Managing EU’s cultural divisions key to crisis

If we have learnt nothing else from this crisis it is that economics is, and must be treated as a social analysis.

A definition of culture is “that complex whole which includes knowledge, belief, art, morals, law, custom, and any other capabilities and habits acquired by man as a member of society”.

We are familiar with this in Ireland. There is a culturally accepted norm that we do not, generally, evict people. There is a cultural norm that we do not generally reward those who act as whistleblowers (we are indeed only now getting round to protecting same). Economic analysts may decry the effects of these, but they are cultural norms. And culture is very slow to change.

Culture, or proxies for same, has only recently been accepted as a valid part of modern economic analysis. This is despite the fact that the most cited social scientist by some measure is a Dutch scholar, Prof Geert Hofstede, whose work on culture from the 1980s has been of profound importance to the way international business scholarship has progressed.

Prof Hofstede proxies culture as being on four (latterly five) dimensions. He suggested that societies could be ranked as to how masculine they were, how great a proclivity they had for individualism, the extent to which people were — and were accepting of — being distant from power, whether they are long or short-term orientated, and the extent to which they would avoid uncertainty.

A vast literature in international business has found that these cultural dimensions are associated with many economic phenomena. Thus we find that even when we account for other issues (different accounting standards, different legal systems, different ways of dealing with creditors) relative cultural distance is associated with lower foreign direct investment, lower degrees of mergers and acquisitions, and lower portfolio investment.

What is perhaps more interesting is how the individual elements of culture impact. In Prof Hofstede’s terms Ireland is low on power distance (information flow and management tends to be informal and not hierarchical), highly individualistic and masculine (encouraging of risk taking and focused on winning for personal gain), and low on uncertainty avoidance (risk is rewarded and technicalities tend to be ignored) as well as on long-term orientation (we tend to not pass up short-term gain even if that may have long-term deleterious consequences).

These traits are associated with earnings management in companies, and to more inefficient banks. Lower uncertainty and shorter term orientation is associated with low levels of cash buffers and thus an inability to ride out shocks;

This analysis can be carried further: countries (such as Greece) with low individuality, low masculinity and high uncertainty avoidance are more prone to tax evasion; higher uncertainty avoidance is associated with more severe impacts from crises.

Low power distance and high individuality (as is the case in Ireland or Germany but not Greece) are associated with easier adoption of new work practices.

One of the things that the eurozone crisis has exposed is the divide in Europe. There are many divides: Germanic neo-mercantilism versus sensible communitarian economic policies, countries with zombie banks and those that have banks in the process of zombification, the UK versus everyone else. But what may underlie all this is the cultural divide. An increasing amount of culture studies use the framework of the world values survey.

This is a complex instrument but it in essence can be reduced to two scales: how traditional/open a society is and how collective/individual it is.

What is striking when we examine this is how non-homogenous the EU appears. The other issue is how much of an outlier Ireland is. Culturally we are much more similar to Latin America than we are to northern European or even Mediterranean countries.

An approach that recognises there are deep cultural divisions, that these reflect in different economic outcomes and approaches, and that a union which wishes to thrive must acknowledge, accept and manage with these is one that will be much more likely to stand the test of time.

Rather than becoming poor imitations of Germans this approach would urge us to become better Irish, Greeks or Italians.

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