Institutional Dissonance and Bridging: A New Perspective on the Relationship between Religion and Development

1
Institutional Dissonance and Bridging A New
Perspective on the Relationship between Religion
and Development

• Min-Dong Paul Lee
• Department of Management
• University of South Florida

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Contents

• Introduction Does religion matter?
• Review of recent empirical studies
• Institutional dissonance
• Property Rights
• Contracts
• Market Interactions
• Organizational Management
• Institutional bridging
• Conclusion

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Does religion matter for development?

• Classical social scientists all devoted
  significant efforts to understand religion and
  its effect on society and economy

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Does religion matter for development?

• Weber even went as far as saying that Protestant
  religion had a causal influence on the rise of
  western capitalism

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Religion still matters!

• Until early 1980s, most social scientists assumed
  religion to be just a fading vestige of
  pre-scientific times (Iannaccone 19981466)
• Revival of religion everywhere since early 1980s
• Return to traditional faith in Eastern Europe
• Rapid spread of conservative Islamism
• Explosion of Protestantism in Latin America

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Religion also matters for development!

• Development goals cannot be achieved without the
  commitment and willing participation of local
  actors (Dar and Cooke 2008 Thomas 1996)
• Mobilizing local actors requires better
  appreciation and understanding of what is
  important to the local population.
• For people who adhere to a religion, it is often
  the most important thing in their lives.
• In religious societies, religion dictates almost
  every aspect of a persons life from deciding
  what to eat and buy to how to interact with
  others in society. Therefore, it would be
  difficult fully to understand or facilitate the
  process of development without considering
  religion.

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Studies on Religion and Development

• 1990s Revival of academic interest in religion
• Cross-country analysis of the relationship
  between religion and economic development
• La Porta, Lopez-de-Silanes, Shleifer, and Vishny
  (1999) Protestant countries have more effective
  governments than Catholic or Muslim countries
  (measured by interventionism, public sector
  efficiency, quality of public goods provision,
  government size, and political freedom )
• Barro and McCleary (2003) Religiosity is
  positively related to economic performance
• Religions effect on individual attitudes or
  values.
• Guiso, Sapienza and Zingales (2003) religion was
  positively associated with the development of
  good economic attitudes

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Religiosity and Economic Growth
Source Barro and McCleary (2003)
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A Constant Puzzle

• Barro and McCleary (2003) strong religious
  belief (e.g., belief in heaven and hell) was, in
  general, positively associated with economic
  growth. However, Islamic countries, with their
  strong religious belief, have strong negative
  association.
• Guiso, Sapienza and Zingales (2003) religious
  participation improved development performance by
  increasing trust in government and social
  capital. However, despite their high level of
  social capital in the form of trust and economic
  reciprocity, Islamic societies often fared poorly
  in economic development.

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Comparison of Economic Performance between
Islamic States and a Selected Group of Countries
and Aggregates, 1975-2002
Country GDP 2002 GDP 2002 GDP per capita GDP per capita GDP per capita annual growth rate , 1975-2002b
Country US (billions) PPPa US (billions) 2002 US PPPa 2002 US GDP per capita annual growth rate , 1975-2002b
Islamic States
Iran 108.2 483.3 1652 6690 -0.4
Kuwait 35.4 37.8 15193 16240 -1.2
Saudi Arabia 188.5 276.9 8612 12650 -2.5
Egypt 89.9 252.6 1354 3810 2.8
Morocco 36.1 112.9 1218 3810 1.3
Syria 20.8 61.5 1224 3620 0.9
Tunisia 21 66.2 2149 6760 2.1
Comparison Group
Chile 64.2 153.1 4115 9820 4.1
South Korea 476.7 807.3 10006 16950 6.1
Singapore 87.0 100.1 20886 24020 5.0
Developing Countries 6189.3 19848.5 1264 4054 2.3
East Asia Pacific 2562.6 9046.9 1351 4768 5.9
OECD 26298.9 28491.5 22987 24904 2.0
World 31927.2 48151.1 5174 8704 1.3
Note a. PPP is an abbreviated form for
purchasing power parity b. Growth rates were
calculated by the World Bank using least squares
method. Source Adapted from Askari, Hossein.
2006. Middle East oil exporters what happened to
economic development? (Cheltenham, UK), p. 84.
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Institutional Explanation

• Society as an inter-institutional system
• Institutions are material and symbolic systems
  that not only regulate human activity, but also
  infuse it with meaning (Friedland and Alford,
  1991)
• Examples of institutions Capitalism, state,
  democracy, family and religion
• Each institution has its own logic that shape
  individual preferences and organizational
  interests
• Institutional logics define the norms and values
  that structure the cognition of economic actors
  and provide a collective understanding of how
  strategic interests and decisions are formulated
  (Thornton, 2002)

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Institutional Explanation

• Individuals perception and interpretation of
  economic actions are conditioned by multiple
  (sometime, competing) institutional logics
• Sen argued that even though different
  commentators have chosen to focus on particular
  institutions (such as the market, or the
  democratic system, or the media, or the public
  distribution system), we have to view them
  together, to be able to see what they can or
  cannot do in combination with other
  institutions. - Development as Freedom
  (1999142)

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Institutional Explanation

• For a Muslim economic actor, two dominant
  institutional logics he/she faces are Islam and
  Capitalism
• These two institutional forces exert significant
  influence on how Muslim economic actors interpret
  their environment and make choices.

Muslim Economic Actor
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Macro economic outcome
Islamic religious Teachings
Macro
Micro
Islamic business ethics
Economic behavior

1. Islamic religious ideology encourages certain
   economic values
2. Muslim economic actors construct an Islamic
   business ethic based on their religious ideology
   and develop a particular orientation to economic
   behavior
3. Muslim economic actors perceive and interpret the
   capitalistic market institutions and various
   economic interactions through the lens of their
   Islamic business ethic
4. The resulting economic behavior and disposition
   determine the extent of Muslim economic actors
   participation in capitalistic markets and their
   competitive efforts

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Islamic Business Ethic Capitalistic Institutions
Property Rights Inclusive rights Communally-oriented Stewardship (khalifah) Exclusive rights Individually-oriented Ownership
Contracts Informal enforcement Conditional enforceability Formal enforcement Absolute enforceability
Market Interactions In-group focus Closed network Out-group focus Open network
Organizational Management Full liability Ambiguous authority Non-distinction from social life Limited liability Clear authority Distinction from private social life
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Resolution of Dissonance?

• Persisting institutional dissonance prevents
  Muslim economic actors from fully participating
  in capitalistic economy without jeopardizing
  his/her social legitimacy
• Then, what can we do about the dissonance?
• Traditional remedies
• Institutional reform replace inferior
  institutions with superior/ advanced institutions
• Problem superior institutions (often, democratic
  and rational institutions) also cause unintended
  dissonance with existing religious institutions
• Institutional reform can result in even
  counter-cultural movement

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Institutional Bridging

• Alternative solution is creation of bridging
  institutions that harmonize existing
  institutional dissonances

Muslim Economic Actor
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Example of Institutional Bridging

• Islamic Bank
• Source of Institutional Dissonance
• Islamic business ethic Islamic law does not
  allows the charging of interest (riba) in
  borrowing or lending
• Capitalism banking system is a central feature
  of capitalist economy. Banks facilitate secure
  and efficient capital flow between savers and
  borrowers through interests
• Institutional bridging Islamic banks
• Banking institution without the use of interest
  (riba)
• Use the methods of profit and risk sharing to
  facilitate financial intermediation
• Result Devout Muslims can save and borrow money
  (participate in capitalistic economy) without
  compromising religious belief or loosing social
  legitimacy

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Successful Resolution of Institutional Dissonance

• Rapid growth of Islamic banks even faster asset
  growth in conservative Islamic societies (e.g.
  Iran)
• Assets held by the world's 100 biggest Islamic
  banks grew 66 percent in 2008 from the previous
  year
• In the same period, Asia's 300 biggest banks saw
  their assets rise by a much slower 13.4 percent,
  it said. (Asian Banker, 2009)
• The top 100 Islamic banks held assets totaling
  580 billion US dollars last year, up from 350
  billion dollars in 2007

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Implication of Institutional Bridging

• Promise
• Can minimize potential cultural and social
  resistance to development initiatives
• Creates a space where local stakeholder can
  voluntarily build their own capacity and thrive
• Broad implications
• Institutional bridging in gender equality
  Grameen bank in Bangladesh -gt empowerment of
  rural women by giving them economic role and
  power through microfinance
• Institutional bridging in education Educate!
  program in Uganda -gt mentoring of high-school
  students