Culture, Institutions and Economic Growth

Are culture and institutions complementary or substitutable? Theoretically, Douglass North highlights that culture and institutions form an institutional matrix which 'is characterized by [& mldr;] complementarities'. This relationship of complementarity means that the institution's effect on economic performance would depend on culture. To test this complementarity hypothesis, we create new measures of culture and institutions and include their interaction term into an endogenous growth model. We use the Institutional Profiles Database and conduct a factor analysis to create good governance and degree of state intervention indicators to measure institutions. We measure culture by the grid and group dimensions of Mary Douglas's cultural theory and use the World Values Survey database to estimate them. Then, we show that for countries characterised by good governance, a marginal increase in culture will strongly affect growth, while the effect tends to zero for countries with bad institutional quality. Second, the marginal effect of an increase in the quality of institutions on growth will be stronger if the country is characterised by a 'religion-centred' culture. So, our results support the complementarity hypothesis. Regarding policy-making, this result paves the way for institutional reforms more in line with people's cultural heritage.