Wednesday, September 22, 2010

Does culture affect long-run growth?

by Yuriy Gorodnichenko and Gérard Roland

September 21, 2010

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.


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