Institutions of economic freedom and generalized trust: evidence from the Eurobarometer surveys

ABSTRACT

We investigate the correlation between institutions of economic freedom and generalized trust. The data we use are derived from the Eurobarometer surveys and measure how trustworthy nationals of a particular country are in the eyes of nationals of other countries. By using these data we avoid the presence of double causality between institutions of economic freedom and generalized trust that has been recognized as a major challenge in the literature. Indeed, external perceptions of trustworthiness are exogenous to the internal institutional building process. We find that during the 1980s and 1990s a 10% increase in the Economic Freedom of the World Index was associated with a 2.5% increase in generalized trust in the countries in our sample.

KEYWORDS:

• Institutions
• trust
• social capital
• economic freedom
• Eurobarometer

Disclosure statement

No potential conflict of interest was reported by the author.

Notes on contributor

Antonio Saravia holds a Ph.D. in Economics from Arizona State University, an M.S. in Economics from Arizona State University, an M.A. in Economics and Social Policies from Georgetown University, and a B.S. in Economics from Bolivian Catholic University. Prior to joining Mercer University, Dr. Saravia held faculty appointments at Georgia State University, American University of Sharjah and Arizona State University. Dr. Saravia's research interests focus on the areas of institutional economics, political economy and the determinants of economic freedom. His work has appeared in highly reputed academic journals such as Constitutional Political Economy and Review of Development Economics among others.

Notes

1 Yamagishi and Yamagishi (1994) define generalized trust as trust that reflects ‘a belief in the benevolence of human nature in general'. Different authors have used different terms to refer to generalized trust. Knack and Keefer (1997), for example, refer to generalized trust as anonymous trust whereas Uslaner (2002) uses the term moralistic trust. Some of the studies that have analyzed the positive effects of generalized trust on economic and social variables include Putnam (1993), Knack and Keefer (1997), Dearmon and Grier (2009), Den Butter and Mosch (2003), Bjørnskov (2003, 2006) and Uslaner (2003).

2 Zak and Knack (2001), Hooghe and Stolle (2003) and Berggren and Jordahl (2006) have all documented the presence of double causality between institutions and generalized trust.

3 The World Values Survey has been administered in six waves between 1981 and 2014. Studies that have used this database such as Rothstein and Stolle (2002), Uslaner (2003) and Berggren and Jordahl (2006), assess the level of generalized trust in a country by using responses to the question ‘Generally speaking, would you say that most people can be trusted, or that you can't be too careful in dealing with people?'

4 Various experimental studies have produced evidence of a positive correlation between trust and trustworthiness (see, for example, Knack and Keefer 1997; Lazzarini et al. 2005; Glaeser et al. 2000). In addition to relying on this argument for the use of external perceptions of trustworthiness as our proxy of generalized trust, our empirical strategy also controls for non-institutional country-level variables that could possibly influence external perceptions of trustworthiness (i.e. income levels, religion, inequality levels, educational levels and age).

5 The evolutionary component of our theoretical framework is consistent with the social learning perspective theory of trust (see, for example, Rotter 1971; Offe 1999; Hardin 2002) in which people make their ‘skeptical judgment largely by generalization from past encounters with other people' (Hardin 2002).

6 We made sure to remove the row for the country for which the question was asked. For example, if the question asked trust perceptions about Italians, we removed the answers given by Italians themselves.

7 The average number of respondents in each country was 1000. Depending on the year, the surveys were implemented in 5–17 countries.

8 An alternative index that measures the extent to which institutions of economic freedom are established is the Index of Economic Freedom published by The Heritage Foundation. We were, however, unable to use this index as it provides data starting only in 1995.

9 We do not add dummy variables for Buddhism, Orthodoxy and Anglicanism as adding these variables will be equivalent to adding dummy variables exclusively for Japan, Greece and the UK, respectively (that is not the case for Catholicism and Protestantism as these religions are the dominant religions in more than one country). Adding Buddhism, Orthodoxy and Anglicanism, therefore, will be equivalent to using a fixed effects model. As we will see below, however, the econometric model that fits the characteristics of our data most efficiently is Panel Corrected Standard Errors. We did check, however, what the results would be without using Panel Corrected Standard Errors. We found that, in general, Protestantism, Buddhism and Anglicanism are positive and significantly correlated with Trust while Orthodoxy and Catholicism are not significantly correlated with the same variable.

10 Remember that the EFW ranges in a scale from 0 to 10 and Trust ranges in a scale from –1 to 1.

11 This result could also be capturing, of course, that foreigners have more opportunities to interact with nationals of the country in question which gives the former the opportunity to develop trust in the latter.

12 Our results are consistent with those of Delhey and Newton (2005) who use the World Values Survey and find that ‘high trust countries are characterized by ethnic homogeneity, Protestantism, good government, GDP per capita and income inequality'. These authors also find that ‘ … Simmel (Simmel and Wolff 1950) rather than Tönnies (1963) was correct to argue that modern money economies with greater individual freedom and personal interdependence have ways of maintaining social trust.'