Carla I. Koen. Comparative International Management

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Factor analysis has been performed on a number of existing measures of institutions

and on the trust measure (see Table 1.1). Factor analysis indicates that there is one factor

in which all these variables ﬁt. The numbers in Table 1.1 reﬂect the weights of the dif-

ferent variables in this factor. The advantage of creating this new variable is that one

single variable reﬂects the general societal environment in a country, including both insti-

tutions and trust as a component of culture. The resulting factor, including trust as well

as these measures of institutional strength, conﬁrms our earlier theoretical reasoning:

trust is related to the presence and effective functioning of institutions.

Table 1.2 depicts, for 33 countries, the score on the variable ‘societal environment’,

the components of which were outlined in Table 1.1. Scores range from 0 (Philippines) to

100 (Canada). This variable is a general measure of the effective functioning of institu-

tions and degree of social capital in a society. A low score for a particular country means

that its institutions do not function well and that the country did not develop much social

capital; vice versa, a high score means that the institutional environment in the country

functions well and the country has built substantial social capital. The advantage of this

measure is that instead of individual items measuring culture or institutions indepen-

dently, this single measure explicitly recognizes that culture and institutions are related.

Evidently it is a crude measure, but at least it provides some empirical intuition.

In order to show the importance of the societal environment for economic develop-

ment it is important to relate the country scores on ‘societal environment’ to measures of

economic success. A technique that can be used to test the relevance of the societal

environment for economic success is regression analysis (see Box 1.2). Table 1.3 summa-

rizes the main results of the regression analysis. The goal is to explain differences in

economic growth between the 33 countries for which the variable ‘societal environment’

has been calculated.

The dependent variable is economic growth between 1970 and 1992. Following neo-

classical growth theory, economic investment in physical capital, investment in human

capital and the initial level of welfare can explain growth. The latter variable controls for

convergence effects, meaning that poorer countries grow faster than richer countries

(ceteris paribus). In sum, in the analysis performed, the dependent variable is economic

THE SOCIETAL ENVIRONMENT AND ECONOMIC DEVELOPMENT 41

Table 1.1 Components of ‘societal environment’

Items Weights

1. Trust (EVS/WVS)

.800

2. Contract enforceability (Zak and Knack, 2001)

.917

3. TI corruption index (Transparency International)

.925

4. Black market premium (Sala-i-Martin)

.659

5. Revolutions/coups per year, average over the period 1960–84 (Sala-i-Martin)

.659

6. Rule of law (Sala-i-Martin)

.910

7. Degree of capitalism (Sala-i-Martin)

.646

8. Index of social infrastructure (Hall and Jones, 1999)

.936

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42 COMPARATIVE INTERNATIONAL MANAGEMENT

Table 1.2 Scores for 33 countries’ ‘societal environment’

Country (World Bank code in brackets) Score on ‘societal environment’

Argentina (ARG) 13.6

Australia (AUS) 91.7

Austria (AUT) 82.2

Belgium (BEL) 80.6

Brazil (BRA) 24.6

Canada (CAN) 100

Switzerland (CHE) 99.8

Chile (CHL) 44.4

Colombia (COL) 15.7

Germany (DEU) 85.3

Denmark (DNK) 96.5

Spain (ESP) 71.1

France (FRA) 70.8

United Kingdom (GBR) 84.6

Greece (GRC) 55.8

India (IND) 16.0

Ireland (IRL) 82.5

Italy (ITA) 51.6

Japan (JPN) 82.4

Korea, Rep. of S. (KOR) 24.9

Mexico (MEX) 32.4

Nigeria (NGA) 4.8

The Netherlands (NLD) 91.2

Norway (NOR) 96.0

Oman (OAN) 62.2

Peru (PER) 17.4

Philippines (PHL) 0

Portugal (PRT) 55.7

Sweden (SWE) 95.6

Turkey (TUR) 4.1

United States (USA) 95.6

Venezuela (VEN) 13.9

South Africa (ZAF) 45.7

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THE SOCIETAL ENVIRONMENT AND ECONOMIC DEVELOPMENT 43

growth between 1970 and 1992, and the independent variables are investment, years of

education, initial level of welfare in 1970 and the measure of societal environment.

The results indicate that there is a signiﬁcant positive effect of the societal environ-

ment on economic growth while controlling for other variables inﬂuencing growth. The

t-value of 3.52 is a clear indication of the importance of the societal environment for

economic growth. Those countries that grow quickly are also the countries with a culture

based on trust and with efﬁciently functioning institutions. The explained variance equals

almost 50 per cent.

Table 1.3 Relationship between economic growth and the societal context

Dependent variable: growth 1970–92 Coefficient (t-value)

Independent variables:

GDP 1970

Investment

Human capital (years of education)

Societal environment

.328 (2.39)

.036 (2.23)

.027 (.876)

1.57 (3.52)

Number of countries

Explained variance

1.33

1.48

1.3 How the Economy Influences Culture: the

Sociologist’s Stance

After this discussion on the economist’s perspective on the relationship between culture

and the economy, it is important to make you aware of the inverse direction of causality

between culture and the economy. As mentioned in the introduction to this chapter,

mono-causal explanations are insufﬁcient to explain the complex set of relationships

between culture and economic development. Economic development also inﬂuences the

Box 1.2: Regression Analysis

Regression analysis is a method used to test whether a speciﬁc dependent variable is

related to a number of independent variables. Given the nature of the variables (e.g.

continuous, interval, discrete) the mathematical technique used differs. The most basic

type of regression analysis is ordinary least squares (OLS). The objective of regression

analysis is to predict changes in the dependent variable in response to changes in the

independent variables. The effect of a certain variable on the dependent variable is sur-

rounded by a band of uncertainty. This uncertainty may imply that it is not possible to

detect with conﬁdence whether the independent variable may in some cases have zero

effect. In these cases the effect is called insigniﬁcant. To obtain a statistically signiﬁcant

result with 95 per cent conﬁdence, the estimated t-value should be at least 1.96. Note

that regression analysis does not imply causal linkages between variables. Causality is

determined by the theory.

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generally shared norms and values in a society. In the remainder of this chapter this

debate, or the sociologist’s perspective, is discussed.

Inglehart’s thesis

In numerous publications, Inglehart has described and empirically analysed the relation-

ship between cultural values and economic development (including Inglehart, 1997, and

Inglehart and Baker, 2000). He writes that ‘in marked contrast to the growing materi-

alism linked with the industrial revolution, the unprecedented existential security of

advanced industrial society gave rise to an intergenerational shift towards post-materialist

and postmodernist values’ (Inglehart and Baker, 2000: 21). Industrialization is linked

with an emphasis on economic growth at almost any price, whereas in afﬂuent societies

elements like quality of life, environmental protection and self-expression are emphasized.

Industrialization brought less dependence on nature, and the world became mechanical,

bureaucratic and rationalized (Bell, 1973). The rise of the service economy coincides with

the reduced emphasis on material objects and a growing emphasis on self-expression

(Inglehart, 1997). To sum up, the shift from industrial to service economies goes together

with a shift in value priorities from an emphasis on economic and physical security

towards an increasing emphasis on subjective well-being and quality of life.

Inglehart’s central thesis is that economic development has systematic and, to some

extent, predictable cultural and political consequences. These consequences are not iron

laws of history, but probabilistic trends. In other words, the probability is high that certain

changes will occur as societies develop economically, but it also depends on the speciﬁc

cultural and historical context of the society in question.

Inglehart’s thesis differs from those of traditional modernization theorists, who argue

that the decline of ‘traditional’ values and their replacement with ‘modern’ values occurs

as a result of economic and political forces. Modernization theory borrowed heavily from

Marxism as it, essentially, takes an economic view of the underlying forces of historical

change. The dialectical process of historical evolution should be reasonably similar for dif-

ferent human societies and cultures. As Marx stated in the preface to the English edition

of Das Kapital, ‘the country that is more developed industrially only shows, to the less

developed, the image of its own future’. In other words, this modernization school predicts

the convergence of values in the long run.

Modernization theory is somehow not really satisfactory, however (Fukuyama,

1992). It is a theory that works to the extent that man is an economic creature, to the

extent that he is driven by the imperatives of economic growth and industrial rationality.

The undeniable power of this theory derives from the fact that human beings, particularly

in the aggregate, do in fact act out of such motives for much of their lives. However, there

are other aspects of human motivation that have nothing to do with economics, and it is

here that discontinuities in history ﬁnd their origin (Fukuyama, 1992: 133–4).

Nevertheless, modernization theory looks much more persuasive after 1990 than it

did in the 1960s or 1970s when it came under heavy attack in academic circles

(Fukuyama, 1992). In particular, since the collapse of the Soviet Union, modernization

theorists would argue that almost all countries that have succeeded in achieving a high

level of economic development have come to look increasingly similar to each other.

Modernization theory eventually fell victim to the accusation that it was ethnocentric –

44 COMPARATIVE INTERNATIONAL MANAGEMENT

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THE SOCIETAL ENVIRONMENT AND ECONOMIC DEVELOPMENT 45

that it elevated the western European and North American development experience to the

level of universal truth, without recognizing its ‘culture-boundedness’. The critique

focused on the idea in modernization theory that the western model was supposedly the

only valid one.

Inglehart’s thesis also differs from the competing school, which emphasizes the per-

sistence of values despite economic and political changes. More precisely, this second

school ‘predicts that convergence around some set of “modern” values is unlikely and

that “traditional” values will continue to exert an independent inﬂuence on the cultural

changes caused by economic development’ (Inglehart and Baker, 2000: 20). Though this

second school of thought has been criticized for its cultural determinism, it has become

quite popular to take cultural differences as independent and stable entities in explaining

the process and speed of (economic) development. The former discussion on social capital

and trust clearly shows the current popularity of this type of thinking in social sciences,

especially economics (Putnam, 1993; Fukuyama, 1995; Knack and Keefer, 1997; Zak

and Knack, 2001).

Inglehart and Baker (2000) show that it is in fact the combination of these two

schools that does most justice to the complex reality of value changes around different

societies. Modernization theorists are therefore partly right. The rise of industrial society

is linked with coherent cultural shifts away from traditional value systems, and the rise of

a postindustrial society is linked with a shift away from absolute norms and values

towards a syndrome of increasingly rational, tolerant, trusting postindustrial societies.

Values are path-dependent, however, which ﬁts the second school. Inglehart and

Baker (2000) show that a history of Protestant or Orthodox or Islamic traditions gives rise

to cultural zones that persist after controlling for the effects of economic development.

Hence, ‘economic development tends to push societies in a common direction, but rather

than converging, they seem to move on parallel trajectories shaped by their cultural her-

itages’ (Inglehart and Baker, 2000: 49). Culture should not be seen in an essentialist or

reductionist manner, as something that is inherent to a society or that condemns it to

path dependency, but as something that is continuously created and recreated (Keating,

1998). Therefore, economic development brings cultural changes, but the fact that a

society was shaped, for example, by Protestantism leaves a permanent imprint and has

enduring effects on subsequent value development.

Given the cultural heritage of a country, Inglehart’s thesis is that countries pass

through several societal stages, from a traditional via a modern to a postmodern society

in which the societal goals and individual values change. Table 1.4 summarizes this idea

of cultural change.

The culture in a traditional society is to maintain social cohesion and stability in a

mainly agrarian economy. Evidently, traditional societies differ greatly, but the majority of

them emphasize individual conformity to societal norms, usually codiﬁed and legitimated

in a religious framework. Norms of sharing in families or kinship-based groups are crucial

to survival. In poor countries like Nigeria and Congo, even today people feel a strong obli-

gation to help take care of the family.

In industrial societies this sense of obligation has eroded to some extent. The main goal

in the period of modernization is economic growth through industrialization. At the indi-

vidual level the rise of achievement motivation is embedded in a broad shift towards

instrumental rationality weakening traditional norms. During the period of modernization,

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economic growth and scientiﬁc discovery form the core of the progress and are almost

good by deﬁnition.

The postmodern shift implies a change from the aforementioned priorities with an

emphasis on economic growth to individual-level priorities like self-expression and a

meaningful job. Instead of economic imperatives like the provision of food, shelter and

clothing, individuals in a postmodern society stress subjective measures of well-being like

the quality of life: ‘Economic growth continues, but output consists less and less of tan-

gible things that contribute directly to survival, and more and more of intangibles whose

values is subjective’ (Inglehart, 1997: 76).

The shift from traditional society to industrial society coincided with a shift from tra-

ditional authority to rational bureaucratic authority. This basically meant a shift from

religious to political authority in most western countries. But in postmodern societies,

concepts like authority and centralization are de-emphasized. In postmodern societies this

may lead to declining conﬁdence in hierarchical institutions.

In the shifts from traditional to modern and modern to postmodern societies, two

major processes occur in both stages.

1. The ﬁrst is secularization, being the decline of traditional religious beliefs in an insti-

tutionalized setting. The publics in most advanced postmodern societies show

declining conﬁdence in churches and there are declining rates of church attendance.

Less emphasis is placed on organized religion. This does not, however, imply that

there is no role for spiritual thinking in general. In line with the process of individu-

ation (see below), it is typical for postmodern societies that people spend more time

thinking about the meaning and purpose of life. The crucial difference is that people

do so on an individual basis and not in a predetermined institutionalized setting like

the Catholic Church.

2. The second is individuation. Both in the process of modernization and the process of

postmodernization individual rights have taken priority over other obligations. In the

process of modernization, it is the erosion of traditional religious beliefs and controls

that increased individual autonomy. This increased personal freedom, however, was

largely taken up by obligations to the state. In postmodern societies the shift away

from religious and state authority has given an even greater push to individuation.

In their groundbreaking analysis Inglehart and Baker use two basic dimensions to

measure the aforementioned cultural differences around the globe. Evidently there are

46 COMPARATIVE INTERNATIONAL MANAGEMENT

Table 1.4 Cultural change according to Inglehart

Traditional Modern

Postmodern

Core societal project Survival in a (mainly

agrarian) economy

Maximize economic

growth

Maximize subjective

well-being

Individual value

Traditional religious

and communal

norms

Achievement

motivation

Postmaterialist and

postmodern values

Authority system

Traditional authority Rational–legal

authority

De-emphasis of both

legal and religious

authority

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several ways to measure the character of societies (e.g. Hofstede, 2001). But having

studied dozens of items and variables, Inglehart argues that two dimensions tap the basic

cultural orientations of societies when comparing the worldviews of the peoples of rich

societies with those of low-income societies across a wide range of political, social and

religious norms and beliefs. Inglehart labels these dimensions the traditional/rational

dimension and the survival/self-expression dimension.

1. The traditional/rational dimension reﬂects a value system in which people at the tra-

ditional pole of this dimension reject divorce, emphasize the importance of God,

support deference to authority, seldom discuss politics and have high levels of

national pride (Inglehart and Baker, 2000). At the rational pole of this dimension,

opposite values are emphasized.

2. The survival/self-expression dimension taps values that emerge in a postindustrial

society with high levels of security. A central component of this dimension involves

the difference between materialist and postmaterialist values. This component

measures the relative priority that is given to economic and physical security over

self-expression and quality of life.

Based on extensive data research, Inglehart has measured culture by these two

dimensions. Using factor analysis (see Box 1.1) he has reduced the number of potentially

relevant variables to two factors each containing ﬁve items (see Table 1.5).

Figure 1.3 shows the location of 43 societies on the two cultural dimensions. The ver-

tical axis corresponds with the traditional/rational dimension and a position on the left

THE SOCIETAL ENVIRONMENT AND ECONOMIC DEVELOPMENT 47

Source: Inglehart (1997).

Table 1.5 The two cultural dimensions of Inglehart

Traditional/rational dimension

Traditional values emphasize the following:

• God is very important in respondent’s life

• respondent has a strong sense of national pride

• respondent favours more respect for authority

• abortion is never justifiable

• it is more important for a child to learn obedience and religious faith than independence and

communication

(Rational values emphasize the opposite)

Survival/self-expression dimension

Survival values emphasize the following:

• respondent gives priority to economic and physical security over self-expression and quality

of life

• respondent describes him or herself as not very happy

• respondent has not signed and will not sign a petition

• homosexuality is never justifiable

• respondent feels one has to be very careful in trusting people

(Self-expression values emphasize the opposite)

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48 COMPARATIVE INTERNATIONAL MANAGEMENT

side of the horizontal axis implies a low score on the survival/self-expression dimension.

Inglehart has aimed to plot the societies with similar cultural orientations in intuitively

plausible clusters (in the next chapter we discuss cultural clusters based on different types

of dimensions).

The ﬁrst observation is that the value systems of rich countries differ from those of

poorer countries. The ﬁgure suggests a direction from the lower-left corner to the upper-

right corner where poor countries are on the lower-left side and rich countries are in the

upper-right. It is interesting to note that the USA seems to be a deviant case. It seems to

have much more traditional values than its level of economic development would predict.

For the rest, however, the ﬁgure suggests clusters of countries that correspond to the

theory. The Latin American countries for which data has been gathered fall into one cluster,

as do the two African countries, the Confucian-inﬂuenced societies of East Asia and the his-

torically Catholic societies of western Europe. It is interesting to observe that although

church attendance has fallen due to the process of secularization, the historically

Figure 1.3 Country location according to Inglehart’s two cultural dimensions

–.40

Traditional authority

Survival

–.30

–.20

–.10

+.10

+.20

+.30

–.30 –.20 –.10 0 +.10 +.20 +.30

–.40

–.30

–.20

–.10

+.10

+.20

+.30

Well-being

Secular–rational authority

first principal component factor loadings

POOR

RICH

West

Germany

East

Germany

Japan

China

Moscow

Estonia

Czechoslovakia

Latvia

Russia

Belarus

Bulgaria

Slovenia

Lithuania

Hungary

Romania

South

Korea

Portugal

Turkey

India

Poland

South

Africa

Nigeria

Brazil

Chile

Argentina

Mexico

Spain

Italy

Austria

France

Belgium

Switzerland

Canada

USA

Ireland

Northern

Ireland

Iceland

Norway

Denmark

Finland

Netherlands

Sweden

Northern Europe

North

America

Catholic Europe

Latin

America

Africa

English-

speaking

Eastern Europe

University Press. Reprinted by permission of Princeton University Press).

MG9353 ch01.qxp 10/3/05 8:34 am Page 48

Protestant and Catholic countries of Europe fall in different clusters. The USA and Canada

form a North American cluster to which the UK could easily be added. The ﬁgure suggests

that Poland is an outlier, having more traditional values than the other ex-communist

countries of eastern Europe.

Although the deﬁnition of these clusters could be discussed, the ﬁgure suggests that

value systems are not random. Culture is shaped by a variety of factors of which levels of

welfare and history (Catholic, Protestant, ex-communist) seem important elements. This

corresponds to Inglehart’s thesis that value differences can be explained both by differ-

ences in welfare levels and by cultural heritage.

1.4 Conclusions

In this chapter the relation between the societal environment and economic development

has been discussed. It has been argued that culture, in particular the degree of social

capital and trust in a society, differs between countries and regions, and that this differ-

ence may have economic consequences.

On the other hand, it has been shown that economic development inﬂuences the

present norms and values in a society. In addition to cultural heritage, differences in level

of economic development are an important explanation of differences in culture.

Processes of modernization and postmodernization are, to a large extent, driven by rising

welfare levels.

From this chapter it follows that mono-causal discussions of the relationship between

culture and economic development are not productive. Whereas the remaining chapters

concentrate on the role of societal differences, the aim of this chapter has been to sketch

out the broader picture of the complex relationship between the societal environment and

economic development.

Study Questions

1. Explain why economists have become increasingly interested in the role of culture.

2. Evaluate the contention that cultural traits have economic effects.

3. Explain and provide some examples of how economic developments influence

cultural values.

4. Assess the usefulness of mono-causal interpretations of the relationship

between culture and economic development.

5. Explain the effects of modernization and postmodernization on culture.

6. Assess the economic functions of trust.

7. Discuss the relationship between generalized trust and institutions.

8. From the text it is clear that trust reduces contact, contract and control costs.

Illustrate these three Cs by providing examples.

THE SOCIETAL ENVIRONMENT AND ECONOMIC DEVELOPMENT 49

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