Mitt Romney don't know much about economic history.
"Culture makes all the difference," Mitt Romney told an intimate gathering of Israeli businessmen at Jerusalem’s posh King David Hotel. "And as I come here and I look out over this city and consider the accomplishments of the people of this nation, I recognize the power of at least culture and a few other things."
The U.S. Republican presidential hopeful, whose own net worth is estimated at roughly $250 million, went on to compare Israelis’ economically comfortable existence with the more straitened circumstances in Palestinian areas. The comment predictably drew the ire of Palestinian leaders, with one senior official deriding it as "racist."
Despite the controversy, Romney then doubled down on his argument in a short op-ed for the National Review, asking, "But what exactly accounts for prosperity if not culture?"
Unfortunately for Romney, the answer is: quite a lot. True, his cultural explanation for why Israel is richer than Palestine has sparked an important debate that rarely occurs in the parochial, U.S.-centric world of American presidential elections. And given the important role the United States plays in global affairs, a presidential candidate’s views about why the United States is more economically successful than most parts of the world are an important indicator of how he would approach the job.
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.
It is true, of course, that living standards are much higher in Israel than in Gaza or the West Bank — the gap is even wider, in fact, than Romney claimed. Israelis have much higher levels of educational attainment and better technology, and they benefit from much better provision of public services — for example, roads, health care, and water — than their Palestinian neighbors. There is also no denying that there are important cultural differences between Palestinians and Israelis: For instance, the former are primarily Muslims, while the latter are primarily Jewish.
But is there any cause-and-effect relationship between these cultural realities and differences in prosperity? The evidence suggests not. In fact, as economists Maristella Botticini and Zvi Eckstein point out in their recent book, The Chosen Few: How Education Shaped Jewish History, the origins of the high human-capital levels of Jews are in the historical adoption of educational institutions in Jewish society that induced people to become highly educated. This decision then led Jews to have a comparative advantage in trade and commerce — specializations that have served them well in the modern world. This is where the roots of Israel’s current prosperity lie, because these highly educated people migrated there, bringing their institutions with them. There was no cultural proclivity that led Jews to introduce or sustain these rules forcing Jews to educate their children. Rather, they emerged out of a political struggle between the Pharisees and the Sadducees to control Jewish society.
These new Israelis migrated to a place that had suffered a long history of colonial exploitation under the Ottomans and the British, who created extractive political and economic institutions — in order words, political institutions that concentrated power narrowly and economic institutions designed to redistribute income and power to themselves at the expense of society. The Israelis replaced these with mostly inclusive institutions that encouraged technological progress and economic growth and created the Middle East’s first democracy, but did not spread it to the Palestinians.
This happened for several reasons, none of them cultural. Let’s start with the long history of Arab-Israeli enmity: The existence of the state of Israel was contested by the surrounding Arab states, leading to a long series of conflicts and Israel’s capture of the West Bank and Gaza in 1967. It is hardly surprising that the Palestinian territories — under occupation and geographically separated from each other — were unable to develop inclusive political and economic institutions under such circumstances. The effects of the conflict haven’t just been limited to the Palestinians: Several authoritarian Arab governments have used it to divert the attention of their citizens and consolidate their corrupt grip on power.
The Middle East conflict extracts political and economic costs on the Palestinians to this day. Israel continues to expropriate large tracts of land in the West Bank for settlements, and of course such insecure property rights have been disastrous for investment and prosperity on the Palestinian side. Both territories have also had serious economic restrictions imposed on them by the Israeli government, not to mention the destruction of infrastructure and buildings.
All this may be justified as necessary to maintain the security of the Israeli state, but it has obvious consequences for Palestinian prosperity. In addition, the Palestinians have not done well at creating the type of inclusive political institutions that are critical for generating economic development. This is mostly because the conflict and struggle for statehood damages accountability and creates serious political polarization, not due to any innate cultural differences.
Leaving aside the case of Israel and Palestine, we show in Why Nations Fail that Romney’s ideas about "freedom" are much closer to the right way to think about relative prosperity than his ones about "culture." Rich countries are those that have created inclusive political and economic institutions. These spread political power broadly in society and make it accountable; they create an economy that can harness the talents, skills, and creativities of the vast mass of their citizens. We also show that cultural differences simply cannot account for the differences in economic prosperity we see today. They are either irrelevant, as in the case of the Israelis and the Palestinians, or they are themselves the product of institutional differences.
The most dramatic example of this is the divide between North and South Korea — a previously cohesive cultural entity driven apart by war and radically different institutions. Since their split six decades ago, the South has prospered under its inclusive system, while the North — with its extractive institutions based on central planning and continuous repression — has been driven to the brink of famine. Bizarrely, Romney cites the case of the Koreas to support his culturalist argument. But the divergence of these two countries obviously cannot be blamed on deeply rooted cultural factors — the only explanation is institutional differences and geopolitical realities. If Romney truly wants to understand the irrelevance of cultural factors to countries’ success or failure, it’s not Jerusalem he should’ve visited — it’s the Demilitarized Zone.