Beruflich Dokumente
Kultur Dokumente
Sayyid Tahir*
ABSTRACT
This paper gives a blue-print of an Islamic economy. It spells out the nature of Islamic
macroeconomics, potential target variables and state of macroeconomic analysis from
the Islamic perspective. In this background, it draws attention to future data
requirements. It points out the need for some disaggregation in the existing National
Income & Expenditure Accounts. It calls for generation of new data sets for distribution,
zakah, wealth, profits and the self-employed. It also brings to fore the urgency of
theoretical work in Islamic macroeconomics.
Islam is a complete code of life. It expects its followers to abide by the Divine Guidance
in the Qur'an and the Sunnah of the Prophet SAAWS at the individual as well as
national levels. At present, no Muslim country can claim to represent the Islamic ideal.
However, all Muslim countries are striving in varying degrees to rediscover this ideal.
One can make a token contribution in this respect by giving a blue-print of an Islamic
economy and by identifying the type of data needed to carry out its economic analysis
at the macro level. By identifying some fresh data possibilities, this effort is likely to
have useful implications for contemporary macroeconomics. This exercise may also
help policy-makers and planners to define a course for Islamization.
This paper has three parts. Section I gives a blue-print of an Islamic economy.
Section II gives broad features of formal macroeconomic analysis for such an
economy. Section III looks at the ensuing data requirements for macroeconomic
analysis from an Islamic perspective.
Professor of Economics, International Institute of Islamic Economics, International Islamic University, Islamabad.
of the Prophet SAAWS and Khulafa-e-Rashideen (the rightly-guided caliphs).
Information about other independent Muslim states during the last fourteen centuries
also confirms that the Ummah has never been in doubt on this subject. The views
about a planned Islamic economy gained currency among some Muslim scholars only
during the colonial days, especially after the now defunct communism won a few
converts in the then Europe.
Notwithstanding its market character, the organized aspect of an Islamic economy
implies that government too will be a part of the scene. As to the nature of the
government's involvement in the economic domain, the following points are
noteworthy. First, as Wal Al-Amr and the Guardian of Islam, it will ensure the
establishment of ‘adl (justice) in the affairs of its subjects. This includes, among other
things, economic justice. The concept of Islamic economic justice will be wider in
scope than the narrow perceptions of equity in the distribution of income and wealth.
For example, it may take the form of penalties on transgressions of an economic
nature. Second, as the custodian of Islamic state, another major function of the
government will be the fulfillment of "critical minimum" or "absolutely essential" needs
of the poor and the destitute. Beyond these two basic functions, its role will be largely
adjudicative. However, the citizens may call upon the government to provide public
goods. But here too it will do the needful without embroiling in the economic life of the
state on permanent basis.
The rationale for Islamic macroeconomics may be traced to the Islamic world-view:
this life is a test. The standard of right and wrong is given in the form of the Ahkam of
Shari’ah in the Qur'an and Sunnah of the Prophet SAAWS. Thus, every action is either
Islamic or un-Islamic. This point provides both the rationale for the Islamic approach
and its broad features in all disciplines in social sciences and humanities, including
macroeconomics.
As for Islamic macroeconomics, one expects it to cover two broad areas. First, the
study of an Islamic economy per se. What might it be? How might it work? How might
it perform? What policies might be called for to ensure its smooth functioning and to
preserve its Islamic character in an otherwise un-Islamic world? Second, Islamization
of economies orchestrated on un-Islamic lines.
Modeling involves description with an eye on the prescription goal. Any model is
essentially an abstraction from reality──perceived reality in the case of an Islamic
economy. Modeling process may start with the goals of analysis. These goals may be
stated in terms of target variables. There may be some omissions──both in terms of
excluded variables and practical details in real life──in the process of abstraction. The
researcher would make due allowance for such omissions while drawing his
1
For details, see R. Dornbush and S. Fischer, Macroeconomics, Fourth Edition (New York: McGraw-Hill, 1988), an
intermediate level textbook.
conclusions. Furthermore, since description aims at prescription, policy instruments
may be suitably fitted into the model. Beyond these general considerations, one is
expected to be careful about mathematical requirements for modeling, such as
equality between the number of variables to be explained and the number of equations
at hand, independence and consistency of equations, solvability of the model and
stability of the solution.2 As noted earlier, the parameters for this exercise will come
from the Qur'an and Sunnah and Aathaar-us-Sahabah. Other useful input may be
derived from economic history of the Muslim states during the fourteen centuries.
At present, economies of virtually all Muslim countries are organized along the
capitalist lines. "Islamization" of these economies will also be on the agenda of Islamic
macroeconomics. For this purpose, one may develop models whose special case
would be either the Islamic or the un-Islamic construct. This would help to track the
implications of various policy options for Islamization.
The key to Islamic macroeconomics lies in the specification of target variables and
economic processes at work. Major variables in traditional macroeconomics were
listed in Section II.1. With the focus on economic activity during a given year, target
variables for an Islamic economy may be divided into three categories: (1) primary
variables or principal aggregates, (2) secondary or link variables which link up decision
making at various levels and affect the level of the primary variables, and (3) any other
variables which depend on the time frame of analysis (short-run versus long-run) or
are related to primary variables [Tahir (1987, p.315)].
Some of the primary variables would be as follows.
i. Aggregate output──the level of economic activity to see where the economy
stands in the global village in any given year.
ii. Aggregate income (the twin of aggregate output in value terms)──potential
purchasing power generated as the result of current economic activity.
iii. Overall price level──indispensable because aggregate output is primarily
defined in value terms but one may be interested in the "real" level of economic
activity.3
iv. Employment and self-employment to work out the level of unemployment and
dependence in the economy.
v. Poverty and economic disparities among the haves and have-nots.
2
Uniqueness of solution is an important consideration in solvability.
3
If one is interested in the determination of aggregate output in a market economy, demand and supply
considerations automatically become important. This also puts the price variable on the centre-stage.
Link variables would depend upon an Islamic economy's likely set-up. For example,
economic agents are expected to address resource shortages either through credit
sales or with the help of financial intermediation based on profit-and-loss sharing. The
former will give rise to spot-price versus credit-price distinction, while the latter would
mean replacement of the existing interest rate variable by a viable Islamic alternative.
Similarly, if one feels the need to continue with the existing macroeconomics tradition
of highlighting the labor market on the supply side, wage rate would also enter the
picture. Foreign exchange rate and balance of trade and payments may be additional
variables in an open economy context.
Among other variables in category 3, wealth and inflation may top the list. The
importance of wealth increases with the need to accommodate zakah in Islamic
macroeconomic models. Inflation becomes important because of its social costs. The
needs for other variables──such as distribution of wealth──may become clear once
the subject progresses. Of course, policy instruments──such as government
expenditure, taxes, monetary aggregates, etc.──need to be envisioned. Finally, if
macroeconomic analysis were carried out with the aim of identifying policies for
Islamizing an otherwise un-Islamic economy, variables like the rate of interest may
also become relevant.
With the demise of communism, the comparative analysis will be mostly in an Islamic
versus capitalist context. Generally speaking, Islamic and capitalist economies differ
with respect to their orientation and institutional set-ups. Therefore, on the apple
versus orange analogy, normally a direct comparison of their performance will not be
meaningful. Habibi (1987) and Tahir (1989) give examples of a theoretically correct
approach whereby the performance of the two types of economies can be compared
by constraining selected parameters values in the framework of a single model.
There is some empirical work on propositions about certain macroeconomic
aggregates in Islamic and un-Islamic milieus. Darrat (1988) and Zuberi (1992) worked
with the Sudanese and Pakistani data, respectively, on the money demand function.
Both studies, however, suffer from incorrect applications of data for the objectives of
those studies──an issue beyond the scope of this paper.
There is no doubt that Islamic macroeconomics is still a dream. Just a beginning has
been made on the theoretical front during the last few years. The current state of the
art indeed calls for focus on basic research in order to delineate broad contours of the
subject and to work out the agenda for further research. But this does not mean that
efforts on the statistical front be delayed. On the contrary, early data compilation
should substantially reduce the time required to establish Islamic macroeconomics as
a competing paradigm.
Expected data needs can be identified and necessary action initiated by recalling
two things: (1) the agenda of Islamic macroeconomics (Sections II.2 and II.3) and (2)
the focus of analysis or potential target variables (Section II.4). In so far as Islamic
macroeconomics is concerned with determination of aggregate output, income and
employment, most of the existing data compilation practices may continue, of course,
with some changes here and there. But one does expect special data compilation
efforts in order to address Islam's unique emphasis on distribution and interest-free
economy. Some details of the these points are explained under (i) distribution
statistics, (ii) zakah statistics, (iii) output and income statistics, (iv) financial statistics,
(v) manpower statistics, (vi) other statistics for an Islamic economy, and (vii) any other
data to address Islamization issues.
These statistics will be required partly for distributional considerations, as above, and
partly to meet the religious obligations of the Islamic state. The following data would
be necessary to track zakah flows in the economy.
1. Composition of output produced during a given year along sectoral lines. For
example, agricultural produce (separately for rain-fed and irrigated areas),
mining and rental income from property.
2. Business and industrial inventories of finished goods and intermediate inputs.
3. Separate zakah budget at the governmental level [Ahmad (1989,p.18)]
4. Distribution of zakah according to income-support or economic-rehabilitation
schemes.──While the latter would be a direct addition to disposable income of
the have-nots, only the latter would affect the proportion of income associated
with the current production process going to them.
At present, such data are available under National Income & Expenditure Accounts.
The expenditure data are in fact the value of current output of (final, not intermediate)
goods and services at market prices. Here one also comes across distribution of
output by type of use, such as personal consumer expenditure, investment,
government expenditure, exports.──Deduction of the value of imports becomes
necessary if the aforementioned aggregates have some imported components.
Recently emphasis has shifted from "national" product" to "domestic" product.
On the side of the existing income accounts, allowance is made for indirect
business taxes and depreciation charges in order to define national income. This is
followed by calculation of aggregate personal income and total personal disposable
income. With the deduction of savings and other non-personal consumption
expenditures from the disposable income aggregate, one arrive at personal consumer
expenditures in the economy.
So far, all output and income data are on an aggregative basis. Furthermore,
interest income and similar items are involved in the derivation of personal disposable
income.
As for macroeconomic analysis in an Islamic perspective, the following changes
would be necessary:
1. The logical place for introducing (personal) distribution considerations in
macroeconomic models, is the aggregate consumption function [Tahir
(1989,p.97)]. Accordingly, it is in the fitness of things to disaggregate the
existing personal consumer expenditure data along the rich and poor
consumers lines. Similarly disaggregation needs to be introduced on the
income and savings sides in the national accounts.
2. Like income from theft, which is not entered in national statistics, the position of
income from interest and other `haraam sources need to be reviewed.
Apart from these major points, the definition of the aggregate output variable would
need to correspond to the definition of the employment and self-employment
variable(s) in macroeconomic analysis.
The need for wealth statistics has already been mentioned in Section III.1. Here one
may add a few observations about the price data.
At present, macroeconomic analysis focuses on the current price level. This price
variable is in fact an aggregative price index defined as a weighted average of selected
prices in the economy. This practice may continue.
As mentioned in Section III.4, after the elimination of riba, there will also be direct
trading between the buyers and sellers on credit, subject the A`hkaam of Shari’ah.
This, in turn, implies that a spot-price versus credit-price distinction will emerge in an
Islamic economy. Thus, one may need to develop statistics on prices for
deferred-payment sales.
As one may guess, most of the existing data on public debt, interest rate and other
aggregate, especially the financial aggregates, may still be useful for macroeconomic
analysis from an Islamic perspective. However, caution would be necessary on the
choice of models and testing procedures. For example, if the aim is to use the existing
data on monetary aggregates to test interest sensitivity of money demand, one should
also build the existing interest-based money creation process into the model──a point
missed by both Darrat (1988) and Zuberi (1992).
4. CONCLUDING OBSERVATIONS
The Islamic tradition in the area of macroeconomics is still in the nascent phase. At this
stage, one can only use a broad brush to identify likely requirements for
macroeconomic analysis from an Islamic perspective.
The need for data also depends on the purpose of study and type of analysis that
one is anticipating. These considerations were deliberately avoided in this study. In
passing, one may mention that in the current phase of Islamic macroeconomics,
emphasis may be on simulations for hypothetical Islamic economies and tests of
hypotheses about various behavioural relations in an Islamic economy. The former
may necssitate additional exogenous information on parameters and pre-determined
variables in the models on hand. The latter, if done in a comparative Islamic versus
un-Islamic perspective, may even require penal data, not addressed in this paper.
Wa-Allaho a`alam.
BIBLIOGRAPHIC REFERENCES
4. Ahmad, Z. (1989) "Public Finance in Islam" IMF Working Paper No. WP/89/68.
9. Hasan, A. (1992) "Is Equity Financed Budget Deficit Stable in An Interest Free
Economy?" A paper read at The 3rd International Conference on Islamic
Economics (28th-30th January, 1992) held at International Islamic University,
Malaysia. (Typescript)
12. Khan, M.S. (1986) "Islamic Interest-Free Banking – A Theoretical Analysis," IMF
Staff Papers, 33(1), pp. 1-27.
13. ________ and A. Mirakhor (1987) "The Financial System and Monetary Policy in
an Islamic Economy" in M.S. Khan and A. Mirakhor (eds.) Theoretical Studies
in Islamic Banking and Finance (Houston, TX: The Institute for Research and
Islamic Studies)
15. Mahdi, S. Iqbal and S.M. AlAsly (1987) "A Model of Interest-Free Islamic Economy"
in F.R. Faridi (ed.) Essays in Islamic Economic Analysis (New Delhi: Institute of
Objective Studies, 1991, pp. 52-66).
17. Mirakhor, A. and Zaidi, I (1987) "Stabilization and Growth in an Open, Islamic
Economy" in A. Ahmad and K.R. Awan (eds.) Lectures on Islamic Economics
(Jeddah: Islamic Development Bank, 1992, pp. 395-417).
22. Zuberi, H.A. (1992) "Interest-Free Banking and Economic Stability," Pakistan
Development Review, 31(4, Part II), pp. 1077-87.