6. Government and Economic Growth: Culture Flashcards
Aspects of culture: Trust
Without trust, economic activity would be reduced to a crude level, and huge resources would have to be devoted to making sure that people came through on their promises.
Society would lose the advantages gained by creating complex organizations—for example, allowing people to specialize in specific tasks or exploiting gains from trade.
Obviously, a SOCIETY IN WHOCH ONE COULD NOT RELY ON OTHERS WOULD BE POORER.
The economist Kenneth Arrow wrote, “Virtually every commercial transaction has within itself an element of trust, certainly any transaction conducted over a period of time. It can be plausibly argued that MUCH OF THE ECONOMIC BACKWARDNESS CAN BE EXPLAINED BY THE LACK OF MUTUAL CONFIDENCE.”
Although it is obvious that a society in which everybody deals honestly will be better off than one in which people do not, it is less obvious WHAT INCENTIVES CAUSE INDIVIDUALS TO BE HONEST.
FORCES THAT MAKE PEOPLE HONEST
- POWER OF STATE: If the person with whom I write a contract fails to fulfill his obligations, I can TAKE HIM TO COURT. But the roots of trust go much deeper than the power of the state.
What are the channels of influence of trust?
1) LABOR MARKERT: An employee trusts that at the end of the week that the boss will give him or her a pay-check.
2) PRODUCT MARKET: A merchant trusts that a customer’s promise to pay will be fulfilled
3) FINANCIAL MARKETSt: Investors in a firm trust that they will receive their share of the profits
and so on
How do we measure trust?
If societies differ in their degree of trustworthiness, we would expect this variation to be reflected in economic outcomes. But how do we measure trust? Researchers have relied on a number of strategies.
1) SURVEYS ASKING GENERALIZED TRUST OR FAIT QUESTION: one approach has been simply to ask people. Generally speaking, would you say that most people can be trusted, or that you can’t be too careful in dealing with people?” The mean response, averaging across all of the countries, was that 25.1% of respondents thought that most people could be trusted. But there was a good deal of variation in the answer. In Norway 74.2% of respondents thought that most people could be trusted, whereas in Turkey only 4.9% of people thought so.
But answers to a survey may not be a perfect measure; for example, people in some countries may be more prone to giving optimistic answers that do not reflect either their experience or their behavior (risk aversion).
2) LABORATORY OR FIELD EXPERIMENTS: A second measure comes from a more direct experiment. In each of 15 different countries, a number of wallets containing $50 in cash and the name and address of their owner were intentionally “lost” in public places. Researchers then kept track of the fractions of wallets that were returned with their contents intact. The correlation coefficient of t his measure with the survey responses about trustworthiness was 0.67, indicating that people’s assessments of their environments were fairly accurate
!!!! THE MOST IMPORTANT MEASURE OF TRUST FOR ECONOMIC PERFOMANCE
3) ECONOMIC IMPORTANCE OF DIFFERENCE IN TRUSTWORTHINESS VIA ANALYSIS OF HOW TRUST IS RELATED TO INVESTMENT:
INVESTMENT is the economic interaction that is MOST RELIANT ON TRUST because it involves a long time lag between when a person invests money and when he or she expects to get it back.
Studies show that across countries, there is indeed a POSITIVE RELATIONSHIP BETWEEN THE MEASURE OF TRUST AND THE FRACTION OF OUTPUT THAT IS INVESTED.
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What determines the level of trust in a country? What is one OF the determinants of trust?
- SOCIAL CAPITAL
Economists and sociologists have identified one of the determinants of trust as SOCIAL CAPITAL.
Social capital refers to the VALUES OF THE SOCIAL NETWORKS that people have and of the INCLINATION OF PEOPLE TO DO THINGS FOR EACH OTHER.
In a SOCIETY where people have large circles of acquaintance, and WHERE PEOPLE who know one another are INCLINED TO BE HELPFUL, SOCIAL CAPITAL IS HIGH.
In a SOCIETY where people are isolated socially, or where there is NO NORM OF HELPING OUT EACH OTHER, SOCIAL CAPITAL IS LOW.
Social capital is the GLUE THAT HOLDS SOCIETY TOGETHER.
EFFECT OF SOICLA CAPITAL:
- IMPROVING THE FUNCTIONING OF GOVERNMENT:
PEOPLE WHO CARE about their fellow community members are MORE LIKELY TO VOTE.
Similarly, POLITICIANS in an environment in which social capital is high are LESS INCLINED TO ABUSE THEIR CONSTITUENTS FOR PERSONAL GAIN.
In a study that examined different regions in Italy, the degree of social capital was measured by counting how many people participated in groups such as soccer clubs and choral societies. The authors concluded that in regions in which social capital was higher, government functioned more efficiently.
Based on such evidence, there is good reason to suspect that
SOCIAL CAPITAL IS A SOURCE OF COUNTRY DIFFERENCE NOT ONLY IN TRUST BUT ALSO IN THE QUALITY OF GOVERNMENT.
Unfortunately, this theory is difficult to test because we have no systematic data on differing levels of social capital among countries.
Tutroial: Explain the difference btw. GENERALIZED AND LIMITED TRUST. Please also explain a measure of trust.
LIMITED TRUST pertains to limited forms of trust, such as trust in family, neighbors, people one knows personally.
GENERALIZED TRUST pertains to trust outside the kin network. The MOST STUDIED CULTURAL TRAIT is generalized trust toward others, where others refer to individuals or groups that the respondent does not know.
When trying to measure trust, researchers ask questions such as: “Generally speaking, would you say that most people can be trusted or that you need to be very careful in dealing with people?” Trust is equal to 1 if the respondent answers “Most people can be trusted” and 0 otherwise. This measure aims at generalized trust, as it asks about “most people”. Note that there are different ways to ask the trust question.
What determines culture?
Specifically, what are the determinants of trust?
1) CLIMATE: The most plausible linkage between climate and culture centers on the need for a person to BEHAVE IN A FORWARD-LOOKING MANNER. In a temperate climate such as that of Europe, CROPS MATURE SEASONALLY, and one must provide for shelter and heat for the winter. A TEMPERATURE CLIMATE INSTILLS VALUES such as SAVING and PLANNING AHEAD. These values might shape a culture in a way that is conducive to modern economic growth.
- CLIMATIC VARIABILITY FAVORS COOPERATION AND THUS TRUST: undependability of harvests, upland regions
- “Catastrophy syndrome” after natural disasters fosters trust.
2) HISTORIC OCCURRENCES AND CORRELATION TO TRUST (PATH DEPENDENCE):
- INCREASED HUMAN TRAFFIC (e.g., slave trade) is NEGATIVELY CORRELATED with trust even today.
- Agents observe the history of conflicts to update their beliefs and to transmit them over generations. Examples : Habsburg Empire, Middle Age Italy, Stasi activity, Soviet Union, etc. Regions still differ today.
3) INHERITED TRUST
Inherited trust: examples (immigrants)
EVOLUTION OF IMMIGRANT ATTITUDES as a FUNCTION of their COUNTRY OF ORIGIN and COUNTRY OF ARRIVAL.
- Football players who grew up in countries undergoing civil war get yellow-flagged or red-flagged more often.
- UN diplomats from high-corruption countries (low-trust) countries violate NYC parking laws more frequently (RUSSIANS FOR SURE :) ).
In general, trust rises among immigrants, if they have moved from a low-trust country to a high-trust one.
Channels of influence for trust on growth:
FINANCIAL MARKETS : promises of future payment which carry effect by reason of the fact that debtors are largely trustworthy.
INNOVATION : uncertainty on account of moral hazard and the difficulties of contract enforcement.
FIRM ORGANIZATION : facilitating cooperation among anonymous persons.
QUALITY OF LABOR RELATIONS : cooperative relations between LABOR and MANAGEMENT and levels of unionization.
FLEXICURITY: ( refers to the combination of LABOR MARKET flexibility in a dynamic economy and SECURITY FOR WORKERS): GENEROUS UNEMPLOYMENT BENEFIT, EFFECTIVE PUBLIC JOB SEARCH AGENCIESs, and weak employment protection.
Cultural change: Japan and Islamic world
The histories of Japan and the Islamic world demonstrate the IMPORTANCE OF CULTURAL CHANGE.
As we saw in Section 14.1, one of the KEYS to Japan’s RAPID ECONOMIC GROWTH in the 19th and 20th centuries was its WILLINGNESS TO ACCEPT IDEAS FROM ABROAD.
An AVERSION TO ACCEPTING NEW IDEAS FROM ABROAD has been one of the factors that HELD BACK ECONOMIC GROWTH in the Islamic world over the last several centuries.
These ATTITUDES TOWARD ACCEPTING IDEAS FROM ABROAD ARE CULTURAL ATTITUDES THAT MAY CHANGE.
Indeed, in both cases, recent attitudes toward accepting ideas from abroad sharply contrast with previous ones. In the case of Japan, the period of cultural borrowing from abroad followed a period of 230 years in which Japan had intentionally sealed itself off from the West to prevent the inflow of new ideas. In the case of the Islamic world, resistance to ideas from abroad dates from the 13th and 14th centuries. For five centuries before this period, the Islamic world was remarkably open to ideas from abroad. Arab scholars preserved and advanced classical science, mathematics, and philosophy during Europe’s Dark Ages, adopted the decimal number system (called “Arabic numerals” in English) from India, and invented the idea of experiments.
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Economic growth and cultural change:
systematic relationship between aspects of a country’s culture and its level of income per capita. Is this relationship casual?
What are the reason to think that economic growth changes a country’s cultural values?
This statistical relationship is not proof, however, that differences in culture cause differences in economic outcomes.
A second possibility is that countries differ in their levels of income for reasons that have nothing to do with culture, and that these differences in income in turn determine differences in culture.
There is good reason to think that ECONOMIC GROWTH CHANGES A COUNTRY’S CULTURAL VALUES. The most important aspect of this change is the SUBSTITUTION OF MARKET RELATIONS FOR OTHER MODES OF PRODUCTION AND EXCHANGE:
- URBANIZATION
- EXPOSURE TO FOREIGN IDEAS
- INCREASED EDUCATION
- NEW PRODUCTIVE TECHNOLOGIES AND OPENNES TO INTERNATIONAL TRADE
!!! The MECHANISM OF CULTURAL CHANGE CAN PRODUCE A MULTIPLIER THAT MAGNIFIES OTHER FACTORS AFFECTING INCOME: i.e cultural change affects income directly, but at the same it also affects some other factors, that will inturn affect income again. So, cultural change results in a multiplier effect that raises income even higher.
How does the multiplier effect of the cultural modernization work?
Now consider what happens when some EXOGENOUS CHANGE AFFECTS THE Y(M) CURVE (not caused by the change in culture, e.g. opening of a country to international trade.)—that is, some change in the economic environment RAISES THE LEVEL OF INCOME FOR ANY GIVEN LEVEL OF CULTURE.
- Because CULTURE TAKES TIME TO CHANGE, the INITIAL EFFECT of this exogenous change will be to shift the economy from point A to POINT B.
- Over time, however, the LEVEL OF CULTURE WILL BEGIN TO ADJUST TO THE NEW LEVEL OF INCOME –> , and there will be a FURTHER PERIOD OF GROWTH toward POINT C.
- Depending on the slopes (flat or steep) of the two curves in the picture, this SECOND PERIOD OF GROWTH, in which MODERNIZATION AND GROWTH REINFORCE EACH OTHER, could account for MUCH MORE INCOME GROWTH THAN THE INITIAL, exogenous change in the economic environment.
Thus, the MECHANISM OF CULTURAL CHANGE WILL PRODUCE A MULTIPLIER EFFECT THAT MAGNIFIES OTHER FACTORS AFFECTING INCOME.
Institutions and cultural change:
Do formal rules and norms embedded in institutions act as a complement or a substitute for informal values?
The INFORMAL INSTITUTIONAL ENVIRONMENT (WHAT IS ACTUALLY HAPPENING IN THE SOCIETY) might NOT MATCH the RELEVANT FORMAL INSITUTIONSs i.e ->
A CULTURE OF PROPERTY RIGHTS, RULE OF LAW, AND POLITICAL PARTICIPATION MIGHT NOT EXIST. –>i.e formal rules embedded in institutions are rather complement to informal values (trust).
In this case, the assumed GROWTH-SUPPORTING INSTITUTIONS MIGHT NOT SUPPORT GROWTH.
However, if countries could CHANGE their INSTITUTIONAL ENVIRONMENTS in a way that FITS THE ABOVE-MENTIONED GROWTH-SUPPORTING INSTITUTIONS then EFFICIENT PRODUCTION would be POSSIBLE and would result in optimizing the growth rate.
Institutions can have long-lasting IMPACT on economic outcomes, but the persistence CHANNEL goes through their EFFECT ON VALUES.
How can institutions, and which institutions, shape trust?
Since we are interested in the impact of institutions on economic growth and
economic development, we should define the meanings of GROWTH-SUPPORTING INSTITUTIONS AND GROWTH-INHIBITING INSTITUTIONS before we examine the issue of institutional efficiency and change.
An institution that has a positive effect on the growth rate is called growth supporting, whereas an institution that has no effect, or that is detrimental to economic growth, is called growth-inhibiting.
General classification in growth-inhibiting and growth-supporting institutions is impossible because the economic impact of an institution depends on several influencing factors such as other institutions, history, geography, ecology, the level of economic development, and so forth.
Depending on the prevalent environment, an institution that supports growth in one country might have a different impact on
the growth rate in another country. However, assuming equal initial conditions, certain institutional features are generally described as growth supporting.
GROWTH-SUPPORTING INSTITUTIONS:
- PROPERTY RIGHTS
- INDEPENDENT JUDICIARY
- RULE OF LAW
- POLITICAL PARTICIPATION
- PROPERTY RIGHTS:
1) they expand the possible USE OF AN ASSET. That is, besides its direct utilization as a living space, office, production facility, showroom, farmland, and so forth, the asset can be used as COLLATERAL and thereby can CREATE NEW CAPITAL.
2) Clearly defined ownership rights guarantee INDIVIDUAL UTILITY MAXIMIZATION: OWNER CAN USE THE ASSET IN A WAY THAT BEST FITS HER OR HIS INTERESTS.
- PROPERTY RIGHTS are useless if they cannot be ENFORCED BY AN INDEPENDENT JUDICIARY; hence, as long as the state or private interest groups are able to appropriate private property or influence the allocation of assets.
An INDEPENDENT JUDICIARY MATTERS MOST IN THE ATTAINMENT OF ECONOMIC FREEDOM.
Government policy and cultural change: explain the relationship + example on government policy aimed at cultural change
One of the FORCES that can CHANGE culture is the government. In some cases, gov-ernment policies are explicitly targeted at changing culture, either as a means of achieving some noneconomic end (e.g., fostering national unity) or to create a cul-ture more conducive to economic growth.
In other cases, cultural changes result-ing from government policies are an accidental by-product of a policy designed to do something else.
An example of a policy aimed at a noneconomic end is linguistic unification.
We saw previously in the chapter that poor countries tend to be more linguistically fragmented than rich countries. This fragmentation partially reflects the arbitrary borders drawn by the European powers between their colonies, which later be-came sovereign states. But it also reflects a long history of deliberate policies of linguistic unification in the richer countries. For example, France is linguistically unified today only because of policies implemented in the 19th century to suppress numerous regional languages such as Breton and Provencal.23 Many developing-country governments today take a similarly strong hand in promoting such na-tional languages as Swahili in Tanzania and Bahasa in Indonesia. These attempts to achieve linguistic unity are generally aimed at political rather than economic goals—specifically, to forge a national identity and prevent separatist movements. Nevertheless, linguistic unification also has important economic effects in foster-ing greater market integration.
