Greece, Germany, Ireland…its a cultural thing

Over the last number of months there has been an increasing flow of stories and rhetoric on Greece, that they are lazy, feckless and generally not fit for the Euro. (see herehere , here, here) While Greek economic governance, to be at the most generous, requires a lot of work to come up to modern standards, this represents to me a different issue that we have tended to gloss over in the crisis debate.

Economists are familiar with the concept of an optimal currency area, and most would agree that the Eurozone is not one (probably if truth were told neither is the USA but they have offsetting fiscal mechanisms that allow the system to work).  However, what of culture? Culture is one of those things that is easy to speak on, but harder to define. Economists, in my experience, tend to like things that are concrete, measurable, quantifiable, and culture is not one of those. In International Business however, and creeping into finance, we see increasing efforts to quantify and then analyze dimensions of national culture. Two main threads or schools of measurement have prominence. The first is the World Value Survey, the second the work of Geert Hofstede. Neither are perfect but buth provide a workable model of quantifing that which is probably unquantifiable.

The World value survey is a survey, conducted on irregular but reasonably frequent bases, which is more fully explained here while the orginal Hofstede work which was based on MNC managers has been updated and extended over the years. It is explained here. What emerges from the World Value Survey is, among other things, a series of measures of how countries see themselves. Two dimensions, it turns out, explain 70% of the cross-country variation in a statistical analysis of ten other indicators of national values: these are Traditional/ Secular-rational and  Survival/Self-expression values. As the survey itself states

“The Traditional/Secular-rational values dimension reflects the contrast between societies in which religion is very important and those in which it is not. A wide range of other orientations are closely linked with this dimension. Societies near the traditional pole emphasize the importance of parent-child ties and deference to authority, along with absolute standards and traditional family values, and reject divorce, abortion, euthanasia, and suicide. These societies have high levels of national pride, and a nationalistic outlook. Societies with secular-rational values have the opposite preferences on all of these topics.The second major dimension of cross-cultural variation is linked with the transition from industrial society to post-industrial societies-which brings a polarization between Survival and Self-expression values. The unprecedented wealth that has accumulated in advanced societies during the past generation means that an increasing share of the population has grown up taking survival for granted. Thus, priorities have shifted from an overwhelming emphasis on economic and physical security toward an increasing emphasis on subjective well-being, self-expression and quality of life.”

The Hofstede variables are somewhat different, being four for many countries but with some recent work extending these. The four are explained by Hofstede himself as

“Power Distance
Power distance is the extent to which the less powerful members of organizations and institutions (like the family) accept and expect that power is distributed unequally. This represents inequality (more versus less), but defined from below, not from above. It suggests that a society’s level of inequality is endorsed by the followers as much as by the leaders. Power and inequality, of course, are extremely fundamental facts of any society and anybody with some international experience will be aware that  “all societies are unequal, but some are more unequal than others”.

Uncertainty Avoidance
Uncertainty avoidance deals with a society’s tolerance for uncertainty and ambiguity. It indicates to what extent a culture programs its members to feel either uncomfortable or comfortable in unstructured situations. Unstructured situations are novel, unknown, surprising, different from usual. Uncertainty avoiding cultures try to minimize the possibility of such situations by strict laws and rules, safety and security measures, and on the philosophical and religious level by a belief in absolute Truth:  “there can only be one Truth and we have it”. People in uncertainty avoiding countries are also more emotional, and motivated by inner nervous energy. The opposite type, uncertainty accepting cultures, are more tolerant of opinions different from what they are used to; they try to have as few rules as possible, and on the philosophical and religious level they are relativist and allow many currents to flow side by side. People within these cultures are more phlegmatic and contemplative, and not expected by their environment to express emotions.

Individualism on the one side versus its opposite, collectivism, is the degree to which individuals are integrated into groups. On the individualist side we find societies in which the ties between individuals are loose: everyone is expected to look after her/himself and her/his immediate family. On the collectivist side, we find societies in which people from birth onwards are integrated into strong, cohesive in-groups, often extended families (with uncles, aunts and grandparents) which continue protecting them in exchange for unquestioning loyalty. The word collectivism in this sense has no political meaning: it refers to the group, not to the state. Again, the issue addressed by this dimension is an extremely fundamental one, regarding all societies in the world.

Masculinity versus its opposite, femininity, refers to the distribution of emotional roles between the genders which is another fundamental issue for any society to which a range of solutions are found. The IBM studies revealed that (a) women’s values differ less among societies than men’s values; (b) men’s values from one country to another contain a dimension from very assertive and competitive and maximally different from women’s values on the one side, to modest and caring and similar to women’s values on the other. The assertive pole has been called masculine and the modest, caring pole feminine. The women in feminine countries have the same modest, caring values as the men; in the masculine countries they are more assertive and  more competitive, but not as much as the men, so that these countries show a gap between men’s values and women’s values.”

As measured, higher scores on power distance indicatethat top and bottom in society are further apart, on individualism that people are more individual and less collective, on masculinity that people on average are more gender stratified and are more assertive and material orientated, and higher scores for uncertainty avoidance indicates less tolerance for ambiguity and a greater desire for order and rules.

Now, there is a wealth of research on these issues, including a review in Journal of International Business Studies, the top ranked journal in its field (as of 2006) of the impact of Hofstede on International Business (see here). For some details of research in the finance field and how these dimensions matter see Lucey, Brian M. and Zhang, Qiyu (2010), ‘Does Cultural Distance Matter in International Stock Market Comovement? Evidence from Emerging Economies around the World’, Emerging Markets Review, 11 (1), 62-78, downloadable.

What is interesting however is if we graph the value survey dimensions. A world graph of these looks like the following (Source: Ronald Inglehart and Christian Welzel, “Changing Mass Priorities: The Link Between Modernization and Democracy.” Perspectives on Politics June 2010 (vol 8, No. 2) page 554.)

WVS Cultural Map of the World

What happens if we superimpose the EU on this? Then we get the following

WVS Cultural Map Plus EU

Its clear that the EU as it presently is constituted while having a core based around the old Catholic Europe is also very very widely spread. Based on the WVS data we have at one extreme Portugal, at another Sweden, at another Estonia, then other poles at Ireland and Germany. Its no wonder there is cultural confusion.

If we look at the Hofstede data we also see significant differences

 Individualism  Masculinity  Power Distance  Uncertainty Avoidance
GERMANY           67           66           35           65
GREECE           35           57           60         112
IRELAND           70           68           28           35
ITALY           76           70           50           75
PORTUGAL           27           31           63         104
SPAIN           51           42           57           86
UNITED KINGDOM           89           66           35           35

Clearly Germany and Greece are vastly different from each other and from other countries. Compared to Germany Greece is much more individually orientated, much less tolerant of uncertainty than Germany, Germany has a lower power distance (indicating closer working relations between top and bottom) than Greece . Ireland is almost the same as Germany, apart from issues around uncertainty, where we are much less concerned about uncertainty than even the Germans – perhaps its the weather.

All in all, the cultural dimensions of this crisis are worth considering in some more depth.