Trust and Corruption in Transition

1. Trust and Corruption in Transition Eric M. Uslaner

2. Strategic trust: trust we gain from daily experience. • Particularized trust: trust in people like ourselves. May stem from direct experience or from stereotypes. • Trust has many different meanings: • Generalized (moralistic) trust: Trust in strangers, especially people who are different from ourselves. Cannot come from interaction with people we know. We learn it early in life, from our parents, and it is largely stable throughout our life. It does not depend upon our experiences.

3. Strategic trust reflects our immediate experience. But generalized trust does not reflect our immediate experience—such as income, life experiences (divorce, being the victim of crime, friendship patterns, or even civic engagement). Instead, generalized trust is learned early in life and doesn’t change much. • Generalized trusters generally dismiss negative experiences as exceptions to the rule. They are optimists who believe that they are in control of their lives. • We learn generalized trust from our parents, not from our political institutions.

4. Generalized trust is part of a “virtuous circle” of positive forces and outcomes in a society. Trust stems from equality and fairness and leads to less corruption, better government, open markets, and higher economic growth. • Mistrusting societies are caught in an “inequality trap.” They have higher (or increasing) rates of economic inequality, high levels of corruption, ineffective governments, closed markets, and lower growth.

5. Inequality Corruption Mistrust Closed Markets Low Growth Bad Government

6. Generalized trust is the key to solving many collective action problems. Countries with high levels of generalized trust have higher growth rates, more open markets, less corruption, less crime, better functioning government, and spend more on redistributive programs that benefit the poor. Generalized trust is also strongly associated with universal social welfare programs such as we see in Sweden. • Generalized trusters are more tolerant of minorities and are more likely to support rights for these groups. They are also more supportive of immigrants and of open markets as well as of an active role for their country in world affairs.

7. Democracy does NOT lead to greater trust in fellow citizens. Many who have written about trust (Margaret Levi, Bo Rothstein, Jean Cohen, Claus Offe, Wendy Rahn and John Brehm) argue that the state can produce trust in fellow citizens by impartial institutions that lead people to believe that evil doers will not get away with their misdeeds. • Trust is but one route to get compliance with the law. When trust in other people is high, people are more likely to behave honestly. But they may also behave honestly if the government strictly enforces the law. We may not see much difference in compliance with the law in high trusting societies such as Sweden and countries such as Singapore where even minor violations of the law will be severely punished.

8. Democratization is not a direct route to trust. • The correlation between change in trust in 22 nations from 1981 to the early 1990s (according to the World Values Survey) and variations in Freedom House scores from 1978 to 1988 is modestly negative (-.381). Yet, even this result turns out to be largely an illusion. Without the outlying cases of Argentina and South Korea, the correlation drops the correlation to -.076. An Indian journalist commented on the sharp cleavages that led to a cycle of unstable coalitions, none of which could form a government: “We have the hardware of democracy, but not the software, and that can’t be borrowed or mimicked.”

9. There is little empirical evidence that either strong institutions or faith in government lead to generalized trust. Generally, the correlations between trust in people and trust in government are not large. Trust in people reflects a deep-seated value that doesn’t change readily. Trust in government reflects satisfaction with the performance of the current regime.

10. Democracy may not create trust, but Communism certainly destroyed both trust and participation in voluntary associations. The totalitarian regime made it risky to trust anyone, even family members. So it is hardly surprising that few people in transition countries believe that “most people can be trusted.” As Marc Morje Howard argued in The Weakness of Civil Society in Postcommunist Europe, people in Communist countries saw civic associations as instruments of the state. Even after Communism fell, people still viewed civic associations with suspicion. They also remained wary of their fellow citizens. • The following tables show the percentage of group members in Western and transition countries, respectively. • The levels of both trust and civic participation among people in transition countries are low.

13. Trust is much lower in transition countries than it is in the West. In the World Values Survey, the mean percentage of people who agree that “most people can be trusted” is 42%, with a standard deviation (spread) of 11.3. There is a wide range of variation in the level of trust among Western nations. The most trusting countries include the Nordic nations: Norway (65%), Sweden (60%), Denmark (58%), the Netherlands (54%), Canada (53%), and Finland (49%). • Transition countries rank much lower in trust than the West. The mean share of trusting people is 23.7%, with a tiny standard deviation (5.7). Transition countries have almost uniformly lower levels of trust, as we see in the following list:

14. Share of Trusters in Transition Countries • Country Trust Share • Armenia 25 • Azerbaijan 21 • Belarus 24 • Bosnia 28 • Bulgaria 30 • Croatia 25 • Czech 30 • East Germany 25 • Estonia 22 • Georgia 23 • Hungary 25 • Latvia 25 • Lithuania 22 • Macedonia 8 • Moldova 22 • Montenegro 32 • Poland 18 • Romania 16 • Russia 24 • Serbia 30 • Slovakia 23 • Slovenia 16 • Ukraine 31

15. The eight formerly Communist countries included in the World Values Survey in both 1990 and 1995-97 (Belarus, East Germany, Estonia, Latvia, Lithuania, Poland, Russia, and Slovenia)became five percent less trusting, but the average democracy score from Freedom House increased from a “not free” 11 in 1988 to a more “free” 4.75 in 1998. • Every transition country included in both surveys except for Belarus and (barely) Slovenia had a lower level of trust in 2000 than in 1990. From 1990 to 1995, eight of nine transition countries had lower levels of trust (the exception being Latvia).

16. Our Romanian survey of the mass public had a companion survey of organizational activists in Cluj-Napoca. These activists are generally young people, often university students. Organizational activists are far more participatory, trusting, and tolerant than ordinary citizens in Romania. • Organizational activists resemble ordinary citizens in Western democracy more than they do citizens in Romania or other transition countries. • 24% of organizational activists volunteer for youth, environmental, animal rights, peace, charity, consumer, or women’s organizations. 8.7% donate money to these same organizations. 38% volunteer for some type of organization and 18% give to some charitable cause. Organizational activists are also more likely to participate in politics. On our scale of 12 political acts, organizational activists took part in an average of 2.6, with the most active involved in 3.4 acts, compared to .8 for the mass public. • Organizational activists are more trusting (both of other people and political institutions) and are more tolerant:

18. Across many countries (and over time in the United States), there is one “real-life” factor that shapes both optimism and trust: the level of economic inequality in a country. The more inequality, the less trust. Equality promotes the vision of a shared fate, where others are part of your “moral community.”

19. In an unequal world, it is difficult to establish bonds between those at the top and those at the bottom. Trust also depends upon a foundation of optimism and control. People are optimistic and feel that they have control over their environment when the gap between the rich and the poor is small.

20. People in trusting countries, especially the West, are far more optimistic than people in transition countries. Many people in transition countries have lost faith that the future will be better than the past—and they will look upon others with suspicion. • The statistical models estimating trust in the West and in transition countries work well for both sets of countries. In both sets of countries, using data from the World Values Survey, I found that optimism for the future was by far the strongest predictor of generalized trust (Uslaner, “Civic Engagement in East and West” in Badescu and Uslaner, eds., Social Capital and the Transition to Democracy.

21. As the graph shows, the connection between trust and inequality only holds for countries without a legacy of Communism. In the transition countries, the correlation between trust and inequality is very low (r = -.25). • Some of this may be due to the structure of the economy in the East prior to transition (manufactured equality) or the poor measurement of trust in surveys.

22. However, there is a stronger connection between change in trust from 1990 to 1995 and change in inequality from the late 1980s to the mid-1990s. As inequality increased in transition countries, generalized trust fell.

23. There are two related aspects of government that are important for generalized trust: • Corruption • Fairness of the legal system • Both are key issues in transition countries.

24. The roots of corruption lie in the unequal distribution of resources in a society. Economic inequality provides a fertile breeding ground for corruption–and, in turn, it leads to further inequalities. The connection between inequality and the quality of government is not necessarily so simple: As the former Communist nations of Central and Eastern Europe show, you can have plenty of corruption without economic inequality. The path from inequality to corruption may be indirect–through generalized trust–but the connection is key to understanding why some societies are more corrupt than others. • Even though transition countries have had--and still have--lower levels of inequality, increasing inequality since transition is linked with increasing corruption.

25. My argument stands in contrast to more traditional institutional accounts of corruption, which often suggest that the cure for malfeasance is to put the corrupt politicians in jail. If we do so (and we ought to do so), they will be replaced by other corrupt leaders. Nor do we need a reformed system of government that either centralizes power to herd in independent “entrepreneurs” who extort businesses or average citizens (Treisman, 1999) or decentralizes power to prevent an all-powerful “grabbing hand” (DiFrancesco and Gitelman, 1984, 618; Fisman and Gatti, 2000; Kunicova and Rose-Ackerman, 2004).

26. Changing institutions may not be easy, but its difficulty pales by comparison with reshaping a society’s culture or its distribution of wealth (and power). Corruption, inequality, and trust are all “sticky”: They don’t change much over time. Yet, all is not lost: As we shall see, there are more malleable ways to control corruption: Policy choices that countries make also shape corruption. Countries that have very high levels of regulation of business have more corruption. In turn, the level of regulation is shaped by the fairness of the legal system, the openness of the economy, and whether the government is military or civilian.

27. Corruption is higher in transition countries than in the West. The mean score on Transparency International’s 2004 Corruption Perceptions Index for transition countries is 3.5 (0 = completely corrupt, 10 = completely honest). For the West, the mean score is 7.9. • The fairness of the legal system is also much lower in transition countries. The mean score on the Economist Intelligence Unit’s legal fairness measure for 2004 is 2.6, compared to 4.4 for the West (1 = very unfair, 5 = very fair).

28. Corruption and an unfair legal system can lead to less trust because they exacerbate inequality. • Corruption thrives in an atmosphere of inequality. And the unfairness of the legal system gives advantages to those with political and economic power.

29. 34 percent of people in societies where corruption was seen as widespread thought the only way you could get ahead was by luck, compared to 29 percent in honest societies. People who believed that the future looked bright were significantly less likely to condone buying stolen goods or taking bribes. If you live in a more honest society, you are less likely to condone cheating on taxes. • Corruption leads to the belief that there is no way to get ahead fairly–so that the ideals underlying what Rawls calls a “well-ordered society” do not develop strong roots. In a “well-ordered” society “everyone accepts and knows that the others accept the same principles of justice, and the basic social institutions satisfy and are known to satisfy these principles” (Rawls, 1971:454). It is prosperous and its government earns the approval of its citizens.

30. How strong is the relationship between corruption and inequality?

31. The plot of inequality and corruption is striking: Across 85 countries, there is a weak (at best) relationship. The r2 is a paltry .082, suggesting no relationship at all between inequality and corruption. I offer a lowess plot of inequality and corruption. The lowess curve suggests a slight downward slope–more inequality leads to more corruption (or less transparency). But the pattern is not at all clear and we can see from this figure that two groups of countries stand out: the former and present Communist nations, which have lots of corruption and relatively equitable distributions of income (lower left part of the graph), and the Western industrialized nations, which have relatively low inequality and even less corruption than we might expect based upon their distribution of wealth.

34. Corruption thrives in an atmosphere of low trust. When people trust their fellow citizens, they are more likely to behave honestly toward them. • Corruption is high when generalized trust is low and particularized trust is strong, as Gambetta argues for the Italian Mafia. Particularized trust makes it easier for people to cheat people who are different from themselves.

35. This does not mean that inequality is not a critical factor in corruption. High levels of inequality lead to low levels of generalized trust--and high levels of in-group trust. Low generalized trust is strongly related to high levels of corruption. • I argue that the relationship between inequality and corruption may be indirect and reciprocal, leading to an inequality trap: • inequality –> low generalized trust & high in-group trust –> corruption –> inequality

36. There is a strong relationship between trust and corruption across 83 countries.

37. Another factor that exacerbates inequality is an unfair legal system. • The justice system is especially important for two reasons. First, a corrupt court system can shield dishonest elites from retribution. Second, the courts, more than any other branch of the polity, is presumed to be neutral and fair.

38. There is a strong relationship between fairness of the legal system and corruption across 86 countries:

39. The Bulging Pocket and the Rule of Law • I estimate a six equation model of corruption across 62 countries–the number of countries on which I have data on all variables in the model. The six endogenous variables are corruption (the TI Index), generalized trust (with imputed values), the level of regulation in a country (from the World Bank Governance data set for 2002), economic inequality, the overall level of risk in a country (from the ICRG data), and a new measure of government effectiveness. This measure is a factor score derived from aggregate level responses to questions posed to business executives in the 2004 Executive Opinion Survey of the World Economic Forum.

40. The key questions I pose are: • Is there a direct relationship between trust and corruption? • Is there a direct relationship between economic inequality and trust–and does it flow from inequality to trust (Uslaner, 2002, ch. 8), trust to inequality (Knack and Keefer, 1997), or both ways? A direct relationship between inequality and trust and a similar connection between trust and corruption would provide support for my argument that inequality has an indirect impact on corruption.

41. Does corruption in turn lead to more inequality? Corruption slows economic growth (Leite and Weidemann, 1999; Mauro, 1995, 701; Tanzi, 1998, 585). It reduces the amount of money available for various government programs, including the government share of the gross domestic product and expenditures on the public sector, for education, and transfers from the rich to the poor (Mauro, 1998, 269; Tanzi, 1998, 582-586). So we should expect that it would lead to more inequality–even if there is not a direct link from inequality to corruption. • Is the fairness of the legal system an important determinant of corruption? The fairness of the legal system should also shape the level of regulation in a society. An independent and fair judiciary should also lead to less regulation. Political leaders would not attempt to control business if they believe that the courts would step in and challenge attempts to capture the state.

42. Does corruption lead to less stable and less effective government? Corruption should lead investors to shy away from a country, for fear of expropriation or being compelled to function in a weak legal enviroment (Rose-Ackerman, 2004, 6). Corruption should also lead to less effective government. When leaders steal from the public purse, they shouldl be less responsive to the broader public. • Does ineffective government lead to greater corruption? Does effective government lead to better policy choices–especially policies that reduce inequality and create greater support for the regime? • Do higher risk ratings lead to less effective government or to poor policy choices? Countries with higher risk ratings should be likely to adopt strangling regulations that distort market competition. These regulations in turn should lead to greater corruption in a vicious cycle.

43. Do trust, corruption, a country’s risk rating, and effective government rest upon institutional foundations–or upon cleavages within society? I expect that structural factors should not be the key determinants of trust, corruption, a country’s risk rating, or effective government–except for the fairness of the legal system. Rather, corruption should depend upon trust and policy choices; risk ratings and government effectiveness should depend upon corruption and the health of a country’s economy–and on its domestic conflicts. And trust, in turn, depends on economic equality and its historical legacies of culture and conflict. • Putnam (1993, 111, 180) argues that trust and good government go hand-in-hand: Good government promotes trust (cf. Levi, 1998; Rothstein, 2001) and trust promotes good government. Is there a reciprocal relationship or does it only go one way–and, if so, which way? I expect that trust will encourage good government, but that good government should not lead to greater trust (Uslaner, 2002, chs. 2, 7).

44. A key part of my argument is that clean government--low corruption--is largely shaped by economic inequality, culture, and policy--rather than institutions. • Clean government leads to effective government rather than the other way around.

45. An enduring question is how we measure effective government. This is an issue on which there is little agreement. Effective government must be more than clean government--and it must be more than popular government. • Here I use country-level indicators from the 2004 Executive Opinion Survey of the World Economic Forum.

46. Factor Analysis of Government Effectiveness Measures: • World Economic Forum Executive Opinion Survey 2004 • VariableLoadingCommunality • Judicial independence .919 .908 • Efficiency of legal system .976 .971 • Efficiency of legislative system .913 .852 • Wastefulness of government spending .876 .801 • Favoritism of government decision making .942 .901 • Transparency of government decision making .934 .882

47. Government Effectivness Factor Scores (World Economic Forum Executive Opinion Survey 2004)

48. Across a wide range of countries, I have found strong support for a model with the following linkages:

49. Particularized Trust Generalized Trust Inequality Legal Fairness Corruption Strict Regulation Overall Risk Effective Government Inequality leads to lower trust and to poor government. Low trust leads to more corruption. Unfair legal systems lead to strangling regulation and to more corruption. Strangling regulation leads to greater corruption. Poor government also leads to strangling regulation. Corruption leads to poor government and to more inequality. Ethnic Tensions