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                Prof. Lincolin Arsyad, Ph. D

                Prepared and Presented by

                  Robertus Heru Susanto

        Graduate Program in Development Economics
                 Universitas Gadjah Mada

1.   Basic Concepts

       In economics terms, culture may be defined as collective subjectivity (Casson,
1992). Subjectivity has two meanings in economics. The subjective theory of value
emphasizes that individual preferences are not directly measurable; they are revealed
only indirectly through behavior. The second use of subjectivity is in the context of
probabilities. In the absence of information about relative frequencies, an individual
may attach a purely personal probability to an event. This probability cannot be
directly measured, but when an individual maximizes expected utility, changes in his
behavior may be attributed to the modification of his subjective probability.
       There are many different kinds of groups, ranging from small groups such as
the family, the work group, and the local club, to large groups such as political parties,
trade unions, and the nation state. In each case, the culture of the group affects
individual behavior trough its impact on preferences and beliefs. In particular it
affects individuals‟ behavior towards each other. This can affect both efficiency and
equity within the group, as Table 1 shows. The table distinguishes between the moral
aspects of a culture, which influence preferences, and the technical aspects, which
influence beliefs (Casson, 1991, Chapter 4).
       So far as efficiency is concerned, a culture that encourages a realistic and
sophisticated view of the environment is likely to support better informed and more
successful decisions. This reflects the technical aspect of a culture. A culture that
encourages good behavior toward other people, honesty, and integrity, for example, is
likely to improve the coordination of different individuals‟ decisions; for example by
reducing transaction costs. This may be termed the moral aspect of a culture. The
moral aspect of a culture may not only reduce transaction costs but also solve a wide

range of externality problems. Culture can also affect equity, for example, a culture
that emphasizes the moral worth of every individual is likely to encourage altruism.
                                       Table 1
             Role of Culture in Enhancing the Performance of a Group

 Aspect of                           Aspect of Group Performance
 Culture                  Efficiency                         Equity
 Moral         1. Reduce transaction costs 1. Redistributes income to compensate
               2. Compensates for missing     for inadequate initial distribution of
                  property rights             rights, or underinsurance against
                                              disaster, etc.
                                           2. Promotes intergenerational altruism.

 Technical  1. Facilitates better decisions
                from better information or
                better    model     of   the
            2. Promotes            improved
                technology trough innovation
            3. May improve monitoring and
                supervision systems.
Source: Casson, 1993, Cultural Determinant of Economic Performance

         A conventional economist is likely to inquire at this point how collective
subjectivity can be reconciled with the assumption of rationality that underpins so
much of economic theory. The answer is that each group may be assumed to have a
leader (Casson, 1991). For simplicity, the leader‟s preferences and beliefs are taken as
given. He/she then manipulates the followers‟ preferences and beliefs to obtain the
desired results. The preferences and beliefs of the followers are predicted once the
leader‟s preferences and beliefs are specified. The preferences need to be legitimized,
and life experiences need to be interpreted. A person who has comparative advantage
in both moral system and scientific theory of some kind can become a leader and
provide a moral system as a service to other members of society. By both presenting
and interpreting the system the leader can legitimate certain kinds of action and
denounce others.

        When available theories are unsatisfactory, individual judgments have to be
made as to whether discrepancies reflect fundamental flaws in a theory or are
something innocuous, such as measurement error. One group may support one theory
and another group another simply because their respective leaders are good at
explaining away the shortcomings of their favored theory and dismissing the attempts
of other leaders to do the same for theirs. Theories that were not invented here or
whose policy implications are inconsistent with the leader‟s moral stance may
therefore be successfully dismissed.

2.   Cultural Prerequisites for Sustained Development

        There are five characteristics of a culture that determine the economic
performance of a group (Casson, 1993) such as:
a. The differentiation of Science and Morals
        In a sophisticated society, morality is concerned with the legitimacy of ends
     while science informs the choice of appropriate means. In more traditional
     societies the distinction is not always so clear. The religions of traditional
     societies sometimes mix accounts of the way things are with accounts of the way
     things ought to be. Morality is confused with expediency; the aim is to do what
     the spirits desire even if they are manifestations of evil rather than good.
     Sophisticated societies are not necessarily secular; they simply have religions
     within which the differentiation of science and morals is clear. Science can be
     devoted to discovering the natural laws while society can be based on moral laws
     revealed trough incarnation or prophecy. Such religion confers respectability on
     scientific inquiry while providing strong supernatural endorsement for morality.
        The differentiation of science and morals opens up the route to economics
     development through technological advance. It is feasible to raise material
     aspirations to above subsistence level. Morality can be used to support higher
     standards of health and hygiene and to encourage sexual restraint in the interest of
     population control. More generally, as material affluence increases, higher

     standards of self-restraint can reasonably be required, since the need to steal, etc.
     There is scope for setting generally higher norms, in terms of both the efficiency
     and the equity of the society.
b. Perseverance in achieving high norms
          An emphasis on achieving ever-higher norms leads to what may be called a
     high-tension society. In high-tension society, people are continually engage in
     projects designed to explore the limits of human capability. It can be compared
     with a low-tension society in which, once people have accomplished what is
     sufficient to survive, they relax until a problem next occurs.
          An important difference between high-tension and low-tension societies lies
     in their attitude toward aggression. Aggression is regarded more favorably in a
     high-tension society because it supports confidence and perseverance in achieving
     high norms. The important thing in a high-tension society is not to subdue
     aggression but to channel it in an appropriate direction, whereas in a low-tension
     society aggression may be purely disruptive unless harnessed for collective
c.   Atomistic View
          According to Putterman (1990), the precise manifestation of high-tension
     depends, however, on the way that the society views itself. At one extreme is the
     atomistic view, favored by neoclassical economists, in which the emphasis is on
     the potential of the individual and his self-fulfillment. Atomistic morality stresses
     the individual‟s rights rather than his obligations to society. It support is the
     private appropriation of resources and the alienability of such property through
     voluntary exchange (Casson, 1993). Free competition is favored as an efficient
     and impersonal way of distributing the gain from trade.
          At the opposite extreme is the organic view, favored by many sociologists,
     in which the emphasis is on collective achievements such as the creation of good
     society or a welfare state. Private ownership is discouraged on the grounds that it
     not only lacks moral legitimacy, but also that the unrestrained exercise of
     ownership rights by selfish individuals will impose negative externalities on

   others. Collective ownership or the sharing of common resources is recommended
   instead. Competition, in this view, is merely a manifestation of conflict, it rewards
   the strong, are good at bargaining and physical appropriation, at the expense of
   the weak.
        Both the atomistic and organic views can support a strong ethic of work and
   a high level of saving, but the process of moral legitimacy is very different. In the
   atomistic society, hard work is necessary in order to discover what one is really
   capable of. In an organic society, hard work indicates dedication to the common
   cause. It is an expression, not merely of conformity, but of solidarity.
d. The level of trust
        The preceding analysis suggests that the high-tension organic society tends
    to be internally coercive and externally aggressive, while the high-tension
    atomistic society is internally aggressive. The reconciliation of internal freedom
    and internal aggression in the atomistic society hinges, as noted above, on the
    market mechanism, and in particular on the dynamics of competition. While
    competition between externally aggressive groups involves very few rules of the
    game, this is certainly not true of internal competition. Internal competition is
    institutionalized by markets that are subject to the rule of law.
        When individuals consider the law more as a scientific instrument than as a
    moral code, however calculations will often reveal that it is advantageous for
    them to cheat on contracts. In this case, the market mechanism may break down
    because transaction costs are too high. According to Milmgrom and Roberts,
    1992, the problems are well known (Casson, 1993): monitoring contractual
    compliance is difficult as people may not realize that they have been cheated;
    detecting the culprit may prove impossible because it is not always clear which
    team members are shirking.
        In a highly mobile atomistic society, many transactions will be one time
   affairs, and with an imperfect legal system, market must operate in an atmosphere
   of trust underpinned by moral forces. Trust requires an optimistic view of other
   party‟s intentions and a moral commitment of one‟s own. If both parties have this

     trust, then each will validate the other‟s beliefs and a successful equilibrium
     outcome will be achieved. Otherwise it is likely that both will attempt to cheat
     each other, and trade will break down.
e.   Theory, Pragmatism, and Judgment
          A high-trust society supports a sophisticated division of labor. People can
     afford to specialize because everyone is confident that the specialists on whom
     they rely will not let them down. It is not just a question of specializing in
     production, moreover, but of specializing in decision making too. In a high-trust
     society, people are happy to delegate decisions about the use of resources they
     own to other people, who will take the decisions on their behalf.
          Some cultures emphasize the importance of theory; it is important to
     understand the situation before acting, they maintain, and such understanding can
     only be provided by a theory of some kind. Other cultures are more pragmatic;
     they suggest that it is sufficient to know that, on the basis of experience, a certain
     course of action produces good results in certain circumstances without knowing
     exactly why this is the case. Table 2 compares the theoretical and pragmatic
     cultures as they apply to scientific inquiry within a differentiated culture. Eleven
     key aspects of inquiry are used in this comparison. The table also shows, for
     interest, the implicit scientific content of an undifferentiated culture.
                The difference between theoretical and pragmatic cultures will also be
     reflected in social organization. Emphasis on theory will tend to create a more
     elitist society because fewer people have the innate ability to acquire the
     qualifications. Emphasis on pragmatism is more likely to establish age as a
     relevant criterion for seniority since age will proxy the amount of experience that
     has been gained.

                                         Table 2
                             Technical Aspects of a Culture

     Aspect                                                           Undifferentiated
                       Theoretical        Pragmatic

Perceived             High             Moderate            Low
capacity to
control               Deductive        Inductive           Mixed: interpretation of omens,
environment                                                oracles, books of wisdom, and
Method of                                                  other historical revelations
inference             Use of           Tinkering, trial    None
                      controlled       operation of
                      condition to     practical devices
Type of               test theories    Moderate            Low
experimentation       High             Eclectic            Holistic
                      Reductionist     Mechanism           Anthropomorphism
Quantification        System           Heuristic           Elementary
Outlook               Rigorous         Informal            Artistic
Metaphor              Formal           Incremental         None
Reasoning             Radical          Opportunistic       Survival
Presentation          Progressive      Improvisation       Prayer, sacrifice
Change                Plan, design,
Policy-orientation organization
Method of
          Source: Casson, 1993, Cultural Determinant of Economic Performance

          In practice, neither pure theory nor pure pragmatism is likely to provide the
most successful formula for decision making. No single theory is ever likely to be
entirely adequate, and so some element of eclecticism needs to be invoked. To

successfully combine theory and pragmatism, considerable judgment is required.
Judgment involves relying on theoretical formulas and prescriptions only when they
seem to be supported, being willing to switch to new theories when the evidence
warrants, and improving decisions when no available theory seems appropriate.
Judgment of this kind, it has been argued elsewhere (Casson, 1982), is the hallmark
of the successful entrepreneur.
       Some cultures regard entrepreneurship as a very scarce quality, possessed
only an elite who make key decisions in a centralized organization, whereas others
regard it as an abundant quality that can readily be tapped by decentralizing decisions,
typically within a market economy.

3.   The Impact of Culture on Economic Development

       The preceding discussion has identified five key factors that, it is claimed, are
crucial for sustained economic development. Table 3 considers four potential
applications, and the results suggest a positive correlation between the number of
factors and the level of economic performance. The second and third columns of the
table present a simple stereotyping of two categories of country, the Less Developed
Country (LDC) and the East European country, while the last two columns stereotype
two major industrial powers, the United States and Japan. There is, of course,
considerable cultural diversity, not only within categories, but also within individual
countries, but notwithstanding this it seems reasonable to portray the salient
differences in this way.
       Most LDCs seem to lack at least one of the two basic prerequisites for
development, a clear moral system harmonized with a scientific world view and a
high-tension culture in which aggression is channeled into attaining high social and
economic norms. Their political organization often reflects an organic view of society
in which dissent is identified with factionalism and suppressed in the interests of
maintaining a fragile national unity. Networks of trust are confined to extended
families and to religious groups, with considerable suspicion existing between

members of different groups. Because scientific and moral issues are not clearly
distinguished, the quality of judgment used in decision making is relatively poor.
                                         Table 3
                             Five Key Cultural Characteristics

           Factor                 LDC      Eastern Europe        United States   Japan

Scientific differentiation       Weak     Strong             Strong              Strong
High tension                     Weak     Strong             Strong              Strong
Atomism                          Weak     Weak               Strong              Weak
High Trust                       Weak     Weak               Weak                Strong
Judgment                         Weak     Weak               Strong              Strong
Source: Casson, 1993, Cultural Determinants of Economic Performance

       During the 1970s and 1980s it has been Japan rather than the United States
that has provided the best model of an advanced high-trust society. But Japan lacks a
tradition of individualism, which makes it less attractive than the United States as a
model for newly liberalized economies. What Eastern Europe really requires is a
model based on the best elements of the United States and Japan. It is surprising as
well as disappointing that no such model has been advocated. Such a model can, in
fact, be readily formulated.

4. Culture Measurement

             There are many studies done by researchers concerning with how to
measure culture and its relationship to economic performance. However, in this paper
the writers only present three studies, which were done by Hofstede, Ng, S.H et al,
and Michael Bond.
             The first study is taken from the book entitled “Culture's Consequences” -
to be referred as 'CC' which is written by Hofstede (1980). From this book, Franke (1991) state that four national cultural aspects were found to measure its
economic growth based on surveys of 72,215 IBM employees in 40 nations. They

are The Power Distance Index, Individualism, Masculinity, and The Uncertainty
Avoidance Index. Hofstede (xix:2001) names those measures as „dimension‟ and
gives further description for those measures as follow:
a.   Power distance is the extent to which the less powerful members of organizations
     and institutions accept and expect that power is distributed unequally. The basic
     problem involved is the degree of human inequality that underlies the functioning
     of each particular society.
b.   Individualism on the side versus its opposite, collectivism is the degree to which
     individuals are supposed to look after themselves or remain integrated into
     groups, usually around the family. Positioning itself between these poles is a very
     basic problem all societies face.
c.   Masculinity versus its opposite to femininity, refers to the distribution of
     emotional roles between the genders, which is another fundamental problem for
     any society to which a range of solutions are found; it opposes “tough” masculine
     to “tender” feminine societies.
d.   Uncertainty avoidance is the extent to which a culture program its members to
     feel either    uncomfortable or     comfortable      in unconstructed situations.
     Unstructured situations are novel, unknown, surprising, different from usual. The
     basic problem involved is the degree to which a society tries to control the
            Meanwhile, Franke paraphrase those dimensions into :
a.   The Power Distance Index (PDI) can be seen as a society's endorsement of
     inequality and its inverse as the expectation of relative equality in organizations
     and institutions.
b.   Individualism (IDV) is the tendency of individuals primarily to look after
     themselves and their immediate families, and its inverse is the integration of
     people into cohesive groups.
c.   Masculinity (MAS) is an assertive or competitive orientation, as well as a sex-
     role distinction, and its inverse is a more modest and caring attitude toward

d.   The Uncertainty Avoidance Index (UAI) taps a feeling of discomfort in
     unstructured or unusual circum- stances, while the inverse shows tolerance of
     new or ambiguous circumstances.

     The second study is developed from a Western point of view done by Ng. et al.
in 1982 (Franke, 1991). This survey called Rokeach's Value Survey ('RVS'), was
administered in 1979 to about 1000 college students in nine nations, yielding five
cultural factors. Furthermore, Franke et al (1991) say that
     “Hofstede and Bond (1984: Table 5) related the national RVS factor scores to
     the four CC measures listed above, and found that each of four RVS factors
     correlated significantly with a CC measure. Thus, both appraisals of culture-one
     developed from IBM employees, the other from college students - seem to tap
     similar cultural information in the six Western and Eastern countries common to
     the studies (Australia and New Zealand, Hong Kong, India, Japan, and

     Due to the small sample of common RVS nations and the very high correlations
of variables with those in the CC study, Franke only employed their analysis on CC
measures as cultural indices based upon Western perspectives.
     A third study, not based on Western social science but on a list of 40
'fundamental and basic values for Chinese people', was conducted by Michael Bond
with the input of seven Chinese social scientists in Hong Kong (The Chinese Culture
Connection - to be referred to as 'TCCC'). Between 1983 and 1985, about 100
students in each of 22 nations (Western as well as Eastern) answered a questionnaire
derived from this list, the Chinese Values Survey (to be referred to as 'CVS'). Student
responses yielded four cultural factors which were labelled Confucian work
dynamism, integration, human-heartedness, and moral discipline (Franke, 1991).
Hofstede (1980) provides the detail explanation of each variable as follows :
a. Confucian dynamism (CONDYN) is an acceptance of the legitimacy of hierarchy
     and the valuing of perseverance and thrift, all without undue emphasis on
     tradition and social obligations which could impede business initiative.

b. Integration (INTEG) is an index of the degree of tolerance, harmony and
      friendship a society endorses, at the expense of competitiveness; it has a 'broadly
      integrative, socially stabilizing emphasis' (TCCC, 1987: 150).
c.    Human - heartedness (HUMHT) is open-hearted patience, courtesy, and
d. Moral discipline (MORDIS) is rigid distancing from affairs of the world.

 6.    Result of the Studies

      As it is mentioned in the previous part that the samples for CC study were from
40 nations while for CVS were 22 nations. It turns out that eghteen nations are
common to the CC and the CVS studies. For these nations, CC IBM employee data
from 1967-73, CVS university student data from 1983-85, and World Bank economic
data for 1965-80 and 1980-87 are available. Half of the 18 nations were 'rich' in 1965
(measured in current U.S. dollars), according to Hofstede's (1980) criterion of $1300
per capita gross national product, and half were 'poor'. The nine rich countries are
Australia, Canada, West Germany, Japan, the Netherlands, New Zealand, Sweden,
the United Kingdom, and the United States, with 1965 GNPs per capita between
$1693 (New Zealand) and $3710 (U.S.A.). (Franke, 1991).
      Furthermore, The nine poor countries include those which were very poor, with
1965 GNPs per capita between $60 and $119-India, Pakistan, the Philippines, and
Thailand , and those closer to the rich/poor dividing line of $1300-Brazil, Hong Kong,
South Korea, Singapore, and Taiwan. Also covered in the CVS study are two African
nations with low GNPs per capita, Nigeria and Zimbabwe, while an extension of the
CC study (Hofstede, 1983 in Franke contains two regional clusters: West Africa
and East Africa.
      Using the IBM scores from these clusters to represent Nigeria and Zimbabwe in
relationships with CVS variables requires the assumption of similarity between these
countries and regions. Comparison across the 18 nations excluding Africa therefore is
technically purer. On the other hand, conclusions about factors which affect economic

development but do not include Africa would disregard information from an
important part of the world for which some data do exist. Present calculations are for
samples of 18 and 20 nations, the one excluding and the other including the two
nations and regions of Africa. Cultural and economic data are presented in Table 6
                          Table 4. Cultural and Economic Data

     Using Pearson product-moment and Spearman correlation coefficient, it is
     found that variables of CC (PDI, IDV, MAS, and UAI) are not related each
     other as well as variables in CVS (CONDYN, INTEG, HUMHT, and
     MORDIS). (Franke et. al, 1991).

Table 5.      Pearson and Spearman correlation coefficient for independent
              variables (sample of 18 nations)

                  PDI            IDV        MAS        UAI     CONDYN INTEG      HUMHT MORDIS

     IDV              -0.75 **
                      -0.61 **
     MAS              0.13        0.05
                      -0.13       0.37
     UAI              -0.02      -0.23       0.23
                      -0.03      -0.31      -0.02
   CONDYN             0.35       -0.46       0.05       0.24
                      0.35       -0.40      -0.29       0.22
    INTEG             -0.56 *     0.63 **    0.09       0.06    -0.16
                      -0.67 **    0.64 **    0.37       0.17    -0.18
    HUMHT             0.11       -0.01       0.70 **   -0.04     0.04   0.03
                      -0.01       0.27       0.67 **   -0.20    -0.14   0.26
   MORDIS             0.63       -0.64 **    0.21       0.37     0.11   -0.31     -0.02
                      0.54       -0.67 **    0.13       0.42     0.18   -0.32     -0.13
 GNP/CAP, 1965        -0.78 **    0.85 ** -0.01        -0.19    -0.36   0.65**     0.05   -0.59 **
                      -0.72 **    0.77 **    0.20      -0.23    -0.20   0.69**     0.28   -0.63 **
 GNP/CAP, 1965        -0.71 **    0.76 **    0.06      -0.17    -0.22   0.68**     0.10   -0.56   *
                      -0.70 **    0.71 **    0.23      -0.16    -0.18   0.68**     0.36   -0.59 **
     Mean         52.72          51.39      51.17      52.94    46.28   0.40       0.68   -0.19
      SD          19.33          29.16      20.08      21.32    26.40   0.54       0.54   0.51

Source : Franke (1991)

      Based on Table 5 above Hofstede shows the inter-correlations among
cultural variables (Western and Eastern) and initial levels of GNP per capita
(1965 and 1980). Two measures of correlation were used, with Spearman rank-
order coefficients serving to check Pearson product-moment correlations since
relatively small sample sizes might allow outlier distortion (McCall, 1980;
Siegel and Castellan, 1988). The four (Western) CC measures are unrelated
except      for   a      negative        correlation      between       power     distance    and
individualism.( Franke, 1991)
      The four CVS measures are unrelated to one another, and the factor of
Confucian dynamism is unrelated to any of the Western measures. Each of the
remaining three CVS variables is correlated significantly although not
overwhelmingly with one or more Western variables. CVS integration has

variance overlaps of about 40 percent with CC power distance and with
individualism, for the former a negative and for the latter a positive relationship,
suggesting that the tolerance, harmony, and friendship exemplified by INTEG
is inconsistent with organizational inequality but consistent with a focus upon
the individual.
      CVS human-heartedness overlaps nearly 50 percent with CC masculinity,
indicating an odd compatibility of assertiveness and sex- role specificity with
the Chinese index's endorsement of patience, courtesy, and kindness (cf.
comments by TCCC, 1987: 152). Finally, the Chinese measure of moral
discipline, indicative of a rigid set of values, overlaps about 40 percent with CC
power distance, indicating acceptance of inequality, and is negatively correlated
with individualism.
      Relationships with economic level presented in Table 2 suggest that
persons in richer nations tend to accept less inequality in organizations (have
lower PDI), that they focus more oIn the individual (higher IDV), that they are
more tolerant and harmonious (higher INTEG), and do not adhere to a rigid set
of rules (lower MORDIS). Only the correlation of level of GNP per capita in
1965 with the CC variable of IDV exceeds a level of 0.80 signaling severe
multicollinearity, which could make conclusions drawn from multiple
regression coefficients ambiguous.

 Table 6.      Pearson and Spearman correlation for dependent variables
               with independent variables (samples of 18 and 20 nations)

                                    Dependent variables : Growth rate of
                                           gross domestic product
                                     Sample of 18         Sample of 20
              Independent               Nations              Nations
                                   1965-               1965-
               variables                    1980-87              1980-87
                                     80                  80

        Source : Franke (1991)

     In Table 6, the four Western and four Chinese measures of culture, plus
levels of per capita GNP, are related to growth rates of gross domestic product
over the periods 1965-80 and 1980-87. In defining dependent and independent
variables an assumption had to be made about cause and effect. It is here
assumed that culture and wealth (GNP per capita) affect economic growth, i.e.,
that they are the independent variables and growth is the dependent variable.
This seems appropriate if one wishes to determine whether it is culture that
affords those competitive advantages which Porter (1990a,b) discussed.

      Based on Hofstede's study, Franke et al. assume cultural factors should be
associated with subsequent economic growth. The CC data collected from
business employees over 1967-73 and measures of economic growth over 1965-
80 and 1980-87 largely satisfy this requirement. The CVS data were collected
from college students in 1983-85, and thus should be reflected in the economic
growth of their countries in the 1990s or later. Table 3 shows that less
individualistic countries experienced more growth.
      Moreover, Confucian dynamism is significantly correlated to economic
growth for both periods and samples, suggesting that CONDYN is a potent and
stable cultural characteristic. Since the relationships are positive, it appears that
economic organizations benefit when perseverance tempered by flexibility and
respect for hierarchy and thrift are accepted values.
      The contribution of each dimension of culture as independent variable
toward economic growth (as dependent variable) can be explained in the
following table.

      Table 7. Correlation between dependent variable and independent

            Independent                       Significance to      Significance to
              Variable                         18 countries         20 countries

                   PDI         Positive        Significance         Significance

                   IDV         Negative        Significance         Significance

                MAS            Negative      Not Significance     Not Significance

                   UAI         Positive      Not Significance     Not Significance

             CONDYN            Positive        Significance         Significance

               INTEG           Negative        Significance         Significance

              HUMHT            Positive      Not Significance     Not Significance

             MORDIS            Positive      Not Significance     Not Significance

            Among those 8 variables (dimensions of culture) are there two other
      variables which also become factor supporting to economic growth, they are
      PDI and INTEG. As it is stated by Franke that

            “… for one or the other economic growth period, there are also
            relationships of growth to PDI (positive) and INTEG (negative). Still,
            there is a tendency for less developed nations to grow more rapidly, and
            since Table 2 shows that IDV, PDI, and INTEG are strongly related to
            level of GNP per capita it is prudent to consider convergencee as a
            secondary contributing factor in any correlation or regression model for
            economic growth which includes one or more of these cultural

 7.   The Meshing of Direct and Indirect Effect of Cultural Traits

      Confucian dynamism and individualism are likely have similar direct and
indirect opposite effect upon economic growth. Casson et al. (1995). may be said to
show that the degree of corporate success is subject to national cultural influences and
that these are compatible with the finding of Franke et al. (1991) in indicating the
negative role of individualism, an important feature of Anglo-Saxon culture, on
performance. Casson et al. also show a high between emphasis on individualistic
values by managers and the goal of maximization of share price. These are direct
      Japan economic success is other sample of direct effect of culture derive from
the degree to which the society and the workforce, as well as management, are able to
accept and accommodate contemporaneous technology change. Japan firm adopted
W. Edward Deming‟s system of quality management. This system has a fundamental
contribution to the success of Japan Industries in global market.
      Deming have a multidimensional system design to enhance the X-efficiency of
the individual firm and through domestic competition, of the national industry. The
system proved to be especially suited to industries producing technology-intensive or
Schumpeterian products.

      Culture must have played an important direct role in the relative ease of
adoption of the Deming system with its emphasis on corporation and team work or
group harmony.
      Undoubtedly many direct effects of cultural characteristics on economic growth,
other effects of cultural differences will exert their effects indirectly through
government policies and the extant commercial environment, including industrial
policies. Deming suggests that government policies should take on the direct role of
reducing those cultural effect that may inhibit wealth creation, including the creation
of technology assets, particularly in this age international mobility of assets. These
policies determined within the constraints imposed by natural culture and institutions.
      The likelihood of mutual reinforcement of the direct and indirect effects may
account for the dominance of Confucian dynamism and individualism in the results of
Franke et al. (1991). Confucian dynamism may be expected to indicate a docile
population willing to accept growth-promoting policies (Simon,1993). In contrast, an
individualistic society is likely to be more concerned with current consumption and
self interest than with accomplishments and constraints that will benefit future

 8.   The Effect of Policy

      The impact of culture on policies depends on the degree to which cultural
constraint and existing law impede the government from instituting or facilitate
certain policies. Particularly important with respect to economic policies affecting
economic growth is the power of the incumbent policymakers to impose policies that
favor future as opposed to current benefits and/or to create trust in the society that the
benefits of future growth would be shared. The implementation of such policies could
reflect the expectation of the incumbents that they will retain political power even if
they impose growth-oriented policies on the society. Thus, the national culture and
the economic values that it generates interact with the political system to affect the set
of policies in force by virtue of either positive support for growth-oriented policies or

a docility, the willingness to accept the advice or orders of authority, on the part of
the electorate in the face of the implementation of policies more likely to benefit
future than current generations.
      Japan can be an example for the effect of policies on economic growth
successfully. During 1965-1987, Japan politically dominated by a single party, this
dominant gave policymakers a great deal of latitude in implementing growth-oriented
policies. The set of economic policies in force has imposed, through heavy reliance
on excise and luxury taxes, a very high rate of saving and taxation on household,
enabling government to provide good support to growth-capable, export oriented
industries. Japan has been the foremost practitioner of export-led economic growth.
      The high rate of household saving has also allowed Japan to run chronic surplus
on current accounts and allows Japanese citizens and business to acquire financial
asset denominated in foreign currencies. These acquisitions have made it possible for
the yen to avoid appreciation.
      The competitive advantages that derive from the existence of appositive free
cash flow, compatible with good industrial policy and adoption of Deming system,
allow firm producing Schumpeterian goods to maintain their competitiveness in
international markets. There are five avenues by which Japanese and other East Asia
firm may have gained market ascendancy over their America counterparts. All five
affect international competitiveness through the ability to generate free cash flow,
that is, after tax profit plus depreciation. The five avenues are industrial policy,
allowing low net tax burden; the high rate of saving, identify as feature of Confucian
dynamism; gain from economies of scale and learning; preservation of the low value
of the yen; and having higher X-efficiency than foreign competitors. This
combination of policies and adaptability must have contributed importantly to
Japanese rate of economic growth both domestically and through successes in
international market. Singapore, Taiwan and Korea were influenced by Japanese
success and used Japanese model.
      There are three possible scenarios the role of culture in implementation of
growth-promoting policies in the East Asian nations:

      a. That culture affected the desire of the electorate that growth-promoting
         policies be adopted
      b. That culture encouraged the docile acceptance of such policies when imposed
         by the authorities even though the electorate would have chosen a set of
         policies that afforded greater present consumption
      c. That culture induced policymakers to implement growth-promoting policies.

 9.     Conclusion

        Based on the description and the above discussion, it can be concluded as
        a. In the concept of economic, culture is collective of subjectivity, which has
           two meanings, subjectivity in the context of values and subjectivity in the
           context of probability.
        b. Cultural characteristics as prerequisites for sustainable development
           includes: the distinction between science and morality, an emphasis on
           achieving higher standards, which are individualist view, the level of trust,
           pragmatism and policy.
        c. There are direct and indirect effect of cultural traits in economic
        d. From the regression correlation analysis, impact of culture to economic
           performance showed that positive significant for Confucian Dynamism
           (CONDYN) and negative effect for Individualism (IDV) in term of
           economic growth. Culture values in the West Countries and East Countries
           differ in term of influences economic performance.

References :

Casson, Mark. 1993. Cultural Determinants of Economic Performance, Journal of
     Comparative Economics, Vol. 17, pp. 418-442

Franke, Richard H. , Geert Hofstede, Michael H. Bond. 1991. Cultural Roots of
     Economic Performance: A Research Note. Strategic Management Journal,
     Vol. 12, Special Issue: Global Strategy. John Wiley & Sons.

Gray, H. Peter, 1996. „Culture and Economic Performance: Policy as an
     Intervening Variable‟, Journal of Comparative Economics 23: 278-291, July.

Hofstede, Geert. 2001. Culture’s Consequences : Comparing Values, Behaviour,
     Institutions, and Organizations across Nations (2nd Edition). Sage
     Publications : London.


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