EFFECTS OF INCOME FALLS ON SOCIAL TRUST: Evidence from the 2009 economic crisis in Russia

01 Apr 2019

Our trust in one another reacts to large changes in income even within short periods of time, but once destroyed, trust takes a long time to be restored.  These are among the conclusions of a study on what determines trust by Maxim Ananyev and Sergei Guriev, published in the April 2019 issue of The Economic Journal. 

 

This study shows that declines in income in Russia during the Global Financial Crisis caused a fall in trust.  Once the recovery restored incomes, small declines in trust were reversed. But the authors demonstrate that the more substantial deterioration of trust has been persistent for at least five years after the end of the recession.

 

The extent to which individuals trust each other, what the authors refer to as ‘generalised social trust’, is a key issue in academic studies.  Many have shown a link between trust and other issues such as economic growth, political participation and financial development.  However, it is less known what determines trust itself.

 

The authors use a unique panel dataset for 66 regions of Russia where GDP experienced an 8% drop in 2009. The impact of the crisis was highly uneven among Russian regions because of their differences in industrial structure inherited from the Soviet era. Regions that traditionally specialised in oil and gas and in production of capital goods experienced a much larger decline of GDP.  According to the research, a 10% fall in income is associated with a 5% fall in social trust – a major impact in Russia where trust levels are at about 25%. 

 

They also find that after the crisis, economic recovery did not fully restore pre-crisis trust levels.  In the regions that had a smaller decline in income and trust in 2009 they find a return to their pre-crisis trust level in 2014. However, in the half of regions which were harder hit by the crisis, even after 5 years, in 2014, trust remained 10% lower than before the crisis.

 

They conclude that the research contributes to a debate within academia on whether trust is persistent or malleable – the so called “Putnam I vs Putnam II” debate.  The leading scholar on trust, Robert Putnam, has shown that today’s trust levels in Italy can be traced to Italian regions’ history (being free cities vs. part of feudal monarchy many hundred years ago) – thus constituting the “Putnam I” view that trust is persistent.

 

At the same time, in his famous “Bowling alone” book Putnam has shown that trust in the United States has changed substantially over recent decades: thus forming the “Putnam II” view that trust is malleable.

 

Maxim Ananyev and Sergei Guriev show that both views may be correct - trust does react to large income shocks even within very short periods of time; but once destroyed, trust take long time to be restored.

 

Effect of Income on Trust: Evidence from the 2009 Economic Crisis in Russia’, by Maxim Ananyev and Sergei Guriev published in the April 2019 issue of The Economic Journal is published in the April 2019 issue of the The Economic Journal.

 

Maxim Ananyev

lecturer at UCLA

Sergei Guriev

chief economist at the European Bank for Reconstruction and Development