Tài liệu The Effect of Social Trust and Economic Growth pdf

Aarhus School of Business, Aarhus University Master of Science in International Economic Consulting Master Thesis The Effect of Social Trust and Economic Growth Author: Lena Pfister Academic Supervisor: Christian Bjørnskov September 2010 Abstract: In recent years, social trust has gained in importance within social science, especially in an economic growth context. The thesis examines social trust as a potential determinant of economic growth using a panel data set including 116 countries over a time span from 1950 until 2005. The findings suggest a strong association between social trust and economic growth and stay robust throughout a Jackknife exercise and an extreme bound analysis implying that it is unlikely that these results are driven by outliers or omitted variables. Reverse causation is ruled out by adopting an instrumental variable approach. Further findings suggest that the effect of social trust on economic performance depends, however, on the development level of the country. Moreover, the analysis provides further evidence that human capital and legal quality are indirect links through which social trust has an economic effect. Finally, the thesis gives insight on the individual characteristics of the respondents that answer the trust question in the affirmative. Index I Index Index I Figures and tables II 0 Introduction 1 1 Overview of the literature 3 1.1 Social Trust 3 1.2 Social trust and growth 5 1.2.1 Direct effects of social trust on economic performance 5 1.2.2 Indirect effects of social trust on economic performance 6 1.3 Who trusts others? 8 2 Methodology and Data 10 2.1 Data description 10 2.2 Methodology 16 2.2.1 Basic assumptions 16 2.2.2 Random effects 19 2.2.3 Logit estimation 20 3 Econometric Analysis 23 3.1 Social trust and economic growth 23 3.2 Extreme Bound Analysis 29 3.3 Instrumental variables 31 3.4 Jackknife exercise 33 3.5 Divided sample 34 4 Transmission channels 38 4.1 Human capital 38 4.2 Legal quality 40 5 Determinants of trust 44 5.1 GSS 46 5.3 WVS 50 6 Conclusion 54 Appendix 60 Figures and tables II Figures and tables Figure 1: Social Trust and Log GDP per capita 1950 23 Figure 2: Social Trust and Log GDP per capita 2005 24 Table 1: correlation matrix PWT 25 Table 2: PWT regression 1 26 Table 3: PWT regression 2 27 Table 4: EBA 30 Table 5: Sagran Hansen statistic 32 Table 6: Instrumental variables 32 Table 7: Jackknife exercise 34 Table 8: Divided sample 36 Table 9: Human capital 39 Table 10: Human capital, divided sample 39 Table 11: Legal quality 41 Table 12: Legal quality, divided sample 43 Table 13: Overview GSS, WVS 1 44 Table 14: Overview GSS, WVS 2 45 Table 15: Overview GSS, WVS 3 46 Table 16: correlation matrix, GSS 47 Table 17: Social trust, GSS 48 Table 18: correlation matrix, WVS 50 Table 19: Social trust, WVS 51 Table 20: Social trust, WVS, USA/Canada 53 0 Introduction 1 0 Introduction The notion of social capital started to develop throughout the 20 th century. It did not, however, have its breakthrough until 1993 when Robert Putnam published “Making Democracy Work: Civic Traditions in Modern Italy”. In his book, Putnam investigates different regions in Italy with the same institutions and governmental structure and tries to explain why there are nevertheless huge disparities in economic performance between Northern and Southern Italy. His findings suggest that the economic disparities are due to different endowments of social capital in the two regions. Putnam’s work appeared to be a starting shot for social scientists to explore the topic, since it subsequently enjoyed a surge in popularity. Today a wide literature can be found and known journals like the “American Economic Review” and “Quarterly Journal of Economics” publish articles on social capital. It was in the latter that Knack and Keefer published their paper “Does Social Capital have an Economic Payoff?” in 1997. They were the first to examine different features of social capital separately in a standard empirical growth framework, and they provided proof that social trust in particular is positively associated with economic performance. Subsequently, more papers have been written on the issue, however, relatively few compared to the size of the social capital literature. Moreover, research within this topic has mainly been performed on the basis of cross sectional data. The aim of this thesis is to obtain further insight into the relationship between social trust and economic performance and thus to contribute to a deeper understanding of economic growth and social trust. To achieve this goal the analysis is based on a panel dataset and thus more comprehensive than previous studies. The questions investigated are: 1. Does Social trust influence economic growth? If so, how and to what extend? 2. Who does trust others? The thesis is structured as follows: The first chapter gives an overview of the existing literature and the current state of research. The concept of social trust is introduced in detail and its measurement is discussed. Subsequently, an overview of social trust within an economic growth context is given and direct and indirect links through which social trust might have an economic effect are presented. Finally, the literature on who trusts others is explored. 0 Introduction 2 The second chapter describes the data used for the analysis. Furthermore, the methodology applied is amplified. In this context the random effects model, which is applied in the third and fourth chapter and the logit model, which is applied in the fifth chapter are introduced. In the third chapter the effect of social trust on economic growth is investigated. Additionally, to verify the robustness of the results, an extreme bound analysis and a Jackknife exercise are conducted. Moreover, an instrumental variable approach is applied to control for endogeneity. The fourth chapter further examines the association between social trust and economic growth. To shed more light on how social trust might influence economic growth, the relationship between social trust and human capital and social trust and legal quality as two potential transmission channels are analysed. In the fifth chapter individual level data is applied to find out more about the characteristics of the trusting citizen. Moreover, it is investigated if the grandparents’ trust levels still influence their grandchildrens’ trust today. This could give more information about the stability of trust. The analysis of this chapter aims to get a deeper understanding of social trust, which could be useful for policy makers. In the conclusion, which is presented in the final chapter, the results of the analysis are summed up and evaluated. 1 Overview of the literature 3 1 Overview of the literature In 1993 Robert Putnam published the book “Making Democracy Work: Civic Traditions in Modern Italy”. He looks into the question why some democratic governments succeed and why others fail and aims at to contribute to the understanding of the performance of democratic institutions. He concludes that their success is based on their endowment of social capital, which he defines as “features of social organization, such as trust, norms, and networks that can improve the efficiency of society by facilitating coordinated actions” (Putnam, 1993: 167). Even though there is no consistent definition for social capital, Putnam’s is the one most referred to. Today social capital is well established as a determinant of growth. So much that the World Bank started a “Social Capital Initiative” in 1996 with the goal of further investigating the formation of social capital and its impacts on project effectiveness and development (World Bank, 2010). However, there have also been discussions about whether to treat social capital as an entity since its different features have different effects (Bjørnskov, 2006b). Several papers have shown that the three pillars of social capital, namely trust, cooperative norms and associations within groups have different or no effect on economic growth, whereas social trust appears to be the most promising candidate (Knack and Keefer, 1997; Newton, 1999; Whiteley, 2000). The first chapter is structured as follows: In section 1.1 the concept of social trust is introduced in detail and the way to measure it is discussed. Subsequently, an overview of social trust within an economic growth context is given in section 1.2. 1.1 Social Trust When the concept of social trust gained popularity within social science there were several discussions about what it consist of and how it can be measured. It became apparent that it is very important to distinguish between two kinds of trust (generalized and particularized trust). Social trust is mainly defined as generalized trust, i.e. it measures how much people trust others about whom they possess no information. This is opposing to particularized trust or reputation that is based on trust, 1 Overview of the literature 4 which in turn originates from previous experience or information obtained about others. How important this differentiation is shows the paper from Alesina et al. (2009) where they confirm Banfield’s (1958) theory of “amoral familiarsm” and show that there is a negative association between trust within the family and generalized trust. In recent years the following question has shown to be a good measure of social trust: “Generally speaking, would you say that most people can be trusted, or that you can’t be too careful in dealing with people?“ (trust question).This question originates from the German political scientist Elisabeth Noelle-Neumann who formulated it in 1948. It was adapted by for instance the General Social Survey (GSS) in 1972, the World Value Survey (WVS) in 1981 and the Barometers. These are today the main sources for researchers within this area and the number of countries for which the data is available rises every year. Yet, the validity of the trust question was questioned on several accounts. Glaeser et al. (2000) conducted an experiment with 189 students of the introductory economics course at Harvard University to investigate the validity of survey questions about hard-to-measure characteristics like trust and trustworthiness. First the students had to answer survey questions about trusting attitudes and trusting behaviour. Subsequently, trust and trustworthiness were measured by experimental behaviour by playing the Berg et al. (1995) “trust game”. Finally the two results were compared. They concluded that “standard attitudinal survey questions about trust predict trustworthy behaviour in our experiments much better than they predict trusting behaviour” (Glaeser et al., 2000). However, there was a severe problem with the setup of the experiment. They allowed students who knew each other to play together. Their reasoning was that non-random pairing procedure generates more variation in social connections. This had however the consequence that particularized trust rather than social trust was measured. In a recent study, Ostrom et al. (2009) repeat the experiment but ensure that the game is played anonymously. They find that “the response to the survey question regarding trust is highly significant and in the expected direction [positively correlated]”, which confirms the validity of the trust question. Another study by Sapienza et al. (2007) gets to the same result under the condition that the stakes of the game are sufficiently high. By the same token, they show that trust and trustworthiness are strongly related. In the trust game they find that “players 1 Overview of the literature 5 extrapolate their opponent’s behavior from their own”, which means that people who trust others are also more trustworthy. In general, an increasing support for the trust question as a measure for generalized trust, trustworthiness as well as a proxy for economically relevant beliefs can be observed. The latter is covered in the next section. 1.2 Social trust and growth Already Putnam associates social capital with economic performance. However, Knack and Keefer (1997) were the first to examine different features of social capital separately in a standard empirical growth framework (Bjørnskov, 2009a). In a cross section of 29 countries they show that social trust and civic norms are positively associated with economic performance whereas being a member of a network shows no effect. Zak and Knack (2001) found, in conformance with Knack and Keefer’s results that social trust is positively associated with economic growth, when they repeated the study with a larger sample of 41 countries. Additionally, they show that this relationship is causal, i.e. social trust promotes economic growth and is not just a consequence of it. Bjørnskov (2009a) provides an overview of the existing literature about social trust and economic growth in the “Handbook of Social Capital”. He gives an overview of several studies that find a positive association, which differs, however, in size. Bjørnskov calculates the average effect in these studies and concludes that an increase of trust by 10 percentage points increases the annual GDP growth rate by approximately half a percentage point. The following sections introduce direct and indirect effects social trust might have on economic activity. 1.2.1 Direct effects of social trust on economic performance As Knack and Keefer (1997) point out, in an economy many commercial transactions are determined by mutual trust between two or more parties. This can be a transaction between parties where goods or services are supplied in exchange for future payments. As within a company, managers have to trust their employees. In general, the principle agent problem arises when there is asymmetric or incomplete 1 Overview of the literature 6 information. Thus, need for trust rises with the extent to which the performed task is not monitorable, which is mainly the case for highly educated employees. Also, investment and saving decisions are dependent on the assurance of banks and governments that these assets are protected. The same is valid for the trust of agents that laws and rights will be abided or otherwise enforced like for example property rights. As outlined before, trust and trustworthiness are highly correlated (Sapienza et al., 2007). This means that the likelihood of dishonest behaviour in commercial transaction is lower in a high trust society since less money for protection is needed. Contracts for example do not have to be as specified and cover every contingency (La Porta et al., 1997). The probability of legal disputes decreases and therewith reduces the deadweight burdens of enforcing and policing agreements (Whiteley, 2000). Besides, managers can save money on monitoring their employees since they are more reliable in a high trust society. Moreover, Zak and Knack (2001) show that social trust and the investment rate are positively correlated. They find that investment/GDP share rises by nearly one percentage point for each seven percentage point increase in trust. This might be due to two reasons. Firstly, property rights are better protected in high trust societies. This increases the return to investment in innovation and hence incentives to invest in new products. Additionally, entrepreneurs have to direct less of their resources to protect themselves from possible dishonest behaviour of their employees and business associates. Secondly, since trust and trustworthiness create a safer investment climate, agents tend to invest more and choose investment projects with a longer time horizon, which might appear too risky in a low trust society. Long term financing is essential for the infrastructure industry, which in turn is an important driver of economic growth. In a nutshell, social trust decreases the costs of economic transactions and increases the investment rate and therewith enhances the economy with a larger capability for production. 1.2.2 Indirect effects of social trust on economic performance In addition to the direct influence of social trust on economic growth elaborated above, social trust might have a positive effect on the quality of institution and thus indirectly on economic performance (Knack and Keefer, 1997; Whiteley, 2000). [...]... paragraph, the relationship between social trust and economic growth is investigated Furthermore, the robustness of the results is tested in an extreme bound analysis, a Jackknife exercise and with instrumental variables Subsequently, the channels through which social trust might influence economic growth are examined, and finally the determinants of trust are further explored 3.1 Social trust and economic growth. .. data of 116 countries from 1950 until 2005 It is presented for averages of five years' sub-periods One of the variables of main interest is the measure of social trust The social trust scores are measured in how many percent of the population of a country answer the trust question in the affirmative They are obtained from the five waves of the World Values Survey (WVS) conducted between 1981 and 2007 The. .. impression of the association between social trust and economic growth, figure 1 plots social trust levels against the log of GDP in 1950 The positive correlation is obvious and it suggests that low economic performance of countries like the Philippines and Peru might be influenced by low trust levels, whereas the positive performance of countries like Finland and Denmark might be influenced by high trust. .. models are fixed effects estimation (FE) and random effects estimation (RE) The main difference between these two methods is the basic assumption about the relationship between the unobserved effect c and the explanatory variables The unobserved effect is called a random effect when there is no correlation and fixed effect when those two are correlated Or expressed in a formula: Random effects Cov(xit,ci)... which gives them a better opportunity to reward and punish others 1.3 Who trusts others? After social trust gained popularity within social science, several relationships between social trust and other variables were investigated After finding out that high trust levels enhance for example economic growth and increase institutional quality, other questions came to light Where does social trust come... 2007 with 2005 as base year As a measure of economic performance, the real GDPper capita is used Several variables that have shown to be determinants of growth are used to isolate the effect of social trust on growth The PWT table provides data on the consumption, government and investment share of GDP As an indicator for the openness of a country, the exports plus the imports are divided by GDP This is... low trust level Finally, the average temperature of the coldest month of the year is applied There is a consensus that norms develop the best where their payoff is the highest This means that social trust has most likely developed best in countries were it had the highest payoff In countries where the winters are very hard, farmers were more dependent on each other in form of collective action and. .. 3.4% in Cape Verde to a high of 64.3% in Sweden with the average trust being 25.5% A full list A1 of all the countries and their trust scores can be found in the appendix Other control variables that are taken from the WVS are education, religiosity and income of the respondent These variables are applied in the analysis about the determinants of trust Education is measured on a scale from 1 to 8 reaching... finds that social capital increases the accumulation of human capital through the family and the society Coleman argues that a higher endowment of social capital eases the transfer of human capital from the parents to their children Moreover, he finds that families with multiple social relations are more likely to be rewarded and sanctioned for their behaviour and hence to comply with norms and trustworthiness... trustworthiness This decreases the chance of their children dropping out of school Coleman’s study was one of the first to combine these two kinds of capital, yet, it his study is limited to particularized trust 1 Overview of the literature 8 Knack and Keefer (1997) find in their regressions that social trust influences human capital accumulation positively They base this on the idea that the return to human . Introduction 1 1 Overview of the literature 3 1.1 Social Trust 3 1.2 Social trust and growth 5 1.2.1 Direct effects of social trust on economic performance. Indirect effects of social trust on economic performance In addition to the direct influence of social trust on economic growth elaborated above, social trust