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Placing our trust in trust

There can be no denying that industrialised societies have a higher level of trust and trustworthy behaviour among their citizens than poor nations, writes Kaushik Basu.

india Updated: May 24, 2008 23:51 IST

When she was in her 60s, my father’s youngest sister, once shared with me a puzzle about her health that had clearly been troubling her. “I don’t know why I keep such poor health, I eat nothing but sweets.” To me, the diagnosis was contained right in that sentence.

I remembered her remark recently, reading about the endless debates on economic growth. From the Washington Consensus to the more recent Growth Commission of the World Bank, experts have debated the determinants of growth and tried a slew of policies. But large tracts of sub-Saharan Africa, much of South Asia and big chunks of Latin America have proved stubborn beyond expectation. It is noteworthy that all these prescriptions have had to do with economic variables — monetary policy, fiscal rules and trade regimes. Is it possible that therein lies the flaw?

I believe the answer is yes. What the conventional wisdom has overlooked is that economic growth owes much to non-economic variables — to culture and social norms, to our habits and collective beliefs, in brief, to variables that traditional economic theory sweeps under the carpet as unimportant. There is fortunately some new research trying to uncover the links between social norms and economic growth. I shall here dwell on one such theme — trust.

There can be no denying that industrialised societies have a higher level of trust and trustworthy behaviour among their citizens than poor nations. What I am suggesting is that this is not mere coincidence. It could not have been otherwise. Unless these societies had inculcated minimal standards of personal integrity and trustworthiness, they would not have succeeded in achieving high economic growth. The phenomenal success of East Asian economies through the sixties and seventies owes some credit to good economic policy, but it also owes a lot to the norms of honesty and trustworthiness that had come to be a part of East Asian life. If we want India to have sustained development, we must try to instill norms of personal integrity in the citizenry. Clearly, the country has some distance to go on this score.

The crux of a prosperous economy is efficient contract enforcement. In industrialised societies, people have to reach agreements and plan on exchange, some of which can be protracted over long stretches of time. In the mortgage market for instance, we take a loan in an instant and promise to pay it back over decades. In societies in which contracts are poorly enforced, people quickly learn not to get into contracts. Since modern, industrial societies depend on contracts and agreements, societies that fail to enforce them will fail to become modern and industrialised. It is not surprising that India’s mortgage market developed only after we had in place a system of enforcing long-term mortgage contracts. And without such enforcement many people who now own homes would never have done so.

There are, however, limits to how much government can do. There are hundreds of situations in life where minor contracts and expectations need to be fulfilled, where it is impossible to have a third party, like government, check them all out. When we eat in a restaurant, we need to be able to trust that the kitchen is clean. When we fly an aeroplane, we need assurance that the engines are in order. Hence, a nation in which people are innately honest and trustworthy, has a great advantage and, conversely, a nation without these traits is handicapped.

These valuable traits cannot however be developed by repeating simple mantras, like ‘Honesty is the best policy’. For one, that is a lie. Teaching people to be honest by propagating a lie is unlikely to be successful. For each person, individually, honesty is not always the best policy. If it were, we would not have to work so hard to persuade people about it.

The problem arises from the fact that traits like trustworthiness, honesty and industry are treated by most human beings as group characteristics. Hence, we talk of ‘Protestant ethics’ and ‘Confucian values’, we think of some groups as being more industrious than others and some nations being more trustworthy than others. And when this happens, it is not in your interest to develop these traits because you will anyway be judged, at least in part, by your group identity.

Hence, we cannot develop these desirable characteristics by appealing to self-interest. They have to be nurtured as ends in themselves, as innate moral qualities. A huge responsibility for this lies with our leaders in government, industry and other walks of life. A vast majority of our politicians and industry leaders make for poor role models. Fortunately, there is a minority that is different. Let us hope that the ranks of this minority grow. Ordinary people could learn from them. Once good norms are in place, the rewards for the economy as a whole can be enormous.

(Kaushik Basu is C Marks Professor and Director, Center for Analytic Economics, Cornell University)