FEAR OF HELL MiGHt FiRE UP ECOnOMY

By Kliesen, Kevin L.; Schmid, Frank A. | Regional Economist, July 2004 | Go to article overview

FEAR OF HELL MiGHt FiRE UP ECOnOMY


Kliesen, Kevin L., Schmid, Frank A., Regional Economist


ECONOMISTS HAVE LONG BEEN INTERESTED IN WHY SOME COUNTRIES ARE RICH AND WHY SOME COUNTRIES ARE POOR. Differences in labor productivity, inflation, and saving and investment rates are traditional economic explanations for variations in wealth across countries. Rut when these explanations fall short, researchers sometimes turn to noneconomic factors. Two such factors are a country's legal and social institutions. Religious factors can also help explain variations in economic growth, many economists are increasingly finding. In particular, in countries where large percentages of the population believe in hell, there seem to be less corruption and a higher standard of living.

Conventional Theories

Over time, a country's economic growth is ultimately a function of growth rates in population and labor productivity (output per hour worked). But since population growth tends to change slowly, a nation's labor productivity growth is what ultimately determines whether it will be rich (high productivity growth) or poor (low productivity growth).

What causes productivity growth rates to speed up or slow down? Improvements in the quality of labor, such as a more educated workforce, seem to matter, as do the quantity and quality of the tools and equipment that each worker uses. Also generally deemed important is a country's saving rate, since saving is used to finance investment in capital goods. Other factors that improve a country's prospects, but which are not readily captured by measured labor and capital inputs, are improvements in the distribution of goods and services that arise from just-in-time inventory processes.

Another significant influence seems to be a country's public and private institutions. These include laws and regulations that enforce contracts, guarantee property rights and promote well-developed financial markets.1 Secure property rights, such as patents and software piracy laws, provide individuals and firms the needed incentive to take economic risks, while deep capital markets better enable financial resources to flow toward promising but unproven technologies.2 Also critical are laws that promote good corporate governance by imposing harsh penalties against firms or government officials that have enriched themselves from illegal or immoral activities. When these public and private institutions are lacking, or not very well-developed, there tend to be high levels of corruption and financial malfeasance, which can create economic uncertainty and destroy wealth. Recent examples of corruption and other misconduct can be found even in advanced economies, as in the United States (Enron, Tyco and WorldCom), Italy (Parmalat) and the Netherlands (Ahold).

While traditional growth theories go far in explaining cross-country patterns of economic growth, some economists believe they do not go far enough. Instead, many researchers are increasingly turning to noneconomic factors, such as religion.

Religion's Early Role

Adam Smith wrote that one of religion's most important contributions to the economic development process is its value as a moral enforcement mechanism.3 He argued that, in a society imbued with these religious mechanisms, fewer resources will be devoted to determining the veracity of an individual's or firm's business ethics -what economists call the credit or default risk associated with lending to an unknown individual. In short, argued Smith, in societies where there is a widespread belief in God, the values of honesty and integrity are more prevalent.

In a similar fashion, Alexis de Tocqueville, writing about early 19th century America, said that "religion . . . for if it did not impart a taste for freedom, it facilitates the use of free institutions," so that Americans held it "to be indispensable to the maintenance of republican institutions."4 To de Tocqueville, a religious country lessened its dependence on the public sector, which not only left a larger amount of resources for the private sector but enhanced the country's moral fiber. …

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