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The impact of religion on international trade
Estimating the Institutional and Network Effect of religious Cultures on International Trade
Economists have increasingly emphasized the role of institutions in shaping economic activity. Among the many studies on institutions, however, there has been relatively little resarch on the economic role of religion in modern societies or in recent episodes of economic growth and change. This lack of research is suprising because religious practices, traditions, and philosophies are important components of national cultures that shape institutions.

By Joshua J. Lewer and Hendrik Van den Berg

Religious cultures are clearly legitimate subjects for scientific study. This paper contributes to the research on the economic impact of religious cultures and religious institutions by examining the empirical relationship between religious cultures and international trade.

The effect of religion on work habits

Religion can impact international trade in several ways. First, religion is a cultural institution that directly guides human behavior. For example, if a religious culture encourages production, hard work, and commercial activity, [...]it is likely to also encourage international trade. On the other hand, many religious cultures discourage the short-term « pursuit of happiness » , and this could suppress people’s desire to engage in short-term welfare-enhancing economic transactions.

The relative strengths of religion’s positive and negative institutional effects on international trade differ from one religious culture to another because each provides somewhat different incentives for human behavior.

Second, the sharing of particular religious cultures by people in different countries may enhance trust and, therefore, effectively create networks that facilitate complex international economic transactions when other supportive government and social institutions are missing (Rauch, 1999, 2001), Barabasi (2002), and Rauch and Castela (2003), examine the economic role of networks. For example, Greif (1989, 1993), describes how the Maghribi traders, a small ethno-religious group dispersed throughout the politically fragmented Mediterranean region in the Middle Ages, established a long-distance trade network. Ensminger (1997) similarly discusses how Islamic merchants created trade networks in the Mediterranean region and North Africa more than 1,000 years ago. Adam Smith (1776) anticipated today’s literature on networks when he described how the strict social organization of religious sects provided a behavioral gurantee that could substitute for formal government institutions to enforce contracts. Fafchamps’ (2003) recent study on Africa finds that the sharing of religious cultures still enhances trust and enables trade.

Discriminatory and Non-Discriminatory networks

Trade networks do not necessarily maximaize trade, however. Networks are by nature exclusive, and they can divert trade as well as create trade. Networks based on the sharing of religious culture may discriminate against « non-believers » and divert trade away from partners with the highest potential mutual welfare gains. Greif (1994) argues that improvment in non-religious institutions during the Renaissance expanded trade to a more diverse set of traders than was possible with the earlier ethnic networks. Freund and Weinhold (2000) find that the Internnet had little effect on international trade before 1995 when [...] was somewhat exclusive, but after 1997, when it became more inclusive, [...] had a significantly positive effect on trade volume.

Finally, religious cultures indirectly affect commerce and trade through their influence on institutions such as social traditions, customs, laws, government and other organizations. For many of the same reasons that the direct influence of religious culture may, or may not, make a country’s government, laws, regulations, social customs, and traditions supportive of international trade. In summary, theory and evidence give us an ambiguous picture of how a religious culture in general [...] is likely to affect international trade

Trade-enhancing networks and religions

Only two religions, Buddhism and Judaïsm, have positive direct and indirect institutional effects as well as trade-enhancing network effects. That Buddhism is so positively and consistently correlated with international trade would not surprise Lal (1998), who argues that the examples of Japan after World War II, and China, India, and many other Asian economies more recently, prove that rapid economic growth can be achieved in non-Western societies.

Judaïsm’s positive network effect suggests that Jewish traders may still form implicit networks, that expand international trade, not unlike the Jewish Maghribi traders 1,000 years ago as described by Greif (1989, 1993).

The result that the Hindu culture does not generate any noticeable network effect is surprising, given the Hindu Diaspora throughout Asia, Africa and the Caribbean. Perhaps the mixed results are driven by the remnants of the Hindu culture’s divisive catse system, or, aus Uppal (1986) and Eisenstadt (1968) note, the culture’s lack of a single unifying written doctrine.

It is difficult to explain why Roman Catholicism, Orthodox Catholicism, and Protestantism, the three Christian religions in our sample, do not provide strong direct institutional support for international trade. The three Christian religious cultures have positive indirect effects on trade through their influence on other institutions that enhance bilateral trade, which may be a very important contribution by those religions in that part of the world where seculairsm and individualism are also strong cultural traditions.

This finding that, indirectly, Protestantism is likely to have inspired other institutions that encourage international trade is supportive of Weber’s (1905) hypothesis that Protestantism is instrumental in the growth of capitalist institutions.

Effects of cultural tendencies

Among the authors who have addressed Roman Catholicism’s direct economic incentives , Stulz and Williamson (2001) report that « Catholic countries protect the right of creditors less than other countries... ». Blum and Dudlet (2001) and McCleary (2002), argue that contactual defaults are more common in Roman Catholic countries because the Catholic sacrament of penance permits people to obtain pardons for their sins at any time and thus lowers the « cost » of violating a contarctual agreement.

Islam’s negative network effect is surprising. Unfortunately, the literature on the economic implications of Islam, such as Kuran (1995, 1997, 2004), Lal (1998), Nafissi (1998), and Noland (2003), provides no consistent explanation for why Islamic trade networks do not expand total trade. Perhaps Islamic networks are specially exclusive. [...]

Confucianism’s positive network effect confirms Rauch and Trindade’s (2002) findings of the important trade relationships among the ethnic Chinese communities in Singapore, Malaysia, Hong Kong, Taïwan, and Indonesia nmaintain [...]

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