Does Culture Matter for Economic Growth?

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There’s been an increasing number of papers concerned with culture and its relationship to economic growth. I happened to just see this working paper by Di Tella and MacCulloch (2014), but the idea of culture being an important determinant of economic development levels has been hanging out there in the literature for a long time. Weber’s theory of the Protestant work ethic is probably the starting point for any discussion of this topic. More recent work tends to try and be more empirical than Weber, often using World Values Surveys as a means of measuring cultural elements. This is what Di Tella and MacCulloch do in their working paper. [If you’d like a good introduction to the culture literature, check out James Fenske’s course materials, in particular his “Foundations of Development” course].

I think this is pretty interesting reading, but I’m starting to get a little antsy about the use of the cross-country empirical work. Not in a standard “Identification!!” way, although that’s an issue, but in a slightly deeper way. In particular, why bother regressing GDP per capita (or growth, or any measure of economic activity) on cultural variables at all?

Culture affects economic activity through the choices that people make about how to allocate scarce resources. In other terms, while culture may be a fundamental determinant of economic activity, it acts through proximate factors like (but not exclusive to) the accumulation of capital, the adoption of technology, or labor market participation decisions. So if we are going to describe how culture influences economic activity, we need to describe how culture influences those proximate factors.

The decisions regarding saving, technology adoption, and labor market participation are similar in that they involve some sort of constrained optimization problem. That is, there is some budget constraint and some utility function, and people do the best they can to maximize utility while keeping within that budget. I have some income, for example, and I need to decide how much of it to consume and how much to save. I have some profits as a firm, and I need to decide whether to invest in a new technology, or distribute the profits to my stockholders. I have a finite amount of time, and I need to decide whether to stay home and raise my kids or put them in day care and go back to work. All constrained optimization problems.

So if culture is going to influence economic activity, it has to influence those constrained optimization problems. And there are really only two options then. Either culture influences budget constraints, or it influences utility functions. I haven’t seen any argument that culture actually changes the budget constraints of people, firms, or governments. Finite resources are finite no matter what you believe. So culture probably acts through utility functions, changing people’s preferences towards the future, or towards education, or towards material success, or towards the environment, or whatever.

Maximizing utility does not mean that people are individualistic money-grubbers. You can write down a utility function where someone cares about other people’s welfare, or a function where someone really enjoys free time with their kids, or highly values the environment, or values the success of their group. Culture, if it has economic effects, would presumably act by changing exactly what is valued in the utility functions of people or households.

Take as an example the common cultural distinction that Americans are more individualistic than Europeans. This would manifest itself in a utility function in the U.S. that is heavily weighted towards individual income, say, versus any measure of community income. In Europe, the opposite would apparently hold. Then, given the same budget, Americans would make choices aimed towards better personal outcomes (e.g. low tax rates and social safety nets) while Europeans wouuld makes choices aimed towards better group outcomes (e.g. high tax rates and social safety nets).

So here’s the issue that I mentioned at the top. If culture leads to different utility functions, which in turn lead to different measurable economic outcomes, then why should we bother with measuring economic outcomes? Let me take this from the opposite angle. If everyone has identical utility functions, then measurable economic outcomes (GDP, average wages) have some information about relative welfare across countries. But if everyone has a different utility function, then measurable economic outcomes don’t necessarily provide any information about relative welfare. If one culture derives utility from having massive families with lots of kids, and doesn’t really care about consumption goods, then what does their low GDP per capita tell me? Nothing. It doesn’t tell me they have lower welfare than a high GDP per capita culture.

If you tell me that culture is important for economic outcomes, then you’re telling me that utility functions vary across cultures. But if utility functions vary across cultures, then cross-culture comparisons of economic outcomes don’t imply anything about welfare. So aren’t the regressions with culture as an explanatory variable self-defeating, even if they are econometrically sound?

I could well be over-thinking this, and I’d be happy to hear a good argument for what the culture/growth or culture/income regressions are supposed to be telling me.

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32 thoughts on “Does Culture Matter for Economic Growth?

  1. Pingback: Does culture matter for economic growth? | ACom archives

  2. Very interesting. I would dare to say that the utility function has little to do with culture. Take migrants, or expats. They take their culture somewhere else, but make different decisions when confronted with the same situation.

    • But expats and migrants making different decisions given the same situation is precisely a case of having a different utility function. If we face the same budget constraint but make different choices, then it must be utility differences.

      • My comment was clearly unclear. I mean they make different decisions compared to the ones they made in their home countries.

        Of course, I only have anecdotal data to support this. I was an expat for 8 years and now I still mingle with expats in my home country. It is quite common to hear them say “Back home I would i.e.pursue a career, but here I’d rather i.e. enjoy my family”. Has their culture changed? I don’t think so. They adapted their utility function to their new environment.

        Bottom line, it fits my perspective, I agree.

  3. Take this for what you paid for it, but I spent many years living in India. I’m an American. One day I had a realization that made everything make sense. Winter. Winter requires us in the north to plan ahead. Do we have enough food, fuel, straw? Our food is made to last for months. We make stews because the stove is on all day anyway so why not. We roast for the same reason. We are on time, We are less likely to make close friends, but very loyal to those we do. A friend from India moved to Finland and couldn’t understand why it was so hard to make friends. I think it’s from a long cultural tradition that if your friend did not put enough away, or the roof caved in from the snow, they are like family. You let them in, but you are now putting yourself and your family at risk. To survive in the north requires more innovation and inventions. It’s important to reduce risk by ensuring quality.

    Tamil Nadu and Andrah Pradesh (where I lived) can easily feed all of India. Coconuts, papaya’s, mangoes, and much more is there for the taking. It’s not a scarce resource. Houses are a luxury, not a requirement. It’s quite comfortable to sleep on the grass. People don’t think in the future, they live in the present. People don’t pay for quality unless status comes with it. People in India are much happier. The cast system, though not what it was gives assurances to peoples’ lives. I’m a maid, OK, my mom was and so on for as long is as known. So I don’t think I’m a failure. The Indians coming to the west recently are almost exclusively from upper classes. They do live more in the rat race, but infrastructure is appallingly bad. The low cast construction worker just wants to get home to his kids and could care less if bad workmanship is preventing the upper casts to have even more.

    One quick thought on food prices. The world market should raise the price of food in India, but it can’t. The cost of transport is very high so by the time it reaches a dock it’s been several days if not weeks in transit. Imagine pre Eisenhower America after a long bombing campaign.

    The far north doesn’t have excess resources to do much more than exist.

    • A Thai friend of mine made a similar argument about Thailand. There, the weather is warm and there are annual rains (more or less). There’s always fruit on the trees and fish in the water, etc. Life is easy. My friend was arguing that this is why Thais are always late – they never had to plan. Northern Europeans had to plan ahead to get through the cold months.

      • That argument has a long history. Montesquieu is probably the most famous proponent of the “cold is good” theory.

  4. “I haven’t seen any argument that culture actually changes the budget constraints of people, firms, or governments” You have not read any of the cross-cultural inquiries developed by economic anthropologists. I would suggest as a beginning Parker Shipton’s excellent trilogy on the Luo, beginning with the Nature of Entrustment. Beyond that there is also a wealth of information on just this topic within the anthropological/ethnographic literature, as well as how cross-cultural difference affect what you identify as the utility function. Another point of reference, and the very beginning of the inquiry itself, would be Malinowski’s classic Argonauts of the Western Pacific and his note on the Kula trade.

  5. First, I agree. GDP welfare.

    Second – I think you are missing some cultural items which likely impact efficiency and productivity. Perhaps a risk taking culture is good for productivity in the long run (more invocation or learning). Perhaps a bargaining culture has higher transaction costs; or maybe it has for efficient price discrimination. A less truthful culture might incur higher transaction costs through increased need for due diligence. A culture of corruption (which might include entertainment, kickbacks, purchaser rebates, birthday gifts, red packets, etc) might lead to larger capital outflows to protect the ill-gotten gains. A more aggressive culture might have more theft/war/breakage and thus a higher depreciation rate. A culture which encourages education might lead to higher productivity.

    Third – I think you are being unfair in places. Economists may claim to care about welfare, but they don’t measure it. I’ve yet to hear an economist celebrate declining labor force participation because it means more people are consuming leisure. I’ve not heard joy at reduced working hours because it means longer vacations or at least longer lunch breaks (possibly excepting Krugman). Nor have I heard economists recommend that the (stereotype) Malaysian work ethic is better than the (stereotype) Chinese work ethic because it means less, well, work.

    No, I think that cultural economics informs the tradeoff space. How much do siestas cost an economy? How much would an extra week of vacation cost? What is the impact of more paternity leave for fathers? The economics can tell us about the monetary cost or benefit. Then it is up to the people to make the utility choice. So yes, I think the study is very worth while.

    • I think your last point may be the most pertinent. If people are were aware of the “cost” of their culture in terms of foregone economic activity, perhaps they would make different choices. And if everyone is making an individual choice to conform to some cultural norm, but this has a big economic cost, then perhaps culture can be a significant factor in economic growth. In this case, culture is like an externality or coordination failure. It is preventing us from coordinating on outcomes we’d all prefer.

      • Yes, that’s much what I was trying to get at. I think there are policy options as well – if there is some highly expensive cultural norm, the government can push against it (I’m thinking of the ads in Paris encouraging Parisians to be nicer to tourists about 20 years back).

  6. I share your view that regressing A v B are not going to be that informative but I disagree with “If you tell me that culture is important for economic outcomes, then you’re telling me that utility functions vary across cultures. But if utility functions vary across cultures, then cross-culture comparisons of economic outcomes don’t imply anything about welfare.”

    I am interested in the role reciprocity plays in finance and I have started looking at how different commercial cultures affect the development of the financial system. My hypothesis is that a financial network based on e.g. pure risk-sharing (i.e Islamic musharakah); reciprocity; profit maximisation; will have different network structures. This will impact on the distribution of money in the financial system and its resilience to shocks. This will have an impact on “welfare”. The point of divergence, I suspect, is that I do not take it as axiomatic that I work in a framework of utility maximisation.

  7. This doesn’t seem to be an example of over-thinking. It seems to be an example of discerning yet another case where “the emperor has no clothes”. Since culture is not a policy decision, there seems to be no use for the results of this “research” other than money-shaming entire nations (and no motivation for it other than “racism” (culturalism?)).

  8. “The decisions regarding saving, technology adoption, and labor market participation are similar in that they involve some sort of constrained optimization problem.”

    These are not cultural precepts, surely, but institutional ones?

    • I’d say that these decisions have institutional and cultural components. The culture/growth research doesn’t claim that only culture matters, just that it is one significant piece.

  9. From your own words and the title of your post, it seems to me that culture is important for economic growth, but it’s not necessarily important for welfare.

  10. If differences in the utility function are the only difference, then I agree. But what if the ability to make good choices differs across cultures. Have you considered the possibility that some cultures are better at maximizing their own utility than others?

    • I guess that could be the case, except I’m not sure what that changes. That is, if we observe women choosing to work in informal family firms rather than in large organized formal firms, it could be because it’s a culture that values family or a culture that doesn’t allow women to work outside the home. Effectively, what is the difference?

      It’s important not to confound utility with happiness. Maximizing utility does not mean that everyone enjoys their decisions. So culture could maximize utility but not maximize happiness.

  11. Thank you for the great post. To start a reply, i’d like to go back to a fundamental level. Insofar as economic growth is the emergent phenomenon of each individual behaving in a certain way (working), and insofar culture affects how each individual behaves, then it is easy to draw a conclusion that culture must indeed have an effect on economic growth.
    Whereas we do no fully understand what exactly is culture and how to measure it’s properties (if it has such things), the regression of any measure of economic growth into cultural aspects is purely intellectual speculation for the sake of it.
    Furthermore, the assumption that culture – whatever it might be – is static seems to be, at least intuitively, erroneous, therefore any regression such as above would be temporal at best.
    Alternatively, we could instead focus on ethical values which, unlike culture, can be defined to be static concepts (i,e, unchanging through time), and try to observe their correlation with economic growth. Even if we cannot really escape the realm of subjectivity, at the very least we have a simpler task. The existence of a certain value in an individual is a boolean (either true or false), and as such we can easily measure how much that value is prevalent within a certain community.

    • This i wrote about on april 2003
      Culture – Ethics – Information: underestimated critical factors for competitive development

      Francesco TOTINO *

      The situation

      In the Economic policy measures , especially in the last years, it has been given a lot of emphasis to some impediments that block both the development policies and the employment . Among the referred obstacles appears: adverse international economic situation , safety , inefficient infrastructure, quality of public administration , labor flexibility , fair tax policy . Against this situation , trying to emulate the successes achieved in other Western countries , the measures put in place by some other Governments, have been focused primarily on quantitative measures, underestimating the capacity to react to these measures of the social system respect that one of other Western countries.

      Basically it was said, ” in the USA, Holland, England , or in some areas of these countries , the stress of some economic variables , in a hypothetical “conventional” development econometric model, have led to results in terms of growth and has allowed to improve the competitiveness of the system … So … let’s do it ..! ”

      Some Governments did it ..or tried to do it … . but the results did not come and for some countries .. even today the situation , unfortunately, is not better than that one of five years ago.

      Indeed .. in front of a positive increase in the number of small businesses and thus in front of an employment in small businesses sector, for aexample.. our country Italy, suffered a decrease in employment in large companies, an increase in the social conflict and a significant decrease of the competitiveness in international rankings . A deterioration , the last, very serious in our economy as it incorporates a structural and not cyclical deterioration which will impact on the future of our country. The same situation happen in other weak countries of Eurozone … and .. imagine in other weak countries !!!

      Think that the competitiveness of enterprises and social development in a country or in a particular “weak” Area , can be implemented only through the emulation of successful economic policies implemented in other countries, is not only true, but it hides oversimplified and outdated economic thinking.

      The phenomena of particular European or American regions economic policy success, which certainly constitute an unequivocal reality to look at, to learn about and be inspired , we must not forget that in these places has been possible thanks to a civil confrontation among the parts, thanks to a civil social context , thanks to a ” cultural infrastructure ” of IDEAS and MENTALITY ‘ , thanks to an intense policy of developing Human Resources , thanks to a strong attention to’ Ethics in Business and in Politics.

      These “qualitative ” factors that has been built in these places out from grueling political mediations, out of a systemic inattention and tolerance of lawlessness and injustice environment, like any other factor of production , have been constitute a fundamental Asset ,, let’s say a “Treasure ” of inestimable importance for regional development and local business competitiveness , especially in the long period .

      Cultural Infrastructure , Ethics and Information are the new strategic factors of development

      Today it’s therefore required , if you do not want to persevere in the failure of “conventional” economic policy measures , to develop and support a new model of economic development that takes into account in its simulations also new variables such as ” Cultural infrastructure” , Ethics and other qualitative factors … the weight of these “social” variable have gained a more and more importance and considerable value respect the most popular economic variables such as ” taxation “, ” wage flexibility ” and so on.

      This is mainly becouse the accelleration in the last years of an incredible Worldwide sophistication of the Economic development process.

      Do overshadowing these variables (ie, consider the factor ” cultural infrastructure ” and the Ethics, as only words to brush up in opportunistic speeches of circumstance or as values to try to give depth to a political party program ) and therefore not support their huge function generating mechanism of development, in a modern design statement , not only will lead to attempts to invalidate economic policy (and thus wasting resources and time ), but will lead to a further deterioration of another fundamental crucial component of development : the expectation of economic operators and the credibility of the country.

      Politics responsibilities

      A crucial role in this game must be played by Politics, by Politicians and then by the Government, the government parties and all political parties in general, which should start to give an example. The “traditional” parties can not fail to notice the credibility gap they have created around them, both at national and international level , for reasons related to the problem of justice, of corruption that since the fall of ideologies seem to constitute a fisiological condition to get vote .. The Political Parties seems not capable any more to select ruling class especially at intermediate level becouse the need to favourite clientelism and corporative interest . The parties and therefore Politics are dependent too much from the vote system and from corporative interests that are not any more helpful to the satisfation of general interest of the countries and of the worldwide economy .

      Negative expectations , doubts , and this loss of credibility and trust in the political institutional apparatuses are now a strong weight deterring factors for the development as they not only undermine the possibility of emersion of all qualitative economic components of the ” cultural infrastructure, but also cut business relations with more efficient components of the social system, with international partners , and in fact encourage the emersion and entrenchment in the social system of all the other qualitatively negative components ( dishonesty, corruption, corporatism, not professionalism, improvisation , subculture etc. .. etc. .. ) , closing the single countries in a negative vicious circle of pauperization.

      These considerations, which affected public opinion and newspapers and television on and off and only during some election campaign , assume today a greater value as greater is the level of the modernization and communication of the country to which they refer becouse also the higher level of influence that (either directly or indirectly foreign investors ) lead also and above all on our productive system and enterprises.

      For these reasons, the combination Ethics and Politics can no longer be considered only as an object of electoral campaingn debate , but it should be seriously considered as a “fundamental” and strategy factor to include in a model of economic development .

      Basically the Politics today must be made more seriously than in the past because it is not only the political decision (ie the one that determines the address of the strategic choices made by the government in different sectors) but it is mostly the Ethics embodied by political class and by the government that make the difference to gain positive effects on the long term economic development .

      Francesco Totino

      Rome, April 7, 2003

  12. I think culture influence many many variables that turn to have impacted on the utility function for the societies and the household in general.Take for example factors such as educational impacts on culture, employment impacts on culture and so on affects the GDP growth either negative or positive depending on the people pespective about cultures on growth.For me i think the factors influence on culture on growth are not only the above but others like decision making in the society,household protection or stay indoor(in some countries women stay indoor lower education, lower participation in labor force and so on.Overall only caring kids and only acts as house wife), affects productivity, affects consumption and saving and even affects investment.So cultures will have correlation either positive or negative with economics growth.

  13. Economic growth is about “willingness to invest in the future” and “the system (including government and market)”. Culture have big influence on “willingness to invest in the future”, but the influence on “the system” is unclear. So, culture must matter but impossible to prove.

  14. Pingback: Does Culture Matter for Economic Growth? | Itcomesundone

  15. Thanks for this interesting post. It points into the right direction: what are the fundamentals for development? We must admit that we haven’t figured it out. We don’t even know them for sustainable economic growth let alone human development which is so much more complex.

    Culture does matter as it relates to collective or societal consciousness, a group’s ambitions, value, ethics etc. This is comprised of individual ambitions, values, belief systems etc. I therefore am convinced that if we would explore answer to the following questions we would shed more light on why some people and societies develop in specifif ways:

    1) What role does our thinking and awareness play? (as thinking leads to decisions and actions).
    2) What role do attitudes, aspirations, passion and ‘inner’ side? play (as inner creates the outer)
    3) How to see development more holistically, from personal to societal?

    Lets take some young entrepreneurs as an example. Will they do better or worse with a “can-do” attitude? With being open-minded, self-motivated, passionate, pro-active, solution-seeking? (even if all other environment and support would be the same). If so, then how can we empower people and entrepreneurs, how can mind-sets and inner attitudes be shifted? These dimensions do matter and can be developed if taken into account.

    Otto Scharmer calls the ‘inner’ side our blind spot. Unless someone has tried meditation or a a similar practice it is a difficult topic for economists and development practitioners to grasp. But until we learn from the personal development, coaching and psychology fields, I feel we are scratching the surface and could do a much better job with a more holistic ‘inside-out’ development approach (which I am sketching at http://www.business4good.org).

    “Development is not something that we do for people. Development is what people do for themselves. It must start and end from within. Our job is to facilitate the process.”
    – IFAD President Kanayo F. Nwanze, Addis Ababa, May 2014

  16. Pingback: Does Culture Matter for Economic Growth? Part Deux. | The Growth Economics Blog

  17. The concept of culture seems to be taken in a very wide sense but the answer is yes. The Luo of Western Kenya were mentioned above and they can serve as an example of culture causing relatively poor, but difficult to measure, economic growth. In the culture of the Luo, the younger brother cannot plough until the eldest brother has ploughed. Hence, assuming the old adage, that the sooner ploughing is done the greater is the yield and economic growth, then the delay in younger men ploughing is harmful to economic growth caused by the above mentioned cultural law, by some immeasurable amount. So, measure this, somehow, against say another Kenyan tribe, which does not cause such delays then you would say, all things being equals as to rain, inputs, etc., the Luo are relatively poorer. It may be that because of this law they plough a lot quicker but that is not commonly held to be the case.
    The issue here is not actually culture in its narrower sense but religion. It also explains why Odinga is still the leading politician amongst the Luo after losing several elections. He is a senior man of a certain house and this law mentioned above means that no one within the Luo will seek to replace him in his lifetime. This law, therefore, opens up the question of economic growth and factors militating against it, in cultures with such laws reflected through to the very top of society and the government of the culture or society. In effect the person of age rules and if he does so badly, none, even although disagreeing with it, will challenge it and do their own thing for their own good. They just agree to suffer the consequences even if harmful. It is not always the case but clearly it all tends to the cementing of power of the big man and long reigns for such persons with disastrous results for economies.

  18. sir, I would like to ask you a questons.Myanmar is developing country.Some kind of people don’t like the chance of eco development for country becaucse they think that they will lose culture and national mind for eco development.How can explain to them for country??

    • Zin – I have no idea how to make that argument. It’s been going on for centuries in every country, I think. Is economic growth worth the loss of culture/history/tradition? Here’s the thing, there is no right answer. Economic growth is not *right* because it is economic growth. Economic growth is *right* is people think it is better for them than not having it.

    • Many of Myanmar’s neighbours have experienced rapid economic growth (eg. Cambodia). These countries have not lost their culture or national identity. Yes, life has changed and in many ways become more modernised. Yes, there are more foreign influences (products, companies, media). But, as Dietz writes above, that does not necessarily mean that the benefits of development are outweighed by the costs. Thailand is still Thai, Cambodia is still Khmer, etc.
      Could Japan have maintained more of its traditional culture had it had control over it’s opening-up rather than being forced to by outsiders? Myanmar now has the opportunity to develop (the IMF expects it to be one of the fastest-growing countries in Asia), and can itself determine how this happens.

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