Institutions and culture co-evolve: Why the quest for the origin of prosperity is so elusive

Alberto Bisin, Thierry Verdier 04 July 2017

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The distribution of income across countries in the world is very unequal. According to World Bank (2015) data, US GDP per capita in international dollars is about 71 times that of the Democratic Republic of Congo, 58 times that of Niger, 9 times that of India, and 3 times that of Brazil, for instance. But what accounts for economic growth and prosperity? What stands at its origin? What drives under-development traps and failed states? Which, if any, policy interventions can avoid them?

In the current economic literature, the question of the origin of prosperity is typically translated into one of causation in the language of statistics and econometrics. As opposed to proximate factors such as savings rates, investment and innovation, a great deal of attention in the last decades has been devoted to the role of deep factors, such as institutions and culture, as the drivers of development across societies.1

Identifying a single main cause of economic growth and prosperity, even in specific contexts, might however be an overly ambitious and perhaps even a misplaced task. Take, for instance, the case of institutions. The methodology used by economic scholars to identify a causal relationship between institutions and growth and prosperity typically requires the examination of historical natural experiments where institutions vary across geographical units with common geographical, cultural, and other possible socioeconomic determinants of future prosperity.2 But the assumption that distinct institutions originated in the natural experiment in otherwise common cultural and geographical environments is often disputable.3 Furthermore, the identification arising from a historical natural experiment of institutional change is often debatable, as institutions generally also reflect cultural attitudes of the institution builders. Studying institutional formation during the early immigration waves in North America, Fischer (1989) shows how the cultural origins of the different groups of migrants (Puritans, Cavaliers, Quakers, and Scots-Irish) determined the institutions they set in place. Naturally, similar issues arise when identifying culture as the cause of prosperity by isolating cultural variation in historical environments with a common institutional setup.

Most importantly, even when not problematic, causal analyses often disregard the interactions between various determinants of economic growth. For instance, the same institutional change may have differential effects in different cultural environments. The work of Robert Putnam on social capital and the differential effects of the institutional decentralisation in the 1960s and 1970s in the North and in the South of Italy is a vivid example of such a situation (Putnam 1992).4

This reading of the literature suggests redirecting the focus of the analysis from the identification of a single causal origin of growth and prosperity to the study of the interaction between distinct possible factors. A schematic representation of such interactions between institutions and culture and their links to output is represented in Figure 1.

Figure 1 The cultural multiplier

Notes: The black arrows indicate the channels of influence of one deep factor (institutions) on output when the other deep factor (culture) is fixed. The red arrows indicate the induced channels of influence when the two factors (institutions and culture) co-evolve.

Indeed, historical contexts in which institutions and cultural traits have jointly contributed to the development or disruption of economic activity are common. This is the case, for instance, of Italian independent city states during the Renaissance (Guiso et al. 2008, 2016), industrialisation and social capital in Indonesia (Miguel et al. 2006), the technology of the plough, patriarchal institutions and gender attitudes (Alesina et al. 2013), or the authoritarian culture of the sugar plantation regions of Cuba operated with slave labour as opposed to the liberal culture of the tobacco farms (Ortiz 1963).

On the joint evolution of culture and institutions: A conceptual framework

Moving the focus from the direct causal effects of culture and/or institutions on socioeconomic outcomes to the process by which culture and institutions co-evolve and affect these outcomes is bound to require, however, a well-specified theoretical framework to guide the empirical analysis. Indeed, the interaction between culture and institutions gives rise, potentially, to complex (but interesting) socioeconomic patterns, such as the dependence of the dynamics of aggregate outcomes on initial conditions, irreversibility and thresholds effects, non-monotonic transition paths, and cycles. In a new paper, we develop one such framework (Bisin and Verdier 2017).

Specifically, we construct an abstract model to study a policy game between society at large and a centralised authority (a state). Institutions are conceptualised as the political mechanisms through which social choices are delineated and implemented, while culture is defined as preference traits, norms and attitudes which affect individual incentives and policy outcomes. Institutions evolve over time in order to imperfectly and indirectly internalise any lack of commitment and/or externalities which arise in the policy game. The dynamics of the distribution of cultural traits in the population instead reflect various inter-generational socialisation and identity formation practices. The joint evolution of culture and institutions in turn ultimately determines the dynamics of the relevant socioeconomic aggregate outcomes.

The cultural multiplier

Our approach allows a simple description of the joint interaction between culture and institutions. In particular, it provides conditions under which cultural and institutional dynamics tend to strengthen each other in a complementary way, or on the contrary, tend to mitigate each other as substitutes in terms of their effects on aggregate socioeconomic outcomes.

The fundamental notion in this analysis is the cultural multiplier, the ratio of the total effect of institutional change, represented by all arrows in Figure 1, and its direct effect (that is, the counterfactual effect which would have occurred had the distribution of cultural traits in the population remained constant after the institutional change – the black arrows in Figure 1).5 Depending on whether culture and institutions are complements or substitutes, the cultural multiplier is greater or smaller than one. Exogenous historical accidents propagating the joint dynamics induced by institutions and culture may have magnified or mitigated the effects on long-run socioeconomic outcomes. The magnitude of these effects is represented by the value of the cultural multiplier, a fundamental statistical measure of any empirical analysis of the effects of institutional change on growth and prosperity (or on any other aggregate socioeconomic outcome of interest).

An example: Civic capital

Our analysis can then be usefully applied to specific examples capturing salient situations commonly discussed in the political economy literature on development: the persistence (or not) of extractive institutions, the formation of civic capital, and the emergence of property rights protection.

Consider a society where the provision of the public good creates opportunities for corruption that benefit exclusively the elite, for example, a caste of bureaucrats. A fraction of the workers possesses a civic culture, preferences motivating them to exert a participation effort, complementary to the provision of the public good, as well as a monitoring effort to fight corruption, which is costly to the elite. Civic participation involves, for instance, contributing privately to public goods, creating social associations, and volunteering in social activities. By monitoring the government in its public good provision process, civic control creates transparency.

In this society, therefore, public good provision is associated with different externalities. On the one hand, it stimulates the civic participation of a fraction of the workers. On the other hand, it induces corruption and the reaction of a fraction of workers against it. Institutions lack commitment – that is, fiscal authorities choose lump-sum taxes to finance public good provision without internalising the effects of civic culture in society. Public good provision can be larger or smaller in equilibrium than is efficient, depending on whether the positive or the negative externalities of civic culture dominate. In this society, the institutional dynamics lead to a stationary balanced allocation of power between workers and the elite. Most interestingly, in this society, culture, and institutions may act as substitutes and the cultural multiplier might be smaller than one. An exogenous institutional change which endows citizens with more political power could have its effects on growth mitigated by the induced cultural dynamics associated with the accumulation of civic capital, that is, the spread of civic culture in the population.

Conclusion

From a historical point of view, the complex dynamics induced by the interaction between culture and institutions appear consistent with the great diversity of development experiences encountered across the world. This suggests the need for structural analyses of the data in empirical studies of the determinants of growth and prosperity.

References

Acemoglu, D, S Johnson and J A Robinson (2001), “The colonial origins of comparative development: An empirical investigation”, American Economic Review 91: 1369-1401.

Acemoglu, D and J A Robinson (2006), Economic origins of dictatorship and democracy, Cambridge: Cambridge University Press.

Acemoglu, D and J A Robinson (2010), Why nations fail, New York: Crown Publishers.

Alesina, A and P Giuliano (2015), “Culture and Institutions”, Journal of Economic Literature 53(4): 898-944.

Alesina, A, P Giuliano and N Nunn, (2013), “On the origins of gender roles: Women and the plough”, Quarterly Journal of Economics 128(2): 469-530.

Alsan, M (2015), “The effect of the TseTse fly on African Development”, American Economic Review 105(1): 382-410.

Besley, T, and T Persson (2010), “State capacity, conflict and development”, Econometrica 78(1): 1-34.

Bisin, A and T Verdier (2001), “The economics of cultural transmission and the dynamics of preferences”, Journal of Economic Theory 97: 298-319.

Bisin, A and T Verdier (2010), “The economics of cultural transmission”, in Benhabib, J, A Bisin and M Jackson (eds.), Handbook of social economics, Amsterdam: Elsevier.

Bisin, A and T Verdier (2017), “On the joint evolution of culture and institutions”, CEPR working paper 12000.

Dell, M (2010), “The persistent effects of Peru's mining mita”, Econometrica 78(6): 1863-1903.

Diamond, J (2005), Collapse: How societies choose to fail or succeed, New York: Penguin Books.

Durante, R, G Labartino and R Perotti (2011), “Academic dynasties: Decentralization and familism in the Italian academia”, NBER working paper 17572.

Fischer, D H (1989), Albion's seed: Four British folkways in America, Oxford: Oxford University Press.

Grosjean, P (2014), “A history of violence: The culture of honor and homicide in the US South”, Journal of the European Economic Association 12(5): 1285-1316.

Guiso, L, P Sapienza, and L Zingales (2008), “Social capital and good culture”, Marshall Lecture, Journal of the European Economic Association 6(2-3): 295-320.

Guiso, L, P Sapienza, and L Zingales (2016), “Long-Term Persistence”, Journal of the European Economic Association 14(6): 1401-1436.

Mauro, L and F Pigliaru (2012), “How binding is low social capital for economic growth? Further lessons from the Italian regional divide”, mimeo, Universita' di Trieste.

Miguel, E A, P Gertler and D I Levine (2006), “Does industrialization build or destroy social networks?”, Economic Development and Cultural Change 54(2): 287-317.

Minasyan, A (2014), “Encountering donor-recipient cultural differences in the effectiveness of aid”, mimeo, University of Goettingen

Nannicini, T, A Stella, G Tabellini and U Troiano (2010), “Social capital and political accountability”, mimeo, Universita' Bocconi.

Ortiz, F (1963), Contrapunteo cubano del tabaco y el azucar, Barcelona: Editorial Ariel.

Putnam, R (1992), Making democracy work: Civic traditions in modern Italy, Princeton: Princeton University Press.

Endnotes

[1] See Alesina and Giuliano (2015) for a recent survey.

[2] Studies of causal relationships between institutions, and growth and prosperity, include Acemoglu, Johnson and Robinson (2001) on the institutional design of colonial empires, Dell (2010) on the Spanish colonial policy regarding the forced mining labour system in Peru, Acemoglu and Robinson (2010) on the the city of Nogales separated by the US-Mexico border and Diamond (2005) on the island of Hispaniola separated by a border into two distinct political and institutional systems, Haiti and the Dominican Republic.

[3] For instance, the celebrated study by Acemoglu, Johnson and Robinson (2001) links weak present economic conditions to extractive institutions and these in turn to higher settler mortality rates. But this link relies on the postulation that settler mortality rates were uncorrelated with natives’ characteristics (and hence with pre-colonial development), which is disputed by evidence on the habitat for the Tse-Tse fly in Africa (see Alsan 2015).

[4] More recently, related examples are documented by Durante, Labartino, and Perotti (2011) on university reform in Italy, by Nannicini, Stella, Tabellini, and Troiano 2010 on voting reform again in Italy, by Mauro and Pigliaru (2012) on how culture has different effects when political institutions are centralised or decentralised, by Grosjean (2014) on the traditional (Scottish-Irish) pastoral society honour code in the US and by Minasyan (2014) on the effects of development aid institutions depending on donor-recipient cultural differences.

[5] Obviously an institutional multiplier can be similarly defined as the total effect of cultural change divided by its direct effect (that is, the counterfactual effect which would have occurred had institutions remained constant after the cultural change).

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Professor, Dept. of Economics, New York University

Professor of Economics at PSE and Paris-Tech Ecole des Ponts; CEPR Programme Director

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