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Trust and Economic Policy


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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

  1. 1. Trust and Economic Policy OECD Workshop „Joint Learning for an OECD Trust Strategy” Dóra Győrffy Associate Professor, Péter Pázmány Catholic University, Hungary
  2. 2. 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 
  3. 3. 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.”
  4. 4. Trust and the time-horizon of decisionmaking
  5. 5. Perceptions on success in Hungary (2009) 90 80 70 60 50 40 30 20 10 0 In this country it is Certain rules have to impossible to get rich be broken if through honest somebody wants to means get ahead Those, who work hard, reach their goals In this country everyone has an equal chance for success
  6. 6. Consequences for economic policy   1. 2. 3. 4.   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: Ignoring the breaking of the rules to ensure social peace Increasing expenditure without corresponding revenues Decreasing taxes without matching expenditure cuts Soft financial regulations to increase access to credit In such an environment reforms are extremely difficult since longterm 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.
  7. 7. Satisfaction with democracy and fiscal outcomes in the EMU 1998-2007
  8. 8. The success of fiscal consolidation   1. 2. 3. 4.  General finding from the 1990s: the superiority of expenditurebased consolidations over revenue-based ones (Alesina and Ardagna 2004, 2010) Why? Cutting politically sensitive expenditures signals commitment  increases credibility  lowers interest rates Lower expenditures  expectations about lower future taxes  increases investment Restraints on government wages  restraint on private sector wages Decreases in social spending  incentive to search employment Hypothesis: expenditure-based adjustments are more likely in high-trust regimes.
  9. 9. Sources of consolidation in the EU-15 during the Maastricht process
  10. 10. Case studies: Sweden vs Hungary 6 4 Sweden Fiscal balance % of GDP 2 0 1990 1994 1998 2002 -2 -4 -6 -8 Hungary -10 -12 2006 2010
  11. 11. 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, expendituresbased 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
  12. 12. 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 policymakers
  13. 13. Satisfaction with democracy in the CEE-10 (2002-2007)
  14. 14. Sources of fiscal consolidation
  15. 15. Public and private indebtedness in the CEE-10 (2002-2008) 100 90 80 70 60 50 40 30 20 10 0 Public debt 2002 Public debt 2007 Private credit 2002 Private credit 2008
  16. 16. Public and private debt in the CEE-8 in 2007/2008
  17. 17. 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) 
  18. 18. The influence of crisis on systemic legitimacy in Greece and Ireland Assessment of national economic situation Trends in systemic support
  19. 19. 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 
  20. 20. Thank you for your attention!