In Pakistan, a breakdown of trust

While there is no universally agreed-upon definition of trust in economics, it has been conceptualized as a form of social capital or an intangible asset that facilitates economic interactions. This encompasses the belief or expectation that others will behave in a reliable, honest, and cooperative manner in economic transactions or relationships. High-trust societies create social attitudes where individuals and groups are willing to rely on others and believe that they will act in a manner consistent with mutually beneficial outcomes. The opposite is observed in low-trust societies. 

Many economists have argued that trust is one of the main determinants of development. Kenneth Arrow, Nobel laureate in Economic Sciences (1972), stated, "Virtually every commercial transaction has within itself an element of trust, certainly any transaction conducted over some time. It can be plausibly argued that much of the economic backwardness in the world can be explained by the lack of confidence.”

In a paper “Social Attitudes and economic development: an epidemiological approach,” economists Professor Pierre Cahuc and Professor Yann Algen provided empirical evidence for the causal impact of trust on economic development. Cahuc and Algen demonstrated that trust in society explains a significant fraction of differences in income per capita observed across countries over the period 1949-2003. For example, comparing the change in GDP per capita in the period 2000-2003, the study suggests that if the level of trust in Africa and India had been the same as that prevailing in Sweden during that period, the GDP per capita in those countries would have been twice what it was. This is significant.

Unfortunately, trust is in short supply in Pakistan. The public's increasing lack of confidence in institutions that have been vested with the formal responsibility of regulating the general political and economic environment is contributing to a climate of distrust and uncertainty. On the 2022 World Justice Project (WJP) rule of law index, Pakistan ranked 129th out of 140 countries worldwide. The perception of a failure of the rule of law where fundamental human rights are not protected erodes confidence in the system even more. When critical public institutions such as the judiciary are perceived as being helpless or refusing to play an adequately robust role in maintaining the rule of law, it further depletes an already low level of trust.

Trying to manipulate public discourse is likely to add to the climate of suspicion and further undermine trust in institutions.

Javed Hassan

Combined with the economic austerity resulting in a widening wealth gap between different segments of the population, there is growing resentment against the unfairness, and the social divisions create polarization in attitudes. The Worldwide Governance Indicators (WGI), comprising legal, political, and economic institutions, show that Pakistan's institutional quality not only ranks near the bottom among 200 countries and territories but has also steadily deteriorated over the last few decades.

The latest legislation that will allow the regulator to adjudicate and penalize media houses for what it considers misinformation or disinformation will further exacerbate the shaping of public opinion and the declining level of trust. Far from erasing the impression that media outlets are independent, it will reinforce the perception that the news being fed to the public lacks credibility. Trying to manipulate public discourse is likely to add to the climate of suspicion and further undermine trust in institutions.

Both academic literature and empirical evidence support the idea that trust within a society plays a crucial role in facilitating cooperation, lowering the cost of transactions and promoting development. On the other hand, adverse factors that lower trust, interact and reinforce each other, creating a vicious downward spiral. Policymakers therefore, need to consider the ramifications of this in the context of the prevailing low level of trust in the system. Rebuilding it will require addressing underlying issues by promoting transparency, strengthening institutions, reducing inequalities, safeguarding democracy, and ensuring the rule of law. Failure to reverse the present downward trend could erode trust to a point where there is a breakdown of the social contract between the people and the state. The implications of that would be dire. 

– Javed Hassan is an investment banker who has worked in London, Hong Kong, and Karachi.

He tweets as @javedhassan.