Authors: Kyriaki Kafka, Pantelis Kostis

Title: Cultural Background and Economic Uncertainty: Dual Drivers of Economic Development

Abstract

The literature regarding cultural background change points out that changes in cultural background can only be slow-moving. However, under high uncertainty levels, the cultural background may also change in the short or medium term. The effect of uncertainty on economic activity varies. The main consequence of uncertainty is forming attitudes and actions that deviate from rationalizing and maximizing wealth and prosperity. At the same time, the strong presence of uncertainty influences the development of modern production models. This paper investigates the effects of culture and uncertainty on economic development. The data used in the analysis refer to an unbalanced panel dataset for 113 countries for the last four decades (1981- 2019). Two measures are used to measure economic development as robustness; GDP per capita and the human development index. An overall civic culture is used to measure culture, which emerges as the first principal component of the alternative traits of a society's civic culture after a Principal Component Analysis. These data are based on survey data from seven waves of the World Values Survey (WVS) and the European Values Study (EVS). For uncertainty, the data comes from the World Uncertainty Index (WUI) of the International Monetary Fund. A fixed effects (FE) estimation approach is followed, which allows for individual heterogeneity using different intercepts across countries and can be estimated using ordinary least squares. In addition, time dummies are included to incorporate time-specific effects common to all countries in the sample. The main assumptions addressed are that 1) culture significantly affects economic development, 2) increasing uncertainty in economies leads to a reduction in economic development, 3) uncertainty significantly affects the cultural background of societies and leads to its change, and 4) the simultaneous effect of culture and uncertainty on economic development is significant; thus, uncertainty is complementary to culture.