Research across a broad group of countries has identified many determinants of economic growth, leading to the conclusion that successful explanations of economic performance have to go beyond narrow economic variables to encompass political and social forces. Economic growth has been found to depend on variables such as education, health, fertility rates, rule of law, and electoral rights. Also important factors are propensity to invest, size of government, international openness, and macroeconomic stability. Given favorable levels of these key determinants of growth, poorer countries tend to grow faster and, thereby, approach the gross domestic product (GDP) of richer countries. However, because poorer countries typically rank low on a number of these growth determinants, they tend not to grow faster than average in an overall sense.

In the continuing search for an adequate theory of economic growth, some researchers have increasingly argued that such explanations for growth should go further to include a nation’s culture, especially religion. In fact, recent research indicates that the economic influence of religion has a profound impact on economic performance. Religion influences the formation of beliefs that shape individual traits such as honesty, work ethic, thrift, and openness to strangers. Religious beliefs and related character traits can be seen as “spiritual capital,” a concept that is analogous to the human capital that economists have found to be important for worker productivity. Human capital includes the skills and knowledge that come from formal schooling, on-the-job training, and guidance from parents. Analogously, spiritual capital includes formal education through organized religion, as well as influences from family and social interactions. Thus, the economic effects of organized religion can be seen as operating through the formation of spiritual capital.

Measuring Religion’s Impact

The relationship between religion and economic growth becomes clear when measures of religiosity are incorporated into more traditional cross-country data sets on national-accounts variables and other economic, political, and social indicators observed since 1960. The measures of participation in organized religion and of religious beliefs come from representative surveys of individuals in about 60 countries, such as the World Values Surveys, International Social Survey Program, and Gallup Millennium Survey. Each survey typically covers between 1,000 and 2,000 respondents in a survey-year, providing data on household attendance rates at houses of worship, as well as information on religious beliefs quantified as the fraction of the population who answered “yes” to the question of whether they believe in heaven, hell, life after death, and God. Other questions, which might be more robust across religions, are whether the respondent considers himself or herself to be religious and whether religion plays an important role in his or her life.

But these data sources alone are not enough basis for firm conclusions about the role of religion in economic growth, since identifying the precise direction of causation is problematic. While the goal is to understand the effects of religiosity on economic growth, as measured by national levels of worship attendance and religious beliefs, there may be reverse effects of economic development on religiosity. This reverse channel has, in fact, been the focus of a substantial literature in the sociology of religion.

One prominent theory in this literature is the secularization hypothesis, whereby economic development is thought to make people less religious as gauged, for example, by church attendance and religious beliefs. This hypothesis also proposes that economic progress causes organized religion to play a lesser role in political decision-making and in other general social and legal processes.

The secularization hypothesis is controversial, and the continuing vitality of religion in the United States has often been offered as a counter-example. A recent study by the economist Laurence Iannaccone shows that the “classic secularization pattern,” whereby states that were once highly religious experienced steady declines in church attendance, applies only to a few countries in Western Europe. France, Germany, and Britain especially showed declines in church attendance rates from 40 to 60 percent in the 1920s and 1930s, to 10 to 15 percent today.

An important competing theory of religiosity—inspired by Adam Smith himself—focuses on “market” or “supply-side” forces. This approach downplays the role of economic development and other “demand factors” for religion and emphasizes instead the extent of competition among religion providers. A greater diversity of religions available in a country or region is thought to promote greater competition, hence a better quality religion product, and therefore higher religious participation and beliefs.

More fundamentally, the extent of religious competition depends on how the government regulates new entrants and existing providers in the religion market. Thus, the supply-side approach argues that government regulation, subsidy, and suppression are important determinants of religious participation and beliefs. The presence or absence of an established state religion is one dimension of this interaction between government and religion.

The primary purpose of our present research is not to assess the validity of the secularization hypothesis or the market model of religious participation. Rather, we are studying the country-wide determinants—or, at least, correlates—of religiosity to analyze the effects of religion on economic growth. Specifically, our study of religiosity helps to pin down the direction of causation from religion to economic performance, rather than the reverse. The estimation procedure is to isolate some variables—called instrumental variables—that have important influences on religiosity without being heavily influenced by economic variables. The estimation then reveals how differences in religiosity—driven by the variations in these instrumental variables—influence economic growth.

The basic empirical framework for such an analysis has been used in many previous studies. This approach relates economic growth to lagged values of a number of explanatory variables. These variables include levels of per capita GDP, schooling, life expectancy, the fertility rate, ratios of investment and government consumption to GDP, measures of international openness and the terms of trade, indicators of the rule of law and democracy, and the inflation rate (an indicator of macroeconomic stability). The present analysis adds measures of religiosity to this list of explanatory variables. Thus, we are examining how religion affects economic growth given values of the other explanatory variables. Moreover, the use of instrumental variables isolates the effects of religion on economic outcomes, rather than the reverse.