It has been increasingly recognized that social capital has a vital role to play in enhancing a nation’s productivity and development, especially in context to the developing countries. The idea behind this is that the traditional inputs of land labour and capital are unable to explain differences in economic outcomes across different regions and countries and the role of social capital is important. Human capital and physical infrastructure need to be accompanied by “social capital” in order to reap the full benefits of any investment.

Recently, much interdisciplinary work has been undertaken on the subject. Economists, sociologists and anthropologists have all written extensively on it.Therefore, there is a growing literature on social capital theory as well as empirical work. However, social capital is a complex term as it is evident from many definitions
of the term found in the literature. Still, there is also no consensus on the exact definition of the term. Various studies have adopted different definitions depending upon the context and culture, and setting the field of study; and the purpose of investigation.

In the existing literature social capital is generally characterized by: (i) groups and networks, (ii) trust and solidarity, (iii) collective action and cooperation, (iv) information and communication, (v) social cohesion and inclusion, and (vi) empowerment and political action; all of which are important for advancement in material gain and welfare [Ian et al. (2001), and Abdul-Hakim et al. (2010)].

The definition which is adopted in this paper is based on how people interact with each other as defined by Dekker and Uslaner (2001). “Social capital is about the value of social network, bonding similar people and bridging between the diverse people, with norms of reciprocity” and that social capital is fundamentally about how people interact with each other.

This paper investigates whether social capital has a positive and significant effect on household welfare in Pakistan and the role which it plays in increasing welfare of households. A social capital index is developed and based on household level data collected through a primary survey of households in different regions of Pakistan. A relationship between measures of social capital and household welfare is estimated through an aggregate model.

The paper is organized in the following way. Section II provides theoretical foundation and a brief review of the relevant literature. Section III discusses the sources of data and the methodology used for estimation. Section IV gives the results of analysis; and finally Section V presents the conclusions and some policy implications of the research.

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