Hierarchy and Wealth

Abstract

A two-way interaction between national cultural characteristics and wealth

is examined with focus on Hofstede’s power distance index. Cultural
propensity to build hierarchical relationships affects wealth of nations
through two channels: ability to innovate and competence in building
effective institutional environments. In countries with high level of
hierarchy, impact of tendency to build hierarchical relationships can
somewhat be mitigated by trade openness and resource rents. These
findings put in doubt probability that China could become the next centre of
global capitalism in the near term.

Key words: power distance index, confucian long-term orientation, growth,

innovation

I. Introduction

This study is motivated by growing interest in China’s economic

performance. China averaged growth rates of about 10 percent in the last
thirty years, and its economy is expected to surpass that of the United
States in terms of purchasing power parity (PPP) as early as in 2014,
according update to the 2011 World Bank's International Comparison
Program (ICP)1.

China would thus topple the United States, which held the limelight as the
world’s largest economy since overtaking the United Kingdom in 1872.
However, some economists have expressed skepticism regarding China’s
long-term prospects (Fan et al, 2012). China is suffering from
overinvestment and high leverage, the Time Magazine noted in April 2014.
More importantly, “the U.S. still has a substantial lead in innovation, and its
dominant position in many industries and sectors is not about to vanish.”2

This study attempts to answer one empirical question: how likely is

continued economic growth in China, or will it be slowed down by its
cultural legacy?

Briefly, results of this study are as follows. First, it shows that there is a
two-way interaction between cultural characteristics and economic
outcomes. Second, impact of cultural propensity to build hierarchical
relationships affects economic performance through two channels – ability
to innovate and competence in building effective institutions. Quality of
1
World Bank press release. April 29, 2014

2
The Time magazine. April 30, 2014
institutions and innovation should therefore be viewed as endogenous to
cultural characteristics. Third, countries with high power distance index can
compensate for tendency to build hierarchical relationships by openness
and oil rents to ahieve economic prosperity. Finally, findings of this study
cast doubt on China’s ability to take place of the United States of America
as the next global centre of capitalism. The latter finding rationalizes
China’s links with global diasporas in developed countries and focus on
acquisition of technologies in developed markets.

The remaining article is organized as follows. Section 2 motivates analysis

and provides sample description. Section 3 presents the empirical results.
Section 4 concludes.

II. Motivation, Methodology and Sample Description

Most of the studies that examined impact of cultural variables on economic

performances looked at a one-way impact of culture on economic outcomes
(for instance, Smith, 1776, and Weber, 1905). Hofstede (1980) was the first
author who proposed a detailed analysis if the issue. Subsequently, a
number of studies reported on correlation between cultural values and
economic growth (Carlsson and Lundstrom, 2002, Hofstede and Bond,
1988).

Unlike Williamson and Mathers (2011), Franke et al (1991), and Hofstede

and Bond (1988) this study takes a view that culture is endogenous, not
exogenous to economic outcomes. It focuses on one cultural metric – power
distance index (PDI), which represents the extent to which unequal power
distribution in organizations is accepted in a society. Culture affects
economic outcomes, but economics impact cultural choices, suggesting a
two-way interaction between the two sets of variables. This proposition is
tested in simultaneous systens linear regression models using the following
specification:

T
Power Distance Index=α 1 +β 1 ×Log (GDP) per capita+∑1 β T × Χ T +e 1
N
Log (GDP ) per capita=α2 + β2 ×Power Distance Index + ∑1 β N ×Γ N +e 2 (1),
where Χ T and Γ N are vectors that contain control variables and errors are correlated .

This study looks at two channels, through which propensity to build

hierarchies impacts economic outcomes – innovation and efficiency of
institutional environment. It builds on a large body of literature that links
culture to innovation (Wind et al, 1990, Shane, 1993, Rinne et al, 2012) and
culture to institutions (Fukuyama, 1995). To test strength of PDI’s impact
innovation and quality of institutions, power distance index is used in first-
stage model as follows:
 Innovation Index=α 1 +β 1×Power Distance Index+e 1
T
Log (GDP ) per capita=α 2 +β 2×Innovation Index+ ∑3 βT ×Χ T +e2 (2),
where Χ T is a vectors of control variables . In other models Innovation Index is replaced with Government
Efficiency Index using the same specification .

In addition, confucian dynamism is tested in the same model specifications

to test whether it could mitigate PDI’s impact on institutional development
and innovation. China’s confucian dynamism reading of 87 puts it in the top
five percent of the global sample, and Hofstede and Bond (1988) found that
confucian dynamism, which reflects persistence, thrift, and a sense of
shame, is strongly correlated with economic growth.

Unlike numerous papers in the realm of macroeconomics, this paper focuses

on levels of economic prosperity, not growth rates. This brings it closer to
literature on law and finance, which examines levels of stock market and
financial sector development (La Porta et al, 1997, 1998).

Sample used in this study includes 93 countries, for which both power
distance index and confucian dynamism (confucian LTO) are available.
Variables used in this study and sources of data are described in Appendix
A. Logarithm of GDP per capita in 2012 is used to compare attained wealth.

One characteristic problem for studies that examine economic growth and
wealth is causality and endogeneity (Paldam, 1996). As Barro (1996, 1999),
this study uses an instrumental-variable technique, where some of the
instruments are earlier values of regressors.

Several characteristics of institutional environment, including rule of law,

government efficiency, corruption, and freedom of press, have been used to
explain accumulated wealth. Results are similar –these variables lower
significance of power distance index variable due to high pairwise
correlation, and can be viewed as endogenous to PDI. This study reports
results with one variable that measures quality of institutions - government
efficiency index in 2000 and in 2013.

Global Innovation Index was first estimated in 2007, but coverage for 2008
is more comprehensive, so innovation index is measured as of 2008. As a
robustness check, government efficiendy index for 2012 and innovation
index for 2013, the latest dates available at the time of completion of this
study, are tested in robustness checks.

Finally, the 2008 innovation index is scaled to make beta coefficients in

regression models directly comparable to its value in 2013 and government
efficiency indices:
 μInnovation index 2013
Innovation index 2008 (scaled )=Innovation index 2008× (1 )
μInnovation index 2008

III. Results

Univariates

Table 1 reports univariate statistics for subsamples of countries with high

and low power distance index. Threshold that separates the subsamples is
0.685 median value of PDI scaled by 100. Countries that have lower
propensity to build hierarchical relationships accumulate larger wealth,
build more efficient institutionsm, and have higher freedom of press. They
spend more on research and development and education, and derive smaller
income from oil rents. There is no difference in size measured by natural
logarithm of population in millions and no difference in trade openness
measured as a sum of export and import scaled by total value of the GDP.

Wealth regressions

Table 2 presents regression models that explain logarithm of GDP per

capita in a sample of 93 nations. In a univariate regression model that
explains logarithm of GDP per capita, power distance index takes on a
negative sign (model 1), and the model explains 23 percent of variance in
dependent variable. A reasonable interpretation is that PDI is positively
correlated with some omitted characteristics that are conducive to growth.
Power distance index survives addition of variables that measure levels of
education and impact of foreign trade (model 2), but it is dominated by
variables that proxy for innovation and institutional efficiency (model 3 and
model 4). These findings match results of Williamson and Mathers (2011),
who use principal components analysis to extract four cultural metrics –
trust, respect, individual self-determination, and obedience – from World
Values Surveys, and relate them to Economic Freedom of the World Index
compiled by Fraser Institute. Their models indicate that economic freedom
is more important for growth than culture.

Assumption that government efficiency and innovation could be endogenous

to hierarchy is tested in models 7-9. Power distance index is used in
univariate first stage models to estimate innovation index and government
efficiency index, which are then tested in second stage models. In model 9,
PDI predicts government efficiency in the first stage model, government
efficiency predicts innovation in the second stage model, and various
regressors, including innovation, are put to test in third stage model. Slope
on coefficients in second (third) stage models are smaller than in models 3-
4, but they retain significance at 1-percent level. These findings suggest
that higher power distance index impacts level of wealth through two
channels – lower innovation and weaker institutional environment.
An interesting issue is whether confucian LTO reverses impact of
hierarchical culture on wealth. The coefficient on confucian LTO reported in
panel B of table 2 and in models 5-6 in panel A of table 2 changes signs,
leading to the conclusion that the relationship is fragile. It appears that
higher confucian dynamism does not contribute to wealth accumulation.

Multivariate regression models reported in panel A of table 2 explain 70

percent to 90 percent of variance in logarithm of GDP per capita in a
sample of 93 countries. Unlike Barro (1996), this study does not find
evidence that female schooling has different impact on economic outcomes
than male schooling – these variables take on different signs only when both
are employed in one regression model, suggesting multi-collinearity effect.
Models in table 2 include total schooling variable without distinguishing
effect by sex. Further, fertility takes on a negative sign, whereas trade
openness and oil rents are positively related to accumulated wealth, in line
with Sachs and Warner (1995). Variables that proxy for foreign trade
impact are conducive to wealth accumulation as reported in other studies,
whereas fertility has a negative impact.

Reverse causality

The question of impact of culture on economic outcomes does not meet with
a uniform response in academic literature. Alexander and Seidman (1990)
are critical of the concept of a unique national culture, whereas McSweeney
(2002) is skeptical about Hofstede’s research methods and, more generally,
about the plausibity of relationship between national culture and uniform
national institutions.

This study does not assume that national culture is deterministic, but it
assumes that culture, political and economic life are intertwined and have
mutual effects. There is a two-way interaction between culture and
economic outcomes. Linton (1936) speaks of culture as “the precipitate of
history,” suggesting that historic events have impact on national psyche.
Culture could thus affect economic outcomes.

But economic characteristics also impacts cultural and political choices,

suggesting a two-way interaction. Klebnikov (1991) shows that agrarian
reform in Russia in 1906-1917 led to entrepreneurial and politically
conservative choices among peasantry.

Potter (1954) argues that the United States of America’s ideal of freedom
and democracy is largely based on accumulation of wealth that
accompanied democratic choices. Freedom and abundance, in Potter’s
words, “are to such a great extent fused in American democratic thought”
(Potter, 1954: 127). Further, “democracy is clearly most appropriate for
countries which enjoy an economic surplus and least appropriate for
countries where there is an economic insufficiency. In short, economic
abundance is conducive to political democracy” (Potter, 1954: 127).

Proposition that culture affects economic outcomes whereas economic

circumstances affect cultural values is tested in simultaneous regression
models reported in table 3. The first equation in the model predicts
logarithm of GDP per capita, and the second equation explains power
distance index. Results are revealing.

Power distance index attains larger significance than in models that do not
incorporate a two-way interaction between between cultural and economic
variables in table 2. In addition to standard choice of variables for this
paper, model 5 – the first stage model that explains logarithm of GDP per
capita – incorporates percentage of spending on research and development,
but PDI retains its negative sign and significance in the presence of
innovation index.

Variables in models with power distance index as dependent variable take

on expected signs with one exception – trade openness, which is positively
related to PDI. It might be that countries with hierarchical cultures open up
to trade and develop their comparative advantages to compensate for poor
economic performance domestically, thus causing positive relationship
between PDI and trade openness. This supports Bekaert, Harvey and
Lundblad (2005), who show that capital account liberalization increases
subsequent economic growth by about 1 percent annually.

Oil rents have positive impact on hierarchical culture, and large countries
tend to have more hierarchies in place. As expected, hierarchies are
stronger in less educated and less wealthy societies.

Results from table 3 suggest that hierarchical culture and economic

outcomes are interrelated and, perhaps, self-reinforcing. They imply that
culture is, expectedly, sticky, and its impact is persistent.

Innovation and institutional efficiency

First stage regression models 7-9 in table 2 employ univariate models with
power distance index as the only independent variable to estimate
innovation and government efficiency. It it possible that PDI attains
significance because it proxies for omitted variables in these models.

PDI attains a negative value in all reported regression models in panel A of

table 4 that explain innovation. It is worth noting that government efficiency
proxy does not render measure of hierarchy insignificant. Interestingly,
confucian dynamism takes on a positive sign when it is used in combination
with power distance, especially in models that explain innovation index in
2013 (panel B of table 4). The interpretation is that confucian LTO mitigates
impact of hierarchical culture on innovation. In other words, long-term
orientation has positive impact on growth at high levels of hierarchy.

PDI is slightly less significant in models that explain government efficiency.

Its impact is mitigated by accumulated wealth – logarithm of GDP per
capita. There is some circularity in models that control for wealth – wealth
is accumulated in societies with low levels of hierarchy through investment
in innovation and efficient institutions (table 2 and table 3), but two-way
interaction is confirmed in models in table 3.

In addition to educational attainment and external economic conditions,

models in table 4 control for size of economies using logarithm of
population in millions. Innovation has big up-front costs, as with drug
development or software, suggesting that size of economy could be
important. Separately, Morck (2005) advances an argument that knowledge
workers in Canada are disadvantaged due to smaller scale and
concentration of innovation activities than in the United States. In the
United States innovation is concentrated in high tech clusters – like Silicon
Valley in California, Route 128 in Massachusetts, and the Research Triangle
in North Carolina. To afford such innovation clusters, substantial wealth
and concentration of human resources and, more narrowly, human capital is
required. This warrants inclusion of logarithm of population (million) in
models that explain innovation.

Oil rents take on a positive sign at low level of government efficiency in line
with Rodriguez and Sachs (1999), and Sachs and Warner (2001), who show
that countries with greater natural resources wealth tend to have a lower
quality of public sector governance.

Probabilities for China

Logistic regressions in table 5 model probability that countries belong to a

club of 19 developed OECD nations with 2012 GDP per capita of 35,960 in
constant 2005 U.S. dollars. In models that employ power distance index
probability for China does not exceed 3 percent. Table 5 also reports
probabilities for the U.S.A. to validate results.

Worth noting, level of innovation has higher bearing on probability of

becoming a developed nation than government efficiency variable.
Confucian LTO took on a negative sign in several specifications, suggesting
small correlation with probability of attaining a status of developed nation.

Results from table 5 highlight difficulties that lie ahead of China in its
developmental drive. They imply that trend extrapolation for China’s growth
rates should not be implemented – China is facing bottlenecks in the form of
inefficient institutions and hierarchical culture that stifles innovation.

High power distance index nations

If certain have experienced traumatic events in the past and developed

hierarchical culture, what can they do to overcome such historic legacy?

Table 6 reproduces the regressions of table 2 for high and low hierarchy
country subsamples. Models 1-5 are for high PDI subsample, and models 6-9
are for low PDI subsample to allow direct comparison. The focus is not on
the PDI variable, but on variables that measure level of education and
foreign trade impact. Coefficient on schooling variable is slightly higher for
high power distance index countries, but most of the differences can be
found in variables that measure foreign trade impact. Coefficients on both
trade openness and oil rents are not significant in low PDI subsample, but
they attain high significance in countries with hierarchical culture.
Apparently, hierarchies may be tempered by an openness to ideas and an
open economy, as in China. Alternatively, countries with hierarchical
cultures could use natural resource endowment to get to higher levels of
wealth.

Worth noting, coefficient on power distance index has larger significance in

the low hierarchy subsample. Univariate model with PDI variable explains
26.8 percent of variance in the low PDI subsample, but only 3.7 percent in
the high PDI subsample. Similar results are obtained in panel B, which
separates high wealth and low wealth countries.

Separately, low hierarchies are more important in high wealth subsample

(model 1-5 in panel B). The conclusion is that low hierarchy culture is
needed to achieve higher levels of wealth. This finding falls in line with
Gerschenkron’s (1962) argument that economic growth in rich countries
differs qualitatively from that in poor countries “catching up.”

Robustness

Law and finance literature (La Porta et al, 1997, 1998) has recently
achieved academic prominence. One key finding of this literature is that
“law matters”, in the sense that various aspects of national legal systems
shape economic outcomes. This finding was later questioned on premises
that the observed correlation does not necessarily imply a causal
relationship (Rajan and Zingales, 1988) and that, contrary to what the law
and finance literature would predict, in the 1930s-1970s the U.S. stock
market development was not triggered by improvements in investor
protection, but by extralegal factors (Cheffins et al, 2012).
Without taking a side in this debate, this study attempts to disentangle legal
environment effects by separating the sample of 93 countries into four
categories by legal origin: English (28), French (43), German (15), and
Scandinavian (5). Models in table 7 take on the same specification as
models reported in table 2. Control variables suppressed. Beta coefficients
on PDI variable and, in models 6-9, beta coefficients on innovation index
and government efficiency index in second/third stage models are reported.
PDI variable takes on the same signs in all subsamples, except a subsample
of Scandinavian countries, which includes just five observations.

Results from table 7 validate major findings of this paper. Further, they
suggest that results are not based on outliers. Low statistical power of legal
origin variables in the presence of cultural variables in table 7 suggests
another avenue of research in the area of “law and finance”. Cultural
preferences could explain why certain countries design elaborate legal
system and at the same time develop highly efficient financial institutions
and markets based on “external finance”. If two processes occur
independently driven by cultural preferences, correlation between legal
choices and economic outcomes could be spurious. This would explain why
development of legal framework in the U.S. in the 1930s was not followed
by higher stock market valuations (Cheffins et al, 2012).

Several ways to calibrate power distance index have been attempted in this
paper to ensure robustness of results. One set of approach uses indicator
variables set to one if power distance index exceeds a certain threshold. A
second approach uses PDI as a continuous variable. More complicated
specifications have been implemented, including quadratic and piecewise
linear terms. These add no significant explanatory power. The relationship
between PDI and our dependent variables is monotonic.

IV. Conclusion

This study expands the academic literature by examining a two-way

mechanism between cultural characteristics and economic outcomes.
Tendency to build hierarchical relationships affects economic outcomes
through two channels - innovation and institutional efficiency. Cultural
variables are endogenous to economic outcomes, suggesting a two-way
interaction between culture and economics.

Countries that have long-standing tradition of hierarchical relationship can

to some extent overcome this historical legacy by increasing foreign trade
or through resource endowment, but joining the club of rich nations
demands development of institutions and innovation. This could to some
extent explain the middle income trap, a situation when poor countries
demostrate high rates of economic growth at low levels of wealth, but fail to
achieve levels of economic development of rich nations.

One limitation of this study is that it looks at culture as a static variable,

whereas culture is affected by economic outcomes and, therefore, dynamic.
Wolrd Values Survey data allows such an investigation, but it’s scope is also
limited as it spans only 30 years of data going back to 1981-1984. Clear
empirical tests perhaps require reliable data over a sufficiently longer term.

These findings cast a serious doubt on the premise that historically high
growth rates in China could extrapolate into the future. They formalize the
argument that China’s growth would be slowed down by weakness of its
institutions and low innovation levels.
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World Bank press release. April 29, 2014

Appendix A. Description of Variables

The appendix reports variables used to describe various characteristics

related to economic growth.

Power distance index (PDI) Geert and Gert Jan Hofstede website.
Coefficient is scaled by 100

Confucian long-term orientation Geert and Gert Jan Hofstede website.

Coefficient is scaled by (Confucian LTO) 100

Log(GDP per capita) Natural logarithm of GDP per capita (constant

2005 US$). Source: World Bank Open Data

Innovation index Global Innovation Index 2007 (2013). Source:

Cornell University, INSEAD, and the World
Intellectual Property Organization (WIPO)

Government effectiveness index Percentile ranks for Government

Effectiveness. Source: Worldwide Governance
Indicators (WGI) report, 1996-2012

Corruption index Percentile ranks for Government

Effectiveness. Source: Worldwide Governance
Indicators (WGI) report, 1996-2012

Freedom of press Percentile ranks for Government

Effectiveness. Source: Worldwide Governance
Indicators (WGI) report, 1996-2012
Rule of law Percentile ranks for Government
Effectiveness. Source: Worldwide Governance
Indicators (WGI) report, 1996-2012

Research and development spending Public spending on R&D, total (%

of GDP). Source: World Bank Open

Education spending Public spending on education, total (% of

GDP). Source: World Bank Open

Total schooling Educational Attainment data. Source: Robert

Barro data sets

Log (fertility rate) Natural logarithm of Fertility rate, total (births

per woman). Source: World Bank Open Data

Log (life expectancy) Natural logarithm of life expectancy. Source:

World Bank Open Data

Trade openness Sum of exports and imports scaled by total

GDP. Source: World Bank Open, own
estimates

Net oil exports Fuel exports (% of merchandise exports) less

fuel imports (% of merchandise imports).
Source: World Bank Open, own estimates
Log (population, mln) Natural logarithm of population (1+ millions of
people). Source: World Bank Open, own
estimates

High income dummy Indicator variable takes on a value of one

when per capita (constant 2005 US$) is higher
than average in OECD countries (USD 35,960
in 2012) and is zero otherwise. Source: World
Bank Open, own estimates

Colony Barro (1999)

Tabletable
This 1. Selected
reports data for low
selected income group
characteristics and high
of high powerincome group
distance countries
index and low power
distance index countries. Each subsample includes 46 bservations. Power distance index
threshold of 0.675 separates high/low PDI subsamples. Panel A reports mean and median Z-
for each subsample, t-statistic for means and Z-statistic for medians. Panel B statisticreports
T-
frequency distributions and Chi-square stiatistic.∗, ∗∗, and ∗∗∗ indicate a p-value of for
10%,
Panel
5%, and
A. 1%,
Meanrespectively.
and median for high PDI and low PDI subsamples statistic
differenc
for
e
differenc
Mean Median Mean Median in
e
medians
in
Power Distance Index 0.46 0.48 0.78 0.80 -12.25***-9.54***
means
Confucian (LTO) 0.45 0.37 0.40 0.37 0.32 0.00
GDP per capita 2012 24,213 18,771 8,968 3,899 4.47*** 4.05***
Log (GDP per capita) 2012 9.60 9.84 8.23 8.27 4.99*** 3.64***
Log (GDP per capita) 1980 9.04 9.51 7.51 7.51 4.74*** 3.06***
Innovation Index 2008 43.3 42.5 35.1 34.3 4.55*** 3.90***
Innovation Index 2013 46.7 49.4 35.9 36.1 4.89*** 4.31***
Government Effectiveness Index
75.3 81.5 46.4 50.0 5.68*** 4.75***
2000
Government Effectiveness Index
75.2 83.0 47.8 47.0 5.51*** 4.85***
2012
Corruption 2000 73.4 81.0 44.3 46.0 5.57*** 4.81***
Freedom of Press 2000 11.67 6.5 33.12 25.5 -4.89*** -4.72***
Rule of Law 2000 72.1 79.2 43.3 42.6 5.52*** 4.87***
R&D expense (% of GDP) average 19 1.13 0.78 0.34 0.03 4.66*** 4.68***
Education (% of GDP) average 1970- 4.5 4.5 3.8 3.6 2.17*** 2.08**
Total Schooling 2000 9.1 9.4 7.1 7.0 4.19*** 3.74***
Log (Fertility) 2000 3.1 3.0 3.5 3.5 1.96* 2.09**
Log (Life Expectancy) 2000 4.3 4.3 4.2 4.3 2.95*** 3.66***
Trade Openness 1991-2000 71.2 63.7 79.9 60.0 0.82 0.36
Oil rents 1991-2000 1.3 0.0 7.6 1.0 3.36*** 2.85***
Log (Population, mln) 2000 2.7 2.4 3.1 3.1 1.33 1.02

Panel B. Frequencies for high PDI and low PDI subsamples Chi-
Square
N N
statistic
High Income Dummy 17 2 for
14.92***
Colony 23 29 frequenc
3.87**
ies
Tabletable
This 1. Selected
reports data for low
selected income group
characteristics and high
of high powerincome group
distance countries
index and low power
distance index countries. Each subsample includes 46 bservations. Power distance index
threshold of 0.675 separates high/low PDI subsamples. Panel A reports mean and median Z-
for each subsample, t-statistic for means and Z-statistic for medians. Panel B statistic
reports
T-
frequency distributions and Chi-square stiatistic.∗, ∗∗, and ∗∗∗ indicate a p-value of for
10%,
Panel
5%, and
A. 1%,
Meanrespectively.
and median for high PDI and low PDI subsamples statistic
differenc
for
e
differenc
Mean Median Mean Median in
e
medians
in
Power Distance Index 0.46 0.48 0.78 0.80 -12.25***-9.54***
means
Confucian (LTO) 0.45 0.37 0.40 0.37 0.32 0.00
GDP per capita 2012 24,213 18,771 8,968 3,899 4.47*** 4.05***
Log (GDP per capita) 2012 9.60 9.84 8.23 8.27 4.99*** 3.64***
Log (GDP per capita) 1980 9.04 9.51 7.51 7.51 4.74*** 3.06***
Innovation Index 2008 43.3 42.5 35.1 34.3 4.55*** 3.90***
Innovation Index 2013 46.7 49.4 35.9 36.1 4.89*** 4.31***
Government Effectiveness Index
75.3 81.5 46.4 50.0 5.68*** 4.75***
2000
Government Effectiveness Index
75.2 83.0 47.8 47.0 5.51*** 4.85***
2012
Corruption 2000 73.4 81.0 44.3 46.0 5.57*** 4.81***
Freedom of Press 2000 11.67 6.5 33.12 25.5 -4.89*** -4.72***
Rule of Law 2000 72.1 79.2 43.3 42.6 5.52*** 4.87***
R&D expense (% of GDP) average 19 1.13 0.78 0.34 0.03 4.66*** 4.68***
Education (% of GDP) average 1970- 4.5 4.5 3.8 3.6 2.17*** 2.08**
Total Schooling 2000 9.1 9.4 7.1 7.0 4.19*** 3.74***
Log (Fertility) 2000 3.1 3.0 3.5 3.5 1.96* 2.09**
Log (Life Expectancy) 2000 4.3 4.3 4.2 4.3 2.95*** 3.66***
Trade Openness 1991-2000 71.2 63.7 79.9 60.0 0.82 0.36
Oil rents 1991-2000 1.3 0.0 7.6 1.0 3.36*** 2.85***
Log (Population, mln) 2000 2.7 2.4 3.1 3.1 1.33 1.02

Panel B. Frequencies for high PDI and low PDI subsamples Chi-
Square
N N
statistic
High Income Dummy 17 2 for
14.92***
Colony 23 29 frequenc
3.87**
ies
Tabletable
This 1. Selected
reports data for low
selected income group
characteristics and high
of high powerincome group
distance countries
index and low power
distance index countries. Each subsample includes 46 bservations. Power distance index
threshold of 0.675 separates high/low PDI subsamples. Panel A reports mean and median
for each subsample, t-statistic for means and Z-statistic for medians. Panel B reports
T-
frequency distributions and Chi-square stiatistic.∗, ∗∗, and ∗∗∗ indicate a p-value of 10%,
Panel
5%, and
A. 1%,
Mean respectively.
and median for high PDI and low PDI subsamples statistic
for
differenc
Mean Median Mean Median
e
in
Power Distance Index 0.46 0.48 0.78 0.80 -12.25***
means
Confucian (LTO) 0.45 0.37 0.40 0.37 0.32
GDP per capita 2012 24,213 18,771 8,968 3,899 4.47***
Log (GDP per capita) 2012 9.60 9.84 8.23 8.27 4.99***
Log (GDP per capita) 1980 9.04 9.51 7.51 7.51 4.74***
Innovation Index 2008 43.3 42.5 35.1 34.3 4.55***
Innovation Index 2013 46.7 49.4 35.9 36.1 4.89***
Government Effectiveness Index
75.3 81.5 46.4 50.0 5.68***
2000
Government Effectiveness Index
75.2 83.0 47.8 47.0 5.51***
2012
Corruption 2000 73.4 81.0 44.3 46.0 5.57***
Freedom of Press 2000 11.67 6.5 33.12 25.5 -4.89***
Rule of Law 2000 72.1 79.2 43.3 42.6 5.52***
R&D expense (% of GDP) average 19 1.13 0.78 0.34 0.03 4.66***
Education (% of GDP) average 1970- 4.5 4.5 3.8 3.6 2.17***
Total Schooling 2000 9.1 9.4 7.1 7.0 4.19***
Log (Fertility) 2000 3.1 3.0 3.5 3.5 1.96*
Log (Life Expectancy) 2000 4.3 4.3 4.2 4.3 2.95***
Trade Openness 1991-2000 71.2 63.7 79.9 60.0 0.82
Oil rents 1991-2000 1.3 0.0 7.6 1.0 3.36***
Log (Population, mln) 2000 2.7 2.4 3.1 3.1 1.33

Panel B. Frequencies for high PDI and low PDI subsamples Chi-
Square
N N
statistic
for
frequenc
ies
Tabletable
This 1. Selected
reports data for low
selected income group
characteristics and high
of high powerincome group
distance countries
index and low power
distance index countries. Each subsample includes 46 bservations. Power distance index
threshold of 0.675 separates high/low PDI subsamples. Panel A reports mean and median Z-
for each subsample, t-statistic for means and Z-statistic for medians. Panel B statisticreports
T-
frequency distributions and Chi-square stiatistic.∗, ∗∗, and ∗∗∗ indicate a p-value of for
10%,
Panel
5%, and
A. 1%,
Meanrespectively.
and median for high PDI and low PDI subsamples statistic
differenc
for
e
differenc
Mean Median Mean Median in
e
medians
in
Power Distance Index 0.46 0.48 0.78 0.80 -12.25***-9.54***
means
Confucian (LTO) 0.45 0.37 0.40 0.37 0.32 0.00
GDP per capita 2012 24,213 18,771 8,968 3,899 4.47*** 4.05***
Log (GDP per capita) 2012 9.60 9.84 8.23 8.27 4.99*** 3.64***
Log (GDP per capita) 1980 9.04 9.51 7.51 7.51 4.74*** 3.06***
Innovation Index 2008 43.3 42.5 35.1 34.3 4.55*** 3.90***
Innovation Index 2013 46.7 49.4 35.9 36.1 4.89*** 4.31***
Government Effectiveness Index
75.3 81.5 46.4 50.0 5.68*** 4.75***
2000
Government Effectiveness Index
75.2 83.0 47.8 47.0 5.51*** 4.85***
2012
Corruption 2000 73.4 81.0 44.3 46.0 5.57*** 4.81***
Freedom of Press 2000 11.67 6.5 33.12 25.5 -4.89*** -4.72***
Rule of Law 2000 72.1 79.2 43.3 42.6 5.52*** 4.87***
R&D expense (% of GDP) average 19 1.13 0.78 0.34 0.03 4.66*** 4.68***
Education (% of GDP) average 1970- 4.5 4.5 3.8 3.6 2.17*** 2.08**
Total Schooling 2000 9.1 9.4 7.1 7.0 4.19*** 3.74***
Log (Fertility) 2000 3.1 3.0 3.5 3.5 1.96* 2.09**
Log (Life Expectancy) 2000 4.3 4.3 4.2 4.3 2.95*** 3.66***
Trade Openness 1991-2000 71.2 63.7 79.9 60.0 0.82 0.36
Oil rents 1991-2000 1.3 0.0 7.6 1.0 3.36*** 2.85***
Log (Population, mln) 2000 2.7 2.4 3.1 3.1 1.33 1.02

Panel B. Frequencies for high PDI and low PDI subsamples Chi-
Square
N N
statistic
High Income Dummy 17 2 for
14.92***
Colony 23 29 frequenc
3.87**
ies
Table 1. Selected
This table reports data for low
selected income group
characteristics and high
of high powerincome group
distance countries
index and low power
distance index countries. Each subsample includes 46 bservations. Power distance index
threshold of 0.675 separates high/low PDI subsamples. Panel A reports mean and median
for each subsample, t-statistic for means and Z-statistic for medians. Panel B reports
T-
frequency distributions and Chi-square stiatistic.∗, ∗∗, and ∗∗∗ indicate a p-value of 10%,
Panel
5%, and
A. 1%,
Meanrespectively.
and median for high PDI and low PDI subsamples statistic
for
differenc
Mean Median Mean Median
e
in
Power Distance Index 0.46 0.48 0.78 0.80 -12.25***
means
Confucian (LTO) 0.45 0.37 0.40 0.37 0.32
GDP per capita 2012 24,213 18,771 8,968 3,899 4.47***
Log (GDP per capita) 2012 9.60 9.84 8.23 8.27 4.99***
Log (GDP per capita) 1980 9.04 9.51 7.51 7.51 4.74***
Innovation Index 2008 43.3 42.5 35.1 34.3 4.55***
Innovation Index 2013 46.7 49.4 35.9 36.1 4.89***
Government Effectiveness Index
75.3 81.5 46.4 50.0 5.68***
2000
Government Effectiveness Index
75.2 83.0 47.8 47.0 5.51***
2012
Corruption 2000 73.4 81.0 44.3 46.0 5.57***
Freedom of Press 2000 11.67 6.5 33.12 25.5 -4.89***
Rule of Law 2000 72.1 79.2 43.3 42.6 5.52***
R&D expense (% of GDP) average 19 1.13 0.78 0.34 0.03 4.66***
Education (% of GDP) average 1970- 4.5 4.5 3.8 3.6 2.17***
Total Schooling 2000 9.1 9.4 7.1 7.0 4.19***
Log (Fertility) 2000 3.1 3.0 3.5 3.5 1.96*
Log (Life Expectancy) 2000 4.3 4.3 4.2 4.3 2.95***
Trade Openness 1991-2000 71.2 63.7 79.9 60.0 0.82
Oil rents 1991-2000 1.3 0.0 7.6 1.0 3.36***
Log (Population, mln) 2000 2.7 2.4 3.1 3.1 1.33

Panel B. Frequencies for high PDI and low PDI subsamples Chi-
Square
N N
statistic
High Income Dummy 17 2 for
14.92***
Colony 23 29 frequenc
3.87**
ies
Table 1. Selected
This table reports data for low
selected income group
characteristics and high
of high powerincome group
distance countries
index and low power
distance index countries. Each subsample includes 46 bservations. Power distance index
threshold of 0.675 separates high/low PDI subsamples. Panel A reports mean and median
for each subsample, t-statistic for means and Z-statistic for medians. Panel B reports
T-
frequency distributions and Chi-square stiatistic.∗, ∗∗, and ∗∗∗ indicate a p-value of 10%,
Panel
5%, A. 1%,
and Mean and median for high PDI and low PDI subsamples
respectively. statistic
for
differenc
Mean Median Mean Median
e
in
Power Distance Index 0.46 0.48 0.78 0.80 -12.25***
means
Confucian (LTO) 0.45 0.37 0.40 0.37 0.32
GDP per capita 2012 24,213 18,771 8,968 3,899 4.47***
Log (GDP per capita) 2012 9.60 9.84 8.23 8.27 4.99***
Log (GDP per capita) 1980 9.04 9.51 7.51 7.51 4.74***
Innovation Index 2008 43.3 42.5 35.1 34.3 4.55***
Innovation Index 2013 46.7 49.4 35.9 36.1 4.89***
Government Effectiveness Index
75.3 81.5 46.4 50.0 5.68***
2000
Government Effectiveness Index
75.2 83.0 47.8 47.0 5.51***
2012
Corruption 2000 73.4 81.0 44.3 46.0 5.57***
Freedom of Press 2000 11.67 6.5 33.12 25.5 -4.89***