Why Trust (Or Lack of It) Can Mean Poverty or Prosperity

Question: Is there a link between trust and poverty?

Paul Zak:  So the kind of key issue that drove me into neuroeconomics was something I found in the late 1990’s, that trust at the level of a country was the big gun to explain why countries are rich or poor.  So economists have for 50 years or more, looked for the factors that cause a country to grow and become prosperous or those factors are missing and countries are mired in poverty.  And trust really was this huge factor.  High-trust countries are by and large rich countries, or certainly fast-growing countries, and poor countries are countries with low trust.  And the variation of this data is substantial. 

So the last data I saw, 2% of Brazilians said they trust each other, whereas in the United States around 45% of Americans said they trust each other and two-thirds of Norwegians trust each other. 

So we characterized why trust would be higher or lower across different environments.  And the payoff to raising trust, which can be done through public policy, is substantial in terms of improving people’s lives. 

Countries in which trust is high have effective governments, they have very tight social structures, people interact very nicely with each other, they don’t have a lot of divisions, and there’s a positive feedback loop.  They have higher incomes which further accentuates greater growth.  So trust is this kind of great summary measure of a society in which things are working well.  And lack of trust therefore is a measure of how things do not work well in society. 

Question: What does this mean for a nation’s potential?

Paul Zak:  So there’s kind of an upside and a downside to this cross-country trust where one is that we find that there is a threshold level of trust in other people below which you get very little growth at all.  And that threshold depends on the environment of that country being in.  But if trust is too low, it’s just too hard to engage in transactions.  There’s too many, what economists call, transaction costs.  I need lawyers and judges and the cops to enforce all of these agreements.  And so therefore, the number of people I interact with economically gets very small.  I am only going to interact with my family or my clan or someone who is really trusted because I can’t count on the government to enforce these contracts.  That limits the size of the market and therefore the number of transactions that can occur that increase prosperity. 

So for the developing countries, this is particularly critical that you need to have solid institutions that will facilitate economic transactions.  So trust, for example in China is quite high.  China has a very effective government; even though it is authoritarian, it's market oriented. And other work I’ve done we’ve shown that with sufficient growth, all authoritarian governments eventually become democracies.  So personally, I’m less concerned with China as an authoritarian system—although I think the human rights abuses are horrendous.  That will resolve itself as economic growth proceeds, because it moves power away from the center and towards the individual.  And when individuals have economic power, they can press a government to be better. 

And so I think that’s the way to make progress in developing countries.  In other developing countries, largely in sub-Saharan Africa and some in South America, you see trust levels that are so low that you see no or little economic growth. And so in some of these countries, Haiti comes to mind, Venezuela, you have such corrupt governments that there’s no reason to even undertake transactions.  You do what you need to eat and then most of the money flows out of that country into the United States or into the West, where the money is safer.  So that’s a huge problem and I think the way to solve that is not necessarily internally; it may require international focus on improving institutions in these countries.  So the World Bank has a program that has done some work in this area, but it’s awfully hard to move a country that has very poor institutions into one that’s got very good institutions absent something catastrophic.
 
Question: Is there another option?

Paul Zak:  The alternative approach is to start from the ground up.  So if things like microfinance and micro-entrepreneurship are a way to take economic power and bring it back to the individuals even at the lowest levels; weaving cloth, making pottery.  And the way to do this now I think is through the Internet, where you can have collectives that sell to someplace that gets this to a larger market and that allows small farmers, small weavers, these individuals to actually earn a living that doesn’t depend or even outside of a purview of a corrupt government.  And as they do that they build this ground swell of support of better institutions because they have enough capacity to do that. 

So if your belly is empty, you’re worried more about getting enough calories onboard than about whether your government is inflating the currency.  But once you actually have some economic base, then there can be a role for ground level change in governments.  And I think this is one reason why the United States had these brilliant framers, but the decentralized power and so there’s a constant feedback between keeping power from centralizing in the United States and allowing it to disperse, which creates better government.

Recorded October 27, 2010
Interviewed by John Cookson

Nations where trust is high have effective governments, very tight social structures, and better interactions among people—they also have higher incomes and greater growth.

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