Countries with higher national IQ are more likely to experience greater financial development

Countries with higher national IQ (intelligence quotient) are more likely to experience greater financial development, according to a study published this March in Intelligence.

Intelligence is closely connected to a number of economic factors at both the individual and national level. For example, research has shown that individuals with higher levels of intelligence are likely to save more and that countries with higher national average IQ have higher rates of economic growth.

This poses the question, how can IQ and economic growth be related? One suggestion is via financial development (the increased availability of funds and the increased use of institutions that promote the allocation of funds). This comes from a large amount of evidence that financial development is a good predictor of future economic growth.

Furthermore, this can be explained by the fact that as financial markets and institutions develop, people are able to more effectively gain interest on savings on excess funds and more easily borrow funds. Financial development thus promotes increased investment which in turn promotes economic growth.

The study, by Rik Hafer of Southern Illinois University Edwardsville, used existing data from 1980-2009 of 80 countries to assess whether financial development explains the link between IQ and economic growth. To measure financial development he used a combination of 3 measures: Liquid Liabilities (calculated as a ratio of liquid liabilities of the financial system to GDP); Private Credit (calculated as the ratio of credit extended by financial institutions to the private sector to GDP); and Bank Assets (calculated as the ratio of commercial bank assets to the sum of commercial bank and central bank assets). This was then compared to national IQ data, whilst controlling for economic growth (economic development, legal origin and economic freedom).

The results revealed that countries with higher national IQ are more likely to experience greater financial development, whilst controlling for economic growth.

The author concluded, “Not only do individuals with higher IQs tend to be thriftier and save more, but countries comprised of such individuals apparently establish and develop financial institutions that promote such behavior.” Further adding, “policies that lead to improvements in human intelligence, such as enhancements in early childhood education or improved health care, may yield outcomes that promote the use of and demand for more sophisticated financial markets.”