About Nick: i am an economist based in malaysia. I write about development economics, while sneaking in a pop culture reference or two.

Religion and Economic Outcomes

Published in The Edge Malaysia, June 2017.

In a previous article in this newspaper entitled, “Improving Productivity is Meaningless without the “Why””, I stated that the literature on the determinants of economic growth is differentiated by MIT economist Daron Acemoglu into proximate and fundamental causes of economic growth. Studies of proximate causes of growth attempt to measure to what extent economic growth can be attributed to standard measure of input, such as capital, labour, human capital, land, and to Total Factor Productivity (“TFP”). These are mostly exercises in measurement; proximate causes tell you the what of economic growth, but not the why.

On the other hand, fundamental causes of economic growth provide insights into the why. Why is labour in country A more productive than labour in country B? Similarly, why is Company C more efficient in deploying capital than Company D? The fundamental causes of growth can be summed up in four major groups. The first is ‘luck’ whereby countries that are in principle identical may diverge because small factors lead them to select different growth choices, leading to different equilibria. The second is ‘geography’ where productivity can be affected by elements such as the physical, geographical and ecological environment. The third is ‘culture’ which are beliefs, values and preferences that affect economic behaviour and therefore may lead to different patterns of factor accumulation and productivity. The fourth is ‘institutions’ which are societally-determined rules, regulations, laws, and policies that affect economic incentives to invest in technology, physical and human capital.

In this essay, I would like to focus on the third fundamental cause of growth – culture. For the sake of clarity, in the economic literature, culture is defined as “…those customary beliefs and values that ethnic, religious, and social groups transmit fairly unchanged from generation to generation…” as per the 2006 seminal work by Luigi Guiso and his co-authors, “Does Culture Affect Economic Outcomes?” To be a bit more specific, given that we are now in the holy month of Ramadan, I would like to narrow this discussion down to the role of religion in economic growth.

The notion that religion can have important effects on social, economic and political outcomes has historically been one of deep interest, with pioneering work by Max Weber who argued, in his classic work, “The Protestant Ethic and the Spirit of Capitalism” that Protestant societies were more likely to experience better economic outcomes because the Protestant ethic of hard work and self-dependency was embodied among the people in those societies. Naturally, in the social sciences (and even in the physical sciences, in fairness), there is no such thing as a last word. Economists Sascha Becker and Ludger Woesmann from the University of Munich argued in a paper entitled, “Was Weber Wrong?” that it was rather the human capital channel – where Protestants had to learn to be literate as they had to learn to read the Bible – that led to more prosperous economies.

Another famous paper in the literature was written by Harvard researchers Robert Barro and Rachel McCleary, who found that economic growth responds in different ways to different aspects of religion. In particular, they find that economic growth is positively correlated with religious beliefs themselves, but are negatively correlated with collective religious rituals. Using a Christian perspective, they find that a belief in heaven and hell may influence individual traits that then enhance economic performance. On the other hand, they also find that church attendance – a collective ritual – is negatively correlated with economic growth.

The direction of causality may also be the reverse! Rather than religion impacting the economy, the economy may also impact religion and its multi-faceted aspects. A research article by economist Stelios Michalopoulous and his co-authors finds that proximity to pre-Islamic trade routes and geographic inequality are fundamental determinants of contemporary Muslim adherence. The former is well-documented by prominent Islamic scholars. The latter, on the other hand, is less so. The authors argue that geographic inequality – differences in the arability of land in a given region – may have led to social inequality and predation.

The authors point out that Ibn Khaldun, one of the most important philosophers in both the Muslim and world history, observed that a crucial factor for understanding Muslim history is “the central social conflict between the primitive Bedouin and the urban society.” Nomads posed a threat to lands which were highly arable for farming. To combat this, the authors argue that Islam provided a centralising state-building force, featuring redistributive principles, which enabled order and relative peace in the region, thereby further facilitating trade and inducing Islamic culture.

Another interesting finding from the Economics literature vis-à-vis Islam and economic growth is from economists David Clingingsmith, Asim Khwaja and Michael Kremer. The authors find that participation in the Hajj pilgrimage increases observance of global Islamic practices – such as prayer and fasting – while decreasing participation in localised practices and beliefs – such as the use of amulets and dowry. Furthermore, the pilgrims who have completed their Hajj pilgrimage also exhibited increased belief in peace, and in equality and harmony among ethnic groups and adherents of different religions.

Finally, to take this to a more topical issue, Harvard economists Filipe Campante and David Yanagizawa-Drott found that longer Ramadan fasting – based on different durations of dawn to dusk across the world – had a negative effect on output growth in Muslim countries. This may perhaps be seen as obvious – if food provides energy, and energy is key to productivity, then surely, fasting would reduce labour productivity. However, and this is my favourite bit of the paper, the authors found that this reduction in economic output was not because of a direct reduction in labour productivity, but rather the evidence that they found indicates that during the holy month of Ramadan, Muslims tend to shift their beliefs and values towards religiosity and away from work and material rewards. Therefore, it was simply that the month of Ramadan made Muslims more reflective and more keyed in on non-material ‘wealth.’

This is, to me, a truly meaningful finding. While I am not a particularly religious person, I do strongly hold the view that there is a wide variety of hugely meaningful benefits that religion may bring. Among these, as it is shown in the Campante and Yanagizawa-Drott Ramadan paper, is a shift in beliefs and values from material wealth to non-material ‘wealth.’ Fasting, in and of itself, is a very deep practice, one that allows those who fast to have empathy and compassion for those less fortunate. I wish my Muslim friends (and all those who also choose to fast in solidarity with Muslims) Salam Ramadan and Selamat Berpuasa.

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