Culture and Institutions: Economic Development in the Regions of Europe

TLDR

Culture is measured by individual values and beliefs such as trust, respect, and self‑determination, and the political and social history of Europe provides rich regional variation in these indicators, which are strongly correlated with economic development and institutional measures. The study investigates whether culture causally affects economic development. The author uses historical literacy rates and long‑standing political institutions as instruments to isolate exogenous cultural variation. The exogenous cultural component, identified via historical literacy and institutions, is strongly correlated with current regional economic development, and the instruments satisfy over‑identification tests, supporting a causal effect.

Abstract

Does culture have a causal effect on economic development? The data on European regions suggest that it does. Culture is measured by indicators of individual values and beliefs, such as trust and respect for others, and confidence in individual self-determination. To isolate the exogenous variation in culture, I rely on two historical variables used as instruments: the literacy rate at the end of the XIXth century, and the political institutions in place over the past several centuries. The political and social history of Europe provides a rich source of variation in these two variables at a regional level. The exogenous component of culture due to history is strongly correlated with current regional economic development, after controlling for contemporaneous education, urbanization rates around 1850 and national effects. Moreover, the data do not reject the over-identifying assumption that the two historical variables used as instruments only influence regional development through culture. The indicators of culture used in this paper are also strongly correlated with economic development and with available measures of institutions in a cross-country setting.