Why Does Individualism Affect Economic Development: Is It Values, Policies, or Institutions?

A substantial body of literature highlights the positive roles of individualism and economic freedom in fostering prosperity, and recent work links the two. This paper disentangles their contributions to economic development. In cross‐country data, we show that both are independently associated with per capita income, even after extensive controls for geography, political history, and alternative cultural dimensions. Using mediation analysis with instrumental variables, we find that individualism functions as a cultural foundation for economic freedom. Treating economic freedom as a single mediator, roughly half of individualism's total effect on income operates through it. Decomposing economic freedom into the channels through which individualism operates, property rights institutions and a policy index of sound money, trade, and regulation, raises the mediated share to about two thirds, roughly 40% through property rights and 27% through policy. We also test whether individualism moderates the returns to economic freedom. It does not, with one exception. Individualism and property rights institutions are partial substitutes, so formal property rights matter most where individualistic culture is weakest. These findings suggest that a substantial share of the gains associated with individualism may be obtainable through liberal institutional and policy reforms.