Culture and Economic Outcomes, By Rafiq Raji
Culture also plays a role in financial development, which is germane to economic growth. Specifically, a strong correlation is found between uncertainty avoidance and the financial development of a country. That is, countries with high uncertainty avoidance or a low appetite for risk, tend to have relatively less developed financial systems…
Most studies employ cultural characterisations of individualism and collectivism by Hofstede (2001), autonomy and embeddedness by Schwartz (1994), and trust and equality by Inglehart (2000). Individualism, autonomy, egalitarianism, trust and tolerance have been found to be significant cultural traits for rich countries, while embeddedness, hierarchy, power distance, uncertainty avoidance, market orientation, and equality are the dominant cultural dimensions in poor countries.
|Hofstede (2001)||Schwartz (1994)||Inglehart et al. (2000)|
|Power distance||Embeddedness||Hard work & thrift|
|Uncertainty avoidance||Mastery||Public good provision|
|Long-term/Short-term orientation||Affective autonomy||Equality|
|Intellectual autonomy||Market orientation|
|Source: Schwartz (1994), Inglehart (2000), Hofstede (2001), Gorodnichenko & Roland (2011)|
Hofstede defines his five cultural dimensions as follows: Individualism/collectivism is the degree to which individuals are expected to look after themselves or remain integrated within groups, usually around the family. Power distance is the extent to which the less powerful members of organisations and institutions accept and expect that power is distributed unequally. Masculinity/femininity refers to the distribution of emotional roles between the genders. Uncertainty avoidance is the extent to which a culture programmes its members to feel either uncomfortable or comfortable in unstructured situations. Long-term/short-term orientation refers to the extent to which a culture programmes its members to accept delayed gratification of their material, social and emotional needs.
|Culture Vs. Wealth|
|Rich Countries||Poor Countries|
|Affective Autonomy||Power Distance|
|Adapted from Gorodnichenko & Roland (2011)|
Schwartz’s cultural values and their characteristics (in parentheses) are as follows: Harmony (unity with nature, protecting the environment, world of beauty); Embeddedness/Conservatism (social order, respect for tradition, family security, wisdom); Hierarchy (social power, authority, humility, wealth); Mastery (ambition, success, daring, competence); Affective autonomy (pleasure, exciting life, varied life); Intellectual autonomy (curiosity, broadmindedness, creativity); and Egalitarianism (equality, social justice, freedom, responsibility, honesty). Inglehart’s cultural values of trust, hard work & thrift, tolerance, public good provision, equality, and market orientation are self-descriptive.
Culture Affects Economic Development
A comparison of the results of an experimental Ulitmatum Bargaining Game (UG) among the Machiguenga tribe of the Peruvian Amazon and participants in Los Angeles in America show significant differences in economic decision-making. The experiment especially demonstrates that humans make economic decisions differently based on their values and beliefs. But even as this fact has always been reckoned, there was hitherto a reluctance to consider it as a factor in the explanation of economic phenomena because “explanations will become less clear-cut than they seem to be in the world of economic models.” Cultural economics studies have since been able to successfully use survey data, study of second-generation immigrants, and experiments to overcome this supposed measurement constraint.
Studies show individualist cultures engender higher economic growth relative to collectivist cultures. This is because “of the social status rewards associated with innovation in that culture.” And studies find that this individualism-innovation-growth nexus is robust to the effects of institutions and other growth-related factors. The suggestion is not that collectivist countries do not engender innovation. Rather, it is that the innovation observed in collectivist cultures tend to be incremental and relatively irrelevant over time. Acemoglu & Robinson (2019) put it in the most straightforward way: “It doesn’t mean no innovation and no technological progress, as China’s own experience during the Song dynasty and the Soviet Union’s early success attest to.” The consensus view is that individualistic societies are likely to maintain their technological leadership and thus likely to remain richer.
|Hofstede (2001) Country Index Scores (Ranks) For Select Countries|
|Country||Power Distance||Uncertainty Avoidance||Individualism
|United States||40 (38)||46 (43)||91 (1)|
|Germany||35 (42-44)||65 (29)||67 (15)|
|Australia||36 (41)||51 (37)||90 (2)|
|UK||35 (42-44)||35 (47-48)||89 (3)|
|South Africa||49 (35-36)||49 (39-40)||65 (16)|
|East Africa||64 (21-23)||52 (36)||27 (33-35)|
|West Africa||77 (10-11)||54 (34)||20 (39-41)|
|Source: Hofstede (2001)|
Culture also plays a role in financial development, which is germane to economic growth. Specifically, a strong correlation is found between uncertainty avoidance and the financial development of a country. That is, countries with high uncertainty avoidance or a low appetite for risk, tend to have relatively less developed financial systems (proxied by private sector credit extension and stock market capitalisation). Incidentally, they also tend to have relatively lower levels of trust. Unsurprisingly, much of the developed world is characterised by a high level of trust. Generalised trust, where the goal of trust is towards the society, engenders economic efficiency while personalised trust, where the goal of trust is towards a small group (e.g., family, etc.), weighs on economic efficiency. Put another way, as most economic activities require dealing with strangers, countries with a generalised trust culture tend to be relatively more prosperous.
Rafiq Raji, a writer and researcher, is based in Lagos, Nigeria. Twitter: @DrRafiqRaji