Articles on Islamic Economics

Labor Productivity and Technical Progress in Islamic Economic Framework

Salman Ahmed Shaikh

Most developing countries have lower labor productivity. Some of the reasons why people are not able to increase their productivity include lack of education and hence lack of employable skills, poor health and malnutrition. Islam has made it obligatory for every Muslim – men and women – to educate themselves. Islam has made it obligatory for Muslims to seek permissible source of income through entrepreneurship or offering other factor services. Islam restricts extravagant and lavish use of wealth and resources which can result in potential increase of the surplus wealth and resources in the hands of earning individuals as compared to the case in unbridled Capitalism.

This surplus wealth is not allowed to be wasted or used lavishly. Zakat on wealth could redistribute the surplus wealth to users who can gain higher marginal utility by spending it as compared to the rich. Besides obligatory Zakat on income and wealth, the direction for Infaaq (charitable giving) opens another door for the channeling of surplus wealth transferred to the hands of the poor. Islam emphasizes that in place of using the surplus wealth for earning interest, one should pay it to charity (Al-Baqarah: 276).

There are approximately 1 billion poor in the world and if it takes Rs 3,000 to feed a poor person for a month, then Rs 3,000 billion can feed all of the world’s poor for one month. If exchange rate is Rs 105 per USD, then with 3.7 trillion USD combined net worth of 300 wealthiest people at December 31, 2013, they can feed all of the world’s poor for 10 years at least. So, the 300 people alone can feed all of the world’s poor for 10 years. If interest rate is 10%, then the the 300 wealthiest can earn 370 billion USD a year. This much amount if instead used to feed poor, it can feed all of the world’s poor easily for a year. The wealthiest 300 people even in recession have accumulated USD 524 billion in their net worth in 2013.

Regressive taxes and high taxes on income from work create a disincentive to work and to engage in productive enterprise. In Islam, there is proportional tax on income and wealth which is neither too low nor too high. Zakat on wealth limits concentration of wealth and encourages circulation of wealth either through Infaaq (charitable giving) or through entrepreneurial activities.

Higher investment could take place in an Islamic economic framework with Zakat (which discourages keeping money idle) and prohibition of interest (which encourages entrepreneurship). In developing countries, Zakat could substantially boost aggregate demand and it will keep the investment consistently increasing and hence facilitating the growth.

Output per person outside agriculture as a multiple of that in agriculture, which is eight in Africa and four in Asia and Latin America, was only about two in Europe in the 19th century. It shows that there is huge room for potential investment in developing countries and return on capital is much more in developing countries if such potential investments are carried out.

In Islamic economic framework, increase in investment through entrepreneurial activities could increase the labor demand and wages. Increase in wages will improve the standard of living of poor labor class and enable them to improve their productivity further. In addition to that, productivity could also rise with increase in capital per worker through increased investments.

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