Social Capital, Creative Destruction and Economic Growth

Abstract

This paper provides an analytical framework to capture the economic importance of social capital for growth and innovation. Relational Capital (RC) consists of contacts between economic necessary to acquire inputs and to sell outputs units. These contacts form the individual aspect of social capital that is directly productive. Replacement of old contacts by new ones is part of Schumpeterian creative destruction leading to technological progress. Because informal social networks facilitate the search for contacts, many empirical studies find that social networks supports income generation and innovation. Market institutions enjoy increasing returns to scale in aiding contact formation compared to informal social capital networks. For growth rates in developing countries to increase, a 'fundamental transformation' from informal to formal search institutions is therefore required. But since RC replacement carries a negative externality, creative destruction and technological progress may be punished if it threatens political elite interests. Growth experiences in transition and developing countries are interpreted in this framework.