Endowments, Culture and Economic Development

• DOI: http://doi.org/10.1111/rode.12279
• Date: 01 August 2017
• Published date: 01 August 2017

Endowments, Culture and Economic Development

Sherif Khalifa*

Abstract

This paper investigates whether the geographic characteristics of a country can explain cross-country

variations in income levels through their ability to explain cross-country variations in cultural traits that

enhance economic development. In other words, this paper attempts to determine whether the

geographic endowment can serve as an instrument in examining the effect of culture on economic

development. The paper conducts two-stage least-squares regressions. The second stage is a regression of

the logarithm of real gross domestic product per capita on each of the cultural attributes that are

considered in this study. In the first stage, the geographic factors that statistically explain a cultural

aspect are used as instrumental variables. The results of the empirical estimation show that the cultural

variables, instrumented by the geographic variables, explain cross-country variations in economic

development.

1. Introduction

This paper investigates whether the geographic characteristics of a country can

explain cross-country variations in income levels through their ability to explain

cross-country variations in cultural traits that enhance economic development. In

other words, this paper attempts to determine whether the geographic endowment

can serve as an instrument in examining the effect of culture on economic

development.

The cultural traits that are considered in this study include trust in people from

another nationality, trust in people from another religion, trust in most people, in

addition to the qualities of responsibility, independence, obedience, thrift, and

tolerance and respect for others. There are several studies

1

that argue that these

attributes have a significant effect on economic development. According to these

studies, trust facilitates the extension of anonymous market exchange, minimizes

the need for external enforcement of contractual agreements and thus reduces the

cost of transactions. Tolerance and respect for others is essential for economic

success as well. If individuals lack respect for other members of their community,

public good provision is bound to be inadequate and public administrators are

likely to engage in nepotism or corruption practices. The qualities of responsibility,

independence and thrift are also essential for economic success in market

economies.

The literature, however, cannot determine easily the causal effect of culture on

economic development. The key difficulty is that culture is endogenous to economic

development. Some studies, such as Inglehart and Baker (2000), argue that the

*Khalifa: Department of Economics, Steven G. Mihaylo College of Business and Economics, California

State University, Fullerton, CA, 92834, USA. E-mail: skhalifa@fullerton.edu. This research is funded by a

grant from the Steven G. Mihaylo College of Business and Economics, California State University,

Fullerton. The author thanks the participants at the International Atlantic Economic Society Annual

Meeting 2016 and the Southern Economic Association Annual Meeting 2016.

Review of Development Economics, 21(3), 664–677, 2017

DOI:10.1111/rode.12279

©2016 John Wiley & Sons Ltd