How does trust in institutions help the economy? 

Citizens’ lack of trust in public institutions is increasing, especially in developed economies, including Cyprus. 

The quality of institutions is a key determinant of prosperity, as highlighted, among others, by the winners of the 2024 Nobel Prize in Economics, Daron Acemoglu, Simon Johnson and James Robinson. The relevant literature, notably Why Nations Fail, highlights that institutions are a key factor for the long-term resilience of economies. 

The main factors that improve the quality of institutions include simplified administrative procedures, accompanied by extensive consultations with private sector organisations, genuine and results-oriented efforts against corruption and stability and predictability of the legal and regulatory framework that governs their operations.  

The effectiveness of the legal system is of particular importance. Without enforcement of rules, functional institutions cannot succeed in the long run, regardless of culture or education. Furthermore, a clear separation of executive, legislative and judicial powers is a prerequisite for their success. 

Scientific studies confirm that there is a close interlinkage between the quality of institutions and long-term economic growth. They also confirm that citizens’ trust in institutions makes accepting reforms more palatable, in particular when they entail considerable adjustment costs for certain social groups, while the accrued benefits are of a long-term nature. 

Ensuring high levels of employment and low unemployment appears, according to empirical studies, to be the main factor that strengthens public trust in institutions.  

Furthermore, especially in developed economies, maintaining low inflation plays an important role. It is noted, in this context, that the independence of central banks has been crucial for price stability, while the current challenges facing the US Federal Reserve highlight the risks when this independence is questioned. 

In general, and although there is no absolute connection between trust in institutions and economic development, improving the quality of public institutions, undoubtedly, supports social welfare. Therefore, modernisation of public institutions should constitute a top priority for governments.  

Key policy measures include the systematic monitoring and evaluation of the perceptions of economic actors and the general public of the socio-economic situation, utilising qualitative and quantitative indicators of international organisations and independent bodies, such as think tanks and fiscal councils and the objective and systematic assessment of the impact of policy measures on the various social groups, accompanied by targeted adaptation supportive measures. 

Another is cultivating a culture of transparency and ensuring unhindered access of citizens to public records, as is formulating a strategy for the continuous upgrading of government services through digital transformation and clear performance indicators, with an emphasis on accountability and independence of institutions.  

Countries such as Finland, Sweden, New Zealand and Estonia, where strong independent institutions, high transparency and effective control mechanisms have contributed decisively to sustainable development and social trust are typical examples of success. Why not Cyprus?