Talk: Trust in a society is an important source of economic development. Some form of trust is embodied in all business and social interactions.

That was the message Kaushik Basu, World Bank’s senior vice president, conveyed at a talk on “Social and Behavioral Foundations of Economic Development” at Taj Tashi Hotel in Thimphu last Monday.

Kaushik Basu, who is also the chief economist of the Bank, emphasised on the importance of social and psychological dimensions of economic development. He said that societies in which there is trust there is economic development.

“It’s not possible for a society to function and do well without a minimal trust. This type of anonymous trust is much higher in industrialised countries,” said Kaushik Basu.

Basu pointed out that the level of trust among people is much higher in industrialised countries than in developing and poorer economies. “Life is full of transactions which you don’t record on paper. If there is trust, you can cut on many deals and transactions.”

Basu praised Bhutan as a leader in building such elements in the society. “If a group of people could be a little bit unselfish, they will collectively do better. Those who are ruthlessly selfish will do very badly.”

More than among people, trust should exist between the government and private sector, said a Bhutanese. “Only then will economic development is to take pace,” he said. Some government policies have failed, he added, owing mainly to lack of trust between sectors.

“How do we build this trust?” he asked.

Basu said that this is very like the chicken and egg problem. To begin by trusting is not an ideal solution. Government should begin by building trust in small behavioral patterns and with some social contracts. In things larger, law and penalty is essential, he said.

And there are some correlations between the trustworthiness and the level of income.

“People say that poor farmers often default on their borrowings. But they forget that big corporations default on huge amounts of money,” said Basu, adding that such a mindset is one of the biggest stumbling blocks in policy dynamism.

Economists often overlook social and psychological aspects of developments. Certain social values and cultural traits make a society more productive and have an impact on Gross Domestic Product. “Some economists realise this, but they feel these are not central to their profession.”

Basu said that social and psychological dimensions of development are now being considered for discussion by the World Bank and windows will be opened for engagement between the Bank and Bhutan. Happiness dimension is new and Bhutan can be valuable resource researchers.

The economist also highlighted human rationality as an important element of government policy. He added that just being rational is not enough. It is equally important to appreciate the rationality of other people as well. “A lot of good plans on paper backfire because very often we don’t realise that even as we are very rational we underestimate the rationality of other people.”

Basu provided an example.

In the olden days, a British trader went to India to sell hats and was travelling from one place to another by road. While on the way he fell asleep keeping all the hats on the ground.

When he woke up, he found monkeys had taken all the hats to the top of the tree. In anguish he took off his own hat and flung it on the ground. Monkeys are good imitators. Seeing the man throw his hat, the monkeys started throwing their hats to the ground. The trader happily collected the hats and went on.

Years later, the trader’s son followed his father’s footstep. The same thing happened to him. But he suddenly remembered that his father had told him how he had got back his hats from the monkeys. He threw his hat on the ground.  This time, however, the monkeys didn’t throw the hats but one of them climbed down the tree and took the last hat up the tree. The monkey gave him a slap and chided the young trader: “Do you think only think you have a father?”

Rationality extends beyond self, Basu said.

Basu added that private companies already use social and psychological dimensions to sell their products better by not only trying to make their products better but also by employing human psychology to sell more.

“I don’t see any reason why governments and people formulating development policies should not use it,” said Basu.

By MB Subba