constituting a measure of “social capital” 92 93 94. The higher the stock of accumulated social capital, the more localities hold political leaders accountable for the welfare of the community 95. Economic relations are always embedded in social relations and can play a role as coordination devices between economic stakeholders when faced with economic shocks 96 97 98. Trust in institutions improves economic efficiency. The relationship between trust and institutions is recursive and self-reinforcing: the more citizens trust the country’s institutions, the better these institutions will work, in turn creating even more trust in them. On the other hand, with a low level of trust in institutions, institutions’ effectiveness suffers, lowering trust levels even further. Low trust causes the transactions costs of business contracting to increase, even if there is a legal system in place that can enforce contracts. Low trust results in higher user cost of capital, putting a damper on capital expenditures. Even stock market participation is lower in countries with a lower level of trust 99. High levels of societal, or generalized, trust should not be confused with high levels of trust within family networks found in many traditional societies. Such societies may accept selfish behavior outside the family networks more easily, leading to less generalized trust in people outside the family circle 100. Measures of “generalized trust” (trust in people you do not know) increase when formal institutions perform better (so that these can be used effectively if you face a betrayal of your trust in others). Conversely, a worsening of institutions leads to a loss of trust. Trust can be measured. Levels of trust and social capital can be measured by scoring levels of agreement to opinion survey statements. Similar survey results exist on “individualism” versus “collectivism” 101, or the importance of family ties 102. A quantitative index of trust in institutions was created for this report (Box 2.15). Trust measures are lower in Southern Europe than in Northern Europe while, on the whole, they worsened considerably during the last decade of economic crises (Figure 2.19).
Box 2.15 Screening and selecting measures of trust Drawing from the Eurobarometer survey, we tested several variables, including an aggregate index, using the replies to the survey questions that covered trust in private, public and political institutions. We also considered the question on trust in politicians from the Global Competitiveness Index. In addition, following Guiso et al. (2012), we looked at measures of levels of civic capital. We used data from the World Values Survey and created an updated version of the aggregate indicator by Guiso et al. (2012). We also created a variable describing the trust people invest in their fellow citizens drawn from the Eurobarometer’s survey. After this screening process, we selected, based on economic and statistical significance, the variable that captured the trust of a country’s residents in the functioning of its institutions as measured by the Eurobarometer survey.
Trust can change, with trust and resilience reinforcing each other. When we interact the differences in countries’ levels of trust and resilience indicators, we find statistically and economically significant relationships supporting the positive correlation between trust and resilience (Figure 2.19) 103. Countries with more trust in their institutions experience faster adjustment processes after a given economic disturbance and lower fluctuations of output and unemployment 104. A faster and more inclusive rebound in turn increases trust, creating a virtuous cycle. In the EU, trust levels rose between 2004 and 2014 in countries that were the most resilient (Sweden, Poland and Germany). By contrast, trust levels fell in countries that were least resilient (Greece and Spain). This underlines the need to strengthen resilience: failure to do so lowers trust levels, which undermines resilience even further, making weathering the next crisis even more difficult.
102 | Including institutions: Boosting resilience in Europe
