Is Trust Important for Economic Development and Growth?

The aim of this paper is to empirically analyse the role of trust in the process of growth and economic development. To be precise, the effect of trust on income growth, physical and human capital accumulation, the invention and diffusion of technologies, formal institutions, governance and financial development is examined. Cross-country regressions are used to evaluate whether trust has an economic payoff addressing the issues of sensitivity and causality. Theoretical foundations underpin the empirical evidence. The general finding of this paper is that trust promotes growth and economic development by encouraging the accumulation and, to a larger extent, the efficiency of physical and human capital accumulation, accelerating the diffusion of technologies and increasing the well-functioning of legal, political and social institutions. Rather than being independent, the evidence points towards a strong interaction between trust and economic development; trust causes economic development that, especially in the long run, increases trust. This mutually reinforcing process makes it difficult to derive results on the basis of cross-country regressions. The theoretical foundation emphasises the role of trust in reducing transaction costs, dealing with uncertainty and encouraging interpersonal interaction. The importance of trust provides a guideline for how to achieve growth and economic development.