Culture and Development

I got in a debate the other day with a friend about whether culture is a reason for low (economic) development, generally and in sub-Saharan Africa in particular.  I tend to suspect that arguments about this consist largely of posturing, that any intelligent person who has seriously thought about it knows, really, that culture is a major factor in keeping some countries poor, but since this insight is politically incorrect, some people think it's necessary to mask it.  Thus Jeff Sachs blames poverty on geography, and Dani Rodrik blames it on "institutions."

No doubt there are some on the left who have the opposite impression.  It's clear that all cultures are equal, or if anything the cultures of poorer countries are better, and the gap between rich and poor is a result of "exploitation," and people like me who think that culture has something to do with it are just making excuses for the rich and blaming the victim.  They would, I suppose, have the same sense of bad faith listening to me as I have listening to serious development scholars who dodge the issue of culture.  And it's partly because those serious development scholars know how vulnerable they are to attacks if they sound like they're blaming the victim for poverty, that they've learned to steer clear of cultural explanations of poverty.

However, there's a more legitimate objection that is offered.  If it's culture that makes countries poor, how is it that the "Confucian" countries of East Asia, once regarded as benighted, are now surging from strength to strength?  Did their Confucian culture hold them back before, and now it's powering them forward?  What is culture, anyway?  Can we measure it, empirically?  Can we model it?  Economists ordinarily regard culture as something outside their sphere.  One of my economics professors said that for him to say culture is the explanation for development is simply to give up, to say that his tools don't work.  If there's no way for economists to model culture, then they, at least-- and they are the most prominent of those who try to understand the reasons for economic development-- have an excuse not to accept it as an explanation for the level of development.

With that in mind, let me offer some ideas of how "culture" could be stylized and made suitable for economic modeling.

Discount rates.  The agents who populate economic models are usually characterized as "discounting" the future, that is, as regarding future utility as less valuable than present utility by some percentage proportional to the time elapsed.  For example, if I have a discount rate of 3%, then I will regard $100 worth of consumption five years from now at (100%-3%)^5=86% of $100, i.e., 86%.  Students of economics tend to resist the idea of discount rates, saying that the agents are being irrational to value present consumption just because they can enjoy it now, and the professors will say no, it's perfectly rational, future utility simply is worth less to them.  Discount rates turn out to be convenient for modeling purposes.  A positive discount rate is usually taken to be a more accurate description of real human behavior than a zero discount rate, though that can be disputed.

Anyway, one possible interpretation of cultural differences is that people from different cultures may have different discount rates.  Maybe Africans discount the future at 10%, Americans at 5%, Japanese at 1%.  This would affect the level of development, because people who discount the future less will tend to save more, which-- in the right conditions-- leads to more capital formation and higher productivity.

Certainly I felt this when I was in Africa.  The lives and futures of the people in the country I was in seemed very bleak, yet I rarely felt a sense of desperation or urgency among the people there.  It seemed that they just had a laid-back culture, and took a carefree attitude to things in situations that an American or European would have regarded as extremely bleak.  I liked that about them, but it might not be conducive to development.

Risk aversion.  If you were offered (a) $70, or (b) a chance to flip a coin, and get $100 if heads, $50 if tails, which would you prefer?  If you picked (a), you're risk-averse.  I suspect that Germans are systematically more risk-averse than Americans.  It's not clear whether risk-aversion is good or bad for development, but it's probably going to lead to slower economic growth, since economic growth involves change, and change tends to involve risk.  If some cultures are more risk-averse than others, that could explain levels of economic development.

Trust.  Several economists and social scientists, notably Francis Fukuyama, have written of the link between trust and development.  Trust can reduce transactions costs, and it can facilitate the creation of social capital.  Social capital is a quasi-economic concept that has never quite entered the mainstream of economic thought, so let me offer a game-theoretic account of it that may be more palatable to economists than the explanations that sociologists might offer. 

Begin with the concept of reciprocity: I do something for you, you do something for me. 

Obviously, the exchange that occurs in a free-market economy is one case of reciprocity: I give you money, you give me a good or service.  Market transactions involve specific reciprocity under contract: I know exactly what I must give, and exactly what I will get, and if I don't, I can, in principle, take the matter to court.

But there's another kind of reciprocity: I do something for you without asking for anything specific in return, but expecting that you'd do the same for me in a similar situation, and that you'll return the favor in some form, at some point.  This kind of reciprocity characterizes, for example, the way friends and families typically relate to one another.  It can be modeled using the following game:

First Move: Player A begins with $10, Player B with $0.  Player A has the first move, and he has two options.  He can play "Assist," in which case he loses $5, B gains $10, and the game continues.  Or he can play "Ignore," in which case the game ends and what they players have becomes their final payoff.

Second Move: If Player A plays "Assist," it's Player B's move, and he has the same options as Player A had before.

The third move is Player A's, the fourth, Player B's, and so on, indefinitely.  Each player's objective is to maximize his own payoffs.

Whether Player A should play "Assist" on the first move depends on what he things Player B will do, that is, on the probability that Player B will respond by playing "Assist."  Let's call A's belief about this probability p, and further suppose that A's expectations about B's behavior in all future moves are the same p.  A's expected payoffs are:

Ignore: $10

Assist/Assist/etc.: (1-p) * $5 + p * (1-p) * $15 + p^2 * (1-p) * $25 + ... = [the math is complicated here but the result is:] ($5+$5*p)/(1-p)

The break-even point is p=1/3.  If p>1/3, then A will play Assist, and if B does likewise, the game will go on and A and B will get unlimited payoffs.  If p<1/3, A will play Ignore, and they will end up with their original payoffs.  This is highly stylized, but it illustrates how many mutually beneficial transactions can take place only in the presence of trust.  Trust seems like a cultural factor.

Altruism.  The social capital game described above will also work, even in the absence of trust, if agents feel altruism towards each other.  If, for example, A values B's welfare half as much as his own, he is certain to play Assist regardless of whether he expects B to reciprocate or not.  Altruism can also cause people to help others when they do not anticipate any future situations when the beneficiary could become a benefactor.  It's reasonable to think that altruism is to some extent cultural.  After all, in a churchgoing society, people will be indoctrinated every week in the virtues of loving their neighbor: surely we would expect that to have some effect.

Corruption.  Corrupt practices certainly vary across countries, but why?  To say "culture" and stop there is not the language of economics, but what if one says that people of different cultures have different preferences over honest and dishonest behavior?  Let's say that British people get very strong disutility from taking bribes, whereas Nigerians get little or no disutility from it.  If you accept that, you can go on to model the negative effects of adminstrative corruption-- for example, it's a barrier to entry for new businesses and so diminishes competition-- and you've given an account of how culture leads to lower levels of development, with the intermediate step-- the claim that corruption is higher in some places than others-- enjoying strong empirical support.

Mobility.  Willingness to move or migrate varies across cultures.  Where people are highly mobile, this could have bad effects, e.g., the disruption of social capital networks, but it will probably make the market for efficient in identifying talent and allocating labor.  It may also lead to higher incomes without leading to higher utility, if higher incomes are just enough to compensate people from being parted from families and friends and childhood memories.

Human capital.  When economists talk of "human capital," they usually mean public education and health care, but cognitive abilities, both in general and aptitudes for particular kinds of learning, are passed on from parents to children by both nature and nurture.  Studies of student performance almost always show that family factors are more important than any aspect of the schools themselves.  Aptitudes for entrepreneurship, which are evidently far stronger in some cultures than others as the worldwide phenomenon of "market-dominant minorities" vividly shows, are particularly important.  Both the ability and the motivation to succeed in education are strongly related to one's socialization at home.  Human capital that is attached to heredity and culture is almost undoubtedly a large factor in making some countries richer than others.

All of the above are aspects of culture which economists should be able, to varying degrees, both to model and to measure empirically.  No doubt some work along these lines has already been done, but not that much I think, because I read a lot of articles about development in grad school and don't recall encountering much of that.  If these lines of inquiry were explored thoroughly, I'll bet economists would find at least some theoretically sound and empirically supported versions of the story that culture is a determinant of development.  I'd be interested to see which versions of the story turn out to be most significant.

Comments

[Nato]

One might say that economics and culture feed back and forth, and so if one is going to "blame" something in the process, they may as well blame the unobjectionable side. That is to say, if there's something wrong with culture, one can simply say peculiarities of economics have pushed things that way. To some extent this is always going to be correct, though since it's not the most *useful* way of looking at it, it would seem that it's on balance incorrect.

[Nathan Smith]

What is meant by "the peculiarities of economics?" You don't mean the *discipline* of economics, I suppose. Surely Africans' discount rates are not higher than Asians' because of some mysterious misdeed of economics professors.

[Nato]

Yes, I mean economics as-they-are, not theoretical or idealized economics. Economic scenarios.