Religious freedom and economic prosperity.
Alon, Ilan ; Chase, Gregory
Let there be no compulsion in religion.
--The Qu'ran, Surah 2, verse 256
The basic notion that an individual's freedom to choose will
advance society at large is a cornerstone of political philosophy and of
the economic theory of the Western world. Early political philosophers such as John Stuart Mill and legendary economists such as Adam Smith
have advocated a utilitarian approach to political and economic life, in
which the advancement of one's own interests also helps others.
Freedom is multidimensional: economic, political, and social aspects are
related to one another, but do not exhibit perfect correspondence. For
example, there are countries--such as China and Singapore--in which
economic freedom has been advanced ahead of political freedom.
This article contributes to the literature by measuring and
discussing the impact of religious freedom--a basic civil right that
includes freedom to worship, freedom from religious persecution, freedom
of religious press, freedom of religious expression, and freedom of
religious organization and affiliation. International businesses should
be concerned about religious freedom because it affects the general
business environment, political relationships among countries, and
consumer sentiment of companies doing business in countries that supress
religious freedom. Recently, the Chinese National Petroleum company,
working with Goldman Sachs, had to downsize its plan to raise money with
American investors by about $7 billion because of the company's
ties to Sudan, a country the U.S. government has called the largest
violator of religious freedom in the world (Shea 2000).
Religious Freedom, Country Risk, and Culture
Several studies have examined the impact of religious freedom and
culture on the business climate. Alon and Spitzer (2003) looked at the
effect religious freedom has on various types of country risk. They
compared the level of country risk with the level of religious freedom
along with several other variables. Their findings indicated that
religious freedom affects country risk as perceived by businesses, but
not as perceived by banks. Lavoie and Chamlee-Wright (2000) placed
religion in a broader cultural context and examined the relationship
between culture and market incentives. They argue that more attention
needs to be given to the "spiritual" realm of the economy and
other elements of culture, such as an "enterprising spirit."
Johnson and Lenartowicz (1998), in a study of economic growth,
found a statistically significant relationship between two measures of
culture and an index of economic freedom. Finally, Easterly and Levine
(1997) examined the differences in countries with high levels of ethnic
diversity (an element of the social environment related to religion) and
found that ethnic-group polarization leads to rent-seeking behavior and
reduces economic performance.
Freedom and Prosperity
In this article, we use several regression models to see how much
of the cross-country variation in per capita GDP (in terms of PPP) can
be "explained" by religious freedom and the other freedoms.
Multi-collinearity that affects the regression analyses, as measured by
the Variance Inflationary Factor (VIF), was tested and was generally not
an issue except where indicated. Following Barro and MeCleary (2003),
all the variables were logarithmically transformed to reduce possible
heteroscedasticity (i.e., unequal distribution of the variance) and to
convert the regression coefficients into elasticity measures. The values
for economic freedom were inverted for intuitive interpretation of the
results so that a coefficient with a positive number denotes a positive
relationship between economic freedom and the dependent variable.
We used the Fraser Institute's measure of economic freedom for
19.3 countries. The economic freedom index includes five major
components: size of government; legal structures and security of
property rights; sound money; freedom to trade with foreigners; and
regulation of credit, labor, and business. These broad areas include 37
different components. (1)
To measure religious freedom, we relied on Marshall (2000), whose
edited volume evaluated the state of religious freedom in 75 countries
comprising more than 90 percent of the world's population. Each
country was assigned a value from 1 to 7 based on the level of religious
freedom. The measure focused on the denial of the right to practice
one's religion.
For data on political and civil liberties, we relied on Freedom
House (FH). Both types of freedom were assigned a value from 1 to 7.
When analyzing civil liberties, FH focuses on effective rights, not
merely constitutional guarantees. Those rights include expression and
belief; association and organizational rights; rule of law and human
rights; and personal autonomy and economic rights. All freedom variables
were inverted so that a higher number indicates more freedom.
The dependent variable in all the regressions is per capita GDP in
U.S. dollars adjusted for PPP. Data on PPP per capita GDP were obtained
from the World Bank's World Development Indicators. After deleting
cases for missing data, we were left with data on 54 countries for which
all variables were available. Table 1 shows the correlation matrix for
the different variables.
There is a strong correlation among most of the variables. The
lowest value of the correlations is 0.57 for PPP per capita GDP and
political freedom, and the highest exceeds 0.92 for political freedom
and civil liberties. Strong correlations among the independent variables
suggest that freedoms across various dimensions are highly related.
Relationships among the variables have the expected directionality. One
can observe from the data that higher levels of freedoms are correlated
with higher levels of per capita income.
Economic freedom has the highest correlation with per capita GDP,
followed by civil liberties, religious freedom, and political freedom.
Religious freedom is most highly correlated with civil liberties,
followed by political freedom. With a Pearson's correlation of
0.82, civil liberties can "explain" about 67 percent of the
variation in the religious freedom variable.
Conceptually, correlations among the independent variables can be
due to overlap in definition and measurement. For example, two
components of civil liberties are free religious institutions and the
presence of free private and public religious expression. Conversely,
many of the components of religious freedom are in fact subsets of civil
liberties. For example, freedom of the press by necessity includes
freedom of religious press.
We present the results for five alternate model specifications
between freedoms and per capita GDP in Table 2. In all regressions the
F-statisitc was significant, indicating that all models have significant
explanatory powers.
Models A and B display paired comparisons of single independent
variable models using economic freedom and religious freedom against PPP
per capita GDP. The coefficients have the predicted signs and are
statistically significant at the 1 percent level.
Model C combines economic freedom and religious freedom in
explaining PPP per capita GDP. Inclusion of both variables into one
model increased the adjusted R-squared of the model to 52 percent,
suggesting that the two freedom-dimensions taken together can better
explain individual prosperity. Again, both variables have the expected
signs and are statistically significant.
Model D incorporates all of the freedom variables, but the adjusted
R-squared falls to 51 percent. The VIF for civil liberties was 10.61,
indicating a possible problem with multicollinearity. To correct for the
possible problem with multicollinearity, the civil liberties variable
was dropped in model E. Economic freedom was significant at the 1
percent level, and religious freedom was significant at the 10 percent
level.
The size of the coefficients in models A through E is also a
telling statistic. Since we logged all the variables, the coefficients
represent elasticity. The elasticity for the economic freedom variable
varied from 3.28 in model D to 4.29 in model A. On average, the
coefficient for economic freedom was 3.58, which means that a 1 percent
increase in economic freedom increases per capita income by 3.58
percent. The impact of religious freedom was much smaller, ranging from
0.51 in model D to 1.50 in model B, with an average of 0.84. The
relative size of the economic freedom variable is about 4.26 times
larger than that of religious freedom, which means that economic freedom
has a greater impact on economic progress than religious freedom.
Conclusion
Looking at the variables across the different models, the
coefficient for the economic freedom variable was always significant and
with the appropriate sign. The more economically free countries also
produce the richest individuals, on average. The impact of economic
freedom on the level of individual income seems to trump that of
religious and other social and political freedoms. Predictably, the size
of the coefficient decreased by the introduction of new freedom
variables. Therefore, the second conclusion is that economic freedom
remains one of the most influential variables affecting economic
prosperity. This result, of course, is intuitive because it is likely
that an economic-related independent variable will best explain
variations in an economic-related dependent variable. The other freedoms
examined were political and social in nature.
The regression results for the religious freedom variable are
promising. All of the models using religious freedom as an explanatory
variable had the predicted sign in the coefficient, and three of the
four using the religious freedom variable exhibited significant results.
Although our results are preliminary, they suggest that religious
freedom has a positive impact on a country's prosperity.
Companies seeking lucrative grounds for their products may be
advised to examine the antecedent freedoms that are related to their
consumers' incomes in foreign markets. A different level of
religious freedom will affect the management of a foreign operation, but
multinationals can also impact the social and political environments of
host markets. Multinational human-resource strategies, for example, can
promote religious freedom as well as other freedoms and their associated
benefits. Insisting on a diverse labor pool and on promotion based on
merit rather than religious affiliation may further the cause of
religious freedom.
History has shown that religious toleration goes hand-in-hand with
other types of freedom, including economic freedom. Our study suggests
that it is in a nation's long-run economic interest to expand not
only economic freedom but also religious freedom. We must not forget,
however, that ultimately those rights should not rest solely upon
economic or utilitarian logic.
TABLE 1
CORRELATION MATRIX
PPP per
Political Civil Religious Economic Capita
Freedom Liberties Freedom Freedom GDP
Political Freedom 1.00
Civil Liberties 0.92 1.00
Religious Freedom 0.71 0.83 1.00
Economic Freedom 0.60 0.65 0.61 1.00
PPP per Capita GDP 0.57 0.68 0.63 0.79 1.00
TABLE 2
REGRESSION RESULTS
(PPP per Capita GDP is the Dependent Variable)
Model A B C
Intercept 0.435 2.93 0.747
(0.86) (14.45) (1.47)
Economic Freedom 4.29 *** 3.37 ***
(6.89) (4.56)
Religious Freedom 1.50 *** 0.67 **
(4.97) (2.14)
Political Freedom
Civil Liberties
Adjusted [R.sup.2] 0.49 0.33 0.52
F Significance 1.07E-8 8.94E-6 1.07E-8
Model D E
Intercept 0.707 0.747
(1.35) (1.44)
Economic Freedom 3.28 *** 3.37 ***
(4.15) (4.35)
Religious Freedom 0.514 0.669 *
(1.12) (1.76)
Political Freedom -0.31 0.0016
(-0.514) (0.0048)
Civil Liberties 0.628
(0.619)
Adjusted [R.sup.2] 0.51 0.51
F Significance 2.56E-7 6.51E-8
NOTES: The top number is the coefficient and the number in the
parentheses is the t-statistic. * Significant at the 10 percent
level; ** Significant at the 5 percent level; *** Significant at
the 1 percent level.
(1) The Heritage Foundation also has a measure of economic freedom,
which produced similar results when used in the models.
References
Alon, I., and Spitzer, J. (2003) "Does Religious Freedom
Affect Country Risk Assessment?" Journal of International and Area
Studies 10 (2): 51-62.
Barro, R. J., and McCleary, R. M. (2003) "Religion and
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Easterly, W., and Levine, R. (1997) "Africa's Growth
Tragedy: Policies and Ethnic Divisions." Quarterly Journal of
Economics 112 (4): 1203-50.
Johnson, J. P., and Lenartowicz, T. (1998) "Culture, Freedom
and Economic Growth: Do Cultural Values Explain Economic Growth?"
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Lavoie, D., and Chamlee-Wright, E. (2000) Culture and Enterprise:
The Development, Representation and Morality of Business. London:
Routledge.
Marshall, P., ed. (2000) Religious Freedom in the World. Nashville,
Tenn.: Broadman & Holman.
Shea, N. (2000) "Religious Freedom and American Foreign
Policy." In P. Marshall (ed.) Religious Freedom in the World, 1-8.
Nashville, Tenn.: Broadman & Holman.
Ilan Alon is Associate Professor of International Business at the
Crummer Graduate School of Business, Rollins College, and Gregory Chase
is Assistant Professor of Business Administration at Brenan University.