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This paper examines the relationship between trust and economic growth. Taking panel data and using a fixed-effects estimation for a 41-country sample over the time period from 1980 to 2004 and with a total of 129 observations, the paper points out that economic growth is negatively related to an increase in trust. This negative finding is in contrast to most empirical findings using a cross-sectional design. The common knowledge which has governed the nature of discussions in social science and economics for the last ten years, that trust is generally positively related to economic performance, must be seriously questioned. From a policy point of view an increase in trust is crucial for countries with low levels of trust, but can likely be neglected by countries with sufficient levels of trust and may even hamper economic performance in countries with high levels of trust. The relationship is tested in the context of EU countries, OECD countries and developing countries. Interpersonal trust and systemic trust is differentiated. [ABSTRACT FROM AUTHOR]

The paper explores the relationship between FDI and economic growth in eight transition countries - EU candidates - in the period 1994-2001. Surprisingly, statistically robust negative causal relationship between FDI and growth emerged implying that FDI hampered their real convergence with EU. This result can be explained by the form of FDI. In the observed period, acquisitions were the predominant form and the proceeds of the sales were spent on consumption and imports rather than enhancing productive assets. Indeed, current account and FDI were strongly linked; the bigger the inflow of FDI into a country, the higher its current account deficit and foreign debt. Small size of the host countries and concentration of FDI in trade and finance could weaken productivity spillovers while increased efficiency of the acquired firm could be more than offset by the reduction of economic links with local firms. FDI would also not automatically increase competition as it could force small emerging local competitors out of business. While foreign trade increased through FDI, multinationals contributed more to imports than to exports. Finally, while FDI might support human capital formation, this type of spillovers simply does not seem to be very relevant. [ABSTRACT FROM AUTHOR]