Skip to main content

Cultural and Institutional Bifurcation China and Europe Compared, by Avner Greif and Guido Tabellini, American Economic Review, 2010

How to explain the cultural and institutional bifurcations between China and Europe? In their paper Cultural and Institutional Bifurcation China and Europe Compared, Avner Greif and Guido Tabellini (AER 2010 citation:187) demonstrated that initial distribution of values and social heterogeneity themselves alone could be the reason. Two otherwise identical societies can evolve along different self-reinforcing trajectories of both cultural traits and organizational forms.

The collapse of the Chinese Han dynasty and the Roman Empire (after 220 CE) were turning points in the cultural and institutional evolution of China and Europe respectively. Large kinship organizations were common in the former but not the latter and this remarks the distinction in initial conditions. In China, the Han dynasty came to power while advocating Confucianism as an alternative to the Legalism of the previous Qin dynasty. Confucianism considers moral obligations among kin as the basis for social order, while Legalism emphasizes legal obligations. After a period of uncertainty, Confucianism, and thus kinship, survived as the main orthodox value from Tang dynasty until Qing dynasty. In Europe, the Church undermined tribalism by advocating generalized morality and discouraging practices that sustain kinship groups, such as adoption, polygamy, concubinage, marriages among distant kin, and marriages without the woman’s consent.

Moreover, values evolve and self-reinforce. A society in which cooperation1 occurs within the clan2 is likely to foster clan loyalty. By contrast, cooperation in cities3 with a large and heterogeneous population foster generalized morality and respect for formal institutions.

In the paper, the authors provide evidences from different aspects. In China, the state reinforced intra-clan cohesion by rules, such as linking rights to buying land to local clans’ members, and by promoting Neo Confucianism in which “the family was given a metaphysical foundation, and filial piety was promoted” (T. Ruskola 2000, p. 1622). A legal system, which would have undermined the clans, is opposed by the elders who controlled the clans and the state encouraged intra-clan disputes resolution instead of unified commercial code (Hui-Chen Wang Liu, 1959). Even large scale cooperation, such as organizing long-distance trade, was to form clan and regional merchant groups that relied on moral obligations and reputations related by kinship or place of residence (Debin Ma 2004, p. 267). Pervasive kinship structure facilitated state control over cities and attributes partly to the lack of self-governance of cites. Immigrants to cities remained affiliated with their rural kinship groups. Guilds-like organizations (huiguan) extended the reach of the rural clans into the city and in order to be a member it was necessary to belong to a particular place of origin (Christine Moll-Murata, 2008).

In Europe, instead, individuals created cities with the support of the Church and secular rulers. Cooperation among relatively large populations enabled most cities in Western Europe to gain self-governance by 1350, which provided motivation to foster the Christian dogma of generalized morality. Formal enforcement, such as transitions from ‘hand-shakes’ to contracts and from voluntary judges relying on customary law to professional judges relying on a formal legal code, supported intra-city, inter-lineage cooperation. Enforcement costs were nevertheless high and both the crime rate and ‘policemen’ per-capita were higher in large pre-modern European cities than in contemporary ones. Self-governed cities, by collecting tax, providing navies, fighting in wars, and administering justice on behalf of the state, extended the power of monarchs beyond clans’ capacity. Intra-city formal enforcement supported inter-city impersonal exchange through the Community Responsibility System and, in turn, reinforced generalized morality (Greif 2005, 2006).

In subsequent centuries significant institutional and cultural changes took place in both Europe and China. In particular, the rise of the West entailed a major backlash (including the Communist Revolution) against Chinese traditions. Yet economic arrangements continue to reflect different traditions. In China, family-firms are common and business relations are personal and this, in turn, reinforces limited morality. The World Value Survey (WVS, 2005-8) reveals that only 11.3% of Chinese trust a person whom they met for the first time compared to between 26.1% to 49.3% in the West (i.e., France, GB, USA and Germany). Friendship is ‘very important’ to less than 30% of Chinese but, on average, to almost 60% in the West. In the US, the level of trust toward strangers exceeds 60%, in China it is less than 40% (Roland Inglehart, et al 1998). A 1994-5 survey of Chinese businessmen in Thailand and Hong-Kong finds that Westerners are considered [by the Chinese] to be attractive partners for ... their respect for the law and keeping of promises.” (T.R. Pyatt and S.G. Redding 2000, p. 59).

Although I agree with the authors on the initial starting point and subsequent evolution processes, I doubt whether the surveys results reflect current institutional environment or current value system in China. Personally, I do feel Chinese, especially young people, trust Chinese strangers more when they are aboard. One interesting research could be to disentangle the persistence in institutional environment from persistence in people’s values using the large population of immigrants and oversea returnees. Maybe, in such an integrated modern world with rich networks of Internet, telecommunications and airlines, people’s opinions depend more on which environment they are in.

1 Cooperation can either refer to bilateral exchange or to public good provision.
2 The clan (lineage) is a kinship-based community whose members identify with and are loyal to. Cooperation is sustained mainly by moral obligations and reputational incentives in clans
3 The city is composed of members of many lineages. Formal enforcement is indispensable to sustain cooperation in cities. Morality also plays a role but moral obligations within the city have a wider scope but a weaker intensity.

References
Greif, Avner. 2005. “Commitment, Coercion, and Markets: The Nature and Dynamics of Institutions Supporting Exchange.” Handbook for NIE. C. Menard and MM. Shirley (eds).
Greif, Avner. 2006. “Family Structure, Institutions, and Growth.” American Economic Review. 96(2), pp. 308-312.
Greif, Avner, and Guido Tabellini. 2010. "Cultural and Institutional Bifurcation: China and Europe Compared." American Economic Review, 100(2): 135-40.
Inglehart, Ronald, Miguel Ba sanez, and Alejandro Moreno. 1998.  Human Values and Beliefs. A Cross-Cultural Sourcebook. Ann Harbor: Michigan University Press.
Liu, Hui-Chen Wang. 1959. “The Traditional Chinese Clan Rules.”  Monographs of the Association for Asian Studies , vol. 7. New York: J. J. Austion
Ma, Debin. 2004. “Growth, Institutions and Knowledge: a Review and Reflection on 18th-20th Century Chinese Historiography.”  Australian Economic History Review , 44(3), pp. 259-77
Moll-Murata, Christine. 2008. “Chinese Guilds from the Seventeenth to the Twentieth Centuries: An Overview.”  International Review  of Social History, 53, pp. 213–47.
Pyatt, T.R., Redding, S.G. (2000), "Trust and forbearance in ethnic Chinese business relationships in Hong Kong and Thailand." Journal of Asian Business, 16(1), pp. 41-63.
Ruskola, T. 2000. “Conceptualizing Corporations and Kinship.”  Stanford Law Review , 52, pp.1599-1729.

Comments

Popular posts from this blog

Shadow Banking in China (Chen, Ren and Zha 2018 AER)

Shadow Banking in China receives rising attention from both the press and the academia. In  The Nexus of Monetary Policy and Shadow Banking in China  (2018 AERNBER WP23377NBER WP21890), Chen, Ren and Zha discuss the interplay between China's quantity-based monetary policy and commercial banks' reaction in terms of shadow banking activity. In this blog, I highlight their theory and  findings on shadow banking in China.

One feature in China's banking system is an institutional division of state and nonstate commercial banks. State banks are state owned and the remaining commercial banks, as a whole represent almost half the size of the entire banking system, are nonstate banks. State banks adhere to the government's own policy against actively bringing shadow banking products into their balance sheet. This is not true of nonstate banks, however. As found in the paper, nonstate banks take advantage of regulatory arbitrage by bringing shadow banking products into a sp…

Dividends and expropriation, Faccio, Lang, and Young (2001 AER)

The failures in East Asian corporate governance are blamed for the East Asian financial crisis.  In East Asia, the predominant form of ownership is control by a family, termed as "crony capitalism", and the top managers are often from the family. In Faccio, Lang, and Young (2001 AER, citation 1861), they document ownership and control structures among East Asian corporations and analyze the salient agency problem, namely the expropriation of outside shareholders by controlling shareholders, by looking at dividend behavior.

To start with, they show an extraordinary concentration of control in East Asia, whereby 6 groups control more than 20% of the corporations in the 9 most advanced East Asian economies. This control is obscured behind layers of corporations, hence insulated against the forces of competition on less-then-transparent capital markets. However, family control is also predominant in West Europe, though the group sizes are smaller, with 5 groups control about 10%…

China’s Gradualistic Economic Approach and Financial Markets (Brunnermeier, Sockin, Xiong, AER P&P, 2017)

"A key approach successfully employed by China to reform its economy in the past 30 years is the so-called "crossing the river by touching the stones" approach, a gradualistic method that optimizes policy through experimentation. The government will start with an initial (usually small) policy change, and gradually modify the policy based on the reaction from the economy to this change." BUT, "Can China continue to use its gradualistic approach in the presence of active financial markets?"

In Brunnermeier, Sockin, Xiong, (AER P&P, 2017), they provide the theoretical rationale for potential ineffectiveness of gradualistic policy approach with the existence of an active financial market. In align with the well-known time-inconsistency problem (Kydland and Prescott (1977) and Barro and Gordon (1983) ), incentives of front-run by private agents in expectation of ex post non commitment of the policymaker renders the gradualistic approach ineffective. 

The po…