Culture and Development Jon R. Jellema* Department of Economics, U.C. Berkeley November 2008 Job Market Paper - Preliminary Abstract Whether culture affects development is one of the most fundamental questions in economics, but sample, measurement, and direction-of-causation issues hinder empirical analysis. Making use of advances in empirical anthropology and population genetics, I provide robust solutions to these problems. I assemble measures of cultural behavior collected systematically from more than 1200 anthropological case studies. I describe the generation of cultural variety without invoking previously existing institutions or tendencies. I exploit the parallel random mutation and long-term persistence of genetic and cultural information in an instrumental variables framework where I demonstrate that predictable variation in neutral genetic information (and not genetic inheritance of social information) provides a valid and powerful instrument for culture. I show that within this instrumental variables framework class stratification, inheritance rights, and other cultural technologies can explain up to 115 percent of a standard deviation in output, or approximately the size of the gap in per-capita GDP between Thailand and Ireland. * Contact information: 508-1 Evans Hall #3880; University of California, Berkeley; Berkeley, CA 94720-3880. Email: [email protected]. 1. Introduction Economic exchange is a social transaction. The outcomes resulting from it, expectations surrounding it, and its prescribed structure cannot be isolated from the shared norms and mandated behaviors that accompany all social transactions. The role of culture in economic development, in other words, is fundamental. However, social behaviors, rules, norms, and standards can logically be determinants or results of economic exchange, making empirical identification of the developmental effects of culture problematic. Culture itself is difficult to measure as it requires observation of social interaction which is multi-faceted and not amenable to summary by indicators like price or quantity; neither are data capturing singular opinions or beliefs precise guides to social activity. In this paper, I assemble two global datasets that offer novel and robust solutions to these identification and measurement problems in order to demonstrate empirically the causal relationship between cultural behavior and economic development. Specifically, I show that cultural technologies that promote division of labor and specialization, informal education or research and development, or property rights lead to cross- sectional increases of up to 70 percent of a standard deviation of economic development. Increases in all of them simultaneously leads to increases of up to 115 percent of a standard deviation of economic development. Cross-sectional differences in current real GDP per capita roughly this size can be found between, for example, Thailand and Ireland, the Czech Republic and Belgium, Colombia and Japan, or Bhutan and Chile. These relationships remain visible within geographic regions and production technologies and each cultural practice remains individually predictive when the others are held constant. 1 To measure culture convincingly, I use observations from detailed ethnographies covering more than 1200 populations worldwide. This dataset of cultural practices is richer in both detail and scope, more objective, less prone to perception bias, and contains less non- random noise than other cultural datasets. Culture is observed closely and recorded as behavior rather than belief. The sample of populations is world-wide and includes groups and areas, like Pacific Island societies, often missing from empirical studies; there is no oversampling of populations by income, geographic location, or colonial history. I describe the discovery and long-term persistence of cultural practices among populations choosing new environments to in which to settle. Variation in cultural technologies is generated by partially-random solutions to problems concerning the management of group resources, or the aggregate of fixed environmental endowments and the labor of individual members. The physical environment, choice of subsistence activity, and the risk stemming from the interaction of these two variables force decisions regarding how labor will be managed. Chance mutation also plays a role, so similar endowments do not necessarily generate similar cultures.1 All of these variables in addition to culture determine economic development simultaneously. The event generating variation in cultural technologies (or, more precisely, variation in the constraints under which technologies are developed) is the serial migration of modern humans across the globe that began roughly 100,000 years before present and ended roughly 10,000 years before present. This event also left a remarkable signature on the human genome visible at the population level: genetic variety, or the number of potential genomic possibilities found in a population, is inversely proportional to distance from East Africa, the original start 1 Though developed consciously and purposefully, cultural outcomes are not always predictable, nor is the decision to adopt any norm always observable. In both senses, the discovery of cultural practices is partially random. 2 line for this era of migration that eventually brought humans to the extreme southern end of South America and virtually every habitable locale in between. This information has been measured across a large portion of the human genome that does not code for the production proteins and is not associated with observable behaviors or physical characteristics. Variety calculated from this information records only neutral genetic diversity, or that portion of overall genetic diversity that is not under natural selection and is mostly not a result of gene flow between populations. Because it is not a likely cause of any observable behavior or characteristic, it is not an object of choice or optimization for economic actors. Variation in this information is analogous to results from successive random draws (at the population level) without replacement from the original pool of genetic material, leaving populations near the source with the most variety and those farthest away with the least. I demonstrate a significant and robust correlation between the candidate instrument and specific cultural technologies. Since both genetic and cultural information are transmitted with modification from parent to offspring across generations, this result is expected. I exploit the empirical correlation and the assumption that variation in genetic heterogeneity is exogenous to income generation to pursue an instrumental variable strategy that demonstrates empirically the main hypothesis of this paper: culture creates economic incentives and human capital that affect development in a robust and economically significant manner. More generally, I provide empirical support for the hypothesis that preferences and incentives are endogenously determined by social interaction and the unpredictable development and adoption of cultural norms.2 It amplifies the notion that luck in the endowment of technologies and culture has played a significant role in economic development.3 From an 2 See Akerlof and Kranton (2005) for the former and Roland (2004) for the latter. 3 See Diamond (1997) for physical technologies and Tabellini (2007) for cultural technologies. 3 economic policy perspective, the key finding is that informal, uncodified, and often-invisible institutions create economic incentives. This suggests that formal institutions should be adapted to local conditions rather than transplanted wholesale. The plan of the paper is as follows: Section 2 reviews the literature on culture and economic development, focusing on empirical treatments with careful identification strategies. Section 3 provides the historical background and a detailed description of the mechanism linking migration, cultural variation, genetic variety, and development. Section 4 describes data sources. Section 5 presents the main empirical specifications and results, brief discussions of the pathways between specific cultural behaviors and development, and examples of the cultural behaviors at work. In addition, Section 5 includes tests of the validity of the instrument and a discussion of the robustness of the empirical findings where I demonstrate that they hold across several different subsamples and alternative measures of economic development. Section 6 offers concluding remarks. Extended robustness testing, discussions of the relationships between cultural technologies and development, and specific examples of culture at work are found in the appendices at the end of the paper. 2. Literature Review Empirical analysis of the link between cultural variables and economic outcomes is a relatively new research program. Some early examples like Knack and Keefer (1997), Temple and Johnson (1998), and Hall and Jones (1999), while they do not explicitly observe culture, use indices of ―social infrastructure‖ which likely contain latent elements of culture. These early empirical analyses are in agreement: variation in social infrastructure predicts variation in economic outcomes. Roland and Jellema (2006) produce evidence that culture and political 4 institutions are complements in income generation and that culture remains a significant predictor of income when other institutions are held constant. Identifying