Historical Prevalence of Infectious Diseases, Cultural Values, and the Origins of Economic Institutions

Abstract

Summary It is widely believed that economic institutions such as competitive markets, the banking system, and the structure of property rights are essential for economic development. But why economic institutions vary across countries and what are their deep origins is still a question that is widely debated in the developmental economics literature. In this study, we provide an empirical test for the provocative hypothesis that the prevalence of infectious diseases influenced the formation of personality traits, cultural values, and even morality at the regional level (the so called Parasite‐ Stress Theory of Values and Sociality), which then shaped economic institutions across countries. Using the prevalence of pathogens as an instrument for cultural traits such as individualism, we show in a two‐stage least squares analysis that various economic institutions, measured by different areas of the index of Economic Freedom by the Heritage Foundation, have their deep origins in the historical prevalence of infectious diseases across countries. Our causal identification strategy suggests that cultural values affect economic institutions even after controlling for a number of confounding variables, geographic controls, and for different sub‐samples of countries. We further show that the results are robust to four alternative measures of economic and political institutions.

Are individualistic societies less equal? Evidence from the parasite stress theory of values

“…These findings are consistent with previous research which finds that the IC dimension of culture is the most robust determinant of different economic outcomes including long-run growth (Gorodnichenko and Roland, 2011) and the quality of economic and political institutions (Nikolaev and Salahodjaev, 2017).…”

“…This is consistent with recent empirical findings which show that more individualistic societies are far more likely to develop high quality political and economic institutions including respect for the rule of law, protection of private property and strong democratic institutions (Greif, 1994;Nikolaev and Salahodjaev, 2017;Kyriacou, 2016;Nikolaev and Salahodjaev, 2016;Gorodnichenko and Roland, 2015;Licht et al, 2007;Inglehart and Oyserman, 2004). People in more individualistic cultures are also more likely to tolerate minorities and have higher levels of interpersonal trust and lower levels of corruption (Thornhill and Fincher, 2014;Allik and Realo, 2004), which can further reduce transaction costs and facilitate market exchange leading to higher rates of human and physical capital investment, technological innovation and long-run economic growth (Oyserman et al, 2002;Gorodnichenko and Roland, 2012) and encouraging people to put more effort and get a fairer share of the economic pie (Alesina and Angeletos, 2005).…”

“…Below, we briefly summarize the evidence for the so called Parasite Stress Theory of Values (PSTV), which provides a strong foundation for the 2SLS analysis in this paper. Thornhill and Fincher (2014) provide a comprehensive overview of this literature while Nikolaev and Salahodjaev (2017) discuss the PSTV in the context of economic institutions.…”

“…The empirical literature since then has successfully linked individualistic cultural traits to better quality political and economic institutions, long-run economic growth, and higher levels of social capital (Gorodnichenko and Roland, 2011;Ball, 2001;Mazar and Aggarwal, 2011;Van Hoorn, 2014;Allik and Realo, 2004;Nikolaev and Salahodjaev, 2017;Thornhill and Fincher, 2014).…”

Can Intelligence Overcome the Effect of Individualism on Economic Development of Regions?

“…This variable is originated from Hofstede (1980) who conducted one of the most all-encompassing research on how values within job environment are formed by culture (Nikolaev & Salahodjaev, 2017). In this study, Hofstede and co-authors carried out surveys covering more than 100,000 IBM employees across different countries.…”