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. …