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LATIN AMERICA & CARIBBEAN
From Site Selection magazine, May 2022
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Trust — It Does an Economy Good

Latin America & CariBbean
Sunrise in Cancun, Mexico
Photo: Getty Images

by MARK AREND
H

ere’s a site selection criterion you may not have considered before — trust. It matters, according to new report issued in January by the Inter-American Development Bank. Called “Trust: The Key to Social Cohesion and Growth in Latin America and the Caribbean,” the report makes the case that mistrust is an acute problem that limits socioeconomic development in Latin America and the Caribbean and the ability to take on difficult issues, such as climate change. Of more immediate concern, it maintains, increasing trust is key to a more dynamic business sector and economic reforms needed for a stronger post-COVID recovery in Latin America and the Caribbean.

A whopping nine out of 10 people in the region do not believe others can be trusted. Levels of trust in the region are one-fourth that of developed nations in the Organization of Economic Cooperation and Development (OECD). The report studies the root causes of mistrust in the region and offers recommendations for policymakers on how to turn this challenge into an opportunity to help address some of the region’s most pressing development issues, such as low productivity and innovation, lagging investment, and high levels of informality and tax evasion.

“Building trust through greater transparency and stronger institutions should be at the center of the policy agenda in Latin America and the Caribbean. Placing trust at the center of government decision-making will measurably advance development in the region,” said IDB President Mauricio Claver-Carone when the report was released in January. “Greater trust means less red tape that burdens businesses and hurts investment and innovation. It means more transparent governments that are committed to deliver on their promise and be accountable for it. And finally, it is also about engaged citizens who will voice their opinion and participate to strengthen democracies and support more inclusive societies.”

LatAmTrustGraph.jpg

High-trust countries tend to have higher productivity levels, and low-trust countries have larger informal economies as a percentage of GDP.

The IDB has been working closely with member countries to strengthen institutions, support the rule of law and promote greater transparency and integrity in its development plan. Why? Higher trust could be a boon for achieving tighter regional integration, strengthened supply chains, more productive small and medium-sized businesses, and greater digitization, which are among the priority areas the IDB has identified as opportunities to accelerate the region´s recovery in the post-pandemic period.

The report makes the case that less trust is associated with:

  • More fragile democracies
  • Less innovation and risk-taking
  • Lower tax revenue
  • More labor informality
  • Inefficiencies in financial markets
  • More and more onerous regulations
  • Harsher and less effective anti-crime policies
  • Less willingness to make sacrifices to combat climate change
  • Lower demand for public goods and investments
  • Lower willingness to participate in collective endeavors.

More trust, it maintains, is associated with:

  • Stronger democracies
  • More entrepreneurship and innovation
  • More willingness to grow and hire workers
  • More productive firms, more able to participate in global supply chains
  • Higher tax revenue
  • More financial inclusion
  • Less regulation and lower barriers to entry; more competition
  • More support for policies that are more effective to combat crime
  • More willingness to support measures to fight climate change
  • More demand for public goods, such as quality education
  • More willingness to participate in collective endeavors.

“This study provides a path for reforms that are pro-market, while building greater social cohesion,” said IDB Chief Economist Eric Parrado. “It also offers a way for governments to harness the support they need to tackle not just the pandemic recovery, but structural issues like lagging productivity and big challenges like climate change, diversity and inclusion.”

“Trust is too often taken for granted in the current economic policy debate because the roots of this problem are often considered to be structural in nature,” added Susana Cordeiro Guerra, manager of the IDB’s Institutions for Development Sector. “However, governments have powerful tools available to them to turn this around. Strengthening public sector institutions, eliminating the arbitrary enforcement of regulations, and making more information available will empower citizens and firms to deter and detect untrustworthy behavior and increase their confidence and trust in the system.”

Trustworthy Recommendations

The study recommends that governments in the region — when designing public policies — create incentives for public officials, economic agents, and citizens to act in a trustworthy manner. Governments must reduce differences in the access of information by investing in high-quality regulatory bodies and educating and making more information available to citizens to empower them to detect and deter untrustworthy behavior.

Governments must also reduce power asymmetries by increasing accountability and strengthening third-party enforcement institutions so citizens and firms feel they can rely on these institutions when mistreated by governments, firms, or other citizens.

The report also finds that:

  • Clean elections, political party institutions, civic participation and other democratic governance factors are key to increasing trust.
  • Addressing the challenges of trust is essential to take on difficult challenges such as climate change.
  • Governments and the media can provide information in a way that facilitates needed pro-growth reforms, lowers tax evasion, and improves crime prevention, among others.
  • Strengthening incentives inside the public sector to improve citizen welfare is essential to enable governments to keep their promises, thereby building citizen trust. 
  • Mistrust slows digitalization in part because citizens are concerned about cybersecurity. By improving cybersecurity, the region can advance more rapidly in the digital transformation of both the public and private sectors.

Mark Arend
Editor in Chief of Site Selection magazine

Mark Arend

Mark Arend has been editor in chief of Site Selection magazine since 2001. Prior to joining the editorial staff in 1997, he worked for 10 years in New York City at Wall Street Computer Review, ABA Banking Journal and Global Investment Technology. Mark graduated from the University of Hartford (Conn.) in 1985 and lives near Atlanta, Georgia.

 





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