Does Big Government Hurt Growth Less in High‐trust Countries?

Abstract

Social trust is linked to both public sector size and to economic growth, thereby helping to explain how some countries combine high taxes with high levels of economic growth. This paper examines if social trust insulates countries against the negative effects of public sector size on growth, documented in several studies. We note that the effect is theoretically ambiguous. In panel data from 66 countries across 40 years, we find no robust evidence of insulation effects: when excluding countries with uncertain trust scores, our results suggest that big government hurts growth also in high‐trust countries, and that the mechanism is by lowering private investments. (JEL H10, O11, P16, Z10)

Social Trust and Patterns of Growth

“…Second, noting that social trust is strongly associated with productivity growth but negatively associated with capital accumulation may, for example, be consistent with Whiteley's (2000) idea that trust affects the marginal efficiency of factor inputs. However, recent evidence in Bergh and Bjørnskov (2020) does not support Whiteley's suggestion that capital accumulation is more strongly associated with growth in high-trust societies. What one is left with is therefore a smaller set of theoretical mechanisms that are not inconsistent with the evidence.…”

“…These types of mechanisms are similar to those covered by other studies, but his second claim was that trust also affects the marginal efficiency of factor inputs such as education and physical capital. While Whiteley only tested direct effects and left the question open whether trust also makes investments more effective, only Bergh and Bjørnskov (2020) have explored his second claim. They find no robust evidence that private investments are more effective in creating growth in high-trust countries, and even show that public investments in such countries are probably less effective.…”

Social trust and patterns of growth

“…Second, noting that social trust is strongly associated with productivity growth but negatively associated with capital accumulation may, for example, be consistent with Whiteley's (2000) idea that trust affects the marginal efficiency of factor inputs. However, recent evidence in Bergh and Bjørnskov (2020) does not support Whiteley's suggestion that capital accumulation is more strongly associated with growth in high‐trust societies. What one is left with is therefore a smaller set of theoretical mechanisms that are not inconsistent with the evidence.…”

“…These types of mechanisms are similar to those covered by other studies, but his second claim was that trust also affects the marginal efficiency of factor inputs such as education and physical capital. While Whiteley only tested direct effects and left the question open whether trust also makes investments more effective, only Bergh and Bjørnskov (2020) have explored his second claim. They find no robust evidence that private investments are more effective in creating growth in high‐trust countries, and even show that public investments in such countries are probably less effective.…”