Culture Macroeconomics Adjustments and Economic Growth

This paper argues that culture is the underlying determinant causing the delays and massive social costs sometimes seen as countries attempt to stabilize after experiencing external shocks. While there have been significant ties between culture and economic performance in the past, as in Tabellini (2008) and Licht et al. (2007), this paper argues that culture matters more during periods of disequilibrium than it does during times of equilibrium. The empirical methodology for this paper closely mirrors that of Rodrik (1999), in which he proposed that latent social conflicts and poor institutions of conflict management were the reasons for delayed adjustments to external shocks. The dependent variable for all regressions is the difference between the change in growth from 1975‐1990 to 1960‐1975. This was the same dependent variable Rodrik (1999) used for his regressions, reasoning that the world economy during the 1970s was very turbulent and filled with external shocks. The independent variables include terms of trade shocks, and Hofstede’s Cultural Dimensions. The three main Cultural Dimensions that are considered in this paper are Power Distance, Individualism and Uncertainty Avoidance. Cultural variables present significant issues in terms of endogeneity, which is why instrumental variables will be used in the regressions when possible. A theoretical model, with components drawn from Alesina and Drazen (1991), supplements the empirical model. Their model has been modified to account for relative income preferences in an attempt to show the significance of the Power Distance variable. Results show that countries with the largest drops in growth after 1975 were those that had cultural aspects that caused delayed adjustments to external shocks that they faced. Particularly, high scores for Power Distance, low scores for Individualism and high scores for Uncertainty Avoidance translated to poor economic performance after external shocks