Trade, social values, and the generalized trust.

• Author: Chan, Kenneth S.

The present paper investigates, empirically, whether global economic integration can lead to national social disintegration, as proclaimed by Rodrik. One can perhaps conjecture that a drop in the generalized trust in a country may signal a rise in social disintegration. Using the survey data on the generalized trust provided by the World Values Surveys, the present paper finds that, in general, there is a positive openness-trust relationship. However, when globalization undermines domestic income distribution, it will weaken this openness-trust relationship. There is also evidence of a threshold inequality above which the openness-trust relationship turns negative.

JEL Classification: F02, F10, F13, Z10

1. Introduction

   The present paper investigates, empirically, whether global economic integration can lead to national social disintegration, as proclaimed by Rodrik (1997). By social disintegration, Rodrik refers to the uprooting of social values of a nation without a suitable replacement. "Nations do have legitimate reasons for worrying about what globalization does to their norms and social arrangement," says Rodrik (1997). Rodrik's pronouncement is closely akin to, if not part of, those contentious trade issues arising from differences in national labor and environmental standards, cultural practices, and child labor, for example.

   To tackle this problem, the present paper chooses the concept of social capital (the stock of norms, rules, shared understandings, and expectations, etc.) in the literature as the basis of evaluation. The choice of this particular framework is discussed in Section 1. A useful function of social capital is to foster collective actions of the community. The latter can be measured by the trust among members of the community. One can perhaps conjecture that a drop in trust may signal a rise in social disintegration. Using the survey data on generalized trust provided by the World Values Surveys, various predictions on trade and generalized trust, reported in Section 2, can be tested. The present paper finds that the openness of a economy, ceteris paribus, does not always lead to a decrease in generalized trust. Income distribution is found to play an important role in this openness-trust relationship. Maldistribution of income reduces the positive impact of openness on generalized trust. Hence, when a more open economy raises the income inequality of a divided nation, the chance of social disintegration may increase. Section 3 concludes with a discussion of results.

2. Theoretical Analysis and Predictions

   Rather than using the conventional utility or social welfare function to evaluate the aforementioned issues, the present paper uses output performance as a criterion to evaluate the impacts of different social values. In other words, social values are considered here as part of the so-called social capital, discussed further, that aids production. (1)

   Literature Survey

   Recently, it is increasingly common for social scientists to use the term "social capital"-the stock of norms, values, civic traditions, conventions, etc., that constrain a person's actions--to explain collective action in a community. Coleman (1988) defines social capital as "people's capacity to work voluntarily together." Similar to the concept of capital, the stock of social capital is productive because it reduces market transactions cost. (2) Most researchers (e.g., Stiglitz 2000) agree that this kind of civic cooperation is the foundation of the nation's informal institution that governs market exchanges and "glues" the community together. The previous discussion can be summarized by the following function:

   V = [upsilon](K,[alpha]); [[upsilon].sub.1] > 0, (1)

   where V is voluntary cooperation, K is social capital, and [alpha] is a country specific variable.

   In the literature, Fukuyama (1995) and Dasgupta (2000) ascribe the ability to cooperate voluntarily to the trust among the people. Fukuyama and Dasgupta define trust as the common expectation of individuals that others' behavior in the community will be cooperative. Indeed, as argued by Paldam (2000), trust and the ease of voluntary cooperation should be two highly interlinked, if not almost identical, concepts. Without trust, cooperation will be limited only to activities that can be easily monitored or enforced. Paldam (2000) also shows that the two concepts imply each other. Elsewhere, Putnam (1993, p. 171) makes a similar argument: "Trust lubricates cooperation. The greater the level of trust within a community, the greater the likelihood of cooperation." In the same vein, Zak and Knack (2001) define trust as, "the resources that agents spend in production rather than in verifying or monitoring the actions of others, which is identical to the defined amount of cooperation in the community." The two concepts are, therefore, equivalent to the definition used by Zak and Knack. The argument in the literature can be summarized as:

   T = T(V) = T([upsilon](K,[alpha])) T' > 0, (2)

   where T is the generalized trust and is directly related to, if not identical to, voluntary cooperation, V. (3)

   To support Rodrik's argument emphatically, one has to show that a drop in the generalized trust in a society leads to social disintegration. This theoretical link is tenuous at best. Although a low level of generalized trust can lead to a lack of social cohesion, it does not automatically imply social disintegration. Moreover, it is difficult to define the normative concept of social disintegration, let alone finding data that measures it. Because of this difficulty, this paper only examines the impact of trade on the generalized trust. This, by itself, is a positive and interesting research question, somewhat different from, but close enough to shed light on, the research question posted by Rodrik. There is no need to enlarge the research focus to include social disintegration or to generalize to such level of abstraction. There are two views on the impact of globalization on the social values of a nation:

   The Pessimistic View

   According to this view, globalization weakens the social cohesion within a country, which eventually leads to social disintegration (see Rodrik 1997). There are two channels through which this can happen:

   (i) When conflicted with the social norms and traditional values of other nations, domestic norms and values (including workplace practices, rules, social insurance, etc.), which confine how domestic goods are produced, could be eradicated through the forces of trade. In terms of Equation 1, if some of the K is destroyed from trade, there will be less trust and cooperation. This will weaken the social cohesion of a nation.

   (ii) Globalization exacerbates tension among groups and pushes the less fortunate into despair. With increasing resentment and insecurity from those who fall victim to globalization, social order and solidarity decline (Rodrik 1997). (4) Moreover, the tax base of welfare states is steadily eroding away as capital and skilled workers become internationally mobile. Funding for social insurance and redistributive programs are weakening considerably (see De Grauwe and Polan 2005 for an update). The retreat of welfare states everywhere aggravates social divisiveness. Hence, globalization weakens the social cohesion or trust within a country.

   Rodrik's more elegant and updated argument echos Karl Polanyi's, that integration with the global market economy tended to destroy domestic social relationships that held human society together. "To separate labor from other activities of life and to subject it to the laws of the market was to annihilate all organic forms of existence and to replace them by a different type of organization, an atomistic and individualistic one," said Polanyi (1944, chapter 14, p. 163), and "such a scheme of destruction was best served by the application of the principle of freedom of contract. In practice this meant that the noncontractual organizations of kinship, neighborhood, profession, and creed were to be liquidated, since they claimed the allegiance of the individual and, thus, restrained his freedom." In the long run, by freeing social constraints, Polanyi argued, the market economy undermined social order and threatened to destroy the social institution upon which the market economy is based.

   The Optimistic View

   According to this view, globalization integrates national cultures, resulting in a better mix of pluralistic cultures. Although there is a clear loss of national cultural autonomy in a more open regime, it does not mean national cultures and values are dysfunctional. On the contrary, a better mix of pluralistic culture improves the functioning of domestic social capital, leading to a gain in social cohesion.

   Sen argues (1999, p. 241), "When an economic adjustment takes place, few tears are shed for the superseded methods of production and for the overtaken technology. There may be some nostalgia for specialized and elegant objects (such as an ancient steam engine or an old-fashioned clock), but, in general, old and discarded machinery is not particularly wanted. In the case of culture, however, lost traditions may be greatly missed. The demise of old ways of living can cause anguish, and a deep sense of loss ... but it is up to the society to determine what, if anything, it wants to do to preserve old forms of living, perhaps even at significant economic cost. Ways of life can be preserved if the society decides to do just that, and it is a question of balancing the costs of such preservation with the value that the society attaches to the objects and the lifestyles preserved." Although there are clear circumstances in which Sen's argument is incorrect, (5) one can perhaps think of his argument as correct for most situations, rather than correct unequivocally.

   In a similar vein, Bhagwati (2004, chapter 9) argues that trade may spread useful values that improve domestic social conditions...