Comment on “How Inequality Affects Trust in Institutions: Evidence from Indonesia”

Suryahadi et al. (2022) address the challenging task of identifying how income inequality affects trust in others, organizations, and institutions through a cross-section analysis of Indonesia. As previous studies have suggested, the extent of trust is considered an important factor for economic development, for example, by reducing transaction costs. This has led many social scientists to analyze the determinants of trust, but few studies have shed light on the impact of inequality on trust (Gustavsson & Jordahl, 2008; Barone & Mocetti, 2016). The importance of the topic seems to be even greater under the current Covid-19 pandemic. It has been noted that low trust in governments may lead to vaccine hesitancy (SAGE Working Group on Vaccine Hesitancy, 2014), which might have lowered the coverage of Covid-19 vaccination in many countries.

In order to identify the effects of income inequality on various aspects of trust, Suryahadi et al. construct an impressive dataset comprising various surveys, such as the World Value Survey, the National Socioeconomic Survey (Susenas), Village Census (PODES), and village-level data on estimated poverty and inequality (PovertyMap). Using the informative dataset, Suryahadi et al. reveal statistically significant negative correlations between district-level inequality and trust in political and state institutions. On the other hand, they also find that higher village-level inequality has a negative effect on trust in strangers. The estimation results are intuitively consistent, and Suryahadi et al. provide a useful perspective on the relationship between inequality and trust in Indonesia, though there appear to be some issues that still need to be cleared up.

First, their cross-section analysis might induce an endogeneity problem. Suryahadi et al. employ ordinary least squares results with reference to endogeneity test outcomes (Suryahadi et al.'s table A.2), which depend on the assumption that their instrumental variable is valid and strong. As Suryahadi et al. are cautious about the results of their analysis, I am still afraid that the inequality variables correlate with the error term (endogeneity). For example, I am concerned that Suryahadi et al. do not control for ethnic diversity among villages in the empirical specifications, while ethnic heterogeneity displays a strong negative correlation with the extent to which people trust each other (Gustavsson & Jordahl, 2008; Jordahl, 2009).

Second, in line with the literature, Suryahadi et al. assume that respondents are well acquainted with the objective level of income inequality in their districts and villages. In other words, this means that the subjective perception of inequality is supposed to coincide with, or at least be proportional to, the objective inequality index, but it seems questionable to make such a simple assumption. Hu (2017) suggests that objective inequality and subjective inequality are not correlated and shows a statistically significant nonlinear relationship between subjective inequality and general trust.

Third, linked to the above comment, it appears that there is room for consideration as to which inequality index is appropriate for the analysis. Previous studies have used inequality indices such as the percentile ratio, top income shares, and the standard deviation of logs in addition to the Gini coefficient, and it is suggested that the estimation results may be sensitive to the choice of indicators (Gustavsson & Jordahl, 2008). If such alternative inequality indices are available for Indonesia, it may be worth trying them to check the robustness of the estimation results.

Fourth, Suryahadi et al. show that while Indonesia's Gini ratio increased at the national level in the 2000s, trust in government organizations and institutions remained flat or increased slightly over the same period (Suryahadi et al.'s figure 3). This simple relationship between disparity and trust seen in the time series data seems to contrast with the results of their cross-sectional analysis, which shows a negative correlation between inequality and trust. It would be useful if Suryahadi et al. could explain the reason for this.

Fifth, in contrast to Zmerli and Castillo (2015) who explore Latin American cases, Suryahadi et al. find a negative correlation between higher inequality and trust in the central government rather than trust in political parties (Suryahadi et al.'s figure 5). This may be brought about by differences in model specifications, but it would be helpful if Suryahadi et al. can elaborate on the possible reason behind the differences.

Finally, one of their main challenges for the future will be the search for another appropriate instrumental variable that will allow them to reveal causal relationships between inequality and trust. The information-rich dataset they have constructed will make it possible to identify the causal inference and contribute to the literature.