China’s Influence on the Future of Global Business Culture in the 21st Century Dr. Jose Aníbal Torres, Keuka College and Southern New Hampshire University ABSTRACT China’s rise to international economic prominence began with socio-political, economic and cultural reforms late 1978 and into 1979 under the leadership of Mao Zedong and Deng Xiaoping. These changes led China’s economy to unprecedented growth for the following three decades; after 1979. Today, China enjoys being recognized as the second largest economy in the world. However, while China’s economy realized an average growth of 9.7% over three decades, questions arise as to whether China can continue its economic growth of the past three decades. Further, challenging the global economic culture of the 21st century is the growth that has been witnessed by the BRIC nations, including an impressive economic growth opportunity from South Africa. That is, the 21st century is witnessing a global change in economic power, from a decrease in the developed nations, and an increase from the developing, emerging, economies. China’s future challenges as surmounted by a shift in the demographics, and arguably, the increase in their middle class; to potentially the largest middle class in the world. China’s rise in Asia, to hegemonic status, and global economic prominence has brought additional challenges, or opportunities, that must be addresses. These challenges focus on the need to develop a sustainable infrastructure, controls, and effective global leadership to sustain economic growth. Researchers project that China’s economy will slow down at a rate of 5 or 6 to 8%; with a higher percentage between the current years until 2015. And from 2016 to 2025 China’s growth is projected to decline to the range of 5 to 7%. While these rates suggests decreases in comparison to China’s past economic growth, they are competitive on a global scale and focus on the development of the new challenges that China is beginning to face. This study will discuss China’s rise in Asia, its economic influence in different regions of the world, its changing structures, its aging and young’s population’s effect, the rise of China’s middle class and the overall prediction of China’s economy to the year 2025. Key words: China in the 21st century, China and the global business culture, Global business culture INTRODUCTION Globalization has been instrumental in transforming not only global economies and the international dynamics of power, but also redefining international power. The Chinese Olympic Games was intended to showcase China’s economic development progress and world leader status; which ultimately helped to transform China’s image as a global economic power and influence on business culture in the twenty-first century (Salloum, 2004). China’s embrace of a market economy, economic growth and geopolitical influence has attracted the attention of foreign countries, but not without its internal challenges (Norris, 2011). Additionally, China has undertaken impressive efforts to enact laws and regulations, in environmental protection, anti-monopoly, property rights and labor laws that encourage corporate social responsibilities and are fueling FDI inflows (Norris, 2011). According to analysts, the decrease of the developed countries’ economic power shifts this power dynamic in the direction of the emerging economies, and political power will inevitably follow; dynamics of geopolitical events of the 21st century. Further, China a large developing country with an emerging economy, is, arguably, accepting the responsibility of encouraging other countries to help in creating a more effective trade and financial system for sustainable world development (Ying, 2010). And during a recent G20 Summit, China’s President Hu Jintao, spoke about China’s position relative to future world economic development and regional cooperation. China’s growing power has not challenged its local region, and has been more of a contributor in maintaining its existing order (Wang, 2011). China’s future growth will have implications for the rest of the world; already influencing the world economy through its booming exports, its demand for natural resources, its influence on global warming and so on. However, researchers argue that growth will slow from 6 to 8 percent over the next two decades (Perkins & Rawski, 2008). And the gap between Chinese and U.S. power is drastically narrowing (York, 2006). Additionally, China’s increasing presence and influence in Latin America, European Union, Eastern Asia, and Africa has now become a hot item of discussion and debate on a global level (Versi, 2006). In a recent World Economic Forum survey, participants identified the most significant global economic society and environment issues of the future: global power shifts; emerging economies and China; uncertain economic recovery; population growth and ageing; shortage of resources; and inequality (World Economic Forum, 2011). And Asia and other emerging markets will outstrip The Journal of American Academy of Business, Cambridge * Vol. 18 * Num. 2 * March 2013 9 the economic performance of Europe and North America (World Economic Forum, 2011). To this end, how China wields power in an integrated global community will determine in the end the character of its international influence (Kim, 2003); as it influences the future of global business culture in the 21st century. Global Business Culture Transformation The global business culture, post-WWII, was led, primarily by the U.S., and within a relatively short time, was joined by Western Europe and Japan. This global business cultural influence began to change during the latter part of the 20th century, where the 21st century’s global business culture has changed its dynamics, with the U.S., China/BRIC nations, and the European Union. Further, researchers argue that globalization, during the 20th Century may now be taken over by a more segmented regionalization, as witnessed by many regional trade agreements, EU, ASEAN, APAC, NAFTA, and so on, and many bilateral trade agreements. This has led to a global economic interrelationship. Researchers argue that both China’s political and economic developments during the past three decades are of unprecedented, amazing, momentous and influential levels. China has embarked on an extraordinary transformation similar in scale to that of the Western Industrial Revolution. Perhaps, and arguably, the most intriguing of this transformation is the role of the Chinese central government; the Communist Party (McGregor, 2010). China’s central planning system, its political party, still depends on a successful free market system that has achieved such extraordinary historic growth. To this end, China’s economic growth is the most significant achievement that supports China’s political Communist Party. Researchers will argue that it is this significant achievement which gives China the power and recognition is now enjoys throughout the international environment (McGregor, 2010). Globalization has been greatly instrumental in influencing not only global power dynamics but also the very definition of what power constitutes. As an example, China’s own perception and understanding have focused on an economic, scientific and technology perspective, as opposed to a military perspective. Many researchers and practitioners will argue that China’s focus is on soft versus hard power. Therefore, as China continues to be integrated and interrelated to the global community, how it exercises its power will determine the character of its global influence. Today, researchers and practitioners recognize China’s sovereignty and power base as more secure and accepted in the international community; more than in the past (Kim 2003). China’s Rise in Asia China’s growing power has thus far led the country to become less of a challenger to the status quo in Asia and more of a net contributor to regional order, and that the future trajectory of Chinese policy in the region will depend critically on how the U.S. conducts itself in Asia (Wang, 2011). In order to persuade the region of the peaceful nature of China’s rise (Wang, 2011), the Chinese government launched many bilateral trade agreements with countries not only within its region, but outside as well. However, China remains highly sensitive to America’s role and policy in the region. “China has thus adapted a moderate policy with the U.S.; resulting from China’s recognition that good relations with the U.S. are crucial to its domestic economic development and political stability. However, China still remains suspicious of the U.S, intentions (Wang, 2011). China’s award of the Olympic Games in 2001 provided them with the vehicle to showcase their extraordinary economic growth and project to the world their country’s new status as a global leader. The recent Olympics in China helped to change China’s past global image, stemming from what many argue as the 1989 Tiananmen massacre, to a new image of China as a global economic power and influence on business culture in the twenty-first century (Salloum, 2004). China’s economy will continue to lead the way to continued Asian economic growth. China’s GDP growth increased in 2010 to 10.3, up from 9.2 in the preceding year 2009. This increase in GDP was fueled by increases in many activities throughout different elements of China’s economy; that is, spread throughout all of China’s various economic activities, such as relaxed credit situations and a stimulus-package backed by the Chinese government that helped to increase the investment segment. Economic growth will decrease in 2011 to 9 percent, the end to spending created by stimulus ceases and tightening of policy leads to a slowdown in the investment in real estate. Business surveys and industrial production figures indicate that activity is already slowing. However, the strength in the growth of income will aid in supporting consumption, while the central government focuses on not allowing growth to slow down; while also remaining diligent on switching to a more supportive stance if required (Economist Intelligence Unit, 2011). The Journal of American Academy of Business, Cambridge * Vol. 18 * Num. 2 * March 2013 10 While China’s economy arguably suggests a slowdown, there are many potential risks that could result in some drastic outcomes. Inflation is a serious danger. In December 2010 year-to-year consumer price inflation decreased to 4.6%, but it is expected to accelerate to an average of 5% in 2011. The main reason for the recent rise in inflation could arguably be related to bad timing, which has provided double-digit food price increases. These pressures should relax conditions so they can return to normal, and core inflation (excluding food) stood at just 1.9% in December. But there are signs of overheating. Nominal wages per head increased by almost 18% in the third quarter of 2010, and it is possible that higher wage costs will filter through to the price of goods. The property market is also still a cause for concern. Although the official data show that real house prices increased by just 8.7% over the past two years, and 16% over the past five years, there has been a clear divergence between the growth in supply and demand for housing in the past year (see chart). With the exception of 2008, when house prices were weak, floor space sold tends to be close to the amount of floor space completed the year before. It would take a sales boom in 2011 (even as borrowing costs are rising) to match the new supply due to become available, suggesting that there is a risk of a fall in house prices next year. The surge in liquidity that occurred in 2009 and 2010 is also a real concern (Economist Intelligence Unit, 2011). The Chinese leadership is taking the appropriate measure to relax the economy. In 2010 the government raised banks' reserve requirement ratios six times. In October and December interest rates were raised. Most recently, on February 8th China hiked the benchmark one-year lending rate by 25 basis points to 6.06% and the oneyear deposit rate by the same increment, to 3%. Administrative measures, such as price controls on some basic items, subsidies and the release of stocks of food and fuel from government warehouses, are also being used to constrain prices. So far the authorities have been successful, at least in curbing bank credit, which should help to restrain inflation. But bank lending is not the only factor adding to the high levels of financing available in the economy. Firms have been active in the corporate bond market and have issued large amounts of equity. Retained earnings have also soared in 2010─corporate profits rose by 49% year on year in January-November. M2 as a percentage of GDP, which is a good measure of liquidity, rose from 152% in 2008 to 178% in 2009 and 191% in 2010 (Economist Intelligence Unit, 2011). There is clearly some way to go in China’s tightening cycle. Capital requirements and interest rates will probably be raised again in the coming months, and the government is also likely to allow some appreciation in the exchange rate. Deposit interest rates, at 3%, are considerably negative in real terms, suggesting the degree of tightening that might still be needed. Our core forecast is that inflation will average 5% in 2011, but this could be too benign (a spike to perhaps above 7% is conceivable). In the event that inflation accelerates further, a more determined policy would result, with negative implications for economic growth. Raising interest rates, curbing loan expansion and tightening up on mortgages all run the risk of exposing state-owned banks to bad loans to local governments, property developers and state-owned enterprises. Such problems can be allowed to build up in the short term, but they risk creating the need for a larger rescue or recapitalization of state banks, which would impair public finances. A spike in inflation and a policy over-reaction could bring GDP growth down to unexpectedly low levels (bearing in mind that anything below 7% would be classed as low in the Chinese context, and 5% would be shockingly low) (Economist Intelligence Unit, 2011). China’s Path to Hegemonic Status Yan Xuetong (as cited in York, 2006) suggests that the gap between the Chinese and U.S. power is decreasing considerably. “Today, there is an ongoing debate in China about the country's increasing political power and its place in the global rankings of power. The clear suggestion is that China is on the path of the same historic rise as Britain, Germany, Japan and the United States. A recent poll of about 2,000 Chinese citizens, conducted for two U.S. think tanks, found that the Chinese are eagerly embracing their rush to greatness. Most expect China to become as powerful as the United States within a decade (York, 2006). Emerging Economies A bigger economic output means a larger voice for emerging economies and developing countries on the world stage. Chinese President Hu Jintao, attending the G20 Summit and the APEC Economic Leaders' Meeting from Nov 11-14, spelled out China's stance on future world economic development and regional cooperation. His remarks represented a common stance by emerging economies and developing countries. Analysts said developed countries' decreasing economic power marks a power shift towards emerging economies. China, as a big developing country with an emerging economy, should take responsibility and urge other countries to help create a better trade and financial system for sustainable world development” (Ying, 2010). The Journal of American Academy of Business, Cambridge * Vol. 18 * Num. 2 * March 2013 11 China’s Future Growth to 2025 “How fast China grows in the next twenty years has implication for the rest of the world” (Perkins & Rawski, 2008, p. 34). China has been able to influence the world economy as a result of its strong exports, its natural resource demands, and its increasing influences on global warming and so on. “Productivity increases will remain important drivers of China’s growth but will not match the gains of last 30 years. Continuing reforms, particularly of China’s financial and legal systems, will be essential to maintain rapid economic growth. However, growth will slow from 6 to 8 percent over the next two decades” (Perkins & Rawski, 2008, p. 35). Research suggests that based on labor, human capital, and with total factor productivity (TFP) factor inputs at negative stages, China’s past GDP growth performance for the period between the years 1952 to 1978 was primarily sustained by the increases in capital and labor inputs. Further, China’s 1978 to 1979’s economic reform brought about dramatic changes, never before witnessed, in the three decades that followed, as a result of the key driver, productivity, that lead rapid growth by way of increased capital formation. To this end, TFP achieved an average annual growth rate of 3.8 percent between 1978 and 2005, with a slight decrease in the final 10 years. Moreover, the labor growth, as well as capital and education can, arguably, increase China’s GDP to a maximum 5 percent rate. China’s real GDP growth increased to 10.3% in 2010, from 9.2% in the preceding year of 2009. Additionally, China’s 2011 GDP was projected to conclude at 9%. China's economy did actually expand in 2011 by 9.2 percent based upon the previous year, and 8.9 percent every year in the fourth quarter (the National Bureau of Statistics as cited in http://www.chinadaily.com.cn/bizchina/2012-01/17/content_14460323.htm). However, China’s quarterly growth proceeded at the slowest pace in 10 quarters. After and economic growth of 10.4 percent in 2010, China projected their economic growth for 2011 at 8 percent. To this end, China’s economy grew by 2 percent in the final quarter on a quarterly basis (Jiantang as cited in http://www.chinadaily.com.cn/bizchina/201201/17/content_14460323.htm). However, China’s economy grew 9.1 percent on a year to year in the third quarter of 2011; in comparison to the 9.5 percent in the second quarter and a 9.7 percent in the first quarter (http://www.chinadaily.com.cn/bizchina/2012-01/17/content_14460323.htm). According to Lu Zhongyuan, deputy director of the Development Research Center of the State Council, or China’s cabinet (as cited in http://www.chinadaily.com.cn/bizchina/2012-01/17/content_14460323.htm) China should no longer be obsessed with the rate of speed of their economy’s growth. To this end, he projected China’s GDP expansion would decrease in 2012 to approximately 8.5 percent. Additionally, a report released by the Center for Forecasting Science under the Chinese Academy of Sciences also predicted growth of 8.5 percent for the year 2012. Moreover, researchers argue that by adding TFP, to drive the economy forward, a growth rate of 6-8 percent, arguably, is projected with the higher range limit (6-8) to 2015, and the lower range limit (5-7) from 2016 to 2025. These projections assume China sustains a stable domestic and international political environment continues to pursue economic reform, and maintain a high rate of savings and investment, over the next two decades (http://www.chinadaily.com.cn/bizchina/2012-01/17/content_14460323.htm). China’s Changing Structural Growth China's roadmap for economic growth favors quality, over speed. This shift comes as China adapts the economy's changing structure. The Chinese argue that the US. Economy is based on consumption & credit => US consumers spending beyond their means (i.e.: buying on credit) => credit from China. In contrast, China’s economy is based on consumption and investment/trade => However, investment/trade is not sustainable, since U.S. consumers cannot sustain buying on credit => Therefore, China, requires a structural change. Moreover, China has spent less on social services and programs (as a percentage of GDP) then the average of developing countries. Therefore, the U.S. projected decrease in consumption from China and China’s large percentage of credit to the U.S., and China’s need to increase social programs will require China to structurally change its economy. China’s Aging Population and Its Effects Researchers argue that three decades ago China was challenged with too many children that required some sort of support. However, three decades later, resulting from China’s “one-child” policy, China’s problem of how to support a large population of children has reversed. In fact, China is now concerned with potentially having too few children that can support the speedy growth of their aging population (Keneda, 2006). With health care improvements that have led to improvements in longevity over the past few decades and decreases in fertility rates, The Journal of American Academy of Business, Cambridge * Vol. 18 * Num. 2 * March 2013 12 China’s new dilemma is that of having one of the fastest aging populations ever recorded. This is further complicated by increases in chronic diseases and disability within its population, especially in the aging sector. Moreover, China had not prepared to meet the challenges that this rapidly aging population, with health care issues, has brought about. However, as a response to this growing dilemma, China is prepared today to accept these challenges, and has begun to develop comprehensive health care reforms. To this end, Chinese health leadership have developed and implemented, at its national level, different chronic disease prevention, and longterm care, programs for its elderly. As a result of these programs and China’s continued growing economy, however, China’s new challenge is that of allocating adequate funding to meet the new and increasing health care costs (http://www.prb.org/Articles/2006/ChinasConcernOverPopulationAgingandHealth.aspx). China’s Young Population and Its Effects Jun Ma, one of China’s leading voices (as cited in Morrow, 2010) argues that the biggest factor influencing China's economic development in the upcoming few years will be its demographics. Ma argues that China’s working population will begin a protracted decline from 2014; pushing the government towards improving consumption and local wages. Further, Ma argues that China's labor force over the next four years will grow at 0.3% a year, but from 2014 until 2050 it will shrink by 250 million people, due to aging; driving Beijing's policies to shift from being an export, investment and government driven country to making itself more consumer-driven and thus more self-sustaining. The shift in demographics is set to have a regional impact in Asia, as well. Furthermore, the number of people living in China's cities for the first time exceeded those living in the country's rural areas as of the end of 2011, according to the NBS. As China's working force shrinks and the country seeks to raise wages, it will have to look into higher-skilled service and manufacturing jobs. Therefore, lower-skilled labor-intensive manufacturing will begin to shift to nearby countries such as Bangladesh, Vietnam and India (Morrow, 2010). To this end, China has developed an aggressive higher education plan that focuses on educating its young population with higher education and varied degrees in preparation for future higher-skilled jobs, in lieu of low or semi-skilled jobs. Research suggests that the current young Chinese population have different spending habits then the preceding generations, resulting from their receipt of extra spending money from their parents (Yi, 2006; China Daily, 2001). Traditionally, Chinese consumers tend to be thrifty and save a much higher percentage of their income then their Western counterparts. The influence of globalization, economic growth, and global flows, especially in the larger and more progressive eastern China cities, has caused Chinese consumers to begin embracing modern consumption values; especially the younger generation. Therefore, younger Chinese will be, arguably, less thrifty than the older generations. However, Western China lags in these changes. And, as the middle class grows and China’s income gap decreases, the effects of savings on their and the world’s economies and markets will be dramatic (Morrow, 2010). The Rise of the World’s Largest Middle Class Research suggests that the Chinese middle class will arguably extend to approximately 600 million people by 2025. This new middle class level will represent approximately 40 percent of China’s population during period, and is based on a projected 6.5 percent annual GDP rate (McKinsey as cited in Wang, 2010). McKinsey (as cited in Wang, 2010) also argues that even if economic growth slows, incomes in urban areas will increase faster than GDP because of higher labor productivity and rising educational levels. However, such an increase in China’s middle class would arguably suggest China’s middle class will be able to increase consumption; that is, the Chinese will be able to afford to drive cars, own homes, and so on. This increase could arguably cause calamitous damage to the environmental system, the availability of urban housing, food, energy, and many other areas of increased consumption; especially since China has already surpassed the U.S. as the world’s largest energy consumer and polluter. China and the U. S. China represents both an opportunity and a threat to the U.S. in economic and security terms. For China to become an opportunity or challenge will depend greatly on the policy choices and internal dynamics of China and the U.S. in the upcoming years. Further, the U.S. influence over China should not be overstated. That is, U.S. policy can influence, good or bad, in shaping the decisions China makes about its future. The Journal of American Academy of Business, Cambridge * Vol. 18 * Num. 2 * March 2013 13 Furthermore, the U.S. has an overriding stake in pursuing a strategy that effectively integrates China into the global economic and security systems in a way that reinforces the American people’s long-term security, prosperity and peace. The U.S. and China should focus on mutual interest and benefits. China and Latin America “Latin America, a thriving region of more than 600 million people, has a promising decade ahead. It is a leading global trader of agro-products with major reserves of raw materials and immense rainforests, which are vital for the global climate and hold potential for renewable energies. Major global environment and sports events are to take place in the region in the coming years, and most countries are on the front line in attracting private investment. They offer remarkable opportunities for a growing number of modern industries to develop, while innovative reforms are being promoted to foster economic growth and improve the quality of life for the majority” (World Economic Forum, 2011). Total trade between China and Latin America reached $140 billion in 2008. Further, Latin America is also a potential arena for strengthening Chinese foreign policy goals; by developing strategic alliances, as part of China’s global positioning, as it emerges as a superpower. And, Argentina, Brazil and Mexico are key targets for Chinese strategic partnerships, because of the value of trade and their regional influence. Moreover, China has also linked trade incentives and aid to Central America and the Caribbean countries. However, most Latin American countries prefer security ties to the U.S. because they are politically important and because they don’t trust China’s long-term political ambitions. To this end, in 2010, China became the third-largest buyer of Latin American assets; as the region's M&A's double. China and the E.U. The EU-China strategic partnership, declared in 2003, suggests both sides are gaining global influence as a new kind of superpower seeking to avoid conflicts that characterized the Cold War. EU-China relations are shifting the meaning of security in an emerging arena of global symbolic politics through various councils and policies focused on mutual interest and benefits. However, EU-China relations are unlikely to construct a shared sense of a Eurasian self. China and India China and India have experienced dramatic economic growth in recent years. And their continued accession into world class competitor status is viewed as a threat to the Southeast Asian economies. While much attention had been directed at the emerging economies of the BRIC nations, it is China, India and Brazil that have emerged as major players. China’s ability to attract FDI has also had a positive effect on the flow of foreign investment into Southeast Asia; due to the “China plus One” strategy in which investors seek to invest in China and other countries in the region, in order to reduce political risk. The same is true of India. China and Africa “China’s increasing presence and influence in Africa has now become a hot item of discussion and debate on a global level. In less than 10 years China’s investments and trade with Africa have registered what can only be described as stunning growth. The pace with Chinese involvement is also accelerating (Versi, 2006). Africa is growing into an important destination for China's foreign direct investment (FDI). China is Africa's third largest trade partner, following the United States and France. Under the principle of no political strings attached, China's trade with the continent has no hidden ideological agenda. China and Africa share the view that countries should not meddle in each other's affairs. They have acknowledged that they can achieve common development only through cooperation based on mutual trust and mutual benefit. And China is ambitious to move its trade with Africa to top US$100 billion by 2010” (China Daily, 2004), becoming arguably the largest investor in Africa. Global Economic Culture The World Economic Forum, on a recent 2011 survey, asked its participating members, 561, from business, academia, international organizations/NGO, governments, and other categories, to identify the global economic society and environment in the future. The highlights of the survey identified the following: (1) global power shifts; The Journal of American Academy of Business, Cambridge * Vol. 18 * Num. 2 * March 2013 14 emerging economies and China; (2) uncertain economic recovery; (3) population growth and ageing; (4) shortage of resources; and (5) inequality (World Economic Forum, 2011). “As economic power moves from the developed world to the emerging economies, political power will inevitably follow. How this dynamic plays out will be at the crux of geopolitical events as we head further into the 21st century. 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The Journal of American Academy of Business, Cambridge * Vol. 18 * Num. 2 * March 2013 15 Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. From Economicist to Culturalist Development Theories: How Strong is the Relation between Cultural Aspects and Economic Development? J O S É C U E S T A Culture has been either neglected as a determinant of economic growth by economicist theories or deemed the main explanation behind international developmental differences by culturalist theses. Empirical evidence supports neither of these arguments. Less ambitious theories connecting concrete cultural aspects, such as trust and associational participation in communities, have more convincingly estimated a significant and positive impact on economic welfare. Using the case of Honduras, this paper similarly estimates a positive, significant and mutual relation between interpersonal trust and participation in community management and economic welfare. La culture a été soit négligée comme déterminant de la croissance économique par les théories économiques, ou prise comme explication principale des différences de développement international par les thèses culturalistes. L’approche empirique n’avalise aucune de ces perspectives. Des théories moins ambitieuses rapprochant des aspects culturels concrets, tels que la confiance et la participation associative dans la vie communautaire, ont clairement mis en évidence un impact favorable sur le bien-être économique. De la même manière, ce papier met en évidence à partir du cas de l’Honduras l’existence d’une relation positive, importante et mutuelle entre la confiance interpersonnelle et la participation dans la gestion de la communauté et du bien-être économique. INTRODUCTION After decades of neglect, there is now a growing interest in the role that culture plays in developmental processes. Standard economic modelling has been extended to include social, political and cultural variables to account for José Cuesta is lecturer in Development Economics, Institute of Social Studies, The Hague, The Netherlands. The European Journal of Development Research, Vol.16, No.4, Winter 2004, pp.868–891 ISSN 0957-8811 print/ISSN 1743-9728 online DOI: 10.1080/09578810412331332677 q 2004 Taylor & Francis Ltd CULTURALIST DEVELOPMENT THEORIES 869 economic growth. International financial institutions have started to draft (admittedly modest) agendas for cultural development. These agendas recognise several developmental aspects, from the economic potential of culture in the tourism industry to the virtues of a participatory culture promoting community cohesion. Governments have also grown more sensitive to the role that culture may play in the context of development. Recent poverty reduction strategies of the highly indebted poor countries explicitly link – nominally at least – national development with cultural and moral values. Arguments which prioritise culture as a prominent development factor are not new. Early in the twentieth century Max Weber raised awareness of the importance of a set of values to explain the success of industrial capitalism vis-àvis pre-capitalist agrarian societies across Europe [Weber, 1905 ]. From the late 1960s to the late 1980s, however, the ‘hard’ economic reality of stabilisation and structural adjustment packages elbowed cultural aspects out of development agendas. Since the 1990s, both the paradigm of human development and passionate discussions on globalisation have revived interest in the role of culture in economic development. The myopic approach of many analyses has contributed to a heated debate. ‘One-size-fits-all’ culturalist (and economicist) analyses attempt to explain development by turning a handful of historical episodes into universal paradigms. Unsurprisingly, empirical evidence does not support such claims. Less ambitious analyses have more successfully shown that concrete cultural mechanisms have a positive and significant impact on economic development. This paper adds to this limited stock of empirical evidence. The first part of the paper presents a critical review of developmental paradigms and the role attributed to culture. Arguments are divided into two categories: those ‘on the fringes’ which deal with an overarching concept of culture; and other, less ambitious arguments which emphasise specific values and behaviours in society. Crucially, the latter provide empirical evidence that trust, civism and community participation can have significant impacts on economic welfare. The second half of the paper considers the case study of Honduras and estimates, country-wide, the impact of trust and community management participation on household welfare. The results show a strong positive, significant and simultaneous relation between a composite of interpersonal trust and community management, and household welfare. CULTURAL ASPECTS ‘ON THE FRINGES’: FROM ECONOMICIST TO CULTURALIST THEORIES OF DEVELOPMENT Although cultural development as an objective of broader development has only recently been recognised, culture – widely understood as a system of values, beliefs and behaviours present in a society [Sen, 2004] – has long been 870 THE EUROPEAN JOURNAL OF DEVELOPMENT RESEARCH recognised as a determinant of economic development. The relevance that has been attributed to it has varied widely, however, from neglect at one end of the spectrum to culture being treated as the over-arching cause of global developmental differences, at the other end. Early work within the exogenous growth paradigm, for example, completely failed to connect economic and noneconomic aspects. It is as if – to quote Fukuyama [1995: 6 ] – ‘the economy is a realm in which individuals . . . satisfy their selfish needs and desires before retreating back into their ‘‘real’’ social lives’. Nurkse [1953 ], Lewis [1955 ] and Solow [1956 ], among others, recognised only the logic of the market for competitive capital accumulation. During the mid-1980s, however, growth theory started to reject the idea of capricious technological development as the basis for long-term growth. A first wave of models of so-called endogenous growth [Lucas, 1988; Romer, 1990; Barro, 1991] put forward a new concept of capital, extending the traditional ideas of physical and financial capital to include human capital. Economic growth had abandoned the strait-jacket of diminishing returns [Barro and Sala-i-Martin, 1995: 13]. New factors such as research and development, imperfect competition, information asymmetries, externalities and technological diffusion all became important, as did public action, especially fiscal policy, provision of infrastructure, intellectual property and commercial and financial regulation. In spite of these shifts, however, cultural aspects remained peripheral, outside the roots of long-term economic growth. In contrast with capital accumulation theories – classical or augmented – other theories have talked of specific cultural aspects or of culture more generally, as the fundamental determinant of economic development. Some have used culture to explain past successes, while others concentrate on conditions for future development. Landes’s explanation of early industrialisation in Europe, and in England particularly, emphasises ‘nonmaterial values (culture)’ and institutions [Landes, 1998: 215] in conjunction with the institutionalisation of technological advance. According to Landes, the fact that England at that time was a nation with a strong sense of identity and a precocious inclination for political and civil freedom and the security of its people put it in a better position to embrace technological and economic development than Islamic and Chinese societies.1 More contemporary approaches, such as that of Porter [1990 ], focus on rapid and sustained productivity growth as the cornerstone of economic development in a global world. His ‘competition paradigm’ argues that productivity depends not so much on the industries with which a nation competes internationally, but how this nation competes. And national culture plays a significant role in a nation’s capacity to organise its production efficiently. As the globalisation process neutralises former economic advantages associated with geographical location and endowments and traditional barriers, values promoting competitiveness become increasingly decisive. Furthermore, Porter [2000 ] CULTURALIST DEVELOPMENT THEORIES 871 concludes that the adoption of this competition culture is not an option but an imperative within the current global context. Of course, other authors disagree with the contention that global marketoriented processes are imperative and unstoppable, while still considering cultural aspects as determinants of economic development. Chang and Grabel [2004 ] recently argued that the ‘no-alternative’ view of free market neoliberal globalisation is a fallacious myth. They also reject the notion that the East Asian development model is culturally idiosyncratic and could not be reproduced elsewhere, as much as they reject the idea that the Anglo-American neoliberal model is based on universal values. Unfortunately, they do not provide a yardstick with which to judge universalism which would strengthen their arguments. On a different note, Chua [2003 ] argues that the current process of economic liberalisation has magnified opportunities across the world for ‘market dominant’ ethnic minorities to concentrate disproportionate wealth in local economies.2 When this process is followed by disorderly and hasty Westernpushed democratic liberalisation, the resentment of local majorities prompts the spiral of confrontation seen in places such as Indonesia, Zimbabwe or Bolivia. Although there is no unique reason for minorities to thrive economically, Chua concedes that part of this success is due to ‘culture/family networks’. Disappointingly, the extent to which these networks are responsible for that success as compared to entrepreneurial values, alliances with autocratic elites (‘crony capitalism’) or colonial practices, for example, is not clarified. Other ‘culturalist’ explanations have gone much further. They constitute what Sen [2000: 11 ] calls ‘over-grand’ cultural theories. They maintain that culture is the main single factor explaining worldwide economic, political and social differences. Huntington’s thesis of clashing civilisations, in which individuals no longer identify themselves along ideological lines but as part of cultural groups, is well known. Huntington [1993 ] predicts that, as a result, economic globalisation will lead to a ferocious competition among civilisations and a protracted confrontation among the most prominent cultures. He envisages that economic competition without cultural convergence will dominate future world relations. Confrontation between democratic, communist and fascist regimes has been replaced by Western, Islamic, Confucian (and other) culture clashes. A frequent critique of this thesis, however, is that traditional civilisations are bound to conflict. There are, after all, at least as many examples in history of civilisations collapsing at the hands of others, as there are of successful episodes of cooperation among them. Another well-known culturalist position is Max Weber’s thesis that the hegemony of capitalism is a cultural phenomenon associated with religion. Protestantism, or more specifically Calvinism, would have facilitated in Europe the adoption of a modern industrial capitalism seeking wealth accumulation. Calvinism is believed to advocate an ethical code of individual behaviour 872 THE EUROPEAN JOURNAL OF DEVELOPMENT RESEARCH conducive to economic success based on hard work, honesty and a prudent use of time and resources. According to Landes [2000 ], Protestantism institutionalised a behavioural pattern of rational, diligent and productive work. Although this was neither new nor exclusive to this religion, it had not been systematically exercised in previous traditional agricultural societies. While these values spread widely along with the Protestant Reform in Central Europe, traditional values of obedience and religious faith remained in Southern Europe. That explains, according to Rao [1998 ], why decades of poorer economic performance ensued across Southern Europe. Similarly, Huntington [2000 ] argues for the existence of superior cultures as far as economic development is concerned. In his comparison of the development of Ghana and South Korea over the past 40 years, Huntington claims that the two countries had similar per capita income levels, economic sectors and composition of exports in the early 1960s. Thirty years later, South Korea was an industrial giant and the fourteenth largest world economy, and its per capita income levels were 15 times higher than those of underdeveloped Ghana. Huntington attributes these divergent paths to different values prevalent in each society: South Korea championed values of saving, investment, hard work, discipline, organisation and learning, all absent in Ghana. There are numerous reasons to exercise great caution in the face of these ‘over-grand’ culturalist theories. While they may explain specific episodes of development, they fail to clearly explain the international development experience following the Second World War. Sen [2004 ] is suspicious of the malleability of the original argument, moulded to account for the economic modernisation of European Catholic countries first; then Japan; later on, the Asian tigers; and more recently, countries like Indonesia, Malaysia, India or China. Similarly, Weiss and Hobson [1995 ] remind us that the same revered Confucian ethics to which culturalist theories attribute the success of East Asian countries, have been associated for centuries with stagnant economies. They also reject the implication that Confucianism encompasses a homogeneous ethics, an argument equally applicable to Christianity or Islamism. Instead, they argue that the choice of political arrangements such as strategic industrialisation guided by the State is behind the development success of the region. In any event, the recurrent swing from neglect to over-explanatory connections of culture and economic development seems to be grounded on arguments which fit only specific instances of success. They are systematically disappointing in explaining why the supposedly superior factors had failed to act in previous situations, and why they did not continue to act. Nor do they explain why ‘successful’ values fail to prevent hiccups along the development process. In other words, culturalist arguments fail to explain the dynamics of economic development. Furthermore, they share with economicist views the same myopia 873 CULTURALIST DEVELOPMENT THEORIES of ‘one-size-fits-all’ stories of successful development. Neither does the empirical evidence seem to support arguments of superior cultures. Table 1 reports a comparative analysis of ten ‘miracles’ and ‘disasters’ of economic growth since the 1960s, using Temple’s [1999 ] classification of successful and failed experiences of economic growth. Indicators of human development, religion, ethno-linguistic fragmentation, colonial history and TABLE 1 SOCIO-CULTURAL CHARACTERISATION OF ECONOMIC MIRACLES AND FAILURES % annual GDP growth per worker 1960–90 HDI ranking Main religion Ethnolinguistic fragmentation (%) Buddhism Indigenous beliefs Buddhism, Confucianism Buddhism Buddhism, Islam Confucianism, Buddhism Catholicism Orthodox Catholicism Christianity* 0 51 No British Yes No 2 British Yes 42 42 No British Yes Yes No Yes 8 35 ... 22 British British British British Yes Yes Yes No 71 11 65 British Spanish Portuguese Yes Yes Yes 18 33 82 78 6 Spanish French British French French Yes Yes No No Yes 69 58 French British No Yes I. Miracles Korea Botswana 6.1 5.9 30 125 Hong Kong 5.8 26 Taiwan Singapore 5.8 5.4 28 Japan 5.2 9 Malta Cyprus Seychelles Lesotho II. Disasters Ghana Venezuela Mozambique 4.8 4.4 4.4 4.4 33 25 36 137 20.3 20.5 20.7 129 69 170 Nicaragua Mauritania Zambia Mali Madagascar 20.7 20.8 20.8 21.0 21.3 121 154 163 172 149 Chad Guyana 21.7 22.1 165 92 Christian* Catholicism Indigenous beliefs, Christianity* Catholicism Islam Catholicism Islam Indigenous beliefs, Christianity* Islam Christianity* 1 European colony? Access to sea? Sources: CIA [2003 ], Mauro [1997 ], Sala-i-Martin [1997 ], Temple [1999 ], UNDP [2003a ]. Note: Human Development Index rankings refer to 2001 and are reported by the Human Development Report 2003 [UNDP, 2003a ]; ethno-linguistic fragmentation by Mauro [1997 ]; colonial history and predominant religion by Sala-i-Martin [1997 ] and CIA [2003 ]. *original sources do not specify the main faith within Christianity. 874 THE EUROPEAN JOURNAL OF DEVELOPMENT RESEARCH geographical location are the variables used for comparison.3 Rates of growth of the product per worker determine which countries are categorised as economic successes and failures. This simple exercise shows that there are no systematic patterns between cultural, social and geographical characteristics and economic performance. Countries that averaged the highest annual growth rates since 1960 may fare worse than ‘failed’ countries in their human development index. This is the case for economically successful Botswana and Lesotho and disastrous Venezuela. Neither is economic performance systematically associated with the degree of ethno-linguistic fragmentation, whether countries have been colonies in the past or whether they are landlocked. In other words, one cannot hope that certain cultural, geographical and historical patterns will guarantee economic growth on their own. Nor does any culture seem a priori bound to economic failure. MOVING AWAY FROM THE FRINGES: CULTURAL ASPECTS AS RELEVANT FACTORS OF ECONOMIC DEVELOPMENT Alternative arguments have burgeoned midway between economicist and culturalist explanations of economic development. These emphasise the impact that relations among individuals and between individuals and institutions have on several aspects of economic development. Social capital has become an increasingly influential concept that highlights the importance of values, beliefs and attitudes of a society in the growth of its economy. As with culture, social capital is an elusive concept and difficult to measure; as a consequence, a consensus on which mechanisms of social capital enhance economic growth has not yet been reached. Coleman [1990 ] uses ‘social capital’ to refer to those relations of authority, trust and allocation of rights that become norms in a society. Putnam [1993 ] emphasises bonds of belonging in groups, whether family-based or of a different nature. He argues that these relationships are positive for economic growth because they instil ‘habits of cooperation, solidarity and public service’ conducive to growth [Putnam, 1993: 89 – 90]. Interestingly, Fukuyama distinguishes between social capital and what he calls ‘spontaneous sociability’ [Fukuyama, 1995: 27]. Social capital is a capability that arises from the prevalence of trust in a society or in certain parts of it. As such, social capital is usually created and transmitted through cultural mechanisms like religion, tradition or historical habit, and in contrast with other forms of capital, it cannot be acquired by a rational investment decision. Spontaneous sociability, on the other hand, is a subset of social capital and refers specifically to the capacity to form new associations and act cooperatively within these associations. Levels of trust ultimately determine the proclivity for spontaneous sociability and social capital in a society. And they have important CULTURALIST DEVELOPMENT THEORIES 875 economic consequences. Fukuyama makes a compelling case for these economic impacts. Sociability and social capital in a society affect the nature of the organisations dominating its economy, either small family-related or large private business organisations. In low-trust economies, administrative rules and bureaucratic structures (that substitute for trust) constitute an implicit tax on economic activity and a transaction cost. Contrary to Porter’s [2000 ] arguments, small firms may not compete internationally in the same sectors as large companies. Large-scale capital-intensive industrial organisations sponsored by the State are arguably less efficiently managed than their private sector counterparts. Examples of ‘lean manufacturing’ (in which production is horizontal and communally organised) deny a trade-off between community and efficiency. Ultimately, it is not that low-trust countries cannot do well economically – recent examples of successful, low-trust economies include, for instance, Italy, France, Hong-Kong, Taiwan and China – but, Fukuyama argues, the nature of these economies means that they may continue to participate in very different economic sectors and never be able to replicate the development paths of high-trust societies such as Japan, the US, Germany, Sweden or Holland. How future markets and technology evolve will determine whether these countries will sustain long-run economic growth, but low levels of trust may harm their longterm growth potential. While Fukuyama’s case is certainly compelling, not everything that glistens in the story of social capital turns out to be gold. On the one hand, in spite of Fukuyama’s claims for the advantage of trust in periods of sudden shocks, hightrust built-in structures may also result in periods of protracted crisis in the same way as rigid regulations in low-trust countries. On the other hand, Olson [1982 ] argues that one of the features associated with higher levels of social capital, namely, associationism, tends to institutionalise rent-seeking, with a resulting loss of efficiency in the economy. Knack and Keefer [1997 ] conclude that the impact of associationism on economic growth is neither positive nor negative. What they find is that relationships of trust and collective civism in a society are strongly correlated with higher economic growth. Large stocks of social capital may reduce or eliminate disincentives to invest and substitute for institutions in underdeveloped judicial systems. They may also improve the provision of public services as the economic environment becomes more stable and credible. Social capital typically strengthens civic participation, which may result in higher demands for transparency and accountability in the public sector, ultimately promoting economic efficiency and growth. Empirically, Knack and Keefer [1997 ] find that the effects of trust and civism on economic growth rates for a sample of 29 countries between 1981 and 1995 are significant and positive. Increases of 10 per cent in constructed indexes of trust and civism may on average raise the annual rate of per capita GDP growth by 0.8 per cent and 876 THE EUROPEAN JOURNAL OF DEVELOPMENT RESEARCH TABLE 2 POTENTIAL GAINS FROM ELIMINATING PERCEIVED CORRUPTION AND INCREASING SOCIAL CAPITAL AND SOCIAL INFRASTRUCTURE (SELECTED STUDIES) Index Perception of corruption Social capital: Trust Social capital: Civism Social infrastructure Source Mauro [1997] Knack and Keefer [1997] Knack and Keefer [1997] Hall and Jones [1999] Average reported effect on per capita GDP growth (%) investment over GDP 0.3–0.4 0.8 0.7 4.4–5.4a 1.9 –3.2 1.4 5.0 n.a. Note: Estimated effects report the change in per capita GDP growth and investment ratios caused by a 10% variation in the incumbent index. aEffects are estimated as change in GDP growth per worker. Hall and Jones [1999 ] results are estimated for a sample of 127 countries between 1960 and 1995. Mauro’s [1997 ] database consists of 58 countries with complete information for the period between 1960 and 1985. 0.675 per cent, respectively. Also, there are strong effects on investment, as reported in Table 2. Besides values and behaviours, political and institutional relations are also believed to be relevant for economic growth. Concepts such as ‘social infrastructure’ [Hall and Jones, 1999], or ‘good governance’ [Kaufman et al., 1999; Islam and Montenegro, 2002] are concerned with the way institutions work and their impact on economic relations. Inasmuch as institutional functioning is both shaped by and expected to shape societies’ and communities’ behaviours and norms, it is also part of a cultural link with development. In this perspective, a country or a community is more favourably equipped for economic growth when its public policies generate trust among economic agents and enhance workers’ productivity, the accumulation of physical, human and financial capital, and the innovation and transfer of technology. Table 2 shows that the order of magnitude of such gains is not negligible. In line with the results of multi-country studies, a few recent analyses have also found that participation in local associations (taken as proxy for social capital) has a positive impact on economic welfare. Studies by Grootaert [1999 ], Narayan and Pritchett [1999 ], Grootaert and Narayan [2001 ] and Grootaert et al. [2002 ] report a significant and positive relation between social capital and household welfare. Increases of 10 per cent in the level of social capital raise household expenditure per capita by around 5 per cent in communities of Burkina Faso, Tanzania, Bolivia and Indonesia. The estimated effects of social capital on economic welfare are larger than the effects of human capital. Unfortunately, these studies focus on a handful of communities and there is no confirmation of their findings at a national level. In the following section, relations between trust CULTURALIST DEVELOPMENT THEORIES 877 and participation in community management and economic welfare are estimated country-wide for Honduras. TRUST, PARTICIPATION IN COMMUNITY MANAGEMENT AND ECONOMIC WELFARE IN HONDURAS Why Honduras? The recent history of Honduras has included an array of events affecting economic development and values, attitudes and behaviours simultaneously. In addition to the devastation caused in 1998 by Hurricane Mitch itself, the postMitch reconstruction period demanded the local management of enormous international resource flows and an unprecedented mobilisation of communities, municipalities, NGOs and the private sector.4 The management of the reconstruction effort at the community level is widely acknowledged to have strengthened individuals’ trust in their communities, fellow citizens and the international community [UNDP, 2003b ]. Paradoxically, this contrasts with a generalised distrust in the national political and institutional establishment. Rápalo [2001 ] links this distrust with the unfinished transition towards a true participatory democracy. Latinobarómetro [Lagos, 2001] reports that only 55 per cent of Hondurans stated a preference for democracy over authoritarian regimes in 2001, while 60 per cent were either ‘somewhat’ or ‘very’ dissatisfied with the functioning of their democracy in that year.5 The view that politicians disrespect the law, pursue their own interests over national interests and do not have any concern for the poor is almost universal in the country. Unsurprisingly, the recent Poverty Reduction Strategy Paper [Government of Honduras, 2001] has gone a long way to show a clear link between values of respect of the law, democratic participation and intolerance to corruption, and national development. Another factor that makes Honduras an interesting case is the availability of the 2001 Transparency and Corruption Survey (TCS) [Seligson, 2001]. The survey is a source of information on social, political and cultural values, perceptions and behaviour. Some 3,000 households all over the country were asked in 2001 about their tolerance towards corruption and their levels of trust in public institutions, the judiciary, private enterprises, the military, the church and non-governmental organisations. Individuals were asked about their perceptions of prevailing corruption in these institutions, as well as their political preferences and ideology; they were also asked about their trust in individuals – in concrete terms, whether they believed that fellow citizens would take advantage of them in difficult times and whether others would help them if needed. Although the TCS did not collect information on associational life and participation in networks, it did ask about participation in local councils meetings (cabildos abiertos) and in other forms of social auditing in the community. Interviewees were also asked 878 THE EUROPEAN JOURNAL OF DEVELOPMENT RESEARCH about their religious beliefs. In terms of economic welfare, the TCS reported on households’ access to public services and their incomes, in the form of income brackets, but failed to capture information on expenditures, productive equipment, land or any asset other than consumer durables. Neither did it provide information on strategies to cope with shocks or on service provision profiles within the community. Appendix 1 presents in detail the original information from the TCS and the variables created for the purposes of this analysis. The Distribution of Trust and Community Participation in Honduras Table 3 shows the rates of trust of individuals and levels of community management participation (cabildos abiertos), grouped together in an index. This composite admittedly falls short of a proper social capital proxy, as the TCS fails to capture explicitly associational life and networking. However, it is believed to represent critical aspects of social capital (such as trust and participation) along the lines emphasised by Fukuyama [1995 ]. A feature of the estimates for Honduras is that households with more unsatisfied basic needs (UBNs)6 report higher levels of interpersonal trust and participation in community management. This result is consistent with the aforementioned studies of associationism and household welfare at the community level. Households headed by males and households in rural areas have also higher levels of the composite than femaleheaded and urban households.7 As expected, bad experiences in the post-Mitch reconstruction phase, and perceptions that reconstruction funds were mismanaged significantly reduce individual trust and community management participation. In contrast, individuals with higher perceptions of good governance and institutional trust also score higher in the individual trust and participation composite. Preference for democracy is associated with higher levels of the composite, although the intensity with which democracy is preferred over authoritarian regimes does not significantly affect trust or participation. This result also reflects the fact that a considerable proportion of respondents (35 per cent) indicated a ‘weak’ preference for democracy (that is, a preference for democratic over authoritarian regimes) but also considered basic living conditions more important than majority rule. Not surprisingly, higher perception of widespread corruption correlates with lower levels of trust and participation among Hondurans. The same negative relation is found when individuals believe that fellow citizens would not help them in case of need and/or would take advantage of them whenever there is an opportunity. Interestingly, being intolerant to corruption is associated with higher levels of social capital but this association is not statistically significant. There may be several reasons for this, including the almost universal acceptance among Hondurans that corruption is a generalised 879 CULTURALIST DEVELOPMENT THEORIES TABLE 3 THE DISTRIBUTION OF TRUST AND COMMUNITY MANAGEMENT PARTICIPATION IN HONDURAS Trust and community management participation (index average) Personal and Household Characteristics Education (years of schooling) A. 0– 3 B. 4–9 C. 10 þ Gender of head A. Male B. Female Location A. Urban B. Rural Unsatisfied Basic Needs A. 0 B. 1 C. 2 þ Mitch Aftermaths Perception of mismanagement during Mitch A. There was no/little mismanagement B. There was a lot of mismanagement Perception of reconstruction efforts A. Bad reconstruction B. Fair or good reconstruction T-test (ho: no difference) 33.68 30.97 35.87 [A 2 B] 2.91** [B 2 C] 23.89** [A 2 C] 21.60 34.09 30.75 [A 2 B] 4.02** 30.43 33.93 [A 2 B] 24.16** 31.36 33.41 34.31 [A 2 B] 21.82 [B 2 C] 20.71 [A 2 C] 22.90** 35.12 30.72 [A 2 B] 5.18** 30.99 33.38 [A 2 B] 22.81** 30.95 33.78 33.77 [A 2 B] 22.36** [B 2 C] 0.01 [A 2 C] 23.03** 33.04 31.70 [A 2 B] 1.32 Political Values Preference for democracy A. Preference for order and authority B. Weak preference for democracy C. Strong preference for democracy Ideology A. Moderate (4,5,6 in a 1–10 scale) B. Radical (1,2,3, 7, 8, 9, 10) Perception of good governance A. Weak B. Moderate C. Strong Trust in institutions A. No/little trust B. Fair or strong trust 31.37 33.11 34.13 [A 2 B] 21.96* [B 2 C] 20.75 [A 2 C] 21.97* 0.78 34.29 [A 2 B] 24.68** Social Values Perception of corruption A. Weak B. Moderate C. Strong 29.29 32.05 33.86 [A 2 B] 21.84* [B 2 C] 22.03** [A 2 C] 23.05** 880 THE EUROPEAN JOURNAL OF DEVELOPMENT RESEARCH Would neighbour help in case of need? A. No B. Yes Would neighbour take advantage when possible? A. No B. Yes Tolerance to corruption A. No B. Yes Religious Values A. None B. Catholic C. Evangelist D. Other 30.63 39.22 [A 2 B] 28.50** 40.61 30.42 [A 2 B] 29.50** 32.72 31.77 [A 2 B] 1.03 30.67 33.30 30.87 40.00 [A 2 B] 21.67 [B 2 C] 2.08** [C 2 D] 21.98* [A 2 D] 21.85 Source: Author’s estimates from Transparency and Corruption Survey [Seligson, 2001]. Note: Definitions as indicated in Appendix 1. T-test statistics permit testing of null hypotheses of no statistical differences between the means of the trust and community participation index among different categories. Pairing of t-tests are indicated with letters A to D. **the null hypothesis of no mean differences is rejected at 1% level; *the null hypothesis of no mean differences is rejected at 5% level; otherwise, the null hypothesis of no mean differences is accepted, that is, the means are statistically equal for the pair considered. The national average of the trust and participation composite is 32.44, and the national average of UBNs, 0.72. practice, and the imprecise formulation of the question capturing tolerance to corruption.8 Levels of ideological radicalism are not associated with large differences in interpersonal trust or community participation. In contrast, different religious values do lead to a marked variation. Evangelists seem to trust people less than other religions and participate less in social control mechanisms. The reasons for this are unclear, but it might be the case that Evangelists prefer to participate in their own religious associations even when these are not part of the local community, as reported for Burkina Faso by Grootaert et al. [2002 ]. The Impact of Trust and Community Participation on Economic Welfare A first (empirical) difficulty in quantifying the relation between trust, community participation and economic development is to find an operational concept of economic development relevant at the household level. Unsatisfied basic needs (UBNs) are selected as this preferred indicator. The choice of this welfare measurement is partially explained by data restrictions (deficiencies in the reporting of incomes and the absence of information on expenditures and wealth in the TCS), but it is also applicable because of benefits specific to UBNs.9 A second (methodological) caveat is a potential simultaneous relation between trust and participation, and welfare levels. After all, community management participation has an opportunity cost. If a mutual relation exists, it is necessary to isolate the effect of trust and participation on welfare from the effect of welfare CULTURALIST DEVELOPMENT THEORIES 881 on trust and participation. A well-known econometric technique, Three-Stage Least Squares (3SLS), allows for the unbiased estimation of a simultaneous relation. In such cases, 3SLS produces unbiased, consistent and (asymptotically) efficient estimates [Kmenta, 1986: 699]. The estimation of a simultaneous equation model is discussed in Appendix 2. Specification tests in Table 4 confirm the presence of a simultaneous relation and show that 3SLS is preferred over alternative estimation techniques. Honduran estimates also indicate a significant and positive effect of households’ trust and community participation on their welfare levels: higher levels of trust and community participation are associated with fewer UBNs in the household. (See the UBN equation in Table 4.) Given the deficiencies of public service provision (water, sanitation, electricity), community participation and informal alliances may well prove decisive in gaining and maintaining access to such services. Local water councils ( juntas vecinales de agua), for example, participate actively in the management of drinking water services in municipalities across the country. Furthermore, urban location of the household decreases the expected number of its UBNs, surely reflecting a deficit of infrastructure and basic service provision in rural areas. Wherever post-Mitch reconstruction efforts are perceived to be unsatisfactorily, households report higher UBNs. Human capital (proxied by household head’s years of schooling) has the expected negative and significant coefficient on UBNs: the more educated the household head, the fewer UBNs are found in that household. In contrast, religious values do not affect welfare levels: differences in household UBNs are independent of their members’ religious values. Interestingly, evidence in Honduras does not support Weber’s hypothesis of superior religious values. On the other hand, higher household UBNs are associated with higher levels of trust and participation. (See the trust and participation equation in Table 4.) Social and political values have the anticipated effect on trust and participation. A low perception of corruption is associated with higher trust and participation in community management. Similarly, individual perceptions of neighbours’ willingness to help in difficult times and the belief that fellow citizens would not take advantage of the needy have significant and positive effects on trust and participation. Preferences for democracy over authoritarian regimes affect positively and significantly the accumulation of trust and participation in community management. On the other hand, bad post-Mitch reconstruction experiences have a significant but negative bearing on current levels of the trust and participation composite. Having controlled for these effects, other social values are not found to be statistically significant determinants of the composite. This is the case for the degree of ideological radicalism, political bias and institutional trust. It is likely that the perception of corruption already captures the effect that such values and attitudes may have on the trust and participation composite. Age and gender have significant effects on social capital, although the 20.49** 20.45** 20.13** 21.61** 20.67** 0.47 4.28** 218.68** Hausman Test of 3SLS vs. OLS Ho Rejected. 3SLS is more efficient a specification than 2SLS Ho Rejected. 3SLS is more efficient a specification than OLS 1.92** 20.15 23.01 3.87** 0.00** 22.43 ** 0.02 0.96** 1.81** 7.50** 27.05** 20.55** Effects on the index of trust and community participation (% variation in the index, 0– 100)2 Source: Author’s estimates of equations (5) and (6) using Transparency and Corruption Survey [Seligson, 2001]. Notes: Effects estimated as re-scaled elasticities, that is, the % impact on UBN and the trust and community participation index, respectively, due to changes of 10% in independent variables. **the estimate is significantly different from 0 at 1% level *at 5% level. 14.38** Hausman Test of 3SLS vs. 2SLS Ho: Both specifications are statistically identical 25.62** Trust and community participation index Tegucigalpa San Pedro Sula Departmental capital Municipality capital Other city Number of children Bad post-Mitch reconstruction Chi2 Statistic (14) Democratic values Degree of ideological radicalism Political bias Exposure to the media Age Gender (Female as reference) 20.01 0.05 Evangelist Other religion Test Unsatisfied Basic Needs Perception of corruption Perception of mismanagement of Mitch funds Perception of neighbour’s help Belief that people will not take advantage of others in need Trust in institutions Determinants of the trust and community participation composite 25.64** 0.62 0.01 Effects on unsatisfied basic needs (average variation in the number of household ubns)1 Years of schooling Catholic (practising) Catholic (not practising) Determinants of unsatisfied basic needs TABLE 4 EFFECTS (IN FORM OF ELASTICITIES) ON UBNS AND SOCIAL CAPITAL IN HONDURAS, 2001 CULTURALIST DEVELOPMENT THEORIES 883 magnitude of the positive age effect is negligible. The result for gender does not necessarily mean that women have lower interest in participation (although they report systematically lower levels of trust than men). It is more likely that this coefficient reflects the well-documented gender division of household chores in Latin America and elsewhere [Jejeebhoy, 1995]. Even when there is evidence – see Correia [2001 ] – that families in Honduras and Nicaragua increased the income-generating role of females in the post-Mitch reconstruction period, their participation in community activities did not follow suit. As for the magnitudes of these effects, differences in household welfare levels are the single-most important determinant of trust and community management participation. An increase of 10 per cent in the welfare index leads to an increase in the trust and participation index of 7.5 per cent. In turn, a 10 per cent increase in the trust and participation composite increases welfare levels by 5.6 per cent. Notwithstanding different definitions used, the magnitude of this effect in Honduras is remarkably close to the estimated effects reported for Burkina Faso by Grootaert et al. [2002 ]. In Honduras, the effects of human capital on the one hand and trust and participation on the other upon household welfare are similar. This contrasts with smaller human capital effects reported consistently for Burkina Faso, Indonesia and Bolivia. Quality considerations apart, average years of education for an adult household member in those countries are lower than in Honduras.10 This suggests that, in contrast to Fukuyama’s argument that social capital cannot be invested in, strengthening trust and community participation may well become a rational strategy for households in an unfavourable position to accumulate human capital when opportunities are unequal. CONCLUSIONS A critical review of economicist and culturalist paradigms shows that the developmental role attributed to culture in general and to specific values, beliefs and behaviours in particular has fluctuated between two extremes, from complete neglect to claims of explanatory superiority. If the ability of these latter claims to go beyond isolated successful episodes and to explain the dynamics of economic development is rather poor, the lack of supporting evidence is even more disappointing. Less ambitious theses, however, have shown more convincingly that specific values of trust, and civic, participatory and associational behaviours have a significant impact on national economic development and community welfare. This study has also confirmed that specific cultural aspects may well have a positive and significant impact on economic development. In Honduras, interpersonal trust and participation in community management are strong determinants of household economic welfare, together with geographical location, human capital or the degree of devastation and reconstruction following Hurricane Mitch. At the same time, lower household welfare is significantly Number of household UBNs, defined as lack of drinkable water and electricity, and having earth floor in the household residence. Index averaging three sub-indexes of participation in open council meetings; participation in social audits and other social control mechanisms; and trust in people. Schooling years Age Male or female Individual reports to practise the catholic faith. Individual reports to be a non-practising catholic. Individual reports to be Evangelist. Individual reports to profess religions other than Catholicism and Evangelism. Individual reports not to profess any religion. Household location in Tegugicalpa. Household location in San Pedro Sula. Household location in departmental capital other than Tegucigalpa and San Pedro. Household location in a municipal capital. Household location in cities other than the previous. Household location in rural areas. Number of children in the household. Unsatisfied basic needs Education Age Gender Catholic (practising) Catholic (not practising) Evangelist Other religion Municipal capital Other cities Rural Number of children in the household No religion Tegucigalpa San Pedro Sula Departmental capital Social capital Definition Variables 1 for unreligious individuals; 0, otherwise. 1 for residents in Tegucigalpa; 0 for residents elsewhere. 1 for residents in San Pedro; 0 for residents elsewhere. 1 for residents in departmental capitals other than Tegucigalpa and San Pedro; 0 for residents elsewhere. 1 for residents in municipal capitals; 0 for residents elsewhere. 1 for residents in other cities; 0, for residents elsewhere. 1 for residents in rural areas; 0 for residents elsewhere. From 0 to 22. From 0 to 18 From 18 to 97 0 for males; 1 for females 1 for practising catholics; 0, otherwise 1 for non-practising catholics; 0, otherwise. 1 for evangelists; 0, otherwise. 1 for professing other religion; 0, otherwise. From 0 to 100 From 0 to 3 Values APPENDIX 1 TRANSPARENCY AND CORRUPTION SURVEY (TCS): DEFINITIONS AND DESCRIPTIVES 3.5 0.016 0.575 0.250 0.079 0.041 0.041 0.075 5.755 38.6 0.496 0.391 0.232 0.281 0.008 32.44 0.722 Mean 2.9 0.128 0.494 0.433 0.270 0.199 0.199 0.263 3.224 14.4 0.500 0.488 0.422 0.449 0.091 22.8 0.962 Standard deviation Good Governance Tolerance to corruption Perception of corruption Deficient post- Mitch reconstruction Perception of financial mismanagement of post-Mitch reconstruction Perception index on financial mismanagement ;of post-Mitch reconstruction funds in the community in which the interviewee lives. Original values in the 2001 Transparency and Corruption Survey are: 1 if funds were correctly managed; 2, if the management was ‘somewhat’ satisfactory; 3, if funds were inappropriately managed; 4, if funds were completely mismanaged. Perception index on the outcome of the reconstruction process. Answers in the 2001 Transparency and Corruption Survey account for a completely satisfactory reconstruction; a somewhat satisfactory reconstruction; inappropriate reconstruction; a completely deficient reconstruction. Index averaging the level of corruption perceived by interviewees regarding the following institutions and individuals: Congress members; ministers; majors; municipal council members; police officers; teachers; university professors; civil society leaders; bank managers; customs officers. Index on the degree of tolerance reported by interviewees regarding the following acts: Congress member accepts a bribe from a firm; firm bribes a Congress member; a student gives a gift to a teacher; a teacher accepts a gift from a student; a civil servant uses a public car for his/her holidays; a civil servant does not report that another makes private use of a public car; a major lends a municipal tractor after receiving money on his own account; a mother bribes a public employee to obtain a birth certificate; a public employee accepts a bribe to issue birth certificate; a firm alters market prices; an individual uses connections to get a job. Tolerance levels before such ;acts include the following answers: such acts are corrupt and should be punished; such acts are corrupt but justified; such acts are not corrupt. Perception index on the willingness of politicians to respect law, their zeal for equality in the application of law; their interest in the development of the country; the extent to which Congress represents people’s interest; the degree of efficiency of the judiciary. From 0 to 100. 100 represents a complete recognition of good governance. From 0 to 100. 100 represents a complete tolerance to corrupt acts. From 0 to 100. 100 represents the maximum perception of prevailing corruption. From 0 to 100. 100 reflects that reconstruction was completely deficient. From 0 to 100. 100 reflects a perception of totally mismanaged reconstruction funds. 29.8 45.1 44.3 57.3 60.9 16.0 12.1 14.6 21.3 48.8 Index on the degree of trust toward the following institutions: the judiciary; political parties; politicians; National Electoral Tribunal; the military; the Congress; the government; the Comptroller; the Ministry of Finance; the police; the church; the media; municipalities; trade unions; and NGOs. Trust is measured on a scale from zero to seven, where seven reflects maximum trust. Index of preference for democracy. A strong preference is considered when individuals both prefer democracy over authoritarian regimes in all circumstances and consider that a participatory system is more democratic than others, ensuring a lifeline level of welfare. A weak preference is attributed to individuals simultaneously preferring democracy over authoritarianism and a lifeline level of welfare over participation. Finally, individuals who prefer authoritarian regimes over democracy are considered to have no preference for democracy. This variable identifies whether an individual has a radical ideology (either leftist or rightist). A radical ideological position fares one to three, or seven to ten in a scale from one to ten. Someone reporting to pertain to the intermediate position (four to six) in the ideological scale is considered ideologically moderate. Index measuring the degree of dispersion from the nationwide average rate of approval for former President Flores (1998 – 2001). Index on the exposure to the media, according to whether individuals are in the habit of reading the press, listening to radio or watching TV news. This variable indicates whether individuals believe that fellow citizens only care for themselves, or, rather, they typically help others. This variable indicates whether individuals believe that most people would take advantage of others in need. Source: Author from Transparency and Corruption Survey [Seligson, 2001] Exposure to the media Political bias Ideological radicalism Preference for democracy Belief that neighbours would help if they could. Belief that neighbours would not abuse someone in case of need. Trust in instittutions 46.7 From 0 to 100. 100 reflects complete trust in institutions. From 0 to 100. 100 represents the largest deviation to the nation-wide average rate of approval to former President Flores. From 0 to 100. 100 indicates a full exposure to the press, radio and TV. 1 for radicalism; 0 for moderate ideologies. 58.8 24.3 0.635 0.672 19.8 From 0 to 100. 100 reflects the belief that people never take advantage of others in need. 0, 1 and 2. 0 indicates preference for authoritarian regimes; 1 a weak preference for democracy; and 2, a strong preference for democracy. 21.0 From 0 to 100. 100 represents the belief that people are always willing to help others. 33.6 17.4 0.481 0.736 17.9 39.8 40.7 CULTURALIST DEVELOPMENT THEORIES 887 associated with higher interpersonal trust and community management participation. Developing informal networks based on trust and community participation thus seems to be a rational strategy when formal channels are not operating and social opportunities are not uniformly available. APPENDIX 2: MEASURING THE EFFECTS OF SOCIAL CAPITAL ON HOUSEHOLD UBNS A well-known econometric technique, Three-Stage Least Squares (3SLS), allows for the estimation of the simultaneous relation of two variables. In the case of an endogenous relation between two variables and correlations between their error terms, the 3SLS technique is preferred to alternative estimating techniques such as Ordinary Least Squares (OLS) and Two Stage Least Squares (2SLS). In such cases, 3SLS estimates are unbiased, consistent and (asymptotically) efficient [Kmenta, 1986]. The challenge remains to find good instruments for the trust and participation composite. Individuals’ perceptions of corruption, trust in institutions, political values and exposure to the media, are believed to be strongly associated with levels of trust and participation without influencing the level of welfare. It is difficult to argue that an individual’s preference for democracy systematically affects her access to sanitation, for instance. However, exclusion from public services may be expected to shape her political preferences as well as her trust in the government, the political system, and her participatory behaviour in community decision-making. The 3SLS technique firstly sets a system of structural simultaneous equations for UBNs and the trust and participation in community management (TP) index and all other independent variables, V, X and Z: UBN ¼ FðTP; X; ZÞ ð1Þ TP ¼ FðUBN; V; X; ZÞ ð2Þ where ‘TP’ represents both the individual’s trust in people and the degree of community participation; ‘V’ includes values, attitudes, and perceptions that affect the trust and participation composite without affecting the individual’s welfare; ‘X’ refers to personal characteristics such as gender, age and education of the household head; ‘Z’ refers to household characteristics such as composition or localisation. Appendix 1 above presents a detailed definition of these variables. Second, 3SLS estimates a two reduced-equation system in which both dependent variables (UBNs and TP) are regressed on all independent variables: UBN ¼ FðV; X; ZÞ ð3Þ TP ¼ FðV; X; ZÞ ð4Þ 888 THE EUROPEAN JOURNAL OF DEVELOPMENT RESEARCH TABLE A2 3SLS ESTIMATES OF THE COEFFICIENTS OF UBN AND TP EQUATIONS UBN Equation TP Equation Explanatory variables Coefficients (Std. Errors) Explanatory variables Coefficients (Std. Errors) Education (years of schooling) 20.063** (0.006) 0.102 (0.081) 0.004 Unsatisfied Basic Needs 0.072** (0.018) 20.103** (0.044) 20.027* Catholic (practising) Catholic (not practising) Evangelist Other religion Trust and community participation index Tegucigalpa San Pedro Sula Province capital Municipality capital Other city Number of children Insufficient post-Mitch reconstruction Constant N. Observations Specification Test: Chi2 R2 (0.085) 20.004 (0.084) 0.450 (0.248) 21.162** (0.353 20.769** (0.118) 20.672** (0.108) 20.662** (0.086) 20.431** (0.049) 20.563** (0.168) 0.009 (0.007) 0.504** (0.098) 1.298** (0.152) 1852 413.9** 0.2780 Perception of corruption Perception of mismanagement of Mitch funds Perception of neighbour’s help Belief that people will not take advantage of others in need Trust in institutions Democratic values Degree of ideological radicalism Political bias Exposure to the media Age Gender (female as reference) Constant (0.011) 0.039** (0.014) 0.071** (0.014) 0.003 (0.036) 0.014* (0.007) 20.015 (0.011) 20.054 (0.031) 0.130** (0.025) 0.002** (0.0003) 20.024* (0.010) 0.113** (0.044) N. Observations Specification Test: Chi2 R2 1852 152.5** 0.1008 Source: Author’s estimates of equations (5) and (6) using Transparency and Corruption Survey [Seligson, 2001]. Notes: Effects estimated as re-scaled elasticities, that is, the % impact on UBN and the trust and community participation index, respectively, due to changes of 10% in independent variables. **the estimate is significantly different from 0 at a 99% interval of confidence; *at a 95%. The estimation of these reduced equations (3) and (4) adjusts the original distribution of UBNs and TP, obtaining corrected distributions for such variables, ^ ^ UBN; TP as well as a full-information matrix of variance and covariance for the error terms of the UBNs and TP equations. The newly estimated endogenous CULTURALIST DEVELOPMENT THEORIES 889 variables and error variance and covariance matrix are used in the third and final ^ step of the 3SLS procedure to estimate a corrected simultaneous system for UBN ^ and TP: ^ ^ UBN ¼ FðTP; X; ZÞ ð5Þ ^ ^ TP ¼ FðUBN; V; X; ZÞ ð6Þ As indicated above, the superiority of the 3SLS technique over OLS and 2SLS estimations needs be checked. Implicitly, the specification test for the preferred technique is equivalent to testing for the presence of endogeneity and error correlation. Hausman’s specification tests will determine the consistent efficient specification. NOTES 1. Material factors also played a role in the English success in early industrialisation. Landes identifies the purchasing power of the lower classes and the wealth of the middle classes as a key factor in the demand for industrialised production. 2. Examples of this phenomenon abound in developing countries: the Chinese minority in Indonesia, Malaysia and Thailand; the Lebanese in Kenya, Uganda or Tanzania; the Whites in South Africa and Zimbabwe in Africa, or in Guatemala, Ecuador or Bolivia in Latin America; the Jews in post-Communist Russia; the Hutus in Rwanda, the Ibo in Nigeria and the Kikuyu in Kenya. 3. The ethno-linguistic fragmentation index measures the probability of two ethnically and/or linguistically different individuals belonging to the same country. The maximum value of the index, 100, indicates that all individuals in a country are ethnically or linguistically different, while 0 implies that all individuals belong to the same ethnic or linguistic group. Taylor and Hudson [1972] describe the methodology for constructing the index. 4. Government of Honduras [2001] estimated that international aid related to reconstruction reached US$2,769 million. 5. Although these levels were no different from other Central American countries (except in Costa Rica, where they were markedly lower), Honduras was the only country in the region where dissatisfaction with democracy had steadily grown since first recorded in 1996. 6. The Unsatisfied Basic Needs (UBNs) variable is constructed from information on household access to drinkable water, electricity and floor material. This is only a partial index of basic needs as defined by the national Human Development Reports. However, the TCS survey reports neither the household size nor the number of rooms, so that crowdedness in the household cannot be included in the UBN calculation. Educational attainment is excluded from the definition of UBN because it is used in the estimations as a proxy for household human capital. See Appendix 2. 7. These results do not necessarily indicate that females or urban residents have less interest or commitment in community participation. It is more likely that women participate less in council meetings and social audit activities than men in order to fulfil their ‘duties’ of reproductive and productive chores. Also, individuals may find it easier to participate in council meetings in small communities than in larger urban communities. In the latter, representation is usually delegated to some members of the community. 8. The TCS inquired about the degree of intolerance (none, weak, strong) to 11 acts of corruption, from the private use of a public car to bribing politicians: see Appendix 1. Individuals who claim to be strongly intolerant to high-level corruption (such as bribes to politicians) may not feel so strongly about low-level acts of corruption such as students giving presents to teachers. If that is 890 THE EUROPEAN JOURNAL OF DEVELOPMENT RESEARCH the case, tolerance to low-level corruption may balance out intolerance to high-level corruption. This averaging may result in a less sensitive measurement of tolerance to corruption. 9. In practice, the use of UBNs is subject to lower measurement errors than income or expenditure. UBNs are less likely to fluctuate over time than expenditures and, especially, incomes. Also, this welfare indicator is in line with current efforts to capture the multidimensional nature of welfare beyond the standard money metrics. 10. 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