Why trust is so impotant to economic wellbeing

I recently heard someone talking about the fact that trust is an important part of the economic well being of a country and it prompted me to dig further into this concept.

The basic premise was that, if people don’t trust their financial systems or their government systems, processes take much longer, are less effective and strangle economic growth. 

It turns out that there has been quite a bit of research of the value of trust, especially following the Covid pandemic. 

A research survey reported by the International Monetary Fund talked about the outcome of a poor Covid 19 response from a Government was that the trust given to politicians and Governments was eroded for many decades to come, especially from young people. 

If people are less likely to trust their government, that government will struggle to get a mandate to undertake any future pandemic responses, or to get public acceptance of government recommendations and policies. 

There is evidence that lower socio economic countries would benefit greatly from their subjects having more trust in their financial systems and governments. A 10% increase in a population’s positive response in trust yielded a 0.8% increase in GDP.    (Knack and Keefer, 1997)

While it has been widely acknowledged that trust on the supply side has an impact (if you trust someone, you are more likely to do business with them), Deloittes published a paper that shows that trust has an impact on the demand side of the economic equation as well.

If there is more trust in an economy, there is less need for legal processes and enforcement, constant monitoring and security protocols.  As a lot of businesses owners in New Zealand are finding, compliance documentation takes a lot of time and a lot of money to keep up with, and it is not productive for business in that it generates no revenue. 

On the other hand, high trust environments reduce cost.  The cited example in the Deloittes paper is businesses allowing staff to continue to work from home after the covid pandemic. This has allowed businesses to rent less office space and reduce their operating costs.    Employees who feel trusted are more likely to stay with an employer long term and to invest in their own personal development. 

Sandra Sucher from Harvard Business School did a study of 6,600 hotel employees in the USA and Canada and found that if an employee had greater trust in their manager, it increased hotel profitability by over 2%.  This mirrored a study of companies in the S&P 500 where companies that had greater trust in their leader’s integrity and ability generated higher revenue. 

The 4 factors of trust that Sandra identified are as follows:

  1. Competence – an organisation has to be good at what it sets out to do.  It must deliver what is promised and be skilled at navigating the environment.
  2. Motives – people care about whose interests companies take into account i.e. people over profit and not price gouging in a tight environment
  3. Fair treatment – that there will not be any favouritism or any undisclosed advantages played among staff or clients.
  4. The impact of the business on others  – are they a good corporate citizen? Are they harming people or the environment? Is their behaviour or their actions unsustainable over the long term?

Many of the post pandemic studies urge leaders (governmental and business) to consider what actions they can take to regain trust that has been lost, and to consider the currency of trust moving forwards. 

If you are interested in looking further into this (as I am) there is a book based on the PhD research of Dr Benjamin Ho called “Why trust matters – an economists guide to the ties that bind us”, published in 2021.  I have just ordered a copy for my Christmas reading pile! 

Janet Natta is a financial adviser and director of Smart Money Advice, offering investment portfolio construction and management services to clients throughout NZ, as well as comprehensive financial planning advice to assist clients to build and protect wealth to achieve their dreams.

DISCLAIMER: The information contained in this article represents the views of the author. It is based on information believed but not warranted to be correct.   Any views or information, whilst given in good faith, are given with an express disclaimer of responsibility and no right shall rise against any of the authors or Smart Money Advice or their employees either directly or indirectly out of any views, advice or information.