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How levels of trust affect economies

By Dylan Carey - posted Tuesday, 27 May 2014

One only has to imagine going to the corner store to buy a carton of milk, to find that the refrigerator is locked. Once you’ve persuaded the shopkeeper to open the fridge to get the milk, you then end up arguing over whether you’re going to hand the money over first, or whether he is going to hand over the milk. After a little jousting, an agreement is arranged for a simultaneous exchange. Let’s not even delve into the negotiations it would take to receive change or a receipt. This scenario is but a little taste of life in a world without trust. Now imagine trying to take out a loan…

This example embodies the shift of thinking with regard to capital, which is now focused more on individuals and less on infrastructure. This line of thought is precisely where the term “social capital” stems from. As such, the definition of trust, in correlation with the emergence of the principle of social capital has evolved. Trust, together with social capital, has evolved to now be regarded as the ability of people to work together towards common purposes in groups and organisations. This social capital is the foundation of a variety of multilateral organisations. Additionally, it is the basis for trust in governance. It is very evident that the importance of trust over all avenues of economics should be treated with the utmost respect.

Perhaps the simplest and most cost effective way to increase trust over the dynamics of interpersonal, inter-governmental and trust in governments is to push for more open and inclusive governance. Open government policies that concentrate on citizen engagement and access to information can assist in increasing public trust. Such initiatives are receiving traction in a number of OECD countries as well as non-member countries. The implementation of these policies facilitates the participation of citizens which can enhance democratic engagement, build trust in government and harness productive forms of responsibility – thereby having a direct impact on the three forms of trust that we are concerned with. Through the implementation of a simple yet effective strategy of open governance, the wider public can begin to develop a thorough understanding of the local economic situation. This will inevitably lead to a greater knowledge of the global community and as a result trust is reinstated in the system at a unilateral and multilateral level by the most basic means of information and education.


However, with this being said, it is important to bear in mind that too much trust may have a negative impact upon an economy. Let’s take the milk bar example again, except this time let’s imagine that the societal trust is stretched to the opposite end of the spectrum. Where the owner of the store no longer needs to be present to accept the money owing for the goods and instead the customer grabs whatever they want and simply leaves payment on the counter – a system such as this may work in a perfect world. But the possibilities for exploitation are very apparent.

The private sector is particularly vulnerable in this regard, as has been seen with the Global Financial Crisis of 2008. The crisis occurred largely as a result of excessive leveraging in both the public and private sectors of the economy. There is no mistaking the enormous amount of trust that is involved once a country, government, business and the public start spending beyond their means. This results in entities relying on debts to finance their expenses, rolling over old debts with new ones. Eventually this high trust bubble expands too much and has no choice but to burst.

Bearing all of this in mind, the need for a happy medium where trust can be maintained in an economy and lead to consistent growth for the economy is evident. In order for trust to be maintained at an operational level, there is a need to further implement key indicators. Such indicators can determine when and where trust in an economy has risen too high and is likely to impact negatively upon the economy. Factors that should be considered include where excessive leverage or borrowing is occurring to the extent that if one entity in the chain were to fault, a considerable problem would arise. The execution of this may be difficult however as the act of leveraging in economics can bring about a lot of economic benefit because it inherently lowers transaction costs.In addition to such indicators, it is imperative that there are strong regulatory practices in place that can assist in the construction, maintenance and validation of trust. It is important that these practices are given to the adequate regulatory bodies who display adequate regulatory powers.

There is certainly a problem within economies around the world that differing amounts of trust in different structures need to be maintained at unequal levels. It makes it nigh impossible to determine what the appropriate trust level is and where efforts to rebuild trust should best be focused. Perhaps the only thing that can be done is learn from our past mistakes and try not to repeat them. This can be done by using data, produced from entities such as the OECD to the utmost potential. One suggestion from the OECD that can be readily improved upon within Australia is the growth of e-governance. OECD data has shown that Australia is 12% behind the OECD average in citizen take up of e-government services.

Looking to the future, it is crucial that entities concerned with trust in economies keep in mind the sentiment that trust is earned over time. After all, trust is an outcome of strong, reliable and robust economic systems. Whilst trust is not built within these structures – it is most certainly the result.

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About the Author

Dylan Carey is a student at James Cook University and was a Global Voices Delegate to the OECD Forum in May this year.

Creative Commons LicenseThis work is licensed under a Creative Commons License.

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