This was a presentation by Prof. Dr. Peter de Gijsel a visiting Professor from Maastricht University during a Public lecture titled "Increasing the competitiveness of the Rwandan economy by managing trust" at the University of Rwanda College of Business and Economics

1. Increasing competitiveness
of the Rwandan economy
by managing trust
Prof. dr. Peter de Gijsel
Department 1

2. Competitiveness of the Rwandan economy
 World Economic Forum Global Competitiveness
Report 2014 -2015 (WEFGCR)
 Global Competitiveness Index (GCI): Rank 62
 3rd in the Sub Saharan Africa
Department 2

3. Definition Competitiveness
We define competitiveness as the set of
institutions, policies, and factors that
determine the level of productivity of a
country.
WEFGCR 2014 2015, p. 4
=> trust as a factor?
Department 3

4. World Economic Forum Global Competitiveness
Report 2014 -2015 (WEFGCR)
Stages of development
 Factor driven economies
 Transition economies
 Efficiency driven economies
 Transition economies
 Innovation driven economies
Department 4

5. Competitiveness
12 Pillars
Source: WEFGCR 2014-15, p. 9
Department 5

6. Department 6

7. Competitiveness
Increasing competitiveness
=> Increasing productivity
=> Higher development level
Department 7

8. Competitiveness Index of Rwanda
Department 8

9. Department 9

10. WEFGCR 2014-15
RWANDA SWITZERLAND
Department 10

11. WEFGCR 2014-15
Competitiveness and trust
The role of institutions goes beyond the legal framework.
Government attitudes toward markets and freedoms and the
efficiency of its operations are also very important: excessive
bureaucracy and red tape, overregulation, corruption, dishonesty
in dealing with public contracts, lack of transparency and
trustworthiness, inability to provide appropriate services for the
business sector, and political dependence of the judicial system
impose significant economic costs to businesses and slow the
process of economic development.
WEF Global Competiveness Report 2014-15, p. 6
Department 11

12. Competitiveness and trust
In order to fulfill all those functions, the banking sector needs to be
trustworthy and transparent, and—as has been made so clear recently—
financial markets need appropriate regulation to protect investors and
other actors in the economy at large.
WEF Global Competitiveness Report 2014-15, p. 7
Department 12

13. Competitiveness and trust
Observation
The importance of trust as a factor
affecting competitiveness is not
systematically discussed in the
WEF Global Competitiveness
Report!
Department 13

14. Impact of trust on competitiveness?
 Impact on growth and innovation (dynamic
efficiency)?
 Impact on economic performance (static
efficiency)?
Department 14

15. Rise of trust research since the late 1980s
 Theoretical developments in economics
(Economics of Information, Behavioral Economics, Institutional
Economics, Game Theory)
 Core theme of organizational analysis and
management
Switch from bureaucratic organizations to more flexible
types of organization
Trust as an efficient mode of coordinating inter- and
intraorganizational relationships
Department 15

16. Source: T.A.E. Ebert (2007), Interdisciplinary Trust Meta-Analysis of High Rank Trust Articles between 1966 and 2006
Department 16

17. OS= Organization Studies; OB=Organization Behavior; HRM=Human Resource Management; IR= Industrial
Relations; MIS=Management Information Systems; KM=Knowledge Management; OR=Operations Research;
MS=Management Science; POM=Production and Operations Management; F&A=Finance and Accounting;
PSM=Public Sector Management
Source: T.A.E. Ebert (2007) Interdisciplinary Trust Meta-Analysis of High Rank Trust Articles between 1966 and 2006
N.B. 89% of trust papers in economics have been published between 1996-2006 and 43% between 2004 and 2006!
Source: Own calculations based on Ebert (2007), pp 19-91.
Department 17

18. Observation
Low percentage of trust papers in
economic top journals
Why?
Answer: Economists have been more
interested in solving trust problems by
looking for control and incentive
mechanisms as solutions instead of
building trust.
Department 18

19. Interpersonal trust and institutional
trust as core concepts of economics
and management of trust
Department 19

20. World Map of Interpersonal Trust
Source:
http://www.jdsurvey.net/jds/jdsurveyMaps.jsp?Idioma=I&SeccionTexto=0404&NOID=104
Department 20

21. Interpersonal Trust
Generally speaking, would you say that most people can be trusted or that you
need to be very careful in dealing with people?
Possible answers:
– 1 Most people can be trusted
– 2 You can never be too careful when dealing with others
TRUST INDEX = 100 + (% Most people can be trusted) - (% Can´t be
too careful)
Source:
http://www.jdsurvey.net/jds/jdsurveyMaps.jsp?Idioma=I&Secci
onTexto=0404&NOID=104
Department 21

22. Interpersonal trust in Rwanda
Generally speaking, would you say that most people
can be trusted or that you need to be very careful in
dealing with people?
Most people can be trusted 16.6%
Need to be very careful 83.4%
Trust index: 100+16.6-83.4 = 33.2
Source: World Values Survey (2010-2014)
Department 22

23. Definition of Interpersonal Trust
Source: R.C. Mayer, J. H. Davis and F. D. Schoorman in:: The Academy of Management Review, Vol. 20, No. 3 (Jul., 1995), p. 712
Trust is the “the willingness of a party to be
vulnerable to the actions of another party, based on
the expectation that the other will perform a
particular action important to the trustor, irrespective
of the ability to monitor or control that other party”
(trustee deG).
Department 23

24. Features of Interpersonal Trust
 At least two parties (trustor and trustee)
 Interdependence
 Trustee is able to perform actions that are important to the trustor
 Trustor believes that trustees will perform actions that are beneficial
or not negative for the trustor
 Trustor is in a situation of uncertainty and doesn’t know actually if
the trustee will really act according to the trustor’s expectations
 Trustor is choosing beforehand to cooperate, thus making himself
vulnerable
 Trust starts with positive expectations (belief) which is turned into
willingness to cooperate (decision) and is translated in concrete
action (action)
Department 24

25. Institutional Trust
Institutional trust is an impersonal form of trust and does not refer to
characteristics of specific agents who are involved in an economic transaction. It
requires confidence in the enforcement of abstract principles and procedures.
Examples:
• Legal system of contract enforcement
• Regulatory agencies
• Industry associations
• Rules and regulations in a company
Department 25

26. Definition Institutional Trust
Institutional trust is the acceptance of a
party to be vulnerable to the actions of an
institution, based on the expectation that
representatives of an institution will perform
a particular action important to the trustor,
irrespective of the ability to monitor or
control that institution.
Department 26

27. Institutional and interpersonal trust in perfectly
competitive market economies
(Arrow-Debreu model of perfect competition)
Assumptions
 Complete set of markets
 Commodities are defined by quality, place and date of
availability
 Households are resource-owners and shareholders of firms
 Households and firms are price takers
 Households choose independently optimal commodity
bundles at given prices and wealth constraints
 Firms maximize profits at given output and input prices and
production technology
 Exchange only at market clearing prices
Department 27

28. Institutional and interpersonal trust in perfectly
competitive market economies
(Arrow-Debreu model of perfect competition)
Results
 Existence of competitive market prices
clearing simultaneously all markets
 Efficient markets
Department 28

29. Institutional and interpersonal trust in perfectly
competitive market economies
(Arrow-Debreu model of perfect competition)
 As households and firms are price takers and
are only allowed to exchange in equilibrium,
an auctioneer has to be assumed who
determines equilibrium prices.
=> Institutional trust has to be assumed.
Department 29

30. Institutional and interpersonal trust in perfectly
competitive market economies
(Arrow-Debreu model of perfect competition)
 Because households and firms independently decide,
no interpersonal trust relationships exist between
economic agents.
“Trust and similar values…are ‘externalities’. They
are…commodities…But they are not commodities for
which trade on the open market is technically possible or
even meaningful.“
K. Arrow, The Limits of Organization, Norton: 1974, p.23.
Department 30

31. Theoretical implications of considering
interpersonal trust as externality
 Dependency relationships have to be
considered
 Uncertainty has to be considered
Department 31

32. Theoretical implications of considering
interpersonal trust as externality
Unsolved problems
 How can trust as externality be internalized if
a market for trust does not exist?
=> how can trust be priced?
 How does interpersonal trust affect economic
efficiency?
Department 32

33. Economic approaches to consider
interpersonal trust relationships
 Adam Smith’s resource based approach of
pricing trust
“The wages of labour vary according to the small or great trust which must be
reposed in the workmen. The wages of goldsmiths and jewellers are everywhere
superior to those of many other workmen, not only of equal, but of much
superior ingenuity; on account of the precious materials with which they are
entrusted. We trust our health to the physician: our fortune and sometimes our
life and reputation to the lawyer and attorney….Their reward must be such,
therefore, as may give them that rank in the society which so important a trust
requires. The long time and the great expense which must be laid out in their
education, when combined with this circumstance, necessarily enhance still
further the price of their labour.”
A. Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, Vol. I, ed. by J.E.T. Rogers, second edition, Oxford
1880, p. 110.
Department 33

34. Economic approaches to consider
interpersonal trust relationships
 Transaction cost theory (O.E.Williamson 1975)
Market and non-market modes of economic transactions exist. Non-market
modes of economic transactions can lower transaction
costs if bounded rationality combines with uncertainty/complexity,
opportunism and small numbers of economic agents
=> production and pricing of interpersonal
trust within non-market organizations
=> transaction cost efficiency of interpersonal
trust
Department 34

35. Economic Performance of
High Trust Companies
Department 35

36. Interpersonal Trust and Growth
 Higher interpersonal trust increases investment and growth
(P.J. Zak and S. Knack, Economic Journal 111 (April), 295-
321)
• In countries with low initial levels of interpersonal trust, an
increase in trust leads to an increase in economic growth(F.
Roth, Kyklos 6 (1), 103-128)
Department 36

37. Competitiveness and Trust:
A Research Agenda
Global Competitiveness Index Impact of
Trust on
Basic requirements
Institutions ?
Infrastructure ?
Macroeconomic environment ?
Health and primary education ?
Efficiency enhancers
Goods market efficiency ?
Labor market efficiency ?
Financial market development ?
Technological readiness ?
Market size ?
Innovation and sophistication factors
Business sophistication ?
Innovation ?
Department 37