It would always get a laugh from readers of Peanuts. Lucy would hold the football for Charlie Brown to kick. Then she would pull it back at the last minute and send him flying onto his back. The gag, repeated over and over throughout the years, was funny because of Charlie’s absurdly trusting behavior. Having been tricked so many times by Lucy, didn’t he realize she would trick him again and again, this time and the next?
Most people are not as lovable and forgiving as Charlie Brown. When they are betrayed, they become mistrustful. Moreover, when they don’t have information about others, most people tend to assume the worst—that they are surrounded by Lucies. It is what has happened to many people in Latin America and the Caribbean where only one in ten people believe that others can be trusted and only three in ten trust their government. Indeed, Latin America and the Caribbean has the lowest rates of trust in the world.
The Importance of Trust
Trust is essential to tackling slow growth, stagnant productivity, inequality, crime, and climate change. Only collective action by citizens can address these and other looming challenges confronting the region. Trust—the belief that other people will not act opportunistically, that they are honest, dependable and of good will—is a prerequisite for collective action. It is essential for pulling the region out of the economic contractions of the COVID-19 pandemic and creating more prosperous, inclusive, and democratic societies.
It is with that in mind that the IDB’s 2021 Development in the Americas (DIA) report tackles the origins and manifestations of the trust problem. Built on the work of countless scholars, it shows how building trust and a sense of citizenship can lead to less informality, more investment, more innovation, greater participation in global value chains, faster growth, and the closer alignment of politics and public policy with the collective needs of citizens.
Entitled Trust: The Key to Social Cohesion and Growth in Latin America, the report shows how mistrust pervades and distorts myriad interactions between and within public and private institutions. Firms, distrusting that rules have been set in the public interest and that others will comply, opt to remain small and informal rather than comply with the law. That slows their growth, reduces their productivity, and creates a situation in which one out of two workers in the region lacks or has limited access to health, unemployment, and pension benefits. Distrusting that employees will take advantage of them, they hire family members and people in their social set rather than the most qualified candidates, reducing talent, productivity, and growth. Lacking faith in other firms, they integrate vertically instead of relying on market transactions. In societies where mistrust reigns, handshakes are not enough. Contracts become cumbersome and costly. Mistrust also feeds red tape. It undergirds high barriers to entry that protect incumbent firms from competition and reduces incentives for the rest to innovate and enter promising markets.
Individuals—and firms—evade taxes, convinced that tax rates have not been set fairly and that others will also evade them, starving governments of much needed funds. They underutilize the banking system, which they distrust—just as banks distrust borrowers—slowing investment. They have little faith in the motives and commitment of their fellow citizens, making it difficult for them to unite in civic organizations or elections that make their demands known and hold governments to account.
Asymmetries of Power and Information
One principal theme of the report is how asymmetries of power and information play into these problems. If individuals pay a price for opportunistic or uncivic behavior and are rewarded for the opposite behavior, they are more likely to act in a trustworthy manner. Individuals cannot rein in opportunistic or uncivic behavior in others, however, if they do not have the necessary information—if they can’t observe it. Even with the necessary information, they cannot prevent opportunistic behavior if there are great imbalances of power, if the powerful can act with relative impunity.
Much of the report is dedicated to showing how these asymmetries of information and power can be overcome to create incentives for more trustworthy and trusting societies that are also more dynamic, productive, and equitable. From reforms in education and communications to reforms in the courts and third-party enforcement agencies; from those in credit and regulatory agencies to those in government cabinets and other public sector institutions, it paints a broad and at the same time detailed picture of how progress can be made.
Trust and the Challenges of Inequality and Growth
The lack of trust is critical. In part the result of the legacy of colonialism, slavery, dictatorships, volatile and slow-growing economies, inequality, forced labor and violent conflict, it is holding the region back. Latin America and the Caribbean is currently among the slowest growing regions of the world. Between 1960 and 2017, countries in the region, on average, closed only four percentage points of their per capita income gap with the United States, far less than the 47 percentage points achieved by East Asian countries. The region is also among the most unequal. Despite notable recent advances, the richest tenth of the population capture 22 times more of the national income than the bottom tenth, and the richest 1% takes in more than double the national income than in the industrialized world.
Trust and the accompanying sense of citizenship significantly impact all the key drivers of growth and inequality. They are fundamental to solving the widespread citizen dissatisfaction that has erupted around the region on issues of taxation, poverty, and corruption. And they are critical to addressing the digital transformation of society, the existential challenge of climate change, the recovery from the COVID-19 pandemic, and a host of other social, political, economic, and environmental challenges. We hope that this report, by diagnosing the trust problem and providing a road map to reform, will help create more trusting, more collaborative and more harmonious societies. We hope that it can help forge the cohesion and sense of collective purpose needed to solve the immense challenges of the 21st century.