Salman Ahmed Shaikh

In neoclassical growth theories, the emphasis is on increasing savings and technological progress which brings about increase in capital per worker and eventually output per worker. In ‘endogenous growth theory’ models, more sophisticated work has been done by determining the factors which affect the technology, human capital and savings.

To summarize their findings for non-economists, these theories and models help us to explain the differences in per capita incomes across countries. The main conclusions are that countries with high savings, countries having people spending more time in learning new skills and countries with better social infrastructure in the form of strong private property rights are able to have more per capita income than countries which lack in these characteristics.

Below, we try to analyze whether Islamic economic principles have the capacity to help build these elements for sustainable growth and development.

Boosting Investment in Islamic Economic Framework

Islamic economic framework provides a lenient rate of income Zakat and withdraws any fixed pre-determined cost of capital. The productive sector is provided with an incentive to boost production. This could itself bring about increase in output per person in the economy and stability in prices. Zakat on cash and capital will force the people to invest their money in productive uses. With prohibition of interest, this money will only go in business either with the start of one’s own business or equity participation in Mudarabah and stocks.

Besides this, a consistent and credible low tax rate policy with broader Zakat base ensures minimum distortions, boosts aggregate demand and encourages investment by decreasing cost of doing business and this could also simultaneously solve microeconomic problems of imperfection in markets by increasing competition and helping to reduce market power.

Improving Income Distribution in Islamic Economic Framework

If we study the classical and neo-classical literature on growth and development, the theories and policies based on them have felt short to improve income distribution. Islamic economics has many non-state mechanisms to ensure income redistribution without interfering with individual freedom and market mechanism. We discuss three main mechanisms below:

Interest Free Financial Intermediation – Interest as a system of allocation of resources ensures a fixed return for one agent (lender) and variable and uncertain for another (borrower) in an intertemporal exchange of money. In contrast, Islam encourages equity financing in which the loss/profit would be shared. This ensures better results from the perspective of redistribution and better co-operative behavior since payoffs for all parties 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. This feature could also help in stabilizing business cycles.

Family System and Inheritance Distribution – Family system of Islam brings social capital into existence. It ensures empathy and responsibility. It brings a very lasting and durable social safety net. Islamic injunctions about how to treat orphans ensure social security for individuals with special circumstances. Furthermore, the 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 concentration of wealth in every generation.

Zakat and Infaaq – Zakat is a combination of wealth and income levy. With Zakat on wealth, redistribution objective is directly achieved. It reduces confinement of wealth in few hands. The flow (income) and the stock (wealth) both are taxed and hence 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 the business cycles.

Building Social Infrastructure in Islamic Economic Framework

Islam does not disallow private property rights. Islam also does not give the government the right to fetch people’s money and violate private property rights. Islam has a very clear view on certain institutions like ‘interest based lending’ which has been partly responsible for concentration of wealth, rising inequality and even poverty. Islam by disallowing interest based earnings and exploitative forms of trade ensures individual freedom in a much wider sense.