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CONTEMPORARY DEVELOPMENT ISSUES
FROM ISLAMIC PERSPECTIVE
Salman Ahmed Shaikh
CONTEMPORARY DEVELOPMENT ISSUES
FROM ISLAMIC PERSPECTIVE
Guest Lecture at Institute of Business Administration
(IBA), Karachi, 2012
Determinants of Growth in Literature
Increased Savings.
Enhanced Technology.
Human Capital or increased effort undertaken for Skill
Enhancement.
Availability of requisite social infrastructure and strong
property rights.
Critical Observations on Growth Models One size-fit all approach is flawed. Simply because if there are same set of problems,
it does not mean that same solutions will work.
Lack of emphasis on alternate institutions for performing intermediation betweensavings and investment units. Interest based financial intermediation that is usedcurrently has resulted in increased concentration of wealth.
Lack of emphasis and answers for polarized income distribution.
Kuznet’s hypothesis which argued that initially in the development process, therewill be increased inequality and afterwards, inequality will decrease lacks supporteven for economies such as USA and even India and China that have done thestructural reforms and have also experienced strong and prolonged periods ofeconomic growth.
Income inequality in OECD countries is at its highest level for the past half century.The average income of the richest 10% of the population is about nine times that ofthe poorest 10% across the OECD, up from seven times 25 years ago.
Rising Income Inequality in China
It can be seen in the graph that despite exemplary growth that China has achieved
in last decades or so, income inequality (measured by Gini Coefficient) has steadily
risen in China and still we see no sign of decrease in income inequality.
Rising Income Inequality in India
It can be seen in the graph that income inequality (measured by Gini Coefficient)
has steadily risen in India and still we see no sign of decrease in income inequality.
Critical Observations on Policy Response
Poor countries became more indebted.
Sub Saharan Africa receives $10 billion in aid but loses $14 billion indebt payments per year (Africa Action, 2008).
Currently, Africa’s total external debt stands at $300 billion. ManyAfrican countries spend more on debt than either on health oreducation.
GNP per capita in Sub-Saharan Africa is $308 while external debt percapita stands at $365.
Nigeria borrowed around $5 billion and has paid about $16 billion,but still owes $28 billion. Regrettably, 7 million children die each yearas a result of the debt crisis.
Level of Indebtedness in Developing Regions
It can be seen in the graph that most of the expenditure gets wasted in debt
servicing. In denominator, we have total expenditure. Since most countries run
deficits, the ratio with total revenue would be even higher.
Critical Observations on Policy Response
Tariff escalation dampened potential gains from free trade. Forexample, In EU, processed foods are subjected to a highertariff than unprocessed foods, and fabrics to a higher tariff thanthread.
Aid/loan tying with trade.
Case in Point: Perkins (2004) revealed that for every $100 ofcrude oil taken out of the Ecuadorian rain forests, the foreignoil companies receive $75. Of the remaining $25, three-quarters must go to paying off the foreign debt. Most of theremainder covers military and other government expenseswhich leaves about $2.50 for health, education, and programsaimed at helping the poor.
Critical Observations on Policy Response
SBT, TBT, Kyoto protocol etc are used to deter entry of
LDC exports.
While High-income countries account for half the world’s
Carbon Di-Oxide (Co2) emissions (Source: Carbon
Dioxyde Information Analysis Center data).
Furthermore, High-income countries account for 36% of
emissions of organic water pollution (Source: World
Bank).
Critical Observations on Policy Response
Huge farm subsidies by OECD countries (almost $350 billion).These farm subsidies have led to farmers in developing countrieslosing source of earning and facing acute poverty.
These subsidies are supported on the premise of food security,while if developing countries want to protect their infant industriesto avoid deindustrialization, that is termed incorrect.
It can be seen in graph that how important is the agriculture sectorto developing countries.
Agriculture Share in Less Developed Countries
1980 1990 2000 2006
In Employment (%) 79.5 76 70.8 68.6
In GDP (%) 30 29.5 30.2 28
Development from Islamic Perspective
Boosting Investment in an Islamic Economy
Wealth Zakat on cash and capital motivates the people to investtheir money in productive enterprise.
With prohibition of interest, the investible resources can only go inbusiness either with the start of one's own business or equityparticipation in other businesses through stocks etc.
A consistent and credible low tax rate policy with broader Zakatbase ensures minimum distortions, boosts aggregate demand andencourages investment by decreasing costs of doing business and thiscould also simultaneously solve microeconomic problems ofimperfection in markets by increasing competition and helping toreduce market power.
Development from Islamic Perspective
Improving Income Distribution in Islamic Economy
Prohibition of Interest –Islam encourages equity financing in which the loss/profit is
shared & payoffs are linked with productive sector of the economy. Consequently,
markets will not have to produce speculative surplus output just to service exorbitant
amount of debt and that could stabilize business cycles.
Family System & Inheritance Distribution – Family system of Islam brings social
capital into existence. It brings a very lasting and durable social safety net. Inheritance
laws ensure that the wealth of the deceased is distributed widely among the members
of the family of the deceased and this permanently and systematically ensures doing
away with the concentration of wealth in every generation.
Zakat & Infaaq –With Wealth Zakat, redistribution objective is directly achieved. It
ensures appropriate transfer of wealth and transfer of asset ownership to the needy. If
an economy is in disequilibrium and policies fail to immediately recover and boost
incomes, wealth Zakat enables the distributive allocation that works independently of
the business cycles and help stabilize the extremes of business cycles.
Development from Islamic Perspective
Building Social Infrastructure in Islamic Economy
Islam does not disallow private property rights. On the other hand, Islam alsoeducates people that they are not just responsible to fulfill duties set out in a legalframework in a society’s legislature, but are also responsible to Allah.
Second, private property rights are safeguarded by the state after the provision oftaxes. Beyond Zakah, Islam also does not give the government the right to fetchpeople’s money and violate private property rights.
Third, Islam has a very clear view on certain institutions like ‘interest based lending’which has been chiefly responsible for concentration of wealth, rising inequality andeven poverty and is an exploitative form of earning money.
Islam by disallowing interest based earnings, exploitative forms of trade andimposition of excessive taxes from the state beyond Zakah ensures individualfreedom in a much wider sense.
Jazak Allah Khair
For Further Information, please contact:
Islamic Economics Project