The Hardware and Software of Latin American Development
For Latin America to grow, it's not enough to put in place the right policies; we must also seek to change the cultural software
Economist and historian Thomas Sowell tells an old Russian fable of two poor peasants – Boris, who had a goat, and Ivan, who didn’t. One day, a fairy comes along and offers Ivan a single wish. And, Ivan wishes for Boris’ goat to die. This fable may tell us something about some Latin American countries where anti-business personal values are the software that runs the hardware of pro-business economic policies.
The larger question is, to what extent do cultural attitudes and beliefs shape the business environment in Latin America? Why would Ivan wish for Boris’s goat to die, rather than seeking a goat of his own? What, if any, is the link between culture and economic development? In this column, taking guidance from strategic guru Michael E. Porter, I focus only on the more limited question of “economic culture.” That is, the attitudes, beliefs, and orientations that influence our economic activities.
I must note that many economists are unconvinced of a strong link between cultural values and economic development. To them, independently of culture, the appropriate economic environment leads to the same results everywhere. To these economists, what matters is the “hardware” of policies conducive to economic growth and not the “software” of culture. Their point is made, for example, by Latin Americans, who, unable to progress in the economic environments of their home countries, flourish in the United States: same culture, different environments. Why are they unproductive at home and enterprising away?
On the other hand, the “software” proponents can also point to examples to substantiate the role of culture. In multicultural countries, under the same economic environment, we find that some ethnic groups do better than others. For example, Vietnamese and Cubans in the United States, and Jews wherever they go. Some scholars use this thesis of cultural differences to explain the success of the Marshall Plan in Europe, and the failure of the Alliance for Progress in Latin America: same policy objectives, different cultures.
Porter argues that, although an economic environment conducive to growth is essential, a nation’s prosperity is determined by the productivity with which it uses its natural, capital and human resources. It is not enough to put in place the right policies; we must also seek to change the cultural software. Yet, promoting cultural change in Latin America has always been deemed an offensive American condescendence.
Maybe, but the intractability of the problems of poverty suggests that, cultural change should not be ignored in the search for solutions. Economic development solutions require more than, opening the economy, lowering interest rates, freeing up trade, and the like. Something is needed to change the toxic anti-business culture. Sociologists tell us that; economic behavior is influenced by what we perceive is the best way to advance economically. The Latin American perception is that the best way to advance economically is through government favors, monopolistic control of resources, political power, and such.
These perceptions need to be replaced by values that enhance productivity such as: capitalism is good, innovation is good, investment in capabilities and technology is good, employees are assets, etc. In other words, a change in economic culture is needed.
The good news is that such a change is possible. “The way people behave in a society has much to do with the signals and the incentives that are created in the economic system in which they live.” (Porter) Thus, an unproductive economic culture is more the consequence of having been guided by flawed economic theories, than the consequence of embedded cultural attributes. If much of our economic culture is learned from the economy, then, economic culture can be modified.
In his essay, Cultures Count, Samuel Huntington cites Patrick Moynihan’s wise assessment of the role of culture in human affairs: “The central conservative truth is that it is culture, not politics, which determines the success of a society. The central liberal truth is that politics can change a culture and save it from itself.” In Latin America, the culture needs to be for Ivan to aspire to his own goat or two.