By David Lipton

May 10, 2018
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Where trust exists and is reciprocated—where there is “confidence” in policies, institutions and systems—economies will achieve more (photo: iStock by Getty Images).

We live in an era of doubts and questions about the global order.  We have seen an erosion of trust in bedrock institutions—political parties, national governments, regional authorities, and among international trade and investment partners.

We often throw around the word trust rather loosely. But serious and careful work by Luigi Zingales and several others has defined trust as “civic capital”, meaning “those persistent and shared beliefs and values that help a group overcome the free rider problem in the pursuit of socially valuable activity.”

They find that where trust exists and is reciprocated—where there is “confidence” in policies, institutions and systems—economies will achieve more. 

But when it is depleted, when people come to believe that the “system” does not reflect their values, is not under their control, and no longer works to their benefit, economies will underperform.

There are three broad reasons for the erosion of trust:

First, is the reaction to globalization—or, more specifically the dislocations that have occurred in our interconnected global economy. Many people believe that it has not delivered fair outcomes, and that there is a lack of accountability for leaders and those who have gained the most.

Second, the global financial crisis, and the slow, decade-long recovery that followed exacerbated this trend. Governments have been blamed for failing to prevent the crisis and then compounding the difficulties by failing to engineer a swift recovery. For many, the past decade only provided proof that special interests had hijacked institutions, that corruption is endemic, and working people are left holding the bag.

Deep anger was directed at the bankers—although, ironically, recent surveys show that trust in banks is now returning. That no doubt reflects the reform that followed the crisis, which underlines one key lesson: trust can be rebuilt.

The third factor is technology. The rise of automation, AI, big data, e-commerce, and fintech each have huge potential. But they also deepen worries about the future of work, the sustainability of established businesses, the spread of cyber-criminality, and the weaponization of data. It should come as no surprise that we are witnessing a loss of trust in the big internet giants.

The rise of populist political movements and parties and protectionist sentiments may be the most obvious consequence of the trust recession, along with the anger in many countries about income inequality. But there is a deeper tendency at work—a shift as people place their trust in local entities or single-issue entities where citizens feel they can regain a sense of control. This includes civil society organizations, social and political movements, and communities that form online.

While decentralization gives people a sense of belonging and local impact, this fragmentation comes with a fundamental downside consequence.  The more trust resides at local and decentralized levels, the less those who are trusted will have the power and authority to address and solve problems that inherently require centralized authority, and, in an increasing number of cases, regional and global cooperation.

For example, trust in some European institutions has suffered from concerns about overreach. Discontent and suspicion of supranational bodies and regulation has generated a backlash in recent elections.

Europe faces additional vulnerabilities as long as elements of the regional construct remain incomplete. With work remaining on banking union and the harmonization of national regulations and practices in the financial sector, the risk is a further erosion of trust. On the upside, progress on further integration there could renew trust. What is proving difficult is contending with risk reduction—the legacies of crisis and national policy indiscipline—while building elements of risk sharing.  Unless that balance is properly struck, trust may be hard to maintain, if citizens in some countries see themselves as payers and others as receivers.

On the global level, distrust of global agreements and institutions is most evident in the realm of trade and foreign direct investment—witness the turn toward bilateral negotiations and treaties and the talk of unilateral actions.  Cooperation for mutual gain is the only sure way to avoid the risk of damaging escalation in trade tensions. But by the same token, globalization will not receive sustained, broad support unless it is based on free and fair trade and investment practices.  That means being willing to update rules and institutions commensurate with the growing sophistication and complexity of the global economy—and as technology changes the economic landscape. All countries need to work to improve their own policies, and work together to take account of the dislocations from globalization and technology.

The IMF is no stranger to distrust. We have been at the center of crisis and controversy. We have faced pressure again and again to reform to meet the changing needs and expectations of the international community. We feel it again now in discussions about the global financial safety net, which is needed as a bulwark against future crises.

Over the past decade, the Fund has taken important steps to make our decision making more reflective of changes in the global economy, with emerging market countries gaining a larger voice.

Our work must continue. We must become better attuned to ideas and grievances coming from all corners of the globe—and that includes addressing corruption concerns. We must demonstrate that we are a learning, evolving, and competent institution. But more importantly, we must prove that there is still reason to work together for global goods that benefit all people and transcend national and parochial boundaries.

It is crucial to prepare multilateralism for a world where trust and authority are more decentralized. Our multilateral institutions are more critical than ever. The way we rebuild confidence is to make sure that cooperation leads to concrete gains that benefit all people, and that these gains are widely shared. We can restore trust in institutions and larger purposes if we set out to regain the sense that something concrete can be achieved by working together.