Social trust is good for economic growth

Would 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?

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 people that is conducted 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 cash flow 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 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. Evidence suggests the role of trade credit was vital to Irish SMEs during the financial crisis.

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 with lower trust levels.

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.

More generally, increased social trust has been shown to be positively associated with economic growth.

Researchers have developed models of economies with low and high trust and find higher trust leads to higher investment and output.

Controlling for institutional and governmental factors, African countries and India would, it is argued, have more than doubled their GDP if they displayed levels of social trust similar to Sweden’s.

So increased or greater social trust is, economically, a good thing. The issue then for policymakers, such as the new transparent open 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 situation here. The more equality we have, the greater the degree of social trust.

It is not clear what happens to social trust when we change equality. It seems to depend on the type of equality we favour. Economic equality is to a great extent an outcome, arising from increased 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 of trials and tribunals.

A paper last year examined the different experiences of social and political trust. The European Social Survey is a pan-European survey which is conducted every two years 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 there with the Scandinavians. Again, this might surprise people.

Our high level of social trust is a massive asset.

The evidence is strong that redistributive welfare systems, good universal education, and a strong body of political freedoms — all of which we have in spades — engenders social trust, which in turn feeds into economic strength.

The new government should keep that in the forefront of its mind.

Brian Lucey is professor of finance at the School of Business, Trinity College Dublin.