Musings of an Entrepreneur: Of Gross Domestic Product, Institutions and Culture in a Developing Economy

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Summary: I want to suggest that the bane of underdevelopment in many countries is not necessarily the lack of institutions as is often argued by many professionals and commentators. If anything, many developing countries are actually ‘over-institutionalised’, leading to wieldy bureaucratization of otherwise simple issues and processes that leads to increased transaction costs. Furthermore, whilst most factors leading to the creation of national wealth are sufficiently understood by economists and policy makers, one factor is not getting the desired attention it deserves: culture. Indeed, there is actually a general acceptance that culture plays some role in the productivity of a people. However, as David Landes(1) puts it, there is a discomfort with what can be construed as implied criticism on a particular culture and this has discouraged broader public discourse. I think that is a grave error and those of us at the receiving end must understand culture and its dynamics on our productivity, efficiency and effectiveness beyond what is ‘comfortable and sensitive’. In addition to that, we must work to remove its dull edges without compromising on agreed fundamental values. I also think there are well-meaning, decent and respectful ways of necessary and productive discourses on culture.

I am of the opinion that part of the problem of development or lack of it in many so-called developing nations, like Nigeria, is the not the lack of understanding of what development is but the dynamics of achieving it. This challenge is not helped by the fact that we are relying on those who do not understand our context to not only define development for us but to dictate the ways it can be or should be achieved. In fairness to those people, they are only trying to help and are equally confused as to why the theories and models that work for them do not work for us. But the onus remains ours to understand how we can step up our ways in a very competitive, even ruthless, global village.

One of the first books that further fired my initial curiosity as to why certain countries develop while others stagnate is Erik Reinert’s How Rich Countries Got Rich … and Why Poor Countries Stay Poor(2)  But that has been an issue to economists for centuries earlier, which got Adam Smith to publish, in 1776, his ‘An Inquiry into the Nature and Causes of the Wealth of Nations’. Other scientists have gotten increasingly interested in the subject over the last two centuries. By now, most economists believe this is almost entirely and fully settled issue. Settled in the sense that the fundamentals of national wealth creation are sufficiently understood.

In understanding the factors that affect the economic development of nations, approaches have been made from different perspectives such as geography, biogeography, demography and economics.

Geography, Biogeography and Development: Hibbs and Olsson(3) agree with popular economic theories that ‘emphasize the accumulation of human and physical capital as well as the successful adoption of state-of-the-art technologies as the main explanations of variation in economic productivity’. However, ‘Capital accumulation and technology adoption are now commonly viewed as proximate variables molded by the political institutions essential for the smooth functioning of markets, such as honest and efficient government based on the rule of law and promoting impartial enforcement of contracts…’ But the scholars went further to argue that geography and biogeography were critical in determining the Neolithic transition from a nomadic hunter-gatherer to sedentary agriculture some ten thousand years ago. This transition was responsible for population growth as well as the rise of non-food-producing specialists that necessitated technological growth and the industrial revolution that followed. The transition, they argued, occurred at different times in different regions of the world. They concluded that ‘…biogeographic initial conditions decisively affected the timing of transitions to agriculture, and through that route they affect contemporary levels of national prosperity.’ But while this argument may explain the commencement of the transition in various societies, it doesn’t suffice in explaining  the widening gap between those societies that transited early and those that did later in spite of the spontaneity of current information flow.

Institutions and GDP: The gross domestic product, GDP, per capita, is generally used as an indicator of the average economic well-being of the people of a country. We can maintain this yardstick even as we know that two things vary from one country to another. First, the economic value of a thousand US dollars in the United States can be vastly different from its Naira equivalent in Nigeria. Secondly and not unrelated to the first, people of different nations and cultures may have different perceptions as to the social meaning of the same material wealth. This means the Congolese with a thousand US dollars bank balance may feel differently about it than the French with the same amount in their bank. Nonetheless, we shall focus on the absolute amounts. We shall also be ignoring the in-country difference in incomes between different groups and simply focus on the inter-nation comparisons.

The interesting challenge about wealth of nations that we all confront was summed up by Douglass C. North(4) when he said, ‘Five or six hundred years ago, everyone was poor by present standards, but the difference between countries was much smaller. What has happened is that some countries, beginning with the Netherlands, then England, then some Western Europe, and then the overseas colonies of Britain, developed. The gap between those countries and others widened and is still widening today. In fact, living standards in sub-Saharan Africa have been falling for most of the last twenty-five years, and so the disparities not only are immense but are getting worse. …… Now this is puzzling; and it is puzzling because we know what makes rich countries rich and what makes (other countries) poor. There is no secret to it all…..’

Perhaps there is!

In discussing the wealth of nations, a recurring factor is institution. Scott A. Wolla(5), explains that economists consider institutions ‘as the rules of the game that create incentives for people and businesses’. The general argument is that if people and businesses are allowed and able to earn profit from their efforts then they have an incentive to ‘not only produce but also to continually improve their method of production.’ Obviously, the corollary is that if people and businesses are not incentivized, their production capacity will diminished or be entirely lost.

Harvard’s Samuel P. Huntington(6) explained how in the early 1960s Ghana and Korea were, by and large, comparable in terms of income per capita as well as structure of production and foreign aid. However, thirty years on and the contrast between the two nations is clearly pronounced. According to him, culture had a major role in explaining the difference. He said, ‘South Koreans valued thrift, investment, hard work, education, organization and discipline. Ghanaians had different values.

Year                                   2018                                  1960

Country                            Current US$                     Current US$

Ghana                               2,202                                 183

Nigeria                              2,028                                 92                       

South Korea                     31,362                               158

Malaysia                           11,373                               234                     

(Source: World Bank GDP data)

How do countries grow their per capita GDP? Except for a few countries with, at least temporarily, a negative population growth rates, we can assume that populations of most countries grow even if only marginally over time. This means a positive and sustained per capita GDP growth is only possible if the rate of growth of production outpaces that of population. In other words, to become richer, a nation must continue to produce more (output) per person.  

Economists also teach us that to achieve any level of production at all, a nation needs the three so-called ‘factors of production’ viz; natural resources, labour, and capital resources.  But in addition to that, the Total Factor Productivity, TFP, which loosely refers to the skills of the labour and the usefulness of the capital resources needs to be positive. This means that for two hypothetical countries with the same factors of production, the one with a higher TFP will be more productive and therefore richer over a period of time.

Given the foregoing, investment in new technologies and in human capital development is key to creating wealth in a nation. But in addition to that, North(4) argues that another fundamental factor to the creation of national wealth is incentives: ‘incentives for people to invest in knowledge, to invest in new technology, to build efficient firms….’. This supports Wolla’s incentivization position as well. Unfortunately, in poor countries, the cost of transactions is very high because of ‘….the rules of the game that define the way the society works – the institutions.’ … ‘We must, then, understand what institutions are, and why they work or do not work.’   

North further explained how institutions are, first, the ‘formal rules of the games’. These include the rules and laws that are written to formalize processes and procedures. But beyond that, institutions are also intrinsically composed of the informal norms and behaviors. ‘We live by informal constraints, conventions, codes of conduct.’ And that ‘Informal norms are a lot tougher to deal with because it is hard to define them, hard to measure them, and hard to see how they work.’

What can we conclude so far?

  • Warts and all, GDP per capita is a reasonable measure that suggests the economic well-being of a people,
  • The economic production of nation is a function of its natural, human and capital resources, the productivity of those factors and beneficial incentivization.
  • Key to increasing wealth production are institutions that set and enforce the ‘rules of the game’.

What of Culture? Augusto Lopez-Claros(7) in his paper ‘What Role Does Culture Play in Development’ states that ‘For a variety of reasons, economists have avoided getting too closely involved with the concept of culture and its relationship to economic development.’ There is, therefore, a general acceptance that culture must have a role in guiding a population towards a particular path, but that as Landes(1) points out, there is ‘a discomfort with what can be construed as implied criticism of a particular culture has discouraged broader public discourse.’ This is a big mistake. And if those not directly affected by the consequences of underdevelopment as a result of counter-productive cultural tendencies do not wish to inflict discomfort, I think it behoves on those who are affected to study, understand and be able to advise on how positive cultural changes can be effected to ignite true and lasting economic development.

Let us try.

Economists define culture as “customary beliefs and values that ethnic, religious, and social groups transmit fairly unchanged from generation to generation.” The Centre for Advance Research on Language Acquisition defines culture as ‘..shared patterns of behaviors and interactions, cognitive constructs and understanding that are learned by socialization.’ Regardless of the definition we decide to adopt, two things are fundamental to each culture: Beliefs and the behaviors derived therefrom. Undoubtedly, these two affect our thinking and action and therefore our levels of productivity.

Gerard Hofstede was a Dutch social psychologist and an employee of IBM. He defined culture as the mind’s collective programming that differentiates between one category of people and members of one group from another. Hofstede developed a cultural dimensions theory. The original theory was proposed on four dimensions but later extended to five and then six. They are:

  • Power Distance: The extent to which less powerful members of a society accept and expect that the distribution of power takes place unequally.
  • Uncertainty Avoidance: This describes the extent to which people are not at ease with ambiguity and uncertainty.
  • Individualism vs. Collectivism: This refers to the preference of people to either be left alone to look after themselves or want to remain in a close-knit network.
  • Masculinity vs. Femininity: A society in which the preference is for assertiveness, heroism, achievement and material reward for attaining success falls to the masculinity end of the spectrum whilst the society that prefers modesty, cooperation, quality of life and caring for the weak falls to the femininity end.
  • Long-Term vs Short-Term Orientation: This describes the inclination of a society toward searching for virtue (long-term) or towards establishment of the absolute truth (short-term).
  • Indulgence vs Restraint: This revolves around the extent to which a society can exercise control over their impulses and desires.

Hofstede’s theory is considered reasonably good as a framework for understanding the ways businesses are done across different cultures. But we need to, more importantly, understand how business is done within our own cultures.

The Ghanaian-Korean analogy over the last fifty years, mentioned earlier, is not dissimilar to the situation between many African countries and their Middle-Eastern and Asian contemporaries. But I think a more ‘impolite’ but honest and realistic cultural dimensions, than Hofetede’s, are required to bring out the African dilemma. A true dimensional analysis is likely to bring out a cultural incongruence that is at the root of the development conundrum in many African nations. Productivity is not entirely mechanical. It is determined by the soft mindset and attitude of a people and therefore heavily influenced by their culture.

I think a better way to isolate the challenges of the cultures in underdeveloped societies is by bringing out those factors that are absolutely necessary in not only establishing institutions but letting the institutions work as designed. Both the formal rules of the institutions and the informal norms of cultures must be in congruence of each other.

A possible dimensional analysis should seek to bring out true people’s mindsets and attitudes might be the following:

  • A test of integrity: Consistency in behavior to different impulses… (For instance, how often do we change standards, formal and informal, just so as to achieve some personal objectives?)
  • A test of enterprise: The willingness to adopt to positive changes … (For instance, how truly receptive to positive changes are we?)
  • A test of confidence: The belief that smart and hard work delivers desired results… (For instance, to what degree do our people have trust that they will be given opportunities if they meet set criteria?)
  • A test of sagacity: Willingness to take intelligent risks without preoccupation with possible failures… (For instance, how willing are our people to take reasonable risks knowing that even a failure is an achievement ahead of not trying?)
  • A test of responsibility: The subordination of private desires to public interests… (For instance, to what extent do our people voluntarily subordinate their legitimate personal desires to larger public interests?)
  • A test of appetite: The desire and ambition for legitimate wealth… (For instance, how ambitious are our people in legitimately creating wealth?)

I suspect that if an appropriate survey along the lines above, individuals from developed countries are likely to score significantly higher than those from under-developed countries. Think of it this way: A twenty year-old sophomore in the United States, threatened with the issuance of a $100-ticket for parking violation would rather pay the fine than pay a $20-bribe (being 20%) to the policeman (who wouldn’t ask in the first instance!). On the other hand, a retired sixty-year old government director in Nigeria would, more likely, opt to bribe the traffic official with N2,000.00 (being 40%) than to pay a N5,000.00 fine. For each of the dimensions above, such differences are likely to, sadly, point the same way. I believe these are the kind of mindsets and behaviours that mitigate against the effective functioning of developing world institutions.

Finally…

A society can build institutions; it can set formal rules and systems of enforcements. But at the end of the day, it is individuals, guided by norms and informal rules that will enforce or refuse to enforce the set standards. It therefore goes without saying that it is voluntary moral restraint, built on a culture of doing things right, that makes possible for the effective running of institutions.

Why is this understanding key to our development?

Governments rely on setting policies to direct an economy towards a particular and desired path. However, if the policies are built on wrong premises the desired objectives cannot be achieved. Contrary to what many people in Nigeria assume, we do not lack institutions. Think of the Nigeria Police Force, the EFCC, the ICPC, Presidential Task Force on Trade Malpractices, the CCB/CCT, etc. all involved, in various ways, in curbing both private and public sector corrupt practices. But are we reasonably corruption-free? Unless individual members of society choose to be law-abiding for the right reasons, they would always find ways around the systems, processes and institutions. After all systems, processes and institutions are designed by men and men can always circumvent what they designed! Economic productivity can only be sustained efficiently by people who have deliberately chosen to do the right things regardless of possible negative consequences to them.

So what do I suggest?

Our governments must commit substantial resources to re-orient the minds, beliefs and behaviours of the public. Initiating the process is a desired objective that cannot just be wished for or left to individuals, long entrenched in wrong-doing, to voluntarily kick-start.

  • We need to re-teach people to do the morally right things in all situations,
  • We need to demonstrate that hard and smart work pays,
  • We need to encourage people to rapidly adopt positive changes,
  • We need to get people to learn to subordinate personal desires to public interests,
  • We need to encourage people to have the confidence to take worthy, ambitious yet intelligent  risks, etc.

Based on the foregoing, I would want to speculate that whilst geography and biogeography might have direct bearing on initial  human and natural resources available to a nation, it is the culture of the people that ultimately enables them to build truly working institutions that positively impact on the building and effective use of capital resources necessarily required to create and build wealth.

On a positive note, the good thing about culture is that it is dynamic and a required one can be built through learning and discipline. This characteristic is in fact exactly why many nations that were poor fifty years ago have been economically transformed within the life span of a single generation.

Now what has all these got to do with the entrepreneur? Well, every entrepreneur needs staff, investors, partners, associates, regulators, etc. with a right mindset and behavioral skills required to further enhance their chances of success.

  1. David Landes The Wealth and Poverty of Nations,  1998  Little, Brown and Company
  2. Erik Reinert How Rich Countries Got Rich … and Why Poor Countries Stay, 2008 Constable & Robinson
  3. Douglas A. Hibbs, Jr and Ola Olsson, Geography, biogeography, and why some countries are rich and others are poor 2004, The Anational Academy of Sciences of the USA
  4. Douglas C. North Why Some Countries Are Rich and Some Are Poor 2001, Chicago-Kent Law Review
  5. Scott A. Wolla Why Are Some Countries Rich and Others Poor? 2017Page One Economics, Federal Reserve Bank of St. Louis
  6. Samuel P. Huntington Culture Matters, 2000 New York: Basic Books
  7. Augusto Lopez-Claros ‘What Role Does Culture Play in Development

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