Caste and Bind
Caste and Bind
How Social Capital can impede economic mobility.
Beneath the aggregate metrics that we associate with economic development, individual people and households strive daily to make a better living and life. A country is said to be doing well in development when an increasing share of the population is experiencing improvements in the things they do like their jobs, businesses, and other subjective measures of well-being that matter to them. The role of public policy (narrowly defined) is to try to solve the collective action problems that prevent development in a country.1 These problems may take the form of bad trade, fiscal, and other regulatory policies - or they may be deeply embedded problems like demography and geography which require coordinating public and private investment for development. Governments are judged on their degree of success in addressing collective action problems of development.
But while many problems that can be solved by public policy are easily identifiable - I have noticed that the problem of economic mobility is easily overlooked. Economic mobility simply refers to the ability of people to move from a previous economic (usually income) state to a relatively better one. An expanded definition of the concept of mobility refers to the ability of a younger generation to surpass the preceding generation on measures like income, education, and other achievements. This is what is commonly called Intergenerational Mobility.
Economic mobility is positively correlated with development - so when an economy improves its development indices, mobility also improves. However, an economy can be stuck in a low-development equilibrium and poverty trap for so long, such that simply undoing bad policies might not do much for mobility. A 2018 World Bank report said that mobility has stalled in many economies in the developing world:
The ability to move up the income ladder, both in one’s lifetime and with respect to one’s parents, matters for fighting poverty, reducing inequality, and even for boosting growth. Yet, mobility has stalled in recent years in large parts of the world, with the prospects of too many people across the world still too closely tied to their parents’ social status rather than their own potential, according to the findings of a new World Bank report launched today. Mobility is also much lower, on the average, in developing economies than in high-income economies
The direct economic cost of poor development performance to people can be easier to observe and can be improved in the short-term by some ‘’big push’’ public policy moves. However low economic mobility can become sticky and difficult to fix because of other factors like level of education, skills, and social capital.
Social Capital and the Connection Economy
Social capital, broadly defined, describes mostly informal networks of relationships and social connections (e.g. ethnic, religious, clubs, etc.) that individuals possess. The strength and diversity of these social ties usually determine a person’s stock of social capital - and can significantly impact access to opportunities, resources, and even information that is not common knowledge. Those with robust social capital can accrue benefits like job referrals, preferential deals, regulatory access, or ultimately capture governments. This can propel them up the economic ladder - and conversely, those lacking social capital may find it challenging to navigate the same playing field. Therefore, the accumulation and cultivation of social capital can constitute an advantage for how quickly some people rise and succeed over others.
Many Nigerians today believe that the biggest contributor to achieving success is not knowledge and skills, but rather your ‘’connection’’ - a euphemism for your place in the socioeconomic ranking or how close you are to the highly ranked. How connected you are can determine a lot of things from getting a job, regulatory approval for your business, fair hearing in a court, to whether or not the police decide to harass and extort you. Connection in the sense that Nigerians use it can be thought of as social capital. We can get a sense of how it works from Feyi’s piece on the founding of GTBank:
It turned out you needed a lot more than money [to start a bank] in those days. You needed to be born into the right family, go to the right schools and make the right friends while you were there. They managed to convince 42 investors to back them - it seems that more wanted to join and they ended up being able to pick and choose who they wanted. An interesting illustration of this is that at a time Nigeria was under military rule with perhaps the most openly corrupt military elite the country has ever seen, they managed to avoid military men (serving or retired) on their board. They, however, got some prominent (at the time) politicians to back them. It is fair to say they managed to put together a convincing idea that won over investors.
This may seem like an atypical example. After all, the majority of the population is not interested in starting a bank hence the GTBank example is just an outlier that does not describe the common economic dynamics. Indeed, one must be careful in drawing such conclusions, especially given the challenges of good data and measurement in developing countries.
Social capital also does not mean that successful people do not work hard, have difficulties, and therefore do not deserve their success. What it means is simply that in a country with a poor development performance - and thus offers a very small opportunity space for people to thrive - the family you are born into, who your friends are, the neighbourhood you were born in, the schools you attended, and all such related measures of social capital will matter a great deal for the chances of moving up the economic ladder.
Recent research led by economist Raj Chetty using data collected in the U.S. found that the most important and consequential (for upward economic mobility) measure of social capital is “economic connectedness” - which is defined as the reach of an individual’s friendships across the lines of socioeconomic class. They reported some interesting related findings. For example, people are most likely to make friends with people of similar socioeconomic status - especially at the higher end of socioeconomic ranking. Another example is that rich people mostly make friends with their college classmates while poorer people make friends mostly with neighbours. Again, it is easy to dismiss studies like these as only relevant in developed economies. However persistent poverty, smaller opportunity space due to lack of growth, and high socioeconomic inequality in economies like Nigeria strongly suggest that the influence of social capital on mobility might even be bigger. Many people have openly reported their success was due to chance encounters with rich and powerful people - also praying and networking to improve your chances of such encounters is a far too common sociological phenomenon.
Permissionism and the “Licence Niger”
Improving economic mobility is not easy - although research on social capital does indicate that some policy defaults to help the poor may not be helpful in the long run. For example, an “affordable” housing policy that groups people of similar socioeconomic status in the same neighbourhood may not be a good idea - and urban planning should adopt a mixed-income housing policy. In a similar vein, policy interventions on education should also aim to improve the ability of parents to choose where their children go to school.
But one thing that is noteworthy here is that social capital can become a “race to the bottom”. Even for high-income and middle-class households, the importance of social capital can be very costly. You do not only have to live in a great neighbourhood, and send your children to the best schools - you also have to provide them with the right connections. Policies designed to improve the economic mobility of poor people by trying to improve their social capital can be costly and fraught with many unintended consequences. In many developing countries (including Nigeria), social capital perpetuates inequality and worsens mobility through the government and how it regulates the economy. When a lot in the economy from small-scale retail to high-tech innovation depends on whether or not the government will allow it to thrive, then your connections become very important.
It is important to make a distinction here. The reason for economic regulation through government institutions is because of negative externalities. Someone has to ensure that a chemical plant is not poisoning the water supply, that a digital app is not secretly collecting people’s private information, or that a group of producers is not colluding to fix the price of a commodity. Preventing private economic activity from causing public harm is vital and justifies the need for regulations. But it is different from what Indian economist Kaushik Basu called ‘’a culture of permissionism’’ - where the regulatory philosophy of the government and bureaucracy is motivated by the power and ability to choose who should thrive. The resulting business environment from this philosophy creates strong incentives for extracting rent by the government and state capture by businesses.
Nigeria very much fits this mode. No matter what you do, whether you are selling onions by the roadside, or building an automobile factory - there is someone in a government office somewhere with a piece of paper that can determine your fate. New rules are written not to stimulate innovation and investment but to block them, and to entrench the bureaucratic power of licence. If the orientation of the government is not to respect the economic rights of its people, then social capital becomes a very valuable currency for success.
To improve economic mobility in poor countries, there has to be economic growth that is inclusive and transformative. When growth is unequal, mobility stalls, and social capital becomes highly important in how people succeed. This tends to favour the rich because they have a more valuable stock of social capital. Designing policies to improve the social capital of poor people can work for specific purposes. However, it is more critical to change the governance culture to be more helpful and respectful of the economic rights of poor people. This will certainly revitalise growth and inclusion.
Collective action problems here refer to efforts to align different political players and interests in order to focus governance on economic development.