Religion and Economic Growth

In the course of economic growth theory, the impact of religion on economic growth and GDP per capita has been largely neglected by the mainstream economic theory. Basically, there have been two major conceptual forces behind the demonstration of the effect of religiousness on economic growth. First, traditional theoretical approach to the analysis of economic growth embodied in the Solow approach emphasized the role of capital accumulation and technological progress in the growth of total factor productivity where the technological progress accounted for the unexplained and exogenous feature that drove the growth of total factor productivity.

Early analysis of economic growth and its main determinants heavily neglected the effect of institutional variables on economic growth. Second, the theoretical framework of economic growth usually follows the empirical evidence on the existence of postulated hypotheses related to the economic growth. Primarily, the effect of religion and other institutional features on economic growth has been displaced to the lack of empirical estimation techniques that could account and control for the effect of the institutional phenomena on the course of economic growth.

The best lucrative and empirically consistent analysis of economic growth and its determinants had been documented by Robert Barro and Xavier Sala-i-Martin. In 2004, Robert Barro published Economic Growth Across Countries. In the explanatory framework, the author included several institutional variables and examined its effect on 10-year economic growth interval in a cross section of 86 countries over 1965-1975, 1975-1985 and 1985-1995 time periods. For a given set of institutional control variables, the rule of law exerted a strong, positive and statistically significant effect on growth. The effect of democracy, the second institutional control variable, was estimated by a single coefficient and its squared term to account for a possible movement of the effect of the level of democracy.

The magnitude of both coefficients was statistically significant. The sign of the squared term was negative suggesting for a typical inverted-U effect of democracy on economic growth. In the meaning of the economic theory, the estimated coefficients suggested that the adoption of democratic institutions and policies in the initial stage of GDP per capita boosts economic growth, particularly by the institutions such as the rule of law, electoral representation, and multiparty political system as well as by the constitutional protection of civil liberties.

However, as countries depart from the initial level of GDP per capita, the political pressure from electoral representation tends to enforce egalitarian policies that negatively effect economic growth, particularly by the fiscal redistribution of income to mitigate income inequality. Consequently, the effect of democratic institutions tends to diminish and, as the curve bends, the predictive effect of constitutional democracy is negative, thereby exerting a negative effect on economic growth. However, the hypothetical relationship between democracy and economic growth is dubious, if not intriguing. In fact, neoclassical growth theories suggest that the rate of economic growth tends to diminish alongside the expansion of the capital stock and productive capacity of the national economy. The hypothesized theoretical assertion postulates that the non-linear, inverted-U effect of democratic institutions on economic growth is overestimated.

In 2003, Robert Barro and Rachel M. McCleary wrote a seminal contribution (link) to the theory and empirics of the relationship between religion and economic growth. Even though in The Protestant Ethics, Max Weber argued that the religious practices and beliefs have had important implications for economic development, the economists paid little or no attention to the role of religiousness as a cultural measure on economic growth. Arguably, the most difficult inferential problem in economic theory is to capture the direction of causality in non-experimental data which indistinguishably confuses the empirical inference from sample estimates. The theoretical relationship between the religion and economic growth is nonetheless a daunting task of the economic theory.

Across the world, there is a whole spectrum of religious diversity in the interplay between religion and economic development. Some countries, such as the United States have been largely influenced by the Enlightenment thought, penned in Thomas Jefferson’s 1779 The Virginia Act for Establishing Religious Freedom, on religious freedom as the principle of freedom from religious oppression. On the other hand, countries in Northern and some parts of the Continental Europe largely adopted Protestantism as the religious establishment while Southern and Central European countries experienced a strong and coercive influence of Roman Catholicism. Hence, the historical bond of nations in the Middle East and North Africa to the Islamic religion accounts for a significant share of the world population and a representative estimate of the effect of Islam on economic growth.

In addition, many political regimes, particularly in China, Soviet Union and Cuba, have attempted to suppress the religious freedom and, hence, establish a system that officially prohibited and punished the religious practice. Surprisingly, countries in Northern Europe such as Norway, Finland and Iceland have established an official religion that is effectively articled in the constitution. Given the vast difference in the distribution of GDP per capita across countries, the assessment of the relationship between the religion and economic growth is not a triviality per se.

Robert Barro and Rachel M. McCleary constructed a broad cross-country dataset which included national account variables and an array of other political, economic and institutional indicators in a cross section of over 100 countries since 1960. The predicted theoretical expectations postulate whether the religion fosters religious beliefs that influence individual cultural characteristics such as ethics, work and honesty. The authors estimated both the effect of different explanatory variables on religious outcomes such as monthly church attendance, the belief in heaven and the belief in hell.

The estimated coefficients suggest that monthly church attendance is strongly affected by urbanization rate and a set of dichotomous religious variables. In particular, a one percentage point increase in the urbanization rate decreases monthly church attendance rate by 1.49 percentage points, holding all other factors constant. In addition, a 1 percentage point increase in religious pluralism fosters the monthly church attendance rate by 1.35 percentage points, ceteris paribus, while the increase in the measure of the regulation of religion by 1 percentage point decreases the church attendance rate by 0.64 percentage point. Hence, the church attendance rate in countries with official state religion, on average, increases the religious participation by 0.87 percent more compared to countries with the absence of state religion, ceteris paribus. The belief in heaven and hell, on the other hand, is positively correlated with state religion and religious pluralism, Muslim religious faction and other religious factions. The belief in heaven and hell is significantly negatively correlated with urbanization rate, communist regimes, Orthodox religion, Hindu religion and Protestant religion. Barro and McCleary regressed growth rates of real GDP per capita on variables of monthly church attendance rate, belief in heaven, belief in hell and dichotomous (dummy) religious variables representing the share of religion in the countries observed. The table below reports dummy coefficients of each religion relative to the Roman Catholicism. The sign of the coefficient is negative suggesting the increase in the share of each religion (see table) decreases the growth rate of real GDP per capita by less than by the anticipated increase in the share of Roman Catholic religion.

The effect of religion on long-run economic growth

Source: R. Barro & R.M. McCleary: Religion and Economic Growth, 2003.

The p-value for religion shares in the regression specification is about 0.001, suggesting that the hypothetical zero simultaneous effect of the explanatory dummy variables of religious share is easily rejected at 0.1 percent level of statistical significance. The estimate suggests that religious shares influence the growth rate of real GDP per capita. Interestingly, sample estimates of regression coefficients suggest that monthly church attendance is significantly negatively related to the GDP growth rate. The estimated coefficient suggests that higher church attendance will, on average, lead to significantly lower growth rate of real GDP per capita and, hence, a lower growth of the standard of living.

On the other hand, the sample estimates of growth regression coefficients suggest that the extent of belief in heaven and hell is positively related to economic growth. Thus, the empirical evidence from the panel of over 100 countries since 1960 suggests that the belief in heaven and hell encourage ethical behavior and honesty and thereby simultaneously increases the growth rate of real GDP per capita. The reported p-value for church attendance and beliefs is 0.000, suggesting the rejection of null hypothesis on a simultaneous zero effect of church attendance and beliefs in hell and heaven on the growth rate of real GDP per capita, and a strong influence of religious factors on the distribution of economic growth across countries since 1960.

The empirical evidence of the relationship between religion and economic growth suggests that the church attendance and the rate of economic growth are substitutes, not complements. The philosophical premises of Roman Catholicism often scrounge individualism and personal liberties and encourage collectivist mentality by punishing individual work, thrift and effort. Incidentally, the empirical evidence suggests strongly negative effect of the share of Roman Catholic religion on the long-run growth rate of real GDP per capita.

Regarding the true importance of religious freedom, not oppression, on the emergence of order alongside the abstract rules and the pursuit of individual liberty, Friedrich August von Hayek wrote in The Constitution of Liberty: “It should be remembered that, so far as men’s actions toward other persons are concerned, freedom can never mean more that they are restricted only by the general rules. Since there is no kind of action that may not interfere with another person’s protected sphere, neither speech, nor the press, nor the exercise of religion can be completely free. In all these fields … freedom does mean and can mean only that what we may do is not dependent on the approval of any person or authority and is limited only by the same abstract rules that apply equally to all.

In the microeconomic perspective, religious market is highly oligopolistic, especially in Europe where government subsidies to large religious groups discourage the entry of competitive religions in the market. Therefore, in strongly Catholic countries, such as Italy and Spain, Roman Catholic church firmly resembles the behavioral pattern of a dominant firm, facing price inelastic demand and price elastic supply. Subsidies to churches do not quite differ from subsidies to corporations and enterprises – the net effect are lower marginal costs, increasing the total producer surplus of the church and increasing the deadweight loss to the consumers of religious services. A cautionary approach would require not only the precise modeling of the religious market upon the theoretical assumptions but also the contestable empirical evidence on the existence of the Catholic church as a dominant firm in highly oligopolistic religious market.

Incidentally, the empirical evidence suggests strongly negative effect of the share of Roman Catholic religion on the long-run growth rate of real GDP per capita. Nonetheless, religion is an important determinant of economic growth. However, the evidence from the second half of the last century suggests that the prosperity and wealth of nations is greater if people allocate fewer resources to the exercise of religious activities.

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