Document Type : Research Paper
Authors
1 Associate Professor, Department of Economic Sciences, Khatam University, Tehran, Iran
2 Master of Economics, Khatam University, Tehran, Iran
Abstract
Economic growth models have long grappled with fundamental questions regarding the relationship between different types of capital and real growth rates. While numerous empirical studies have demonstrated the independent effects of physical capital and social capital on the quantity and quality of economic growth, less attention has been given to the interactive effects of these investment types. This study examines the influence of social capital on the interaction between physical capital and Iran's economic growth using the Smooth Transition Regression (STR) model. The analysis covers the period 1346–1400 (1967–2021) and employs four indicators inspired by Fukuyama's framework to measure social capital.
The findings indicate that the impact of physical capital on Iran's gross domestic product (GDP) varies across different levels of social capital. Periods of greater fluctuations in social capital have been associated with increased variability in the effect of physical capital on economic growth. Specifically, stronger social capital enhances the productivity of physical capital, while weaker social capital reduces its effectiveness.
This study highlights the critical role of social capital in shaping the returns on physical capital investments, suggesting that strategies to stabilize and strengthen social capital could lead to more consistent and sustainable economic growth outcomes.
Introduction
Economic growth, as a key driver of national welfare, has long captured the attention of not only economists but also social and political scientists. This interest stems from its profound impact on living standards, social stability, and political dynamics. Unstable economic conditions, linked to phenomena such as unemployment, inflation, and disparities in quality of life and life expectancy, can trigger social unrest and political crises. As such, understanding the determinants of economic growth is essential for shaping policies that foster sustainable development and prosperity.
One of the enduring questions in the study of economic growth concerns why nations or regions with similar resource endowments and economic conditions often experience divergent growth trajectories. This question remains partially unresolved, especially regarding the interplay of various forms of capital in driving economic outcomes.
This study focuses on examining the factors influencing Iran's gross domestic product (GDP), with a particular emphasis on the role of social capital in shaping the impact of physical capital over the period 1346–1400 (1967–2021). Specifically, the research investigates the threshold effect of social capital on the interaction between physical capital and GDP, exploring how varying levels of social capital influence the productivity of physical capital in the Iranian context.
A review of prior studies reveals mixed findings regarding the relationship between human capital and economic growth. While some research highlights a positive correlation, others argue that variables such as social capital and the broader developmental context mediate this relationship. Similarly, studies on the role of social capital in economic growth suggest its contribution, albeit often emphasizing its indirect role or relatively modest impact compared to other variables. This study seeks to build on these findings by specifically exploring the interaction between social capital, physical capital, and production, offering new insights into their combined effects on economic growth in Iran.
The study is structured into seven sections. Section 2 reviews the theoretical foundations underpinning the research. Section 3 explores the existing literature and contextual background of the study. Section 4 details the research methodology, while Sections 5 and 6 discuss the data and findings, respectively. Finally, Section 7 presents the conclusions and policy recommendations derived from the analysis.
Methods and Material
While linear estimation methods are simpler and often preferred for their ease of use, they are not always suitable for analyzing economic phenomena with inherently nonlinear behavior. Relying on linear models in such cases can lead to inaccurate specifications and misleading results, underscoring the need for more flexible nonlinear regression models.
In the context of social capital's impact on economic growth, the dynamics differ from the short-term effects of trade shocks or external economic fluctuations, which often have a pendulum-like nature. Instead, the erosion of social capital gradually distorts the economic landscape, exerting a prolonged and subtle influence on growth trajectories. These long-term and incremental changes necessitate a modeling approach capable of capturing both the gradual and nonlinear nature of these effects.
To address this, the Smooth Transition Regression (STR) model was selected for the analysis. The STR model offers significant flexibility by accommodating nonlinear relationships between variables without imposing restrictive or predefined functional forms. This approach allows for the modeling of transitional changes based on observations of the threshold variable, enabling the examination of how variables evolve and interact continuously across regimes.
In essence, the STR model is particularly suited to studying the nonlinear effects of social capital on GDP, as it captures the slow and progressive changes in economic outcomes resulting from variations in social capital. By employing a transfer function, the model identifies regime-dependent behaviors and thresholds, providing a comprehensive framework to analyze the nuanced relationship between social capital, physical capital, and economic growth over the long term.
Conclusion
This study aimed to investigate the role of social capital in the interaction with physical capital and its effect on Iran's GDP. Specifically, it explored how social capital influences economic growth both directly, as a production input, and indirectly, as a threshold variable that modulates the impact of other inputs, including physical capital.
The findings align with the broader literature, underscoring the pivotal role of social capital in differentiating the economic outcomes of nations. Social capital, reflected in the quality of governing institutions, their behavior, and their interactions with society, is confirmed to have a strong, two-way relationship with economic growth. Importantly, previous studies have highlighted that while measuring social capital quantitatively is challenging, its absence (manifested through phenomena such as crime or corruption) provides compelling evidence of its critical role.
Over the 54-year period of analysis (ending in 1400), this study employed Fukuyama's conceptual framework for social capital and utilized a smooth transition regression model with an exponential transfer function. The results validated the hypothesis that social capital significantly influences the interaction between physical capital and economic output. Specifically, periods of greater fluctuations in social capital were associated with more pronounced variations in the effect of physical capital on production.
Given the unique properties of social capital—particularly its tendency to depreciate if not actively utilized—this study recommends adopting strategies to bolster its presence in society. Drawing from the experiences of successful nations, the following steps are proposed:
Encouraging Non-Governmental Organizations (NGOs): Promote the activities of NGOs to foster public participation, especially among youth and elites, thereby building trust and strengthening social networks.
Reversing Brain Drain: Iran’s position as a major exporter of human resources underscores the need for policy reforms that create opportunities for the political participation of diverse groups. Ensuring inclusivity—irrespective of religion or political affiliation—can help rebuild public trust and attract expatriates with human and financial capital.
Strengthening Public Trust: As the cornerstone of social capital, public trust must be prioritized through transparency, equitable governance, and the provision of meaningful social roles for all citizens.
Ultimately, by fostering social capital and leveraging it to enhance the productivity of physical capital, Iran can create the foundation for sustainable economic growth and development.
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