Does culture affect long-run growth?

Yuriy Gorodnichenko, Gérard Roland

Does culture affect long-run growth? This column argues that countries with a more individualist culture have enjoyed higher long-run growth than countries with a more collectivist culture. Individualist culture attaches social status rewards to personal achievements and thus provides not only monetary incentives for innovation but also social status rewards.

The idea that culture is a central ingredient of economic development goes back to at least Max Weber who, in his classical work “The Protestant Ethic and the Spirit of Capitalism” (Weber 1905), argued that the protestant ethic of Calvinism was a very powerful force behind the development of capitalism in its early phases. In our new research (Gorodnichenko and Roland, 2010), we provide both a theoretical model and empirical evidence showing that countries with a more individualist culture have more innovation, a higher level of total factor productivity and higher long-run growth than countries with a more collectivist culture.

Here are the main tenets of our theoretical formulation of the idea:

Individualism emphasises personal freedom and achievement and therefore individualist culture awards social status to personal accomplishments such as important discoveries, innovations, or great artistic achievements. Collectivism encourages conformity and discourages individuals from standing out.

Individualism makes collective action more difficult than collectivism as individuals pursue their own interest without internalising collective interests

In short, individualism better encourages innovation while collectivism has the advantage in coordinating production processes and in various forms of collective action.

To formalise the argument, we put these ingredients in an endogenous growth model to study the dynamic versus static elements of the trade-off. In the model, collectivism increases the overall efficiency in the economy, but these are static. Individualism meanwhile, spurs innovation and thus faster growth. Intuitively, people in an individualist culture have not only a monetary reward from innovation but also a social status reward. They are therefore willing, all other things being equal, to allocate more effort to innovative activities. The impact of this depends upon the overall setting.

In a Malthusian economy, however, where all resources were devoted to survival consumption, the collectivist economy exhibits a higher level of output per capita.

In a modern growth setting, the individualist culture has lower coordination capacities than a collectivist culture but its higher innovation rate leads to higher long-run growth.

This contrast can explain how countries with individualistic cultures were relatively backward before the Industrial Revolution, but overtook collectivist cultures afterwards. The model also yields an interesting relationship between culture and institutions. Under bad institutions, a predatory government can expropriate the monetary returns from innovation. However, social status and prestige cannot be expropriated. Therefore, even in societies where institutions are relatively predatory, there will be more innovation in an individualist culture because of the social status reward to innovation.

How do we bring these predictions to the data?

We use the individualism scores developed by Dutch sociologist Hofstede (2001).

Initially, Hofstede surveyed IBM employees in about 30 countries in order to understand differences in corporate culture across the world. Further surveys included other professions and expanded the coverage to 80 countries.

To avoid cultural biases in the way questions are framed, the translation of the survey into local languages was done by a team of English and local language speakers.

The individualism score measures the extent to which it is believed that individuals are supposed to take care of themselves as opposed to being strongly integrated and loyal to a cohesive group.

Individuals in countries with a high level of the index value personal freedom and status, while individuals in countries with a low level of the index value harmony and conformity.

A broad array of survey questions is used to establish cultural values in different countries. Factor analysis is used to summarise the data and construct the individualism score. The latter is the first component in a principal component analysis and loads positively on valuing individual freedom, opportunity, achievement, advancement, recognition and negatively on valuing harmony, cooperation, relations with superiors. Hofstede’s measure of individualism has been validated in a number of studies. For example, across various studies and measures of individualism the UK, the US and the Netherlands are consistently among the most individualistic countries, while Pakistan, Nigeria and Peru are among the most collectivist.

We regress the log of GDP per worker on Hosftede’s individualism score and find a strong and significant positive effect of individualism (see Figure 1). The same is true if we use as dependent variables different measures of total factor productivity or measures of innovation (see Figure 2). According to our estimates, a one standard deviation increase in individualism score (say from the score of Venezuela to Greece, or from that of Brazil to Luxemburg) leads to an increase in the level of income of between 60% and 87% – a large effect. Figures 1 and 2 illustrate these relationships.

Figure 1. Individualism vs GDP per worker



Figure 2. Individualism vs patents per million



Ruling out other causes

The strong positive correlation between individualism on one hand and measures of long-run growth and innovation on the other hand can be due to a causal effect of culture on innovation and growth. One can also argue, however, that there might be a reverse causality at work; as countries get richer, their culture becomes more individualistic. In order to rule out reverse causality, we perform instrumental variable regression of growth and innovation on culture.

The instrumental variable we use is a measure of genetic distance between countries. In particular we employ a measure of the Euclidian distance between the frequency of blood types in a given country and the frequency of blood types in the US, which is the most individualistic country in our sample. These genetic data originate from Cavalli-Sforza et al. (1994), providing measures of genetic markers for roughly 2,000 groups of population across the globe.

Why can blood distance be a good instrumental variable?

First, genetic data indirectly measure cultural transmission since parents pass on both culture and genes to their children.

Second, blood types are a neutral genetic marker not related to fitness. It would thus be hard to argue that blood types may have a direct effect on why some countries are richer than others. Furthermore, genetic variation was by and large determined thousands of years ago.

Third, our genetic distance measure correlates strongly with our individualism score and thus the instrument is powerful.

The instrumental variable estimates of culture’s effect on long-run growth indicate a strong causal effect which is similar in magnitude to the effect implied by ordinary least squares regressions. These results are very robust to using other measures of genetic distance, blood distance to other countries, and other instrumental variables such as linguistic variables (e.g. languages that prohibit pronoun drops are more individualistic, see Kashima and Kashima 1998).

If we can exclude reverse causality, it might still be the case that blood distance affects long-run growth via other channels than individualism and collectivism. We rule out colonisation effects by showing that the effect of individualism on long-run growth still works when we exclude continents as the Americas and Oceania strongly affected by settler colonisation. The effect of individualism holds at the level of individual continents and even if we look only at European or OECD countries.

Other possible channels might be institutions, human capital, other measures of culture, and geographical distance. Indeed one can argue that these variables may be correlated with our measure of genetic distance. Even when we control for all these variables, we find that culture continues to have an important effect on income per capita and innovation. Other control variables we also use are measures of ethno-linguistic fractionalisation, legal origins, geographical controls such as distance from the equator or being landlocked. We find that generalised trust, a measure used in other research on culture, has no significant effect on long-run growth. In summary, we find that none of popular alternatives can undermine the strong causal effect of culture on economic outcomes.

Confirmation from cross-cultural psychology

The final confirmation for a causal effect of individualism on long run growth comes from recent advances in cross-cultural psychology which provide some direct evidence of genes’ effects on culture. We bring in three separate research strands.

First of all, it has been found that collectivism is stronger in countries where a higher percentage of people have a short (S) allele in the polymorphism 5-HTTLPR of the serotonin transporter gene SLC6A4, putting them at greater risk for depression when exposed to life stressors.

Second, collectivism is also stronger in countries with a higher frequency of the G allele in polymorphism A118G in the mu-opoid receptor gene, leading to higher stress in case of social rejection.

Third, collectivism is also stronger in countries with a historically higher pathogen prevalence, i.e. in countries more prone to a number of important diseases.

Studies establishing these links emphasise that collectivism provides strong psychological support networks to deal with depression and stronger protection from social rejection. Similarly, more collectivist values emphasising tradition and putting stronger limits on individual behaviour, and showing less openness towards foreigners provide protection against disease spread. Using these three variables in turn as instruments, we find robust and significant effects of individualism on log output per worker with magnitudes similar to our baseline estimates.

We also find that institutions, measured by average protection against expropriation risk (the variable used in the famous work by Acemoglu et al. 2001 on the effect of institutions on long-run growth) can be explained by our individualism score but institutions also appear to affect culture. Culture and institutions, together with human capital, play a key role in explaining long-run growth.

What are the policy implications?

Understanding the effects of culture on economic development and economic performance is a fascinating task that the economics profession is only beginning to understand. Yet we advise caution when drawing policy conclusions from such analyses. Countries inherit their culture over a long historical period. It would be vain, and probably destructive, to try to impose cultural change on countries. On the contrary, countries need to embrace their cultural heritage and find institutions appropriate to this heritage. Cultural exchange is an integral part of the globalisation process and will no doubt benefit all as countries learn from the strengths and weaknesses of other countries’ culture in a spirit of tolerance, respect, and peace.

References

Acemoglu, D, S. Johnson, and J Robinson (2001), “The Colonial Origins of Comparative Development: An Empirical Investigation”, American Economic Review, 91:1369-1401.

Gorodnichenko, Y and G Roland (2010), “Culture, Institutions and the Wealth of Nations”, CEPR Discussion Paper 8013

Kashima, E and Y Kashima (1998), “Culture and language: The case of cultural dimensions and personal pronoun use”, Journal of Cross-Cultural Psychology, 29: 461-486.

Weber, Max (1905) The Protestant Ethic and the Spirit of Capitalism.