The influence of belief in God on a nation's economic performance

Ari A. Perdana, Cambridge, Massachusetts

Economists are sometimes accused of being indifferent about religion. Wrong. Actually, we do care about religion. At least, we care about whether religion affects economic performance.

Consider Harvard Professor Robert Barro. Two years ago, he spent some time analyzing whether religiosity has any relation with a country's economic performance. Applying some cross- country econometric method, the findings were mixed. If religiosity is measured by the rate of church attendance in a country, the correlation with economic growth is negative. However, he found a positive association with the belief in heaven and hell with economic growth.

Barro's study was interesting and intellectually stimulating. Nonetheless, it does not answer anything since econometric analyses only tell us about correlations, not causations. To find the causations, we need to go beyond the numbers and regressions, even beyond the standard economic theories.

Religion may affect economic performance through some channels. One channel is attitude and work ethics. There is no doubt that the leading theory in this area is Max Weber's Protestant ethics. Weber argued that Protestantism, more specifically the Calvinist branch, has promoted the rise of modern capitalism. Calvinist Protestants, according to Weber, believed in the doctrine of predestination: one could not gain salvation by faith or deeds, but by hard work, honesty, seriousness the thrifty use of money and time.

Economic historian David Landes in his book The Wealth and Poverty of Nations (1999), echoing Weber's theory, argued that Protestant ethics help explain why the Catholic world (the Spanish, Italian and Portuguese), who were the pioneers in exploring the new world, faced a decline when entering the 18th century. Conversely, the Protestant economies, namely the Netherlands and England, were rising.

There have been later rebuttals of the Weberian thesis. Historian Harry Tawney (1926) argued that the English economy took off in the sixteenth century only after the religious influence diminished, and the society moved into a more secular one.

Then, in 2004, Amartya Sen argued that Weber's thesis was only useful in explaining what happened in the past, but not really powerful in predicting the future. By the time Weber's book was published in (1904-05), Protestant economies were in a decline. On the other hand, during that time, the economies of predominantly Catholic Latin America, were experiencing a rise.

The Weberian perspective also cannot explain well the Confucian growth miracles in the 20th century: Japan after the World War II, the East Asian tigers in the mid-1980s, and later China. Later on in the end of the century, India also joined the fast growth club.

Weberian supporters replied by saying that one does not have to be a Protestant to share the Calvinist ethics. Japan, China and the East Asian tigers have something in common with 16th century Calvinists: a hard working society and willingness to save for the future. But if culture -- namely the work ethic -- is the reason, then why have many Chinese been very successful as immigrants but the country has been left backward for centuries? And what took the East Asian tigers so long to take off, why not several decades earlier?

If culture is the reason behind the performance of these economies, can it explain the collapse of East Asian miracles in the late 1990s, and the Japanese slow-down in the mid-1990s, which continues until today?

The same thing also applies to India. The cultural explanation somewhat fails to explain India's recent turn around. The modest performance of the Indian economy from the 1950s to the 1990s was attributed by many to the Hindu culture (even the 2 percent to 3 percent consistent annual growth rate was branded the "Hindu growth rate"). Surely, the cultural explanation cannot be the reason for India's near-to-miraculous performance since the late 1990s.

The second channel through which religion can affect economic performance is institutions. More specifically commercial institutions, which are the heart of modern capitalism.

In their 2003 study, Shulz and Williamson argued that the Catholic economies in the 17th century to 19th century performed poorly because of the incompatibility of their institutions with modern capitalism.

For example, the medieval church tended to restrict charging interest for the reason that it is a kind of economic transaction where one of the parties would be taking advantage of the other because of greater bargaining strength. On the other hand, the (Calvinist) Protestants viewed the payment of interest as a normal part of commerce, thereby making it possible for modern debt markets to develop.

Catholic and Protestant countries also differed in their attitudes towards protection of creditors' rights. The authors found that countries which main religion is Catholic tend to protect the right of creditors less than the Protestant countries. The Catholic Church regarded private property in some instances as for the good of society.

That implies that to a certain degree private property is considered "common goods" with the Church having the authority to define what goods it considered "common". On the other hand, protection of private property was higher in Protestant countries because the definition of the common goods was passed down to the individual members rather than decided by the centralized power of the church.

The lack of compatibility with modern capitalist institutions was also the reason for underdevelopment in the Middle Eastern Islamic world. An UCLA Economist Timur Kuran (2003) argued that there were two main issues with the Islamic commercial institutions.

First, the Islamic business partnership law came in a package with the inheritance law that provides a mandatory inheritance shares to all sons and daughters. While this kind of partnership was well suited to the medieval economy in which it developed, it raised the costs of dissolving a partnership following a partner's death. This has kept Middle Eastern commercial enterprises small and short-lived.

Second, in contrast with the Islamic system, European inheritance systems facilitated large and durable partnerships by reducing the likelihood of premature dissolution. As the result, European enterprises grew larger than those of the Islamic world.

There is more room to explore the relationship between religion and the economy. At least Marx's claim that religion is the opium of the masses is not completely true. On the other hand, we can also see that it is not one's religiosity that provides salvation. It is one's ethics, as well as the ability to adjust with institutional challenges, that changes one's fate.

And now we understand that God has created economists for a reason: to remind people that there is no such thing as a free lunch.

The writer is a graduate student at the Kennedy School of Government, Harvard University, Cambridge, Massachusetts, and a researcher at the Centre for Strategic and International Studies, Jakarta. He can be reached at ari_perdana@ksg06.harvard.edu.