Does Culture Affect Economic Growth?

How do some countries fare better than others, despite not having adequate resources?

This has been largely debated by the best economists in the world. Some believe that culture can dampen the growth significantly. For instance, Middle Eastern economies have failed to develop most things while being home to scarce resources like oil. On the other hand, countries like Switzerland which has no resources have flourished. Similarly, Asian countries like China and Japan have developed through manufacturing, despite the lack of natural resources. But, countries like India (a country that is a paradise of land and cheap labour) are still struggling to develop completely after independence. While there are a lot of factors that affect the growth of a country, it can be observed that culture plays a modest yet, important role in the development of an economy.

The study of behavioural economics was a significant aspect of determining the relationship between culture and economics (cultural economics). The existence of rational buyers who have good knowledge of the market makes up the economy of the country. The behaviour of the rational consumer can be influenced by a myriad of things. Naturally, it differs with country to country. Americans are more individualistic than their European counterparts. This makes them prioritize individual income and lower tax rates. This can also affect their political decisions which will ultimately affect their economy on the whole. On the other hand, in Europe, the priority would be community income which makes them more efficient. This makes most of the European economies mature economies.

The interpretation of the Indian situation is much more ambiguous. To understand how Indian consumers behave in general, they have to be studied over a period of time. During pre-colonization, Indians were known for the system of caste hierarchy which constantly discriminated against people of a particular caste. This hierarchy worked in alignment with occupations into which people were involved. This method had explicit flaws that were rectified during post-colonization. To prove the same, some studies showed that when students from different castes were put in the same class without any prior knowledge of their birth, students performed satisfactorily. However, when they were informed of their births, students belonging to a higher caste performed better than children from a lower caste.

During post-colonization, the Indian economy was liberated from the clutches of caste hierarchy. However, some new questions were to be answered by economists. Some theorized that Indians, owing to their religious practices were fundamentally spiritual and not materialistic. If that was truly the case, the economic development of such a country would be a very precarious affair. Although, this could have been a topic of discussion in the past, in the contemporary sense, this notion could be defeated by arguing that the existence of politicians and other power-hungry leaders defies the logic presented here. The money grubbers in the economy are a paradox to that theory. Instead, it can be proven that culture in terms of beliefs, values, language, geography and institutions, cause rational consumers to behave differently from one another.

In simple words, a person’s life experience shapes his preferences, desires, cognition and perception. That said, in the pre-independence context, India’s caste hierarchy had forced the innovation out of the minds of people for centuries. Fathers taught their sons their profession and thereby, carried forward their family occupation to every generation, whether it was trade or agriculture. There was no scope for innovation. Industrialization was brought into the country by the colonizers. It was extremely vital for innovation. Without industrialization, the economy would be further behind in terms of development. In the contemporary context, Indians have made least innovations in comparison to other economies in the world. India was ranked 57 of 126 countries in the World Innovation Index for the year 2018. It becomes clear then, why 95% of Indian startups failed within the first 5 years of their inception. Well, it was basically due to lack of innovation.

India’s middle class is the driving force of the economy. According to the 2011 census, more than half of India’s population fell under the category of the middle class. That is roughly more than 600 million people. Due to lack of innovation, majority of the middle-class population is utilized as cheap labour for other developed countries. Although, Indians are supposedly more qualified than their western counterparts since most of them have college degrees, they are unable to use their knowledge to improve their economy. Culture doesn’t cause explicit barriers in the growth of the economy, but leaves the people of a country with lesser opportunities. This is sadly, the case with India today.

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