Trust, the Internet, and the digital divide.

The Internet is expected to be an important source of economic growth in the 21st century. The Congressional Budget Office (1) predicts the U.S. economy will grow at an annual rate of 2.1 percent over the coming decade--an increase of 0.9 percent over U.S. growth for the period 1974 to 1995. Varian et al. (2) estimate that the Internet will account for 48 percent of this increase in growth. In a similar vein, Litan and Rivlin (3) discuss research estimating Internet-driven productivity gains in U.S. manufacturing of 0.2 and 0.4 percent per year. Since the Internet dramatically reduces the oust of transmitting information, the costs associated with the distribution of goods and services between businesses, between businesses and consumers, and between businesses and their employees are reduced as well, accounting for these expected gains in productivity.

Whether predictions regarding the contribution of the Internet to economic growth come to pass depends upon whether people and firms choose to adopt the Internet and how fully they embrace the idea of conducting business over it. The degree to which people and firms adopt Web-based activities will depend on how willing they are to accept the greater anonymity and associated possibilities for opportunism inherent in Web-based transactions. This willingness may, in turn, depend on how much people trust each other. If trust dues influence Internet adoption, it will have an indirect impact on economic growth rates among nations through its influence on the adoption of this growth-enhancing technology.

In addition to the possibility of an indirect impact of trust on growth, there is evidence that trust directly impacts economic growth and growth rate differences across countries. Prior to the late 1990s, economic growth rates were explained almost exclusively in terms of labor and capital endowments and differences in how these endowments are augmented by capacities for technological change. Differences in the prosperity of nations or regions relative to others are, in some cases, difficult to explain in terms of differences in these standard economic variables. During the 1990s, spurred largely by observations and arguments put forth by social theorists like Fukuyama (4) and Putnam et al., (5) economists investigated the possibility that differences in economic growth might stem directly from differences in the extent to which members of different cultures were willing to trust each other. The arguments in favor of this possibility are straightforward. Almost all transactions involve some opportunities for misrepresentation, non-compliance, or outright fraud. Detailed contracts, extensive monitoring of performance, and litigation are means of discouraging such behaviors, but they are all costly to implement. Empirical evidence suggests that mutual trust is an efficient substitute for these enforcement mechanisms. For example, Dyer and Chu (6) examined differences in procurement costs in 453 supplier-automaker relationships in the U.S., Japan, and South Korea. Procurement costs incurred in situations where the suppliers trusted automakers the least were rive times higher than those in which the suppliers trusted automakers the most, while the costs associated with negotiating contracts and post-contractual disputes were double.

Trust appears to have significant returns at the macroeconomic level as well. Knack and Keefer, (7) for example, round that a very simple measure of how trusting inhabitants of different countries are was a significant explanatory variable in regressions of average annual growth rates in per capita income from 1980 to 1992. Moreover, the impact was very large--a 10 percent increase in the measure of trust translates into an increase of 0.1 percent in economic growth--a sizable increment, given world average growth rates of 1 to 3 percent in the latter half of the 20th century.

The fact that trust directly impacts economic growth through reductions in transaction costs, coupled with the possibility that it may impact growth indirectly to the extent that it impacts Internet adoption rates, raises a troubling possibility: namely, that low-trust countries, the majority of which tend to be of low and middle income, will take a double hit in terms of economic growth in the coming years. They may be penalized for low trust by incurring higher transaction costs and by lower adoption rates of growth-enhancing technology. Knack and Keefer's (7) findings suggest that the first effect, higher transaction costs, will surely come to pass. Whether the second, lower Internet adoption rates, does as well depends upon whether trust does, in fact, encourage Internet adoption. Our objective in this paper is to determine whether this proposition is true. To presage our findings, it is. This result would seem to suggest that efforts to increase trust in low and moderate trust countries are in order. Unfortunately, we show that the returns for any such policy will be greater for high-trust rather than for low-trust countries, so that differences in trust among countries, will promote an increasing digital divide between them. To the extent that contributions the Internet makes to economic growth accrue disproportionately to high trust countries, this digital divide will translate into a developmental divide.

Data

The specifics of out analyses of the impact of trust on Internet adoption are dictated by the availability of trust measures for different countries. In their examination of whether trust directly influences economic growth rates, Knack and Keefer (7) used responses to a question involving trust posed to thousands of respondents from 29 countries with market economies in the 1981 and 1990-1991 World Values Survey (WVS). (8) The question was, "Generally speaking, would you say that most people can be trusted, or that you can't be too careful in dealing with people?" Knack and Keefer took the percentage of respondents from each country who answered that people could be trusted as a measure of how "trusting" that country's populace was. (9) Then they conducted regression analyses examining the impact of this measure of trust on average annual growth in per capita income for 1980 to 1992. They round that trust contributes significantly to economic growth, particularly in poorer countries without developed legal enforcement systems. (10)

The growth rates in Knack and Keefer (7) were averages over the period 1980-1992, To minimize endogeneity problems, specifically, the possibility that economic growth rates have an impact on levels of trust, they computed trust values based on 1980 wvs responses where possible and 1990 responses otherwise. Knack and Zak (11) provide trust measures derived from responses to the 1995 wvs for 17 of the 29 countries used in Knack and Keefer (7) and 1990 values for 11 of the others. (No recent trust measure is available for Nigeria, the 29th country in the Knack and Keefer study.) Given that the Internet was not commercialized until 1995, endogeneity is not an issue in our analyses, so we use the most recent 1995 data where possible and 1990 values otherwise. None of the results reported in the ensuing sections are particularly sensitive to whether we employ a combination of values, or exclusively 1990 values. Values for this trust variable for each country in Knack and Keefer's original study (excluding Nigeria), as well as values for all other independent and dependent variables considered in our analyses are shown in Table 1.

For each of the 28 countries for which we had a trust measure, we tried to collect two measures of Internet penetration. The Organisation for Economic Cooperation and Development (OECD) provides data on the percentage of households with Internet access in 1999 and/or 2000 for 17 countries. To maximize available degrees of freedom, we combined this data, taking the average for countries with 1999 and 2000 data and the single year data for the remaining countries, to create data on the percent of households with Internet access for 1999-2000, denoted "IP1." (12) OECD also provided data on the number of Internet subscribers per 100 inhabitants in 2000 for 22 of these countries (denoted "IP2"). (13)

The literature on the determinants of technology adoption suggests a number of economic, demographic, and infrastructural factors that might influence internet adoption. Economic theory suggests that the quantity of a product that is demanded depends on its own price, the buyers' income, and the price of substitutable and complementary goods. For our measure of income, we computed the average per capita national income for our sample of countries by averaging data provided by the World Bank for the period 1995-1999. (14) This variable is denoted "Income." Our measure of Internet access price, denoted "Int. Price," is the average price of 20 hours of Internet access for 1995-2000 in dollars adjusted for purchasing power parity, as computed by OECD. (15)