Luigi Guiso is Axa Professor of Household Finance at the Einaudi Institute for Economics and Finance.
Let me put the question a bit in perspective. Basically, what you are interested in is to contrast the standard economic factors of economic performance and the role of culture in this context, whether it should matter at all once standard economic factors are taken into account. In standard economics, differences in performance between countries and communities depend essentially on factor endowments: the amount of labour, the amount of capital and the ability of a society to use these endowments in the most efficient way. It depends on the technology of production and what is known as the total factor productivity, i.e. the amount of output that can be extracted from the factors of production available to a society. Typically, standard economic factors can explain perhaps 50% of the differences in economic performance (per capita income) between countries. The question is, what, other than a direct economic ingredient, can explain the other 50%? This other 50% could be explained by the country’s ability to transform endowments into output, i.e. the efficiency of the economy. So the question now is, what makes a particular economy more efficient than another? And this is where other factors play a key role. Economists have debated two factors that are closely related. One is institutions and the other is culture. It is not enough to have a certain endowment of labour and a certain endowment of capital; it is also necessary to have the capacity to transform these endowments into production. Let me give you an example within one country, Italy, where the institutional set-up is the same everywhere. Let’s look at northern and southern Italy. Let’s take a single company, let’s say FIAT, the car manufacturer. Let’s look at one factory in the north of Italy and one in the south. They essentially use the same technology, depend on the same company, operate under the same legislation and the same formal institutional set-up. However, the productivity of the southern plant is much lower than that of the northern plant. This is where culture can play a role. Economists argue that workers’ behaviour, which influences productivity, can be affected by local cultural norms, in the South and in the North, that regulate their behaviour and motivations as workers.
The concept of culture is, as one might imagine, quite broad. Thus, there is room for disagreement even on the definition, let alone on which components of culture are relevant to the performance of the economy. Broadly speaking, we can think of culture, at least in the definition that is relevant to our discussion, as the set of behavioural norms, the set of informal rules and the set of beliefs that are shared by a given population, a given community, and that are important to its actions. Take, for example, the rules on tax evasion. In some places, people may be more or less tolerant of tax evasion. There are rules about tolerance of corruption. In some places, corruption is seen as a kind of ingredient that can be useful in keeping the economy running smoothly. In other places, it is seen as a sin that a person should never commit. Consider, for example, beliefs about how trustworthy other people are. Trust is a system of informal norms, rules of behaviour and beliefs that tend to regulate the behaviour of individuals. In some places, people tend to trust others a lot, like in the Nordic countries, the Scandinavian countries. In other places, people are very cautious, they are sceptical about trusting other people. Is this definition of culture universally accepted? Broadly speaking, I would say yes. What are the key factors from an economic point of view? That depends. For example, it has been shown and argued that the degree to which people trust others is an extremely important ingredient. There is a whole literature that documents a very strong correlation between how much people trust each other and the level of GDP per capita in a community. And there is evidence that when trust is destroyed, it has a causal effect on the performance of the economy. So I would argue that if you look at the empirical evidence, mutual trust is probably the most important component of culture that has the biggest impact on the performance of an economy.
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Desarrollo para la Ciencia y la Tecnología, C. A.
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