Do cultural factors play a significant role in explaining the economic performance of countries?

Introduction

This paper attempts to answer how important the cultural factors are in the economic performance of countries. In order to be able to reach to a satisfying conclusion, we are going to analyze and compare the role of culture in explaining the economic performance of two regions, East Asia and Latin America. Due to the cultural similarities that can be observed between counties of East Asia and countries of Latin America separately and due to the differences in their economic development, this example can shed some light on whether culture affects the economic performance of countries and in what grade.

In explaining why East Asia and Latin America had different economic performances during the past several decades, scholars around the world have applied several approaches, one of which is cultural. By taking the cultural approach, this paper will first review the notion of culture and the relationship between culture and development. Then, it will explore as synoptically and representably as possible the nature of both cultures and also try to see whether cultural factors can explain the different economic performances in East Asia and Latin America during the past decades.

At least until the current financial crisis, East Asia had achieved legendary success in economic development. As a World Bank booklet pointed out in 1993, no other group of developing countries in the world has done as well as in fostering growth, reducing poverty, integrating with world markets or raising standards of living. According to this World Bank publication, per capita incomes in the region almost quadrupled over the past 25 years. On average, absolute poverty fell by about two-thirds, while population growth rates declined rapidly and health and education improved significantly. The first set of success stories of the Asian “tigers” has led to second generation of rapidly industrializing , fast growing economies; and now China has started a new engine of regional growth (Leipziger; Thomas, 1993:1).

On the other hand, in Latin America the picture seemed different. By 1955, Brazil and Mexico were already entering a second dynamic phase of import substitution, well before Taiwan and South Korea started their real industrialization process. By the end of the 1970s, however, Latin America’s economic “golden age” ended, and started the “lost decade” of the 1980s (Grieco; Ikenberry, 2003:254-256). That’s why Latin America seems to be a prime candidate for comparison with East Asia, for the purpose of this essay.

What is culture?

Its notion can be varied from different aspects and according to different understandings. According to some scholars, from its earliest usage the world “culture” has always designated the cultivation or tending of something like “agri-culture”. During and after the 16th century, the tendency was extended in elite usage to include the cultivation of prestigious human qualities: mind, manners, spirit, sensibility and taste. By the 18th century elite Europeans used the word to distinguish between the highly refined civil cultivation achieved by privileged western Europeans and what was perceived as the relatively primitive development of such human qualities both in non-Europeans and the poor. Toward the end of the 18th century, the German historian Herder, introduced perhaps the first usage of “culture” as a substantive noun, suggesting all people had a culture (Berger, 1995:14-15).

It is interesting to note that in his article, The Clash of Civilizations? , Samuel Huntington mentions seven or eight civilizations, of which two are Confucian and Latin America civilizations. According to Huntington, “a civilization is a cultural entity. Villages, regions, ethnic groups, nationalities, religious groups, all have distinct cultures at different levels of cultural heterogeneity…A civilization is thus the highest cultural grouping of people and the broadest level of cultural identity people have short of that which distinguishes humans from other species. It is defined both by common objective elements, such as language, history, religion, customs, institutions and by the subjective self-identification of people.” Huntington believes that civilization has nothing to do with population size. Therefore, “a civilization may also include several nations states, as in the case with Western, Latin America and Arab civilizations, or only one, as in the case with Japanese civilization.” (Huntington, 1993)

In a paper discussing the relationship between culture and development, Gao Xian raises the issue of macro-culture. He points out that macro-culture includes not only culture in the narrow sense (art, literature, academic activities etc), but also culture in the broadest sense. Therefore, the macro-cultural approach to development is a holistic exploration of the development process, material and moral, current and historical, partial and total. According to Gao Xian, the macro-culture approach primarily addresses the issue of an objective attitude towards tradition and the relation ship between traditional culture and modernization development (Gao Xian, 1996:143-144).

Finally, in discussing the notion of culture, we also need to mention what tradition is. According to Gao Xian, tradition is what a society inherits from its history and which forms the norms of morality, concepts of value, models of behavior, methods of thinking, ways of life, systems and habits, ideas of aesthetics etc. This serves the foundation of the cultural identity of that particular society. However, tradition should not be seen as entirely “good” or completely “bad”. In other words, in dealing with tradition, people should not blindly accept everything past, nor get rid of the tradition because it is totally harmful. Traditions, which are very closely linked to culture, should be renewed and improved constantly (Gao Xian, 1996:143-144).

The relationship between culture and development

It has been increasingly acknowledged that the primary aim of the contemporary era is to seek development and peace. In pointing out the causes of underdevelopment, some people would put more emphasis on external factors, such as unequal exchanges or the absence of a just international economic order. However, it is also necessary to pay attention to internal factors. As a matter of fact, development is the result of both external and internal factors. In terms of internal factors determining economic development, people are increasingly emphasizing the non-economic ones like culture. “Underdevelopment is not just a collection of statistical indices which enable a socio-economic picture to be drawn. It is also a state of mind, a way of expression, a form of outlook and a collective personality marked by chronic infirmities and forms of maladjustment.” (Harrison, 1985)

Many famous scholars have worked on the relationship between culture and development. For instance W. Arhtur Lewis put forward the argument that cultural influence is related to entrepreneurship and the broader issue of the sociopolitical environment for growth. “Economic growth depends on attitudes to work, to wealth, to thrift, to having children, to invention, to strangers, to adventure, and so on, and all these attitudes flow from deep springs in the human mind.” He also believes that religion impacts monetary habit, risk-taking, honesty and rationality – all related to development (Lewis, 1955:14). Apart from Lewis, Schumpeter noted that human creative genius was one of the keys to development. In his view, “…the function of entrepreneurs is to reform or revolutionize the pattern of production by exploiting an invention or, more generally, an untried technological possibility for producing a new commodity or producing an old one in a new way, by opening up a new sources of supply of materials or a new outlet for products, by reorganizing industry and so on…” (Schumpeter, 1961:132)

Many scholars have also relied on long term field-study for their research on the relationship between culture and economic development. For instance based on his life in a poor village in southern Italy during the 1950s, Edward Banfield observed that, “we are apt to take it for granted that economic and political associations will quickly arise wherever technical conditions and natural resources permit…The assumption is wrong because it overlooks the crucial importance of culture.” (Banfield, 1958:8)

In answering the question of what makes development happen, Gunnar Myrdal concluded that cultural factors are the principal obstacles to modernization. Not only do they get in the way of entrepreneurial activity, but they rigidify and dominate the entire national system in all its political, economic and social dimensions. Even in their economic choices people are conditioned by their total mental make-up and in particular by the community they live. According to Myrdal, “the conflict between articulated specific traditional valuations and the modernization ideals can be expressed in terms of the costs to the latter through lost opportunities.” He also believes that religion usually acts as a tremendous force for social stagnancy (Myrdal, 1968:7, 93, 103).

In sum, culture, no matter what it exactly means, is a combined reflection of politics and economics in any society. Culture along with politics and economics are the three productive forces of any society and only when they move harmoniously can the whole society develop rapidly. Cultural progress guides the actions and responses of human beings in every walk of life. But it is important to point out that its importance should not be exaggerated. In other words, compared with other internal factors determining economic performance, cultural factors occupy a lower position than economic policies. Culture serves to facilitate or hinder the creation of an environment where sound economic policies can be made and implemented.

East Asia and Latin America: Different culture…different economic performance?

Mankind’s industrialization process has proceeded through three stages of rapid development. The first was from the beginning of the Industrial Revolution in the late 18th century to the mid-19th century, with Western Europe standing at the center. Then the second wave came from the mid-19th century to the first half of the 20th century. At this time it expanded from Western Europe to Eastern Europe and North America. Latin America was affected by the end of this wave. The third wave appeared in the post World War II period and it washed through Asia, Latin America and even Africa, with East Asia being the central focus of this industrialization boom.

It appears that the third wave of industrialization and modernization took place in the Confucian cultural circle, apparently with the exception of Latin America. At this point we are interested in exploring the nature of East Asian culture, and hence in concluding how it affected economic development in East Asia. But first we need to make mention that East Asia is not culturally homogeneous. Taoism, Buddhism and Christianity, along with Confucianism which originated from China, all have large followings in East Asia. However, according to Lucian Pye, “the political features that East Asian systems have in common are…their shared Confucian cultural traditions.” (Berger; Hsiao, 1988:82) Indeed, Confucianism occupies one of the most, if not the only, important position in the region’s cultural arena. Therefore, by saying East Asian culture in this paper we mean Confucianism in general.

Then what is the nature of Confucianist culture? Zhang Hongyi lists the following components of Confucianist economic thinking (1989:80-241):

Confucianist Economic Thinking
1) Economic functioning should rely on comprehensive harmony, consistency with natural laws, human supremacy and avoiding extremes.
2) Economic policies of the government should stress making people rich, designing a light tax regime, developing the agricultural sector and reducing poverty.
3) Economic behaviors should emphasize using benign ways of making fortunes, lining a thrifty life, keeping promises in business contracts and working hard.
4) Economic relations should be built upon the efforts to curtail selfishness and reduce inequality.
5) Economic management should highlight centralized administrative power and efficient governance
6) Economic life should be intergrated with economic morality

Other western scholars have a similar account of East Asian culture. For example, according to Herman Kahn, “first and perhaps foremost, Confucian societies uniformly promote in the individual and the family sobriety, a high value on education, a desire for accomplishment in various skills (particularly academic and cultural) and seriousness about tasks, job, family and obligations. A properly trained member of a Confucian culture will be hardworking, responsible, skillful and (within the assigned and understood limits) ambitious and creative in helping the group (extended family, community or company). There is much less emphasis on advancing individual interests.” (Kahn, 1979:121) In other words, like Engholm states, “Confucianism inculcates servility, frugality, abstinence and diligence. It recognizes hard work, patriarchal leadership, entrepreneurial spirit and familial devotion.” (1991:25)

While many scholars believe that Confucianism confers certain advantages over other traditions like the Ibero-Catholic or Hispanic heritage in Latin America in promoting economic development, others point out that simplistic cultural arguments yield several problems. For instance, according to Gary Gereffi (1995:38), these problems include:
-Timing, since Confucian and Ibero-Catholic traditions have existed for centuries, but the shifts in economic performance that gave rise to the East Asia have occurred in recent decades.
-Discussions of culture have been as inconsistent as the same Confucian beliefs that are now claimed to facilitate rapid industrialization in East Asia. They were criticized by several Generations of western scholars for inhibiting economic development.
Another interesting point of view that this culture was once seen as an obstacle to development in China is Weber’s claims. Weber’s study of Asia, including Confucianism, led him to the conclusion that the values and attitudes articulated in Oriental religions explained why Asian economic development was much slower than that of Europe. He argued that the norms of Confucianism did not produce the same kind of psychic anxiety, and hence the same desire for achievements as the Protestant ethic in the West.

However, despite the debate, we can still mention three crucial ways in which East Asian culture is beneficial to economic development:
-Confucianist culture encourages thrift and savings, which in turn benefits the growth of investment. It is pretty obvious that no economy can grow unless surpluses are created that can increase the economy’s productive capacity. Apart from that, economic development also relies on investment of physical capital in the form of roads, machine tools, computers etc. In 1965, investment rates in East Asia equaled about 20% of GDP, very low compared to that in Latin America. By 1990 the East Asian investment rate was 35%, more than twice the Latin America investment rate (Rohwer, 1995:54-55). Furthermore, creation of physical capital depends on financial capital (the saving of money by people and companies).East Asia was good at generating savings which were transformed into capital via banks, stock markets and bond markets. In the mid-1960s the savings rate in East Asia was about 16% of GDP, less than that of Latin America. By the early 1990s, East Asia was saving 35% of GDP, almost twice as much as Latin America (Rohwer, 1995:53). Undoubtedly, economic factors are very important in explaining why the savings rates were so high in East Asia. But, cultural factors also play a role in encouraging people to leave in a thrifty manner and not to show off their wealth with conspicuous consumption. In East Asia thrift was so important that it could determine the fate of a person, a family or even a nation.

-Confucian beliefs place a high value on education, which promotes the development of human resources. Many studies have indicated a significant correlation between educational development and the economic development. Some scholars emphasize that human resources are the ultimate basis of wealth for nations, as it is the capacity of people that leads to the accumulation of capital, the exploitation of natural resources and the building of social, economic and political organizations (Alexander; Kumaran, 1992:19). At the same time, Schults points out that return on investment in education is much greater than return on investment in other items (1963). As far as the role of education to economic development is concerned, education improves the quality of labor through the promotion of skills, efficiency and work knowledge; it increases labor mobility to promote division of labor and to strengthen labor force participation rates; it increases scientific and technical knowledge; it increases the ability of entrepreneurs to improve management and allocation of production factors; and it makes people more responsive to economic change and removes social barriers to economic growth (Kim, 1989:530). In addition to that, Kim came to the conclusion that educational contribution to growth in Korea was lower than that of many developed countries, but higher than the average level of Latin American countries. But that doesn’t imply that Latin America countries pay no attention to school education. According to a World Bank report, the share of educational investment in GDP was much similar in Latin America and East Asia. But the proportions of investment on primary education are not the same. For instance, though Venezuela’s share of educational investment in GDP was larger (3.4%) than that of S. Korea (3%), the former’s percentage of primary education in total educational investment was smaller than the latter’s (World Bank, 1993:199); and the same goes for secondary education. As a result, in East Asia spending was concentrated first on primary schooling and then on secondary schooling rather than on higher education (Latin America). Finally, they combined this high level education with imported technology and the return of expatriates to produce rapid productivity growth.

-Confucianism stresses work ethic. As Barbash puts it, work ethic includes:1)work as an end in itself, which is expected to bring the reward of material success, 2) pride in good quality workmanship, hard work and satisfaction in work and 3) adherence to the discipline of work, namely, punctuality, obedience, diligence, industriousness (1983:233). Through cultural inheritance via learning, the Confucian ethical codes of working hard are well kept in minds of many East Asians. Harrison has illustrative example: A team of rice experts from Taiwan helped set up a rice farm in Costa Rica. A group of Costa Rican farmers were invited to visit the farm, whose yields where much higher than those of the Costa Rican farms. One of them asked a Taiwanese how many hours a day he worked and he responded, “Twelve.” The Costa Rican smiled and said, “Oh, anyone could do that!” Moreover, the success story of the overseas Chinese, who are well influenced by the teachings of Confucianism, may illustrate well the importance of this virtue of working hard. Indeed, it is recognized that overseas Chinese have made great economic achievements during the past decades. In Indonesia, Thailand, the Philippines and Malaysia, the Chinese still occupy a very important position in the economy. It is also worth mentioning that among the countries surveyed by the International Labor Office, South Korean workers had the longest working hours in the world, averaging 54 hours per week in 1987 (Lie, 1992:285-286).

Despite all the above, the year of 1997 seemed to be a turning point for the East Asian success story. Starting from Thailand, financial crisis hit East Asian economies one by one. Faced with this crisis, some people are already beginning to ask whether Asian values are what led to nepotistic credit allocation, a disastrous lack of transparency in financial transactions or simply the “economic bubble”. Francis Fukuyama supports, “from being the cause of Asian’s success, Asian values are now seen (by some people) as the root of last summer’s currency crisis of the ensuing economic meltdown across nearly the whole region. Neither reading is correct.” (1998:23) Indeed, a closer look at the East Asian crisis reveals that culture is not the cause, but the results of currency overvaluation, large trade imbalance, declining international competitiveness and speculative attacks are the factors that caused the crisis.

At this point, it would be helpful to say a few things about the nature of Latin American culture. It is true that the region of Latin America is composed of many countries, and each country seems to have its own cultural identity. However, it is a common feeling that there is a “Latin” culture that defines the region as a whole. Likewise, George Foster claims that Ibero-Catholic culture has shaped Latin America and the similarities among Hispanic American countries are more important than the differences (1960:3). Then what is the nature of Latin American culture?

It can be observed that many scholars, who have tried to answer this question, have a somewhat negative impression of Latin American culture. For instance, Lawrence Harrison says, “In the case of Latin America, we see a cultural pattern, derivative of traditional Hispanic culture, that is anti-democratic, anti-social, anti-entrepreneurial and, at least among the elite, anti-work.” (1985:165) He also points out that “it is values and attitudes –culture—that differentiate ethnic groups and are mainly responsible for such phenomena as Latin America’s persistent instability and inequity, Taiwan’s and Korea’s economic ‘miracles’ and the achievements of the Japanese, in Japan, in Brazil and in America.” (1992:1) It took him many years of day-by-day experience in Latin America to “appreciate how traditional Iberian values and attitudes impede progress toward political pluralism, social justice and economic dynamism.” (1992:2-3) Furthermore, Latin America’s chronically poor policies and weak institutions…are principally a cultural phenomenon flowing from the traditional Ibero-Catholic system of attitudes and values. That culture focuses on the present and the past at the expense of the future; it focuses on the individual and the family at the expense of the broader society; it enshrines orthodoxy; and it is disdainful of work, creativity and saving…” (1997:4) In other words, Latin America is a region powerfully influenced by the Ibero-Catholic culture, which accords lower priority to values like work, education, merit, frugality, community and justice…

Harrison’s views are also echoed by others. For example, Alan Riding writes about Mexicans and claims that “…what counts to the Mexican is what he is rather than what he does, the man rather than the job: he works to live and not to inverse…Status and appearances are crucial throughout society. The poor spend ostentatiously to hide the ‘shame’ of their poverty…Businessmen gamble on large, fast profits rather than long-term expansion of a market; individuals prefer spending to saving.” (1984:3-21) According to Wiarda, Latin America “remains in many ways hierarchical, authoritarian, paternalistic, Catholic…elitist, corporatist and paternalist to its core. These ingredients have been and remain, even in the new period of democracy, at the heart of its development tradition and are what help make it distinctive.” (1992:20) Another very interesting example is given by Dealy. In his words, “In general, capitalist-industrial society has viewed leisure unfavorably because it is not useful, it does not produce anything…” On the other hand, in Latin American societies “people actively and rationally utilize leisure for the advancement of their goal of public power.” (1977:3) Therefore, the habit of keeping late hours in these societies can be easily justified as rational behavior, just as the capitalist, early-to-bed-early-rise philosophy is consistent with a production ethic. Dealy also mentions that Uruguay, not the USA or Canada, was the first nation in the Western Hemisphere to establish a limit upon work in the form of an eight-hour day and a forty-eight-hour week. Interestingly, the call for shortening hours came from the intellectuals who believed that toil was an inherently degrading evil.

Though we can easily discern the different features of East Asian and Latin American cultures, it is still too simplistic to attribute the different economic performance between East Asia and Latin America solely and totally to cultural differences. In other words, East Asian culture cannot be the only answer to East Asia’s past success. This success was mainly brought about by economic factors, such as strong export promotion, macroeconomic stability, effective government regulations, effective use of resources and better use of the external environment created by the world economic development after WWII. For Latin America, its culture is not the only cause of its relatively bad economic performance before the 1990s and it cannot be used to explain the recent economic recovery either.

As a matter of fact, we cannot contend that Latin America’s culture in the 1990s is much different from that of the 1980s and earlier and at the same time we should note that Latin America’s economic performance has not always been disappointing. For instance, in 1913 Argentina’s per capita GNP matched that of Switzerland and exceeded those of France and Sweden (Waisman, 1987:6). According to one estimate, Brazil grew faster between 1870 and 1980 than any other country in the world (Winn, 1992:191). Also Chile’s GDP in 1981-1990 grew annually at an average rate of 3% and in 1991-1997, the growth rate stood as high as 7% (UNECLAC, 1997). This economic performance during the past two decades is no less remarkable than some of the East Asian economies. Therefore, we can observe that there are examples of Latin America’s economic performance that can hardly be explained by the cultural approach. Finally, we need to take into consideration of the Protestant conversion in many traditionally Catholic Latin American countries like Brazil, Chile, Guatemala, and Nicaragua. Protestant conversion in Latin America has been associated with significant increases in hygiene, educational achievement, savings and per capita income (Fukuyama, 1995:44-45).

Conclusions

To sum up, after the analysis of cultural approach, the relationship between culture and development and the useful example of East Asia and Latin America, we can conclude three very important points:
1) The cultural approach has opened a door for us to see why economic performance is different among regions and countries. The key question here is not whether cultural factors are the exclusive influence over economic performance; rather, it relates development policy options and institutional choices to certain cultural antecedents that make the reason for such selections easier to be understood. In other words, cultural approach provides us with a frame of reference within which we can see how values, attitudes or practices have influenced the economic performance of countries. In our example, it complements rather than contradicts other interpretation of the so-called East Asian “success” and Latin America “failure”.
2) On one hand, culture plays an important role in economic performance, as it can affect people’s behaviors towards savings, education, work ethic etc. On the other hand, culture compared with economic factors, it is less important. Of all the factors determining economic performance, economic factors stand on top.
3) Each culture has its own unique positive and negative components. The positive ones cannot automatically create better economic performance in the absence of other necessary conditions like sound economic policies, effective institutions, favorable world economic conditions, political stability and the right time of a nation’s entry into industrialization. Therefore, only in a favorable economic and political environment can culture trigger economic growth.


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