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Although the causal effect of social capital on poverty in developing countries has been increasingly documented, the empirical evidence regarding the two-way causality between social capital and poverty is still limited. This study empirically explores the relationship between social capital and poverty in rural areas of Indonesia. Using two nationally representative data sets, this analysis showed social capital defined by participation in social activities positively affects household expenditure (proxy poverty). Besides household expenditure, the findings on the determinants of social capital are (a) well educated (measured by years of formal schooling), (b) the number of social organizations in the village, (c) permanent market infrastructure, and (d) home ownership. These factors constitute a possible means to facilitate poor household access to social capital, which will increase income and reduce poverty especially in rural areas.

Two-Way Causality between Social Capital and Poverty in Rural Indonesia