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. Trust and Economic Policy
OECD Workshop „Joint Learning for an
OECD Trust Strategy”
Dóra Győrffy
Associate Professor, Péter Pázmány Catholic University, Hungary
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. 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.”
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. 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.
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.
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. 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. 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
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. The influence of crisis on systemic
legitimacy in Greece and Ireland
Assessment of national
economic situation
Trends in systemic
support
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
