Religion and Economic Development

Abstract

The number of micro-level social anthropological studies is continually growing. Many of these concentrate on what to the economist may appear odd aspects of society such as ritual and religion … and to which he pays little or no attention. For instance, an understanding of the complex of Hindu religious beliefs as they operate at village level … is directly relevant to the problem of developing India’s economy. This is but one of numerous examples which can be quoted to support the claim that development economists work in the dark unless they acquaint themselves with the relevant socio-political literature. (Epstein, 1973, p. 6)

Full text

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Religion and Economic Development*
Sriya Iyer
University of Cambridge
February 2007
S. N. Durlauf and L. E. Blume, The New Palgrave Dictionary of Economics,
forthcoming, Palgrave Macmillan, reproduced with permission of Palgrave
Macmillan. This article is taken from the author's original manuscript and has not
been reviewed or edited. The definitive published version of this extract may be found
in the complete New Palgrave Dictionary of Economics in print and online,
forthcoming.
* I am grateful to the editors Steven Durlauf and Larry Blume for their very helpful suggestions and
comments on this paper.

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Abstract
The role of religion in economic development warrants a nuanced perspective that
integrates economic theory with an understanding of socio-political structures,
appreciating the econometric issues that arise in quantifying religious processes.
Existing research focuses on religious structures and organizations, state religions,
faith-based welfare programmes, the regulation of religion, and the impact of religion
on measures of well-being such as income and education. Viewing religion as
spiritual capital, with the attendant role played by religious network externalities in
fostering economic development, is vital for development policy. Contemporary
research in religion and economic development is flourishing, encompassing all these
diverse concerns.

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religion and economic development
The number of micro-level social anthropological studies is continually
growing. Many of these concentrate on what to the economist may appear odd
aspects of society such as ritual and religion … and to which he pays little or
no attention. For instance, an understanding of the complex of Hindu religious
beliefs as they operate at village level … is directly relevant to the problem of
developing India’s economy. This is but one of numerous examples which can
be quoted to support the claim that development economists work in the dark
unless they acquaint themselves with the relevant socio-political literature.
(Epstein, 1973, p. 6)
How times have changed since Scarlett Epstein first lamented economists’ general
neglect of the role of religion in the study of economic development. She need not
have been quite so fearful: contemporary economics has seen the light, as it were,
increasingly demanding a perspective on religion in order better to understand how it
interacts with economic decision making. The increasing resilience of religion in both
developed and developing countries, influencing globally both political will and
popular debate, has been observed by scholars investigating the economics of religion
(Iannaccone, 1998; Stark and Finke, 2001; Glaeser, 2005). Recent studies have
investigated how religion affects growth (Guiso, Sapienza and Zingales, 2003; North
and Gwin, 2004; Noland, 2005; Barro and McCleary, 2003; Glahe and Vorhies, 1989)
with emphasis on particular religious traditions such as Islam, Hinduism or
Catholicism (Kuran, 2004; Sen, 2004; Fields, 2003). Other studies have focused on
the impact of religion on fertility (Lehrer, 2004; McQuillan, 2004). Still others
examine the impact of religion on political outcomes (Glaeser, Ponzetto and Shapiro,
2005) and the role of religious organizations as insurance (Dehejia, DeLeire and
Luttmer, 2005). Other studies examine how the causality may run the other way, from
economic development to religion (Berman, 2000; Botticini and Eckstein, 2005;
Goody, 2003).
Several theories have been advanced to account for the links between religion and
development. First, there are theories that typify the ‘rational choice’ approach to
religion and development. This approach considers the resilience of religion as a

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rational economic response to changes in the political, ecological and economic
environments in which religions operate. In addition, a range of other structural
theories encompass family socialization, social networks and a belief in other-worldly
or supernatural elements. However, regardless though of the scholastic tradition from
which one approaches the study of religion, examining the interactions between
religion and development poses significant challenges: first, to understand the
endogenous interactions between religion and economic growth; second, to examine
the techniques and methods needed to quantify these interactions; and third, to
evaluate the impact of religion on development policy more widely.
Early writings
The economic concern with religion and development is not new, nor is it restricted to
scholars of the 21st century. The writings of Thomas Aquinas, notably the De Regno
(De Regimine Principum) ad Regem Cypri, written in 1267, dealt extensively with
religion and public finance. Indeed, some scholars have considered the ideas in this
work, as in Aquinas’s Summa Theologica (1265–72), strikingly relevant for poverty
reduction today; their themes of the ‘universal common good’ and ‘global civil
society’ have implications for current debates about globalization and human
development (Linden, 2003). The links between religion and development also feature
in Joseph Schumpeter’s History of Economic Analysis (1954). Jacques Le Goff
authored La Naissance du Purgatoire (1981), which argued that purgatory was a
necessary religious innovation for medieval capitalist development. However, it was
in 1904 that Max Weber put forward his famous theory of the Protestant ethic and the
spirit of capitalism, arguing that economic development in northern Europe could be
explained by developments that were associated with the Protestantism – the concern
with savings, entrepreneurial activity, the frugality which Puritanism demanded, and
the literacy needed to read the scriptures. The essence of Weber’s thesis was that
nascent capitalism emerged in the 16th century in Europe on account of the Protestant
ethic which arose from the Reformation. Ascetic Protestantism encouraged diligence,
discipline, self-denial and thrift. Both Lutheran and Calvinist doctrines urged
adherents robustly to undertake their ‘calling’. Spiritual grace from religion was
attained by demonstrating temporal success in one’s calling. The Protestant ethic thus
involved the diligent undertaking of one’s calling as a religious obligation, which
promoted a work ethic that increased savings, capital accumulation, entrepreneurial

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activity, and investment, all of which in turn fostered economic development. Many
scholars have criticized Weber’s thesis, typified in the writings of Tawney (1926) and
Gorski (2005). Tawney was concerned with reverse causality: how religion affected
development, and in turn how economic and social changes themselves acted on
religious beliefs. In his words, ‘”The capitalist spirit” is as old as history, and was not,
as has sometimes been said, the offspring of Puritanism’ (1926, p. 225). Tawney
argued that Puritanism both helped mould the social order and in turn was moulded by
it. Gorski (2005) focuses more on whether Weber’s thesis stands up to closer
historical scrutiny, highlighting other aspects of the Reformation that contributed to
economic development such as Protestant migration, reforms to landholding, fewer
religious holidays, and insurgencies, all of which influenced labour supply and the
actions of government in Protestant countries.
The economic view of religion
Against this backdrop, recent academic interest linking religion and development has
centred on the economics of religion. Studies in the economics of religion have
focused on applying the tools of modern economic analysis to the analysis of religious
institutions, faith-based welfare programmes and the economic regulation of the
church (Oslington, 2003). Three principal themes emerge: first, identifying what
determines religion and religiosity; second, examining how religion and religiosity
may be described as social capital; and third, understanding the micro and macro
consequences of religiosity.
Adam Smith (1776) made reference to the church in the Wealth of Nations; and recent
work by economists such as Becker and Iannaccone have been very important for the
development of this field. The broadly socio-economic view of religion, which
expounds the rational choice approach, is set out in the work of Azzi and Ehrenberg
(1975), Iannaccone (1998), Stark, Iannaccone and Finke (1996), and Stark and Finke
(2000). The focus here has been both on the supply side (the structures of religious
organizations) and on the demand side (the preferences of consumers in religious
economies). The micro view explains religious activity as the outcome of rational
choice, with utility derived both in the individual’s lifetime and in the afterlife. For
example, if we think of religion as a club good, then many practices are used by
religions to screen potential free riders and to ensure better monitoring of the existing

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faithful (Iannaccone, 1992). Religion also influences individual welfare through the
externalities occasioned by social behaviour (Becker and Murphy, 2000). Religious
forces are important as they change the environment in which individuals operate,
directly affecting individuals’ choices and behaviour by changing the utilities of
goods. Moreover, greater trust fostered by the religious environment can encourage
repeated interactions, leading to more cooperative behaviour within networks.
It is in this way that the second theme – religion as social capital – becomes
important. Three aspects are emphasized here: social networks, social norms, and
sanctions to penalize deviations from norms. Corresponding to this emphasis,
economists of religion have been examining ‘spiritual capital’ – or religious capital –
which embodies the norms, networks and sanctions exercised by groups that are
organized on the basis of religion and religious networks.
Finally, the macro and micro consequences of religiosity have been examined. For
example, there are a number of channels through which religious capital might affect
economic growth. Religious capital affects output by changing the manner in which
technology and human capital are used. Religious capital exerts a positive impact on
human capital by increasing education. For example, particularly in many less
developed countries, religious networks are important not only for the religious
services they provide but also for their non-religious services, specifically with
respect to health and education. Moreover, as religious institutions provide this
insurance function, these networks determine the extent to which education is taken
up (Borooah and Iyer, 2005). In developed countries, too, this would have
implications for religious market structure and the growth of residential
neighbourhoods that may be based upon faith-based activities (Gruber, 2005). So
understanding the economic consequences of religion is of central concern.
The empirics of religion and development
Most empirical economic studies of religion and development attempt to solve classic
decompositions of the form Yi – Yj = ∑ β(Xi – Xj) where the idea is to examine the
various factors (X) that affect measures of religious attendance or behaviour (Y) across
individuals (i,j), or more widely across countries, or alternatively in varied historical

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time periods, thence to arrive at conclusions based on the effects suggested by the
parameters (β) estimated.
Empirical studies of religion and development across countries have investigated
religious movements, examining particularly sect behaviour, with an emphasis on
contrasting the ‘European experience of religious monopoly’ with the ‘American case
of religious cacophony’ (Warner, 1993, p. 1081), drawing implications for the issue of
whether regulation of religious organizations is necessary. This concern manifests
itself in a plethora of research projects, especially on religion in the United States
(Marty, 1986–96; Finke and Stark, 1988; Warner, 1993). In cross-country studies,
economists have also revisited Weber’s hypothesis. Barro and McCleary (2003)
assess the effect of religious participation and beliefs on a country’s rate of economic
progress. Using international survey data for 59 countries drawn from the World
Values Survey and the International Social Sciences Program conducted between
1981 and 1999, these authors find that greater diversity of religions is associated with
higher church attendance and stronger religious beliefs. For a given level of church
attendance, increases in some religious beliefs – notably belief in heaven, hell and an
afterlife – tends to increase economic growth.
Other studies have focused more on particular religions in varied historical time
periods. For example, very useful insights have been gained by focusing on Islam and
on Judaism. For Islam, there have been detailed investigations into financial systems
in the Middle East including zakat (alms for charity) and the manner in which Islamic
banks have been using a financing method equivalent to the rate of interest to
overcome adverse selection and information problems. There has also been more
detailed investigation into Islamic law and financial activity historically with
implications for poverty reduction in the Middle East (Kuran, 2004). There is research
that has examined Jewish occupational selection using historical data from the eighth
and ninth centuries onward to explain the selection of Jews into urban, skilled
occupations prompted by educational and religious reform in earlier centuries
(Botticini and Eckstein, 2004). Data are also being used to elucidate the role of
religion in explaining historical differences in education among Hindus and Muslims
in India (Borooah and Iyer, 2005).

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A primary focus of current studies of religion and development is on explaining
differences across individuals. For example, using data from the General Social
Survey and the US Census, Gruber (2005) investigates religious market structure by
estimating the effects of religious participation on economic measures of well-being,
and concluded that residing in an area with more co-religionists improves well-being
through the impact of increased religious participation. This particular study is also
valuable from the methodological point of view, as it addresses a common problem in
empirical studies of religion and development – the persistent endogeneity of religion
to economic measures of well-being – and consequently the common econometric
problem of how best to identify religion effects. While this particular study
successfully uses ethnic heritage to provide an exogenous source of variation, and is
thereby able to draw out cleanly the effects of religious participation on the variables
of interest, econometrically the potential endogeneity of most religion variables is
possibly the single most significant limitation of incorporating religion into empirical
work in economics. This is mirrored in the many efforts to identify the effects of
religion which generally have not been able to deal with self-selection issues easily.
To this end, fields such as economic demography have much to offer the study of
religion and development. For example, recent research in economics has made a start
towards examining the religious and economic reasons behind fertility differences
between religious groups, especially in developing countries (Iyer, 2002). The
economics of religion has also elucidated the study of politics, both local and
international: Glaeser (2005) presents an economic model of religious group
behaviour and the so-called ‘political economy of hatred’. The economic approach to
religion has been evaluating whether religion and politics are mutually exclusive.
Glaeser, Ponzetto and Shapiro (2005) link religion with strategic extremism – the
issues and platforms espoused by political parties, and the manner in which private
information matters for this. Other studies have focused on terrorism and display a
more general preoccupation with understanding views and attitudes in the Muslim
world (Gentzkow and Shapiro, 2004).
Drawing a perspective from all these classes of studies, it strikes one that emerging
economies are experiencing appreciable modern economic growth, yet this is
coterminous with the increasing resilience of religious institutions. And it is this

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dichotomy between the sacred and the secular which epitomises the puzzle of the
relationship between religion and economic development. It seems reasonable to
address this puzzle by combining quantitative analysis of sample data with nuanced
qualitative evaluations of the textual theology of religion, linking these to the manner
in which individuals and institutions interpret religion at a local level. As well, an
appreciation of the approach of the interdisciplinary economist would permit a more
informed understanding of all these concerns. Economists will enthusiastically study
religion and economic development in the future, and they will do so with ascetic
assiduity – researching data with all the intensity of religious fervour in order to
provide thoughtful prophecy for development policy.
Sriya Iyer
See also Islamic economic institutions; religion, economics of; social capital; social
interaction (empirics); Weber, Max
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