-operation and collective action for mutual benefits, and creates te base for economic prosperity. Social capital refers to te norms and networks tat enable collective action wic creates te base for inclusive growt and sustainable development. Social capital contributes to economic growt by focusing te importance of cooperation and trust witin firm, industry, market and te state. Heller (1996), Ostrom (2000) and Rose (2000) point out tat social capital contributes to economic growt 2 by facilitating collaboration between individual interests towards acievement of increased output. Several studies (Bertrand and Mullainatan (2000), Beugelsdijk and Smulders (2004), Bjornskov (2006), Glaeser et al. (2000), Alesina and Ferrara (2002), Dinda (2008), Miguel (2003), Knack et al. (1997), Sobel (2002), Tau (2003), Temple and Joson (1998)) ave discussed about te features of social capital and its contribution to economic growt. Social capital 3 greases te weels tat allow communities or nations to advance smootly. In tis context, Coleman empasizes te use of social capital as a precursor of uman capital. Bourdieu and Coleman agree tat te notion of social capital can be converted into oter forms of capital. Social capital appears to be a desirable tat arises from social organization (Coleman 1990), specifically informal forms of social organization suc as trust, norms and networks (Putnam et al (1993)). Social capital, in Putnam s view, is te features of social organization suc as networks, norms, and trust tat facilitate coordination and cooperation for mutual benefit. Social capital as two important components: (i) it represents resources embedded in social relations rater tan individuals, and (ii) access and use of suc resources reside wit actors. Coleman outlines tree aspects of social capital: obligations and expectations, information flow capability, and norms accompanied by sanctions. 2 Countries/regions wit relatively iger stocks of social capital, in terms of generalized trust and widespread civic engagement seem to acieve iger levels of growt, compared to societies wit low trust and low civicness. 3 It represents one of te points of interaction between individual and society, since social capital allows te individual to act in certain ways, but only witin a collectively defined and supported area of freedom. Interaction enables people to commit temselves to eac oter and to knit te social fabric. A sense of 3

object for policy-making. Policy makers can aim to increase social capital wit te related ideas of scool improvement and social inclusion tat creates employment and oter opportunities for te society 4. Rupasinga et al (2006) and Dinda (2008) suggest ow tis social capital generates or wat policies stimulate to form tis capital. Development economists (Steger 2002, Dasgupta and Marjit 2002) recognize te possibility of productive consumption tat enables te satisfaction of current needs and also increases productivity of labour. Te productive consumption stimulates to accumulate uman capital troug wic base is created for cooperation, social norms, regulations and institutional formations, and tus, it elps to develop and strengten social networks and tereby form social capital. Tis paper is an extension of Dinda (2008). Spending in social sector is a part of inclusive growt strategy tat provides basic facilities like ealt, education and ousing. Te paper focuses on ow productive consumption 5 improves economic performances in te cannel of development of uman and social capital and analyses its impact on economic development in te framework of endogenous growt model. Te paper is organized as follows: Section 2 builds up a model in te framework of endogenous growt model. Section 2.1 discusses ow productive consumption develops uman capital. Section 2.2 analyses ow te developed uman capital generates and belonging and te concrete experience of social networks bring benefits to te members. Individuals are engaged in repeated interactions wit oters and everyday business, so, social transactions are less costly. 4 An individual as access to resources troug social capital tat depends on is/er connections, te strengt of tese connections, and resources available to it. Truly, social capital elps to improve te efficiency of society by facilitating coordinated action. Tus, social capital creates a common platform in wic individuals can use membersip and networks to secure benefits. Social capital allows individuals to resolve collective problems more easily. Individuals often migt be better off if tey cooperate, wit everybody doing er/is own work. 5 Te expenditure on ealt and education as positive contribution to te output growt, wic is revealed, on macroeconomic level (Hicks 1979, Weeler 1980). Tis consumption expenditure (activities) is classified as productive consumption. 4

accumulates social capital. Section 2.3 provides standard welfare function and optimizes it wit respect to constraint. Section 2.4 analyses te results derived from our model. Section 3 provides tree cases wit policies. Section 3.1 explains possible multiple equilibrium grapically. Section 4 provides empirical support to te model. Section 5 discusses about te possible policies tat elp to develop social capital and lastly section 6 concludes. 2. Model Te representative ouseold produces output, y, using composite capital, k. Te intensive production 6 functional form is y f (k), f 0, f 0 and f ( 0) 0. (1) Te assumption of diminising returns is replaced by constant returns, wic is crucial for sustainable growt and also a broader interpretation of capital 7. One part of produced output is used for consumption ( c ) and oter part for investment. Te equation of motion of te pysical capital ( k p ) is k f ( k) c k (2) p p p Were p is te depreciation rate of pysical capital. 2.1 Productive Consumption creates Human Capital A part of expenditure (consumption) is used for te development of uman capital in terms of ealt and education tat improves labour productivity of te economy. Tis type of consumption expenditure elps to develop uman capital and Steger (2002) 6 All variables are measured in terms of per capita. Here, we assume tat population growt rate is zero. 5

termed it as productive consumption (see also Steger 2000). Human capital enancement function, (c), is strictly concave (suc tat, ( c) 0, ( c) 0 and lim ( c) ( c) c or lim ( c) 0 and lim ( c) 0 c c ). Te equation of motion of te uman capital ( k ) is k ( c) k (3) Pysical capital 8, k p, is produced on te basis of te same tecnology tat is used to produce consumption goods and its accumulation requires, at least in part, te renunciation of consumption, wile uman capital, k, results from productive consumption (Steger 2002). 2.2 Human Capital develops Social Capital Development of uman capital creates te base for social capital formation suc as social norms, trust, cooperation, networks etc tat forms in te scooling system. Education s longstanding concern wit association makes direct and indirect contribution to te development of social networks 9, trust, tolerance and reciprocity. Educated individuals are interested in dialogue and conversation, and develop cultural environment in wic people can work in coordination and trust eac oter. So, improvement of scooling system creates te platform for interaction between individuals 10, groups and sub groups. Interaction enables people to commit temselves to eac oter, and tereby to knit te 7 Steger (2002) defines capital as te composition of pysical and uman capital, in tis paper social capital is added to it for wider notion of capital tat is discussed later. 8 In tis context, k p could be equally interpreted as pysical and uman capital tat requires te renunciation of consumption for its accumulation (Steger 2002). 9 Educational acievement is likely to rise significantly, and te quality of day-to-day interaction is likely to be enanced by a muc greater empasis on te cultivation of extra-curricula activity involving groups and teams. Tus, encouraging te development of associational life can also make a significant difference to te experience of being in different communities. 10 In oter word, uman capital is capable to create and develop norms, regulations, and social networks tat form te social capital, and tereby economic growt and development (Temple and Jonson (1998)). 6

social fabric. Social capital of an economy definitely depends on te available stock of uman capital (tat is definitely greater tan one, because, at least two individuals are required to form social capital). So, social capital formation is a function of uman capital, i.e., S k ), wit usual property 0 and 0. Te equation of motion of ( te social capital ( k s ) is k ( k ) k (4) s s s Were, s is te depreciation rate of social capital due to misused or non-used. Composite Capital formation Pysical, uman and social capitals are well connected eac oter and jointly produce output in te economy. Tree capitals (pysical, uman and social) are taken togeter to form composite capital, k. Te wole stock of composite capital is defined as k k k k. (0 < α, β <1) (5) 1 p s Here, te elasticity of pysical, uman and social capital are α, β and 1-α-β, respectively. Te equation of te motion of stock of composite capital (k) can be written as: k k (6) 1k p 2k 3 s Were k 1, k p k 2, k (1 )k ; η represents sare of individual capital 3 k s contributed to composite capital. Substituting eq.(2) - (4) in eq(6), it can be written as k f k) ( k) ( c) k (7) 1 ( 3 Were c) c ( ) is te net consumption and depreciation rate: p ( 1 2 c ( 1 ) s 7

Te equation (7) contains two additional terms viz., social capital generating function ( k ) and net consumption (c), wic includes productive consumption tat creates uman capital (c). Improved uman capital as two fold impacts on te economy directly develops uman capital and indirectly creates te pace for wider base for all section of te society in te form of social capital. 2.3 Welfare function Individuals may form or join groups weter tey are organized around certain (entusiasms) interests, social activity, economic and/or political aims can make considerable contribution to te economy. Te simple act of joining regularly involved in organized groups as a significant impact on individual well being. Te representative ouseold or central planner maximizes er instantaneous utility troug consumption at eac moment. Te traditional objective of te ouseold is Max W c 0 U t ( c) e dt (8) Subject to te constraint k f k) ( k ) ( c) k (9) 1 ( 3 k p ( 0) 1, k ( 0) 1 and k s ( 0) 1. F.O.C of te optimization solution is 2.4 Analysis uc (10) c were is te sadow price of k, and c 1 2 c. Te eq. (10) implies tat along te optimal trajectory te marginal utility of consumption equals to marginal net cost of 8

consumption in utility measured units. It is also clear tat te level of consumption is iger compare to productive consumption. Te optimal economic growt rate is c c 1 3 1 f k ( k) K 2 ( ) (11) cucc c cc 2ccc Were 0,, provided 1 2 c u c c 1 2 c Te term is inter-temporal elasticity of consumption. Te second term,, is te elasticity of net consumption. It implies tat productive consumption significantly contributes on economic growt troug te elasticity of net consumption ( ). Since K 0, te marginal productivity of social capital is positive, economic growt rate in eq.(11) is iger tan tat of Steger (2002). Tis difference is created due to incorporation of social capital tat is reflected in te second term, K, in eq. (11). Proposition: Productive consumption and social capital contribute to economic growt. Te economic growt rate will be more compared to te conventional growt rate because of te contribution of social capital in te economy (i.e., K >0). Tus, as long as social capital as definite contribution or return, te economic growt rate will be iger wit economic development. Specific Functions For te analytical purpose, we specify te following functional forms. Production function: y f ( k) Gk (12) Human capital enancement function: 9

( c) ln(1 c) (13) Social capital function: Sk k ( k ) S k wen S k Utility function: k k (14) 1 c 1 u ( c) (15) 1 3. Specific Case Studies Case 1: Consider a situation were people are living at te below subsistence level of consumption (C0), i.e., C<C0, people are suffering from malnutrition aving low quality of ealt capital, wic is below te normal uman ealt capital, i.e., k k. In tis situation (economy), enancing uman capital is zero, i.e., (c ) = 0, and consequently te society poses only te bonding social capital, i.e., ( k ) S. It is mostly te family bonding. It restricts interaction between groups and te mobility of resources, even tere is no excange of culture or any economic activity between groups and/or sub-groups in less developed society/country. Tis is te situation in several parts of Biar, Orissa, and MP in India. Eac group is confined among temselves and all kinds of interaction witin group only. Everyting is restricted by teir social restrictions in te name of caste, create, religion etc 11. Tis society as a strong bonding relation tat forms te bonding social capital but it as no impact on overall economic activity or/and economic development. Tus, te economy becomes stagnant (due to social restrictions tat 11 It is observable in Indian states also like Biar, UP, Rajastan, MP, Orissa etc. 10

generate no trust on oters, no reciprocity). Te economists explain tis stagnant economy as a low level poverty trap. Income is very low and unable to provide subsistence and as a result productivity is zero. Using above information and equations, te economic growt rate is c c 1 1G ( p ) (16.1) Tis is a low level of equilibrium growt rate wit te bonding social capital. Tere are lot of development economics literature explain te low level poverty trap in terms of economic factors but social factors are almost neglected in earlier. Now policymaker focuses on social aspects. Policy 1: To overcome tis stagnation, te government sould reac at te door of tese excluded groups and provide nutritional intake troug food programmes tat improve ealt uman capital and create te base for social interaction between groups at distribution centre. It will definitely dismal te social blocking and elp to form te base for bridging social capital tat elps to cange te social attitude and beavour. Case 2: Now consider te situation were te consumption level just crosses te subsistence level (C0), i.e., C C0, and corresponding to tis subsistence level, te society starts to develop uman capital, i.e., ( c)>0. Here is te productive consumption [c = (C-C0) 0] tat enances uman capital, (( c)), but still in tis pase it is at te border or margin line of bonding and bridging social capital. Tis is te pase of social conflicts arising in te initial motion from bonding to bridging social capital and it is termed as social mass transition. Wit certain social conflicts initial economic development starts marginally and economic growt starts. Still pysical capital 11

determines economic growt but more social conflicts may reduce economic growt at initial stage of development. c c 1 G ( ) 1 (16.2) Policy 2: Scool inclusion is te most important policy troug wic increase te enrolment in scools. Tere will be a development in te feeling of oneness or togeterness in scooling. Tis creates te base for social and economic reform and development starts. Case 3: Consider te situation were te productive consumption enances uman capital, wic is productive. Education develops knowledge and cultural capital troug scooling tat also elps to create friendsip, fellow feeling among tem. It certainly creates a bridge connecting different groups of society. Te process of uman capital formation increases te intensity of social interaction witin and between groups. Te social norms, rules and regulations are created troug discussion. Tus, development of uman capital creates te base for social capital formation. Interaction enables people to commit temselves to eac oter and creates te pace for economic reform and development. Te productive consumption stimulates to accumulate uman capital troug wic te base is created for cooperation, norms, regulations and institution. It elps to develop te linking social capital wit productive resources. Suppose te economy is at k k, ten ( k ) Sk S k, social contacts or networks increases and strengtening te family bonding, bridging and linking social capital and tereby employment opportunity rises. Ten te economic growt rate is 12

c c 1 3 1G 2 2 S ( ) 2 S k (16.3) Tis is a ig level equilibrium growt rate wit iger social capital formation compared to eq. (14). Obviously, economic growt rate at k k is iger tan tat of at k k only because of te presence of effective social capital in second bracket viz., 3 2 S S 2 k 2 0. Policy 3: Appropriate design of scool curriculum is important suc tat employment opportunity sould be matced wit available uman capital. Watc dog institutions will be set up for monitoring and regulating economic activities. 3.1 Analyzing possible multiple equilibrium situation Now grapically we explain and analyze te economic growt and development at different stages of economic position. Te formations of uman and social capital are explained grapically in te R-side (c, k) plane and L-side (k, ks) plane in figure 1, respectively. Figure 1 sows te possible multiple equilibrium situations. A low-level equilibrium trap exists in less developed economy, wic as poor quality uman capital in terms of ealt and education, and social network confines only wit family relationsip. Social network/capital remains more or less fixed at ks *. It is independent of k up to a minimum level of uman capital k tat does not elp to generate sufficient social network in terms of bridging/linking capital 12, wic could be productive. In suc low level or underdeveloped economy, low level of uman capital is insensitive and 13

ineffective and fails to play a significant role to develop productive social capital. Terefore, less developed economy remains at e1 (k *, ks * ) low level equilibrium trap tat occurs at low level of social, uman and pysical capital (Fig.1). Figure 1: Social Capital Formation and Multiple Equilibrium k k ) s *** ( k e3 Stable ig level growt (c) equilibrium L-side R-side e 2 k ** k e 1 k * *** ** * ks k s k s k s c * c ** c *** c Stable Low level equilibrium trap Unstable equilibrium Te productive consumption is a crucial development policy for improving uman capital tat elps to generate social capital and tereby economic development. Social capital 12 It is a productive social capital tat is accumulated as a result of simultaneous production and consumption of relational goods taking place in te context of different kinds of social participation, wic 14

formation (in terms of bridging capital) takes sape as soon as uman capital exceeds k as defined in Figure 1 and continues until it reaces its maximum. Tis situation leads to a stable equilibrium at e3 (k ***, ks *** ) ig level of capital ( k consumption level ( c *** *** ) and corresponding ig ). In between low and ig level equilibrium, an unstable equilibrium exists at e2 (k **, ks ** ) corresponds to ** c. From fig.1, we observe multiple equilibrium (e1, e2 and e3) wit two stable equilibrium at (e1) and (e3), and one unstable equilibrium (e2) in between tem. If once te economy crosses k **, in fig.1, it certainly leads to iger economic growt rate along wit iger level of uman and social capital. It sould be noted tat ** k k is very difficult zone for less developed countries (LDC) and comparatively ig effort (or big pus) is required to acieve considerable social development and economic growt. Low-level equilibrium trap exists wen k k and te productive consumption is ineffective to develop uman capital as well as social networks. It becomes effective and efficient only wen k k. Tus, effectively productive consumption affects economic growt only after attainment of k level of uman capital tat starts to generate social network and tereby social capital. Economy needs greater efforts for development of uman capital particularly for te zone of k - ** k (i.e., k k k ** ). As soon as k exceeds ** k, k s monotonically increases wit k tat develops from productive consumption. In te context of economic development, productive consumption is effective only in ** *** c c zone corresponding facilitate te learning of cooperative attitudes, beaviours and reciprocity (Sabatini 2006). 15

to ** *** k - k and ** *** s k s k zones. It sould be noted tat an unstable equilibrium exists at e ( k, k 2 ** ** s ). A stable equilibrium occurs at e3 (k ***, ks *** ) wit ig social capital. It sould be mentioned tat developments of infrastructure and communication systems, wic are igly depends on te availability of pysical and uman capital, igly affect te formation of social network/capital. So, in tis context, we ave to consider tat social capital formation depends on bot uman and pysical capital, i.e., S k p, k ). ( For simplicity we consider ere tat only uman capital generates social capital, i.e., S ( k ), and continue our analysis. 4 Empirical Observations Tis section provides some empirical support for te above said model based on crosscountry study. Tis paper tries to sow tat (i) scooling (uman capital formation) improves troug rising government consumption, (ii) scooling develops trust and (iii) income level increases wit rising social capital and improvement of uman capital. Te government consumption sare, trust in people (see Ingleart et al. (2004) for details), and average years of scooling 1990 are mainly considered ere as productive consumption, social capital and uman capital, respectively. 4.1 Data and Empirical results In tis study te data set is taken from te website: ttp://www.nek.uu.se/staffpages/publ/p431.xls. Tis data set is a compilation of several data tat are taken from different sources (given in details in p431 excel file). Several studies (Zak and Knack (2001), Bengtsson et al. (2005), Berggren and Jordal (2006), Dinda (2008)) ave used tese data. Few relevant variables - viz., growt per capita 16

(annual percentage growt rate of real GDP (cain) per capita 1990-2000), trust 13 (first value of trust 1990-2000, World Value Surveys), per capita real GDP (Penn World Table 6.1), scoolmean90 (average number of years of scooling in 1990, see Barro and Lee 2000 for details), pol-rigt90 (political rigts 1990, Freedom House), civil-lib90 (civil liberties 1990, Freedom House), scool_loggdp90 (product of average years of scooling and log of GDP per capita in 1990), lifeexp1990 (life expectancy 1990) and socinf (index of social infrastructure) are taken for tis study (see also Dinda (2008) for details). Tere are 69 countries but few variables are missing for some countries. Table 1 provides te impacts of productive consumption on scooling. Te empirical findings support tat government consumption as direct impact on scooling but it varies wit te level of productive consumption (govt consumption sare) in different (poor and ric) country groups. Increased productive consumption raises uman capital in terms of scooling. Productive consumption increases scooling significantly iger in countries wose productive consumption (government consumption) sare is less tan 15 percent of gdp (Table 1). Table 1: Results of Scool Improvement for Productive Consumption Variables Coeff Std error t-value p-value Govt Consumption 12.611** 5.069 2.49 0.016 Constant 4.322*** 0.8548 5.06 0.000 R-squared 0.098 N 59 A: Gov Cons sare less tan 15 per cent of gdp Govt Consumption 32.058*** 11.4565 2.8 0.009 Constant 1.533 1.252 1.22 0.23 R-squared 0.207 N 32 Note: (i) *** and ** indicate te level of significance at 1% and 5%, respectively. (ii) Government Consumption is te sare of gdp during 1974-1989. 13 First value of trust in people (%) 1990 2000 from World Value Surveys plus Newzealand from a government sponsored survey www.worldbank.org/researc/growt/pdffiles/trust_data.xls for 1980, 1990-91, 1995-96 (see Zak and Knack 2001). 17

Figure 2 sows a direct association between average scooling and social trust. Tis indicates tat rising literacy rate improves te trust level among people in te society. Figure 2: Relationsip between Scooling and Trust Source: Dinda (2008) Table 2 depicts te empirical results of te impact of scooling on trust. On an average 3.7 trust point increases for eac additional year of scooling. Average year of scooling of te sample is 6.45 year. Now sample is divided into two groups below average (less tan 6.45 years) and above average year of scooling (greater tan 6.45 years). Marginally 3.2 point trust index improves for eac extra one year of scooling at initial stage (below average scooling year) but it is 6.5 in later stage of development (above average scool year, (Table 2)). Tese empirical findings (Table 2) provide evidences tat trust is low wit less scooling wic is associated wit under developed countries, and trust is more wit iger level of scooling associated wit developed countries. 18

Table 2: Regression results of Scooling on trust Variables Coeff Std err t-value p-value Scool 3.691*** 0.546 6.76 0.000 Constant 5.669 3.864 1.47 0.147 R-squared 0.405 N 69 Scool mean < 6.45 Scool 3.214** 1.46 2.2 0.035 Constant 8.5 6.175 1.38 0.178 R-squared 0.1316 N 34 Scool mean > 6.45 Scool 6.532*** 1.544 4.23 0.000 Constant -20.554 13.92-1.48 0.149 R-squared 0.3517 N 35 Note: (i) *** and ** indicate te level of significance at 1% and 5%, respectively. Table 3 displays te significant variables tat affect trust. Income level, growt rate, year of scooling, political rigt, people s voice ave direct impact on trust but inequality and rule of law are inversely associated wit trust. Trust also improves wit reducing inequality tat is measured by Gini coefficient. In oter word, level of trust in te society increases as te gap between ric and poor declines. Te rule of law also elps to improve te level of trust in te society/economy. Te rule of law migt be te precondition to build up trust in less developed economies. Table 3: Result of Significant variables influences on trust Variables Coeff Std err t-value p-value PCGDP 1.290** 0.568 2.27 0.031 Growt rate 2.766** 1.127 2.45 0.021 Scool 3.370*** 1.161 2.90 0.007 Gini -1.025*** 0.281-3.64 0.001 Polrigt 7.821*** 2.391 3.27 0.003 Voice 13.67** 6.179 2.21 0.036 Rule of Law -29.761*** 8.94-3.33 0.003 R-squared 0.8899 N 43 Note: (i) *** and ** indicate te level of significance at 1% and 5%, respectively. 19

Now tis paper focuses and igligts on data analysis critically. Considering GDP level, wole sample is divided into two groups developed countries (DC) and less developed countries (LDC). Now tis data analysis elps to understand critically te relationsip between scooling and trust in LDC and DC. Figure 3 sows te relationsip between scooling and trust for poor (LDC) and ric country (DC) groups. In LDCs, trust is nearly constant (or fixed) and scooling as no impact on it. It is true because te large section of te society in LDCs is excluded from scooling system and ineffective scool teacing-learning system prevails in LDCs (Park and Hannum 2001, Glewwe and Kremer 2005, UNESCO 2011). From our data set of LDCs it is clear tat majority of poor and marginalised people ave no access to scool and also deprived from teir basic needs, tey ave no fait on society and can t trust social system. Trust building mecanism is unsuccessful since impact of scooling is little or nil. In DCs scooling improves trust directly (Fig 3). Figure 3: Relationsip between Scooling and Trust in DC and LDCs scool vs trust 70 60 y = 4.3834x + 3.2981 R 2 = 0.3104 50 trust 40 30 LDC DC Linear (LDC) Linear (DC) 20 10 0 y = 0.2316x + 21.409 R 2 = 0.0017 0 2 4 6 8 10 12 14 scool (year) 20

After diagnostic tests on residuals of OLS regressions, two sample points are identified as outliers. Removing outliers tis paper again re-estimates all te equations but qualitatively results remain same. Figure 4 sows te relationsip between income and trust in LDC and DC. Trust as no significant association wit GDP in LDC but as direct and significant relation in DC. Tis is explained teoretically in earlier section and grapically in Fig 1 in different way. Figure 4: Relationsip between Trust and GDP in LDC and DC. trust vs income 30 25 gdp 20 15 10 5 y = 0.1496x + 12.107 R 2 = 0.2214 y = -0.0098x + 4.7826 R 2 = 0.0022 LDC DC Linear (LDC) Linear (DC) 0 0 10 20 30 40 50 60 70 trust Fig 3 and Fig 4 clearly suggest tat scooling built up trust, wic generates income (gdp) in developed economies but not in LDCs. In under developed economies, scooling does not built up trust tat is indifference of scooling. Trust as no impact on income generation in LDCs. Our empirical findings suggest tat te social trust in people, civil rigts, social infrastructure and quality of life improve as uman capital develops troug scooling. 21

Tese social capitals ave definite impact on te income level as well as on te economic growt and development. Tus, tese empirical results support our model. 5. Policy Productive consumption sould be a good policy for te development of underdeveloped countries if it truly enances te uman capital of tat country. In LDCs, productive consumption is a crucial policy for development of uman capital tat concretizes social capital. Te policy makers sould focus tose forms of social capital, wic will noticeably improve te economic prosperity of distressed communities, and te economic inclusion of deprived, disadvantaged and marginalized individuals. Social capital can be created in a wide variety community based projects like business, sports and cultural development programme, or community networks, work for food programmes etc. Community development programs sould be te prime policy to develop face-to-face interaction among individuals and creates a setting of norms for development work tat elps to build up trust among temselves (Dowla 2006, Sabatini 2006). Tis builds a new level of social trust tat acts as collateral and solve te collective action problems of poor people (Dowla 2006). Te community development projects did raise (i) te confidence levels and feeling of well-being of te vast majority of te participants, (ii) improve te employability and (iii) employment opportunity of te participants. Tus, it also elps to grow a social culture in te community as well as in te economy. Briefly and specific few policies are suggested as given below: (i) Improve productive consumption providing nutritional intake to all te excluded people of te society. 22

(ii) Dismal te social blocking and create te base for bridging social capital formation. (iii)improve scool enrolment and strengten te feeling of togeterness (iv) Design scool curriculum as per need base (v) Develop institutions and improve capacity building 6. Conclusion Inclusive growt is concerned wit te overall welfare of te society. Te paper focuses on te process of expanding social and economic opportunities for all. Tis paper identifies and prioritizes te factor of inclusive growt and focuses on ways to raise te pace of growt by creating opportunities for all groups troug relevant social aspects. Tis paper explains te formation of social capital troug development of uman capital wic is generated troug productive consumption and examines its contribution to economic development. Te economic growt rate improves and overcome low level equilibrium trap troug inclusive growt process. As a result, social and uman capital rises. Overall economic growt rises wit accumulation of social and uman capital. Te prediction of te model is examined empirically for a cross-section of countries and as substantial support in te cosen sample data. More rigorous empirical investigations are needed in future for region/country specific policy formulation. Te lack of clarity on te policy options for inclusive growt needs to be urgently addressed. Policy maker sould focus on (i) building a sared understanding on te concept of inclusive growt, (ii) effectively address inclusive growt, especially issues of persistent exclusion and (iii) major policy actions for different stakeolders to promote 23

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