“Trust and Economic Growth in the Knowledge Society”

1. “Trust and Economic Growth in the Knowledge Society” Eric M. Uslaner Professor of Government and Politics University of Maryland College Park, MD 20742 http://www.bsos.umd.edu/gvpt/uslaner

2. Trust has many different meanings: • Strategic trust: trust we gain from daily experience. • Particularistic trust: trust in people like ourselves. May stem from direct experience or from stereotypes. • Generalized (moralistic) trust: Trust in strangers, especially people who are different from ourselves. Cannot come from interaction with people we know.

3. Trust as a key component of social capital, helping us to find ways of cooperating with others. The other key part of social capital is our social connections, both formal –membership in voluntary organizations–and informal – our social connections.

4. Generalized trust rather than strategic or particularistic trust is the cornerstone of the benefits of trust. We gain when we see strangers as offering opportunities rather than risks. • Trust is a moral value. We learn it early in life and it is stable over the years for most people.

5. Trust and Socialization • We learn trust at an early age from our parents. There is a strong carry-over from parental trust to children's trust. Parents' levels of trust continue to exert powerful effects on their children even when the children become adults themselves. • Early experiences, then, play a key role in developing trusting (or non-trusting) attitudes.

6. Young people who have good and supportive relations with their parents are more likely to trust others. Parents should be encouraging and warm, but not overbearing.

7. Trust and Globalization • In a globalizing world, people need to be connected to others all over the world, and many of these people will have different backgrounds and worldviews. • Generalized trust helps us make globalization work. Thomas Friedman writes in The World Is Flat (p. 327): "When tolerance is the norm, everyone flourishes--because tolerance breeds trust, and trust is the foundation of innovation and entrepreneurship."

8. Trust makes globalization work because trust: • provides the basis for working with people of different backgrounds; • promotes factors that are essential to globaliztion: use of technology (especially the Internet), more open markets, less corruption, and treating others as equals. • One of the key features of a globalizing economy is education--and trust both depends upon education and leads to greater spending on education.

9. Trust is thus an essential part, perhaps the essential part, of the syndrome of forces that leads to a more globalized economy, more open markets, and greater economic growth. • Without trust, countries will face greater problems in dealing with the challenges of globalization.

10. Generalized trust depends upon a foundation of equality. 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.

11. Across many countries (across the American states 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.”

12. 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. In an unequal world, people will be reluctant to take risks in dealing with people who might be different from themselvs. They will press for closed markets and work within their own cultures--and will tolerate corruption.

13. Authoritarian societies destroy trust. But democratic societies do not create trust. Democracy is consistent with high and low levels of generalized trust. Democratizing a regime will not automatically lead to higher levels of trust.

15. When people trust strangers, they will take risks such as opening markets. Societies with high levels of trust have more open markets.

16. They will also have higher levels of globalization, more broadly defined.

17. They are more likely to use new technologies of communication such as the Internet. Individuals in the United States who trust others are more likely to use the Internet for commerce; they do not fear that their Internet transactions will violate their own privacy.

19. More recent data for a larger number of countries supports the same argument: More people will use the Internet when there is higher trust.

20. Trust, the Cutting Edge, and Innovation • In individual-level survey data from the United States (the General Social Survey), confidence in science is one of the strongest predictors of trust. • Even though confidence in most institutions does not lead to more trust, science is distinctive. • Confidence in science matters because science gives us the capacity to control our environment and trust is all about being masters of our fate.

21. So it should not be surprising that countries with higher levels of trust would invest more resources in science. • The number of scientific researchers per million people is greater in countries with higher levels of trust (using UNESCO data on the number of scientists reported by the Environmental Stability Index).

23. Together with science comes innovation. The World Economic Forum rated countries according to their levels of scientific innovation. • More trusting countries are considerably more likely to be innovative.

25. It is not surprising, then, that societies with higher levels of trust will have better performance, as measured by higher levels of economic growth.

26. Social capital is more than just trust. Putnam, in Bowling Alone, argues that social capital includes trust, social ties, and membership in voluntary associations. All are expected to bring benefits to society. The benefits of membership in voluntary associations are less clear. Do countries with high levels of voluntary association membership also have better functioning governments and societies?

27. Trust is more important than voluntary association membership in creating wealth. Globalization and economic growth do not depend upon this “other” component of social capital. But they do depend upon trust.

30. More trusting societies spend more on education per capita and transfer more of their resources from the rich to the poor.Trust forges bonds across groups and social classes and leads those who are well off to care about the fate of those less well off.

33. Corruption rests upon a foundation of low generalized trust and high in-group trust, as Gambetta noted about the Italian Mafia. The higher the level of trust, the lower the level of corruption (higher scores on the corruption index indicate more honest governments):

34. Corruption is also fundamentally a relationship that rests upon inequality and leads to more inequality. • Corruption also stems from an unfair legal system and from strangling regulations. It leads to lower economic growth, less effective government, and less stability in economic performance (greater risk).

35. Low trust and corruption form part of a syndrome of "bad social capital" that threatens the global economy in the knowledge society. • Corruption raises the cost of doing business and makes firms less willing to invest in countries with high levels of dishonesty. • Low trust and high corruption have common sources--and negative consequences for economic growth.

36. Corrupt governments have less to spend on social programs. They also are more likely to close markets and to have a weak rule of law. • Economic growth and globalization depend upon the rule of law--and the fairness of the legal system. An unfair legal system promotes corruption and low trust. It constitutes one of the greatest threats to a globalized economy.

37. In my book in progress, The Bulging Pocket and the Rule of Law: Corruption, Inequality, and Trust, I present the following model of the interconnections amnog trust, corruption, inequality, the quality of government, and economic policy:

38. 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

39. Democratic governments are less corrupt. However, changes in corruption are not attributable to greater democratization.

40. Trust, Business, & Globalization • Globalization depends upon well regulated markets--the rule of law. • High levels of corruption, weak property rights, unenforceable contracts, and an unfair legal system make businesses less willing to invest in a country--and works against globalization.

41. Trust forms the basis of "business on a handshake," where potential business partners agree to do business without a formal contract. The informal bonds of trust were said to be more conducive to good relations than were legal documents enforced by courts. • In today's world with globalized markets and contracts for millions of dollars, "business on a handshake" is no longer feasible.

42. What we see today is that trust and the law have become partners, rather than rivals. • Countries with strong and fair legal systems are countries with high degrees of generalized trust. The fairness of the legal system, as measured by the Economist Intelligence Unit, is much stronger in countries where generalized trust is strong (r2 = .376, N = 84).

43. High trusting countries are more likely to protect property rights. Both objective measures of the protection of property rights (a 1997 World Bank index) and subjective measures (business executives' perceptions of how well property rights are protected, from the 2004 World Economic Forum Executive Opinion Survey) show robust relations with generalized trust (r2 = .411, N = 51 for the World Bank measure and r2 = .380, N = 78 for the subjective measure).

44. One of the great threats to globalization is unenforceable contracts. Contracts are more likely to be enforced (as measured by Rafael LaPorta) in countries with high levels of generalized trust (r2 = .518 , N = 44). • Countries with high levels of trust have stronger legal systems. However, there is no direct linkage from any measure of legal quality, property rights, or contract enforcement to generalized trust. You can't create trust through the strong arm of the law. But trusting societies have stronger legal systems.

45. Trust is a key component of the cooperative spirit that “makes democracy work.” Yet, it is not easy to "create" trust where there trust is low. Trust is remarkably "sticky." The r2 between generalized trust, as measured in the 1981, 1990-1995 World Values Surveys across between 1980 and the 1990s is .81 for the 22 nations included in both waves—the r2 between generalized trust in 1990 and 1995 is also robust (.851, N = 28).

46. Corruption and inequality are also sticky. There is little evidence that countries can escape the curse of corruption easily–or at all. The r2 between the 2004 Transparency International estimates of corruption and those of the ICRG (International Country Risk Guide) in 1980-85 across 52 countries is .742. The r2 for the most commonly used measures of economic inequality (Deininger and Squire, 1996) between 1980 and 1990 is .676 for a sample of 42 countries. A new inequality data base developed by James Galbraith extends measures of inequality further back in time and across more countries. The r2 between economic inequality in 1963 and economic inequality in 1996 is .706 (for 37 countries).

47. The Inequality Trap • This stability of trust, corruption, and inequality--and the strong interconnections among them suggests that it will not be easy to build up trust or to end corruption. • To build trust, we need to focus on two key issues: (1) the socialization of our children, making sure that they have strong values and opportunities to interact with people of different backgrounds; and (2) policies designed to lessen economic inequality.

48. Trust and Education • Young people who have friends of a different background are also more likely to become trusters as an adult. • School offers a great opportunity to build trust--since more highly educated people are more trusting. Young people learn about other cultures in school and may come into contact with people of different backgrounds.

49. Simply spending money on social programs will not reduce economic inequality. Spending has to be targeted by policy but not by recipient. Education is one of the best investments we can make, since it provides people with opportunities to advance themselves and to participate in the global economy. The higher the level of education in a country, the more trusting the citizenry.

50. Targeting people is likely to be counterproductive. Bo Rothstein of Goteborg University (Sweden) and I have shown in a new paper, "All for All," published in World Politics (58, October, 2005), that means-tested programs are counter-productive. They do not reduce inequality or eliminate poverty. And they stigmatize those who receive such benefits. • Instead, the type of policy that can reduce inequalities is universal social welfare policies (including education).