A Discussion of “Which Dimensions of Culture Matter for Long-Run Growth?”
For the past few semesters, I have been using Barry Clark’s “The Evolution of Economic Systems” in my MBA global economy classes. I like how it is comparing economic systems across countries, not just economies.
An economic system consists of three realms:
- the economy governed by the market,
- the polity governed by the state, and
- the civil society governed by the community.
We need all three realms to be healthy, but in each type of economic system, there is one that is dominant. Capitalism is a market-centered economic system, although Clark identifies seven different “flavors” of capitalism. Arguably, there are even more.
Over time, countries move from one type of economic system to another as circumstances change and the old system does not seem to be working anymore as I have discussed previously.
Time for a Paradigm Shift in Economics?
I think my MBA students benefit from learning about different economic systems around the world and from seeing you cannot easily import a working system from one country to another.
Transplanting a market-centered set of laws into a society that has been state-centered or community-centered is not going to work. It is not just a set of economic regulations or new laws that can transform how people will behave. All three realms need to be supporting each other. If the new laws are not supported by the community, the transplant will fail.
You can see this fight in the US between our two political parties. At a high level, the Republicans support more individualistic, market-based policies while the Democrats support more collectivist, state-based policies.
To some extent this fight which has been ongoing and developing for decades will only be settled by the third realm, the community. As long as people are oriented with America’s historical preference for individualism, collectivism will not work well in this country.
What Contributes to Long-Run Growth?
But that political and sociological fight is not what I want to focus on. I am an economist, so I am always curious when I see an article like the one Gorodnichenko and Roland (2011) wrote that seeks to identify what types of culture are statistically significant with long-run growth.
Does one type of system, more individualistic or more collectivist, tend to contribute more to long-run growth, as measured by growth in output per capita?
The authors say they are returning to this question to explore it further based on an endogenous growth model they built for an earlier paper that
…captures the trade-off between the innovation advantage of individualist culture giving social status rewards to innovators, and the coordination advantage of collectivist culture where individuals internalize group interests to a greater extent. (p. 492)
Their Results
The authors assert they have “empirical evidence of a causal effect of individualism on measures of long-run growth” and they “find essentially that only individualism has a robust effect.” (p. 492)
They are facing the same problem of endogeneity that has them turn to the Instrumental Variables estimator I have recently discussed in another paper. It is reasonable to think that individualism could cause growth, but there could be a feedback loop where growth impacts individualism.
Their goal: investigate the impact of culture on economic growth.
Their problem: economic growth (or lack thereof) could enhance or weaken culture.
Solution: culture is inheritable from parents so use another variable that is inheritable from parents that is not going to be influenced by economic growth — they turn to blood types.
They can thus capture just the part of culture that is related to economic growth by looking at the relationship between blood types and economic growth. Any explanatory power is likely capturing the impact of inheritable culture rather than blood types since it is not reasonable to think blood types cause economic growth.
So, if you are still with me, what are the cultural variables they investigate? Some of the cultural dimensions they measure include (p. 493)
- Individualism as mentioned above
- Masculinity (a measure of the dominance of “masculine” values)
- Uncertainty avoidance
- Egalitarianism
- Intellectual autonomy
- Harmony
All these measures come from existing international survey data sets.
They find that only individualism has a strong and robust effect on the growth of GDP per capita.
The only other variables that approach any significance seem to be picking up on the effects of individualism, because their significance disappears when more controls are added to the estimation. A couple of such measures they mention include egalitarianism and intellectual autonomy.
Thus, the authors conclude
…from this exercise that the individualism-collectivism dimension is the central cultural variable that matters for long-run growth. Other cultural variables may of course affect other aspects of economic behavior and economic performance, but they do not appear to robustly influence long-run growth. (p. 496)
What to do with this?
I would say first, in our political battles along this dimension let’s recognize the likely negative impact on our future growth if we turn away from individualism.
Second, we should acknowledge the trade-offs:
- individualism yields more innovation and growth
- collectivism is better at dealing with collective action problems which require coordination and planning.
In the words of the authors,
…identifying effects of culture on economic indicators should facilitate better dialogue and communication across cultures rather than turn cultures against one another. (p. 498)
Since we seem to be having a cultural war in our country right now, I think you could take their conclusion and say that within our country we need “better dialogue and communication” so we do not turn against each other.
References:
Gorodnichenko, Yuri and Gerard Roland (2011). “Which Dimensions of Culture Matter for Lon-Run Growth?” AER: Papers & Proceedings, 101(3): 492–498.
By Ellen Clardy, PhD on .
Exported from Medium on December 15, 2022.
