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I don’t know if you could really call it a “gaffe” — because that’s more so a minor thing that gets exaggerated by the media — but Mitt Romney sure did something similar a few days ago. Speaking at a fundraiser in Israel, Romney said that cultural differences explain the disparity in wealth and prosperity between Israelis and Palestinians. I hesitate to call this a gaffe because it has real implications for how Romney views development and economic policy. His comment drew criticism from Palestinian leaders, but Romney dug in his heels and doubled down in a National Review op-ed the next day:

During my recent trip to Israel, I had suggested that the choices a society makes about its culture play a role in creating prosperity, and that the significant disparity between Israeli and Palestinian living standards was powerfully influenced by it. In some quarters, that comment became the subject of controversy.

But what exactly accounts for prosperity if not culture? In the case of the United States, it is a particular kind of culture that has made us the greatest economic power in the history of the earth. Many significant features come to mind: our work ethic, our appreciation for education, our willingness to take risks, our commitment to honor and oath, our family orientation, our devotion to a purpose greater than ourselves, our patriotism. But one feature of our culture that propels the American economy stands out above all others: freedom. The American economy is fuelled by freedom. Free people and their free enterprises are what drive our economic vitality.

The first line of criticism that came at Romney labelled him racist, as did Saeb Erekat, a senior aide to President Mahmoud Abbas of the Palestinian Authority. In this vein, Romney’s statement boiled down to “Israelis know how to generate wealth and Palestinians don’t, and this is because there’s something innate, something cultural about Israelis that sets them apart from Palestinians.” It’s not hard to see how this view of what Romney says makes him look like a racist. If nothing else, this line of thinking ignores the fact that what an “Israeli” is, or what a “Palestinian” is, is a fluid notion subject to reinterpretation and adaptation, and its definition is always contested by Israelis and Palestinians themselves.

A second line of criticism came from Fareed Zakaria who took Romney’s argument that “culture makes all the difference” head on. Zakaria writes in the Washington Post:

Had Romney spent more time reading Milton Friedman, he would have realized that historically the key driver for economic growth has been the adoption of capitalism and its related institutions and policies across diverse cultures.

The link between economic policies and performance can be seen even in the country on which Romney was lavishing praise. Israel had many admirable traits in its early decades, but no one would have called it an economic miracle. Its economy was highly statist. Things changed in the 1990s with market-oriented reforms — initiated by Benyamin Netanyahu — and sound monetary policies. As a result, Israel’s economy grew much faster than it had in the 1980s. The miracle Romney was praising had to do with new policies rather than deep culture.

Ironically, the argument that culture is central to a country’s success has been used most frequently by Asian strongmen to argue that their countries need not adopt Western-style democracy. Singapore’s Lee Kuan Yew has made this case passionately for decades. It is an odd claim, because Singapore’s own success would seem to contradict it. It is not so different from neighbouring Malaysia. The crucial difference is that Singapore had extremely good leadership that pursued good economic policies with relentless discipline.

Essentially, Zakaria argues that culture is nowhere near as important as policies — the outlines of the incentive structure in which individuals make economic decisions. “China was stagnant for centuries and then suddenly and seemingly miraculously, in the 1980s, began to industrialize three times faster than the West. What changed was not China’s culture, which presumably was the same in the 1970s as it was in the 1980s. What changed, starting in 1979, were China’s economic policies.” China’s culture had been blamed by Max Weber for the country’s relative poverty, similarly to India with its “Hindu rate of growth”, yet now these two countries are more or less the main drivers of global economic activity. Interestingly, in this turn of events, China’s “Confucian” culture with its alleged deference to authority and quest for harmony are now used by some to explain China’s recent rapid state-led growth.

And a third line of criticism argued that Romney confused “culture” with “institutions”, which is what people who study what makes societies prosperous generally use to explain economic behaviour and outcomes. Daron Acemoglu and James Robinson made this argument in Foreign Policy:

Unfortunately, Romney’s views are seriously out of sync with those of the great mass of social scientists. For one, as his more extended argument in the National Review illustrates, he confuses “culture” with institutions. By culture, social scientists mean people’s values and beliefs. Romney refers to Americans’ “work ethic,” which is cultural, but he also claims that political and economic freedoms are the real keys to economic success. But political and economic freedom are not guaranteed by (or even related to) culture but by institutions, such as the U.S. Constitution or its system of property rights. Romney did cite Harvard University historian David Landes, who did indeed argue that values and beliefs are crucial for economic development, as providing the intellectual origins of his views — but his focus on institutions is much more in line with our book “Why Nations Fail” than with Landes. Indeed, the facts on the ground in the Middle East illustrate the power not of culture, but of institutions.

In this piece, Acemoglu and Robinson don’t explain what they mean by “institutions” (they do a better job in an excerpt here from Why Nations Fail), but we can think of institutions as, broadly, anything that shapes behaviour. Douglass North in his Nobel Prize for Economics acceptance speech broke institutions down into “informal” and “formal” categories. Informal institutions are “the norms of behaviour, conventions and self-imposed codes of conduct” that shape how we interact with each other. Formal institutions are the more tangible constraints on behaviour in the form of regulations, laws and constitutions.

Acemoglu and Robinson’s work in Why Nations Fail (again, excerpted here in the Montreal Review) further categorizes institutions into “inclusive” and “extractive”. For them, the key to prosperity is nurturing inclusive institutions (laws, norms, regulations, etc.) that allow individuals and firms to enter and exit the market, that uphold a standard of certainty and continuity with regard to private property, contracts and investment, and that clearly publicize incentives so individuals can invest into the future with confidence that their gains will not be stolen, expropriated or entirely taxed away. Inclusive institutions have the effect of distributing resources among more actors in society and, following a materialist framework, a more pluralistic distribution of material resources engenders a more pluralistic distribution of political power, which in turn will be put to use to safeguard these inclusive institutions. Extractive institutions effectively concentrate wealth and power in the hands of the few and as such do not promote self-sustaining widespread prosperity.

The problem with all these analyses is that they don’t get to the heart of the problem. The reason why Palestinians are so much poorer than their Israeli neighbours is that they’re really not neighbours. As Elizabeth Anderson notes, markets can only flourish when they have a values component that encourages prosocial norms, a willingness to cooperate with others, and certain level of trust among individuals. These create the social capital that turns people living in proximity to each other into “neighbours”.

Looking at the situation on the ground, it’s quite clear that Israel’s “closure policies” that restrict trade, movement, investment — and economic activity, more generally — have had the effect of stifling the economy and creating a climate of disorder that erodes social capital. How is a society supposed to raise its median income when imports are nearly completed blockaded and when its infrastructure is routinely destroyed? It’s not Palestinian culture that has prevented Palestinians from developing inclusive institutions that generate self-sustaining and widespread prosperity, but Israeli occupation. To the extent that Zakaria, Jared Diamond and Acemoglu and Robinson fail to clearly make this the core of their pieces they provide a disservice to their readers.

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