Religion and international trade: does the sharing of a religious culture facilitate the formation of trade networks?

American Journal of Economics and Sociology, The, Oct, 2007 by Joshua J. Lewer, Hendrik van den Berg

I

Introduction

WHEN RELIGIOUS TERRORISTS FLEW AIRCRAFT into the World Trade Center in New York on September 11, 2001, they attacked an important icon of the global economy. The event raised the question of whether religious fervor is compatible with the continued rapid globalization of the world economy. The direct effects of tighter border controls, increased security costs, and the increased perceived risk of global supply chains obviously discourage the continued globalization of economic activity. And, to the extent that religious fervor promotes isolationist economic policies, globalization will also be restrained. Religion's role in the global economy is not always a negative one, however. As a social institution, religion may encourage social behavior favorable to specialization and exchange. An important social institution like religion has a broad range of economic consequences.

There has recently been increased interest in studying religion as an institution that guides economic activity. For example, Iannaccone (1991, 1998) and Barro and McCleary (2002, 2003), among others, have begun to build on the economic analysis of religion that was begun by Adam Smith (1976) and other early economists over two centuries ago but has been largely ignored during the long interim. However, as Brooks (2003) argues, we do not yet fully understand religion's likely role in our increasingly integrated world economy. Few scholarly studies have addressed the specific question of how religion and globalization interact.

The relationship between religion and international trade is complex, and economic theory does not provide us with unambiguous answers. On the one hand, most of the world's major religions seem to discourage the short-term "pursuit of happiness" in favor of various concepts of eternal spiritual happiness. This suggests that religion may suppress some of the incentives for people to engage in welfare-enhancing economic transactions. And, if religion discourages commercial activity in general, it is also likely to discourage specifically international trade. On the other hand, religion often promotes honesty, diligence, and the provision of public goods, which are "economically friendly" behaviors that enable people to engage in mutually beneficial specialization and exchange.

The relative strengths of religion's positive and negative cultural influences on economic activity in general, and on international trade in particular, are likely to differ from one religion to another since each religion has its unique set of incentives and rules of behavior. For example, McCleary (2002) recently argued that different religions' views of eternal salvation result in differences in economic incentives that have important implications for human welfare. Weber's (1930) classic work is well known for its hypothesis that Protestantism provided incentives that were especially appropriate for the development of capitalism.

One specific way in which religion can influence international trade is through its network effects. That is, the sharing of religious beliefs by adherents of the same religion living in different countries can create networks of trust and familiarity that facilitate complex international economic transactions. Many fields have studied networks, as reviewed by Eakin (2003). Sociologists in particular have studied how social networks facilitate economic transactions; see, for example, Coleman (1998), Uzzi (1996, 1999), Podolny (2001), and Macy and Skvoretz (1998), among many others. Networks have also become popular research topics in the hard sciences and in business management.

In economics, the literature on networks has developed rapidly in recent years. Surveys include Economides (1996), Rauch (2001), and Rauch and Casella (2003). Rauch (1999) and Rauch and Casella (2003) examined the general effects of networks on economic activity. Gould (1994), Head and Ries (1998), and Rauch and Trindade (2002) described specifically how networks of immigrants and ethnic diaspora stimulate trade between the countries. Networks enable trade when other institutions necessary for carrying out international transactions are missing. For example, Greifs (1989, 1993, 1994) analysis of the Maghribi traders in the Mediterranean after the fall of Rome details how small communities of Jewish merchants that were spread across distant cities facilitated transactions requiring a high degree of mutual trust. Ensminger (1997) similarly describes Islamic trade networks in the Mediterranean region and Africa more than 1,000 years ago.

Like religion's overall institutional effects mentioned earlier, networks of like-minded religious adherents have a theoretically ambiguous net effect on international trade flows. On the one hand, people who share a certain religious culture may be able to overcome some informational and reputational barriers to international exchange, thereby expanding trade. On the other hand, networks tend to be exclusive in nature, which means that they may divert trade away from its most efficient channels. For example, if religious-based networks discriminate and prevent "nonbelievers" from participating in international trade, they could divert trade away from trade partners who would experience the greatest potential mutual gains and toward network members who experience relatively lower mutual welfare gains. If such trade diversion is large, the volume of international trade could actually end up being smaller than it would be if there were no exclusive trade networks, even though weak economic and social institutions discourage trade through other, more general channels.