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Culture: the Key to Economic Growth?

Volume 3, 2014

By Shaomin Li & Seung Ho Park

Why do some economies grow faster than others despite having similar economic institutions? The reason, as our study shows, is culture.

If one suggests that Egypt, Morocco, and Bangladesh will be the next bright spots for high economic growth, it would not be surprising to get sceptical reactions.  Yet, based on the culture of these countries, this is what our study on productivity gains suggests.

While analysts and policy makers emphasise the importance of economic reforms to pursue economic growth, they miss other factors that play a critical role in improving worker productivity – the ultimate source of economic growth.  The narrow focus on economic reforms, such as the rule of law and property right protection, leaves a puzzle unexplained. We found the answer during our study.

Let’s take China and South Korea and compare them with countries with similar levels of economic and institutional quality and income.  They greatly outperformed their peers in productivity gains during the past ten years by as much as five and three times, respectively. This has a lot to do with their culture.

Table 1. Productivity Gains, Institutional Quality, and Income Levels

CEIBS Knowledge, Volume 3, 2014

What inspired us to study this issue was not a gap in the academic literature, but some personal observations: the failure of inner city schools (hint: it is not poor infrastructure or teachers), debate around the book Battle Hymns of the Tiger Mother, and mounting anecdotal evidence on why people of certain cultures thrive while others fail.  From here we draw on social science theories to build our case with a focus on emerging economies that are searching for clues to boost economic development.  We then examined over 100 possible explanatory variables using the data from reliable sources such as the World Bank, World Value Survey, and the Conference Board to identify the cultural variables that would affect labour productivity.

Our study identified three groups of cultural factors that significantly affect labour productivity in emerging economies – countries with a per capita income below $10,000. The first group is economy-related culture, i.e., people’s perceptions on their own financial situations and their attitudes toward income inequality and taxes. We found that people who are not satisfied with their financial situations tend to plan for a longer term and are willing to take greater risks, factors which in turn help improve productivity. We also found that high-productivity people tolerate inequality more and dislike taxes.

The second group is attitude toward authority and freedom.  In particular, we found that four cultural factors are conducive to productivity gains in this group: a culture that accepts and expects a high power distance, e.g., less powerful people accept that power is not distributed equally; people who perceive that they do not have much freedom tend to be more productive; and, a social attitude that prefers to have government ensuring social safety and stability versus a deregulated society where people are responsible for their own actions.  In sum, the culture of highly productive countries tends to be more authoritarian and less ‘free’.

The third group of factors is all about family value. The family – the most basic element in a society and the primary organisation in which a person is brought up and socialised – plays the most important role in forming the value of a person.  It is the primary vehicle through which culture is passed along from generation to generation.  When the family is broken, it will adversely affect children’s learning of the established culture in the society. We examined three family value-related attitudes, in particular the view of a happy family. Countries with high productivity have a social attitude that frowns upon non-traditional family arrangements, supporting the thinking that “a child needs a home with both a father and a mother to grow up happily” (The World Value Survey).  Statistically high-productivity countries have lower divorce or separation rates.  In general, high-productivity countries tend to have strong traditional family values and more intact families.

Combining the three groups of factors, we created a single cultural index that captures the most important elements of a culture to encourage people to work hard and be productive.  As can be seen from the chart below, there is a strong correlation between the cultural index and productivity gains: countries high in the cultural index are also high in productivity gain.

CEIBS Knowledge, Volume 3, 2014

This leads to another interesting and important finding we have made: comparing the positive effects of economic reform and culture on labour productivity gains, we found that the positive effect of economic reform will reach a peak in a country when per capita income reaches the range of $5,000 to $10,000. Meanwhile, the positive effect of culture on productivity gains will not taper off until income per capita reaches a much higher level, from approximately $15,000 to as high as $60,000.  This shows that culture has a much longer-lasting effect on improving productivity than that of economic reform. This should be an incentive for governments to invest in and implement policies that will nurture a productivity enhancing culture.

Several policy implications can be drawn from our study. First, high taxes and high social welfare that aim to reduce income inequality do not help nurture a productivity growth culture. Governments should institute economic policies that encourage risk-taking and entrepreneurial behaviour, such as making it easier to start a business (simplifying the process and instituting automatic approval of business registration).  An extension of the above discussion is that governments should not raise the wage level of regions with low labour productivity, because doing so does not address the source of the low productivity. On the contrary, it may exacerbate the problem by nurturing an entitlement culture that hinders productivity growth.

Second, our finding regarding the attitude toward authority and freedom and its relationship with productivity gain shows that there is a positive association between an authoritarian culture and productivity gains in emerging countries.  The educational policy should allow schools to have more authority over students’ learning and discipline. Especially for least developed nations, implementing policies that can help establish an obedient and disciplined labour force may help increase productivity growth.  These policies work best if combined with economic reform that aims at instituting the free market and the rule of law.

Third, we found that family is important in nurturing a productivity-growth culture. There is a strong association between high productivity gains and low divorce rate, teenage childbirth, and birth out of wedlock. This suggests that government policies that encourage traditional family values could be more conducive to productivity growth.   

Today countries are seeking ways to revitalise their economies.  Our study implies that governments, schools, and families can actively help nurture productivity-enhancing cultures. Although it is not easy, some elements of culture can be changed in a relatively short period of time. A good example is the change in attitude toward smoking in recent decades.

Lastly, a caveat: The fundamental reason for a country to be poor is in the economic institutions. Without economic reform, even a productivity-enhancing culture will not bring a country to prosperity. For the above-mentioned countries to harvest the cultural dividend, they must improve their economic institutions such as protecting property rights and fair market competitions.  It also needs to be noted that this study is limited to productivity gains, not innovations that would require different attitudes and cultural values. 

Multinational firms pursuing a margin increase through productivity gains should pay attention to culture.  Most emerging economies embark on an economic reform and the ones with productivity-enhancing culture will win the next round of the race and become hot destinations for foreign investments.

Shaomin Li is Professor of International Business at Old Dominion University. Seung Ho Park is Professor of Strategy at CEIBS.