Increasing Competitiveness of Rwandan Economy by Trust

Department 1

Increasing competitiveness of the Rwandan economy

by managing trust

Prof. dr. Peter de Gijsel

Department 2

Competitiveness of the Rwandan economy

World Economic Forum Global Competitiveness Report 2014 -2015 (WEFGCR)

Global Competitiveness Index (GCI): Rank 62

3rd in the Sub Saharan Africa

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Definition Competitiveness

We define competitiveness as the set of

institutions, policies, and factors that

determine the level of productivity of a

country.

WEFGCR 2014 2015, p. 4

=> trust as a factor?

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World Economic Forum Global Competitiveness Report 2014 -2015 (WEFGCR)

Stages of development

Factor driven economies

Transition economies

Efficiency driven economies

Transition economies

Innovation driven economies

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Competitiveness

12 Pillars

Source: WEFGCR 2014-15, p. 9

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Department 7

Competitiveness

Increasing competitiveness

=> Increasing productivity

=> Higher development level

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Competitiveness Index of Rwanda

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WEFGCR 2014-15RWANDA SWITZERLAND

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WEFGCR 2014-15

Competitiveness and trust

The role of institutions goes beyond the legal framework.

Government attitudes toward markets and freedoms and the

efficiency of its operations are also very important: excessive

bureaucracy and red tape, overregulation, corruption, dishonesty

in dealing with public contracts, lack of transparency and

trustworthiness, inability to provide appropriate services for the

business sector, and political dependence of the judicial system

impose significant economic costs to businesses and slow the

process of economic development.

WEF Global Competiveness Report 2014-15, p. 6

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In order to fulfill all those functions, the banking sector needs to be trustworthy and transparent, and—as has been made so clear recently—financial markets need appropriate regulation to protect investors and other actors in the economy at large.

WEF Global Competitiveness Report 2014-15, p. 7

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Observation

The importance of trust as a factor affecting competitiveness is not systematically discussed in the WEF Global Competitiveness Report!

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Impact of trust on competitiveness?

Impact on growth and innovation (dynamic efficiency)?

Impact on economic performance (static efficiency)?

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Rise of trust research since the late 1980s

Theoretical developments in economics(Economics of Information, Behavioral Economics, Institutional

Economics, Game Theory)

Core theme of organizational analysis and

management

Switch from bureaucratic organizations to more flexible types of organization

Trust as an efficient mode of coordinating inter- and intraorganizational relationships

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Source: T.A.E. Ebert (2007), Interdisciplinary Trust Meta-Analysis of High Rank Trust Articles between 1966 and 2006

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OS= Organization Studies; OB=Organization Behavior; HRM=Human Resource Management; IR= Industrial Relations; MIS=Management Information Systems; KM=Knowledge Management; OR=Operations Research;MS=Management Science; POM=Production and Operations Management; F&A=Finance and Accounting; PSM=Public Sector Management

Source: T.A.E. Ebert (2007) Interdisciplinary Trust Meta-Analysis of High Rank Trust Articles between 1966 and 2006N.B. 89% of trust papers in economics have been published between 1996-2006 and 43% between 2004 and 2006! Source: Own calculations based on Ebert (2007), pp 19-91.

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Observation

Low percentage of trust papers in economic top journals

Why?

Answer: Economists have been more interested in solving trust problems by looking for control and incentive mechanisms as solutions instead of building trust.

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Interpersonal trust and institutional trust as core concepts of economics

and management of trust

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World Map of Interpersonal TrustSource:http://www.jdsurvey.net/jds/jdsurveyMaps.jsp?Idioma=I&SeccionTexto=0404&NOID=104

http://www.jdsurvey.net/jds/jdsurveyMaps.jsp?Idioma=I&SeccionTexto=0404&NOID=104

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Interpersonal Trust

Generally speaking, would you say that most people can be trusted or that you need to be very careful in dealing with people?

Possible answers:

– 1 Most people can be trusted

– 2 You can never be too careful when dealing with others

TRUST INDEX = 100 + (% Most people can be trusted) - (% Can´t be too careful)

Source:



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Interpersonal trust in Rwanda

Generally speaking, would you say that most people can be trusted or that you need to be very careful in dealing with people?

Most people can be trusted 16.6%

Need to be very careful 83.4%

Trust index: 100+16.6-83.4 = 33.2

Source: World Values Survey (2010-2014)

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Definition of Interpersonal TrustSource: R.C. Mayer, J. H. Davis and F. D. Schoorman in:: The Academy of Management Review, Vol. 20, No. 3 (Jul., 1995), p. 712

Trust is the “the willingness of a party to be vulnerable to the actions of another party, based on the expectation that the other will perform a particular action important to the trustor, irrespective of the ability to monitor or control that other party” (trustee deG).

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Features of Interpersonal Trust

At least two parties (trustor and trustee)

Interdependence

Trustee is able to perform actions that are important to the trustor

Trustor believes that trustees will perform actions that are beneficial or not negative for the trustor

Trustor is in a situation of uncertainty and doesn’t know actually if the trustee will really act according to the trustor’s expectations

Trustor is choosing beforehand to cooperate, thus making himself vulnerable

Trust starts with positive expectations (belief) which is turned into willingness to cooperate (decision) and is translated in concrete action (action)

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Institutional Trust

Institutional trust is an impersonal form of trust and does not refer to

characteristics of specific agents who are involved in an economic transaction. It

requires confidence in the enforcement of abstract principles and procedures.

Examples:

• Legal system of contract enforcement

• Regulatory agencies

• Industry associations

• Rules and regulations in a company

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Definition Institutional Trust

Institutional trust is the acceptance of a party to be vulnerable to the actions of an institution, based on the expectation that representatives of an institution will perform a particular action important to the trustor, irrespective of the ability to monitor or control that institution.

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Institutional and interpersonal trust in perfectly competitive market economies

(Arrow-Debreu model of perfect competition)

Assumptions Complete set of markets

Commodities are defined by quality, place and date of availability

Households are resource-owners and shareholders of firms

Households and firms are price takers

Households choose independently optimal commodity bundles at given prices and wealth constraints

Firms maximize profits at given output and input prices and production technology

Exchange only at market clearing prices

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Results

Existence of competitive market prices clearing simultaneously all markets

Efficient markets



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As households and firms are price takers and are only allowed to exchange in equilibrium, an auctioneer has to be assumed who determines equilibrium prices.

=> Institutional trust has to be assumed.



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Because households and firms independently decide, no interpersonal trust relationships exist between economic agents.

“Trust and similar values…are ‘externalities’. They are…commodities…But they are not commodities for which trade on the open market is technically possible or even meaningful.“K. Arrow, The Limits of Organization, Norton: 1974, p.23.



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Theoretical implications of considering interpersonal trust as externality

Dependency relationships have to be considered

Uncertainty has to be considered

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Theoretical implications of considering interpersonal trust as externality

Unsolved problems

How can trust as externality be internalized if a market for trust does not exist?

=> how can trust be priced?

How does interpersonal trust affect economic efficiency?

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Economic approaches to consider interpersonal trust relationships

Adam Smith’s resource based approach of pricing trust

“The wages of labour vary according to the small or great trust which must be

reposed in the workmen. The wages of goldsmiths and jewellers are everywhere superior to those of many other workmen, not only of equal, but of much superior ingenuity; on account of the precious materials with which they are entrusted. We trust our health to the physician: our fortune and sometimes our life and reputation to the lawyer and attorney….Their reward must be such, therefore, as may give them that rank in the society which so important a trust requires. The long time and the great expense which must be laid out in their education, when combined with this circumstance, necessarily enhance still further the price of their labour.”

A. Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, Vol. I, ed. by J.E.T. Rogers, second edition, Oxford

1880, p. 110.

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Economic approaches to consider interpersonal trust relationships

Transaction cost theory (O.E.Williamson 1975)

Market and non-market modes of economic transactions exist. Non-

market modes of economic transactions can lower transaction

costs if bounded rationality combines with uncertainty/complexity, opportunism and small numbers of economic agents

=> production and pricing of interpersonal trust within non-market organizations

=> transaction cost efficiency of interpersonal

trust

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Economic Performance of High Trust Companies

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Interpersonal Trust and Growth

Higher interpersonal trust increases investment and growth (P.J. Zak and S. Knack, Economic Journal 111 (April), 295-321)

• In countries with low initial levels of interpersonal trust, an increase in trust leads to an increase in economic growth(F. Roth, Kyklos 6 (1), 103-128)

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Competitiveness and Trust: A Research Agenda

Global Competitiveness Index Impact of

Trust on

Basic requirements

Institutions ?

Infrastructure ?

Macroeconomic environment ?

Health and primary education ?

Efficiency enhancers

Goods market efficiency ?

Labor market efficiency ?

Financial market development ?

Technological readiness ?

Market size ?

Innovation and sophistication factors

Business sophistication ?

Innovation ?

Education

Increasing Competitiveness of Rwandan Economy by Trust