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 simplifying 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. The 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.

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