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Department 1
Increasing competitiveness of the Rwandan economy
by managing trust
Prof. dr. Peter de Gijsel
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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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Department 3
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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Department 4
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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Department 5
Competitiveness
12 Pillars
Source: WEFGCR 2014-15, p. 9
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Department 6
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Department 7
Competitiveness
Increasing competitiveness
=> Increasing productivity
=> Higher development level
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Department 8
Competitiveness Index of Rwanda
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Department 9
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Department 10
WEFGCR 2014-15RWANDA SWITZERLAND
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Department 11
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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Department 12
Competitiveness and trust
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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Department 13
Competitiveness and trust
Observation
The importance of trust as a factor affecting competitiveness is not systematically discussed in the WEF Global Competitiveness Report!
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Department 14
Impact of trust on competitiveness?
Impact on growth and innovation (dynamic efficiency)?
Impact on economic performance (static efficiency)?
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Department 15
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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Department 16
Source: T.A.E. Ebert (2007), Interdisciplinary Trust Meta-Analysis of High Rank Trust Articles between 1966 and 2006
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Department 17
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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Department 18
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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Department 19
Interpersonal trust and institutional trust as core concepts of economics
and management of trust
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Department 20
World Map of Interpersonal TrustSource:http://www.jdsurvey.net/jds/jdsurveyMaps.jsp?Idioma=I&SeccionTexto=0404&NOID=104
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Department 21
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:
http://www.jdsurvey.net/jds/jdsurveyMaps.jsp?Idioma=I&SeccionTexto=0404&NOID=104
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Department 22
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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Department 23
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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Department 24
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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Department 25
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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Department 26
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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Department 27
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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Department 28
Results
Existence of competitive market prices clearing simultaneously all markets
Efficient markets
Institutional and interpersonal trust in perfectly competitive market economies
(Arrow-Debreu model of perfect competition)
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Department 29
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.
Institutional and interpersonal trust in perfectly competitive market economies
(Arrow-Debreu model of perfect competition)
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Department 30
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.
Institutional and interpersonal trust in perfectly competitive market economies
(Arrow-Debreu model of perfect competition)
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Department 31
Theoretical implications of considering interpersonal trust as externality
Dependency relationships have to be considered
Uncertainty has to be considered
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Department 32
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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Department 33
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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Department 34
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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Department 35
Economic Performance of High Trust Companies
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Department 36
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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Department 37
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 ?