Sunday, August 7, 2011

The Issue of Trust in Developing Countries

The Role of Adam Smith and the Role of Modern Economists

This article examines the role of and the issue of trust and trustworthiness within the development field. Is this question of trust in the marketplace a question of "hard" legal principles such as contract enforcement rights or rather of "soft" market principles resulting from market discipline?

Adam Smith was of the view that market discipline played the key role in the establishment of trust in the marketplace, believing the issue to be a positive feedback loop whereby trustworthy behavior encourages  more trusting behavior. Contemporary scholars imply a more Hobbesian view that trust is  essential for the market to function well, and is thus the realm of the state. 

In many societies in the developing world however, said institutional framework may be partially or wholly absent. In fact, Hernando de Soto describes "development" essentially as the replacement of informal and family-based institutions by formal constructs. Other scholars see development as a process in which more trustworthy institutions develop and in turn, inspire more trust. 

Nevertheless, a relationship between the types of economic activity and the levels of trust exist across the developing world. In other words, soft principles do inspire a certain amount of trusting and trust worthy behavior. Furthermore, studies show a complimentary relationship between "hard" legal regulation and self regulation in the marketplace (trustworthy behavior).  This principle has far-reaching implications for institutional development in the developing world.

About the Authors:
-Max Berre is an economist who has worked as a sovereign debt expert at the Inter-American Development Bank in Washington and has taught financial economics at Maastricht University in the Netherlands. 

-Dr. Albert Schram is a former economics professor at Maastricht University in the Netherlands and at the University of Puerto Rico. He was also a development economist at the Inter-American Development Bank.

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