Social Capital and the Global Economy: A Redrawn Map of the World

Francis Fukuyama

From Foreign Affairs, September/October 1995

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Summary:  Competitiveness debates have contrasted countries that have industrial policies, like Japan, with more laissez-faire countries like the United States. But the pivotal difference is the level of a people's trust. High-trust societies are interlaced with voluntary organizations--Rotary clubs, Bible study groups, private schools--and thus have "social capital," which makes for the growth of large corporations in highly technical fields. Low-trust societies--France, Italy, China--tend toward small, family-owned businesses in basic goods. Social capital is not necessary for growth, but its absence tempts governments to intervene in the economy and imperil competitiveness.

Francis Fukuyama is a Senior Social Scientist at the Rand Corporation. This article is adapted from his new book, Trust: The Social Virtues and the Creation of Prosperity, published by The Free Press.

Conventional maps of the global economy divide the major players into three groups: the United States and its partners in the North American Free Trade Agreement, the European Union (EU), and East Asia, led by Japan but with the four dragons (South Korea, Taiwan, Hong Kong, and Singapore) and the People's Republic of China catching up rapidly. This three-pronged geography is said to correspond to major divisions in the approach to political economy: at one pole lie Japan and the newly industrialized Asian economies, which have relied heavily on state-centered industrial policies to guide their development, while at the other extreme lies the United States, with its commitment to free-market liberalism. Europe, with its extensive social welfare policies, lies somewhere in between.

This familiar map, while not wrong, is today not the most useful way of understanding global economic geography. The most striking difference among capitalist countries is their industrial structure. Germany, Japan, and the United States were quick to adopt the corporate form of organization as they industrialized in the late nineteenth and early twentieth centuries, and today their economies are hosts to giant, professionally managed corporations like Siemens, Toyota, Ford, and Motorola. By contrast, the private sectors of France, Italy, and capitalist Chinese societies like Hong Kong, Taiwan, and the marketized parts of the People's Republic of China (PRC) are dominated by smaller, family?owned and ?managed businesses. These societies have had much greater difficulties institutionalizing large?scale private corporations; their relatively small companies, while dynamic, tend to fall apart after a generation or two, whereupon the state is tempted to step in to make possible large?scale industry.

The reasons for these differences in industrial structure have less to do with level of development than with a key cultural characteristic, what the sociologist James Coleman has labeled social capital--that is, the component of human capital that allows members of a given society to trust one another and cooperate in the formation of new groups and associations. In this redrawn map of the world, Germany, Japan, and the United States are societies with healthy endowments of social capital and thus have more in common with each other than any of them do with low?trust countries like Taiwan, Hong Kong, Italy, or France. The competitiveness literature of the past decade has it wrong when it describes the United States and Japan as polar opposites with respect to individualism and group orientation. In fact, the strong historical propensity of Americans to form voluntary associations is quite similar to that of the Japanese, and it is no accident that these two societies pioneered the development first of the corporate form of business organization and later the smaller, decentralized network.

Virtually all economic activity, from running a laundry to building the latest?generation microprocessor, is carried out not by individuals but by organizations that require a high degree of social cooperation. As economists argue, the ability to form organizations depends on institutions like property rights, contracts, and a system of commercial law. But it also ...

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