Who do you trust and why does it matter?

trust-but-verify-e1389107073481Would you trust a banker? Stop laughing now…you there, in the back, stop it… Now, seriously, would you? More to the point perhaps, would a banker trust you? And what matter if they did or didn’t? Generalising, how much trust do you place in your business partners up and down the supply chain?  In others in the financial system? And does it matter?
There is increasing evidence that trust matters for economic and financial outcomes. Trust is something intangible, but measurable. The World Value Survey , a survey of tens of thousands of persons which takes place every few years, includes questions on trust.  Questions are along the lines of “Generally speaking, would you say that most people can be trusted, or that you can’t be too careful in dealing with people?”.

Recent work suggests that trust matters a lot. It matters in particular for trade credit., the management of payments and receivables to smooth cashflow and aid liquidity. Although unglamorous, trade credit is an essential element of company finance. Finance is used for two things – investment (for which bank loans, equity and other forms of long tenor loans are optimal) and liquidity (for which short-term bank credit, overdrafts and trade finance are ideal).  Trade credit can thus be seen as a partial substitute for other forms of finance, in particular bank finance. Irish firms,  from recent research, are especially fond of using trade credit. 75% of Irish SME’s use trade credit, as opposed to the European average of 50%. Other evidence suggests that the role of trade credit was vital to Irish  SME’s during the financial crisis, and that the ability to use trade credit effectively was a cucial determinant of the likelihood of  a firm being able to weather the liquidity storm. This was especially important in the context of overall liquidity and especially trade credit shrinkage. Berger and Udell, the names in research on firms finance choices, suggest that Trade Credit is perhaps one of the most ubiquitous forms of finance firms can obtain.

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US researchers have also looked at the role of Trade Credit in times of crisis. Across 34 countries that saw financial crises since 1990 those in countries with higher levels of social trust came out better than those in lower. They obtained more credit, had lower levels of unemployment and retained higher levels of profitability This was especially the case for those with higher liquidity needs.  Other researchers have examined trade credit in China, and look at private companies. The evidence is strong that, especially for regions where institutional rights are lower, making it harder to enforce contracts etc, the higher the level of social trust the greater the reliance on trade credit. Social trust can act as a counterweight to formal structures being weak.

More generally, increased social trust has been shown directly and indirectly, to be positively associated with economic growth.  Researchers have developed models of economies with low and high trust and find that higher trust leads to higher investment and output.  A key predictor of this model is that lower trust countries can be caught in a poverty trap – it costs to verify and the cost may be higher than the possible benefits, resulting in lower investment and spending. There is significant evidence that trust matters a great deal for long-term economic development, perhaps at least as much as things like institutional strength. Indeed, taking the evidence on its face value, and controlling for institutional, endowment government factors African countries and India would, it is argued, have more than doubled their GDP if they displayed levels of social trust similar to that of Sweden. Even if this is an order of magnitude out the effect is still massive.

So increased or greater social trust is, economically, a good thing.  The issue then for policymakers, such as the new transparent open etc government we are now blessed with, is how to increase or engender social trust.

One way is equality. There is a bit of a chicken and egg here – the more equality we have the greater the degree of social trust. The evidence is not clear on what happens to social trust when we change equality. It seems to depend on the type of equality we operationalize- economic equality is to a great extent an outcome, arising from increased equality of opportunity. Equality of opportunity

So where stands Ireland ? It might come as a surprise to many to know that social trust has not, so far, been  eroded by the last decades trials and tribulations. A paper last year examined the different experiences of social and political trust. The European Social Survey is a pan European survey conducted every two years, with about 2200 Irish respondents, and it also contains questions on social trust. With 2002 as a baseline trust in others and indeed trust in politicians was down only a little in 2012. Indeed, preliminary 2014 analyses suggest the same. Our faith in politicians and in other people has eroded only a very little. Internationally, we have quite a high degree of social trust, up with the Scandinavians. Again, this might surprise people but data don’t lie. Indeed, it might surprise to find that we trust the police quite a fair bit more than we trust each other, and that we trust the European Parliament a fair bit also

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Our high level of social trust is a massive asset. The evidence is strong that redistributive welfare systems, good universal education and a strong corpus of political freedoms – all of which we have in spades – engenders and strengthen social trust. That in turn feeds into economic strength. The new government should keep that in the forefront of its mind in its deliberations. The old irish habits of meitheal and neighbourliness are still extant and we need to cherish and build on them. The crisis saw a concerted attack on social trust from many in the media. Sides were pitted – urban v rural, public v private sector, migrant v stay at home – and wedges driven. Thats not just socially but economically wasteful.

 

A longer version of a column published in the Irish Examiner, 14 May 2016

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2 thoughts on “Who do you trust and why does it matter?

  1. Pingback: Trust is a massive asset | What is behavioral?

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