When does greater economic freedom promote distrust?

There are some fairly obvious reasons why societies characterized by low levels of inter-personal trust tend to be highly regulated. In a society where people tend not to trust each other there is likely to be less adherence to social conventions and there is likely to be more political pressure for the use of government regulation to deter anti-social behaviour. Causation can also be expected to work in the other direction. In a society where it is impossible to conduct market transactions without breaching some regulation it is only to be expected that many people will wonder whether those with whom they are dealing can be trusted not to dob them in to the authorities. Regulation promotes low trust.

So, what is likely to happen to levels of inter-personal trust following substantial deregulation in a highly regulated, low-trust society. As a general rule I think it would be reasonable to expect that greater reliance on market disciplines would generally promote more trustworthy behaviour. Individuals and firms would find that it pays to develop a reputation for trustworthiness and this would result in higher levels of inter-personal trust. Such attitudes could be expected to be associated with public support for deregulation policies.

However, evidence presented in a paper by Philippe Aghion et al, entitled ‘Regulation and Distrust’, suggests that an opposite tendency was more common in countries undergoing transitions away from socialism in the 1990s. Data from the World Values survey indicates that levels of inter-personal distrust increased in most of these countries during that period. There were also substantial increases in distrust of civil servants, justice systems and business. Most households perceived that corruption had increased. The surveys suggested that there was also an increase in tolerance of corruption (bribe taking) and a reduction in the proportion of the populations who considered tolerance and unselfishness to be important attributes to teach children. Not surprisingly, there was also an increase in the proportion of the populations who disliked competition and private ownership of firms.

The authors suggest that those findings are a consequence of low levels of social trust prior to transition. Their model predicts that in a low trust society entrepreneurs will tend to be less civic-minded (because they need to pay bribes in order to enter the business) so liberalization of entrepreneurial activity will tend to result in an increase in negative externalities (e.g. pollution) and an increase in corruption. They conclude: ‘Liberalization of entrepreneurial activity starting from a low level of social capital has increased corruption, invited a demand for greater state control of economic activity, and reduced trust’. At the end of their paper the authors suggest that public education might provide a way forward for transition economies by leading the way toward greater ‘civicness’, lower regulation and higher productivity.

One of the merits of the model put forward by Aghion et al is that it is capable of explaining why many people in countries with bad governments may want more government intervention. The benefits of liberalization of entrepreneurial activity are perceived to be outweighed by the costs.

I am not convinced, however, that the poor outcomes of reforms in transitional economies should be attributed to low levels of social trust prior to transition. An alternative explanation is that the reform process was poorly managed so that instead of a transition from socialism to competitive markets – permitting mutually beneficial exchange that had previously been prevented - these countries underwent a transition from socialism to crony capitalism following the collapse of communist governments. The evolution of attitudes to business may reflect the rent-seeking entrepreneurship to which people were exposed. Under the prevailing circumstance it may not have been possible for the reform process to have been better managed in the transitional economies, but this means that their experience may not be of much relevance to other low trust, high regulation countries.

Rather than focusing on the transitional economies as a group it might be interesting to consider whether different reform strategies adopted in different countries (including other countries such as China and India in the analysis) have had different effects on levels of social trust.