This is an expanded and updated version of an opinion piece published in the Irish Examiner on Saturday 4 August 2011.
National Culture is a funny fuzzy concept. Anyone who has ever dealt across different societies knows that cultures and how things are reflected in them differ widely. It can be thought of in this context not as the “high culture” so derided by Goering and the other Nazis who declared, “When I hear the word culture I reach for my gun”, but as the complex interwebbing of how we operate as a society. If we have learned nothing else form this crisis it is that economics is, and must be treated as a social analysis. Culture in this context then includes religion, the way we formulate laws, the holistic way in which society works. A widely cited definition of culture is “is that complex whole which includes knowledge, belief, art, morals, law, custom, and any other capabilities and habits acquired by man as a member of society”. We are familiar with this in Ireland. There is a culturally accepted norm that we do not, generally, evict people. There is a cultural norm that we do not generally either whistleblower or reward those that do so (we are indeed only now getting round to protecting same). We might as economic analysts decry the effects of these, but that they are cultural norms is something we cannot deny. And culture is very slow to change.
Its a funny feeling to be on the (kinda) same side as Mitt Romney, who caused uproar when in Israel he suggested that the culture of a country powerfully influences its economic prosperity, pointing favourably to Israel in contrast to the palestinians. This did not go down well in many quarters. On parsing this in the National Review he seems to equate culture with freedom and no doubt there is a linkage but the relative lack of freedom of the average palestinian is as much a reflection of their being a geopolitical chewtoy as some form of inate cultural preference. And the massive aid channeled to the Israelis by the USA over the decades has had some influence one might imagine on their economic development. But Romney is right in one sense, that culture, defined broadly, does matter for economic outcomes.
Culture, or proxies for same, has only recently been accepted as a valid part of modern economic analysis. While cognate disciplines, in particular international management and latterly international finance scholars have adopted many measures that proxy for aspects of culture mainstream economics has been to date slowly to take these on board. This is despite the fact that the most cited social scientist by some measures is a Dutch scholar, Hofstede, who’s work on culture from the 1980s has been of profound importance to how international business scholarship has progressed. I had the experience dealing with Irish economists on presenting work ( see here and here )involving this scholar’s concepts to be told by such things as “what we cant measure is not amenable to being modeled and as such is not useful” and “sure that’s not economics so why would we read or cite it”. If economics is to move forward it needs to escape from the blind alleys of needless formalism and the conflation of assumptions made for modeling purposes as being actual representations of reality. At the leading edge this is already the case but we know from studies of the philosophy of science that the body of knowledge rarely moves until a crisis. Perhaps this is the crisis.
Hofstede proxies culture as being on four (latterly five) dimensions. He suggested from his work with managers and later extended that societies could be ranked along how masculine they were, how great a proclivity they had for individualism, the extent to which people were and were accepting of being distant from power, whether the society is long or short term orientated, and the extent to which they would avoid uncertainty. Over the years other scholars, in particular those associated with the world values survey have amended and extended this basic insight but the work and measures of hofstede still dominate.A vast literature in international business has found that these cultural dimensions are associated with many economic phenomena. Thus we find that even when we account for other issues (different accounting standards, different legal systems, different ways of dealing with creditors) relative cultural distance is associated with lower foreign direct investment, lower degrees of mergers and acquisitions, and lower portfolio investment. That’s perhaps not very surprising – all things being equal people feel more comfortable doing business with people “like themselves”.What is perhaps more interesting is how the individual elements of culture impact.
In hofstede metrics Ireland is low on power distance (information flow and management tends to be informal and not hierarchical), highly individualistic and masculine (encouraging of risk taking and focused on winning for personal gain), and low on uncertainty avoidance (risk is rewarded and technicalities tend to be ignored) and on long-term orientation (we tend to not pass up short-term gain even if that may have long-term deleterious consequences). These traits are associated in recent research with for example earnings management in companies, and to more inefficient banks. Lower uncertainty and shorter term orientation is associated with low levels of cash buffers and thus an inability to ride out shocks. This analysis can be carried further : countries (such as Greece) with low individuality, low masculinity and high uncertainty avoidance are more prone to tax evasion ; higher uncertainty avoidance is associated with more severe impacts from crises. Low power distance and high individuality (as is the case in Ireland or Germany but not Greece) are associated with easier adoption of new work practices. The list can be extended greatly. The reality is that there is a growing body of literature, mostly outside economics but increasingly seeping into it that shows that we ignore national culture at our peril.
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One of the things that the Eurozone crisis has exposed is the divide in Europe. There are many divides: Germanic neomercantilism versus communitarian economic policies, countries with zombie banks and those that have banks in the process of zombification, the UK versus everyone else. But one that in many senses may underlie this is the cultural divide. An increasing amount of culture studies use the framework of the world values survey. This is a complex instrument but it in essence can be reduced to two scales : how traditional/open is a society and how collective/individual is it. What is remarkable is when one plots these measures we find groupings of countries fall in place in accordance with our preconceptions : latin American countries fall mostly in one area, east Asian in another and so on.What is striking when we examine this is how non-homogenous the EU appears. The other issue is how much of an outlier Ireland appears when viewed through this cultural lens. Culturally we are much more similar to latin American countries than we are to northern European or even Mediterranean countries. The prevailing approach in Europe at present is to make us all good germans it seems. That wont happen. An approach that recognizes that there are deep cultural divisions, that these reflect in different economic outcomes and approaches, and that a union which wishes to thrive must acknowledge, accept and manage with these is one that will be much more likely to stand the test of time. Rather than becoming poor imitations of germans this approach would urge us to become better Irish, greek or Italians.
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Brian M. Lucey 