To isolate the effect of religiosity on economic growth, the authors have dealt with the
possibility of reverse effects from development to religion. They base this on the
‘Secularization Hypothesis’ (Weber, 1930), which says that economic development
causes individuals to become less religious, as measured by church attendance and
religious beliefs. The beliefs may refer to heaven, hell, an afterlife, God and so on. A
second theory talks about demand and supply of religions, focusing on competition
among religion providers. A greater diversity of religions available in a country or region
is thought to promote greater competition, hence a higher quality of religion product and
one that is tailored better to Individual preferences. Thus more religious diversity
stimulates greater religious participation and beliefs. This was propounded by Adam
Smith as early as in 1791, which compared to today was much less diverse. So in today’s
context religious diversity is an important factor.
The extent of religious diversity the extent of religious diversity and competition
are thought to depend on how the government regulates the market for religion. For
example, the existence of an established state church is viewed as one source of a low
degree of religious pluralism and, therefore, of low participation in organized religion.
Greater state regulation of religion, measured by, among other things, whether the
government appoints or approves church leaders is argued to decrease the efficiency of
religion providers and, therefore, to generate lower rates of church attendance.
The authors’ approach to the determinants of religiosity assumes that demand and
supply forces combine to influence levels of religious participation and beliefs. They try
to pin down the direction of causation from religion to economic performance, rather than
the opposite. The instrumental variables used are (i) Dummy for the existence of a state
religion, and (ii) Dummy for existence of a regulated market structure in which govt.
approves or appoints religious leaders. An instrument for religious adherence is also used.