The Financial Crisis and Social Trust

By Gert Tinggaard Svendsen. Gert Tinggaard Svendsen is Professor of Public Policy, Department of Political Science, Aarhus University, Denmark. He earned his PhD (Econ.) in 1996 and a MSc (Pol.Sci.) in 1991. Director of the Danish Social Capital Project (SoCap) since 2002. Visiting scholar at the University of Maryland, Department of Economics (1994-95) and member of a steering committee on Social Capital in the World Bank (1997-99). Author of seven books and about 50 scientific articles in international refereed journals. Award for Best 2007 JCPA Article

What is the role of trust in mitigating shocks? One overlooked factor during the financial crisis may exactly be that of social trust. Countries with higher social trust may be better equipped to deal with a financial crisis like the current one. Strikingly, pure, blind panic and general distrust seemed to hit the United States and the United Kingdom particularly strong, especially in comparison with the four Scandinavian welfare states (Denmark, Sweden, Norway and Finland). This contribution suggests that the ‘missing link’ in explaining the calm waters of Scandinavia may be the accumulated stock of social trust.

Social trust is one way of measuring social capital which can be defined as the ability to cooperate voluntarily without the need for thid party intervention or written agreements. We use social trust as the standard measure for this ability to cooperate because it expresses how people estimate the risk of being cheated in a society. Thus, social trust is measured as the percentage of a population answering yes to the question “Do you think that most people can be trusted, or can’t you be too careful?”

The Social Trust data in 86 countries are drawn from the World Values Survey and the Danish Social Capital Project headed by the author. The data clearly indicates that the four Scandinavian welfare states indeed stand out as countries with much more social trust than the rest of the world.

On this indicator, three Scandinavian countries (Denmark, Norway, and Sweden) clearly stand out from the rest of the world by covering the first three places on the trust measure with scores of 66 %, followed at some distance by a fourth Nordic country, Finland, and the Netherlands (both about 59 %) and the English-speaking parts of Canada (54 %). Below this leading group, we generally find other Western European countries. Most strikingly, the United States has experienced a drastic drop in social trust from about 50% in 1990 to 35% in 2000 and the United Kingdom a drop from 44% to 29% in the same period.

African and South American countries fall along the bottom tier of social trust. Brazil, Philippines, Costa Rica and Uganda are the lowest with scores below 10%. Brazil is lowest with a 3% score. The average of the 86 countries in which credible surveys have been undertaken is slightly below 30 %.
The superior levels of Scandinavian social trust presumably tell us that people there are less likely to panic during a crisis simply because they are less distrusting in general. As a famous jazz tune goes in Denmark: the people of Scandinavia are more inclined to “Take it easy boy boy.”

Notably, the Scandinavian countries also rank the highest in the world in terms of non-corruption. In the new 2008 Corruption Perception Index from Transparency International, Denmark ranks number 1 (9.6 score) whereas the United States ranks number 18 (7.3 score) and United Kingdom number 16 (7.7 score).

Arguably, one explanation for the huge variation in social trust across countries could be the quality of institutions as measured by the level of corruption. There is no sense in trusting ‘most people’ if they are generally known to bribe, threaten or in other ways corrupt the impartiality of government institutions in order to extract special favours. In other words, well-functioning formal institutions reduce the likelihood that individuals will be cheated.
People, for example, should be able to trust that tax payments are not stolen by corrupt bureaucrats and politicians but are invested well in public goods by the state. In non-corrupt countries, citizens get their ‘bang for the buck’ as one Pentagon general once put it. If Scandinavian and other countries, such as the United States, are to maintain and enhance their stocks of social trust, one first step could be to preserve and improve the quality of institutions by fighting corruption efficiently.

Thus, one way to fight future financial crises is to investigate the role of social trust. One possible explanation why people in the United States flocked to the banks during the financial crisis could be the missing buffer of social trust. As it is, average Americans and British generally trust other people less than average Scandinavians. The current distrust seems irrational when most households and businesses are still doing well. Still, people (including bankers) are nervous and the public’s trust in banks, politicians and companies is on the decline. Consequently, people cut back on consumption, which puts further pressure on businesses and escalates fears of job losses.

Social trust brings the crisis down to more ordinary levels. In a low-trust society, people have to be relatively more careful in trusting the advice of those working in the financial sector, for example. The problem is that in the absence of social trust, a financial chock is more likely to cause people to become Robinson Crusoes and forget about cooperation and social responsibility. The situation will only become worse. Overall, the underlying problem of a worsening financial crisis may not be that of banks and stock markets only, but also that of the social trust level in a population. If social trust really is an important factor in understanding the collective psychology behind mitigating shocks from the current financial crisis, a major question is how to create more social trust in a society. Further research into the roots of social trust in Scandinavia may provide new insight into how social trust accumulation can be enhanced all over the World and perhaps reduce the risk of severe financial crises in the new Millenium.