Trust and Economic Growth in the Knowledge Society

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Trust and Economic Growth in the Knowledge
Society

• Eric M. Uslaner
• Professor of Government and Politics
• University of Maryland
• College Park, MD 20742
• http//www.bsos.umd.edu/gvpt/uslaner

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• Trust has many different meanings
• Strategic trust trust we gain from daily
  experience.
• Particularistic trust trust in people like
  ourselves. May stem from direct experience or
  from stereotypes.
• Generalized (moralistic) trust Trust in
  strangers, especially people who are different
  from ourselves. Cannot come from interaction
  with people we know.

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• Trust as a key component of social capital,
  helping us to find ways of cooperating with
  others. The other key part of social capital is
  our social connections, both formal membership
  in voluntary organizationsand informal our
  social connections.

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• Generalized trust rather than strategic or
  particularistic trust is the cornerstone of the
  benefits of trust. We gain when we see strangers
  as offering opportunities rather than risks.
• Trust is a moral value. We learn it early in
  life and it is stable over the years for most
  people.

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Trust and Socialization

• We learn trust at an early age from our parents.
  There is a strong carry-over from parental trust
  to children's trust. Parents' levels of trust
  continue to exert powerful effects on their
  children even when the children become adults
  themselves.
• Early experiences, then, play a key role in
  developing trusting (or non-trusting) attitudes.

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• Young people who have good and supportive
  relations with their parents are more likely to
  trust others. Parents should be encouraging and
  warm, but not overbearing.

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Trust and Globalization

• In a globalizing world, people need to be
  connected to others all over the world, and many
  of these people will have different backgrounds
  and worldviews.
• Generalized trust helps us make globalization
  work. Thomas Friedman writes in The World Is
  Flat (p. 327) "When tolerance is the norm,
  everyone flourishes--because tolerance breeds
  trust, and trust is the foundation of innovation
  and entrepreneurship."

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• Trust makes globalization work because trust
• provides the basis for working with people of
  different backgrounds
• promotes factors that are essential to
  globaliztion use of technology (especially the
  Internet), more open markets, less corruption,
  and treating others as equals.
• One of the key features of a globalizing economy
  is education--and trust both depends upon
  education and leads to greater spending on
  education.

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• Trust is thus an essential part, perhaps the
  essential part, of the syndrome of forces that
  leads to a more globalized economy, more open
  markets, and greater economic growth.
• Without trust, countries will face greater
  problems in dealing with the challenges of
  globalization.

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• Generalized trust depends upon a foundation of
  equality. In an unequal world, it is difficult
  to establish bonds between those at the top and
  those at the bottom. Trust also depends upon a
  foundation of optimism and control. People are
  optimistic and feel that they have control over
  their environment when the gap between the rich
  and the poor is small.

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Across many countries (across the American states
and over time in the United States), there is one
real-life factor that shapes both optimism and
trust the level of economic inequality in a
country. The more inequality, the less trust.
Equality promotes the vision of a shared fate,
where others are part of your moral community.
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• In an unequal world, it is difficult to establish
  bonds between those at the top and those at the
  bottom. Trust also depends upon a foundation of
  optimism and control. People are optimistic and
  feel that they have control over their
  environment when the gap between the rich and the
  poor is small.
• In an unequal world, people will be reluctant to
  take risks in dealing with people who might be
  different from themselvs. They will press for
  closed markets and work within their own
  cultures--and will tolerate corruption.

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• Authoritarian societies destroy trust. But
  democratic societies do not create trust.
  Democracy is consistent with high and low levels
  of generalized trust. Democratizing a regime will
  not automatically lead to higher levels of trust.
  

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• When people trust strangers, they will take risks
  such as opening markets. Societies with high
  levels of trust have more open markets.

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• They will also have higher levels of
  globalization, more broadly defined.

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• They are more likely to use new technologies of
  communication such as the Internet. Individuals
  in the United States who trust others are more
  likely to use the Internet for commerce they do
  not fear that their Internet transactions will
  violate their own privacy.

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• More recent data for a larger number of countries
  supports the same argument More people will use
  the Internet when there is higher trust.

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Trust, the Cutting Edge, and Innovation

• In individual-level survey data from the United
  States (the General Social Survey), confidence in
  science is one of the strongest predictors of
  trust.
• Even though confidence in most institutions does
  not lead to more trust, science is distinctive.
• Confidence in science matters because science
  gives us the capacity to control our environment
  and trust is all about being masters of our fate.

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• So it should not be surprising that countries
  with higher levels of trust would invest more
  resources in science.
• The number of scientific researchers per million
  people is greater in countries with higher levels
  of trust (using UNESCO data on the number of
  scientists reported by the Environmental
  Stability Index).

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• Together with science comes innovation. The
  World Economic Forum rated countries according to
  their levels of scientific innovation.
• More trusting countries are considerably more
  likely to be innovative.

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• It is not surprising, then, that societies with
  higher levels of trust will have better
  performance, as measured by higher levels of
  economic growth.

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• Social capital is more than just trust. Putnam,
  in Bowling Alone, argues that social capital
  includes trust, social ties, and membership in
  voluntary associations. All are expected to
  bring benefits to society.
• The benefits of membership in voluntary
  associations are less clear. Do countries with
  high levels of voluntary association membership
  also have better functioning governments and
  societies?

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• Trust is more important than voluntary
  association membership in creating wealth.
  Globalization and economic growth do not depend
  upon this other component of social capital.
  But they do depend upon trust.

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• More trusting societies spend more on education
  per capita and transfer more of their resources
  from the rich to the poor. Trust forges bonds
  across groups and social classes and leads those
  who are well off to care about the fate of those
  less well off.

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• Corruption rests upon a foundation of low
  generalized trust and high in-group trust, as
  Gambetta noted about the Italian Mafia. The
  higher the level of trust, the lower the level of
  corruption (higher scores on the corruption index
  indicate more honest governments)

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• Corruption is also fundamentally a relationship
  that rests upon inequality and leads to more
  inequality.
• Corruption also stems from an unfair legal system
  and from strangling regulations. It leads to
  lower economic growth, less effective government,
  and less stability in economic performance
  (greater risk).

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• Low trust and corruption form part of a syndrome
  of "bad social capital" that threatens the global
  economy in the knowledge society.
• Corruption raises the cost of doing business and
  makes firms less willing to invest in countries
  with high levels of dishonesty.
• Low trust and high corruption have common
  sources--and negative consequences for economic
  growth.

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• Corrupt governments have less to spend on social
  programs. They also are more likely to close
  markets and to have a weak rule of law.
• Economic growth and globalization depend upon the
  rule of law--and the fairness of the legal
  system. An unfair legal system promotes
  corruption and low trust. It constitutes one of
  the greatest threats to a globalized economy.

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• In my book in progress, The Bulging Pocket and
  the Rule of Law Corruption, Inequality, and
  Trust, I present the following model of the
  interconnections amnog trust, corruption,
  inequality, the quality of government, and
  economic policy

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Particularized Trust
Generalized Trust
Inequality
Legal Fairness
Corruption
Strict Regulation
Overall Risk
Effective Government
Inequality leads to lower trust and to poor
government. Low trust leads to more
corruption. Unfair legal systems lead to
strangling regulation and to more corruption.
Strangling regulation leads to greater
corruption. Poor government also leads to
strangling regulation. Corruption leads to poor
government and to more inequality.
Ethnic Tensions
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• Democratic governments are less corrupt.
  However, changes in corruption are not
  attributable to greater democratization.

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Trust, Business, Globalization

• Globalization depends upon well regulated
  markets--the rule of law.
• High levels of corruption, weak property rights,
  unenforceable contracts, and an unfair legal
  system make businesses less willing to invest in
  a country--and works against globalization.

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• Trust forms the basis of "business on a
  handshake," where potential business partners
  agree to do business without a formal contract.
  The informal bonds of trust were said to be more
  conducive to good relations than were legal
  documents enforced by courts.
• In today's world with globalized markets and
  contracts for millions of dollars, "business on a
  handshake" is no longer feasible.

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• What we see today is that trust and the law have
  become partners, rather than rivals.
• Countries with strong and fair legal systems are
  countries with high degrees of generalized trust.
  The fairness of the legal system, as measured by
  the Economist Intelligence Unit, is much stronger
  in countries where generalized trust is strong
  (r2 .376, N 84).

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• High trusting countries are more likely to
  protect property rights. Both objective measures
  of the protection of property rights (a 1997
  World Bank index) and subjective measures
  (business executives' perceptions of how well
  property rights are protected, from the 2004
  World Economic Forum Executive Opinion Survey)
  show robust relations with generalized trust (r2
  .411, N 51 for the World Bank measure and r2
  .380, N 78 for the subjective measure).

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• One of the great threats to globalization is
  unenforceable contracts. Contracts are more
  likely to be enforced (as measured by Rafael
  LaPorta) in countries with high levels of
  generalized trust (r2 .518 , N 44).
• Countries with high levels of trust have stronger
  legal systems. However, there is no direct
  linkage from any measure of legal quality,
  property rights, or contract enforcement to
  generalized trust. You can't create trust
  through the strong arm of the law. But trusting
  societies have stronger legal systems.

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• Trust is a key component of the cooperative
  spirit that makes democracy work.
• Yet, it is not easy to "create" trust where there
  trust is low. Trust is remarkably "sticky." The
  r2 between generalized trust, as measured in the
  1981, 1990-1995 World Values Surveys across
  between 1980 and the 1990s is .81 for the 22
  nations included in both wavesthe r2 between
  generalized trust in 1990 and 1995 is also robust
  (.851, N 28).

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Corruption and inequality are also sticky. There
is little evidence that countries can escape the
curse of corruption easilyor at all. The r2
between the 2004 Transparency International
estimates of corruption and those of the ICRG
(International Country Risk Guide) in 1980-85
across 52 countries is .742. The r2 for the
most commonly used measures of economic
inequality (Deininger and Squire, 1996) between
1980 and 1990 is .676 for a sample of 42
countries. A new inequality data base developed
by James Galbraith extends measures of inequality
further back in time and across more countries.
The r2 between economic inequality in 1963 and
economic inequality in 1996 is .706 (for 37
countries).
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The Inequality Trap

• This stability of trust, corruption, and
  inequality--and the strong interconnections among
  them suggests that it will not be easy to build
  up trust or to end corruption.
• To build trust, we need to focus on two key
  issues (1) the socialization of our children,
  making sure that they have strong values and
  opportunities to interact with people of
  different backgrounds and (2) policies designed
  to lessen economic inequality.

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Trust and Education

• Young people who have friends of a different
  background are also more likely to become
  trusters as an adult.
• School offers a great opportunity to build
  trust--since more highly educated people are more
  trusting. Young people learn about other
  cultures in school and may come into contact with
  people of different backgrounds.

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• Simply spending money on social programs will not
  reduce economic inequality. Spending has to be
  targeted by policy but not by recipient.
  Education is one of the best investments we can
  make, since it provides people with opportunities
  to advance themselves and to participate in the
  global economy. The higher the level of
  education in a country, the more trusting the
  citizenry.

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• Targeting people is likely to be
  counterproductive. Bo Rothstein of Goteborg
  University (Sweden) and I have shown in a new
  paper, "All for All," published in World Politics
  (58, October, 2005), that means-tested programs
  are counter-productive. They do not reduce
  inequality or eliminate poverty. And they
  stigmatize those who receive such benefits.
• Instead, the type of policy that can reduce
  inequalities is universal social welfare policies
  (including education).