Is trust the missing root of institutions, education, and development?

Abstract

We report evidence that trust is the missing root relating education, institutions, and economic development. We observe that more trust both increases education and improves legal and bureaucratic institutions, which in turn spurs economic development. We substantiate this intuition with a series of regressions that provide evidence that trust determines both education and the quality of institutions, and that education and institutions in turn affect GDP per capita.

This is a preview of subscription content, access via your institution.

Fig. 1

Notes

  1. 1.

    It bears mentioning that the direct link between education and development is not undisputed. Pritchett (2001), for example, notes several problems relating to measuring average impacts and achieving the ‘right’ mix between primary, secondary and tertiary education. Berggren et al. (2008) and Beugelsdijk et al. (2004), in extreme bounds analysis, also find only weak support for education as an important growth factor.

  2. 2.

    In principle, one could think of arguments similar to discussions of the duration and protections offered by patent rights that would indicate some optimum level of trust. For example, extreme levels of trust may imply that industrial secrets are transmitted so slowly that the diffusion of technology is hampered.

  3. 3.

    The early literature on social capital and trust outlined a number of direct mechanisms connecting social trust to output, summarized in Fukuyama (1995), Putnam (2001) and Bornschier (2005). They pertain to reduced transaction costs in society as a whole, and a general acceptance of anonymous cooperation in high-trust societies, as the perceived risk of someone taking advantage of another is lower. Ikeda (2008) also suggests that trust allows entrepreneurs to have more impersonal contacts, thereby accessing a wider range of knowledge resources. In general, though, the empirical literature has failed to support such direct transmission mechanisms.

  4. 4.

    We thank Martin Paldam for popularizing this type of easily interpretable figure.

  5. 5.

    Descriptive variables are provided in Appendix A.2.

  6. 6.

    More precisely, we use the variable RGDPCH of the Penn World Tables for per capita GDP, GDPWOK for GDP per worker, and the ls25_2005 variable in Barro and Lee’s dataset for education.

  7. 7.

    We get an additional observation for Jamaica from a large, representative survey. The survey is described in Bourne et al. (2010). The inclusion of Jamaica is the only difference from the dataset in Bjørnskov (2012). The list of trust scores is displayed in Table A.1.

  8. 8.

    We acknowledge that the assumption may be questionable in the case of the United States, where trust levels fell in the 1970s and 1980s.

  9. 9.

    Reverse causality would, for instance, be a concern if trust increases as countries grow richer from total factor productivity growth, as Paldam (2009) argues. We note that the contention has, however, been rejected by Delhey and Newton (2005) and Bjørnskov (2007). In general, recent studies suggest that trust in most countries is remarkably stable over time (e.g., Uslaner 2008; Nunn and Wantchekon 2011). As corruption certainly has declined and property rights institutions are stronger in most of the world, compared to immediately after World War II, while trust seems to have remained approximately stable in most of the Western world in the same period, it seems logical to assume that causality mainly runs from trust to institutional quality (Bjørnskov 2007).

  10. 10.

    With Hippocrates, one can find arguments along these lines in his “On Airs, Waters, and Places”, in particular, parts 12 and 23. The Aristotelian view, expressed in “The Politics”, book 7, claims that populations in colder climates have more freedom, yet have no (formal) political organization.

  11. 11.

    An example often mentioned in this strand of the literature is that of Denmark. The last successful attempt at killing a leading politician dates back to 1286, while the last attempt occurred in 1885. Norwegian history, although substantially shorter as an independent nation, is equally peaceful.

  12. 12.

    A potential worry is that the findings are overidentified, even though the Sargan tests in Table 3 remain insignificant. As noted in Sect. 3, we have addressed this by correlating the residuals from the 3SLS GDP estimates with social trust. While there is a significant negative association, it is limited in size. This suggests that the bulk of the impact of trust on GDP is mediated by education and institutions. Technically, this result also implies that our coefficients are approximately unbiased.

References

  1. Acemoglu, D., & Johnson, S. (2005). Unbundling institutions. Journal of Political Economy, 113, 949–995.

    Article  Google Scholar 

  2. Acemoglu, D., Johnson, S., & Robinson, J. A. (2001). The colonial origins of comparative development: an empirical investigation. American Economic Review, 91, 1369–1401.

    Article  Google Scholar 

  3. Aron, J. (2000). Growth and institutions: a review of the evidence. World Bank Research Observer, 15, 99–135.

    Article  Google Scholar 

  4. Arrow, K. J. (1972). Gifts and exchanges. Philosophy and Public Affairs, 1, 343–367.

    Google Scholar 

  5. Barro, R. J., & Lee, J. W. (1994). Sources of economic growth. Carnegie-Rochester Conference Series on Public Policy, 40, 1–46.

    Article  Google Scholar 

  6. Barro, R. J., & Lee, J. W. (2010). A new data set of educational attainment in the world 1950–2010. NBER Working Paper 15902.

  7. Bassanini, A., & Scarpetta, S. (2002). Does human capital matter for growth in OECD countries? A pooled mean-group approach. Economics Letters, 74, 399–405.

    Article  Google Scholar 

  8. Berggren, N., Elinder, M., & Jordahl, H. (2008). Trust and growth: a shaky relationship. Empirical Economics, 35, 251–274.

    Article  Google Scholar 

  9. Beugelsdijk, S., de Groot, H. L. F., & van Schaik, A. B. T. M. (2004). Trust and economic growth: a robustness analysis. Oxford Economic Papers, 56, 118–134.

    Article  Google Scholar 

  10. Bjørnskov, C. (2007). Determinants of generalized trust: a cross-country comparison. Public Choice, 130, 1–21.

    Article  Google Scholar 

  11. Bjørnskov, C. (2009). Social trust and the growth of schooling. Economics of Education Review, 28, 249–257.

    Article  Google Scholar 

  12. Bjørnskov, C. (2010). How does social trust lead to better governance? An attempt to separate electoral and bureaucratic mechanisms. Public Choice, 144, 323–346.

    Article  Google Scholar 

  13. Bjørnskov, C. (2012). How does social trust lead to economic growth? Southern Economic Journal, 78, 1346–1368.

    Article  Google Scholar 

  14. Bjørnskov, C., & Kurrild-Klitgaard, P. (2008). Economic growth and institutional reform in modern monarchies and republics: a historical cross-country perspective 1820–2000. Department of Economics Working Paper 08-15. Aarhus School of Business.

  15. Bjørnskov, C., & Méon, P.-G. (2010). The productivity of trust. Working Paper CEB 10-042. Université libre de Bruxelles (ULB).

  16. Bohnet, I. (2008). Trust in experiments. In S. N. Durlauf & L. E. Blume (Eds.), The new Palgrave dictionary of economics online. Palgrave Macmillan.

  17. Boix, C. (2003). Democracy and redistribution. Cambridge: Cambridge University Press.

    Google Scholar 

  18. Boix, C., & Posner, D. N. (1998). Social capital: explaining its origins and effects on government performance. British Journal of Political Science, 28, 686–695.

    Article  Google Scholar 

  19. Bornschier, V. (2005). Culture and politics in economic development. London: Routledge.

    Google Scholar 

  20. Boulila, G., Bousrih, L., & Trabelsi, M. (2008). Social capital and economic growth: empirical investigations on the transmission channels. International Economic Journal, 22, 399–417.

    Article  Google Scholar 

  21. Bourne, P. A., Beckford, O. W., & Duncan, N. C. (2010). Generalized trust in an English-speaking Caribbean nation. Current Research Journal of Social Sciences, 2, 24–36.

    Google Scholar 

  22. Chomsky, N. (1981). Lectures on government and binding: the Pisa lectures. Holland: Foris Publications.

    Google Scholar 

  23. Coleman, J. S. (1988). Social capital in the creation of human capital. American Journal of Sociology, 94, S95–S120.

    Article  Google Scholar 

  24. Dearmon, J., & Grier, K. (2009). Trust and development. Journal of Economic Behavior and Organization, 71, 210–220.

    Article  Google Scholar 

  25. Dearmon, J., & Grier, R. (2011). Trust and the endogeneity of physical and human capital. European Journal of Political Economy, 27, 507–519.

    Article  Google Scholar 

  26. Delhey, J., & Newton, K. (2005). Predicting cross-national levels of social trust: global pattern or Nordic exceptionalism? European Sociological Review, 21, 311–327.

    Article  Google Scholar 

  27. Demsetz, H. (1967). Toward a theory of property rights. American Economic Review, 57, 347–359.

    Google Scholar 

  28. Dixit, A. (2009). Governance institutions and economic activity. American Economic Review, 99, 5–24.

    Article  Google Scholar 

  29. Djankov, S., Glaeser, E., La Porta, R., Lopez-de-Silanes, F., & Shleifer, A. (2003). The new comparative economics. Journal of Comparative Economics, 31, 595–619.

    Article  Google Scholar 

  30. Dunning, T. (2008). Model specification in instrumental variables regression. Political Analysis, 16, 290–302.

    Article  Google Scholar 

  31. Fukuyama, F. (1995). Trust: the social virtues and the creation of prosperity. New York: Free Press.

    Google Scholar 

  32. Galor, O., & Zeira, J. (1993). Income distribution and macroeconomics. Review of Economic Studies, 60, 35–52.

    Article  Google Scholar 

  33. Glaeser, E. L., & Shleifer, A. (2002). Legal origins. Quarterly Journal of Economics, 117, 1193–1229.

    Article  Google Scholar 

  34. Glaeser, E. L., La Porta, R., Lopez-de-Silanes, F., & Shleifer, A. (2004). Do institutions cause growth? Journal of Economic Growth, 9, 271–303.

    Article  Google Scholar 

  35. Guiso, L., Sapienza, P., & Zingales, L. (2004). The role of social capital in financial development. American Economic Review, 94, 526–556.

    Article  Google Scholar 

  36. Guiso, L., Sapienza, P., & Zingales, L. (2008). Social capital as good culture. Journal of the European Economic Association, 6, 295–320.

    Article  Google Scholar 

  37. Hall, R. E., & Jones, C. I. (1999). Why do some countries produce so much more output per worker than others? Quarterly Journal of Economics, 114, 83–116.

    Article  Google Scholar 

  38. Hanushek, E., & Woessman, L. (2008). The role of cognitive skills in economic development. Journal of Economic Literature, 46, 607–668.

    Article  Google Scholar 

  39. Heston, A., Summers, R., & Aten, B. (2011). Penn World Table version 7.0. Center for International Comparisons of Production, Income and Prices at the University of Pennsylvania. March.

  40. Heyneman, S. P. (2004). International education quality. Economics of Education Review, 23, 441–452.

    Article  Google Scholar 

  41. Heinemann, F., & Tanz, B. (2008). The impact of trust on reforms. Journal of Economic Policy Reform, 11, 173–185.

    Article  Google Scholar 

  42. Inglehart, R., Basánez, M., Díez-Medrano, J., Halmann, L., & Luijkx, R. (2004). Human beliefs and values. A cross-cultural sourcebook. Ann Arbor: University of Michigan Press.

    Google Scholar 

  43. Ikeda, S. (2008). The meaning of “social capital” as it relates to the market process. Review of Austrian Economics, 21, 167–182.

    Article  Google Scholar 

  44. Kaufmann, D., Kraay, A., & Mastruzzi, M. (2009). Governance matters VIII: aggregate and individual governance indicators 1996–2008. World Bank Policy Research Working Paper 4978.

  45. Knack, S. (2002). Social capital and the quality of government: evidence from the US States. American Journal of Political Science, 46, 772–785.

    Article  Google Scholar 

  46. Knack, S., & Keefer, P. (1995). Institutions and economic performance: cross-country tests using alternative institutional measures. Economics and Politics, 7, 207–227.

    Article  Google Scholar 

  47. Knack, S., & Keefer, P. (1997). Does social capital have an economic pay-off? A cross-country investigation. Quarterly Journal of Economics, 112, 1251–1288.

    Article  Google Scholar 

  48. Knack, S., & Langbein, L. (2010). The worldwide governance indicators and tautology: six, one, or none? Journal of Development Studies, 46, 350–370.

    Article  Google Scholar 

  49. La Porta, R., Lopez-de-Silanes, F., Shleifer, A., & Vishny R, R. (1997). Trust in large organizations. American Economic Review, 87, 333–338.

    Google Scholar 

  50. Levine, R., & Renelt, D. (1992). A sensitivity analysis of cross-country growth regressions. American Economic Review, 82, 942–963.

    Google Scholar 

  51. Lipset, S. M. (1960). Political man: the social basis of modern politics. New York: Doubleday.

    Google Scholar 

  52. Mankiw, N. G., Romer, D., & Weil, D. N. (1992). Contribution to the empirics of economic growth. Quarterly Journal of Economics, 107, 407–437.

    Article  Google Scholar 

  53. Marshall, M. J., & Jaggers, K. (2008). Polity IV project: political regime characteristics and transitions, 1800–2006. Dataset and codebook. Available at http://www.systemicpeace.org/polity/polity4.htm. Accessed March 2010

  54. Mauro, P. (1995). Corruption and growth. Quarterly Journal of Economics, 110, 681–712.

    Article  Google Scholar 

  55. Méon, P.-G., & Weill, L. (2005). Does better governance foster efficiency? An aggregate frontier analysis. Economics of Governance, 6, 75–90.

    Article  Google Scholar 

  56. Munck, G. L., & Verkuilen, J. (2002). Conceptualizing and measuring democracy: evaluating alternative ideas. Comparative Political Studies, 35, 5–34.

    Google Scholar 

  57. North, D., & Weingast, B. (1989). Constitutions and commitment: the evolution of institutions governing public choice in 17th century England. Journal of Economic History, 49, 03.

    Article  Google Scholar 

  58. North, D. C. (1990). Institutions, institutional change and economic performance. New York: Cambridge University Press.

    Google Scholar 

  59. Nunn, N. (2008). The long-term effects of Africa’s slave trades. Quarterly Journal of Economics, 123, 139–176.

    Article  Google Scholar 

  60. Nunn, N., & Wantchekon, L. (2011). The trans-Atlantic slave trade and the evolution of mistrust in Africa: an empirical investigation. American Economic Review, 101, 3221–3252.

    Article  Google Scholar 

  61. Paldam, M. (2000). Social capital: one or many? Definition and measurement. Journal of Economic Surveys, 14, 629–653.

    Article  Google Scholar 

  62. Paldam, M. (2002). The cross-country pattern of corruption: economics, culture and the seesaw dynamics. European Journal of Political Economy, 18, 215–240.

    Article  Google Scholar 

  63. Paldam, M. (2009). The macro perspective on generalized trust. In G. T. Svendsen & G. L. H. Svendsen (Eds.), Handbook of social capital: the troika of sociology, political science and economics (pp. 354–375), Cheltenham: Edward Elgar.

    Google Scholar 

  64. Paldam, M., & Gundlach, E. (2008). Two views on institutions and development: the grand transition vs the primacy of institutions. Kyklos, 61, 65–100.

    Article  Google Scholar 

  65. Paldam, M., & Svendsen, G. T. (2000). An essay of social capital: looking for fire behind the smoke. European Journal of Political Economy, 16, 339–366.

    Article  Google Scholar 

  66. Papagapitos, A., & Riley, R. (2009). Social trust and human capital formation. Economics Letters, 102, 158–160.

    Article  Google Scholar 

  67. Parsons, J. (2010). The world’s flags given letter grades. Accessed June 2010 at http://www.otago.ac.nz/philosophy/Staff/JoshParsons/flags/intro.html.

  68. Pritchett, L. (2001). Where has all the education gone? World Bank Economic Review, 15, 367–391.

    Article  Google Scholar 

  69. Putnam, R. (1993). Making democracy work. Civic traditions in modern Italy. Princeton: Princeton University Press.

    Google Scholar 

  70. Putnam, R. (2001). Social capital: measurement and consequences. Isuma: Canadian Journal of Policy Research, 2, 41–51.

    Google Scholar 

  71. Robbins, B. G. (2012). Institutional quality and generalized trust: a nonrecursive causal model. Social Indicators Research, 107, 235–258.

    Article  Google Scholar 

  72. Rodrik, D., Subramanian, A., & Trebbi, F. (2004). Institutions rule: the primacy of institutions over geography and integration in economic development. Journal of Economic Growth, 9, 131–165.

    Article  Google Scholar 

  73. Sobel, R. S., & Coyne, C. J. (2011). Cointegrating institutions: the time series properties of country institutional measures. Journal of Law and Economics, 54, 111–134.

    Article  Google Scholar 

  74. Sokoloff, K. L., & Engerman, S. L. (2000). History lessons: institutions, factor endowments, and paths of development in the new world. Journal of Economic Perspectives, 14, 217–232.

    Article  Google Scholar 

  75. Tabellini, G. (2008). Institutions and culture. Journal of the European Economic Association, 6, 905–950.

    Article  Google Scholar 

  76. Transparency International (2010). Corruption perception index 2010. Press release, October.

  77. Treisman, D. (2000). The causes of corruption: a cross-national study. Journal of Public Economics, 76, 399–457.

    Article  Google Scholar 

  78. Uslaner, E. M. (1999). Democracy and social capital. In M. Warren (Ed.), Democracy and trust (pp. 121–150), Cambridge: Cambridge University Press.

    Google Scholar 

  79. Uslaner, E. M. (2002). The moral foundations of trust. Cambridge: Cambridge University Press.

    Google Scholar 

  80. Uslaner, E. M. (2008). Where you stand depends on where your grandparents sat: the inheritability of generalized trust. Public Opinion Quarterly, 72, 725–740.

    Article  Google Scholar 

  81. Williamson, O. E. (2000). The new institutional economics: taking stock, looking ahead. Journal of Economic Literature, 38, 595–613.

    Article  Google Scholar 

  82. World Bank (2010). World development indicators. Online database. Washington: The World Bank.

    Google Scholar 

  83. WMO (2010). World Meteorological Organization. Online database available at http://www.wmo.int/pages/index_en.html.

  84. Zak, P. J., & Knack, S. (2001). Trust and growth. The Economic Journal, 111, 295–321.

    Article  Google Scholar 

Download references

Acknowledgements

We thank Niclas Berggren, Henrik Harms, participants at a seminar at the Higher School of Economics in Moscow in April 2011, participants at the 2011 European Public Choice Society conference in Rennes, two anonymous referees for numerous comments that improved the paper, and an editor (William Shughart). We kindly beg the reader to blame no one but ourselves for remaining errors.

Author information

Affiliations

Authors

Corresponding author

Correspondence to Christian Bjørnskov.

Appendix

Appendix

A.1 Countries in the sample and trust scores

Table A.1 Trust scores of countries in the sample

A.2 Descriptive statistics

Table A.2 Descriptive statistics

Rights and permissions

Reprints and Permissions

About this article

Cite this article

Bjørnskov, C., Méon, PG. Is trust the missing root of institutions, education, and development?. Public Choice 157, 641–669 (2013). https://doi.org/10.1007/s11127-013-0069-7

Download citation

Keywords

  • Development
  • Social trust
  • Institutions
  • Education

JEL Classification

  • O43
  • O47
  • O57
  • Z13