Authors: Kyriaki Kafka, Pantelis Kostis

Title: The Effects of Culture and Institutions on Economic Development

Abstract

The requirements of the co-evolution of the institutional and cultural background are critical to the economic development process. When the institutions and the cultural background co-evolve, that is, evolve simultaneously and in the same direction, the process of economic development is facilitated. Conversely, when deviations from this co-evolution exist, their asynchronous or in different direction movement may lead to a series of failed attempts to implement a modernized developmental framework. Thus, the purpose of the paper is to highlight whether the institutional and cultural background function in a complementary or substitute way in terms of their role in economic development. The data used in the analysis refer to an unbalanced panel dataset for 113 countries for the last four decades (1981-2019). After a descriptive foundation of the complementary or substitute relationship between cultural and institutional background for economic development, an empirical analysis takes place, through a two ways fixed effects assessment, with different intercepts between the examined economies and using time dummies for the seven total waves of data released from the World Values ​​Study (WVS) and the European Values ​​Study (EVS). Additionally, country specific clustered robust estimates of the standard errors are used. Robustness analysis of the results is also performed which includes: i) the addition of various combinations of control variables to the base model, ii) an alternative way of estimating the basic model using a dynamic GMM method (Arellano – Bond) which takes into account the possible endogeneity between cultural background and economic development, and (iii) the relaxation of the boundaries for the descriptive analysis, in order for more countries to enter the analysis. The main conclusions of the analysis are the following: a) There is a complementary relationship between the institutional and the cultural background regarding their role in economic development (descriptive and empirical analysis). a1) When both notions are at a strong level this leads to the highest level of economic development, while when at least one of both or both are at a weak level economic development is lower. a2) The effect of the institutional background on economic development is doubled when the role of the cultural background is simultaneously included in the analysis. a3) The effect of the cultural background becomes statistically significant when it enters the analysis simultaneously with the role of the institutional background. a4) The interaction term of the two quantities has a positive and statistically significant effect on economic development in all regressions performed. b) The same institutional background (strong) can have a different effect on economic development depending on the prevailing cultural background. This explains why economic policies are effective in some countries and ineffective in others. c) The institutional background seems to have a greater impact on shaping the level of economic development than the cultural background.