Trust in transition

Abstract

This paper examines the role of trust in transition. Trust is an important ingredient in the institutional infrastructure of a market economy. Trust between economic actors allows efficient trade to take place in the face of uncertainty and constrains opportunistic behaviour. Trust in state institutions reduces the costs of rule enforcement and supports collective action. A key message of the paper is that what is needed in a modern market economy, characterised by a complex division of labour, is extended trust, beyond the closed circles of family or existing business contacts. With reference to the countries of central and eastern Europe and the former Soviet Union, the paper argues that they face heavy legacies of distrust in the state and closed social and business networks which reduce competitive pressures on existing enterprises to adjust. A key challenge for successful transition is to rebuild confidence in government and provide a minimum level of rule enforcement, which would lower the risk for economic actors to break out of existing networks in search of new economic opportunities. The paper also examines other determinants of trust in transition, such as moral leadership by the government, constitutional safeguards for open and democratic government, and redistributive policies that lower social distance among various groups in society. JEL Classification Number: L14, P30

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