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Sarracino, F. (2010). Social capital, economic growth and well-being. Ph.D. Dissertation in Policy and Economics for Developing Countries at the University of Florence, Italy.

Background and motivation

In recent years the public and scientific debate has paid considerable attention to subjective well-being. The number of scientific articles, conferences and journals dealing with people's well-being increased significantly. The media, from magazines to TV shows, have always been ready to report the latest and more intriguing discoveries emphasizing the implications for people's lives. This debate became so relevant that Governments, international institutions and political organizations started wondering how to coin this knowledge into clear guidelines for better societies. For example, in 2007 the European Commission and other organizations hosted a conference titled “Beyond GDP” leading – two years later – to the institution's commitment to improve Europeans' quality of life (European Commission, 2009). The French Economic Commission directed by Stiglitz, Sen and Fitoussi (2009) published a report recommending the development of indexes of well-being to supplement the more commonly used income-based measures. Similarly, in 2011 the OECD launched the “Better Life Initiative” to bring together internationally comparable measures of well-being to inform about how well people are doing in modern societies (OECD, 2011).

The information underlying the whole debate can seem trivial for it comes from a very simple question: in the course of surveys, people are asked to evaluate their lives as a whole. Usually these questions ask directly the respondent to state how happy or satisfied with his/her life he/she is (van Praag et al., 2003).

The studies on subjective well-being became so popular attracting so much attention because these measures are reliable sources of information on individual's well-being and provide interesting insights about modern societies (Blanchflower and Oswald, 2004a; van Reekum et al., 2007; Schimmack et al., 2010; Kahneman and Krueger, 2006; Layard, 2005). These measures have been applied in various domains – from macro to micro-economics, from policy evaluation to the study of unemployment, from the analysis of political institutions to the study of ageing, gender and marital conditions – unveiling interesting stories (Alesina et al., 2004; Diener et al., 2009; Clark and Oswald, 1994; Frey and Stutzer, 2006).

One of these stories concerns a crucial point for modern societies: the relationship between money and well-being. Does economic growth make people happier over time? Contrary to the common belief that stronger economies are the key to better lives, the available evidence suggests that economic growth does not significantly improve people's well-being (Easterlin, 1974). Although this finding – commonly referred to as the “Easterlin paradox” – has been challenged (Sacks et al., 2010; Stevenson and Wolfers, 2008), other recent studies have provided further evidence corroborating the existence of the paradox (Becchetti et al., 2011; Bruni and Stanca, 2008; Easterlin and Angelescu, 2009; Easterlin et al., 2010).

In other words, modern societies shouldn't expect significant improvements in people's well-being from economic growth. Adaptation and social comparison theories are the main mechanisms provided to explain the paradox (Blanchflower, 2008). These theories rest on the idea that subjective well-being is negatively affected by the level of one’s income aspirations (Loewenstein and Ubel, 2008; Truyts, 2009). Aspirations may depend either on one’s own past income (adaptation) or on the income of one’s own reference group (social comparisons). These well-established theories explain why economic growth does not improve subjective well-being over time. However, it is now clear that subjective well-being follows different trends across countries: in some cases people's well-being has been steadily improving, in some others it has been decreasing, still in others it has been first increasing or decreasing to finally stagnate (Inglehart, 2009; Sarracino, 2010 and 2011, Stevenson and Wolfers, 2008). Hence, what does explain the trend of subjective well-being and its differences across countries?

Recently, a new stream of research proposed a promising answer to this question pointing out the importance of social capital (Uhlaner, 1989; Helliwell, 2002; 2008; Bartolini et al., 2011). Consistently with the definitions provided by Putnam (2000) and the OECD (2001), these studies define social capital as “networks together with shared norms, values and understandings that facilitate co-operation within or among groups” (OECD, 2001, p. 41). Unfortunately, the analysis of the relationship between social capital and subjective well-being is still in its infancy. Much of it still relies on cross-sectional data and doesn’t account for unmeasured individual characteristics. Because of the quality of data, it is hard to provide a broad, strictly comparable cross-national evidence on the role of various determinants, including social capital, of subjective well-being. Because of the nature of the two variables, it is hard to clearly state the causality nexus between social capital and subjective well-being. However, recent analyses suggested that the link between at least some forms of social connections and subjective well-being is causal (Becchetti et al., 2009). A further problem is the scarcity of information about the trends of social capital. This topic has been widely studied for the US, but we don’t know much about what happened to social capital trends in other countries (Adam, 2008; Morales, 2004).

My research aims to explain what determines the long-term changes in well-being across countries. I test the hypothesis that social capital is a major predictor of well-being. Using micro and macro data from various data-sets, I answer my question in four steps: 1. checking whether the determinants of subjective well-being differ across countries; 2. testing whether international trends of social capital and subjective well-being are consistent; 3. analysing the role of social capital as a predictor of subjective well-being trends at a micro-level and 4. checking whether social capital variations predict long-term subjective well-being changes in nations.

The happiness equation

The various theories have been proposed to explain what really makes people happy or satisfied with their life, but they mainly focus on developed countries. This is mainly because richer countries have longer and reliable data-sets allowing such analysis. Nonetheless, data on individual's subjective well-being became more and more available also in poorer countries. Recently, this debate has been revived by Layard (2009) who, criticizing Deaton's conclusion that only income matters to happiness, contended the assumption of a universal ``happiness equation''. This topic has been longly debated in the literature and still there is not a broadly accepted consensus, although the vast majority of the studies suggest that people have similar preferences.

One of the best data-sets to deal with this question is the World Values Survey – European Values Study (WVS-EVS)1 that now collects information on individual perceptions for a great number of countries from all over the world. This makes WVS a precious instrument to perform a cross-country comparison on the determinants of well-being. In particular, I test whether the determinants of well-being proposed in the literature have the same role in various economic contexts. In other words, I am asking whether income, positional and relational goods and social capital play a different role for subjective well-being in rich and poor countries.

Answering this question is very important for at least two reasons: 1) studying international differences in subjective well-being implicitly assumes that people have similar happiness equations across countries, but on this point economic literature still didn't find any agreement; 2) testing the role of different determinants of subjective well-being in low income countries can have notable effects on these economies. For example, it may allow a better evaluation of the effects of development policies and, above all, it can be useful to identify new and more socially and environmentally sustainable development policies.

Using both cross-country and Blinder-Oaxaca decomposition techniques, my results suggest that subjective well-being in poor and rich countries is shaped by similar preferences. In particular, social capital - as proxied by membership in voluntary organizations and time spent with various groups of people - is positively correlated with subjective well-being across countries.

Social capital and subjective well-being trends: comparing 11 western European countries

The What do we know about the trends of social capital across countries? We know much about what happened to the US, but the evidence about other developed countries is scarce. Moreover, we don't know much of what happened to subjective well-being trends either. Stevenson and Wolfers (2008) inform that western European countries experienced either a growing or stable subjective well-being trend, whereas the declining trend of American well-being has been found consistent with the declining trend of the American social capital (Putnam, 2000 and Bartolini et al., 2011). Hence, I ask the question: “how is social capital performing in western European countries?” My aim is, first, to test whether social capital erosion is a general trend of modern societies or if it is rather a characteristic feature of the American one. By answering this question I also contribute to the literature on social capital defining the trends of 4 groups of proxies of social capital. Secondly, I test whether social capital trends are consistent with subjective well-being trends. I adopt World Values Survey – European Values Study data collected in eleven western European countries2 between 1981 and 2000.

Using four different sets of proxies of social capital - Membership in groups or associations, performing voluntary work, trust in others and confidence in institutions - , I find evidence of a positive relationship between social capital and happiness. Figures suggest that the trends of social capital across western Europe are positive. This is true for Germany, Denmark, Sweden, Norway and Finland as well as for Netherlands and Belgium. To a lesser extent, also France, Italy and - in part - Ireland seem to have experienced a rise in social capital. The most notable exception is the United Kingdom which, on the contrary, experienced a steady decline in social capital. In this case basically all the proxies of sociability are declining meaning that, between 1980 and 2000, Great Britain experienced an erosion of social capital.

What about the trends of subjective well-being? Most importantly, the trends of subjective well-being are typically concordant with the trends of social capital: subjective well-being increases in every Western European country with the sole exception of Great Britain, where subjective well-being is strongly decreasing. Remarkably, these results are strongly robust to the inclusion of a broad set of control variables such as: age, sex, marital status, number of children and education.

Even if this evidence is essentially descriptive, it leads to two considerations: 1. cross-country differences in social capital trends are compatible with the international differences in subjective well-being trends; 2. while in most parts of Western Europe both subjective well-being and social capital have increased, in the US and Great Britain they have either stagnated or decreased.

Sociability predicts happiness in nations: some world-wide evidence

Can social capital trends predict the international variability of subjective well-being trends? To answer this question, I adopt the same techniques for the correlation of time-series set up by Stevenson, Easterlin and their collaborators to test the correlation between subjective well-being and GDP over time (Stevenson and Wolfers 2008, Sachs et al. 2010, Easterlin and Angelescu 2009, Easterlin et al. 2010). However, these techniques have never been applied to analyze the correlation over time between subjective well-being and social capital.

The analysis is based on a sample of developed and developing countries for which long time-series on social capital – as proxied by individual participation in groups or associations – and subjective well-being are available. Data are drawn from the WVS-EVS and refer to the period 1981 – 2007. Results are remarkable: the same methodology bringing to the conclusion that in the long run subjective well-being is unrelated with economic growth, documents that well-being is strongly related with social capital in developed countries, developing countries and all countries together. Put it differently, this result confirms that in the long run the trends of social capital are a strong predictor of the long-term trends of subjective well-being.

Does this macro evidence hold also within countries? The analysis of the determinants of subjective well-being and, in particular, of the role of social capital to explain the overall variation of subjective well-being is explored in more detail using individual panel data from the German Socio-Economic Panel (SOEP)3.

Predicting the life satisfaction of Germans: the role of sociability, comparisons and adaptation

Does the trend of social capital predict the trend of subjective well-being also at a micro level? And how much do other explanatory factors – such as income growth, adaptation and social comparison – matter?
To answer this question I turn to the SOEP, one of the main sources of evidence on the relevance of adaptation and social comparisons (e.g. Ferrer-i-Carbonell, 2005; Vendrik and Wojtiers, 2007; Clark et al., 2008; Layard et al. 2009) as well as a source of data on social capital. Indeed the SOEP has been also used to provide some evidence of the causal relationship between social capital and well-being (Becchetti et al., 2009). Moreover, SOEP's panel structure allows to control for individual fixed effects and for adaptation, two aspects that cross-sectional data used in previous literature prevent to account for. Thus SOEP is an ideal database to quantify how much social capital, income growth, social comparisons and adaptation account for the trend of subjective well-being.
The results inform that between 1996 and 2006 German subjective well-being trend is largely predicted by changing in income, social capital, adaptation and social comparisons. In particular, the moderate increase in social capital accompanied a moderate increase in subjective well-being. Substantial income growth resulted in a substantial increase in subjective well-being, but the overall effect is very small because the effects of adaptation and social comparisons wipe out the benefits of income growth. Hence, social capital is the main explanatory factor of the trend of German well-being. This causal interpretation is further confirmed by two tests of causality in which, first, the past individual social capital and, second, the level of social capital available in the region where the respondent lives are used to predict current subjective well-being.
idea that economic growth improves the human condition shaped the modern economic, social and cultural order. However, recent research has shown that – at least in the long run – developed countries shouldn't expect substantial increases in well-being from economic growth. On the contrary, they should rather re-orient their efforts to increase well-being towards some other aspects. My research shows that social capital explains the trends of subjective well-being both across and within countries. Obviously, we need


The idea that economic growth improves the human condition shaped the modern economic, social and cultural order. However, recent research has shown that – at least in the long run – developed countries shouldn't expect substantial increases in well-being from economic growth. On the contrary, they should rather re-orient their efforts to increase well-being towards some other aspects. My research shows that social capital explains the trends of subjective well-being both across and within countries. Obviously, we need further research to provide some definitive evidence on this topic, still the implications of this study for economic policies are relevant. If social capital is important for people's well-being, economic policies should take into account their effects on social capital: specific policies could be enacted to preserve or enhance social capital; the way many existing institutions are organized could be reconsidered to support the creation and promotion of social capital among their stakeholders. New scenarios are available for policies aimed at increasing well-being: urban organization, educational system, labor market and health systems are only a few examples of the fields in which re-considering the role of social capital can significantly improve people's experience with their lives.

1 www.worldvaluessurvey.org and http://www.europeanvaluesstudy.eu

2 The list of countries includes: Italy, France, Netherlands, Belgium, United Kingdom, Ireland, Germany, Denmark, Sweden, Norway and Finland.

3 http://www.diw.de/en/soep


Sarracino, Francesco

I am an economist collaborating with the national institute of statistics of Luxembourg, the GESIS - Leibniz Institute for the Social Sciences and an associate member of the scientific network of the Laboratory for Comparative Social Research – Higher School of Economics, Russia. My thesis...


University of Florence, PhD programme in Development Economics

The PhD programme in Development Economics is a curriculum of the University of Florence's PhD in Economics. It aims at providing students with the methodological tools necessary to analyse the social and economic structures and political institutions of developing countries, their evolution...

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