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Manager of countries who trust each other do most trade with each other

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How much do cultural biases affect economic exchange?  Luigi Guiso, Paolo Sapienza and Luigi Zingales have tried to answer this question by using the relative trust European citizens have for citizens of other countries. They show in the paper mentioned at the end of this article that trust in Europe is affected not only by objective characteristics of the country being trusted, but also by cultural aspects such as religion, a history of conflicts, and genetic similarities. Their paper is well worth the read and costs only about €3 to download.  They state that lower relative levels of trust toward citizens of a country lead to less trade with that country, less portfolio investment, and less direct investment in that country, even after controlling for the objective economic health of that country. This effect is even stronger for services and goods that are most trust intensive.  The effect doubles or even triples when trust is "instrumented" with its cultural determinants. They conclude that historical perceptions rooted in different national cultures and the frequency of war-fare between countries are important determinants of economic exchange, but that they are usually not taken into account during discussions of economic trade. However, Germany and Britain, two countries which were at war sixty years ago trust each other more than they trust the French, the "historical enemy" over many centuries.  The full title of the paper is "Cultural Biases in Economic Exchange”, by Luigi Guiso, Paola Sapienza and Luigi Zingales, May 2005.  

In the paper mentioned above, Guiso et al. made use, among other tools, of a survey carried out by the 3i/Cranfield European Enterprise Centre, where European managers of five different nationalities were asked to rank managers of the same five countries on the basis of their trustworthiness.[1]  The results are given in the table below.

Guiso et al.’s paper shows that “…everybody ranks the German managers relatively high, while Italian ones are ranked relatively low…Managers trust home country managers relatively better than they are ranked by other country managers.”  Guiso and his colleagues found that these results were replicated in a much larger survey (Eurobarometer).  These differences in trust affect the level of economic exchange between countries.  In their report there is a full table showing the relative levels of trust between 18 European Countries and inside countries.  “Swedish citizens trust each other 16 percent more on average than Irish citizens and 26 percent more than Greeks trust each other.”

Between countries, Swiss managers are the most trusted in Europe .  They are trusted 15 percent more than Irish managers and 42 percent more than Turkish managers.  A long history of warfare can explain the lack of trust between two countries.  For example, the British and French tend to trust each other very little (only 8 percent of the British fully trust the French).

The authors found a correlation between trusting and being trusted. The Portuguese are those who trust the least (only 10 percent report that they trust other countries a lot, on average) and the Swedish are those who trust the most.  Thus the Scandinavian countries are found at the top level of trustworthiness by others and they are also the ones who tend to trust other European managers the most.

What effect does this have on trade between European countries ?  The authors found that the level of trustworthiness resulted in Switzerland trading much more than any other country and Turkey trading the least with other countries in Europe .  Switzerland trades 40 percent more than Ireland , which is in the middle of the trustworthiness table in Europe and Turkey trades 73 percent below Ireland .  Below you will find a table of trust levels adapted from the “Cultural Biases in Econonomic Exchange” paper.  China, Japan, Turkey and the United States have been included for comparison purposes, to show the level of European trust towards them as compared to their fellow countries in Europe :

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http://www.economist.com : The Economist print edition of July 21st 2006 carried an interesting article based on the Guiso et al. paper : "HOW do people decide whether to trust a country's investment climate, or the quality of its goods and services? Objectively, to a degree: places with skilled workers and high technology tend to make reliable stuff; countries with clear laws and clean politicians are more trustworthy. You might suspect, though, that plain prejudice also affects trade and capital flows.… " You will have to pay to read the whole article.

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