Cultural traits and its influence on economic growth

The issue of economic growth has for several decades been at the fore-front of every country’s policy agenda and has been the most talked about phenomena spanning from the industrial revolution era up to date. With most of the world economies recovering from the shock and memories of the 2008 global economic downturn, the world still remains ascetically divided between affluent and underprivileged, democratic and authoritarian, just and unjust, orderly and chaotic. These differences are so conspicuously clear to even the casual spectator that we live in highly disjunctive times. This has generated a lot of explanations pinpointing to the underlying causal factors. Geography, climate, previous historic situations such as colonization among others have been propounded in support of this huge economic divergence.

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However, cultural traits and its influence on economic growth seem to have been given less attention. The reason for this gap is easily traceable. Anything invoking cultural attributes, values and predisposition according to [1] Patterson (2006) has been pushed and sidelined within the field of social sciences and policy circles. One would therefore be wondering why such a marginalization? The obvious answer to this is simply due to the fact that culture is difficult to address on several levels. What is perceived as culture in one locality or region might not be applicable to another. This makes culture definitionally problematic. Its relativity and ambiguity affected by contextual factors is actually difficult to objectify and assess.

The focus of this thesis however, is to do an empirical study on this subject matter especially considering the fact that most research works such as Jiang Shixue (1998) and others have resorted to theoretical means of finding explanatory factors to buttress culture and its relationship to economic development. To make this paper distinctive enough, we employ a multidisciplinary approach in which a wide array of data set from 948 countries would be considered for sampling from the world value survey database from 1981 to 2009. Our tasked would be to sample out 30 countries across the six continents with their distinctive cultural values. These cultural values sampled from the selected 29 countries would be regrouped into four main indices- instrumental rationality, affectual rationality, value rationality and traditional rationality. The detail of these headings would be covered in subsequent sections. Corresponding economic variables such as real GDP per capita, human capital captured as in gross school enrollment at different levels and physical capital ( employment levels) measured by the value of gross fixed capital formation would as well be collected to match the sampled countries.

1.1.2 Motivation

Recent causal factors on economic growth have been expounded from different angles and theories. These divergent views have established a somewhat two strands or schools of thought. The first and widely known group is the neoclassical group based on Solow’s growth model which emphasizes the importance of investment. The second and most recent group- known as the theory of endogenous growth propounded by Romer and Lucas has also shed more light on the essence of human capital and innovation capacity (technology).

Besides these two economic think tanks, there have also been other contributions from Myrdal’s cumulative causation theory and another from the New Economic Geography School (NEG). Others such as Jiang Shixue (1998), Granato, Inglehart and Leblang (GIL; 1996), Papamarcos, Watson, Fukuyama (1995; 1996), Weber (1958), Jonathan (2009), Jackman and Miller (1996a), McClelland et al (1953; 1961), Landes (1998) have all highlighted on the significant role of non- economic factors play on economic growth. The emergence of this area has given rise to yet another distinction between what Petrakos et al (2007) termed as ‘proximate’ and ‘fundamental or ultimate’ sources of growth.

However, with the exception of few of these works, most publications on economic development have centered on the ‘proximate’ sources of growth. The proximate group advocate on issues such as accumulation of capital, labor and technology. On the ‘ultimate’ group, most research works (see Weber, Jiang Shixue) have been done theoretical without empirical backing. It is only in most recent times that others such as Granato et al (1996) and Jonathan Hanson (2009) correlated cultural factors to economic growth with data collected from the world values survey database. For instance, in the work of GIL (1996), that was developed based on the shortcomings of McClelland et al (1953; 1961), collected data from 25 countries from the world value survey database. They systematically tried to test the robustness of “achievement motivation” index on economic growth. As part of their findings, they concluded that there exist significant relationship between achievement motivation index and economic development. However, their work received a lot of critiques from James Miller, Jackman and most recently by Jonathan Hanson (2009). These criticisms span from the sample size to the inability of their model to predict the future except the past. Jonathan Hanson (2009) in an attempt to address and assert on GIL’s findings, has also tested the validly of earlier results and has concluded that there is no such relationship between achievement motivation and growth. He did this by increasing the sample size from 25 to 42 countries and also extended the years from 17 years to 27 years period.

From the above developments, it is evident that the ‘ultimate or fundamental’ source of growth has had limited attention and that findings on the relationship between cultural factors and economic development has not been straightforward. We are therefore left to wonder if there exist any sort of relationship between cultural factors and economic development. If yes, can it be measured and its effects compared with traditional economic factors such as savings and investment? These questions and others would constitute the basis of my research objectives. My desire to do this research work is therefore informed by the questions raised above and the huge vacuum in research publications in this area. Also, considering the fact that all the research works on this area seems to follow similar pattern, that is, they all employ the same index (achievement motivation) in their test. This paper would somehow differ by employing a different approach that would seek to go beyond this by aggregating cultural traits into four indices.

1.1.3 Aims and Objectives

The objective of this research is to answer the question posed in our motivation by identifying and investigating if there are any relationship between cultural traits and economic growth. To achieve this, our aim would be to try to assign quantities and measure these cultural traits empirically. Specifically, the research would focus on data sets from across the six continents, advanced, emerging and LDCs. We would build cultural traits indices on the basis of rationality as defined by Max Weber.

1.1.4 Hypothesis of the Study

The following null and alternative hypotheses have therefore been set and the research would seek to prove the validity of each hypothesis formulated:

H0: Culture is positively associated with economic growth with high level of IR/ VR and low levels of TNR/ANR

H1: Culture is negatively associated with economic growth with low level of IR/ VR and high levels of TNR/ANR

1.1.5 Significance of the Study

Just as we highlighted in our rationale as to the vacuum in research as far as this area is concern, it is our expectation that this work would fill the gap in research publications. Our findings as to whether cultural values have strong correlation with growth or not would also go a long way to give an empirical meaning to the numerous theoretical publications on this subject matter. Given our distinct approach coupled with the large sample size of 52 countries across the six continents and the depth in data set spanning from 1981-2009, we believe our result would hold more credibility. Our result would lay to rest the discrepancies in findings by Granato et al (1996) and Jonathan (2009) by affirming either of their results. The policy recommendations that would be outlined based on our result findings would be very useful to policy makers and the world of academia.

Limitation

We encountered a lot of shortcomings in undertaking this research work. To begin with, our chosen topic in itself poses a lot of problem as it is not straightforward to deal with. Its subjectivess was a cause to worry to us. The immaterial nature of culture traits quantitatively was also another bottleneck to us. There are no quantitative data representing cultural traits. We had to rely on world value survey and European value survey responds to represent culture traits in quantities. This approach is tedious and time consuming. Last but the least, the time allotted for students to write their thesis is not enough. We were given approximately three months to come out with this thesis report. Originally, our aim was to go beyond the sample sizes of the different literatures we have reviewed, but time did not permit us to do so. We had to settle on 30 countries.

Outline

This thesis report is divided into eight main parts. Section one gives a general overview of the intended work encompassing background, research motivation, limitations and research outline. Section two devotes attention on the various literatures in lieu to this research. Section three looks into how culture has been perceived and defined from different perspectives and dimensions. Our aim in doing this is to identify the various traits as in culture. Section four deals with the methodology and specification of the model employed. We move on to describe our data set, sources and the countries involved in section five. We move on to Section six which is the empirical aspect in which our economic and cultural variables are co-tested and interpreted. Sections seven and eight attempts summarizing the result findings and its implication and further conclude with recommendations in a respective manner.

CHAPTER TWO

REVIEW OF RELEVANT LITERATURE

2. INTRODUCTION

This part of the paper takes a critical look at some of the works already been done as far as our subject matter is concern. To do this, our quest would be to review relevant literatures and approach employed by other writers. Our target would be to consider all explanatory factors that shares relevance with economic growth as proposed.

2.1 LITERATURE REVIEW

There is more than enough literature on sources of economic growth but amongst these sources, little seems to have been done on culture, as a factor that could induce development. The reason for this negligence is easily traceable, perhaps due to the complications and ambiguities attached to this subject matter. Culture is dynamic and harbors a lot of relativities hence making it quite difficult in ascribing a definite definition.

For instance, theories such as the one developed by Solow (1956), and publications by Romer (1986), Lucas (1988), Aghion and Howith (1992), Barro (1990), Grossman and Helpman (1991) acknowledges and therefore highlighted three sources of growth: new knowledge, innovation and public infrastructure. Another batch of literature, that is not widely known in academic circles is the growth theory of cumulative causation developed by Mydal (1957) and Kaldor (1970) that argues growth emerges from centrifugal effects ( positive spillovers) that’s spreading growth from more to less advance economies. This theory implicitly shares a lot of commonalities with endogenous growth. In another view, Krugman, 1991; Fujita et al, 1999 tried using the New Economic Geography (NEG) theory to explain the possible sources of growth. They assert that economic growth tends to be an unbalance process favoring the initially advantaged economies. This theory focus on location of economic activity, agglomeration and specialization rather than growth, but indirectly, growth outcomes can be sourced from this model.

When observed in a more macro point of view, other theoretical approached have emphasized the significant role non-economic factors play on economic performance. In other words, institutional economics have embraced the emerging roles of institutions [2] , economic sociology stressed out the importance of socio-cultural factors [3] , political science placed its clarification on this emerging subject on political determinants [4] and others have shed light on the role played by geography [5] and demography (Brander and Dowrick, 1994; Kalemli-Ozcan, 2002).

Granato et al (1996), Huntington (1996); Temple and Johnson (1998); Landes (2000); Inglehart and Baker (2000); Zak and Knack (2001); Barro and McCleary (2003); in recent years have done some research on how socio-cultural factors may affect growth. Most of them used different approaches and data sources to buttress their points. As part of some of their findings, it was concluded that there is a significant relationship between cultural factors and growth. However, Authors like Granato, Inglehart and Leblang (GIL 1996) have come under serious criticism. For instance Jackman and Miller claim that it is impossible to measure the stability of democracy as purported to have been measured in GIL’s work. Jackman and Miller cited the reason that levels of democracy have changed greatly over the last two centuries.

Jiang Shixue (1998) carried out a theoretical study on cultural factors and its role in changing the economic positions of most East Asia and Latin American economies. His aim was to compare how economic growths in these two regions have been shaped by cultural factors or values. In his findings, he was of the view that Confucianism as a cultural value has contributed immensely to East Asian Development as compared to its Ibero-Catholic or Hispanic counterpart in Latin America. He argued that Confucianism encourages thrift, savings (which is core to investment) and education. We are made to understand that, in the mid 1960s, the savings rate in most East Asian countries was 35 percent. However, this was not the case for most Latin America economies that were by then struggling to overcome high inflation rate, which kept interest rate negative. Their saving rate was therefore 16 percent, one half of their Asian counterparts.

Jonathan (2009) used similar approach by Granato et al (1996) to test how correlated achievement index is to economic growth. As opposed to the findings of GIL, Jonathan extended the data sample years from 1991-2008. An empirical test was thus carried out with the same data from world value survey. Jonathan concluded that there is no such relationship between achievement motivation index and growth as may have been reported by GIL.

Muhammed et al (2010) have recently done an empirical research on cultural values and economic growth in Asia. They used the traditional growth model as built by Solow and Lucas to test cultural values collected from world value survey database (1995-2007). Presence in their model was factors such as investment in human capital and per capita income since it is an established fact these factors have had positive correlation with economic growth. They augmented these economic variables with cultural variables such as trust, respect, self-determination and obedience. Their findings were quite similar to Granato et al (1996). They saw that obedience as a cultural value bears a negative correlation to economic growth. However, the other two traits indicated a positive correlation to economic growth. They summed these up to conclude that there is a strong and robustly positive impact of cultural traits on growth.

In addition, the effect of economic growth are thought to be related to the elements of culture that affect production and investment decisions, efficient allocation of resources, technological innovation and openness to trade. Altman (2001) models the impact of culture on economic growth by arguing that work effort is maximized when the cultural environment stimulates cooperative work, which is positively correlated to labor productivity. In the same direction, Faria and Leon-Ledesma (2004) also argue that cultural values that emphasis hard work affects labor supply. In their views, work is like a habit forming. They indicated that in the case of habit forming, the labor supply is higher than neoclassical case and can further lead to higher level of consumption, capital stock and output.

Cozzi (1998) also asserts that culture affects technological innovations. He however points out that culture in itself bears no utility and that its survival is linked to its positive effects on productivity. Cozzi generated technological innovations as an externality in his model by the aggregate investment in bubble culture. In a similar study, Johnson and Lenartowicz (1998) investigated the relationship between cultural factors and economic growth. They concentrated on values like uncertainty avoidance, conservatism and hierarchy (economic freedom and economic growth). They found a strong and robust relationship between economic freedom and economic growth and weak uncertainty avoidance and high level of individual autonomy.

Yuriy and Roland (2010) in their preliminary research publication investigated the relationship between cultural variables and growth by constructing an endogenous growth model. They used individualism-collectivism as the main cultural traits and sought to predict how this trait has a bearing on growth. Their work was an improvement of Hofsede (2001) who used surveys among IBM workers in 30 countries. Yuriy and Roland expanded this number to 80 countries. Their results were quite similar to Hofsede’s work. They found a strong and robust relationship of culture traits on long-run economic growth. They conclude that individualism should lead more to innovation due to the social rewards and that this cultural effect may offset negatives of bad institutions on growth.

From the vast array of literatures, it is quite evident that our approach is different from the others. Our decision to aggregate the various cultural traits on the basis of reason affirms this notion. Our collection of more traits to form distinctive indices transcends what others have done.

CHAPTER THREE

DEFINITION AND AGREGATION OF CULTURAL TRAITS

3.0 INTRODUCTION

In this section, we seek to give a general picture as in the definition of culture as understood by several authors. We would move a step further by proposing and outlining our working definition by our own understanding of what culture is. On the basis of our definition, we then group the various cultural traits under the various level of rationality as mentioned in our introductory part.

3.1 DEFINITION OF CULTURE

To understand how culture can affect economic growth, we would attempt to define it in several ways in order to capture some of the traits as used. However, [6] culture just as we pointed out in our introduction is difficult to define. Its subjectiveness makes it a bit difficult to objectify. Nevertheless, in the light of these difficulties, certain writers have been able to define it to suit their various works or purposes. [7] This has brought some sort of enmity between historical economists and these scholars (culture writers) who are fans of culture.

These subjectiveness in culture definition prompted people like A.L. Kroeber and Clyde Kluchohn to list about 160 definitions in their work between 1871- 1951. Ian Jamieson surveyed 160 definitions of culture that were in use by anthropologists, sociologists, psychologists and others.

Earlier usage of the word “culture” has always been designated the cultivation or tending of something like “agri-culture”. It was during and after the 16th century that there were some modifications. There has since been an extension to include the cultivation of prestigious human qualities like mind, manners, spirit, sensibility and taste. The 18th century elite Europeans used the term culture to distinguish between the highly refined civil cultivation achieved by privileged western Europeans and what was generally perceived as the relatively primitive development of such human qualities both in non-Europeans and the poor. The term however received its first usage to signify a noun when it was used by a German Historian Herder implying that all peoples “had” a culture.

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The term has since then seen changes from time to time. For instance, Tylor defined culture in the classical book primitive culture (1871) as ” that complex whole which includes knowledge, beliefs, art, morals, law, customs and any other capabilities and habits acquired by man as a member of society”. Others such as [8] A.L Kroeber (1948) have described culture as consisting speech, knowledge, beliefs, customs, art and technologies, ideals and rules; what is learned from other man, from elders and what is added to it. In 1952, Kroeber and Clyde Kluchohn added new dimension to the notion of culture. They stated that culture consists of patterns both explicit and implicit, of and for behavior acquired and transmitted by symbols, constituting the distinctive achievements of human groups including their embodiment in artifacts. They argued that the essence of culture lies in tradition- historically derived and selected, ideas and their attached values; a cultural system may on the other hand be considered as a product of action and on the other hand as a conditioning element of further action. Succinctly, culture is the total social heritage acquired by man as a member of the society. This definition argues that culture is shared and has distinctive forms or patterns that it shapes human behavior and its essence is the values embodied in the beliefs of the people.

Lawrence Harrison (1997) also tried to define culture in a simple manner. He stated that culture is a set of values and attitudes that guide the actions of individuals and the interaction of people within society. He defines ‘values’ as ideals or norms of behavior to which a society attaches importance, and “attitude” as ways in which people learn to respond to facts, circumstances and issues.

Others like Nobel laureate and economic historian Douglass North views and defines culture in the realm of institutions and institutional change. He views culture as “the transmission from one generation to the next, via teaching and imitation, knowledge, values and other factors that influence behavior”. Douglas continues to say that culture provides a language-based conceptual framework for encoding and interpreting the information that the senses are presenting to the brain.

Fukuyama (1995) defines culture as “inherited ethical habit”. He was of the opinion that this definition which draws on both culture and social structure comes closer to understanding the word. Huntington (1993) also defined culture on the basis of civilization. He argues that civilization is a cultural entity. Civilization according to him is the highest cultural grouping of people and the broadest level of cultural identity people have short of that which distinguishes humans from other species. He identifies language, history, religion, customs, institutions and the subjective self-identification of people as the major elements of culture.

We can infer from the above definitions and descriptions that culture as a subject matter is not that straightforward to tackle. However, it is also evident that there are a lot of commonalities in the definitions and opinions as shared by some of these writers. The sort of core elements some of them mentioned was quite similar and kept appearing in each other’s work. In this research work, we define culture simply as the implicit force that prompt individuals to behave in a certain rational manner (action). These implicit forces are the set of values imbued in the individual by learning. Defined this way, we can appreciate that culture does not only affect social norm but also economic activities like the propensity to consume and save, fertility choices, investment in education among other economic variables. These implicit force(s) are open to changes from time to time. We view this definition to be synonymous to the ones given by Max Weber, A.L Kroeber and Clyde Kluchohn and Lawrence Harrison.

Invariably, the complex and vast nature of culture as a concept involves a lot of elements which makes it too general to be captured by a single traits, idea or object. Thus when one intends to examine the role of culture on economic growth, one has to look for a proxy for culture. Previous studies to infer economic growth from culture have relied on [9] historical evidence without any quantitative backing. The end results of these studies have been criticized on the basis of its subjectiveness. We seek to use a cultural proxy that can be tested and validated to give a particular outcome.

3.2 AGGREGATION OF CULTURAL TRAITS

In aggregating the various cultural traits to form an index as described and defined by the various writers above, we sought to rely on the definition by [10] Max Weber (1978). Weber defined culture on the basis of rationality or action. Weber defines “action” as behavior invested with an individual’s subjective meaning and culture is “a segment on which human beings confer meaning and significance”-we can conclude that culture, in its very nature, is reflected in people’s action. All individual action may be oriented in four ways: instrumentally rational, value-rational, affective (especially emotional) and traditional rationality. [11] Our task hereafter is to identify the various traits as it’s related to the level of action or rationality mentioned.

3.2.1 Traditional Rationality

Traditional rationality or behavior is determined by long standing habits. They are actions which are carried out due to tradition, because they are always carried out in such a situation. An example would be putting on clothes or relaxing on Sundays. Some traditional actions can become cultural artifacts. It is expressed in terms of social rules, with violations interpretable as cheating – as defections from cooperative norms. If you want me to accept a belief from you, you are obligated to provide me with a certain amount of evidence. Traditional Rationality is phrased similarly to the customs that govern human societies, which makes it easy to pass on by word of mouth. Humans detect social cheating with much greater reliability than isomorphic violations of abstract logical rules. But viewing rationality as a social obligation gives rise to some strange ideas.

Here, we try to identify in our responses traits that fall under [12] TR. Possibly, as inferred from its definition above, our focus would be on democracy, belief, religion, obedience, respect, trust, faithfulness, thrift, hard work and leisure. Collecting a set of these traits would help us to come out with TR index.

3.2.2 Affective Rationality

Affective Rationality is strongly associated with strong feelings (emotional) for something. Emotions are an integral part of being human; we all express them and they shape the character and contents of our lived experiences. Emotion is functionally integrated alongside cognition in how we reason. Specific traits that relates to [13] AR include care, tactfulness, love, patriotism, religion, peace, revenge, loyalty, and confidence. Those actions are taken due to one’s emotions, to express personal feelings. For example, cheering after a victory, crying at a funeral would be emotional actions.

3.2.3 Value-Rationality

Value rationality is determined by a conscious belief in the intrinsic value of acting in a certain way. Value-rational action, wert rational is a social action which is taken because it leads to a valued goal, but with no thought of its consequences and often without consideration of the appropriateness of the means chosen to achieve it (‘the end sanctifies the means’). Specific traits that relates to [14] VR include hard work, confidence, frugality, generosity, grandeur and determination.

3.2.4 Instrumental Rationality

Instrumental rationality is determined by a consciously calculating attempt to achieve desired ends with appropriate means. This is direct opposite to VR. It is pursued after evaluating its consequences and consideration of the various means to achieve it. They are usually planned and taken after considering costs and consequences. Specific traits that fall under [15] IR are hard work, tactfulness, confidence, speech, thrift, discipline, commitment, worldly achievement.

CHAPTER FOUR

METHODOLOGY, MODEL SPECIFICATION AND DATA DESCRIPTION

4. INTRODUCTION

Chapter four introduces us to the methodology and model we employed. This section also exposes us to the fundament Cobb Douglas function and the extension of this function by Mankiw, Romer and Weil. The 29 countries involved in the research work are also introduced in this chapter. We also explain how we derived our cultural traits from the data collected. The build-up of all this brings us to our own model, the Solow augmented exogenous growth model.

4.1 METHODOLOGY AND MODEL SPECIFICATION

To account for the contribution of factor accumulation and measure the impact of the different factors in the economic growth, this paper employs the input-output data model. Capital from other forms of physical capital and human capital inputs and some cultural traits that produce output in the form of real GDP.

For this purpose, the model taken is the original Robert Solow (1956) model of exogenous growth with technological progress. The centerpiece of the standard neoclassical growth model developed by Solow is an aggregate production function of the form: