Economic prosperity breeds trust

Markus Brückner, Alberto Chong, Mark Gradstein

29 August 2015

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In the 1950s Edward C Banfield, a US political scientist, made a research visit to an impoverished village in southern Italy. His observations in the course of the visit led to a book, based on his impressions and interviews, “The Moral Basis of a Backward Society,” in which he purports to trace the roots of extreme poverty witnessed there.

Banfield’s argument was that the crucial component was cultural. Specifically, the villagers’ cherished norm of what he called “amoral familism”, as opposed to the value of acting for the sake of the common good of the community. This family-centric orientation, according to Banfield, was related to mistrust and suspicion among the villagers, leading to their inability to act in tandem, thus contributing to the (lack of) economic development of their community at large. The importance of social capital and, specifically, of generalised trust with potential implications for economic development was subsequently reemphasised in Fukuyama (1995), and Putnam (2000).

Trust and growth

More recent econometric analyses have relied on self-reported ‘generalised trust’ attitudes (i.e. trust toward anonymous, as opposed to familiar, individuals) as a measure of social capital that can be potentially correlated with economic development. Beginning with Knack and Keefer (1997) and Zak and Knack (2001) – and continuing with Algan and Cahuc (2013) and Bjornskov (2012) – this work has documented strong correlations between generalised trust, as reported in various surveys, and measures of national economic prosperity. For example, about one fifth of cross-country variation in income per capita between 1980 and 2009 in a sample of 106 countries is accounted for by differences in generalised trust. And an increase of one standard deviation in trust, increases income per capita by 6.8% of its sample mean (Algan and Cahuc 2013). Average income growth rates are also positively correlated with trust, as noted in Knack and Keefer (1997). Algan and Cahuc (2013), updating these results with more recent data find that a one standard deviation increase in the level of trust, increases growth by 20% of its sample mean.

While positive correlations between trust attitudes and GDP per capita (or its growth rate) have been firmly established, their causal direction is unclear. Whereas scholarly work has tended to interpret these correlations as trust-driving economic prosperity, we (Brueckner et al. 2015) undertook to address the possible causal link from the latter to the former. Indeed, Banfield himself speculated that “[i]f the average income were increased by a large amount, people would sooner or later act on a broader conception of self-interest”.

Causal inference

In order to test the hypothesis that economic prosperity leads to more generalised trust, we have compiled panel data, based on all available waves (six in total) of World Value Surveys that include self-reported generalised trust attitudes. Focusing on within-country changes (by using country fixed effects) and extracting an exogenous component of GDP per capita through the use of instrumental variables estimation,1 we are able to document a causal response of trust attitudes to the exogenous change in national prosperity, while using a host of individual characteristics as controls. We find that national income has a significant effect on trust attitudes. In particular, a one percent increase in national income tends to cause an average increase of one percentage point in the likelihood that a person becomes trustful.

Theoretical rationale

Why would economic prosperity cause more societal trust? One possibility, advanced already in Banfield, 1958, is that generalised trust norm is a luxury good, whose income elasticity is large, so that in a prosperous society it replaces the parochial trust norm. Another possible explanation that we elaborate upon in the paper, is that enhanced economic prosperity acts as a signal that fellow citizens are trustworthy. The more optimistic assessment then breeds trust among individual citizens. This theory suggests the possibility of a mutual feedback between trust and economic growth.

References

Algan, Y and P Cahuc (2013), “Trust, Growth and Happiness: New evidence and policy implications,” in P Aghion and S Durlauf (eds), Handbook of Economic Growth P. Aghion and S. Durlauf, volume 2A.

Banfield, E C (1958), “The moral basis of a backward society, Glencoe, Il, The Free Press.

Bjørnskov, C (2012), “How does social trust lead to economic growth?”, Southern Economic Journal 78: 1346-1368.

Brueckner, M, Antonio C, and A Tesei (2012a), "Oil price shocks, income, and democracy", Review of Economics and Statistics 94: 389-399.

Brueckner, M, A Chong, and M Gradstein (2012b), "Estimating the permanent income elasticity of government expenditures: Evidence on Wagner's law based on oil price shocks", Journal of Public Economics 96: 1025-1035.

Brueckner, M, A Chong, and M Gradstein (2015), "Does economic prosperity breed trust?”, CEPR DP 10749, August.

Fukuyama, F (1995), Trust: the social virtues and the creation of prosperity, New York: Free Press.

Knack, S and Keefer, P (1997), “Does social capital have an economic pay-off? A cross-country investigation”, Quarterly Journal of Economics 112: 1251-1288.

Putnam, Robert D (2000), Bowling Alone: The Collapse and Revival of American Community, New York: Simon & Schuster.

Zak, P J and Knack, S (2001), “Trust and growth”, The Economic Journal 111: 295-321.

Footnote

1 Our instrument is the change in the natural logarithm of the international oil price multiplied with countries’ average shares of net oil exports in GDP – this variable has been shown to have a significant and persistent effect on GDP per capita (see Brueckner et al. 2012a, b).

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Topics:  Microeconomic regulation

Tags:  trust

Professor of Economics, University of Queensland

Professor of Economics, Georgia State University

Professor of Economics at Ben Gurion University

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