Neo-Liberalism, Globalization and Developing Economies

The issue of Trust and Honesty

 Raj Kumar Sen

John Felix Raj

International Economic Conference

Marrakech, Morocco

August 2005

  Contents:  

I. Introduction

I.1. Rich and Poor Countries of the World

I.2. Ethics and Values  

II. USA – A Case for Developed Countries

II.1. Factors Responsible for Development

II.2. Values as Important Factors for Development

II.3. Religion – Promoter of Values  

III. Scandalous Realities of Developing Countries

III.1. Russia as Low Trust Country

III.2. India – A case for Developing Countries

III.3. Factors Responsible for Underdevelopment  

IV. Impact of Globalization and Liberalization  

V. Conclusions and Suggestions  

ABSTRACT

This paper makes an attempt to establish that values like trustworthiness, truthfulness and honesty play an important role in the economic development of a country, and this is quite important in the cotemporary era of globalisation and dominant theory of neo-liberalism. It is divided into five sections. It first discusses the meaning of trust and honesty in the context of present wide divergent realities of the rich and poor countries of the world. It has also used the Corruption Perception Index and the correlation coefficient between the GDP, corruption and IQ for various groups of countries. Secondly, USA is presented as a case for developed world and the role of values in its development is discussed. In this context, the role of moral and ethical values as propagated by religions is analyzed. In the third section, while discussing the present situation of developing countries requiring urgent improvement, we have presented the erstwhile Soviet Union as a low-trust and less honest country and discussed the case of Indian economy as a case study of the developing countries. Next, the impact of the present globalization and liberalization on the developing economies is discussed in the perspective of widespread corruption and eroded values. Finally, on the basis of experiences of the developing countries like India, it follows, as we discuss in the concluding section, that the conventional understanding of development needs rethinking, and that erosion of values affects economic growth. What are urgently required are political, economic and judicial reforms, based on accountability, transparency and an environment of trust and honesty. We call all governments to introduce measures for making governance more effective, transparent and people-oriented.

---------------------------------------------------------------------------

Key Words: Trust and honesty, Corruption perception, Development, Globalization, Ethic and Values.

Neo-Liberalism, Globalization and Developing Economies:

The issue of Trust and Honesty

    Raj Kumar Sen*                                         John Felix Raj** 

Conjoint action is possible just in proportion as human beings can rely on each other.  There are countries in Europe, of first-rate industrial capabilities, where the most serious impediment to conducting business concerns on a large scale, is the rarity of persons who are supposed fit to be trusted with the receipt and expenditure of large sums of money.

-John Stuart Mill[i]

I. Introduction

I.1. Rich and Poor Countries of the World:

The earth is one, but the world is divided. Countries of the world are divided into rich and poor, developed and developing, advanced and backward, modern and traditional, south and north, first world (Western Europe, USA and the Pacific- the capitalist), second world (the Eastern Europe – the socialist) and third world (Latin America and the Caribbean, Africa, the Middle East, and Asia except Japan – the developing) and so on. International organizations and institutions – UN, IMF, WB, and WTO - were founded to heal the wounds of division. But the sad story is that they themselves are divided and have become mouthpieces of powerful countries. 

Look at Table 1. While the developed countries have, according to purchasing power parity (PPP), more than $ 25,000 as GDP/PC, the developing ones have around $ 2,500 (just one/tenth of the rich countries). World economies are divided according to 2003 GNI per capita, calculated using the World Bank Atlas method, as low income: $765 or less; lower middle income: $766 - $3,035; upper middle income: $3,036 - $9,385; and high income: $9,386 or more.  Why is it that rich countries are always rich and poor ones remain always poor? What are the factors for such realities?  

Rich Countries:   

1. Countries like USA, Germany, Japan have become rich due to domestic resources, stimulation of industry and economy with scientific and technological advancement.
2. England, France were colonial powers and accumulated resources from their colonies.
3. Australia, South Africa remained as centres of colonizers.
4. Singapore, Hong Kong were commercial centres founded by developed countries. 

Poor Countries:  

1.      India, Bangladesh, Pakistan, Sri Lanka and many other countries in Asia were colonies of European countries. They are today characterized by massive poverty and illiteracy. They are dependent on the technology of the rich countries.

2.      Countries like Russia, China are Communist countries with monoculture and homogeneity.  

There are many factors, which are responsible for the economic growth and development of rich countries: domestic resources, industrialization, scientific and technological advancement, education, efficiency of labour, investment, commercial interests and trade, colonial accumulations, environmental advantages and so on. In this paper, we want to establish that values like trustworthiness, honesty and integrity play an important role in the development of a country.  

I.2. Ethics and Values:

Business schools teach a lot of things -- managerial economics, accounting, marketing, and retailing, among others. Nowadays, they are also trying to instill something they should have been doing all along -- plain old-fashioned trust, honesty and integrity. They call it "ethics," and a few of them call it "business ethics" or “development ethics” (as if that was something different from "regular" ethics), but they are all trying to counteract the loss of trust and truthfulness that has been created by the massive business frauds of the last few years.

Ethics is concerned with how a moral person should behave. It refers to principles that define behaviour as right and wrong. Such principles do not always dictate a single "moral" course of action, but provide a means of evaluating and deciding among competing options.[ii] Values are the inner judgments that determine how a person is and behaves. We translate values into principles so that they can guide and motivate moral and ethical conduct. Values are different from ethics. For example, trustworthiness, truthfulness, honesty, integrity are values. The terms “ethics” and “values” are not interchangeable. Ethics flow from values and not vice-versa.

Trust, writes Piotr Sztompka,[iii] may be defined as “a bet on the future contingent actions of others”. When we decide to trust an individual or an institution, we are not completely certain what is going to happen, that is, if the person or institution is going to live up to our trust and in fact prove trustworthy. That is why we differentiate between “blind faith” and trust. Even if we do not sit down and perform a probability analysis of the risks that our trust will be abused every time we decide to trust someone, there is usually an element, however small, of uncertainty. If we were entirely sure that someone was trustworthy, we would have no need for a word like confidence, that is, advance belief. Confidence expresses what we believe in advance in something, but do not know for certain. Trust involves strength, frequency, and reciprocity of successful repeated interaction.  

We would define trust as a belief that the other agents would act in a predictable way and fulfil their obligations without special sanctions.[iv] We differentiate between two levels through which trust relationships have to develop. The first level of trust is achieved through a predictability of behaviour of the other actors. The second level of trust is reached through mutual obligations to follow accepted conventions, which are voluntarily taken by the market actors. We also accept a division between one-sided trust in institutions and reciprocal trust among business actors.[v]   

Trust and honesty are key factors. A prerequisite of trust is honesty. As Jim Clemmer[vi] explains, honesty is a clear conscience "before myself and before my fellow human beings." Honesty is the awareness of what is right and appropriate in one’s role, one’s behavior, and one relationship. With honesty, there is no hypocrisy or artificiality, which creates confusion and mistrust in the minds and lives of others. Honesty makes for a life of integrity because the inner and outer selves are a mirror image.

Honesty is to speak that which is thought and to do that which is spoken. There are no contradictions or discrepancies in thoughts, words, or actions. Such integration provides clarity and example to others. To have one form internally and another form externally creates barriers and can cause damage, since one would neither be able to come close to anyone else, nor would others want to be close. Some think, "I am honest, but no one understands me." That is not honesty. Honesty is as distinct as a flawless diamond, which can never remain hidden. The worth is visible in one’s actions

Honesty and integrity are motherhood leadership phrases. And they should be. They are fundamental to leadership. Honesty and integrity produce trust, which produces high levels of confidence. High confidence encourages people to dream and to reach for new horizons. High confidence fosters risk-taking. Risk-taking and initiative are fundamental to organizational change and improvement. Our ability to lead others is directly related to our ability to forge strong relationships. Strong relationships are dependent upon trust. Trust provides the glue.

II. USA - a Case for Developed Countries:   

Let us take USA as an example. It is the premier and dominant economy through the post world war II period. With a population of around 285 million, it is known as the “Land of opportunities”. It has a little bit of every country, culture and religion in the world. The USA produces the largest GDP in the world, valued at $9.87 trillion in 2000. Its GDP per capita is around $ 37,600 in 2002. The real GDP, GDP per capita and inflationary rates have been more or less representative of a leading world power over the past several decades.   

II.1. Factors Responsible for development:  

Anchoring US’s economic colossus is a strong industrial sector which has been crucial factor in generating economic growth, providing job opportunities, and ensuring national security. Starting from construction boom for canals in 1830s and railroads in 1840s, industrialization has transformed US economy elevating the nation to an economic power with a high level of industrial production capability. A distinctive feature of its successful economy is said to be its heavy reliance upon market mechanism to allocate resources among competing desires. The market remains the distinguishing core, the powerful force of the US economic system.

The multivariate equation has in part contributed to the dynamic efficiency of the private and public sectors as well as the overall economic prosperity of the US. According to DeLong and group’s findings, “we are different but we can live in harmony” has been the formula in the USA where creativity and knowledge are valued. Tolerance and trust have been main reasons for its undisputed economic growth. Unity in diversity breeds creativity. Silicon Valley is a concrete example for this. The Silicon Valley leaders are taking the ethical high road -- and betting that it's the road to success.

You ask the people in silicon Valley what makes their company special. The immediate answer is: “integrity”. As George Anders,[vii] a Fast Company senior editor based in SV, puts it, “we live and work in a world where “ the internet changes everything”. But it heartening to see that some of the smartest mavericks believe that honesty is still the best policy.

As Ben W Lewis[viii] observes, roughly three-fourth of US GNP derives from labour inputs. High labour productivity is achieved by trained and skilled labour force, which is in turn, reflects human capital investment, incentive system, management and cultural factors.  

According to J. Bradford DeLong, Claudia Goldin, and Lawrence H. Katz[ix], the three major factors responsible for American economic growth are: 1. Human capital – the knowledge and the skills acquired by practice and experience of labour force; 2. Physical capital – the machine, buildings and infrastructure that amplify worker productivity and embody technological knowledge; and 3. The ideas that make the modern industrial technology.  

Of these, as they observe, it is the human capital – education, skills, harmony (trust and moral values like honesty) – that must take the first place when we think about policy. This is so for human capital has played the significant role in America’s 20^th century economic growth – the increase in average schooling, the positive effects of policies intended to boost the knowledge and skills of people, the proper distribution of income that enables people to lead better lives, a measure of well-being.  

There are other factors beneficial for rich countries for their economic development. William Masters and Margaret McMillian[x] say that climatic condition – cold weather is a key stimulus. Cold climate plays two important roles: 1. It makes for the increase of agricultural production; and 2. It saves people from tropical diseases like malaria and improves life span and immune system of people.

II.2. Values - Important Factors for Development:

Germany is different from the US and is one of the most diverse nations in the wealthy world. Ireland is often shown as the shining example for diversity, tolerance and honesty. Thailand with its long belief in openness and tolerance has been rewarded. G Paschal Zachary[xi] enumerates this idea of how multicultural and peaceful societies grow economically in his book “ The Global Me”.

There are contrasts – situations that are different from US or Germany among rich countries. Japan wants the illusion of oneness or China enforces an unbending homogeneity. The communist government upholds the myth of Chinese oneness while completely ignoring the proven benefits of diversity. China is often cited as an awoken giant. But the biggest drawback seems to be that it is the world’s largest official monoculture.  

Susan Rose Ackerman[xii] has found in her study that honesty and trust affect the functioning of the state and the market, and conversely, the quality of formal rules and institutions has an impact on personal trust. While analysing the relationship between trust and government, she stresses the mutual interaction between trust and democracy in improving development, and the impact of corruption leading to decline in development.  

Table 1

Corruption Perceptions Index 2003

The CPI 2003 Score relates to perceptions of the degree of corruption as seen by business people, academics and risk analysts, and ranges between 10 (highly clean) and 0 (highly corrupt). A total of 15 surveys were used from nine independent institutions, and at least three surveys were required for a country to be included in the CPI.

Table 2

The chart and correlations on this page were done by Parhatsathid (Ted) Napatalung of Thailand.

Table 2 shows the correlation between GDP, Corruption and IQ for developed, developing and underdeveloped countries: 1. For developed countries, if integrity is already high, improvement in integrity takes an even greater importance. Higher integrity is associated with higher income; 2. For developing countries, if integrity is medium, IQ takes equal importance to integrity; and 3. For underdeveloped countries, if integrity is low, IQ takes a great importance towards GDP. Lower integrity is associated with underdevelopment. Corruption shows a very high 0.89 correlation to income, while the correlation of IQ to income is a bit lower at 0.67.

Why does trust vary so substantially across countries? How does trust affect growth? Zak and Knack[xiii] in their paper present that trust is higher in more ethnically, socially and economically homogeneous societies and where legal and social mechanisms for constraining opportunism are better developed. High-trust societies, in turn, exhibit higher rates of investment and growth. Agents in this world may trust those with whom they transact, but they also have the opportunity to invest resources in verifying the truthfulness of claims made by transactors. They characterize the social, economic and institutional environments in which trust will be high and show that low trust environments reduce the rate of investment and thus the economy's growth rate. Further, they show that very low trust societies can be caught in a poverty trap.  

Stephen Knack[xiv] explains that trust potentially can influence economic performance through either of two major channels, “micro-economic” and “macro-political.” At the micro level, social ties and interpersonal trust can reduce transactions costs, enforce contracts, and facilitate credit at the level of individual investors. At the macro level, social cohesion underlying trust may strengthen democratic governance,[xv] improve the efficiency and honesty of public administration,[xvi] and improve the quality of economic policies.[xvii]  

Esa Mangeloja[xviii] of University of Jyvaskyla, Finland, in a study shows that moral institutions and ethics affect the economic development, as for example; trust and honesty are essential requirements for emerging economic activity.

Robert Putnam’s[xix] well-known study of Italy shows that social trust is the density and weight of civil society. Social trust teaches individuals the noble art of living together, which has an impact on economic growth. This is how Putnam introduces the idea:

Whereas physical capital refers to physical objects and human capital refers to the properties of individuals, social capital refers to connections among individuals – social networks and the norms of reciprocity and trustworthiness that arise from them. In that sense social capital is closely related to what some have called “civic virtue.” The difference is that “social capital” calls attention to the fact that civic virtue is most powerful when embedded in a sense network of reciprocal social relations. A society of many virtuous but isolated individuals is not necessarily rich in social capital.

In other words, interactions enable people to build communities, to commit themselves to each other, and to knit the social fabric. A sense of belonging and the concrete experience of social networks (and the relationships of trust and tolerance that can be involved) can, it is argued, bring great benefits to people.

Zak and Knack[xx] demonstrate that interpersonal trust substantially impacts economic growth, and that sufficient interpersonal trust is necessary for economic development. Policies must be trust-raising if policy makers seek to stimulate economic growth. Policies that enhance freedom, build civic culture, reduce income inequalities, raise educational levels, strengthen the rule of law and facilitate interpersonal understanding, all of which raise trust. Trust, honesty and democracy are the foundations of abiding prosperity.  

Douglass North[xxi] has argued “the inability of societies to develop effective, low-cost enforcement of contracts is the most important source of both historical stagnation and contemporary underdevelopment in the Third World.” Spot market transactions allow some gains from trade, but most of the potential benefits from specialization will be forgone in the absence of any trust-dependent trades, i.e. trades that occur over time or across space, and which are thus subject to opportunism on the part of one or both parties to the transaction. For example, goods and services may be provided in exchange for a promise of a future payment. Creditors loan money to debtors on the promise of future repayment. Managers hire employees to accomplish tasks that are difficult to monitor or measure.  

Leadership quality is directly related to relationship with people. Strong relationships are dependent on values – trust, truthfulness and honesty. Building trust and being truthful is essential for strong relationships and to the success of organisations. Unfortunately, values are not always present. Many studies show that mistrust of management and low morale are significant factors in the widening “we-they” gap between employers and employees. In organizations where there are unethical business practices, cynicism runs rampant and employees feel an ever-diminishing commitment to their organization?[xxii] This situation will never change if there are no strong and trustworthy leadership at all levels.

While crime doesn't pay, being trustworthy does pay off. One study of the eight biggest automobile manufacturers in Japan, South Korea, and the United States, along with 435 of their suppliers, looked at the economic value of trust (defined as "confidence that the other party will not exploit one's vulnerabilities"). The results of the research indicated that in all three countries relationships with higher levels of trust had substantially lower costs. Trust actually adds value to the relationship because it encourages the sharing of resources.[xxiii]

Another study commissioned by MacLeans magazine[xxiv] found that companies whose employees believe their bosses are good people-managers are the ones with the strongest shareholder returns. "Where trust in management is high," says Dawn Bell, a Vancouver-based senior consultant with Watson Wyatt Worldwide, "it is incredible what employees can do to drive business success. In organizations where the trust and confidence has gone, it is very difficult just to keep the lights on."

Here is a first hand report of Venezuelan situation of Mark Tweito.[xxv] “Having now lived for over a year in Venezuela, I have been able to put my finger on one of the reasons I feel that Venezuela is not able to economically advance at the level it could. It is not that Venezuelans are lazy, as many of them work long hours for little pay. It is not a matter of intelligence either, as most Venezuelans are able to grasp difficult concepts and are able to make do with the materials at hand in order to solve problems. However, there is a rampant problem with distrust. This arises from the rampant corruption on the part of many citizens. It is simply harder to make business when trust is lacking. If Venezuelans want to improve their economy, one of the best ways would be to act trustworthy.”

II.3. Religion – Promoter of Moral and Ethical Values:  

Max Weber’s famous theory about capitalism posits that religion affects the economy by influencing certain individual traits. These traits, in turn, may make people more or less economically productive. Weber stressed the Protestant ethic that honesty, ethics and other kind of values influence individuals who influence the economy.  

We cannot deny the role of religion or values preached by religion in economic development. Most of the rich countries in the west, the first ones to develop, are Christian – either predominantly Catholic or Protestant or both. Germany is about 50/50 Catholic and Protestant. USA, France, England and other developed countries are more or less in similar situations. Christianity, as an organized religion has spread systematic education and supported scientific and industrial growth in western countries.

Christianity is a 2000-year-old religion and is based on the Bible: Old Testament and the New Testament. Ten Commandments of the Old Testament and the Gospel values as preached by Jesus – love, justice, peace, fellowship have all deeply influenced individuals and communities. Christianity is missionary by nature and has been preaching the Gospel message throughout the world. Although the Church and the State are separated in the modern world, Christian ethics have deep root in the socio-economic life of people. Take for example the motto of USA: “In God we trust”. It is taken from the Old Testament, Psalm 91.  

The Church has always emphasized the dignity of human person. “ How we organize our society – in economics and politics, in law and policy – directly affects human dignity and the capacity of persons to grow… The State has a positive moral function as an instrument to promote human dignity”.[xxvi] According to the social teachings of the Church, the economy must serve people, not the other way around. All workers have a right to productive work, to decent and fair wages, and to safe working conditions. They also have a fundamental right to organize and join unions. People have a right to economic initiative and private property, but these rights have limits. No one is allowed to amass excessive wealth when others lack the basic necessities of life.

Catholic teaching opposes collectivist and statist economic approaches. But it also rejects the notion that a free market automatically produces justice. Distributive justice, for example, cannot be achieved by relying entirely on free market forces. Competition and free markets are useful elements of economic systems. However, markets must be kept within limits, because there are many needs and goods that cannot be satisfied by the market system. It is the task of the state and of all society to intervene and ensure that these needs are met.

All people have a right to participate in the economic, political, and cultural life of society. It is a fundamental demand of justice and a requirement for human dignity that all people be assured a minimum level of participation in the community. It is wrong for a person or a group to be excluded unfairly or to be unable to participate in society.

We are one human family. Our responsibilities to each other cross national, racial, economic and ideological differences. We are called to work globally for justice. Authentic development must be fully human and integrated development. It must respect and promote personal, social, economic, and political rights, including the rights of nations and of peoples. It must avoid the extremists of underdevelopment on the one hand, and "super-development" on the other. Accumulating material goods, and technical resources will be unsatisfactory and debasing if there is no respect for the moral, cultural, and spiritual dimensions of the person.

III. The Scandalous Realities of Developing Countries:   

There are 123 developing countries, 44 least developed countries, 25 Central and East Europe and Commonwealth of Independent States (CIS) and 30 OECD Countries in the world. According to WB Report 2003, there are 54 countries with high GNP per capita of $ 9,386 or more; 37 upper middle-income countries ($ $ 3,036 to 9,385); 56 lower middle-income countries ($766 to 3,035) and 61 low-income countries with $ 765 or less. The proportion of people living below poverty line in the world is reported to have fallen from 29 per cent in 1990 to 23 percent in 2002.  

The richest 5 per cent of the world’s people have incomes 114 times those of the poorest 5 per cent. The USA, Canada, Brazil, Mexico and Argentina have 95 per cent of the combined GDP of the 35 Countries of Americas. There are built-in inequities, not only in income, but also in the capacity and strength to deal with global issues like trade. Seven countries, - US, Japan, UK, France, Saudi Arabia, Germany and the Russian Federation, hold 48 per cent of the voting power at the