Institutional Performance and Social Capital: an Application to the Local Government Level

A large and growing body of research is devoted to the effects of social capital on institutional performance. This literature reveals that societies characterized by higher levels of social capital tend to achieve superior performance. Still, enquiries to date predominantly concentrate on country-level data or large sub-national units. The primary purpose of this article is to extend the empirical work to the local government level, while retaining the use of objective data to gauge institutional performance. This use of local data has the advantage of increasing the data set available and provides a more stringent test of the effect of social capital because social capital is likely to vary less at lower levels of government. The results—based on an empirical analysis of 305 Flemish municipalities in 2000—support the view that social capital leads to government (out)performance also at the local level of government. In recent years, substantial academic interest in social capital has developed. Although the exact definition and measurement remain elusive, it is by now widely acknowledged that the presence of dense networks of formal and informal associations and the accompanying norms of generalized trust and reciprocity represent the core of the social capital concept. Importantly, just as human and physical capital, social capital has been brought forward as an important resource available to societies. It has an important influence on the performance of societies at the economic, social, and political levels. Societies high in social capital are expected to outperform those low in social capital. The reason is that social capital allows people to overcome collective action problems more effectively and at lower cost, resulting in a better overall performance. Putnam’s (1993) Making Democracy Work has propelled the issue of social capital to the front stage of the social sciences. In this work, he has shown how the regional governments in the more trusting, more civic-minded northern and central parts of Italy provide public services more effectively than those in the less trusting, less civic south. In the decade following the publication of this work, a myriad of studies have tested *Direct Correspondence to: Hilde Coffé, Department of Political Science, Vrije Universiteit Brussel, Room M210, Pleinlaan 2, B-1050 Brussels, Belgium. E-mail: [email protected] JOURNAL OF URBAN AFFAIRS, Volume 27, Number 5, pages 485–501. Copyright # 2005 Urban Affairs Association All rights of reproduction in any form reserved. ISSN: 0735-2166. Putnam’s hypothesis that social capital has a beneficial effect on (institutional) performance. These studies analyze data from many different countries, concentrate on diverse indicators of performance, and generally provide support for the beneficial influence of social capital. One constant in this rapidly expanding literature, however, is the focus on the country, state, or regional level. Little attention has been given to local governments. Nonetheless, as argued by Rice and Sumberg (1997), these offer another interesting locale of study. A move to the local government level not only entails an increase of the data set under analysis but also provides a more stringent test of the social capital hypothesis in that the variation in social capital is likely to be less pervasive at lower levels of government (Rice, 2001). Research at a lower level of government is thus a welcome supplement to cross-national and regional analyses. Yet, to the best of our knowledge, only two studies have analyzed the link between social capital and institutional performance at the local government level (Cusack, 1999; Rice, 2001). Both have found that higher levels of social capital lead to an improved subjective approval of government performance. In this article, we use data on Flemish municipalities and clearly confront the question whether social capital also significantly affects performance at lower levels of government. Moreover, we extend the previous work on social capital in two important ways. First, we concentrate explicitly on its effect on the quality of the municipality’s financial management (proxied by the fiscal surplus). The reason for this focus on the municipality’s ‘‘fiscal balance’’ as our measure of performance is that it taps directly into the desire for sound financial management and the aversion to fiscal deficits in the electorate (Niskanen, 1979; Peltzman, 1992). Also, prudent financial management constitutes a crucial part of the (local) government’s functioning (and its ability to build and/or remain a thriving society in the future). Second, in contrast to previous local-level analyses by Cusack (1999) and Rice (2001), we employ objective indicators of local government performance. This avoids the difficulty that social capital might affect the subjective assessment of government performance—confounding inferences from the analysis—a potential pitfall of which Rice (2001) was clearly aware. The remainder of this article is structured as follows. A brief description of the social capital concept and a rationalization of its effect on institutional performance are given in the first section, which also reviews previous empirical results. The next section addresses our own analysis, which examines whether the quality of financial management in Flemish municipalities is related to the level of social capital within its population. Before describing the results, this section first explains our indicator of social capital and discusses the particularities of the model and the estimation methodology. The last section concludes.