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Building social capital requires trust and participation among individuals

By Peter Costello - posted Monday, 25 August 2003

Last month I was doing a press conference, on a rather memorable day, and I became reflective. At the end of the press conference I said this:

I want to see Australia be everything it can possibly be. I want to see it prosperous and strong and secure and tolerant and I want to be able to see it fulfill all of those objectives and I want to make a contribution to that.

As I was speaking I was thinking about the kind of country I would like Australia to be. I was thinking about a prosperous country with high living standards supporting high standards of health care and education, high standards of transport and communication, and disposable income. I was thinking about a strong country respected in the region and the world which was secure against outside threat and able to protect its citizens and allow them to enjoy this high standard of living. But I didn't want to leave just a picture of a country that was obsessed with material prosperity. I wanted to leave the thought that we should aim to be rich in values as well. So I talked of being a country that was tolerant.


A tolerant society is one that respects differences and allows people to pursue their different aims and ambitions within an overall framework of order. How do you promote such a society? Where does the notion of trust and tolerance come from?

If you were re-building a country from the ground up after the fall of a totalitarian state you would have to start re-building trust among citizens. You would need to build a culture of tolerance between citizen and citizen which would allow expression and association within the context of trust. You would need to build trust between citizens and institutions.

And this can take enormous effort. And yet a country that has the experience of voluntary associations is likely to have a higher level of trust between citizens which can be used to build confidence in public institutions.

If you want to run a successful modern liberal economy then trust and tolerance between citizens gives you a long head start.

Trust facilitates compliance. Trust enhances efficiency. It reduces transaction costs because you do not have to ascertain and negotiate the bribe on each transaction. Trust in the legal system and the enforceability of contract underpins the willingness to invest.

Trust and tolerance are sometimes described as social capital. In an IMF paper on Second Generation Reform, Francis Fukuyama argued: "Social capital is important to the efficient functioning of modern economies and is the sine qua non of stable liberal democracy."


In 1987 Margaret Thatcher famously declared: "there is no such thing as society. There are individual men and women, and there are families." This is an extremely individualistic view of the world. And she received a lot of criticism over this statement.

At the other end of the spectrum are the collective views of the world usually held by politicians of the left who want to submerge individuals into groups of one kind or another. One clear giveaway is the tendency to put the word "community" after everything. In this view of the world there are no longer individuals who are artists or Greeks or businessmen. There are a series of groups into which individuals are divided and treated together. It is assumed that they have a uniformity of opinion because they share a particular characteristic even though they might never have met, have no desire to do so, and have very different perspectives.

In reality, individuals have varying connections of varying intensity with others. In the first place there is the family, then maybe the street, the neighbourhood or a town. They might have a religious association through a church they attend and their relationships might extend to involvement in a voluntary association, a sporting club, or a political organisation.

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Article edited by Bryan West.
If you'd like to be a volunteer editor too, click here.

This is an edited extract of Peter Costello's July 16 address to The Sydney Institute.

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About the Author

Peter Costello AO is a former, and longest serving, Commonwealth Treasurer. He is a company director and a corporate advisor with the boutique firm ECG Financial Pty Ltd which advises on mergers and acquisitions, foreign investment, competition and regulatory issues.

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