The Market-Promoting and Market-Preserving Role of Social Trust in Reforms of Policies and Institutions

Abstract

Social trust has been identified as a catalyst for reforms. We take the literature further in two ways. First, we make a fine-grained analysis of mechanisms through which social trust enables liberalizing reforms – by strengthening the ability to overcome obstacles in the political process (stemming from ideology, ideological fractionalization, coalition government, minority government and legislature-seat instability). Second, we define reforms as distinct changes in the quality of the legal institutions and in the scope of regulation and separate reforms that increase economic freedom in these two areas from reforms that decrease it. We study separately how social trust, interacted with the different types of political hindrances, affects the probability of reforms. We find a dual role of social trust in the political process – facilitating liberalizing reforms and making de-liberalizing ones more difficult. This result suggests that trust does not make agreement on any reform more probable – the content of the reform matters. Other research shows that trust is associated with a positive view of market actors, which indicates that only reforms that strengthen the market economy are more easily agreed upon in the presence of trust.

Keywords: Reforms, Liberalization, Social Trust, Ideology, Fractionalization, Coalition Government

JEL Classification: H11, P11, P48, Z13