Media Briefings

THE ECONOMIC IMPACT OF CULTURAL CLOSENESS

  • Published Date: June 2014

THE ECONOMIC IMPACT OF CULTURAL CLOSENESS: Evidence from cross-border banking in Europe

Cultural closeness between Austria and its East European neighbours has promoted cross-border bank lending since the end of communism, according to research by Franz Hahn, published in the June 2014 issue of the Economic Journal. His study finds that cross-border lending has been higher in Austrian districts with a bigger share of residents bearing surnames of Slavonic-Hungarian origin and whose ancestors are likely to have migrated from the eastern periphery of the Habsburg Empire.

This evidence is suggestive of why the transition of the formerly command economies to fully-fledged market economies after the fall of the Iron Curtain in the late 1980s could be so speedy. It provides support for widely held beliefs in the economics of ‘transition countries’ that it is the common culture and history shared by East and West Europeans for centuries that was the underlying force behind the process of economic and political convergence.

With the fall of the Iron Curtain in the late 1980s and the swift economic transformation of the formerly communist countries, history has provided economists with a unique opportunity to test core notions within the framework of a quasi-natural experiment. This particular study focuses on a core question in international banking – namely, to what extent culture, geography and institutions matter as motivators of cross-border lending.

Theory suggests that cross-border bank lending flows from rich countries to poor countries is facilitated when lending-related legal and social norms are shared and valued equally by both lenders and borrowers. Accordingly, the rapid adoption of democracy and market economy principles by many of the East European countries since the early 1990s should have raised cross-border lending from ‘old’ European Union (EU) members to clients resident in new members.

Applying this hypothesis to data on the cross-border lending activities of Austrian small- to medium-sized regional banks over the period 1995-2008, the study shows that the transitional dynamics of foreign lending by these banks has indeed been positively affected by the swift alignment of Austria’s eastern neighbours – the Czech Republic, Hungary, Slovakia and Slovenia – to EU norms.

Most importantly, the research presents evidence that the cultural closeness between Austria and its East European neighbours – as measured by a new gauge of common culture built on the relative prevalence of surnames of Slavonic-Hungarian ancestry in Austria at the district level – has had a positive and statistically significant effect on cross-border lending by the Austrian banks to residents of its neighbours in the East.

This result holds even after controlling for the geographical closeness of the countries and their institutional convergence – and it can be considered as a valuable piece of evidence in support of the view that culture as an independent factor plays a role in economics.

A rapidly growing body of statistical evidence supports the view that ‘culture matters’ in economics. But isolating and identifying a causal effect of culture on economic performance requires a solid measure of culture. Various measures of culture have been proposed.

A very subtle measure builds on the genetic distance (or closeness) across human populations as an indicative measure of cultural differences. Though this measure technically captures the time elapsed since two or more populations shared the same ancestors, worthwhile ‘cultural information’ is extracted from this gauge by showing that populations that share common ancestors are more likely to adhere to the same social and cultural values.

Thus, genetic distances between two populations reflect cultural differences between them. For example, there is evidence that genetic closeness (distance) exerts a statistically significant and positive impact on cross-country income differences even controlling for measures of geographical and climatic distances, transport costs and measures of historical, linguistic and religious distances.

But measures of genetic distance based on DNA sequences of human populations do have their limitations when used as an instrument of cultural differences in econometric analyses. Apart from anything else, these measures are not available at all levels and scopes of economic activities where cultural differences are expected to be an independent factor of economic influence.

For various reasons, the most important of which is data protection regulation aimed at preserving highly sensitive personal data from misuse, individual DNA-based information at the level of states (and geographical regions) is strictly confidential in most countries and thus off-limits, at least for social and economic research.

At the centre of the new study is an attempt to propose an alternative measure of cultural distance that preserves the core features of genetic distance measures but in addition, allows for culture-related economic research at all geographical levels. The newly proposed gauge is aimed at measuring ‘cultural proximity’ on the basis of ‘onomastic’ similarities of residents’ surnames across local or regional areas.

This indicator shares aspects of genetic measures since it carries DNA-related information, but contrary to them, does so without violating individual rights inherent in human genetics. It builds on the fact that surnames like genes are passed from parent to child, as is the usual rule at least in societies of European ancestry. In most European countries, it only depends on the marital status of the parents whether the surname of the male and/or female parent is passed on to the child.

As an instrument for the shared past (and, thus, common culture) between Austria and its East European neighbours, the gauge is based on the prevalence of surnames with Czech, Hungarian, Slovakian and Slovenian onomastic roots in Austria. Historically, migration in the Habsburg Empire used to be one way, that is, from the Eastern periphery to the centre. The latter greatly coincides with today’s metropolitan area of Vienna and its surrounding regions (that is, the eastern parts of today’s Austria).

In the south-eastern parts of Austria, the prevalence of surnames of Hungarian-Slovenian ancestry is mainly due to the presence of Hungarian and Slovenian ethnic minorities that have lived in these areas for centuries. The statistical analysis shows that cross-border bank lending has been higher in Austrian districts with a bigger share of residents bearing surnames of Slavonic-Hungarian origin.

ENDS


Notes for editors: ‘Culture, Geography and Institutions: Empirical Evidence from Small-scale Banking’ by Franz R Hahn is published in the June 2014 issue of the Economic Journal.

Franz Hahn is at the Austrian Institute of Economic Research in Vienna.

For further information: contact Franz Hahn +43-1-7982601-255 (email: Franz.Hahn@wifo.ac.at); or Romesh Vaitilingam on +44-7768-661095 (email: romesh@vaitilingam.com; Twitter: @econromesh).