This study investigates how social capital can lead to enhanced economic development through lowering transaction costs and promoting labour productivity and investment. Based on a combination of classical economic theory and social capital theory, three hypotheses concerning the causality between social capital and economic development are made. These suggest that social capital enhance economic development through the lowering of transaction costs, promotion of productivity and promotion of investment. By investigating these mechanisms, this thesis counters the frequently expressed critique of social capital theory, namely the lack of understanding of this causality. Furthermore, it expands the scope of the social capital theory in a developing context viz. a Latin American one. The results indicate that trust does have an economic pay-off through the lowering of transaction costs. The effect of trust on labour productivity is also supported, but seems to be influenced by factors important in a development context, such as socioeconomic security and crime. The effect of trust on economic development through investment is not supported by the data.