NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Religion Shapes Financial Rules and Growth

"Creditor rights are strongest in Protestant countries, irrespective of whether the country has common or civil laws."

It is obvious that financial development benefits economic growth. Yet, countries that protect investors, such as the United Kingdom and the United States, are in the minority, despite the fact that global competition for capital penalizes countries with poor investor protection. Why is it, then, that protection of investor rights differs so much across countries?

In Culture, Openness, and Finance (NBER Working Paper No. 8222), authors René Stulz and Rohan Williamson find that cultural differences, systems of belief that shape the actions of individuals within a society, play a critical role in policies and practices related to investor protection.

Religion, for example, is a key component of culture. Usury, interpreted to mean receiving any interest on loans, was prohibited by the medieval church and led to excommunication. The Calvinist reformation, however, viewed payments of interest as a normal part of commerce, making it possible for modern debt markets to develop. That development has created sharp historical differences in creditor rights between Catholic and Protestant countries. Since cultural practices change slowly, the authors find those differences still persisting in the twentieth century. However, religion appears to have no effect on shareholder rights.

Similarly, language is another cultural variable that has an effect on creditor and shareholder rights. Countries having the same language more often share similar laws regarding protecting rights of creditors and shareholders.

Cultural practices related to the origin of laws also make a difference in creditor and shareholder rights. Common law countries protect investors better than civil law countries, in part because of the greater flexibility offered judges in shaping and applying common laws. Similarly, religion has more of an influence on creditor rights. Creditor rights are strongest in Protestant countries, irrespective of whether the country has common or civil laws. Protestant countries also have better enforcement of creditor rights than do Catholic countries. These findings are supported by the fact that debt issuances relative to GNP are smaller in Catholic countries than in Protestant countries.

The authors also find that a country's openness to international trade is closely tied to creditor rights, since such trade must be financed. Countries with open trade have stronger protection of creditors. Openness to international trade also tends to mitigate the influence of religion on creditor rights, so that even in Catholic countries with significant international trade there is better protection of creditor rights.

The striking difference between countries is harder to explain with regard to shareholder rights than creditor rights. For example, a shareholder's vote is likely to count more in a Catholic country when the shareholder gets to vote, but it is harder to get to vote in such a country. Cultural influences are also related to enforcement, with Catholic countries, especially those that are Spanish-speaking, having weaker enforcement of rights.

-- Les Picker


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