Mysay: Religion and economic outcomes

This article first appeared in Forum, The Edge Malaysia Weekly, on June 5, 2017 - June 11, 2017.
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In a previous article in The Edge titled, “Improving productivity is meaningless without understanding the reason why” (Issue 1143, Jan 2), I stated that the literature on the determinants of economic growth is divided into proximate and fundamental causes of economic growth by Massachusetts Institute of Technology economist Daron Acemoglu.

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 and land — and to total factor productivity. 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 that in Country B? Similarly, why is Company C more efficient in deploying capital than Company D? The fundamental causes of growth can be divided into 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 column, I would like to focus on the third fundamental cause of growth — culture. For the sake of clarity, in 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 titled Does Culture Affect Economic Outcomes? by Luigi Guiso and his co-authors. To be more specific, I have narrowed 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 attracted deep interest. Max 

Weber 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 people in those societies embodied the Protestant ethic of hard work and self-dependency.

Naturally, in the social sciences (and even, in fairness, in the physical sciences), there is no such thing as the last word. Economists Sascha Becker and Ludger Woesmann from the University of Munich argued in a paper titled Was Weber Wrong? that it was 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, written by Harvard researchers Robert Barro and Rachel McCleary, stated that economic growth responded in different ways to different aspects of religion. In particular, the researchers found that economic growth correlated positively with religious beliefs but negatively with collective religious rituals. Using a Christian perspective, they found that a belief in heaven and hell may have influenced individual traits that then enhanced economic performance. On the other hand, they found that church attendance — a collective ritual — correlated negatively 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 multifaceted aspects. A research article by economist Stelios Michalopoulous and his co-authors stated that proximity to pre-Islamic trade routes and geographic inequality were fundamental determinants of contemporary Muslim adherence. The former is well-documented by prominent Islamic scholars. The latter, in contrast, is less so. The authors argued that geographic inequality — differences in the arability of land in a given region — may have led to social inequality and predation.

The authors pointed out that Ibn Khaldun, one of the most important philosophers in both the Muslim and world history, had observed that a crucial factor for understanding Muslim history was “the central social conflict between the primitive Bedouin and the urban society”. Nomads posed a threat to arable lands. The authors argued 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 the 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 found that participation in the Haj increased observance of global Islamic practices — such as prayer and fasting — and decreased participation in localised practices and beliefs, such as the use of amulets and dowry. Furthermore, the pilgrims who had completed their Haj 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, during the holy month of Ramadan, Muslims tended 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 focused on non-material “wealth”.

This is, to me, a truly meaningful finding. While I am not a particularly religious person, I hold the view that there is a wide variety of hugely meaningful benefits that religion brings. Among these — as it has been 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.

Nicholas Khaw is an economist with the Khazanah Research and Investment Strategy Division