Role of Islam in Economic Develpoment

Introduction

Researchers like Huntington, Landes, and Inglehart, and Baker argue that explanations for economic growth should go further to include a nation’s culture. Their argument absolutely makes sense because culture affects personal traits such as honesty, thrift, willingness to work hard, and openness to strangers, which consequently influences economic outcomes. Religion is thought to be one of the most important dimensions of culture. Thus Weber argued that religious practices and beliefs had important consequences for economic development.

Islam is no exception, just as David Landes, the Harvard economic historian, wrote in his book "The Wealth and Poverty of Nations", "No one can understand the economic performance of the Muslim nations without attending to the experience of Islam as faith and culture," In the 10th century, which is known as Golden Age for Islam, Muslim societies led the world in science, philosophy, culture, and prosperity. But soon it came to the end, and Islamic countries have long lagged behind other countries. It is easy to define with the help of analysis of current international financial data.

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Those data highlight the great inequality in income between Christian-dominant and Muslim-dominant countries. The richest countries in the world are Europe, North America, and East Asia. Only a small number of Muslim countries approach their income levels, and this is only due to their oil wealth. In many of Muslim countries income growth is low so the gap is widening. Scholars are sure that it is not just coincidence but Islam has a significant influence on economic ascents and descents. If it is so, what role does Islam play in economic performance? How does it affect economic advancement?

What spheres and industries does Islam influence? Is there any way to solve the problem? The purpose of this paper is to show the relationship between Islam and the economy and critique some Islamic mechanisms that drag economic activity. The first part of the paper suggests some statistical data that reflects the general image of the economic state of Islamic countries. The next section defines the process of wealth generation and the impact of Islam on capital, innovation, and literacy. After, Islamic trading patterns are analyzed. Then Timur Kuran, a well-known economist, argues about the economic effect of Islam are stated. And the last part reviews Islamic financial institutions.

Economics of Wealth Generation

The level of income in an economy is related to the volume of goods and services produced. The amount of this product in the long term is determined by three factors: the availability and exploitation of natural resources; the quantity of productive capacity in terms of buildings, infrastructure, machinery plant, and equipment; and the availability, ability, training, and resourcefulness of the workforce. These “factors of production” are essential to income-producing capacities. The natural resource endowment of a country is a matter of circumstance, religion has nothing to do with the availability of the natural resource.

Islamic countries, especially those in the Middle East are very lucky to have oil wealth, the biggest contributor to the Muslim economy. Physical resources however are man-made. The availability of these resources depends on the accumulation of physical investment in building construction, the purchase of equipment, and the maintenance of the stock of these assets. It is here that the culture and religion, Islam in particular, may play a role. In order to create physically productive assets, what economists call “capital”, a long process of planning, risk-taking, vision, and enterprise is required.

Arthur Lewis argued in his textbook on economic growth: “Some religions are more compatible with economic growth than others. If religion stresses material value, work, thrift, productive investment, honesty in commercial relations, experimentation, and risk bearing, and equality of opportunity, it will be helpful to growth, whereas in so far as it is hostile to these things, it tends to inhibit growth. ” He did not provide the classifications of religion according to their support for development.

But other economists like Luigi Guiso, Paola Sapienza, and Luigi Zingales did. They conducted a multinational set of surveys that covers sixty-six countries. In a study that appeared in the Journal of Monetary Economics, they noted that “on average, Christian religions are more positively associated with attitudes that are conducive to economic growth, while Islam is negatively associated. ” In comparison with people of other religions, Muslims were generally less disposed to agree with pro-market statements such as “Competition is good”, “private ownership of business an industry should be increased”.

It means that Muslims are not willing to adopt industrialization and modernization, without which the creation of capital is barely possible. The report clearly indicates that Islam sufficiently discourages economic development in terms of physical resources. The same opinion Daniel wrote in his best-known work, The Passing of Traditional Society, that “the top policy problem, for three generations of Middle Eastern leaders, has been whether one must choose between ‘Mecca or Mechanization’ or whether one can make them compatible. He observed that Islam was inimical to the structural changes essential to the Islamic world’s progress. Affirmatively Islam played a very effective role in capital creation and obviously negative. So, if the country’s aim was to develop, the choice would ultimately get resolved in favor of ‘mechanization’. The third factor of production is human resources. This is not just a matter of population. People need to be educated and trained in order to make use of physical capital. Religion may play a role here too – possibly a negative one.

To the question of whether Islam contributed to shaping the educational system that limited curiosity and innovation, Lewis answers in the affirmative. But how? Islam highly encourages education. It might have stemmed from the closure of the gate ‘ijtihad’, which meant end of freedom of innovation, and independent judgment, and that all answers were already available and needed merely to follow and obey. Treating Islamic learning as perfection helped support an educational system that emphasized rot learning and memorization at the expense of problem-solving.

Granting that the prevailing educational system must have limited inquisitiveness and innovation, it could have extinguished new ideas and the desire for change. This resulted in an overwhelmingly illiterate Muslim population. The scene has not changed a lot in present days either, series of reports for the United Nations pointed out that the adult literacy rate barely topped fifty percent, which is disastrous for economic development. If there is no human resource who can tackle technology and machinery what are they needed for anyway?

The nature of progress is improvements in physical capital over time that deliver increased output for a given amount of material and labor input – higher productivity. Labor meant highly educated and trained people, who obviously lack the Muslim world. This ‘knowledge deficit’ has severely impeded economic growth. One thing that I cannot skip is the attitude toward women in Islam. In Islam, women are inferior to men. Recent figures from the International Labor Organizations, published by World Bank, indicate that in the Middle East and North Africa, women comprise 28 % of the total labor force, whereas the world average is 40 %.

As a group, these countries have the lowest female labor force participation in the world. One of the lowest figures in Saudi Arabia with 16%. This is a reflection of cultural values regarding women in Muslim countries, values inseparable from religious values, which form the following consequences. First, it decreases the overall income of the country. If women were engaged in paid employment, increasing the labor force by 30%, an additional contribution to national income would be around of 10%. Second, this limitation reduces potential production.

Third, it is associated with higher birth in these countries, which corresponding per capita income growth rate. So, this Islamic wise about women contributes to relative poverty. Now, as we have obtained a sufficient image of how Islam has influenced the process of wealth generation I would like to take a quick look at Muslims' trading patterns.

Islamic Merchants

The fact that Muslims ended up being poor at trading puzzles me because the founder of Islam, The Prophet Muhammad is believed to have been a merchant, and on one occasion he reportedly said, “The trustworthy merchant will sit me in the shade of Allah’s throne. It is especially puzzling that Muslim merchants, given that early Islamic thought harbored certain pro-competitive traditions, along with Muslim consumers who stood to benefit from greater competition, failed to counter the anti-competitive influence of the guilds. Sabri Ulgener suggests that trading patterns were influenced by the economic morality associated with Islam. The foremost objective of Muslims’ economic doctrine is to replace individualistic economic morality with a communalist morality.

This means Muslims do not support private ownership and income inequality, which is necessary to provide incentives for individual effort, and it leads to discouraging consequences for merchants. As private property rights were not protected in Islamic countries it is possible that trade with Muslims or in their countries was inefficient, and merchants simply avoided having any deals in the Muslim world. Of course, this is not the only reason for static trading patterns, there are tons of factors that could affect it. We just see that Islamic morality might have had an impact on merchants.

Islamic Law and Economic growth

The economist Timur Kuran, who grew up in Turkey and teaches at Duke University, traced the causes of fault in achieving industrialization and stable growth in his well-acclaimed book, The Long Divergence: How Islamic Law Held Back the Middle East. Islamic societies were slow to develop banks, commercial courts, joint stock companies, and business organizations, for which Kuran blames social customs and religious rules, and Islamic laws. He focuses on laws covering business partnerships and inheritance practices. These, he argues, discouraged the emergence of modern industrial corporations. In medieval times, trading partnership was the leading form of business in the Middle East. In an Islamic partnership, any individual partner could end the relationship at will, and even the most successful ventures were terminated on the death of a partner. As a result of these rules, most businesses tended to be small and short-lived.

By the end of the nineteenth century, the most durable trading entities in many Islamic countries were operated by non-Muslims, such as Armenians and Jews, Kuran adds, these organizations too were limited in their ability to raise money from outsiders because the region lacked non-governmental financial channels. And this held back the establishment of corporations that would do huge contributions to the economy. The other thing, according to Kuran, which hindered business consolidation is inheritance customs. Quran dictated that if a Muslim merchant died at least two-thirds of his estate had to be split among surviving family members.

This egalitarian Islamic law of inheritance discouraged the accumulation of wealth by dividing it among family members. The permissibility of polygamy fueled this problem as it divided the assets of wealthy merchants with multiple wives and children. Further, it prevented the creation of long-lasting, capital-intensive companies. These provocative claims are not backed up by statistical and empirical works, they are generally derived based only on history. One can argue that claims are just hollow claims as Adeel Malik, professor at the University of Oxford, did.

But Kuran’s claims are sound and rational. In Western countries, for instance, giant corporations were a vital part of the economic engine, which fueled prosperity, and they didn’t have any rules slightly related to those of Islam. This could mean that Kuran is right in his arguments and Muslims should pay a little attention to them and maybe check up on their rules and see whether it is compatible with the modern economic and financial system.

Islamic Banking

While investigating the Islamic economy, it is impossible to ignore their financial system. Islamic economic doctrine on the prohibition against riba, an Arabic word that means “interest” or “usury”, is widely known. The Muslim world is convinced that the conventional financial system is decadent, immoral, and inequitable. However, in the modern world, the one who is out of this system is out of economic advancement because financial institutions are the only monetary support for business investment. Muslims may think that Muslim lenders and borrowers have long found their own ways to circumvent, but some data prove the opposite. First of all Islamic Banks are deficient.

These banks exist not in all predominantly Islamic nations. They have constituted only a small share of the national banking system. For instance, in thirteen out of fifteen major Islamic countries listed by Henry and Wilson, Islamic banks accounted for less than 17% of the share of commercial bank deposits in the late 1990s, in Algeria, Iraq, Libya, Morocco, Oman, Syria, and Tunisia Islamic banks were nonexistent or minuscule. By the year 2000 only three countries – Iran, Pakistan, and Sudan- had Islamized their banking system.

The implication of this information is that Islamic bank appears to be important in only a very small number of Muslim countries. The shortage of banks is a huge obstacle to new investments and the emergence of industrial businesses. Furthermore, Islamic banks are at a competitive disadvantage before other domestic or foreign bans for three reasons. First, a problem of moral hazard arises. Second, accounts in an Islamic bank must yield a return at least close to that of their competitors in order to attract deposits.

Third, these banks are burdened with a curious problem of adverse selection. So, the future of Islamic banking does not seem to be glowing. As we see, the prohibition on interest serves no beneficial purpose. Elaborate schemes to circumvent such transactions because of their supposed immorality or due to their prohibition serve no purpose except to increase costs and increase inefficiency.

Conclusion

This paper has reviewed important areas of economic activity and the role of Islam in it. And religion affirmatively has a great influence on the economy of the Islamic world. Basing on all findings I conclude that Islam was conducive to economic development, or at least less supportive than Christian dominant countries. Few Muslims appreciated the discoveries and innovation, which has been a fatal cause for physical resources or capital. The nature of Islamic education was not helpful in developing open-minded citizens fully equipped to fulfill their ambitions and potential. Islamic attitude toward women negatively affects production and income. Very few Muslims were seeking to capitalize, which caused uncomfortable conditions for merchants.

The constraints and costs imposed on financial institutions by the nominal prohibition on interest payments preclude a free market in financial capital, causing inefficiencies, and moral hazards in the banking system, and limiting the funds for investment. These were drawbacks of religion that possibly caused stagnation in Islamic countries. And of course, there are ways of getting out of this situation. Recent history provides examples of Muslim countries seeking to engage in the global economy and some of them succeed.

Indonesia, for instance, in 2008 its inflation-adjusted GDP per capita was five and half times what it was in 1990, in Malaysia during the same period, it rose almost sixfold. Just a generation ago, both of these nations were overwhelmingly rural and poverty-stricken. Today, they are industrialized middle-income countries. Maybe some Islamic countries should follow the lead of Turkey, the country which was transformed into an economically vibrant democracy. Mustafa Kemal Ataturk, founder of the Turkish Republic, 1929 abolished the caliphate and imposed a strict church-state divide.

After 1980, Turgut Ozal removed barriers to foreign trade and investment. Party’s Islamic heritage hasn’t prevented it from embracing a policy of economic modernization. Today, Turkey is the world's fifteenth-largest economy and a member of G-20. An example of Turkey suggests that it is possible to industrialize, modernize and still be faithful to religion, but Islam should not intervene in economic and political activities for its own sake, this will prevent Islam from being changed under the political influence and will maintain its cleanness.

So, Islamic countries are not in perfect condition, however, they have all opportunities to prosper. This research paper analyzed just some of the factors, further research and surveys need to be conducted to identify other possible problems of the static economy of the Muslim world and to provide empirical and statistical information on Timur Kuran’s arguments. References

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