Trust, Population Size And Economic Outcomes
01 Sep 2011
Countries with larger populations generally have higher levels of trust – a belief across their societies that other people will ''do the right thing'' and refrain from opportunistic acts. For example, China, India, and Indonesia all have trust levels around three times greater than Guatemala, Malaysia and Zambia – 45% versus 15%.
These are among the findings of research by Dr Chris Bidner and Professor Patrick Francois, published in the September 2011 issue of the Economic Journal. Their analysis also shows why larger societies do not necessarily end up with stronger legal and political institutions: think of India, China, Indonesia, Bangladesh and Russia versus the Scandinavian countries, Australia and Singapore.
The authors stress the importance for social trust of rapid improvements in institutional quality in the face of new technologies that provide opportunities for the unscrupulous to cheat. They emphasise the value of a society''s institutions stamping out opportunism before it takes hold: ''Punishing a few bad apples early on will limit the likelihood that those bad apples spoil the whole barrel.''
Well-functioning economies have always required trust. But trust is particularly important today, when the rapid pace of technological change raises new opportunities but at the same time challenges the capacity of existing regulatory institutions.
What features of a society cultivate trust? To explore this question, these researchers develop a theory built on two key premises:
- First, opportunism flourishes when there are high returns from it – that is, where regulatory institutions provide insufficient deterrent;
- Second, institutions improve faster the more benefits they generate – for example, where much economic activity is undercut by opportunism, the spur to improvement is greater.
The theory traces the co-evolution of a society''s honesty norms and its institutional strength. A basic conclusion is that institutions need to be strong enough if trust is to be solidified, but the required strength becomes greater as opportunism grows more widespread.
Essentially, pervasive social mistrust undermines institutional capacity, thereby rewarding opportunism, but this further increases mistrust, worsening institutions still more, and so on in a self-reinforcing cycle. The sooner this Gordian knot is cut the better. Institutions that take too long to dissuade opportunism, must be truly excellent to work in the face of the ensuing widespread opportunism and mistrust.
A central – and novel – prediction that emerges from the analysis is that, all else equal, larger countries will have higher levels of trust. Using the canonical ''trust question'' from the World Values Survey, the researchers are the first to explore this, and find it strongly supported.
Countries with larger populations generally have more trust, once account has been taken of other determinants of trust, such as income per capita, income inequality, the extent of ethnic and religious homogeneity, the urbanisation rate and average educational attainment.
For example, countries such as China, India, Indonesia, Zambia, Guatemala and Malaysia all have comparable institutional qualities as measured by the Protection of Physical Property index, but they differ greatly in average trust. The three large countries (China, India and Indonesia) have trust levels around three times (45% versus 15%) greater than those in the small countries (Zambia, Guatemala and Malaysia).
The analysis also shows why larger societies, despite their scale advantages in spurring institutional improvements, do not necessarily end up with stronger institutions. Their higher trust levels allow them to stabilise institutions able to operate at a lower quality.
This explains why the scale advantages that larger countries enjoy do not lead to stronger institutions. Think of India, China, Indonesia, Bangladesh and Russia versus the Scandinavian countries, Australia and Singapore.
The analysis highlights the policy importance of institutional flexibility and the capacity for rapid adjustment. When technology throws up new trading opportunities, and hence new opportunities for the unscrupulous to cheat, rapid improvements in institutional quality serve to reward honest trading, and can stamp out opportunism before it takes hold. Punishing a few bad apples early on will limit the likelihood that those bad apples spoil the whole barrel.''Cultivating Trust, Norms, Institutions and the Implications of Scale'' by Chris Bidner and Patrick Francois is published in the September 2011 issue of the Economic Journal.
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