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

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

3. Does religion matter for development? Adam Smith Emile Durkheim Max Weber • Classical social scientists all devoted significant efforts to understand religion and its effect on society and economy

4. Does religion matter for development? Protestant religious doctrine Macro Capitalism Calvinist doctrine encourages certain values Changes in economic behavior bring about Capitalism Micro Value Appropriation of certain kinds of orientations to economic behavior Economic behavior • Weber even went as far as saying that Protestant religion had a causal influence on the rise of western capitalism

5. Religion still matters! • Until early 1980s, most social scientists assumed religion to be just a “fading vestige of pre-scientific times” (Iannaccone 1998:1466) • 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

6. 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 person’s 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.

7. 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 • Religion’s effect on individual attitudes or values. • Guiso, Sapienza and Zingales (2003): religion was positively associated with the development of good economic attitudes

8. Religiosity and Economic Growth Source: Barro and McCleary (2003)

9. 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.

10. Comparison of Economic Performance between Islamic States and a Selected Group of Countries and Aggregates, 1975-2002 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.

11. Institutional Explanation • Society as an inter-institutional system • Institutions are materialand 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)

12. 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 (1999:142)

13. 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. Dissonance Islamic Institutions Capitalistic Institutions Muslim Economic Actor

14. Macro economic outcome Islamic religious Teachings Capitalistic Institutions Macro • Islamic religious ideology encourages certain economic values • Muslim economic actors construct an Islamic business ethic based on their religious ideology and develop a particular orientation to economic behavior • Muslim economic actors perceive and interpret the capitalistic market institutions and various economic interactions through the lens of their Islamic business ethic • The resulting economic behavior and disposition determine the extent of Muslim economic actors’ participation in capitalistic markets and their competitive efforts Islamic teachings encourages certain economic values Effect on market interaction Micro Islamic business ethics Appropriation of certain kinds of orientations to economic behavior Economic behavior

16. 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

17. Institutional Bridging • Alternative solution is creation of bridging institutions that harmonize existing institutional dissonances Capitalistic Institutions Islamic Institutions Bridging Institution Muslim Economic Actor

18. 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

19. 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

20. 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 -> empowerment of rural women by giving them economic role and power through microfinance • Institutional bridging in education: Educate! program in Uganda -> mentoring of high-school students