Trust and economic growth - YouTube

Hello, this is Tyler Cowen.

Let's consider today the role of trust in supporting and promoting

economic growth.

Economics suggests that societies with higher levels of trust

should also be wealthier and have higher levels of economic growth.

Think about it. Every time you trade with someone,

typically, that trade involves some measure of trust.

You trust that the goods and services you are receiving will be worthwhile,

or that you trust the supplier will still be in business,

say, a year from now, in case you have some kind of problem.

When trust is high, cooperation tends to be high.

It tends to be higher in the workplace.

This makes businesses more efficient,

and it makes it easier to build large businesses.

When trust is high, you don't have to spend

all of your resources protecting property rights.

To some extent, you are trusting other people

to not simply come along and take what you have.

When trust is high, corruption tends to be lower,

you can rely more upon the quality of public sector officials

and public services.

Also, capital markets should work better when trust is high,

because borrowing and lending will be easier and less costly,

because people in general will expect others to be paying them back.

Let's look at a specific empirical article

on the connection between trust and growth.

This is written by Paul Zak and Stephen Knack.

This paper, and a lot of the other research in the area,

draws upon something called 'The World Value Survey.'

This took place in many different countries.

Basically, the researchers went around and they spoke to people,

and they asked them what they thought of these two statements.

First: 'Most people can be trusted,'

versus, 'You can't be too careful in dealing with people.'

As you would expect, the more trusting countries

are more likely to support the response 'Most people can be trusted.'

The country which comes out highest on the trust scale is Norway,

a very wealthy country and, also, a very cooperative country

where rates of crime are quite low.

The country of Cape Verde pulls in the lowest score,

but it would be a mistake to conclude

that Cape Verde is the least trustworthy country

in the world or even close to it.

A lot of countries simply aren't surveyed because it's too violent there

and there's simply not a high enough level of trust

for a stranger to be going around

asking people, 'How much do you trust others?'

In any case, Knack and Zak take this data set

and they perform some statistics on it.

They do what are called 'cross-country growth regressions.'

On the left-hand side of the statistical equation

is a country's growth rate.

That's what we're trying to explain.

On the right-hand side, we put a number of variables

that might contribute to explaining that growth rate.

In this paper, these variables include schooling, investment,

the starting point of a country in terms of per capita income,

and also religion.

Of course, these are not the only possibilities.

The authors ran a much greater number of possibilities

for variables on the right-hand side.

But the key thing we want to see is that when we put in

some plausible variables on the right-hand side,

is the variable for trust going to make a difference

for the growth rate?

In fact, in the paper, it turns out that trust really does make a difference.

What Zak and Knack find is growth rises by, nearly,

one percentage point on average for each 15 percentage point increase

in trust.

To make this a little more concrete, if the nation of Panama

had about as much trust in it as the nation of Austria,

according to their results, in Panama, economic growth

would be about one percentage point higher.

If you'd like to see the relationship between trust and economic growth rates

in the form of a picture, here's Figure 1 in their paper.

You can see also that the country with the highest level of trust,

it's out here, it's Norway.

The country with the highest level of economic growth is South Korea.

And, again, in this picture you're seeing

a positive relationship between trust and economic growth

plotted in this graph.

You might wonder in this paper, 'What is it that is determining trust?'

In their data set, they find trust is positively correlated

with both formal and informal institutions,

and, also, positively correlated with wages.

That makes good intuitive sense.

Trust decreases with population heterogeneity

and, somewhat oddly, trust goes down somewhat

with increases in wealth.

Other research has found that, very often, trust is inherited

from the culture of one's forefathers.

That is, if your ancestors came, say, from Norway

and you are Norwegian American,

your degree of trusting this is likely to be correlated

with the level of trust in Norway.

In other words, trust somehow persists in a culture

and it's something you pick up, in part, from your parents

even if you're living in a different country altogether.

You might also wonder, 'What are the channels of trust?'

That is, how does trust actually operate

to increase the growth rate and bring about prosperity?

It's not automatic. You don't simply wake up one day,

and you trust each other, and then more wealth falls out of the sky.

How does it work?

There's a good paper on this topic.

'How does social trust affect economic growth?'

You can google that online.

This paper finds two major channels for how trust boosts economic growth.

The first is through quality of governance in the rule of law.

That is, the more trusting societies have governments which work better

and they're more likely to apply their laws in a fair and just manner,

and that will boost economic productivity and wealth.

Another channel for how trust boosts the growth rate

is through schooling.

Societies with higher levels of trust invest more in schooling.

This raises the value of human capital and productivity,

and it boosts the growth rate.

I would stress that, throughout the videos in the series,

we see numerous examples of just how much trust matters

and how and why trust matters.

Trust seems to matter for better outcomes in education,

better outcomes in health care, better outcomes in water policy,

and lower levels of corruption.

All of these will boost economic growth.

So, the evidence that trust matters, it comes in part

from these macroeconomic studies as we've looked at.

But it will also come from a lot of very finely grained,

small-scale micro-investigations,

which you'll be seeing more of as we proceed.

If you'd like to read more on this topic,

I suggest starting by simply googling 'trust and growth'

and looking at the papers which come up.