Trust Prosperity Government Francis Fukuyama Freeman Spogli Institute

Trust, Prosperity, Government Francis Fukuyama Freeman Spogli Institute for International Studies Stanford University Warsaw, May 25, 2012 11/23/2020 1

A Third Type of Capital Physical Capital Human Capital Social Capital 11/23/2020 2

What is Social Capital? • Definition: Informal norms or values that promote social cooperation and trust • Uses: – Economic: reduction of transaction costs – Political: basis for civil society and democracy • But not all norms or values promote cooperation 11/23/2020 3

Some Examples • • Asia: China v. Japan Europe The United States Latin America 11/23/2020 4

Changing Forms of Authority Flat Organizations Traditional Hierarchies Virtual Firms Networks 11/23/2020 5

Traditional Hierarchy/Taylorism CEO 11/23/2020 Division Chief Subdivision Branch Section 6

The Flat Organization Senior Management Responsibility pushed up Middle Management Responsibility pushed down Workers 11/23/2020 7

From Vertically-Integrated Company: CEO 11/23/2020 Manufacturing Marketing Subdivision Branch Section 8

The Virtual Corporation: CEO Design Personnel Design Manufacturing Marketing Responsibility pushed outward Final Product 11/23/2020 9

Networks: Radical Decentralization Responsibility shared 11/23/2020 10

Networks: Informal Alliances 11/23/2020 11

The Limits of Taylorism • In all cases, social capital is substituting formal control and hierarchy • Monitoring and control is internalized on the part of workers/subordinates • More delegation of responsibility 11/23/2020 12

Why These Changes? • Local knowledge needs to be processed locally – Especially under conditions of greater technological complexity – both in products and production process • More highly educated workers • Better educated, more affluent customers 11/23/2020 13

Networks and Hierarchies • Networks can be understood not as an alternative to hierarchy, but a complement • Networks overlay and pervade society… 11/23/2020 14

Networks of Trust 11/23/2020 15

A Corporate Culture 11/23/2020 16

A Patronage Network 11/23/2020 17

Trust networks critical to flat organization. . . 11/23/2020 18

And to Virtual Corporations CEO Design Personnel Design Manufacturing Marketing Final Product 11/23/2020 19

Networks often transcend organizational boundaries 11/23/2020 20

Governments and Trust • Governments can undermine trust by being too strong – Examples: France, former USSR • But they can also undermine trust by being too weak – Failure to establish a rule of law – Mexico today? 11/23/2020 22

Two Equilibria • High trust – Scandinavia, Northern Europe – Trust in government; high taxes, high quality services • Low trust – Latin America, many developing countries – Distrust in government; low taxes, low quality services 11/23/2020 23

Why Government Can’t Be Like the Private Sector • Most governments remain Taylorite – Too many rules, rigidity • Reasons: – Public officials can’t share in earnings – Govt can’t reallocate factors of production – Multiple and confusing mandates • Businesses can delegate far more authority 11/23/2020 24

Discretion v. Accountability Zone of Trust Excessive autonomy Too many rules Discretion China 11/23/2020 Accountability Singapore Germany, Sweden US 25

Challenge for Modern Governments • Build trust by increasing capacity • Shift toward greater discretion while maintaining democratic accountability – Reduction in rules • But: dangers of political corruption • No optimal solution! 11/23/2020 26