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Presentation by Dóra Györffy at the OECD Workshop on “Joint Learning for an OECD Trust Strategy” on 14 October 2013. Ms. Györffy discusses trust in-depth including its relationship with decision-making, economic policy, popularity of government and its influence on the crisis.
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Trust and Economic Policy
OECD Workshop „Joint Learning for an
OECD Trust Strategy”
Dóra Győrffy
Associate Professor, Péter Pázmány Catholic University, Hungary
Structure of the presentation
Definitions of trust
Trust and the time-horizon of decision-making
Trust and economic policy:
1. Satisfaction with democracy and fiscal
performance
2. Choosing a method of fiscal consolidation
3. Public vs private sector indebtedness
Trust in government vs systemic trust
Definitions Definition of trust:
1. “A psychological state comprising the intention to accept vulnerability based
upon positive expectations of the intentions or behavior of another”
(Rousseau et a 1998).
2. “A trusts B to do X” (Levi 1998).
Trust in government: perception that the government is committed to serve the
public good and is capable to do so (Rosanvallon 2008).
Institutional trust: institutions fulfill a legitimate function and operate in the
interest of the public good.(Offe 1999).
Sources of institutional trust:
Gilley (2009): main determinants of legitimacy /trust/: general governance,
income level, gender equality, welfare level and economic governance
Rothstein and Teorell (2008): theory of impartial institutions to assess quality
of governance. Impartiality: a norm on the output side of the political process,
“when implementing laws and policies government officials shall not take into
consideration anything about the citizen / case that is not beforehand
stipulated in policy or the law.”
Trust and the time-horizon of decision-
making
Perceptions on success in Hungary (2009)
0
10
20
30
40
50
60
70
80
90
In this country it isimpossible to get rich
through honestmeans
Certain rules have tobe broken if
somebody wants toget ahead
Those, who workhard, reach their
goals
In this countryeveryone has anequal chance for
success
Consequences for economic policy
Given their need for gathering votes politicians cannot ignore the
dominant time-horizon in society
In the absence of strong external pressure, the short-term orientation
in society is paralleled by short-term orientation in policy, which have
various forms:
1. Ignoring the breaking of the rules to ensure social peace
2. Increasing expenditure without corresponding revenues
3. Decreasing taxes without matching expenditure cuts
4. Soft financial regulations to increase access to credit
In such an environment reforms are extremely difficult since long-
term promises are not credible and the pain of adjustment is seen
not as a sacrifice for tomorrow but rather as a loss today.
Consequences: growing indebtedness, macroeconomic volatility and
periodic crisis.
Satisfaction with democracy and fiscal
outcomes in the EMU 1998-2007
The success of fiscal consolidation
General finding from the 1990s: the superiority of expenditure-
based consolidations over revenue-based ones (Alesina and
Ardagna 2004, 2010)
Why?
1. Cutting politically sensitive expenditures signals commitment
increases credibility lowers interest rates
2. Lower expenditures expectations about lower future taxes
increases investment
3. Restraints on government wages restraint on private
sector wages
4. Decreases in social spending incentive to search
employment
Hypothesis: expenditure-based adjustments are more likely in
high-trust regimes.
Sources of consolidation in the EU-15
during the Maastricht process
Case studies: Sweden vs Hungary
-12
-10
-8
-6
-4
-2
0
2
4
6
1990 1994 1998 2002 2006 2010
Fis
cal
bal
ance
% o
f G
DP
Sweden
Hungary
Different responses to fiscal imbalances Sweden Hungary
Source of imbalances Credit boom following the
deregulation of financial
markets in the 1980s
Growing debt due to
inheritance and
transformational recession
Method of adjustment Devaluation, banking
resolution, expenditures-
based fiscal consolidation,
structural reforms,
strengthening fiscal
institutions
Procrastination followed by a
surprise package: devaluation
aiming at surprise inflation,
new exchange rate regime,
import surcharge, some cuts
in welfare provisions. Later
privatization, and pension
reform
Outcome Regular surplus, steady
growth
Acceleration of growth,
defeat of government in the
next elections fear of
consolidation for a decade
The role of trust
Method of decision-making: political consensus vs
secret planning and increased polarization
Choice of method: international best practices vs
navigating among political constraints
Sustainability: presence or absence of election
cycles reflecting the planning horizont of policy-
makers
Satisfaction with democracy in the CEE-10
(2002-2007)
Sources of fiscal consolidation
Public and private indebtedness in the CEE-10
(2002-2008)
0
10
20
30
40
50
60
70
80
90
100
Public debt 2002 Public debt 2007 Private credit 2002 Private credit 2008
Public and private debt in the CEE-8 in
2007/2008
Popularity of government vs trust
In a democratic regime where the possibilities for
using force to induce compliance are limited,
governments need the voluntary compliance of the
citizens to be able to govern effectively
Popularity caused by short-term populist measures
should not be confused with trust
Latest trend in Hungary: given the constraints on
both public and private indebtedness redistribution of
existing wealth takes place, which is rather
popular…
Difference between specific and systemic support
(Easton 1965)
The influence of crisis on systemic
legitimacy in Greece and Ireland
Assessment of national
economic situation
Trends in systemic
support
Conclusions
In a low-trust environment the time-horizon of
decision-making shortens given the prevalence of
uncertainty
The manifestation of short-term measures can vary
greatly depending on the constraints presented by
the international financial markets
In a low-trust environment building trust in the
government might come into conflict with economic
rationality
Building systemic trust is unavoidable in order to
lenghten the time-horizon in society, which in turn
allows governments to plan for the long-term
Thank you for your attention!