Culture and Economic Development

 

Introduction

The effect of culture on economic development has been studied through various channels over the last decade. However this is a more complex topic than what it might seem! Considering the fact that culture is a very broad term, we need to define it as specific as possible in order to examine its effect on economic development. Such definition should focus on cultural traits and dimensions which are relevant for economic outcomes .

What is culture?

Geert Hofstede (1991) has defined culture as “the collective programming of the mind which distinguishes the members of one group or category of people from those of another”. Culture consists of habits that are shared by members of a society. It is the product of learning, not of heredity ( Murdock 1965). It is customary beliefs and values that ethnic, religious, and social groups transmit fairly unchanged from generation to generation (Guiso, Sapienza and Zingales  2006) , which emphasizes on aspects of culture that are fixed over time.One can also think of the subset ‘economic culture.’ Economic culture is defined as “the beliefs, attitudes, and values that bear on economic activities of individuals, organizations, and other institutions (Porter 2000) .Following this terminology, one would be able to design a testable hypothesis about the impact of culture on economic development.

Does culture matter for development?

In order to answer this question, perhaps we can start with Weber’s theory of the Protestant work ethic. Max Weber, the German social scientist, concluded that religious values which are clear example of cultural differences could impact economic output. He argued that the Protestant work ethic, that considers hard work and thrift as duty, has inspired Protestants to be more productive than Catholics , namely Germany and Great Britain, for instance, compared to Spain, Portugal and Italy during his time.
David Landes in his book,  The Wealth and Poverty of Nations: Why Some Are so Rich and Some so Poor , concluded that cultural dimensions like thrift, hard work, persistence, honesty and tolerance primarily define the success or failure of national economies. He said: “Max Weber was right. If we learn anything from the history of economic development, it is that culture makes almost all the difference.”
Culture has a direct impact on behavior of people (Hofstede 1980). Hence, national culture can support or impede entrepreneurial behavior at the individual level (Hayton, George, & Zahra, 2002). Cultural traits relevant to entrepreneurial activities  which affect economic development are individualism, power distance, and uncertainty avoidance (Hayton et al., 2002).
Guido Tabellini (2010) in his study of Economic Development in the Regions of Europe used data from the World Values Survey for trust, control of one’s destiny, respect for others , and obedience to measure culture and its impact on economic development. He concluded : These cultural traits are strongly correlated not only with the economic development of European regions, but also with the economic development and institutional outcomes in a broad sample of countries. Claudia R. Williamson and Rachel L.Mathers (2011), showed that economic freedom  is a primary determinant of economic growth.Culture is important for initial growth when economic freedom is absent, diminishing in significance once the institutions of economic freedom have been established!

So there is a general acceptance that culture has impact on economic development but the extent to which it affects economic development, is still a debate among the economists, social scientists and all others who are interested in this topic.

How might this conception of economic culture impact economic growth and development?

Trust as the first element of economic culture has impact on transaction costs and subsequently might affect the economic outcomes. The higher the trust among individuals, the lower the transaction and monitoring costs and the more secure the property costs (C. Williamson and Kerekes 2008). Low trust levels increase transaction and monitoring costs and as a result shrink the trading networks between individuals (Coyne and C. Williamson 2009). That is why the extent of the market is enlarged in the case of elevated trust levels, where anonymous trade becomes attractive due to the lower monitoring and transaction costs.

Another cultural trait, self-determination, indicates quantitatively how much control do individuals perceive to have over determining their actions.In other words, do individuals have control over their choices? Individuals tend to work harder to get a better payoff for their efforts and achieve an increased welfare level, if they think economic success or failure results from their own actions.Due to this argument, if individuals have higher levels of control, the overall economic development level raises in the economy (Banfield 1958).

Respect, considered as the third cultural dimension, influences the tolerance for others in a positive manner leading to a better acceptance of trade with outsiders. Therefore, extent of the market, economic growth and development increases.According to Coyne and Williamson (2009: 13) “in societies with lower levels of social capital, and hence lower levels of respect, the extent of the market will be limited to close kin and friendship networks.” Thus, the higher the respect level, the higher the economic development level.

Obedience, as the fourth cultural measure, influences the economic growth negatively. Harper (2003) argued that if individualism is not welcome in a society and the children are expected to be obedient, they will have lower control levels and they would probably engage less in the risk-taking essential for entrepreneurship.The existing literature also confirm the inverse impact of obedience on individual risk-taking, autonomy and as a result on economic development.

Overall, culture plays a role in economic development. Cultural elements may not fully explain the whole relation, but they are relevant. As Lawrence E. Harrison (2006) stated, taking cultural analysis and cultural change into account along the policy and project design factors, may highly accelerate the speed of economic development.

References:

Augusto Lopez-Claros.(2014). “Does Culture Matter for Development?,” http://blogs.worldbank.org/developmenttalk/does-culture-matter-development

Coyne, C.J. and C. Williamson.(2009). “Trade Openness and Culture,” Mimeo.

Claudia R. Williamson and Rachel L. Mathers. (2011).“ Economic Freedom, Culture, and Growth,”

Francis X. Hezel, SJ.( 2009).“ The Role of Culture in Economic Development,” http://www.micsem.org/pubs/counselor/frames/culture_economic_developmentfr.htm?http&&&www.micsem.org/pubs/counselor/culture_economic_development.htm

Geert Hofstede.(1980).“Cultures and organizations,”

Geert Hofstede. (1991).“ Cultures and organizations : Software of the mind,”

Guido Tabellini.(2010).“ Culture and Institutions : Economic Development in the Regions of Europe,”

Guiso, Luigi, Paola Sapienza, and Luigi Zingales. 2006. “Does Culture Affect Economic Outcomes?,”

Harper, D.A. (2003).“ Foundations of Entrepreneurship and Economic Development,”
Harrison, Lawrence E., Samuel P. Huntington. 2000.“Culture Matters,”
Hayton, J. C., George, G., & Zahra, S. A. (2002).“ National Culture and Entrepreneurship,”
Landes, David. 1998.“ The Wealth and Poverty of Nations,”

Lawrence E. Harrison. 2006.“How Much Does Culture Matter?,”http://www.cato-unbound.org/2006/12/03/lawrence-e-harrison/culture-economic-development

Murdock, George Peter. 1965.“Culture and Society,”

Porter, Michael E. (2000). “Attitudes, Values, and Beliefs, and the Microeconomics of
Prosperity,” in ed. Lawrence Harrison and Samuel Huntington Culture Matters:
How Values Shape Human Progress.

Williamson, C.R. and C.B. Kerekes. (2008). “Securing Private Property: Formal versus Informal Institutions,” Mimeo.