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A few months ago, we candidly embarked on an economic series under the label ‘Return of Confidence’. The first episode was dedicated to presidential candidates: who inspires confidence, and who will trigger a widespread escape just by their mere presence, as their discourse is incomprehensible in any case? We were blissfully optimistic, thinking we would quickly move on to the next stage.
But the series stopped there, as history froze. Nothing is happening anymore. However, this won’t prevent us from returning to this matter of confidence, because it is the key to economic revival.
The entire economy and social life, in fact, are built on trust. The relationship of trust not only precedes but determines the very possibility of economic, social, and friendly exchange…
But first, let’s take a brief tour of this concept among the giants of the economic world, to highlight its importance.
One of the early theorists on the matter, Kenneth Arrow, saw trust as an “invisible institution” that cannot be bought. He then argued that among the characteristics of societies with underdeveloped economies, the lack of trust makes exchanges between all kinds of institutions, whether public or private, more difficult.
Other economists even conducted an empirical study across 41 countries and found an average increase of 1 point in GDP growth for every 15-point increase in generalized trust over the studied period. Average income increases proportionally.
A proponent of trust as an economic factor, Stanford professor Davis Kreps, even had fun creating a mathematical formula for trust with X’s and Y’s, just like in algebra (if you’re interested, you can look it up…).
Another economist, Francis Fukuyama, is even more categorical: “A nation’s well-being is tied to a single cultural trait: the inherent level of trust in society.” For others, including Nobel laureate in economics Elinor Ostrom, trust explains the ‘economic miracles’ that history is full of, even in less-than-divine countries. Perhaps that was our case at some point, but now?! We’re getting there.
Who can we trust in Lebanon? Not the state institutions, that would be ridiculous. And most people no longer trust the banks, either, even if paradoxically, ‘external’ bank accounts are growing a bit every day. In any case, it doesn’t change anything since the banks are currently barely operational.
What remains is trust among actors in the private sector. It’s the only link that is currently keeping the economy running. We’ve always said that this sector is resilient, entrepreneurial… but this is mostly true because of the trust among its members. And it’s even more important here because, due to the lack of bank credit, supplier credits have partially taken over: we provide raw materials or services to an entrepreneur without demanding immediate payment – we trust them.
But how do you build trust? One way to do it is usually to test the waters: a first limited economic transaction that, if successful, leads the partners to increase their economic commitment.
In a normal country, these transaction partners also arm themselves with a slew of lawyers and provisions, in order to secure a good contract performance guarantee. In Lebanon, we do this too, but without much conviction, because in the event of a dispute, it’s not our courts that will decide (see above the zombie state).
In times of economic crisis, it’s even worse because trust takes on a plural meaning: trust in others, in individuals, institutions, the country itself… and the future.
In other words, do households and businesses have enough confidence in the future to continue consuming and investing? Do all depositors risk moving their newfound savings elsewhere? Will there still be affluent consumers in a few years to buy my products? It’s as if trust is a spring that, if it seizes, jams up the whole machine. But it seems we’re not there yet in Lebanon.
That being said, as we are lacking a rule of law, trust in Lebanon relies on non-legal risks that compel agents to honor contracts, even unspoken ones. This threat is reputation.
In a small country where everyone knows everyone else, nothing can be concealed, neither a good nor a bad reputation. The market sifts through, and the machine keeps moving. It’s the absolute guarantee, in fact the only one, which is why external observers, even highly educated ones, struggle to fully grasp what’s happening and even less so what might happen. It doesn’t follow the rules taught at Harvard.
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