Role of Islam in Economic Develpoment

International Ataturk-Alatoo University Role of Islam in Economic Development Done: Aizhamal ZHUMALIEVA Checked: Ibragim KONCAK 2012 Content Introduction………………………………………………………………. 1 Statistics and Trends………………………………………………………2 Economics of Wealth Generation ………………………………………. 3 Islamic Merchants…………………………………………………………5 Islamic Law and Economic Growth………………………………………6 Islamic Banking…………………………………………………………… 6 Conclusion…………………………………………………………………7 Introduction
Researchers like Huntington (1996), Landes (1999), and Inglehart and Baker (2000) 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 stranges, which consequently influences economic outcomes. Religion is thought to be one of the most important dimensions of culture. Thus Weber (1930) 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 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.

Those data highlight the great inequality in income between Christian dominant and Muslim dominant countries. The richest countries in the world are those of Europe, North America, and East Asia. Only a small number of Muslim countries approach to their income levels, and this is only due to their oil wealth. In many of Muslim countries income growth is low so that gap is widening. Scholars are sure that it is not just coincidence but Islam has 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 economy and critique some Islamic mechanisms that drag the economic activity. The first part of the paper suggests some statistical data that reflects general image of economic state of Islamic countries. Next section defines the process of wealth generation and impact of Islam on capital, innovation, and literacy. After, Islamic trading patterns are analyzed. Then Timur Kuran’s, well-known economist, arguments about economic effect of Islam are stated.
And the last part reviews Islamic financial institutions. Statistics and Trends Level of economic development, whether measured by per capita income or variables like trade, literacy, science, scholarship and technology, has long been lower in the Islamic world than in Christian world, especially those of in West. Here is one empirical data that prove this situation with income per capita being a dependent variable. Table 1 is a regression model, which include 132 countries covered by the World Development Report for 1995, shows that relationship exists between Islam and per capita income.
In the first regression, independent variable is the share of Muslim within total population, this regression indicates statistically significant negative relationship between two variables, but its fit is poor. The second regression, which includes additional independent variable, has considerably better fit. Membership in OPEC turns out to be a significant contributor to income, and location in Subsaharan Africa a highly significant depressor. The Muslim share of population remains very significant negative determinant of income.
The model also reflects the fact that the African, South Asian, and East Asian countries with large Muslim minorities tend to be poorer than countries with Muslim majorities located in the Middle East. Table 1 The Relationship between Islam and Per Capita Income | (1)| (2)| Constant| 3. 33| 3. 55| Share Muslim| -0. 41***(-2. 57)| -2. 07****(-2. 87)| Square Share Muslim| | 1. 76**(2. 29)| OPEC Member| | 0. 42*(2. 20)| Susaharan Africa| | -0. 67*****(-5. 77)| R-squared| 0. 4| 0. 34| Notes: 132 countries were included in the regression. Asterisks *, **, ***, ****, ***** denote significance at the 0. 03, 0. 2, 0. 01, 0. 005, and 0. 0000 levels, respectively. Following charts show the Muslim share of global income and the share of global population. Income share is 5. 98 %, which is strikingly less than population share, which is 19. 22 %. According to this data we can assume that Muslims average income obviously lower than of non-Muslims. In most of the countries, where Muslims live in large numbers, are generally poorer. And few will deny this fact. To investigate how this outcome came up I will review the process of wealth creation and the role of Islam in this process. Figure 1 Economics of Wealth Generation
Level of income in an economy is related to the volume of goods and services produced. The amount of this production in the long term is determined by three factors: the availability and exploitation of natural resource; 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. Natural resource endowment of a country is a matter of circumstance, religion has nothing to do with availability of natural resource.
Islamic countries, especially those in the Middle East are very lucky to have oil wealth, the biggest contributor to Muslim economy. Physical resources however are man-made. The availability of these resources depends on accumulation of physical investment in building construction, purchase of equipment and 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 physical productive asset, what economists call “capital”, long process of planning, risk taking, vision and enterprise are required.
Arthur Lewis (1955, 105) argued in his textbook on economic growth: “Some religions are more compatible with economic growth than others. If religion stress upon material value, upon work, upon thrift and productive investment, upon honesty in commercial relations, upon experimentation and risk bearing, and upon equality of opportunity, it will be helpful to growth, whereas in so far as it is hostile to this 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 conductive to economic growth, while Islam is negatively associated. ” In comparison with people of other religion, 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 creation of capital is barely possible. Report clearly indicates that Islam sufficiently discouraging economic development in terms of physical resources. The same opinion had Daniel (19958, 405) who 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 very effective role in capital creation and obviously negative. So, if country’s aim was to develop, choice would ultimately get resolved in favor of ‘mechanization’. The third factor of production is human resource. This is not jus a matter of population. People need to be educated and trained in order to make use of the physical capital. Religion may play a role here too – possibly negative one.
To the question whether Islam contributed to shaping the educational system that limited curiosity and innovation Lewis (1982, 229) 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, 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 overwhelmingly illiterate Muslim population. The scene has not changed a lot in present days either, series of reports for United Nations pointed out that adult literacy rate barely topped fifty percent, which is disastrous for economic development. If there is no human resource who can tackle technology, machinery what are they needed for anyway?
The nature of progress is improvements in physical capital over time that deliver increased output for given amount of material and labor input – higher productivity. By labor meant highly educated and trained people, whom obviously lacks 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 is Saudi Arabia with 16%. This is reflection of cultural values regarding women in Muslim countries, values inseparable from religious values, which form following consequences. First, it decreases the overall income of country. If women were engaged in paid employment, increasing the labor force by 30%, 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 correspondingly per capita income growth rate. So, this Islamic wise about women contribute to relative poverty. Now, as we have obtained sufficient image on 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 to be poor at trading puzzles me because the founder of Islam, The Prophet Muhammad is believed to have been a merchant, and in one occasion he reportedly said, “The trustworthy merchant will sit I in the shade of Allah’s throne. It is especially puzzling that Muslim merchants, given that early Islamic thought harbor 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 (1981) suggests that trading patterns were influenced by the economic morality associated with Islam. The foremost objective of Muslims’ economic doctrine is to replace the individualistic economic morality with a communalist morality.
Which means Muslim do not support private ownership and income inequality, which is necessary to provide incentive 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 deal in Muslim world. Of course this is not the only reason for static trading pattern, 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 the business organizations, for which Kuran blames social customs and religious rules, i. . Islamic laws. He focuses on laws covering business partnership and inheritance practices. These, he argues, discouraged the emergence of modern industrial corporations. In medieval times, trading partnership was the leading form of the business in the Middle East. In Islamic partnership any individual partner could end the relationship at will, and even the most successful ventures were terminated on the death of partner. As a result of these rule, most businesses tended to be small and short-lived.
By the end of 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 which would do huge contributions to economy. The other thing, according to Kuran, which hindered business consolidation is inheritance customs. Quran dictated that if Muslim merchant died at least two-third 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 generally derived basing only on a history. One can argue that claims are just hollow claims as Adeel Malik, professor in University of Oxford, did.
But Kuran’s claims are sound and rational. In Western countries for instance giant corporations were vital part of economic engine, which fueled prosperity, and they didn’t have any rules slightly related to those of Islamic. This could mean that Kuran is right with his arguments and Muslims should pay a little attention to them and may be check up their rules and see whether it is compatible with modern economic and financial system. Islamic Banking While investigating Islamic economy, it is impossible to ignore their financial system.
Islamic economic doctrine on prohibition against riba, Arabic word which means “interest” or “usury”, is widely known. Muslim world convinced that conventional financial system is decadent, immoral and inequitable. However, in modern world, the one who is out of this system is out of economic advancement because financial institutions are the only monetary support for a 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 (2004 b:7), Islamic banks accounted for less than 17% of the share of commercial bank deposits in 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 very small number of Muslim countries. Shortage of banks is huge obstacle for new investments and emergence of any 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 scheme to circumvent such transactions because of their supposed immorality or due to their prohibition serve no purpose but 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 great influence on economy of Islamic world.
Basing on all finding I conclude that Islam was inconductive to economic development, or at least less supportive than was Christian dominant countries. Few Muslims appreciated the discoveries and innovation, which has been fatal cause for physical resource 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, moral hazard in 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 I the global economy and some of them succeeding.
Indonesia, for instance, in 2008 its inflation adjusted GDP per capita was five and half times what it was in 1990, in Malasia during the same period, it rose almost six fold. Just a generation ago, both of these nations were overwhelmingly rural and poverty stricken. Today, they are industrialized middle-income countries. May be some Islamic countries should follow the lead of Turkey, the country which was transformed into an economically vibrant democracy. Mustafa Kemal Ataturk, founder of Turkish Republic, in 1929 abolished the caliphate and imposed 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. 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 researches and surveys needs to be conducted to identify other possible problems of static economy of Muslim world and to provide empirical and statistical information on Timur Kuran’s arguments. References

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