**1. Introduction**

Many studies and empirical works have come to conclusions about the important role of the institutional and/or cultural background in economic development and growth. Theoretical constructs that choose to refer to the institutional and cultural background presuppose that both of these backgrounds are in optimal form. However, this is not the case in the real world.

The requirements regarding the coevolution of the institutional and cultural background are crucial to the development process of an economy. When institutions and culture coevolve in an optimal pattern, economic growth is facilitated. In contrast, when institutions and culture deviate from the optimal pace of coevolution, incompatible alterations of institutions and culture may end up causing an inability of the policy designers to implement the required changes in institutions and/or cultural behaviors. The result can be a series of failed attempts to implement a modernized development framework for the institutional and cultural background of societies, leading to the perpetuation of stagnated growth prototypes.

A stagnated growth prototype can be transformed into a progrowth one by introducing ambitious institutional and cultural alterations through structural reforms. These reforms require the optimal coevolution of institutions and culture. However, the process of the reorganization of the institutional background and the change of culture can be seriously interrupted by the so-called coevolution requirements of institutions and cultural background. In fact, the evolution of institutions and culture can be toward the same direction but may not coincide time-wise. Then, the prevailing cultural background, which has not been altered yet, could work as a brake to the new institutional setting or vice versa. Therefore, the implementation of structural reforms can fail, given that institutional and cultural behaviors can be incompatible.

The purpose of this chapter is to highlight the problems arising from the asynchronous change of the institutional and cultural background for the economic development and growth. In that way, the aim is to highlight the interconnection between the institutional and cultural background and how this interconnection affects the economies. In other words, the chapter aims to show whether the institutional and cultural background functions in a complementary or substitutive way in their role in economic development, contributing to the debate on whether or not they coevolve. The analysis is based on a sample of 80 countries for the period from 1981 to 2019.

The structure of the chapter is as follows: In Section 2, the coevolution of institutions and cultural requirements is presented. In Section 3, why institutions and culture usually lead to stagnated growth prototypes is presented. In Section 4, a descriptive analysis on culture is presented and institutions are complements or substitutes, while Section 5 analyses the fact that structural reforms that promote growth need institutional and cultural changes that also promote growth. Finally, the chapter ends with the conclusions.

#### **2. The coevolution of institutions and culture**

In general, the problem of coevolution in a system, the subparts of which evolve at a different pace, creates imbalances and failures in its effective operation. The evolution of institutions and culture does not always present a compatible path of evolution leading to conflicts when institutions and culture do not match. The issue under investigation has a time dimension, but usually it has a qualitative nature as well. In other words, institutions may change at the same direction with the cultural background, but these changes may not be compatible as far as the end result is concerned.

Thus, incompatibility may arise because either the institutions may change but not the cultural background or the cultural behaviors may change but the institution changes do not follow. In addition, incompatibility may appear because both concepts may evolute but their stationary equilibrium is not characterized by the optimum supplementary combination of institutions and cultural behavior matching.

But there is an even worse situation of incompatibility. This is when a change in institutions may appear and the noncompatible cultural behaviors would act to oppose and cancel these changes and vice versa. This is a very probable situation, which can arise after the implementation of an institutional structural reform, which we usually expect to be enforced and have fruitful results on growth in shortor medium-term horizon, but the prevailing cultural behaviors may sterilize those reforms.

**5**

system.

*Why Coevolution of Culture and Institutions Matters for Economic Development and Growth?*

can change the cultural background even in the short run [2, 3].

On the one hand, the cultural background is usually a slow-moving structure, which evolves in the long and the very long run (sometimes it can take more than 100 years to change). Globalization effects and other megatrends (e.g., the aging) may lead to incremental changes of the cultural background. Norris and Inglehart [1] conclude to the cultural backlash hypothesis in the sense that factors such as generational substitution, increased access to higher education, urbanization, increased gender equality, and increased ethnic diversity have led to cultural background changes in the last decades in the high developed world. Moreover, there may exist several external shocks (like an economic crisis) or migration shocks that

On the other hand, institutions can change at different speeds too. Institutions can be divided into two categories, based on the speed of their evolution: fast-moving institutions (such as political institutions), which can change overnight, either through a legislative intervention or after revolutionary moments; and slow-moving institutions (such as the property rights, cooperation procedures, etc.), which need a long period of time through a gradual and constant process of evolution [4]. A basic question raised is why countries with ineffective institutions do not "copy" the institutions of developed countries [5]. The answer lies in the fact that institutions do not change easily; it takes 10–100 years for formal institutions and 100–1000 years for informal in order to be changed [6]. Thus, the political leadership usually finds it very difficult to innate a similar process of structural reform. In this way, during the process of their evolution, a vicious cycle of interaction between the institutions and culture can be created. If the two concepts could change at the same rate, that is, when there is coevolution, then the economy could approach a new point of equilibrium, enhancing the efficiency of the economic

The relevant literature on the coevolution of institutions and culture focuses on the hypothesis of the natural selection of the institutions [7–11]. According to that, some institutional and behavioral traits might give competitive advantage to individuals or populations within their local environment [12]. Nevertheless, gaining an understanding of the way in which institutions and culture interact is not an

Samuel Bowles' contribution to the field of coevolution process [8–10, 15–17] focuses on the impact of the institutions on human behavior through the ways in which particular institutional settings prompt individuals to draw one or another response from their varied behavioral repertoires. Furthermore, the structure of social interactions, both within and between groups, affects the pace and direction of cultural evolution, the economic institutions and policies that influence ingroup-outgroup relationships, and other aspects of preferences, casting doubt on the economists' canonical premise that preferences are exogenous [18]. In addition, some institutions may reduce the variance of reproductive success within groups and, thus, weaken the force of selection on the level of individuals [8]. The emergence of these institutions depends on the existence of such group-beneficial traits and these in turn may only be able to proliferate if these institutions are in place. According to Veblen [19], institutions shall be understood as the rules, habits, and other culturally transmitted norms that individuals follow when interacting with each other [20]. He shows that evolution may also create institutions that are complementary to the mate choice based on genetically fixed preferences, which can be interpreted as genetically coded information processing. The evolutionary theory of institutional change of [19] centers on the notion of "habits of thought,", where habits are viewed as durable and adaptable—in the long run—propensities on how to think and act. Because these habits reside within individuals,

easy task, due to the endogenous character of their evolution [13, 14].

*DOI: http://dx.doi.org/10.5772/intechopen.90631*

#### *Why Coevolution of Culture and Institutions Matters for Economic Development and Growth? DOI: http://dx.doi.org/10.5772/intechopen.90631*

On the one hand, the cultural background is usually a slow-moving structure, which evolves in the long and the very long run (sometimes it can take more than 100 years to change). Globalization effects and other megatrends (e.g., the aging) may lead to incremental changes of the cultural background. Norris and Inglehart [1] conclude to the cultural backlash hypothesis in the sense that factors such as generational substitution, increased access to higher education, urbanization, increased gender equality, and increased ethnic diversity have led to cultural background changes in the last decades in the high developed world. Moreover, there may exist several external shocks (like an economic crisis) or migration shocks that can change the cultural background even in the short run [2, 3].

On the other hand, institutions can change at different speeds too. Institutions can be divided into two categories, based on the speed of their evolution: fast-moving institutions (such as political institutions), which can change overnight, either through a legislative intervention or after revolutionary moments; and slow-moving institutions (such as the property rights, cooperation procedures, etc.), which need a long period of time through a gradual and constant process of evolution [4]. A basic question raised is why countries with ineffective institutions do not "copy" the institutions of developed countries [5]. The answer lies in the fact that institutions do not change easily; it takes 10–100 years for formal institutions and 100–1000 years for informal in order to be changed [6]. Thus, the political leadership usually finds it very difficult to innate a similar process of structural reform.

In this way, during the process of their evolution, a vicious cycle of interaction between the institutions and culture can be created. If the two concepts could change at the same rate, that is, when there is coevolution, then the economy could approach a new point of equilibrium, enhancing the efficiency of the economic system.

The relevant literature on the coevolution of institutions and culture focuses on the hypothesis of the natural selection of the institutions [7–11]. According to that, some institutional and behavioral traits might give competitive advantage to individuals or populations within their local environment [12]. Nevertheless, gaining an understanding of the way in which institutions and culture interact is not an easy task, due to the endogenous character of their evolution [13, 14].

Samuel Bowles' contribution to the field of coevolution process [8–10, 15–17] focuses on the impact of the institutions on human behavior through the ways in which particular institutional settings prompt individuals to draw one or another response from their varied behavioral repertoires. Furthermore, the structure of social interactions, both within and between groups, affects the pace and direction of cultural evolution, the economic institutions and policies that influence ingroup-outgroup relationships, and other aspects of preferences, casting doubt on the economists' canonical premise that preferences are exogenous [18]. In addition, some institutions may reduce the variance of reproductive success within groups and, thus, weaken the force of selection on the level of individuals [8]. The emergence of these institutions depends on the existence of such group-beneficial traits and these in turn may only be able to proliferate if these institutions are in place.

According to Veblen [19], institutions shall be understood as the rules, habits, and other culturally transmitted norms that individuals follow when interacting with each other [20]. He shows that evolution may also create institutions that are complementary to the mate choice based on genetically fixed preferences, which can be interpreted as genetically coded information processing. The evolutionary theory of institutional change of [19] centers on the notion of "habits of thought,", where habits are viewed as durable and adaptable—in the long run—propensities on how to think and act. Because these habits reside within individuals,

*Perspectives on Economic Development - Public Policy, Culture, and Economic Development*

A stagnated growth prototype can be transformed into a progrowth one by introducing ambitious institutional and cultural alterations through structural reforms. These reforms require the optimal coevolution of institutions and culture. However, the process of the reorganization of the institutional background and the change of culture can be seriously interrupted by the so-called coevolution requirements of institutions and cultural background. In fact, the evolution of institutions and culture can be toward the same direction but may not coincide time-wise. Then, the prevailing cultural background, which has not been altered yet, could work as a brake to the new institutional setting or vice versa. Therefore, the implementation of structural reforms can fail, given that institutional and cultural behaviors can be

The purpose of this chapter is to highlight the problems arising from the asynchronous change of the institutional and cultural background for the economic development and growth. In that way, the aim is to highlight the interconnection between the institutional and cultural background and how this interconnection affects the economies. In other words, the chapter aims to show whether the institutional and cultural background functions in a complementary or substitutive way in their role in economic development, contributing to the debate on whether or not they coevolve. The analysis is based on a sample of 80 countries for the period from

The structure of the chapter is as follows: In Section 2, the coevolution of institutions and cultural requirements is presented. In Section 3, why institutions and culture usually lead to stagnated growth prototypes is presented. In Section 4, a descriptive analysis on culture is presented and institutions are complements or substitutes, while Section 5 analyses the fact that structural reforms that promote growth need institutional and cultural changes that also promote growth. Finally,

In general, the problem of coevolution in a system, the subparts of which evolve at a different pace, creates imbalances and failures in its effective operation. The evolution of institutions and culture does not always present a compatible path of evolution leading to conflicts when institutions and culture do not match. The issue under investigation has a time dimension, but usually it has a qualitative nature as well. In other words, institutions may change at the same direction with the cultural background, but these changes may not be compatible as far as the end result is

Thus, incompatibility may arise because either the institutions may change but not the cultural background or the cultural behaviors may change but the institution changes do not follow. In addition, incompatibility may appear because both concepts may evolute but their stationary equilibrium is not characterized by the optimum supplementary combination of institutions and cultural behavior

But there is an even worse situation of incompatibility. This is when a change in institutions may appear and the noncompatible cultural behaviors would act to oppose and cancel these changes and vice versa. This is a very probable situation, which can arise after the implementation of an institutional structural reform, which we usually expect to be enforced and have fruitful results on growth in shortor medium-term horizon, but the prevailing cultural behaviors may sterilize those

**4**

incompatible.

1981 to 2019.

concerned.

matching.

reforms.

the chapter ends with the conclusions.

**2. The coevolution of institutions and culture**

institutional change involves the simultaneous coevolution of both shared prevalent habits of thought (institutions) and the habits of individuals [21]. Endogenous interactions among institutions and culture, and their coevolution are important during economic evolution [13].

However, we do not have adequate critical information on how economic institutions may impact on culture, due to the fact that we know very little about the process of cultural transmission, which means that we do not have adequate information on who acquires what trait from whom, under what conditions, why, how, and how persistent the traits may be once the initiating environment is withdrawn [22]. Furthermore, there is no strong evidence on how culture and institutions evolve over time and whether they mutually reinforce each other or whether one is a precursor to the other [23]. Thus, the question is posed on whether culture and institutions coevolve or they proceed independently or causality is unidirectional.

Bisin and Verdier [24] claim that culture and institutions jointly evolve and interact, and focus on the process as determined by the interaction and not on the cause of the interaction. They define the cultural (or institutional) multiplier as the ratio of the total effect of institutional (or cultural) change on economic prosperity divided by the direct effect, that is, the counterfactual effect that would have occurred had the distribution of cultural traits in the population (or the institutions) remained constant after the institutional (or cultural) change. In that way, they contribute to the analysis of whether culture and institutions coevolve or their change is incompatible in time and quality considerations.

In sum, the coevolution process of institutions and culture is the product of complex interactions between human behavior, preferences, economic performance, and time. How and in which speed the institutions change vis-à-vis the cultural background-and vice versa-is particularly important, as coevolution affects the effectiveness of the growth model, since different degrees of compatibility can be observed.

#### **3. The role of institutions and culture in stagnated growth prototypes**

The existence of an optimum structure of institutions that is associated with an optimal nexus of cultural values can exist at the theoretical level for the sake of simplifying reality and for improving the analytical tools of comprehension. Thus, in real economy, "stagnated growth prototypes" are created since usually the institutions and culture that prevail interrupt the process of economic development and growth and could be characterized as idiosyncratic [25]. The prevalence of a stagnated growth prototype has crystal-clear effects on the mode of operation of the economies, the most important one being the increase in the level of insecurity and the inefficient allocation of resources. Thus, an optimal growth pattern often cannot be encountered, as the existence of idiosyncratic institutions is one of the most significant reasons for the deviation from the optimal pattern [25].

For instance, a stagnated growth prototype could be described as following1 [25]: (a) Existence of extractive institutions [26]. The economies that are dominated by extractive institutions are characterized by the absence of established relations between the members of the economic system. This results in the emergence of conditions that favor factors that enhance the existence of idiosyncratic institutions. Factors that enhance the creation of idiosyncratic institutions (hierarchies and high transaction costs) are coordination failures, asymmetries of

**7**

*Why Coevolution of Culture and Institutions Matters for Economic Development and Growth?*

information, evolution path dependence, and rent-seeking activities, which all lead to the appearance of high systematic risk. (b) Existence of specific characteristics that act in a peculiar manner, shaping human behavior and preferences. This could be the case when there exist idiosyncratic cultural values like uncertainty avoidance behaviors, in-group collectivism, high time discount preferences, and lack of trust, as well as nondiversified investment attitudes [27, 28] and loss aversion behaviors

There is a two-sided effect between idiosyncratic institutions and idiosyncratic cultural background described above, since the existence of idiosyncratic institutions can lead to the formation of an idiosyncratic cultural background and vice versa. This interrelationship perpetuates the existence of idiosyncratic institutions and cultural characteristics. Thus, a stagnated growth prototype is generated and prevails. This stagnated growth prototype has no endogenous energy to break the barriers to growth. Stagnated institutions always affect culture and vice versa, through the coevolution pattern that they follow and that has a long lasting ability to survive. When a stagnated growth prototype is prevailing in an economy, it can experience long periods of stagnation or periods near stagnation. These periods usually can be interrupted only by large waves of foreign incoming capital, which usually take the form of a very large public or private investments in specific

**4. Culture and institutions: complements or substitutes?**

achieve the objectives of the chapter, a dataset of 80 countries2

Outlook (WEO) database of the International Monetary Fund (IMF).

In this section, we try to examine whether the cultural and the institutional background of the societies and the economies are characterized as substitutes or complemented issues in relation to their effects on economic development. To

Initially, as a measure of economic development, GDP per capita (purchasing power parity; 2011 international dollars) is used derived from the World Economic

To measure the cultural background, the present chapter makes a selective selection of seven cultural values that express the cultural background of the societies that make up the sample under analysis, based on relevant studies in the literature [2, 32–34]. The data contributing to the cultural background were compiled from the World Values Survey (WVS) and supplemented by data from the European Values Study (EVS) for corresponding questions, on the following waves: 1981– 1984, 1990–1994, 1995–1998, 1999–2004, 2005–2009, 2010–2014, and 2017–2019. Specifically, for the measurement of the cultural background, an overall measure was used that emerges as the first principal component of a principal component analysis (PCA) for the following seven cultural values: generalized trust, control of life, respect, independence, honesty, competition affinity, and

<sup>2</sup> The countries used in the analysis are the following: Albania, Algeria, Argentina, Armenia, Australia, Azerbaijan, Bangladesh, Belarus, Bosnia and Herzegovina, Brazil, Bulgaria, Burkina Faso, Canada, Chile, China, Colombia, Croatia, Cyprus, Czech Republic, Dominican Republic, Ecuador, Egypt, Estonia, Ethiopia, Finland, France, Georgia, Germany, Ghana, Haiti, Hong Kong, Hungary, India, Indonesia, Iran (Islamic Republic of), Italy, Japan, Jordan, Kazakhstan, Republic of Korea, Kuwait, Kyrgyzstan, Latvia, Lebanon, Libya, Lithuania, Malaysia, Mali, Mexico, Republic of Moldova, Morocco, Netherlands, New Zealand, Nigeria, Norway, Pakistan, Peru, Philippines, Poland, Romania, Russian Federation, Rwanda, Serbia, Slovakia, Slovenia, South Africa, Spain, Sweden, Switzerland, Thailand, Tunisia, Turkey,

Ukraine, United States, Uruguay, Venezuela, Vietnam, Yemen, Zambia, Zimbabwe.

is used for the period

*DOI: http://dx.doi.org/10.5772/intechopen.90631*

[29–31].

sectors.

of 1981–2019.

<sup>1</sup> It is not the only possible form of deviation from optimality but we chose to concentrate on that due to the fact that it could describe better an emerging economy that faces a long period of stagnation.

#### *Why Coevolution of Culture and Institutions Matters for Economic Development and Growth? DOI: http://dx.doi.org/10.5772/intechopen.90631*

information, evolution path dependence, and rent-seeking activities, which all lead to the appearance of high systematic risk. (b) Existence of specific characteristics that act in a peculiar manner, shaping human behavior and preferences. This could be the case when there exist idiosyncratic cultural values like uncertainty avoidance behaviors, in-group collectivism, high time discount preferences, and lack of trust, as well as nondiversified investment attitudes [27, 28] and loss aversion behaviors [29–31].

There is a two-sided effect between idiosyncratic institutions and idiosyncratic cultural background described above, since the existence of idiosyncratic institutions can lead to the formation of an idiosyncratic cultural background and vice versa. This interrelationship perpetuates the existence of idiosyncratic institutions and cultural characteristics. Thus, a stagnated growth prototype is generated and prevails. This stagnated growth prototype has no endogenous energy to break the barriers to growth. Stagnated institutions always affect culture and vice versa, through the coevolution pattern that they follow and that has a long lasting ability to survive. When a stagnated growth prototype is prevailing in an economy, it can experience long periods of stagnation or periods near stagnation. These periods usually can be interrupted only by large waves of foreign incoming capital, which usually take the form of a very large public or private investments in specific sectors.
