International Journal of Business and Social Science Vol. 3 No. 20 [Special Issue – October 2012] 152 The Effect of Social Capital on Indonesian Economic Growth Period 1983 – 2008 Y. Sri Susilo Faculty of Economics Universitas Atma Jaya Yogyakarta Indonesia Lincolin Arsyad Faculty of Economics and Business Universitas Gadjah Mada Indonesia Abstract This research aims to identify and analyze the effect of social capital on the economic growth in Indonesia. The social capital in this case is approached with government debt, unemployment, and average real wages variable. In this research there is another independent variable that is the export variable. Economic growth variable used is Gross Domestic Product (GDP) growth variable. Data used is secondary data with observation period 1983- 2008. Model and analysis tool used is Error Correction Model (ECM) econometric model. The result of the estimation by ECM model is in the short term social capital variable (government debt) has negative and significant effect on the economic growth. Whereas other social capital in the model (unemployment and average real wages) doesn’t have any effect on the economic growth. However, in long term, social capital variable (government debt and average real wages) each has positive and significant effect on the economic growth, while the unemployment variable has negative and significant effect on the economic growth. To the export variable, it has positive and significant effect, both in the short and long term. Keywords: social capital, export, economic growth, error correction model. 1. Introduction The concept of social capital becomes more popular lately in the social science. Sociologists, political scientists, economists, and organization theorists tend to refer to the social capital concept in their researches to answer various broad topics which are often caused some stirs in practice (Ariani, 2007). Putnam (1993) defined social capital as traits or characteristics of social organization such as networks, norms, and social trusts that helps coordination and cooperation to mutual benefit. Fukuyama (1995) stated that social capital is individual’s ability to cooperate with others for general purposes in groups and organizations. Whereas Akdere (2005) divided the theory of social capital into three levels. The first level is macro level, which includes institutions such as government, the role of law, civil, and political freedom. In this level social capital related to the effectiveness, accountability, and government’s ability to carry out its role fairly, economic growth in encouraging corporate and domestic market development, and in encouraging foreign investments or covering the social development and economic growth. The second level is meso level, which shows networks among communities. Analysis on social capital in meso level focuses on the development and distribution of network structure process, involves team work, and pays attention to the local development and organization’s growth. Then level three, that is micro level which emphasizes on the individual’s ability to mobilize resources through local network to build trust and shared norms. In organizations, social capital in this level shows recognition, cooperation and mutual trust, solidarity, loyality, reputation, ease of getting information, and human capital, or includes relationship with others, individual’s development, and personal growth. In classical understanding, physical capital is considered providing the main contribution in production process and development.