A Short Treatise on Economic Development and the Role of Culture

Another little essay from my bag of tricks, hopefully this one is easier to grok than the last

Recently, economic development literature has stopped presupposing the existence of formal institutions like property rights and rule of law.  It now examines the norms or social values that promote exchange, savings, and investment.  This new line of research argues there is a cultural dimension to economic behavior. It is difficult to precisely define culture, but this line of research identifies cultural influences as “the informal shared values, norms, meanings, and behaviors that characterize human societies” (Fukuyama, 2001).

Traditional neoclassical economics downplays the role of specific societal norms in economic choice.  The first chinese-tigersimplifying assumption in most models is that Homo Economus is a rational utility maximizing agent. This assumption underlies the simplest microeconomic model to the more complex macroeconomic and trade models.  This means that human behavior is invariant across human societies.  Culture, religion, tradition, and all other forms of societal identification are some residual factor accounted for within the white noise of random variation.  Most sociologists will argue that cultural norms pervade economic choices and that an economy cannot be completely understood without understanding these cultural factors (Granovetter, 1985).  Economists tend to presuppose shared norms.  One of the reasons we see this is that cultural factors are methodologically very difficult to quantify, measure, and disentangle from other factors.

Economic historian Douglas North was one of the first economists to revive culturalist interpretations of economic development in the 1980s and 1990s.  Institutionalists began to recognize the importance of norms in economic choices.  North (1990) argued that institutions that are run by either formal or informal rules are critical in reducing transaction costs.  This makes them essential to promoting economic efficiency.  If a society, for example, cannot agree on property rights, there would be no incentive for innovators to take risks or make investments.  Institutional economists like North, began to pay attention to more than just the rational, maximizing behaviors of agents (including households and business) and became interested in studying the importance of factors like history, culture, tradition and what is now known as ‘path dependent’ variables that have  a role in shaping economic behavior and choices.

Besides a renewed interest in these things by institutionalists, it also became more apparent that traditional approaches to economic development were having mixed success depending on which continent you were studying. kachinadolls3The same factors examined in countries that were part of the Asian Tigers or Asian Miracle showed differing levels of importance when compared to the transition economies of the old Soviet successor states.  Many Eastern European countries had to set up formal market institutions as well as judicial and political systems.  It became evident that countries like Poland, Hungary, and the Czech Republic were experiencing relatively smooth transitions from centrally-planned economies.  Russia and the Ukraine were experiencing many more troubles.  Their institutions were generally weak and the levels of corruption were astounding.

As a result of these and the many challenges still presenting themselves in the Middle East and Africa, the World Bank and the IMF began to more closely examine cultural variables in their traditional development models.  They begin to find that some uniquely Asian cultural characteristics were at play in the Asian Tiger countries. As a result, we now have a large amount of literature that studies culture factors and economic and financial development.

There are basically four channels that have become the focus of this line of literature.  The first is the impact of cultural institutions on organization and production.  The second is cultural factors that influence attitudes towards work and consumption. The third factor is how culture impacts the ability to create and then manage institutions.  The last is the creation of social networks.  Let’s look at each of these a bit more in depth.

1950s-kitchenPerhaps the best example of the idea of organizational culture differs across countries is to examine the Japanese factory.  Organization culture studies the norms and behavior characteristics of organization.  Dore (1973) compared a Japanese Factory to a British one.  He found there were differences in several dimensions.  Some firms are open to outside influences. Others are closed.  Some firms are quite hierarchical; others are more flexible with decision-making and power sharing. What Dore discovered was that these choices were more based on informal norms than on the industry or factors that might increase production efficiency.  In this study, Dore found that Britain’s strict social hierarchies and attitudes that define what it means to be English middle class instead of English upper class were as important to these decisions as were more mundane things like technology and choice of production methodology.

The difference in performance between the English factory and the Japanese factory was as much due to cultural factors as differences in industrial organization.  Of course, the work ethic of the Japanese worker and manager is legendary.  The culture there makes it much easier for the society to create and properly manage institutions also. The future Asian Tigers, for example South Korea and Japan, were much more successful during the post world war two years because the state allocated credit to national industries to encourage economic growth. Similar institutions in Latin America and Africa did not achieve similar results.  Industrial policy built the Tigers.  It floundered in many other parts of the world.  Institutionalists found that industrial policy is heavily influenced by culture.  The large part of the failure in of these policies in Latin America and Africa was because of expectations of corruption by public officials.  Lack of Education, a professional work force, and the idea of teamwork or working together was also seen as responsible for the failure of industrial policy in other parts of the world.

One of the most interesting topics of study to come up is the idea of ‘social capital’ first posited by Putnam (1993).  Social capital is basically those values shared among a society that promote cooperation or trust.  There are other economic variables that are considered capital or assets.  The first is the machinery, plant equipment that is used to produce things.  This is called physical capital.  The second is human capital which is the education level and skill level of the work force.  The introduction of social capital has brought an entirely new dimension to development economics.  This idea originally came from a sociologist James S Coleman (Coleman, 1988).  Perhaps the greatest example of this is the idea of the “Protestant work ethic” that permeates the Middle of the USA.

The most recent success of development lies in the area of social networks.  Microlending is a direct result of this line of literature.  The success of microlending depends on the information and creditworthiness of individuals that may not have access to traditional lending channels because of lack of financial depth and development in their corners of the world. NGOs and other development organizations have sought to overcome these information inefficiencies and set up networks where individuals with small amounts of money to lend can do so.  I personally lend money through KIVA.ORG and encourage every one of my students to do something similar.

There is an entirely new line of literature that looks at the roles of emotions in shaping basic economic decisions.  imam_hadiReligious fervor is counted in many of these studies. These researchers argue that culture modulates emotional expression through culture-specify rules.  This works towards explaining the many taboos that can influence consumption decisions.  Mormons, for example, don’t use caffeine. Strict Muslims avoid alcohol consumption.  Many Hindus and Buddhists are vegetarians.  Strict Muslims and Jews avoid pork and shellfish.  This aspect has led to unique institutions that express culture specific rules.  Islamic banking and the banks of Orthodox Jews are examples.  Because of the prohibition against usury, these institutions do not charge religious adherents interest and must create unique institutions to serve the values of their clientele.

We have learned that we cannot achieve a convergence of economic growth rates and standards of living by using technology, methodology and traditional industrial organization.  Economists now realize that those variables most difficult to quantify and disentangle are perhaps the most significant.  Tribal behaviors may play a stronger rule in human economic behavior than previously thought.  Development economists and the institutions that rely on their research continue to advance human endeavor with this in mind.