The World Bank and Social Capital by Juan Guerra

Hi, my name is Juan. Many years ago, I fundraised my way into university. I could have missed out because of money and that sparked a fire in me: I decided to dedicate my career to making poverty optional.

And so, as a young student, I started researching what tools could be used to tackle poverty. A powerful one I came across is social capital. I knew exactly how this could work, because it was what I used to get to university in the first place. I was never very academic, so please forgive the sloppiness of my writing, but this is a paper I wrote when I was 21.

Student Funder

A year later, I joined Citi’s SME Banking division in Mexico City, I later moved on to do microfinance and am now building StudentFunder, helping students do the same thing I did to pay for their studies, but now it is called crowdfunding. And actually, we have big plans to roll out a lending mechanism based largely on social capital, so watch the space!

The World Bank and Social Capital: Rural Development in Mexico

  • Akademia Ekonomiczna w Poznaniu
  • Integration of Polish Financial Institutions
  • Juan Guerra
  • May 13th, 2007


Pedro and Pablo are on top of a hill in a park right in front of their houses, each with a winter sled. However, their mothers, who were pushing them, are gone for a while. After a while of boredom, they approach each other and greet one another. Shortly afterwards, they make a deal: Pedro will push Pablo downhill, and then Pablo will do the same for Pedro. In this way they’ll both have fun while their mothers are gone.
Let us suppose that Pablo and Pedro did not know each other. Being both a little shy, it took them a long time to approach each other and decide to cooperate. This meant more costs for them in the form of boredom. If they wouldn’t have come to the agreement of cooperating together soon, or at all, their costs might also have been greater. What’s more, how could Pedro be sure whether or not Pablo would keep his promise and come to push him down once had done it for Pablo. Well, the calculated risk paid off as Pablo returned to do the same for his new friend. Not only where they happy about being able to sled downhill, but also about their acquaintanship.
This example illustrates how both Pedro and Pablo, together, could cooperate to achieve more than they could have simply achieved on their own. This means that they could achieve more working together, than the simple sums of their individual actions. Furthermore, next time they meet in the park, they can count on each other for playing with their sleds, which means less boredom while Mom is gone. By now they could have even have become friends (this outcome in a short span of time is exponentially likelier as one grows younger! ), and they could call each other to go and play together, so there would be no need for Mom (as mean as it may sound) to come along to the park anymore, leaving her some time for her own. What Pedro and Pablo may not know, is that while their mothers were gone, they made very important investments: They began an acquaintance, or even a friendship, a connection between them based on mutual benefit, reciprocity, trust and or goodwill. In time, Pedro and Pablo might become great business partners. Being friends since childhood, they know they can trust each other and work efficiently as a team. While their moms where gone, they invested in Social Capital.
Social capital, defined by Robert Putnam as the features of social organizations such as networks, norms, and social trust that facilitate coordination and cooperation of mutual benefit allow actors, in our example Pedro and Pablo, to mobilize greater resources and achieve common goals.

Social Capital and Economic Growth

It is given that some kinds of social capital contribute for economic and institutional development (Putnam 1993). The following section intends to provide an intuitive explanation of the role of social capital as an agent promoting economic interactions resulting on economic growth on the aggregate level under the theoretical framework of Transaction Costs, remarking what social perils relate to social capital, intuitively boarding the socio-economic situation in Mexico.
Trust is a most valuable element that contributes to the stock of social capital. Asking whether repeated transactions generate trust, or if it is trust that generates repeated transactions, would be like asking whether the egg came before the chicken or vice versa. Presumably, both are reciprocal concepts. Where trust is lacking, transaction costs may be higher, representing the risk for opportunistic behavior or moral hazard, and accounting for lengthier negotiations, reliance on formal contracts, or monitoring costs. In some industries investment in social capital is even determinant, as long term partnerships ensure survival and continuance for the partners engaged in business.
High transaction costs consequently inhibit economic growth, as actors refuse to engage in economic activities, averse to uncertainty and risk. In such areas, nonetheless, a subsidy might upset the balance of such costs, raising incentives between the actors of the market to engage in economic activities, which in time, may foster trust, and so enhance the accrued stock of the community’s social capital.
It is in the interest of the State and other institutions to provide security in these sectors of the economy, betting on trust bonding actors together as transactions are repeatedly conducted amongst them.
Institutions should be nevertheless wary of the following. Promoting social capital as such may be good for society as a whole, or only for a select group of people. The downside of social capital is that the same strong ties which are needed for people to act together can also exclude non-members, such as the poor (Portes and Landolt 1996).
The latter seems to have had a strong income distribution effect not only of Mexico, but many other emerging economies, such as Russia, where a close circle of society accounts for large shares of the country’s capital (social, physical), and many remain poor and segregated from society and the economy. This can be intuitively deducted from the fact that Mexico ranks 80th in the World with a per capita purchasing power parity of 10,560 , where one of the top five richest men in the World, Carlos Slim, has amassed his more than 7.4 billion Dollar fortune; and is home, however, to 104 million people, out of which about a half lives in poverty, around 43% of them being extremely poor.
Social Capital is not solely an issue of emerging economies. Patrick Hunout identifies an opposite process, in which social capital is not fostered by a dominant class but rather eroded in the rest of the society, emerging in developed economies. Hunout suggests the presence of a ‘New Leviathan’, constituted by the upper class of society seeking to build a new order based on less equality and less democracy, eroding social capital, developing economic flexibility and precariousness, and pushing forward individualist, hedonist, and consumerist values. Even though the topic is truly fascinating, the scope of the International Scope Review, based on Hunout’s model, escapes the topic of this paper.

Social Capital and the Poor

Despite the negative impact of exclusionary social capital in some societies, it has been recognized by the World Bank and other institutions as a form of capital readily available to the poor: Networks of trust and reciprocity are used by the poor as a readily available method of insurance, as they take care of their neighbors children, while parents are at work, police the local well, purchase farming equipment being in some instances critical to their survival. This falls under bonding social capital, which appears amongst members of a socially heterogeneous group.
Some scholars identify exclusion, which in turn may be partially attributed to stocks of bonding social capital in the Mexican dominant classes, as the real cause of persistent poverty, as segregation from the rest of society restricts the poor access to resources that the rest of the society enjoys. Efforts are made precisely to include those isolated from the mainstream resources of the community through the fostering of bridging social capital, following Putnam’s thought. Bridging social capital is that which networks members of socially heterogeneous groups together, such as choirs or bowling clubs.
Being available to the poor, social capital constitutes a powerful policy resource to foster economic growth and development, paradoxically providing a solution to the problem. As bonding social capital is a tool for survival, it is bridging social capital which can really provide a way out of poverty through the linkage of the resources of society to those most needy of them.
The overarching objective of the World Bank is to work with member countries to alleviate poverty and to contribute to their long-term economic and social development: Reforms within the World Bank
Failures in the past, led to questioning old economic premises and paradigms, and eventually to reforms within the World Bank. More interdisciplinary views where adopted for approaching the multifaceted affairs of social development. As a concept gaining rising consideration from scholars, social capital became a central component of the new, more comprehensive, World Bank policy. In the words of the World Bank’s Michael Woolcock:
Social Capital provides a fruitful conceptual and policy device by which to get beyond exhausted modernization and world-system theories and make potentially important contributions to questions of economic development. Social capital’s greatest merit is that it provides a multi and interdisciplinary approach to some of the most pressing social issues of our time.

The World Bank and Social Capital

Social capital is integrated into the work of the World Bank in three areas: participation, policies and partnerships.


“The effectiveness and accountability of community-based organizations is seen to be due in part to local decision-making and participation.”  Ensuring so, that members from the community become engaged with the project and provide continuity to it, once the development agents from the aiding institutions are gone. Furthermore, this form of subsidiarity empowers local project managers to adapt the project to the specific situation of the community. “Accordingly, the World Bank in recent years has begun to employ participatory methods of research and data collection to elicit new information for understanding poverty as it is experienced by the poor.” (Narayan 1997)
In that sense the practice of project implementation remains a decision of the local organizations and feedback concerning the vicissitudes of such, as well as the circumstances of the poor, flow bottom up. In plain terms, no longer will scholars decide what is wrong with the poor, but it is left to them to inform what problems they face and propose solutions to them. Implementing “participatory techniques leads to different conclusions about the causes and nature of poverty and reveals the policy and institutional choices that can best address the problem.” (Serageldin 1997). The World Bank incorporates these insights into its world wide development know-how. What’s more, not only do participatory processes provide a measure of social capital, but they are the means to build social capital over the long run.


The World Banks policies are strongly influenced by Christiaan Grootaert’s Social Capital: The Missing Link (1998), which highlights the potential roles of donors as related to social capital:
‘Do Your Homework’ and ‘Do no Harm’: Identify existing pockets of social capital and take care not to destroy them by disabling partnerships and breaking down social cohesion.
Use local-level social capital and participation to deliver projects: For example, a cooperative credit system may function more smoothly among women who already have relationships and a history of networking together to reach common goals. Subtle skill is however required in order to identify such groups.
Create an enabling environment: for social capital to thrive by providing infrastructure which helps people to communicate better and promoting rule of law which provides opportunities for recourse if partnerships or associations go awry. In some cases, mobile technology has provided an infrastructure leap in many rural societies, where telephone lines are missing. As to what concerns the rule of law, let measures of social coercion be understood as a means to control for opportunistic behavior, which gain central importance there where the judicial system fails. This last example can be illustrated by Chinas famous Mr. Wong, who drives around town on a motorcycle wearing a vest with the inscription ‘chasing debt’ and recurs to public shame, by sounding a gong in front of the debtor, publicly shaming him and forcing him to pay, in a society where law enforcement is weak and the value of one’s reputation is high.
Invest in social capital directly and indirectly through participatory project design and implementation and fostering cross-sectoral partnerships for development, becoming more and more common as a multidisciplinary approach is taken towards tackling poverty. The Grameen Bank, for instance, carries on development projects ranging from micro-crediting to infrastructure provision, where an effective fight against poverty can only be accomplished by comprehensive multifaceted action present on several fronts of action. This links different groups of experts, and people belonging to different groups in a common cause, generating what we identified earlier as bridging social capital.
Promote social capital research and learning: As much of the content of this paper had been long ignored or neglected by economists, technocrats, managers, and policy makers, the need for scientific studies and a deeper understanding of the topic is now as great as the interest that recently aroused, as more and more specialists realize that older economical paradigms provide no satisfactory answer to many grave issues of our time. Two such efforts are fully under way at the Bank, the Social Capital Thematic Group and the Social Capital Initiative.


“Helping the world’s poor has to be a partnership”  In the fight against poverty “we are building stronger partnerships with other players in the development business, focusing on the comparative advantage of each.”
Recognizing that networks and partnerships have the potential to accomplish more than the sum of their parts, the World Bank is engaged in an array of partnerships with a set of diverse actors working towards poverty reduction.
“Partnerships must be inclusive and straddle the main categories of development actors“ governments, private sector, civil society, and aid agencies.” (Partnership for Development: Proposed Actions for the World Bank, The Partnerships Group, 1998.) Such partnerships provide for continuous participation from a wide range of players, making development projects sustainable.

World Bank Development Projects: Lessons from Mexico

Mexico has been a distinct partner of the World Bank for decades. Their mutual cooperation has yielded positive results in the field of poverty reduction, and has produced much knowledge related to the topic. The following section of this work, intends to assess some lessons concerning social capital issues involved in some World Bank projects for rural development in Mexico carried out between the years 1994-1997.
Among other things, these assessments evidence how World Bank loans can not guarantee results if not paired with case specific refined subtlety to allocate the money and design the policies in the most widely impacting fashion. Special revision of World Bank projects is taken through the scope of the three-way Partnership between the World Bank, the State, and civil organizations, as well as through the perspective of pro-social capital environment creation.

World Bank projects

Indicators of social capital

Varied bargaining power amongst reformers produced outcome variation

Variation was the norm in even the most promising projects. The patterns seem to confirm that those projects endowed with funds aimed at implementing agencies dominated by pro-social capital managers performed better. Furthermore, variation appeared even within the same project implemented in different regions, where managers attitudes towards autonomous organizations and regional variation on scaled up social capital are identified as the main reasons.
The Community Forestry Project directed funds towards agencies containing powerful pro-poor project managers. This converged with World Bank staff deviating from their main tasks to build inter-sectoral social capital with other reformists within the state as well as civil society. Its positive results confirm that pro-social capital policy makers perform better than those who are not.
Key institutional obstacles and opportunities were found in regional configurations of power. It is no surprise to reformers from Mexico or the World Bank that rural elites might oppose power-sharing and participation by the organized poor, nevertheless, project managers tended at most to react to these along the project implementation process, rather than have designed an ex-ante incentive aligning approach, taking local elites into account. This denoted, in simple terms, how policymakers from Mexico and the World Bank underinvested in enabling institutional environments for social capital.

Policies failed to integrate ethnic and gender dimensions

Only the Community Forestry project took serious ethnic differences into account, while Rural Development in Marginal Areas seemed to have excluded consolidated indigenous producers (Fox and Gershman, 1999) apparently due to politization of the project from local authorities. None of the projects included gender perspective. This follows the dull pattern of the World Bank to conceive women solely as mothers, rather than as economic actors (Buvenic, Gwin and Bates 1996). Indeed, organized rural women in the state of Oaxaca pressed to be included in the program.

The State is too broad a term: it must be unpacked to support enabling environments

The three-way partnership between the Bank, government agencies and civil societies must be enhanced by horizontal and vertical unpacking of the state. At the national level, the Treasury Ministry played a central role in the implementation of the projects, as it the national legislatures lack of oversight over the executives resource allocation, provides national authorities (currently run largely by technocrats) extensive autonomy.
The vertical unpacking of the state involves decentralization, empowering local authorities with implementation tools. The theory is that such decentralization should bond the government and the governed. The empirical experience, however, showed that most relevant pro-social capital initiatives came from national agencies dominated by reformists, meaning that the challenges of local democratization and capacity-building were underestimated. This requires revising policies to take incentive compatibility and cultural embeddedness into account.

Policy implications

Based on the previous findings, four main implications may be suggested in order for policies to more successfully support enabling environments from pro poor social capital.

Invest where reformers already are to reinforce a pro-social capital environment

The lessons from Mexico concur with previous findings of the World Bank (1999): foreign aid delivers the greatest impact where institutions and policies (second level embeddedness) are right. Indeed, local governments and national agencies are relevant subjects of analysis. Particularities of these regions should not be underrepresented by analysis regarding nation-states as a homogeneous unit of study. This gains considerably more relevance in multi-ethnical, religion and socio-economically diverse societies such as in Mexico. Assuming institutional homogeneity may neglect attention to promising pro-reform enclaves. As stated exposed by the analysis of our cases, it was variation in commitment to pro-social capital reforms within the state that explained the variation of environments and the best results were achieved by projects were funds were facilitated to agencies already in control of pro-participation reformers such as the Secretara del Medio Ambiente (Environment).

Investment of political capital during the design phase is necessary

Only such investment within the World Bank, state actors and civil players may provide an operative defense against the enemies of power sharing with poor people’s organizations inserted within all three arenas. Continuous monitoring should aim to hinder attempts to derail projects. Monitoring, in turn, should best be bottom up participatory, voluntary work, consequence of social capital empowering the organized poor to watch for their own interests, and a result of the encouragement and the adequate resources put at disposal of independent civil bodies.

Building pro-poor social capital may expect conflict with threatened interests

To this purpose, shared norms and consensual understandings should be negotiated, on the basis of consensus. This is expected to encounter increasing opposition as income and power are distributed amongst a decreasing number of individuals. This has been a reason for policymakers to promote a society based on a relatively homogeneous large middle class able to achieve consensus at the lowest possible cost in terms on time and other resources.  Unfortunately, many countries receiving aid from the World Bank exhibit higher levels of inequality. It is no mystery that redistributing power from higher concentration to poor people’s organizations will raise conflict between state and social actors, particularly under a framework of high disparity.
Pro-social capital strategies should work to weaken, avoid or neutralize such obstacles from the beginning, launching the virtuous cycles (Putnam, 1993) that promote social capital accumulation (Fox 1996). Otherwise, reforms will be entrenched in continuous defensive battles, minimizing losses, rather than maximizing gains. World Bank staff may provide encouragement to pro-poor social capital reformers by creating a collective conscience, to overcome frustration and isolation. Macroeconomic technocrats, for instance, are said to possess a certain espirit de corps .

Social capital requires support strategies adapted to its different levels of concentration

This last, fourth policy implication involves civil society and the uneven distribution of social capital. Differentiated investment strategies concordant with ethnic and gender differences should seek potentially strong civil partners, at the expense of weaker ones. Eventually, a spill-off effect may deliver benefits to neglected groups. “If development investments are to tap social capital, they must be understood as institutional change strategies.”

Conclusion: Social Capital as a Policy Resource

Out of 5 projects, only Community Forestry had a significant pro poor impact which could contribute to the accumulation of scaled up or intersectoral social capital. Here, the reformist policymakers invested their own political capital in order to generate social capital in a form in which it could be deployed as a policy resource.
Most cases showed, however, that managers either ignored or attacked existing forms of pro-poor social capital. In the case of Rural Financial Markets, policymakers tried to strengthen private commercial banks, rather than financial organizations from the community. The Rainfed Areas Poject required producers to present their applications in organized groups (World Bank, 1994 p.13). Nevertheless, institutional mechanisms for coordination with the producers were not created (Adelson 1999).
Pro-participation policymakers often lack enough political tools for starters. They need social actors to mobilize in their support. These actors might have their reserves as to what concerns backing innovative policies. For a mutually reinforcing coalition to emerge, each player must invest under a high degree of uncertainty regarding the commitment, capacity, and intentions of their potential partners. In such a scenario, trust plays a central role.
The Rural Development in Marginal Areas project proved to be an educational experience for the World Bank, starting with seemingly promising odds, and failing to deliver result in the end. Initially, a high level of trust and communication existed between the World Bank project manager and the participating social organizations and NGOs in the relatively densely organized state of Oaxaca. In an unfortunate turn of events, the project manager moved elsewhere and the design of the project failed to take key recommendations form civil society into account. Years went by, as the launch of the project was frozen. The intersectoral social capital created during the project’s designing phase, was consumed, rather than invested.
The example also underscores the need for the State and the Bank to achieve trustworthiness, taking measures aimed to generate trust and committing only when compliance is possible. Only in this way will negative prophecies which fulfill themselves be substituted by positive ones. If initiatives are met by a wary society, skeptical of engaging into government programs, only a few will engage in pro-participation projects. This in turn, might not grant the initiative enough strength to offset opposition at every level, including that from within the World Bank. Should the opposition prevail, those skeptical will see their suspicions confirmed, and those engaged will be disappointed. The final result is a scenario worse than the initial one, with a higher level of distrust and eroded credibility for the Bank and the state. It is therefore crucial to provide for the credibility of the project during the design phase and to invest in state-society partnerships.
World Bank know how already provides guide to avoid the problems encountered during the implementation of the Mexican projects. In praxis, however, they are not always followed due to case peculiarities and their one size fits all approach (lack of specificity), excessively high aims (resulting in disappointment for the parties involved) and political opposition, as proven by our examples. Nevertheless, we can remain optimistic, as the World Bank has recently exhibited trends of change, reform, and adaptation to the more subtle œreal world, complementing, modifying, and disregarding old economical paradigms. At the pace Woolcock and other World Bank champions are working to integrate lessons from fieldwork and other knowledge emerging from different disciplines, we can expect the lessons from Mexico to be contemplated in the next World Bank projects.

Printed Sources:
1. Andelson, N. (1999). ˜The Rainfed Areas Development Project: An assessment of World Bank Reforms in Action Mexico City: Trasparencia
2. Fox, Johnathan and Greshman, John. The World Bank and Social Capital: Lessons from Ten Rural Development Projects in the Philippines and Mexico. Netherlands. Kluwer Academic Publishers. 2000
3. Grootaert, C. (1997) ˜Social Capital; The Missing Link? in Expanding the Measure of Wealth: Indicators of Environmentally Sustainable Development. Washington. World Bank. Environmentally Sustainable Development Studies and Monographs, Series No.17, June, pp. 77-9
4. Michael Woolcock, (1998) ˜Social Capital and Economic Development: Towards a Theoretical Synthesis and Policy Framework Theory and Society 27 151-208
5. World Bank (1994). ˜Mexico: Rainfed Areas Development’ Project Washington: World Bank Staff Appraisal Report No.12533-ME, June 15
6. World Bank (1999). Assessing Aid. Washington: World Bank.
Electronic Sources:
1., 8th of May, 2007.
2., 8th of May, 2007.

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