Sabbatical Leave Application Economics

Sabbatical Leave Application – Economics

Title of Proposal: Social Trust and Economic Growth: Institutional and Policy Channels

1. Narrative description

a)Significance of this work: Economists have long had an interest in understanding why some countries grow faster than others and over time end up with much higher levels of income per person. (A thorough survey of the research in this area can be found in Helpman (2004).) Most scholars have usually focused on a few things thought to encourage economic growth, including sufficient investment into “human capital” (skills and knowledge of individuals, usually acquired through formal education), acquisition of “physical capital” (machines, buildings, and infrastructure), and a lower population growth rate. Recently, some economists, political scientists, and others have begun emphasizing the role played by other factors. Notably, the role played by “social capital” (defined by the Organization for Economic Cooperation and Development as“networks, together with shared norms, values and understandings which facilitate cooperation within or among groups”) has received increased attention.Probably the best-known work for the general public is that of Putnam (1993, 1995), who did not develop the notion of social capital, but certainly helped promote it (Coleman (1988) gets credit for its conception). The seminal work in economics was by Knack and Keefer (1997), who sought to measure the degree to which trust in others – one element of social capital – promotes economic growth. They found that “high-trust societies,” in which people at least claim to trust one another to a high degree, tend to have more rapid economic growthand higher levels of income per person than do “low-trust” societies.

Quite recently, scholars have asked more precisely exactly howhigher levels of social trust promote economic growth and generate higher per capita incomes. That is, what are the specific channels and mechanisms through which this general correlation between trust and growth/incomes exists? The answer to this question will help governments, international organizations, and others to better design policies to promote economic development. For example, Zak and Knack (2001) argue that most nations acquire additional physical capital through the savings of their citizens, which are placed into financial investments such as stocks or bonds (think TIAA-CREF) that companies can use to fund acquisition of physical capital. If individuals are less trusting of others and worry about getting a fair return (and their money) back because of fraud or dishonesty, they will tend to save less. Society will thus be able to acquire less of the physical capital needed for economic development. Zak and Knack also argue – and find evidence – that ethnic and racial diversity,as well as income inequalities,within nations can foster lower levels of trust in others. Rothstein and Ulaner (2005) identify corruption as yet another channel through which social trust affects income per capita and economic growth.

Of course, there are other potential channels through which trust in others – as well as other forms of social capital – might affect economic growth and per capita incomes. My own reading of the literature and research tells me that many of these channels have not yet been identified or hypothesized; this also means, of course, that evidence (in the form of appropriate data analysis) has not yet been provided to support or dispute these hypotheses. In this sabbatical projectI will work to identify other possible specific channels through which social trust affects economic growth/incomesand see if there is any empirical evidence (patterns in data) to support these theories. For example, it might be that a nation whose citizens exhibit a low level of trust in one another will potentially face higher incidences of civil strife, which requires that the government spend considerably more on the military (or law enforcement) to “keep the peace.” This in turn means that fewer resources are available to the government to spend on other areas, such as education, that contribute to economic growth over time. This hypothesis can then be tested – or we can see if there is empirical evidence in support of it – through the appropriate analysis of data on social trust, military spending, and growth rates across nations.

This project combines different strands in the economics literatureand research in a way not done before: it takes research on the role of social trust and research from economic development and synthesizes them to come up with deeper understandings of how trust and development are exactly related. Over the past decade, economists have identified many new conditions needed for countries to find a way out of poverty. This research is far from complete, and this sabbatical project will (I hope) contribute to our understanding of how they, and international organizations that assist them, might exactly do this.

b) Basic description of the proposed work: While I have done some work in this area recently (please see the fuller description of this below in section c), I will first need to spend some time reviewing certain key topics in the economics development literature that are outside my primary area of expertise. For example, I must brush up on my current knowledge of the literature on the effect of policy decisions by a government (such as how much to spend on the military as opposed to education, infrastructure, etc.) on economic growth and incomes. While I know that literature generally has concluded that there is indeed an effect (examples include Bharat, et. al. (2000), Poot (2000), and Abu-Bader Ameer Abu-Qarn (2003), among others), reading the very latest articles will help me better identify the data and statistical methods needed to carefully test hypotheses I develop about the specific relationship between social trust and growth/incomes. I also must brush up on the latest data analysis techniques, not just through a review of the latest articles but also through a reading of a recent graduate-level textbook in statistical analysis. (A widely-acclaimed recent text in this area is Wooldridge (2007).)I will also investigatewhat has been published very recently on the origins of social trust (Bjornskov (2006) is an example) whichwill help me decide if there is a bidirectional cause-and-effect relationship between trust and growth/incomes. If so, different statistical methods (exact ways of looking for patterns in the numbers) are needed to identify the degree to which each affects the other.

Once I have finished readingthe recent literature, I will need to construct an appropriate data set. Since these data sets are not pre-packaged, I will need to use different sources for the numbers I need, and construct my own data set from them. This can be time-consuming since some numbers are drawn from individual nation’s government publications, and must be scrutinized for comparability. Once the data are gathered, statistical software packages such as EViews – commonly used in economics – should allow me to analyze the data for any evidence to support my particular hypothesis. Because scholars don’t always agree on which methods or data best work for finding patterns in the data, I will likely need to use a variety of methods before concluding that any positive support for the hypothesis is not spurious or tenuous. For example,if there is evidence of a relationship between social capital and (in my example above) the percent of the government budget devoted to military spending using several different statistical methods,I can be more confident that the evidence is reliable. This is called robustness analysis and is common to the literature and work in this area (see Beugelsdijk, et. al. (2004) as a recent example.) This can take up to a month, at least based on my recent experience with the paper I wrote with Professor Papagapitos.

Upon completion of the data analysis, I will write up the results and present the initial draft at a departmental seminar. I will then revise the paper and put in a proposal to present at a professional conference and later submit the revised paper to a disciplinary journal. (It is common to first present the paper at a conference in order to get feedback on it and revise the paper before submitting it to a journal.) Some possible conferences and refereed journals that would serve as appropriate venues for this dissemination are listed below. The timeline I have provided reflects my estimate of the time needed to finish each of these activities and also reflects the fact that I will likely identify more than one specific channel through which social trust affects growth/incomes, which could result in more than one journal submission.

c) Previous work in the area: I recently collaborated on a similar project with Professor Agapitos Papagapitos of the Economics Department, which resulted in a paper that is now under review at a refereed disciplinary journal (Economics Letters). This research looked for evidence that social trust affects economic growth through its impact on the decision of individuals to obtain secondary education; it bridged the literature on education’s effect on economic growth with that on social trust in order to identify a specific way in which social trust affects economic growth. Our argument is that higher levels of social trust induce individuals to invest more into education as they will be more certain of receiving the reward of doing so rather than having it unfairly “confiscated” by others (this part of the argument had not been previously made in the literature). Higher levels of education in a country have previously been shown to positively affect the growth rate of the economy; thus, we argue that higher levels of social trust will result in higher growth rates through this channel. This is thus similar in methods and theory to the work I propose for my sabbatical, as it bridges one area of the literature (exemplified by Wilson (2001) on decisions to obtain higher education) with that on social trust.

d) Specific professional goals: The sabbatical work will help me strengthen my currency in the area of economic development which is germane to my primary field of international economics. I discuss these issues in several of the courses that I teach, including International Economics (Econ 348), Western Hemisphere Economics (Econ 346), and – to a lesser degree – Principles of Macroeconomics (Econ 251). Further, I mayeventually teach the course we offer on Economic Development (Econ 345), in which these topics are addressed on an even deeper level. Undoubtedly, the reading and research that I do for this sabbatical project will benefit my teaching of all these courses. Further, this sabbatical project builds on the recent work I did with Professor Papagapitos and may provide the foundation for possibly several additional projects in this area. As noted above, at least one publication in a refereed disciplinary journal will be realistic. Journals such as Economics Letters, Economic Enquiry, and World Development are examples of respected journals that favor the empirical work this project involves. Interim presentations of a draft paper at a regional conference – at which useful feedback is often received – would be part of the process. These conferences include the Western Economics Association and the Midwest Economics Association meetings.A conference presentation or journal submission will take place after the sabbatical period itself.

e) Off-campus locations: none. All of this work can be done on campus or in the area.

2. Timetable for proposed work

January/February 2009

Read latest research on composition of government spending and its effect on economic growth. Read latest research on the sources of social trust. Read appropriate sections of graduate-level text on statistical analysis.

March 2009

Compilation of data set. I anticipate that most of the date can be found through library resources and government agencies online. A variety of sources will be needed.

April/May 2009

Statistical analysis of data, including “robustness analysis.” Write a draft of a paper and present it at the Economics Department seminar.

June/July 2009

Revision of paper based on feedback from my colleagues and submission of proposal for a conference presentation (e.g., the Midwest economics Association annual meetings the next March.)

Bibliography

Abu-Bader, Suleiman and Aamer Abu-Qarn. 2003. “Government Expenditures, Military Spending and Economic Growth: Causality Evidence from Egypt, Israel, and Syria,” Journal of Policy Modeling25, pp. 567-83.

Beugelsdijk, Sjoerd, Henri L.F. de Groot, and Anton B.T.M. van Schaik. 2004. “Trust and Economic Growth: A Robustness Analysis,” Oxford Economic Papers 56, pp. 118-134.

Bharat, K., Panik, M., and M. Wahab. 2000. “Government Expenditures and Economic Growth: Evidence from G7 Countries,” Applied Economics 32, pp. 1059-1068.

Bjornskov, Christian. 2006. “Determinants of Generalized Trust: A Cross-Country Comparison,” Public Choice130, pp. 1-21.

Coleman, James S. 1988. “Social Capital in the Creation of Human Capital,” The American Journal of Sociology 94, pp. s95-s120.

Helpman, Elhanan. 2004. The Mystery of Economic Growth, Cambridge, MA: The Belknap Press of HarvardUniversity Press.

Knack, Stephen and Paul Keefer. 1997. “Does Social Capital Have an Economic Payoff? A Cross-Country Investigation,” Quarterly Journal of Economics 112, pp. 1252-88.

Papagapitos, Agapitos and Robert Riley. 2007. “Human Capital Formation and Trust,” submitted to Economics Letters, July 2007.

Poot, J. 2000. “A Synthesis of Empirical Research on the Impact of Government on Long-run Growth,” Growth and Change31, pp. 516-546.

Putnam, Robert. 1993. Making Democracy Work, Princeton, N.J.: PrincetonUniversity Press.

Putnam, Robert. 1995. “Bowling Alone: America’s Declining Social Capital,” Journal of Democracy 6,pp. 65-78.

Rothstein, Bo and Eric M. Uslaner. 2005. “All for All: Equality, Corruption, and Social Trust,” World Politics58, pp. 41- 72.

Wilson, Kathryn. 2001. “The Determinants of Educational Attainment: Modeling and Estimating the Human Capital Model and Education Production Functions,” Southern Economic Journal 67, pp. 518-51.

Wooldridge, Jeffrey M. 2007. Econometric Analysis of Cross Sectional and Panel Data. Cambridge, MA: The MIT Press.

Zak, Paul and Stephen Knack. 2001. “Trust and Growth,” The Economic Journal111, pp.295-321.