How Do High and Low Levels of Social Trust Affect the Long-run Performance of Poor Economies?

Poor countries with high levels of social trust are shown to experience a hump-shaped pattern of long-run growth. With social trust modelled as a human capital externality, a calibrated two-sector model replicates the observed hump-shaped growth path. The simulation results imply that a hypothetical poor economy with a high level of social trust, when beginning at a relative income level of 16 per cent, may need about 160 years to reach 50 per cent of the income level of the leading countries. For a hypothetical poor country with a low level of social trust, the process of catching up may only begin after more than 150 years of relative stagnation. (c) 2018 John Wiley & Sons, Ltd.