CONTEMPORARY DEVELOPMENT ISSUES FROM ISLAMIC PERSPECTIVE. Salman Ahmed Shaikh

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1 CONTEMPORARY DEVELOPMENT ISSUES FROM ISLAMIC PERSPECTIVE Salman Ahmed Shaikh

2 CONTEMPORARY DEVELOPMENT ISSUES FROM ISLAMIC PERSPECTIVE Guest Lecture at Institute of Business Administration (IBA), Karachi, 2012

3 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.

4 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 between savings and investment units. Interest based financial intermediation that is used currently 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, there will be increased inequality and afterwards, inequality will decrease lacks support even for economies such as USA and even India and China that have done the structural reforms and have also experienced strong and prolonged periods of economic 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 of the poorest 10% across the OECD, up from seven times 25 years ago.

5 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.

6 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.

7 Critical Observations on Policy Response Poor countries became more indebted. Sub Saharan Africa receives $10 billion in aid but loses $14 billion in debt payments per year (Africa Action, 2008). Currently, Africa s total external debt stands at $300 billion. Many African countries spend more on debt than either on health or education. GNP per capita in Sub-Saharan Africa is $308 while external debt per capita 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 year as a result of the debt crisis.

8 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.

9 Critical Observations on Policy Response Tariff escalation dampened potential gains from free trade. For example, In EU, processed foods are subjected to a higher tariff than unprocessed foods, and fabrics to a higher tariff than thread. Aid/loan tying with trade. Case in Point: Perkins (2004) revealed that for every $100 of crude oil taken out of the Ecuadorian rain forests, the foreign oil companies receive $75. Of the remaining $25, threequarters must go to paying off the foreign debt. Most of the remainder covers military and other government expenses which leaves about $2.50 for health, education, and programs aimed at helping the poor.

10 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 (Co 2 ) emissions (Source: Carbon Dioxyde Information Analysis Center data). Furthermore, High-income countries account for 36% of emissions of organic water pollution (Source: World Bank).

11 Critical Observations on Policy Response Huge farm subsidies by OECD countries (almost $350 billion). These farm subsidies have led to farmers in developing countries losing 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 industries to avoid deindustrialization, that is termed incorrect. It can be seen in graph that how important is the agriculture sector to developing countries. Agriculture Share in Less Developed Countries In Employment (%) In GDP (%)

12 Development from Islamic Perspective Boosting Investment in an Islamic Economy Wealth Zakat on cash and capital motivates the people to invest their money in productive enterprise. With prohibition of interest, the investible resources can only go in business either with the start of one's own business or equity participation in other businesses through stocks etc. A consistent and credible low tax rate policy with broader Zakat base ensures minimum distortions, boosts aggregate demand and encourages investment by decreasing costs of doing business and this could also simultaneously solve microeconomic problems of imperfection in markets by increasing competition and helping to reduce market power.

13 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.

14 Development from Islamic Perspective Building Social Infrastructure in Islamic Economy Islam does not disallow private property rights. On the other hand, Islam also educates people that they are not just responsible to fulfill duties set out in a legal framework in a society s legislature, but are also responsible to Allah. Second, private property rights are safeguarded by the state after the provision of taxes. Beyond Zakah, Islam also does not give the government the right to fetch people 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 and even poverty and is an exploitative form of earning money. Islam by disallowing interest based earnings, exploitative forms of trade and imposition of excessive taxes from the state beyond Zakah ensures individual freedom in a much wider sense.

15 Jazak Allah Khair For Further Information, please contact: Islamic Economics Project