The economic price we pay for distrust

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1 SETU June 1, 2013; No 36 If you want to get ahead be a bridge Synergy*Excellence*Transformation*Unlearning The economic price we pay for distrust Widespread distrust in a society, according to Francis Fukuyama, imposes a kind of tax on all forms of economic activity, a tax that high-trust societies do not have to pay. Rules and norms that are prevalent in society are intricately related with its institutional arrangements (i.e., markets, the state, regulators, and participants) for coordinating relationships among social actors. Thus, if the rules and norms of a society are such that people have a very low degree of trust beyond the family and if they will cooperate only under a set of highly formal rules and regulations, then the state must become highly involved in establishing regulations for the governance of the society. Without an understanding of a society's rules and norms, it will be very difficult to comprehend each of its institutional arrangements. Economists Paul J Zak and Stephen Knack conducted a study in 2001 across a cross section of 41 countries, and concluded that growth rises by nearly a percentage point on average for each 15 percentage point increase in trust. According to the World Values Survey, social trust plunged almost 18 percentage points in the first half of the last decade. If this relationship holds, India can add one percentage point to its growth rate if it restores its social trust to 2001 levels.

2 So while economists and policymakers have been sensitive to slowing growth, growing inflation and widening fiscal and current account deficits, few account for the impact of the fall in social trust. How did other countries fare? Scandinavian countries score very high. Brazil, surprisingly, scores very low. Here s a chart that compares India, China, Japan and the United States. Even if social trust in China appears to be declining gradually, the Chinese enjoy much higher levels of trust than the others being compared. The United States seems to be recovering gradually from a plunge in the 1990s. For a country that is relatively homogenous, Japanese trust levels are lower than Chinese, and are comparable to the much more diverse United States. Note, also, that other than the Chinese, a majority in the other countries does not trust other people. In a similar study on the same subject, Jan Delhey and Kenneth Newton analysed social trust levels in 60 countries and arrive at the following conclusion: The highest levels of generalized social trust across the globe are closely associated with a tight syndrome of religious/cultural, social, economic, and political characteristics. Protestantism, but no other religion, is strongly associated with trust, probably because the Protestant ethic has left a historical imprint on cultures of equality and the importance of consistently trustworthy behaviour. An absence of ethnic cleavages is also important, presumably because people of the same ethnic background find it easier to trust one another.

3 Wealthy and egalitarian societies are trusting societies, although wealth seems to matter more than equality. Last, good government is an essential structural basis of trust. Corruption free and democratic government seems to create an institutional structure in which individuals are able to act in a trustworthy manner and can reasonably expect that others will generally do the same. Nitin Pai from the Takshashila Institution, a non-partisan think tank writes this Only one in five Indians polled by the World Values Survey in 2006 agreed that most people could be trusted. In fact, the number of Indians who said they trusted others fell from 38.9 per cent in 2001 to 20.7 per cent in Trust in others, which had risen from around 33 per cent in the 1990s, fell precipitously by the middle of the last decade. We do not have the latest figures, but we can feel the pervasive distrust around us. To get a post-paid telephone connection, you need notarised photocopies of your rental agreement. We need the notary because we distrust people. We also distrust notaries, but mercifully no one has yet called for a super-notary to super-notarise a notarised photocopy of a rental agreement. The telephone company, in turn, is distrusted by regulators, law enforcement authorities, tax departments and ultimately by the customer, thus completing the cycle. Running an economy on distrust is frustrating and dehumanising. It is inefficient: if you want to rent an apartment in Bangalore, you must deposit the equivalent of 10 months' rent with the landlord. If there were greater trust between people or in the justice system, some of this money could have been invested elsewhere. Social distrust also strengthens incumbents and their cronies: if you are a new entrepreneur, you find it hard to acquire big customers because they prefer to deal with suppliers they trust. It might be hard to measure social trust and tricky to include it in the macroeconomic models that policy makers use, but it is important to start somewhere. The question is, how? While it's easy for bad policy to increase social distrust - for instance, by asking people not to repay loans, by bailing out cronies' investments and caving into competitive intolerance - the repair is harder and takes longer. Furthermore, the answer might fall beyond the domain of public policy. Problems like these need real mahatmas, of whom we have few in this age. Worse, even mahatmas have only been partially successful in arousing compassion and trust across communities.

4 The state can, however, do something to help. Obviously, the first thing it can do is not destroy the trust that exists. Here's something the United Progressive Alliance (UPA) government should pay attention to: A study by the University of Chicago's Cheol-Sung Lee shows that "public investment in skill provision... leads to higher accumulation of social trust, whereas passive social transfers result in lower social trust". He further finds that active labour market policies can ameliorate the damage caused by passive transfers of the kind that the UPA has introduced. Playing up the politics of identity also damages social capital. In an analysis covering 27 European societies, Tim Reeskens and Matthew Wright have found "strong evidence that ethnic nationalism goes hand-in-hand with reduced social capital and that it increases the negative social impact of diversity". Beyond this, there are straightforward things the government can do. First, it can play fair. Second, the government can be a more credible enforcer of private contracts. Third, it can keep its own promises - today contracts signed with the government are considered risky. Land titles issued by even the smaller Indian kingdoms enjoyed a certain sanctity that today's governments are unable to match. Every non-repudiable instrument enhances trust. Every unenforceable law weakens it. Consider this, though. Even if we somehow found a way to make us trust each other, only one out five is likely to trust the persons advocating the solution. A democracy with high levels of distrust will, thus, find policies hard to implement, especially if they are non-intuitive. References: The Economics of Trust, Business Standard, May , Nitin Pai The wages of Distrust, The Takshashila Institution, Nitin Pai Trust, Francis Fukuyama Trust and Growth, The Economic Journal, Royal Economic Society, 2001, Paul J Zak & Stephen Knack World Values Survey, 2008

5 Predicting Cross-National Levels of Social Trust: Global Pattern or Nordic exceptionalism?, European Sociological Review, 2004, Jan Delhey & Kenneth Newton If you have liked reading this issue or otherwise please do write to the SETU team: SETU is a monthly electronic publication of SIBM. SETU is published by Director, SIBM, Pune distributed by SIBM, Pune free of cost to corporate patrons with a view to share knowledge and perspectives only. Due care has been taken to ensure that the information published herein is correct and to mention sources of information. The editorial team and publishers take no responsibility for any damage resulting from inadvertent omission or inaccuracy in the publication. The views expressed in this publication are not necessarily those of SIBM, Pune. Website: Past issues are archived on the website. sibmsetu@sibmpune.edu.in Credits for this issue: Prof. Deepika Pandita and Prof. Vivek Krishnamoorthy. SETU Team: Dr Tarun Kushwaha, Dr. B. Vinod Cadambi, Ms. Shilpa Ravalallu, Mrs. Saee Gokhale, Mr. Nilesh Kadam.