Social Capital

Knowledge, Skills, Trust

Why this is a problem

The lack of knowledge, skills, and trust is a major constraint in developing countries. On the consumer side, many technologies and services- such as mobile phones and bank accounts- simply cannot be used or understood by the poor since they may be illiterate, or unwilling to try a product that they are unfamiliar with. And in many cases, they might not have the aptitude to use the product. On the producer side, the level of knowledge and skills of labor- human capital- can be instrumental in determining whether a firm will survive or not. A firm faced with labor supply that is uneducated or does not know how to take advantage of the latest technology might experience efficiency and productivity losses, as well as lower growth. Finally lack of trust makes it hard for the poor to be willing to use products offered to them by the private sector, or to want to participate in production processes or work for companies that might seem alien to them.

How Big the problem really is (the level of education etc.) and why it Exists

 Lack of Education

The lack of education is a major contributor to the knowledge constraint faced in developing countries. In the least developed countries, the overall illiteracy rate is just 49 percent. Africa as a continent has a literacy rate of less than 60 percent. And as a benchmark to developed countries, 98 percent of all non-literates live in developing countries. As a result, the poor cannot participate in markets; in fact, there is a strong correlation between income and illiteracy

 Access to Information Sources:

To be sure, formal education doesn't always have direct correlation with people's knowledge of and ability to make use of products that could improve their lives. One doesn't need formal education to learn about products and their uses via television or radio. But in most developing countries, even these information sources are sparsely available. In Africa one in four persons have a radio (200 million), and only one in 13 have a television (62 million) . Even if the population is literate, sources of information such as the Internet are not readily available.

 Skills

With regard to skills too, developing countries come up short, thus further making it difficult for its citizens to fully benefit (if at all) from product offerings. The ratio of unskilled to skilled workers is lower in industrial than in less-developed countries. Many developing countries suffer further from low levels of human capital investment, aggravated by the outward migration of highly skilled professionals. The cumulative "brain drain" since 1990 has been estimated at 15% for Central America, 6% for Africa, 5% for Asia and 3% for South America.

 Trust

Trust rises from repeated interactions with an agent or some other information one may have about the probability of the other to comply with expectations. In countries with high rates of inequality, there also seems to be a decrease in the level of trust. This might lie in the rationale that in an unequal world, people will be reluctant to take risks in dealing with people who might be different from themselves. They will press for closed markets and work within their own cultures--and will tolerate corruption. This negative correlation between inequality and trust shows that developing countries, such as Brazil and Colombia- with high GINI coefficients- are also countries that will make it harder for more inclusive markets to flourish.

Evidence of impact on market inclusion and/or overall growth

 Macro Impact

Findings from industry and firm level studies indicate that successful adoption of skills, and R&D, information technology tends to take place in "organizations that have a greater investment in human capital." Furthermore, industries that emphasized R&D have been more successful in adopting informational technology projects.

The lack of knowledge, skills, and trust has impact on a broader scale as well. Empirical evidence has shown that countries with higher average years of education (including higher education where appropriate) of their labor forces tend to grow faster, other things being equal. Additionally, OECD countries which expanded their higher education more rapidly from 1960 experienced faster growth (ceterus paribus) . Much of the lack of progress in developing countries, on the other hand, is explained by the lower levels of investment in human capital, R&D, and infrastructure.

Studies on trust also indicate that countries with higher levels of trust also seem to have more open markets, higher levels of globalization, and seem to be more open to investment in science. According to UNESCO data on the number of scientists reported by the Environmental Stability Index, the number of scientific researchers per million people is greater in countries with higher levels of trust. Empirical evidence also shows that industries with a low level of "trust" have serious difficulties in effectively implementing IT. Finally, more trusting countries are considerably more likely to be innovative. The level of trust in a country therefore has serious implications for how welcoming its citizens are of the technological and scientific innovations offered by inclusive markets.

 Impact on Poor

The impact on the poor of a lack of knowledge and skills is illustrated in the case of Philippine telecommunications provider Smart. Smart needed to surmount two obstacles when offering mobile banking services to people: lack of knowledge of bank accounts, and lack of experience- and thus skills- with mobile handsets. It faced similar issues when it offered expatriate Filipinos a service that transfers overseas remittances to relatives via phone. To succeed, Smart had to fill two gaps: A knowledge gap, owing to its prospective clients' dearth of banking and mobile-phone experience, and a trust gap due to the considerable leap of faith required to release hard-earned funds into the digital ether at the push of a button.

On a community wide level, trust seems to have a strong impact on group dynamics, for example in the instance of group lending. The presence of a tight network of trust and social ties seems to promote positive financial performance, on measures such as repayment rate and savings rate, as well as reducing moral hazard and adverse selection-factors