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Future Insight is our monthly think-piece on long-term macroeconomic issues.TRANSCRIPT
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FUTUREINSIGHTWhat is the ultimate driver of growth?
July 2016
What is the ultimate driver of growth?
Summary
• macronomics has created the concept of the River of
Prosperity to help understand what ultimately drives long-
term economic performance.
• Imagine a river running upstream to downstream and
out into the ocean. The proximate causes of growth
are downstream, the ultimate drivers are upstream.
Upstream is culture, mid-stream is the role of institutions
(the so-called rules of the game) and downstream are
competitiveness and productivity.
• Conventional long-term economic analysis has focused
very much on downstream economic performance.
More recently this has been added to, with mid-stream
analysis on the role of institutions, most notably in the
work of Daron Acemoglu and James A. Robinson in their
international bestseller, Why Nations Fail: The origins of
power, prosperity and poverty.
• The mid and downstream contributors to long-term
economic performance remain critically important, but
they are not, in our view, the ultimate drivers. Institutions
shape productivity and competitiveness, but to understand
ultimate long-term causes, we need to understand what
shapes institutions. macronomics argues that the answer
is culture.
• Culture is not easy to define precisely. At times it’s akin to trying to nail jelly to a wall. But despite the challenges,
macronomics argues culture should play a much greater
role in long-term analysis by investors. It’s a hugely important topic, which has been neglected.
• Support for the culture first thesis comes from many sources, including, surprisingly, the economic performance
of the Nordic economies.
• This is not to deny that institutional change can occur
without a shift in culture, or that at times a change in
the direction of flow can occur, with institutional forces influencing culture. The culture first rule is not absolute.
F U T U R E I N S I G H T 2
PROFESSOR GRAEME LEACH
CEO and Chief Economist
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Introduction
One of the world’s leading economic historians, David Landes, wrote in his book, The Wealth
and Poverty of Nations that, “if we learn anything
from the history of economic development it
is that culture makes all the difference.” And
yet, economists have been largely dismissive
or neglectful of culture (see: Box A for an
explanation of culture) as a source of growth.
For most of the second half of the 20th
century growth economists tended to ignore
the role of culture in explaining cross-country
differentials in economic performance. Economists were reluctant to rely on culture as
a possible determinant of economic behaviour,
because the notion of culture is so broad, and
the channels through which it could operate
potentially so vague. As economic theory
increased its mathematical sophistication
economists tended to lose interest in culture.
They tended to see culture as an exogenous
influence like technology in the Solow Neo-Classical growth model. Culture was also
perceived as so slow-moving, capturing and
disentangling its effect empirically, would be a herculean task. But the neglect of culture
began to change in the mid 1990s, following
the work of Robert Putnam and Francis
Fukuyama.
Over recent years there has been something
of a renaissance in research on the impact
of culture on institutions (see: Box C for an
explanation of institutions) and economic
behaviour, with links from culture to savings
rates, from trust to trade and entrepreneurship,
and evidence that Judeo-Christian societies
are more opposed to re-distribution than non-
religious and atheistic societies. Extending
the basic Solow Neo-Classical growth model,
to incorporate social capital – defined as interpersonal trust – has also been shown to
be an important factor in explaining variations
in economic growth. So this is a growing area
of analysis.
“If we learn anything from the history
of economic development it is that culture makes all the
difference.”
F U T U R E I N S I G H T 3
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