Teaching Notes · Economic Development and Growth

Culture, Institutions, and the Long Run Roots of Development

Why are some countries rich and others poor, not just today but across centuries? Growth models built around capital, labor, and technology, covered elsewhere in this series, can explain a great deal about how an economy expands once it is already on a reasonable footing, but they say comparatively little about why some societies ended up on a stronger footing than others in the first place. Two related ideas, culture and institutions, have become central to that longer run question.

What economists mean by institutions

In the sense development economists use the term, institutions are the rules of the game of economic life: property rights, contract enforcement, and the broader legal and political arrangements that structure how people and firms interact. Good institutions do several things at once. They improve coordination, restrict coercive, fraudulent, and anti competitive behavior, give a broad population genuine access to economic opportunity rather than reserving it for a narrow elite, constrain the power of that elite and help manage conflict, and provide a baseline of social insurance. Weak or extractive institutions do the opposite: they let a small group capture the gains from growth while leaving the wider population with few genuine opportunities or protections.

The economists Daron Acemoglu, Simon Johnson, and James Robinson built an influential research program around this idea, centered on what they call a reversal of fortune. Looking at regions colonized by European powers, they found that places which were relatively prosperous and densely populated before colonization often ended up poorer in the long run than places that were sparsely populated and comparatively poor at the time of colonization. Their explanation is institutional rather than geographic or cultural: in already prosperous, densely populated regions, colonizers tended to set up extractive institutions designed to pull resources out as efficiently as possible, while in sparsely populated regions with fewer people to extract resources from, colonizers were more likely to settle permanently and build inclusive institutions, protecting property rights and enabling broad participation in economic life, that persisted and kept paying dividends long after colonial rule ended. On this account, a great deal of today's global income gap traces back to institutional choices made centuries ago, which is one reason comparative development research increasingly treats institutional quality, alongside geography and colonial legacy, as a fundamental long run determinant of where a country ends up.

What culture is, and what it is not

Culture is a notoriously difficult concept to pin down. One widely cited definition, from the anthropologists Alfred Kroeber and Clyde Kluckhohn, describes culture as the patterns of behavior, and the values historically attached to them, that a human group transmits and embodies in its artifacts, functioning both as a product of past action and a conditioning influence on future action. Other researchers have offered their own shorthand: culture as the collective programming of the mind, in Geert Hofstede's phrase, or as simply the human made part of a society's environment. Whatever the precise definition, a few things about culture are generally agreed. It is shared rather than individual, it is learned rather than genetic, and it is, in an important sense, value free: a description of how a society actually organizes meaning and behavior, not a judgment about whether that organization is good or bad.

Culture is usually described as having layers that differ in how visible, and how easy to change, they are. Artifacts, language, dress, food, and other directly observable expressions of a culture sit at the most visible and most changeable layer. Values, the characteristics and goals a society considers important, sit beneath that, and are harder to shift. Assumptions and beliefs, propositions about how the world works that are simply taken for granted, sit at the deepest and least visible layer, and change the most slowly of all. Cultural values matter for development not only through individual behavior but through how social institutions themselves operate: a society that places a high value on justice and equality, for instance, tends to produce welfare policy that reflects that value, with political leaders explaining and justifying their decisions in exactly those terms.

Measuring cultural difference: Hofstede's dimensions

The most influential attempt to measure cultural difference systematically comes from Geert Hofstede, an industrial psychologist who, working at IBM in the late 1960s and early 1970s, had access to survey data on work attitudes from well over one hundred thousand employees across dozens of countries. Statistical analysis of that data identified several recurring dimensions along which national cultures differ, eventually organized into six: power distance, the extent to which a society accepts unequal distribution of power and hierarchical relationships; uncertainty avoidance, how comfortable a society's members are with ambiguity and unpredictability; individualism versus collectivism, the degree to which people act as individuals rather than as members of a group, with collectivist cultures drawing a sharper line between in groups and out groups than individualist ones; masculinity versus femininity, the relative emphasis on competitive achievement against cooperative, quality of life oriented values; long term versus short term orientation, whether a society favors pragmatic, long horizon planning or values rooted in the present and the past; and indulgence versus restraint, the degree to which a society permits free gratification of everyday desires as opposed to regulating them through social norms.

Subsequent research linked these dimensions to economic outcomes in some surprising ways. One study found that countries scoring lower on power distance and higher on individualism tend to be more inventive, while a separate comparison of entrepreneurs across eight countries found that entrepreneurs, relative to non entrepreneurs, tend to score higher on power distance, individualism, and masculinity, and lower on uncertainty avoidance. Other researchers have organized countries into broader clusters, Anglo, Nordic, Arab, Latin American, Far Eastern, and so on, based on similarity in work values, language, religion, and geography, a classification that correlates loosely with income, since countries ranking higher on GNP per capita tend to sit closer to the center of their respective cluster.

A separate line of research, associated with Ronald Inglehart and Christian Welzel, maps cultures along two different axes: traditional versus secular rational values, where traditional values emphasize religion, deference to authority, and family ties, and secular rational values reflect the opposite; and survival versus self expression values, where survival values prioritize economic and physical security, and self expression values prioritize individual autonomy and quality of life. These value orientations tend to shift generationally and are associated, in the cross country evidence, with differences in attitudes toward work, trust, and civic engagement, variables that connect fairly directly back to economic outcomes such as investment rates and firm level value creation.

Social capital: the economic value of trust

A related concept, social capital, has become one of the more empirically grounded bridges between culture and economic outcomes. Social capital refers to the networks, norms, and especially the trust that allow people to cooperate for mutual benefit, built through formal and informal relationships, in Elinor Wallis's phrasing, or through the features of social organization that facilitate collective action, in Robert Putnam's widely cited definition. Researchers distinguish three forms it can take: bonding social capital, links based on a shared identity such as family or close friends; bridging social capital, links that extend beyond that shared identity to more distant friends and colleagues; and linking social capital, connections to people or institutions positioned higher or lower on the social ladder.

The empirical literature associates higher social capital with a strikingly wide range of favorable outcomes: higher economic growth, better public health, stronger innovative performance, higher value creation by firms, higher educational attainment, deeper financial market development, and lower rates of both homicide and suicide. The mechanism in each case is broadly the same: trust lowers the cost of cooperation, whether between business partners negotiating a contract, neighbors organizing a local public good, or citizens and their government, which is precisely the kind of cost that weak or extractive institutions tend to raise.

Sources: Notes on culture, norms, and institutions, and Chapter 2, “Comparative Economic Development,” following M. P. Todaro and S. C. Smith, Economic Development (Pearson); D. Acemoglu, S. Johnson, and J. A. Robinson, “Reversal of Fortune,” Quarterly Journal of Economics (2002); A. L. Kroeber and C. Kluckhohn, Culture: A Critical Review of Concepts and Definitions (1952); G. Hofstede, Culture's Consequences (1980, 2001); R. Inglehart and C. Welzel on the World Values Survey cultural map; R. Putnam, Making Democracy Work (1993); and S. Knack and P. Keefer on social capital and economic growth.