Why some states fail: the role of culture.

• Author: Shikida, Claudio D.
• Position: Essay

There are many studies on the relationship between economic development and institutions. Institutions can be classified as formal or informal. This article emphasizes the importance of the relationship between culture (informal institutions) and the quality of public goods supplied by the government, using a measure of state failure: the Failed States Index. The results suggest that culture is more important than formal institutions in explaining differences in the degree to which states fail.

The Importance of Institutions

In 2008, the World Public Organization (WPO) carried out a poll indicating a decrease in people's optimism regarding the market and an increase in their belief in the need for stronger state regulation. That popular sentiment was widespread across countries, including Latin America, Germany, Italy, Nigeria, the Philippines, Turkey, and South Korea (WPO 2008). Do those personal beliefs and values influence development beyond the traditional variables of Solow's economic growth model? Are ideas and values important for economic development, or are they only consequences of it?

In this article, we study the relationship between institutions and governments. Our objective is to understand the impact of formal and informal institutions on the quality of states--and thus to better appreciate how institutions help shape public policies and affect economic development. We survey the most recent work on the role of institutions and then present and test our model.

Markets, Culture, and Development

In 1936, Leacock criticized the cultural values that Adam Smith admired. Having witnessed the Great Depression, Leacock clamored for a cultural change: Would it not be the time to convince people to alter their beliefs about the operation of free markets?

In less poetic terms, North (1989), among others, has emphasized the importance of understanding the influence of formal and informal institutions on economic development. One of the most important questions has concerned the role of property rights in the process of development (de Soto 2000).

Is it possible to distinguish between formal and informal institutions? The laws of a country can represent the codification of a significant part of its informal institutions, and, following the literature, one can label formal institutions as "laws" for operational purposes. This distinction, however, does not deny the existence of informal institutions, under the label of "culture," including people's values, behavioral norms, and traditions (Williamson and Kerekes 2009), all of which, in many cases, play an important role in determining market results. (1)

Guiso, Sapienza, and Zingales (2006: 23) define the informal institutions that embody culture as "those customary beliefs and values that ethnic, religious, and social groups transmit fairly unchanged from generation to generation." Boettke, Coyne, and Leeson (2008: 338) use the Greek term "metis" to convey culture:

Metis is characterized by local knowledge resulting from practical experience. It includes skills, culture, norms, and conventions, which are shaped by the experiences of the individual. This concept applies to both interactions between people (e.g., interpreting the gestures and actions of others) and the physical environment (e.g., learning to ride a bike). Such definitions suggest that one proxy for informal institutions may be culture (or metis), translated into some type of value or initial belief that influences the choice among formal institutions. Empirically, the impact of formal and informal institutions on economic development is affected by government quality (La Porta, Lopez-de-Silanes, and Shleifer 1999, 2008). (2) Guiso, Sapienza, and Zingales (2006) show that the cultural factor should not be underestimated: They find that preferences regarding redistributive policies affect the policies themselves. In other words, public policies can result from cultural factors. (3)

The literature reviews by Guiso, Sapienza, and Zingales (2006) and La Porta, Lopez-de-Silanes, and Shleifer (2008) present evidence that institutions are important for the economy, although it is not possible to affirm that there is consensus regarding the mechanisms of transmission of such (formal and informal) institutions to economic development. This article does not seek to resolve that issue; rather, we revisit the problem of the influence of institutions on the quality of governance.

Model and Data

The importance of culture in determining state quality can be expressed as

(1) [Y.sub.i] = [alpha] + [[beta].sub.1][F.sub.i] + [[beta].sub.2][I.sub.i] + [summation over (i)] [[delta].sub.i] [X.sub.i] + [[epsilon].sub.i]

where Y is the index of state failure, F represents formal institutions and I informal institutions, X is a vector of control variables, and [epsilon] is an error term (i.e., "white noise").

Definition of Variables

We now give a detailed explanation of each variable.

The Failed States Index. To operationalize the concept of "socioeconomic arrangement," we use the 2007 edition of the Failed States Index, published by the Fund for Peace. The Failed States Index includes 177 states, and has been published since 2005. Using its own methodology (the Conflict Assessment System Tool or CAST), the Fund for Peace examines the social, economic, and political dimensions of a state by relying on news items. The social dimension is captured by four indicators, the economic dimension by two, and the social dimension by six. Values based on an ordinal scale of 0 to 10 are attributed to each indicator and then aggregated, creating a "tendency index." That index is used to estimate the risk of occurrence of conflicts in the country. In other words, the Failed States Index measures the deterioration (failure) of the capacity of a state or government to resolve peacefully the problems of a society--that is, to supply basic public goods such as security and stability for various social groups in their economic and noneconomic transactions. In the measurement of this index, states such as Iraq (113.7) and Sudan (111.4) were, in 2007, at the top of the ranking (most failed states), whereas Finland (18.5) and Norway (17.1) were, respectively, the 176th and 177th (last ones) of the list. (4)

Formal Institutions. According to Williamson and Kerekes (2009) and Glaeser et...