Is there a relationship between trust and economic growth?

Economic growth is best described as any increase in a nation’s potential output that raises the average standard of living within a population. Trust is commonly omitted as a potential driver of economic growth given the difficulty that comes with placing a dollar value on intangibles. Despite this, the role it plays shouldn’t be underestimated. In a world where we are continually confronted with imperfect knowledge, the trust we place on other economic agents is fundamental in guiding our decision-making. A society devoid of trust will also likely have high levels of corruption. This prevents markets from functioning at optimal levels, and thus the economy from performing to its full potential.  This article will detail the instrument used to measure economic growth, and the role that human trust plays in facilitating this growth.

Measuring economic growth

The consensus among economists is that economic growth carries the benefit of increasing the availability of goods and services within a society – rendering a higher quality of life for those experiencing this growth [1]. The most common measure of economic growth is real GDP per capita, which provides a measure of the quantity of goods and services available to a person in an economy. While real GDP per capita only captures changes in material living standards, it is nevertheless the most widely-used approach when measuring the general standard of living in a society. Real GDP per capita can be calculated by considering the output produced by each employed worker in an economy and multiplying this figure with the share of the working population, as shown below:

The above equation implies that there is a dual mechanism at work – that economic growth can only rise if there is an increase in average labour productivity or a rise in the share of the working population.

How does trust affect labour productivity?

An important determinant of average labour productivity is human capital. Human capital refers to the economic value of a workers’ experience and skills, and broadly to the level of talent, education and training that exists within a workforce [1]. Workers with a large stock of human capital are often more specialised in their roles, and because of their expertise, are thought to be capable of producing higher levels of output. However, dedicated training to upskill employees is unlikely to happen if employers do not trust that their employees will remain loyal to the firm and won’t take the skills elsewhere[2]. In a sense, an employee with recognised loyalty to a firm is likely to engender increased trust from their employer who will respond by investing resources to upskill their potential. A workplace built upon trust and integrity is also likely to facilitate a more collaborative environment where employees are free to share ideas and information with one another, fostering a more innovative organisational atmosphere which raises workplace productivity [2].  On a macroeconomic scale, enhanced workplace trust in a country will bolster the collective human capital of its workforce– a fundamental component in raising average labour productivity and by extension, economic growth.

The role of trust in the technology sector

One cannot deny the role that technological advancement plays in bolstering production optimisation. Afterall, with advanced machinery comes increased efficiency in the production of goods. However, technological discoveries cannot be made without sufficient funding allocated to research and development, and the level of funding that researchers receive is often contingent on the level of trust between researchers and those who provide funding. A high-risk, innovative study which has the potential to push past the current frontier of knowledge is unlikely to capture the interest of any investor if there is an attitude of distrust and scepticism towards the project, and they will likely prefer instead to invest in less ambitious and easily monitored projects [2]. It is only reasonable to imagine that a society void of trust would discourage innovative research, impede on technological advancement, and thereby hinder productivity gains. This can have huge implications for economic growth.

Trust and entrepreneurship

It is also important to recognise that new technological discoveries and production techniques are unlikely to be adopted without entrepreneurs and their willingness to experiment with new ideas. However, the promotion of entrepreneurship is largely dependent on the surrounding political landscape. A country rife with political instability where property rights are poorly defined will discourage entrepreneurial investment, as entrepreneurs do not trust that the political landscape is conducive to any profitable investment opportunities [1]. Without entrepreneurship, economic growth is difficult if not impossible to achieve; establishing a fair and stable political ground is therefore imperative in developing the trust that entrepreneurs need to invest in new ventures.  

The Data on Trust

While the explanations above are largely descriptive, a 2021 study by Deloitte attempted to numerically quantifies the impact that trust can have on economic growth, reporting that Brazil and Mexico can expect a 2.2% and 2% increase in GDP per capita respectively if 50% or more of its population “trusts most people” [2]. It is clear why this is the case. Both countries are no stranger to political corruption, with the ‘Corruption Perception Index’ of 2018 rating both Mexico and Brazil highly against other countries globally for corruption [3]. In fact, according to the Ethical Trading Initiative, both Brazil and Mexico have unequal workplace structures rife with labour exploitation – discouraging organisational loyalty and hindering human capital development [4]. As such, an atmosphere of political and workplace distrust clearly impedes on entrepreneurship and human capital investment, with negative implications for economic growth.

Conclusion

On the surface, trust does not seem to be linked with economic growth; however, this is far from the truth. Trust promotes the human capital investment, research and development and entrepreneurship needed to nurture new technologies and production strategies. Together, these factors can improve labour productivity and by extension, economic growth.

References:

[1] Bernanke, B., Olekalns, N., Frank, R., Antonovics, K. & Heffetz, O. Principles of Macroeconomics 5e

[2] Kalish, I., Holdowsky, J., & Wolf, M. (2021). The link between trust and economic prosperity.  https://www2.deloitte.com/us/en/insights/economy/connecting-trust-and-economic-growth.html

[3] 2018 Corruption Perceptions Index – Explore the results. (2018). https://www.transparency.org/en/cpi/2018

[4] Burrow, S. (2017). Top 10 worst countries for workers’ rights | Ethical Trading Initiative. https://www.ethicaltrade.org/blog/top-10-worst-countries-workers-rights