Social Capital and Corruption Incorporated

Social capital or simply trust is a source of competitive advantage. Transaction costs are high in low trust societies working as constraints on investment and economic growth. The level of generalized, as evidenced by results of the World Values surveys, is low in Pakistan. Low social trust is primarily a function of low economic growth, widespread poverty and inequality, lack of credible commitments, corruption, and poor governance. The data of the World Bank’s governance indicators of selected countries is analyzed. The results suggest that Pakistan is very low on all the variables of governance and has been persistently low for decades as confirmed by time series analysis of governance indicators. Other international reports also give a similar depiction of governance in Pakistan. The relationship between corruption (a proxy for bad governance) and economic growth is explored. It is suggested, in the light of empirical studies, that corruption works as a big constraint on economic growth. Its impact on the growth of existing firms is more detrimental than that of a tax due to the element of uncertainty. Moreover, corruption restricts the entry of new businesses into the market and discourages entrepreneurship. The paradox as to why some countries witnessed high economic growth despite widespread corruption is discussed by deriving insights from the studies undertaken on the subject by Professors Pranab and Ang. Corruption is discussed as an economic problem and insights from the economic literature are derived to tackle it. The role of competition, transparency, and accountability are in particular discussed, in the light of empirical literature, for curbing rent-seeking and improving governance.