Mitt Romney and those responding to him have stirred up a controversy over the role of culture in economic growth. But they seem not to realize that, at least in academic studies of culture and the economy, the data have settled the matter. Culture does not determine or constrain economic growth; rather, it is institutions – how political and economic power are organized and deployed – that is the key factor. Romney and his followers seem to have confused culture and institutions, a common mistake.
“Culture” consists of long-established, ingrained values and practices that distinguish a society’s social relationships, status rules, and conduct. Culture is stubborn and hard to change. Attitudes and practices toward women – must they be hidden or veiled, do they have rights, can they work and gain advancement – are an example of cultural practices. “Institutions” consist of deliberately established organizations, such as governments, schools, banking systems, legal and criminal justice systems, and so on. Institutions create powerful incentives and penalties for behavior. Where institutions interfere with markets, concentrate wealth and power, sustain corruption and lawlessness, and deny a quality education to the bulk of the population, you can expect poor economic performance. Conversely, where institutions provide open and competitive markets, disperse power and ensure widespread access to capital, protect private property and reward creativity for all citizens not just a favored few, and provide quality education to all, you can expect rapid economic growth to follow.
The data are clear and eloquent on this. In the 1970s, scholars looked at Japan’s rapid economic growth and China’s and India’s continued poverty and pronounced that the difference must be “culture.” Japan, it was said, had a samurai culture of sacrifice and honor that paralleled the “Protestant ethic” of rich western societies. China and India by contrast, it was said, were saddled with authoritarian and passivity-inducing Confucian and Hindu cultures that doomed them to pitiful economic performance.
Then the data changed – from 1980 on China suddenly zoomed to double-digit growth, and in the 1990s India doubled and nearly tripled its former growth rate. Meanwhile, Japan’s economy stalled. Looking at the last thirty years, did Japan’s culture suddenly became fatal to growth, while China’s and India’s cultures suddenly were transformed? No – it was institutions that changed. Japan’s institutions – close relationships between the state and banks and firms – reacted to the collapse of its property bubble by warping markets to preserve its banks, large firms and local family businesses at the expense of innovation and greater efficiency. China and India dismantled the central economic controls that had throttled their economies and began spreading access to education, capital, and markets more widely across their vast populations. The result was a sudden leap of growth where institutions were changed to provide the right incentives and opportunities to fuel growth.
The clearest natural experiments in institutions come from Germany and Korea. After World War II and the Korean War, two nations that had long been united societies with a single culture were split: Germany into east and west, Korea into north and south. In East Germany and North Korea, the traditional culture was overlaid with new communist institutions that centralized political and economic power in the hands of Party officials and ended markets; in West Germany and South Korea, the traditional culture was overlaid with new free-market institutions and democratic government (immediately in west Germany, after a couple of decades in South Korea) that empowered entrepreneurs. The results were diametrically opposite outcomes in regard to economic growth in societies that started with identical cultures in both halves.
The difference between Israel and Palestinian economic performance is simply attributable to the difference between open, democratic, and market-friendly institutions in Israel and a centrally controlled and corrupt authoritarian regime in Palestine for most of the last sixty years. Broader differences in ‘culture’ are not the issue – indeed when Palestinians move to societies with more opportunities, they flourish economically, just as Indian and Chinese emigrants have flourished economically when they moved to the U.S.
“Culture” has long been called upon as an apparent explanation for political and economic differences. I recall when South Korea, at the end of the Korean War, was written off as likely to be a permanent basket case due to its lack of any natural resources and its anti-economic “Confucian” culture. Today Korea is on track to surpass Japan in income per capita in a few years. I recall when the lack of democracy in Latin America was attributed to its “Catholic, hierarchical” culture. Today, every country in the region is a democracy. Until last year, many observers argued that the lack of democracy in the Middle East was due to those societies having an “anti-democratic Islamic culture,” not simply to the combination of oil wealth and US support for authoritarian regimes deemed to be allies in the war on terror. Today, many of the world’s countries with the largest Muslim populations – Indonesia, Nigeria, Bangladesh, Pakistan – have democratically elected governments, and populations throughout the Middle East and North Africa from Morocco to Oman have challenged their governments, overturned corrupt dictatorships, and are demanding accountable regimes. They realize that their institutions have held back their societies. At the same time that they are embracing their Islamic culture, they are demanding institutions more like those that have led to economic success in the West – open access to markets, equal protection of property for all, quality education, and fair legal and justice systems.
If ‘culture’ were the key factor determining economic success, Brazil and Mexico, India and China, Mongolia and South Korea, would not all be economic successes today. Culture remains a powerful force in society; it influences the condition of women, attitudes toward family, beliefs about morality and virtue, and views of strangers and other societies. Without a strong culture, societies cannot cohere and function. But to believe that some cultures are superior in economic performance or potential to others is simply wrong. It is time to take account of the plentiful data that clearly shows that any society that embraces the right institutions can enjoy respectable economic growth.