How economic prosperity is important for social cohesion

Australia is a prosperous country. According to the World Bank’s World Development Indicators (2024) Australia ranks 10^th in the world by GDP per capita – just one place behind the United States, which is ninth in the world ranking. GDP per capita is arguably the most widely used measure of a country’s economic prosperity. GDP measures the value added of all the goods and services produced by people residing in a country and serves as a comprehensive indicator of economic activity.

While GDP is often seen as a marker of economic strength, it can also be linked to social factors such as community cohesion and trust. With stubborn inflation and cost-of-living pressures, the question of how economic prosperity links to social cohesion and trust is an important one.

Economic prosperity enhances trust

In the international study National income and trust I conducted with colleagues from the US and Israel, we placed under the microscope the intricate link between a nation’s economic prosperity and the trust harboured by its citizens. The paper examines the nuanced relationship between a country's GDP per capita and the sense of trust among its people. 

The study presents more than just mere correlations. Using data from the World Values Surveys and innovative statistical methods we argued that the estimates reflect a causal relationship. We found that increases in GDP per capita significantly increased trust. Specifically, our estimates showed that a one per cent increase in GDP per capita led to an increase of about one percentage point in the likelihood that a person would become trustful. 

We also explored how the effects of GDP per capita might differ across different groups in society. We found that the effects of GDP per capita on trust were significantly larger among individuals in the low-socioeconomic strata, that is, poorer, less-educated, small-town dwellers.

The connection between prosperity and trust is multifaceted. High levels of trust in a society facilitate better cooperation among individuals and more effective enforcement of contracts, steering clear of the otherwise inevitable “prisoner's dilemma” scenario, where individuals acting in their own interest harm the group’s wellbeing. The study points out the potential role of reduced crime and corruption as mechanisms through which income may nurture trust. 

Implications for Australia

The most recent Australian Bureau of Statistics data show GDP per capita declined by about 0.3 percentage points from September 2022 to September 2023. This was in part driven by the fall in international commodity prices: Australia’s terms-of-trade declined by about nine percentage points in that time. 

The results of our study suggest that the decrease in GDP per capita over the past year caused a decline in interpersonal trust. However, quantitatively, the decline in trust due to the decrease in GDP per capita is likely to be very small. This is because a 0.3 per cent decrease in GDP per capita is not very large. According to our estimates, a 0.3 per cent decrease in GDP per capita decreases interpersonal trust by about 0.3 per cent.

As of January 2024, my view is that social cohesion in Australia is still very much intact. It would take a very large decline in GDP per capita, of say five to 10 per cent, for there to be any noticeable effects on social cohesion. Such a decline in GDP per capita is highly unlikely. 

According to the most recent projections by the IMF (2024), Australia’s real GDP growth is projected to be around 1.2 percentage points for 2024. According to the United Nations (2024), population growth in Australia will most likely be around 0.9 to 1.0 percentage points during 2024. This means that GDP per capita in 2024 will most likely not decline much relative to the previous year. 

If anything, real GDP per capita (real here means adjusted for inflation) in 2024 will most likely be about the same as real GDP per capita in 2023. In other words, growth in real GDP per capita during 2024 will most likely come in at around close to zero per cent. While a significant decline in social cohesion in Australia appears unlikely given current economic forecasts for 2024, it’s important to consider the broader implications for society of GDP growth. As our study shows, economic stability plays a crucial role in fostering not just financial security but also social trust.  

Study design

To identify the effects of economic prosperity on trust, we used a so-called instrumental variables approach. The idea is to search for a variable that is exogenous to a country’s GDP per capita and trust; and the variable should only affect trust through GDP per capita. The variable we employed was oil price shocks. This instrument is very similar to a terms-of-trade shock.