Economic Growth in the Muslim World How Can USAID Help?

Bureau for Policy and Program Coordination
June 2004
PN-ACY-101
ISSUE PAPER NUMBER 3


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Cover graphic currency: left row, top to bottom: Indonesia, Afghanistan, United Arab Emirates, Jordan; right row, top to bottom, Lebanon, Pakistan, Iraq,
Saudia Arabia.Economic Growth in the
Muslim World
How Can USAID Help?
Peter Timmer
Development Alternatives, Inc.
and
Center for Global Development
Donald McClelland
U.S. Agency for International Development
Bureau for Policy and Program Coordination
June 2004Contents
Executive Summary 1
Economic Growth in the Muslim World:
How Can USAID Help? 5
Introduction 5
Overview of the Islamic World 9
Muslim and Non-Muslim Countries:
Key Comparisons 11
Islam and Economic Growth 15
Key Issues Facing Muslim Countries 19
Conclusions and Policy Recommendations 23
Annex 1. Countries in the Muslim World 25
Annex 2. Agrarian Economies and
Oil Producers 27
Annex 3. Indonesia and OPEC:
Two Case Studies 29
Annex 4. Statistical Characteristics of
Muslim Economies 31
Annex 5. The Status of Women in
Muslim Countries 37
Bibliography 41iv Issue Paper Number 3
Tables
Table 1. GDP Per Capita Growth Rates in Muslim and
Non-Muslim Countries, 1990–2000 12
Table 2. The Status of Women in Muslim Countries 13
Table 3. Female Clients of Microfinance Institutions
by Number and Quality of Portfolio 14
Table 4. Structural Characteristics of Islamic Countries, 2000 31
Table 5. Per Capita Income in Muslim Countries 33
Table 6. Population Growth (1990–2000) and
Age Structure (2000) in Muslim Countries 34
Table 7. The Status of Women in Muslim Countries 37
Table 8. Female Clients of Microfinance Institution in the Muslim World by Number and
Quality of Portfolio 39Executive Summary
The long-standing debate over the impact of
religion on economic growth—particularly
the current debate over the impact of
Islamic thought on the economic prospects of
Muslim countries—parallels similar debates over
the impact of Catholicism, Hinduism, and other
religions. These debates have not had much impact
on development practice, partly because of their
inconclusive nature.
The issue addressed in this paper is whether Islam,
as the “religion of practice” in a wide range of
countries, poses serious problems for economic
growth or whether the undeniably poor economic
performance of many Muslim countries stems from
sources unrelated to Islamic theology and practice.
Recognizing the tension between progressive and
moderate practitioners of Islam and their funda-
mentalist challengers—a tension that often spills
into the political arena—the paper concludes that
most Muslim countries face very difficult gover-
nance issues that have impeded rapid economic
growth
Why do Muslims tend to be relatively poor? The
facts are undisputed: Muslims make up 19 percent
of the world’s population but earn only 6 percent
of its income. The issue is whether there are any
causal relationships between religion and economic
development. Many scholars suggest that religion is
typically not a problem, pointing out that Islamic
beliefs and values that appear inimical to growth
(e.g., the ban on interest and restrictions on specu-
lation) are routinely circumvented. The corporation
is now an acceptable and popular organizational
form in most Muslim countries. Insurance con-
tracts are legally enforceable. Banks are integral
components in every Muslim country’s economy.
And contracts involving interest payments are com-
monplace, although payments are sometimes dis-
guised as commissions or fees.
Others believe there are deeper problems.
Characterizing an Islamic economic system—
“Islamic economics”—as a middle ground between
capitalism and socialism, they cite the Koran’s
overriding emphasis on the need for social justice;
rejection of severe economic disparities; condem-
nation of economic exploitation, usury, and dis-
honesty; call on well-to-do individuals to use part
of their wealth to help the poor and support vari-
ous charitable endeavors; and repeated expressions
of concern for those least capable of defending
themselves against poverty. Despite the Koran’s
emphases, proponents of Islamic economics argue
that it can effectively promote both economic
development and social welfare in predominantly
Muslim countries.
It seems clear that the economic institutions Islamic
law prevented—corporate law, banks, stock mar-
kets, modern firms, insurance—are all integral parts
of most economies of the Muslim world. As a
result, economic policy reforms needed to acceler-
ate economic growth in the Muslim world could be
adopted without having to confront Islam as a reli-
gion. Although Islam harbors elements inimical to
economic productivity and efficiency, these have
not formed an absolute barrier to economic
growth. In fact, Noland’s recent analysis (2003) of
India, Malaysia, and Ghana provides empirical evi-
dence that there is no consistent, systematic rela-
tionship between economic growth and the share of
a country’s population practicing Islam. He con-
cludes that the impact of Islam on short-run eco-
nomic performance is as diverse as Islam itself.
The Islamic world is diverse:
■ It consists of 48 countries where at least 50 per-
cent of the population is Muslim. These coun-
tries of the Muslim world are concentrated in
the Middle East and North Africa, Europe and
Economic Growth in the Muslim World 1Eurasia, South and East Asia, and sub-Saharan
Africa. Muslim Arabs constitute about 25 per-
cent of the world’s 1.2 billion Muslims.
■ It also includes several countries with a signifi-
cant Muslim minority. India is the most promi-
nent, with over 125 million Muslims (12 per-
cent of the population), but Kazakhstan and
Uganda, for instance, have substantial Muslim
minorities. Even France: 10 percent of the
French population is Muslim.
■ Muslim countries are both rich and poor. In
2001, per capita income ranged from a low of
$100 in Ethiopia to a high of $18,270 in
Kuwait. The World Bank categorizes 22 coun-
tries as “low-income,” with a per capita income
of $745 or less.
■ Muslim countries tend to be poorer than non-
Muslim countries. In 2000, average per capita
income in 70 non-Muslim countries in five geo-
graphic regions was $5,987. This was nearly
twice as high as the $3,375 in 37 Muslim coun-
tries. Of course, these averages mask substantial
differences across regions and religious groups.
■ Of the Muslim countries reporting data, 21 are
agrarian (at least 50 percent of the labor force
employed in agriculture); many of these coun-
tries are in Africa. There are 22 oil producers,
many located in the Middle East and North
Africa. The average per capita income of the oil
producers ($5,233) is four times higher than
that of the agrarian countries ($1,272).
■ Gross domestic product (GDP) during the
decade 1990–2000 grew more slowly, on aver-
age, in Muslim countries (2.02 percent) than in
non-Muslim countries (2.22 percent). These
averages also mask significant differences among
geographic regions, individual countries, and
different time periods.
■ Muslim countries are generally poorer than non-
Muslim countries. Their long-term economic
problems point to deep-seated failures to estab-
lish the core elements that support modern eco-
nomic growth. The list of the elements is not
long, but it is basic: provision of public goods
and social infrastructure, a stable macroeconom-
ic environment, and a business climate con-
ducive to growth. Why do governments fail to
provide these essentials of growth? And specifi-
cally, why are Muslim countries so much worse
at doing so than others?
Several factors may hamper economic growth in
the Muslim world. These include a social system
that values “unchangeability” and thus has a dimin-
ished capacity for adaptation and innovation; an
emphasis on communalism rather than individual-
ism; a reduced role for public discourse, inhibiting
individuals from questioning; an educational sys-
tem that may limit curiosity; Islamic economics,
which forces economic decisions to pass through an
ethical or moral Islamic filter; poor economic poli-
cy; a difficult geographic “neighborhood”; women’s
inferior position in society; and culture.
What Is USAID to Do?
What can be done to improve incomes in Muslim
countries and help them move forward? It seems
clear that any prescription requires dual reforms—
in governance and economics. In the case of eco-
nomics, over the next 5–10 years several relatively
tractable opportunities appear to offer scope for
important interventions in partner countries, with-
out challenging Islamic governance or orthodoxy.
■ Economic policies. Analysis shows that govern-
ment intervention in the domestic economy,
which tends to hamper economic growth, was
significantly greater in Muslim countries than in
non-Muslim countries. Moreover, international
trade was significantly less important in Muslim
countries than in non-Muslim countries.
Promoting increased economic openness and
trade reforms should bring faster growth with-
out challenging Islamic principles. Indeed, the
Koran, in support of private property rights and
in defense of trade among equal partners, would
seem to favor such reforms.
■ Banking system. In many Muslim countries, the
banking system’s extraordinary inefficiency
inhibits it from allocating national savings to
their most productive uses. Savings allocation is
2 Issue Paper Number 3often unproductive and wasteful, in part
because an unusually high proportion of total
investment occurs in the public sector. Sala-i-
Martin and Artadi (2003) conclude that “with-
out proper channeling of savings into produc-
tive and efficient investment, economic growth
is impossible.” Thus, basic financial reforms,
especially introducing more competition into
the domestic banking system, could have sub-
stantial payoff, again without challenging basic
Islamic principles.
■ Social safety nets. Approaches to poverty reduc-
tion tend to focus on public sector activities.
In Muslim countries, however, there is a wide-
spread network of private charities that are
enjoined by the Koran to share wealth among
the poor. These private charities may offer
additional approaches to poverty reduction
by providing important social safety nets for
the poor, especially in times of significant
economic reform.
■ Women’s roles. The status of women in Muslim
countries, as measured by employment, educa-
tion, health, and political participation varies by
region. For example, women’s participation in
the labor force in Muslim countries in Europe
and Eurasia (E&E)
1
and East Asia (EA)
2
is very
close to that of EMU3
countries, used as a proxy
for the Western norm (see Table 2). On the
other hand, their participation is much lower in
the Middle East and North African and South
Asia than in EMU countries. The ratio of
female to male literacy rates in Muslim
countries in E&E (97 percent) and in EA
(99 percent) indicates near parity between men
and women. However, these rates are lower in
Muslim countries in other regions.
Health in Muslim countries, as measured by life
expectancy, is lower in all regions than in EMU
countries. However, political participation, as
measured by the proportion of female seats in
parliament in Muslim countries, is higher than
in OECD countries in all regions except for the
Middle East and Northern Africa.
In many countries, broader roles are evolving
for women. In Muslim countries worldwide,
women constitute 55 percent of total borrowers
in microfinance institutions, which compares
favorably to the 59 percent found across all
countries (see Table 3).
However, in regions and countries where the
status of women is lower (the Middle East and
North Africa and South Asia), it is often the
result of legalized discrimination, such as laws
that prohibit women from participating in
public life or competing in the labor market.
In those countries, USAID must show cultural
sensitivity to Islam when implementing
programs to support women.
Donor programs and policies should focus on these
areas. Specific areas of intervention will, of course,
depend on each country situation: no one blueprint
applies to all.
Economic Growth in the Muslim World 3
1
E&E region (see Annex 1 for a listing of countries).
2
EA region includes the Pacific (see Annex 1 for a listing of
countries).
3
Economic Monetary Unit is defined as EU members excluding the
United Kingdom and is used as a proxy for the Western norm.Economic Growth in the Muslim
World: How Can USAID Help?
Introduction
Although much of the recent flurry of
research and writing on the economics of
religion by mainstream academics has been
motivated by concerns about links between Islam
and terrorism, there is also a long-standing debate
over the impact of religion on economic growth.
Starting with Max Weber’s attribution of the
Industrial Revolution to the Protestant ethic, schol-
ars have seen in religious thought both barriers and
inducements to the economic behavior that is nec-
essary to achieve rapidly improving living stan-
dards. Usually, the arguments are cast in terms of
cultural modes of thinking: rational versus mystical,
inquisitive versus received wisdom, and self-expres-
sion versus authority.
From this broad historical perspective, the current
debate over the impact of Islamic thought on the eco-
nomic prospects of Muslim countries parallels similar
debates over the economic impact of Catholicism,
Hinduism, Buddhism, and Confucianism. An excel-
lent review of this debate is provided by Noland
(2003). Noland also presents important new econo-
metric evidence on the impact of religion, especially
Islam, on economic performance.
The debates over the impact of religion on eco-
nomic affairs have not had much impact on devel-
opment practice because of their inconclusive
nature, a finding supported by the new research
reported by Noland and by Barro and McCleary
(2002). Although the recent research tends to focus
on relatively short-run effects that show up in mod-
ern time series data, there is also a longer run
dimension that involves the interaction of econom-
ic forces and institutional change. From this longer
run perspective, in nearly all cases, the dominant
religion of a country has seemed ultimately flexible
in the face of prospects for rapid economic growth
and the behavior needed to realize those prospects.
Fundamentalist Islamic groups seem to be mount-
ing political challenges to mainstream flexibility in
a wide range of Muslim countries. An issue
addressed in this paper is whether Islam, as the
“religion of practice” in these countries, poses seri-
ous problems for economic growth or whether the
undeniably poor economic performance of many
Muslim countries stems from sources unrelated to
Islamic theology and practice. This paper argues
that the tension between progressive and moderate
practitioners of Islam and their fundamentalist
challengers often spills into the political arena.
In many countries where this challenge is being
mounted, there are few mechanisms for open
political expression (perhaps a reason for their poor
economic performance), so the political challenge
is posed as a religious challenge. And precisely
because secular governments try to suppress
radical religious challenges, violent means, includ-
ing terrorism, may be used. The result is serious
instability in societies facing these challenges,
and instability is a major impediment to good
economic performance.
The bottom line is that most Muslim countries
face very difficult governance issues that have
impeded rapid economic growth. This poor per-
formance is then the cause, rather than the effect,
of the resurgence of political Islam (now com-
monly termed Islamism), but this political chal-
lenge undermines economic performance even
more because of the uncertainty and instability it
creates. The first link in this causal chain, from
poorly performing economies to religious chal-
lenge, has been tested recently for Indonesia by
Chen (2003): Despite the difficulty of finding
quantitative measures of religious intensity,
Chen shows a statistically and economically
powerful relationship between loss of income
during the crisis and time spent studying the
Koran or willingness to place children in Islamic
Economic Growth in the Muslim World 5schools. The underlying theoretical rationale
for such effects is that demonstrated religious
intensity is a form of social insurance for families
because of the role of mosques and Islamic
charities in helping the poor.
The key insight from this general introduction is
the two-way interaction between economic per-
formance and political governance, and how the
internal dynamics of Islamic thought contribute to
that interaction. To illustrate that Islam per se is not
the basic issue, Noland (2003) cites approvingly
from Lal (1998)
But there are important instances (post-Ataturk
Turkey, modern Egypt, and most important,
major outposts of Islam in Southeast Asia,
Malaysia and Indonesia) that show that it is not
Islamic beliefs in themselves that have hindered
development but dysfunctional étatism and
dirigisme, which, when reversed in the Muslim
parts of Southeast Asia, have delivered
Promethean intensive growth (66).
What Key Thinkers Say about Islam
and Economics
This perspective on the interaction between eco-
nomics and governance, especially in Muslim
countries, examines why Muslims tend to be rela-
tively poor. The fact itself is not disputed:
Muslims make up 19 percent of the world’s popu-
lation but earn only 6 percent of its income.
Another issue is whether there are any causal rela-
tionships between religion and economic develop-
ment and, if so, what is the direction of causation?
As noted, there is suggestive evidence that the eco-
nomic fortunes of Muslims have nothing to do
with Islam per se. The scholars who make this
argument point out that Islamic beliefs and values
that may appear inimical to growth (e.g., the ban
on interest and restrictions on speculation) have
routinely been circumvented. Others believe there
are deeper problems.
Kuran (1997b) makes four observations on the
nature of Islamic civilization based on his reading
of the literature.
■ Unchangeability. Islam stands for unchangeabili-
ty, and it defines and promotes a social system
lacking capacity for adaptation, according to a
frequently expressed view of Western scholars
and secularist movements across the Islamic
world. This explanation emphasizes that religion
(Islam) is an obstacle to free thinking and inno-
vation. The implication is that one must choose
either “Mecca or mechanization” because the
two are not compatible.
■ Communalism. Islamic civilization remained
largely communalist even as Western Europe
turned increasingly individualist, and commu-
nalist norms dampened incentives to develop
capitalist economic institutions. Western thought
espouses a strictly individualist economic morali-
ty, which encourages people to pursue their own
ends without having to consider their social con-
sequences, but a communalist morality focuses
attention on collective needs.
■ Public discourse. Islamic societies have reduced
the role of public discourse, discouraging indi-
viduals from questioning. The relative openness
of public discourse in the West helped create an
engine of growth that the Muslim world failed
to develop. New ideas tend to emerge in envi-
ronments hospitable to free inquiry and experi-
mentation. If it is risky to put forth new ideas,
they will not be expressed.
■ Education. Some argue that Islam helped shape
an educational system that limited curiosity and
innovation. Traditional education, in turn,
played a critical role in conditioning individuals
to accept the social status quo. The impetus for
changing any part of the educational curriculum
came largely from abroad.
Kuran (2003) identifies the absence in Islamic law
of the concept of a corporation and two institu-
tional bottlenecks that once seriously hampered
economic growth in the Muslim world: the Islamic
law of inheritance, which inhibits capital accumula-
tion, and the waqf system, which locks vast
resources into unproductive organizations designed
to deliver social services.
6 Issue Paper Number 3■ Inheritance law. Under Islamic inheritance law,
two-thirds of any estate must be divided among
a potentially long list of relatives according to a
complex set of rules. This had the effect of lim-
iting the concentration of wealth, made it diffi-
cult to keep successful enterprises or other prop-
erty intact over generations, and created an
incentive for keeping partnerships small. The
system’s net effect was to fragment property,
especially financial wealth.
■ Waqf system. The waqf system helped circum-
vent inheritance regulations, especially for
wealthy individuals. A waqf is established by
turning immovable private property into an
endowment to support any social service per-
missible under Islamic law, such as a mosque,
school, lighthouse, or orphanage. The person
establishing the waqf could appoint himself as
its trustee and manger, pay himself a salary,
appoint family members to salaried positions,
and designate a single child as successor. In
return for this enhanced material security, the
founder supplied social services, thereby unbur-
dening the state of supplying these services.
Although the waqf system partly got around the
problem of fragmenting wealth, the waqf was
not a corporation. It had no legal status as an
organization, and because its functions were
fixed in perpetuity, it could not change. For
example, if new technologies made it optimal to
operate on a large scale, small waqfs could not
merge to pool resources. Indeed, the waqf sys-
tem locked resources into uses that were decided
centuries earlier, and many once-beneficial
waqfs became dysfunctional.
These institutional obstacles to economic growth
were largely overcome through radical reforms initi-
ated in the 19th century. The corporation is now an
acceptable and popular organizational form in most
Muslim countries. Insurance contracts are legally
enforceable. Banks are integral components of every
economy. And contracts involving interest payments
are commonplace, although the payments are some-
times disguised as commissions or fees.
However, traditional Islamic law’s lasting conse-
quences are still manifested by the weaknesses of
the private sector and deficiencies of human capital,
and were exacerbated by state-centered develop-
ment programs in many Muslim countries.
4
Lewis (2002) points out that by all standards that
matter in the modern world—economic develop-
ment and job creation, literacy and education, sci-
entific achievement, political freedom, and respect
for human rights—Islamic civilization has fallen
behind. However, this was not always the case.
Islamic societies in the past were pioneers in science
and economic development. In fact, for hundreds
of years before 1400, Islamic civilization was
among the most advanced in the world.
Seeking to find out what went wrong, Lewis cites
two diametrically opposed, yet widely supported,
answers. The first attributes the lack of economic
progress to the abandonment of Islam. Those who
subscribe to this view (manifested by the Iranian
revolution and fundamentalist movements and
regimes in various Muslim countries) advocate the
return to pure Islam as practiced in the past. The
second argues that present-day problems are due to
the past and thus, remedies cannot be found in a
return to the past or in Islamic fundamentalism.
Those who subscribe to this latter view advocate
secular democracy, as illustrated by the Turkish
Republic proclaimed by Ataturk in 1923.
Lewis offers two explanations for “what went
wrong.”
■ First, economic progress, at least in the West, is
associated with the separation of church and
state and a civil society governed by secular laws.
■ Second, lack of economic progress in the
Muslim world is due in large part to the relega-
tion of women to an inferior position in society,
Economic Growth in the Muslim World 7
4
It is worth noting that the corporation, with the legal rights of a “fic-
titious,” infinitely-lived person to have a major impact on Western
economic growth. The modern corporation emerged from church and
guild organizations in medieval Europe in the 12th
century and started to evolve formal legal status, at least in England,
in the late 16th century.thereby depriving the Islamic world of the
talents and energies of half its people.
Lewis suggests that these two factors, secularism
and feminism, will play a major role in shaping the
Muslim world of the future. He also suggests that
lack of freedom—freedom to inquire and speak,
freedom from corrupt and pervasive economic mis-
management, freedom of women from male
oppression, and freedom from tyranny—underlies
many of the troubles of the Muslim world.
Sachs’s worldwide examination (2000) of why some
countries are rich and some are poor explored the
role of economics and politics, geography, and cul-
ture. His principal conclusions include the follow-
ing:
■ Economic policy (essentially, whether a country
is capitalist or socialist) affects economic growth
rates.
■ Geography matters. Temperate and snow-zone
countries, those with coastlines, and those free of
malaria grow more rapidly than other countries.
■ Culture, if a determinant of economic growth, is
subsidiary to geography and the political and
economic dimensions. For example, culture may
play a role in explaining the underperformance
of Islamic societies in North Africa and the
Middle East and the strong performance of East
Asian countries that have an important overseas
Chinese community—but economic policy and
geography are paramount.
A country cannot alter its geography, nor can it
much change its culture in the short run. A coun-
try can, however, modify its economic policy envi-
ronment and political arena, although these modifi-
cations are also conditioned by the “hysteresis” of
path dependency and inherited institutions.
Sirageldin (1995) compares “Islamic economics” to
capitalism and socialism. Suggesting that market
capitalism is an economic system where the values
that matter can be measured in terms of money,
capitalism seems indifferent to many of the social
ills often associated with a free market. Conversely,
socialism is an economic system where individual
motivation and the drive for personal achievement
are highly constrained. Islamic economics attempts
to balance individual freedom and motivations and
social obligations. It forces economic decisions to
pass through an ethical or moral Islamic filter. It
“tames” the market mechanism, minimizing its
potential negative externalities, such as severe
inequalities, degeneration of social values, spread of
crime, and human alienation.
Management Systems International (MSI), like
Sirageldin, characterizes an Islamic economic sys-
tem as a middle ground between capitalism and
socialism (2002, 20). MSI highlights the Koran’s
overriding emphasis on the need for social justice;
rejection of severe economic disparities; condemna-
tion of economic exploitation, usury, and dishon-
esty; call on well-to-do individuals to use part of
their wealth to help the poor and support various
charitable endeavors, and repeated expressions of
concern for those least capable of defending them-
selves against poverty.
The issue, according to Sirageldin, is whether an
Islamic society that adheres to Islamic economics
can compete favorably with other economic sys-
tems in a highly competitive global environment
characterized by accelerating technological change
while maintaining an Islamic ethical system.
Pfeifer (2001) studied the performance of 15
Egyptian firms, seven Islamic and eight non-
Islamic. The factor that most clearly distinguishes
the two groups is that the owners/managers of all
seven Islamic firms indicated that their firm never
borrowed (or lent) at interest. By contrast, all eight
non-Islamic firms had outstanding loans at interest.
The study found that the non-Islamic firms had a
significantly higher average rate of profit. The
Islamic firms paid a significantly higher average
wage, suggesting that cultural institutions shape
economic behavior even in a market economy. All
eight non-Islamic firms employed some women;
four of the seven Islamic firms had a policy of not
employing women. Of course, the small size of the
sample suggests caution in reading much statistical
significance into the results.
8 Issue Paper Number 3Proponents of Islamic economics argue that it can
effectively promote economic development and
social welfare in predominantly Muslim societies.
However, Islamic economics prescribes certain rules
of behavior for Islamic firms. These rules include
precepts, such as hiring “the best and most faith-
ful,” paying fair wages enabling workers to support
their families, and being responsible for the health
and other basic needs of their employees. Thus,
lower profit rates in Islamic firms may result from
pursuit of the social objectives that Islamic eco-
nomics exhorts.
What should we conclude? According to Kuran
(2003, personal communication), there is good news
and bad news. The good news is that the economic
institutions Islamic law proscribes—corporate law,
banks, stock markets, modern firms, insurance—are
all integral parts of most economies of the Muslim
world. Therefore, economic policy reforms needed
to accelerate economic growth in the Muslim world
could be adopted without having to confront Islam
as a religion. Although Islam harbors elements inim-
ical to economic productivity and efficiency, these
have not formed an absolute barrier to economic
growth. The bad news is that even if all the bad poli-
cies of government were to disappear today, strong
private sectors and civil societies could take decades
to develop. In addition, it is still necessary to take on
Islamism (and Islamists) who want to set back the
clock; for example, Islamists who object to insurance
markets and interest-based banking. The fundamen-
talist challenge must be met if Muslim countries are
to sustain economic growth. The issue is how to
stimulate the appropriate economic policy reforms
within the constraints of each country’s Islamic
political economy. That task requires a much more
nuanced view of the Muslim world.
Overview of the Islamic
World
The Muslim world is extensive and diverse, com-
prising 48 countries where at least 50 percent of the
population is Muslim. It extends from West Africa
(Morocco and Mauritania) to East Asia (Indonesia).
The larger Islamic world includes several countries
with a significant Muslim minority. India is the
most prominent of these countries with a Muslim
minority of over 125 million people (12 percent of
the population). Others include Kazakhstan, with
almost 8 million Muslims (47 percent of the popu-
lation), and Uganda, with almost 4 million Muslims
(16 percent of the population). In France, nearly 6
million people are Muslim (about 10 percent of the
French population).
Key Geographical Distinctions
The 48 Muslim countries (Annex 1) are concen-
trated in five geographic regions: the Middle East
and North Africa (18 countries); Europe and
Eurasia (7 countries); South Asia (4 coutries); East
Asia and the Pacific (3 countries); and sub-Saharan
Africa (16 countries). There are no Muslim coun-
tries in North America, South America, or Western
Europe. The Arab world consists of the 22 coun-
tries that form the Arab League. Arab countries are
defined as countries where the population speaks
Arabic. Muslim Arabs constitute about 25 percent
of the world’s 1.2 billion Muslims.
The top five Muslim-country recipients of USAID
economic assistance over the five-year period
1997–2001 were Egypt, Jordan, West Bank/Gaza,
Indonesia, and Bangladesh. In 2002, Pakistan and
Turkey were among the top five recipients;
Indonesia and Bangladesh were not, though they
were still among the top 10. The top five recipients
of USAID assistance per capita in 2002 included
Albania, Kyrgyzstan, Egypt, Jordan, and West
Bank/Gaza.
Structural Characteristics and
Resource Endowments
Of the Muslim countries reporting data (Annex 2),
21 are agrarian (at least 50 percent of the labor
force employed in agriculture). Most are in Africa,
but some are in South and Southeast Asia
(Indonesia, Bangladesh, and Pakistan), Eurasia
(Afghanistan and Tajikistan), and the Middle East
(Yemen). The average per capita income of these
agrarian countries, $1,272, is much lower than that
of nonagrarian countries, $5,594. This is not sur-
prising in view of the regularities of the structural
transformation (Timmer 2002).
Economic Growth in the Muslim World 9Twenty-two Muslim countries are oil producers,
many of them located in the Middle East and
North Africa. Any connection between oil riches
and Islam must be coincidental, as the religion was
well established in these countries before oil became
a valuable resource. Any connection between Islam
and the poor governance and economic perform-
ance that often accompanies oil resources is similar-
ly coincidental because these powerful political
economy effects are seen in many oil producers,
Muslim and non-Muslim alike.
As expected, the average per capita income of oil
producers, $5,233, is higher than that of nonoil
producers, $2,108. Indonesia, Nigeria, Sudan, and
Yemen are both agrarian and oil producing, and all
four are quite poor. Nine countries are neither
agrarian nor oil producing. Only Turkey and
Malaysia can properly be described as industrial.
Annex 3 summarizes two case studies of agrarian
and oil-producing Muslim countries. Indonesia,
despite its problems, is a success story that may
suggest “what to do” in other Muslim countries
whose economies are predominately agricultural.
The experience of the Middle Eastern OPEC coun-
tries may provide insights on “what not to do.”
These case studies may be instructive for designing
growth strategies for the Caspian republics, which
have rich oil and natural gas reserves.
Table 4 (Annex 4) summarizes key structural char-
acteristics of the Muslim economies. The agrarian
economies tend to be concentrated in Africa, where
agriculture contributes, on average, over 30 percent
of gross domestic product (GDP). This includes
five countries where agriculture contributes over 40
percent. The services sector’s contribution ranges,
on average, from 38 percent of GDP in East Asia
and the Pacific (with only two reporting countries)
to 53 percent in the Middle East and North Africa.
The average contribution of industry is weakest (22
percent) in Africa and strongest (49 percent) in
East Asia and the Pacific. Of course, these regional
averages mask significant country differences.
If the diversity of Muslim countries is taken into
account, is there anything left to explain their
poverty or poor record of economic growth?
Noland (2003) suggests not. His best econometric
model, explaining growth for 78 countries from
1970 to 1990, incorporates the standard growth
variables but shows no correlation between eco-
nomic growth and the share of population practic-
ing Islam.
5
His conclusion is notable and provoca-
tive: “Some commentators have claimed that
Islam is inimical to growth. In general this is not
borne out by the econometric analysis at the cross-
country or within-country level” (26).
The Political Economy of Islam
Khan (1999) zeros in on the crux of the issue, ask-
ing how would one know what an Islamic economy
looks like if there has never been one. He draws a
sharp distinction between Islamic countries as politi-
cal entities, of which there are many, several with
very deep historical roots, and Islamic economies,
where historical experience is thin. The examples of
the latter usually cited—Afghanistan under the
Taliban, Iran under the Revolutionary Council of
Ayatollah Khomeini, and Sudan under Hassan al-
Turabi—certainly give cause for concern that
Islamism can be a vehicle for economic growth and
improved standards of living. According to MSI
(2002), the reason seems deeply rooted in the
nature of Islam:
First, economics is, at best, of secondary impor-
tance to Islamists. It does not feature prominent-
ly in their political agenda, or in the books, arti-
cles and pamphlets that emanate from Islamist
circles. Islamist thinkers, politicians, and activists
are clearly far more concerned with matters of
morality, ethics, and piety than with economic
questions. Some even express contempt for eco-
nomics. As Ayatollah Khomeini once remarked
when pressed to address economic issues, “the
revolution is about Islam, not about the price of
melons.” Islamism is driven first by culture (the
search for a “moral order,” consistent with God’s
will for mankind, as revealed in the Koran) and,
second, by politics (the quest for controlling the
levers of power that will make it possible to
establish that moral order). Economic concerns
are far less central to Islamist thinking and strate-
10 Issue Paper Number 3
5
Intriguingly, the correlation for “Catholic” and “Protestant” are sig-
nificantly negative (Noland 2003, table 2).gizing; they come well after cultural and political
objectives (19).
To understand the impact of Islam on economic
growth in Muslim countries, it is necessary to
understand this challenge from Islamism and the
links between economics and politics (economic
governance). Although it is probably fair to say
that Islam per se is not a significant impediment
to improved economic performance in any
Muslim country (Annex 1), it can be a contribut-
ing factor. According to Jabber (2002), poor eco-
nomic performance in so many of these countries
is one of the three basic causes of widespread
alienation of the populations of Muslim coun-
tries from their governments.
6
This alienation in
turn supports fundamental Islamism, which is
the main challenge to political authority in
Muslim countries. And Islamism’s political chal-
lenge—often using violent means—undermines
the basic economic environment needed to
improve investment returns and to stimulate
higher standards of living.
From this perspective, analyses of what went
wrong economically in the Muslim world have
focused on immediate or proximate causes,
rather than deep and fundamental causes. Abed’s
review (2003) for the IMF of the Middle East
and North Africa region, for example, provides
an extensive litany of policy failures and poor
governance as the reasons for their “unfulfilled
promise.” Islam is not mentioned even once as a
factor associated with these problems. Similarly, a
USAID review of lessons learned from USAID
and other donor experience in providing eco-
nomic assistance to selected Islamic countries
never mentions Islam as a contributing factor to
the success or failure of the ten specific projects
reviewed. Moreover, neither the IMF nor the
USAID review provides guidance on how to fix
poor policies or improve governance, when both
may well be held hostage to the political chal-
lenge from fundamental Islamists. Specific
actions for possible support by USAID are iden-
tified at the conclusion of this report.
Muslim and Non-Muslim
Countries: Key Comparisons
Economic Performance
Muslim countries are both rich and poor (Annex 4,
Table 5). In 2001, for the 37 Muslim countries
reporting data, per capita income ranged from a
low of $100 in Ethiopia to a high of $18,270 in
Kuwait. The World Bank categorizes 22 as low-
income (per capita income of $745 or less) (World
Bank 2003).
Muslim countries tend to be poorer than non-
Muslim countries. In 2000, average per capita
income in the 70 non-Muslim countries located in
the five geographic regions was $5,987, nearly
twice as high as the $3,375 in the 37 Muslim
countries. Of course, averages mask substantial dif-
ferences across regions and religious groups: in
South Asia, for example, average per capita income
in the three Muslim countries was higher, $2,563,
than in the four non-Muslim countries, $2,153.
But in each of the other four geographic regions,
average per capita income was higher in the non-
Muslim countries (World Bank 2003).
GDP during the decade 1990–2000 grew more
slowly, on average, in Muslim countries, 2.02
percent, than in non-Muslim countries, 2.22 percent
(Table 1). These averages mask significant differences
among geographic regions. In Africa from 1990 to
2000, for example, average annual GDP growth was
substantially lower in Muslim countries, 1.88 per-
cent, than in non-Muslim countries, 3.03 percent.
But in East Asia and the Pacific, the average growth
rate was higher in Muslim countries (5.46 percent)
than in non-Muslim countries (3.59 percent).
Regional averages also mask individual country per-
formance. For example, although most Muslim
countries in Africa tended to perform poorly on
average, some countries, such as Mali, performed
well: 3.5 percent GDP growth during 1997–2002.
The time period chosen may further have an
important bearing. For example, the six Muslim 6
The others are the absence of meaningful political participation and
the impact of the information and communications revolution.
Economic Growth in the Muslim World 11Table 1. GDP Per Capita Growth Rates in Muslim and Non-Muslim Countries, 1990–2000
Muslim countries Non-Muslim countries
GDP growth Countries reporting GDP growth Countries reporting
(%) (Total countries) (%) (Total countries)
Middle East and North Africa 3.78 10 (18) 4.03 1 (1)
Europe and Eurasia –2.42 6 (7) –0.95 18 (22)
South Asia 3.36 3 (4) 4.87 4 (4)
East Asia and Pacific 5.46 2 (3) 3.59 16 (28)
Africa 1.88 13 (16) 3.03 28 (32)
Total 2.02 34 (48) 2.22 67 (87)
Note: Growth calculated on a purchasing power parity (PPP) basis (unweighted).
Source: World Bank, World Development Indicators, 2002.
countries in Europe and Eurasia reporting data had
negative average growth rates during 1990–2000;
however, they all had positive average growth rates
for the more recent period 1997–2002.
Noland’s (2003) analysis of India, Malaysia, and
Ghana, for which detailed regional data are avail-
able on religious practices, examines economic
growth trends and relates them to the prevalence
of different religions. In India, the analysis finds
no significant relationship between the share of the
population practicing Islam at the state level and
growth in per capita incomes in the state. In
Malaysia, a similar analysis showed a significant,
negative correlation between the share of the pop-
ulation practicing Islam and per capita income,
but in Ghana the correlation was significant and
positive. It seems that the impact of Islam on
short-run economic performance is as diverse as
Islam itself.
Demographic Considerations
Population growth rates (country-by-country data
inTable 6 in Annex 4) show no particular pattern
in the Muslim world. For the period 1990–2000,
regional average growth rates range from a low of
1.6 percent per year in Europe and Eurasia to a
high of 2.8 percent in Asia. Of the 48 Muslim
countries, the United Arab Emirates, Jordan, West
Bank/Gaza, and Afghanistan had relatively high
population growth rates of 4.0 percent per year or
more. Kuwait had a negative population growth
rate of –0.7 percent.
An analysis of the age structure in Muslim countries
(Table 6) reveals that at least 60 percent of the pop-
ulation is of working age (15–64) and presumably
able to support the other 40 percent of the popula-
tion—children and the elderly. By contrast, in the
West Bank/Gaza, Chad, Mali, Niger, and Somalia,
less than half the population is of working age, and
presumably is supporting the more than half that
are children or elderly. In short, the dependency
ratio is relatively high in these countries.
The status of women is measured by employment,
education, health, and political participation.
Employment is measured by women’s participation
in the labor force, education by female literacy rates
and female literacy parity indices, health by female
life expectancy, and political participation by pro-
portion of female seats in parliament. Perspective is
provided by statistics for Europe and by including
per capita growth in GDP, 1999–2000. This facili-
tates a comparison of women’s status to economic
growth in each Muslim country.
12 Issue Paper Number 3GDP growth
per capita,
1999–20001
(%)
Females in the
labor force2
(%)
Female
literacy rate,
all ages3
(%)
Female literacy
parity index,
4
15–24 years
Female
life expectancy
from birth
(age in years)
Female seats
in parliament
5
(%)
Table 2. The Status of Women in Muslim Countries
Europe
EMU/OECD
weighted average6
3.1 41.3 99.9 1.00 81 7.1
Middle East and
North Africa 1.9 27.5 54 .84 69.6 4.5
Europe and Eurasia 5.8 41.1 84 .97 71.8 7.8
South Asia 3.0 36.4 29 .65 61.2 11.5
East Asia and Pacific 3.4 40.6 82 .99 68.7 11.5
Africa 2.1 39.2 42 .84 48 9.7
Notes:
1. Weighted calculation based on the total population.
2. Proportion of women in the total formal labor force in percent.
3. Female literacy rate is the percentage of all women who are literate in each country.
4. Female literacy parity index is the ratio of the female literacy rate to the male literacy rate for the 15–24 age group. (A parity index of
less than 1 indicates that the proportion of literate females is less than that of males. For example, if 50 percent of women are literate with
a parity ratio of .9, it would indicate that 55 percent of males were literate.)
5. Percentage of seats in the lower house of parliament held by women.
6. Europe is represented as the EMU countries (European Monetary Unit countries, which are the EU members excluding Great Britain), except
for seats in parliament which uses the OECD countries as a base.
Sources: World Bank World Development Indicators, 2001 and 2002; UNDP Human Development Report, 2003; CIA World Fact Book, 2002
and 2003.
Women’s participation in the formal labor force
varies by region, and there is not always consistency
between per capita growth and participation. As
shown in Table 2, growth rates and participation
are close to EMU country participation in both
Europe and Eurasia and East Asia. In the Middle
East and North Africa, participation and per capita
growth are lower. However, in Africa, participation
is 39.2 percent, only about 2 percent less than in
EMU countries, while the per capita growth rate of
2.1 percent is among the lowest. Accordingly, com-
paring women’s status with growth rates yields
inconclusive results.
Female literacy rates are heterogeneous, even when
the sample is restricted to Muslim countries.
Literacy and economic growth (Table 2) are diffi-
cult to compare among regions. Growth rates and
literacy are both relatively high in Europe and
Eurasia, but statistics for other regions caution
against drawing hard conclusions. For example,
growth rates in East Asia and South Asia are com-
parable, but literacy rates are very different (82
percent compared to 29 percent). In the Middle
East and North Africa, the literacy rate is 54 per-
cent and growth is low, but the literacy parity
index indicates that overall literacy rate for men
and women in that region is also low, suggesting
that literacy is not solely a gender issue. Additional
technical analysis showed a statistically positive
relationship between the literacy rate and per
capita growth.
Female life expectancy in the Muslim countries is
not at the level of the EMU baseline (81 years) in
any region, but is closest in Europe and Eurasia
(71 years), which also has the highest per capita
growth. Differences follow expectations by region:
the Middle East and North Africa and East Asia are
similar, while Africa is lowest (48 years).
Economic Growth in the Muslim World 13The role of women in politics varies according to
country and region. It may be affected by a number
of factors, including the level of democracy in the
political institutions themselves, social and cultural
constraints, education, and legal policies. Women’s
participation in politics, as measured by the pro-
portion of seats held in the lower house of parlia-
ment, is less in the Middle East (4.5 percent) than
in EMU countries (7.1 percent), but more in other
Muslim regions, such as Eastern Europe where it
reaches 22.2 percent. In some countries, a specific
number of seats are reserved for women; this may
contribute to a higher proportion of women mem-
bers than would otherwise be the case.
Women’s participation in microfinance institutions
(MFIs) is an indication of their participation in pri-
vate sector activities. Their participation as MFI
borrowers in Muslim countries is compared to that
of women in the non-Muslim world (See Table 3.
Country-by-country data are in Annex 5, Table 8).
Women constitute more than 50 percent of bor-
rowers in all regions, except in East Asia.
4
In the
Muslim world, the proportion of women borrowers
is 55 percent, which compares to 59 percent for
Muslim and non-Muslim countries. Loan losses for
borrowers in Muslim countries are 1.6 percent
compared to 1.5 percent for the total Muslim and
non-Muslim world. These indicators show that a
sizeable number of women borrow money for their
small businesses in Muslim countries and that they
are good credit risks.
The data show that although women do not gener-
ally have economic or political parity with men in
most Muslim countries (see Annex 5, Table 7),
women in other societies face similar barriers. Legal
equality—including voting rights—for women
became accepted in Western countries only in the
20th century. Given the difficulty of achieving
radical cultural change, even in open societies, one
should not be surprised to find slow progress toward
gender equality in some Muslim societies. However,
significant economic growth seems possible while
this process is underway.
Qualifying for the Millennium
Challenge Account
One of the most revealing ways to assess the eco-
nomic competitiveness of developing countries is to
see how well they score on the original 16 criteria
proposed to rank countries seeking to qualify for
funding under the Millennium Challenge Account
(MCA). Radelet (2003) ranked all the counties
having available data. Using two criteria—IDA eli-
gibility and annual per capita income of $2,975 or
less—produces a list of 115 countries, of which 36
are Islamic.
For countries to be eligible for MCA assistance,
they must also have a passing score for each of
three qualifying areas and must satisfy the
Women borrowers
(millions)
Proportion of women to
total borrowers1
(%)
Total portfolio
($ million)
Loan loss rate2
(%)
Table 3. Female Clients of Microfinance Institutions by Number and Quality of Portfolio
Total Muslim world3
3.5 55 1,553.2 1.6
Total Muslim and
Non-Muslim world4
4.8 59 2,635.2 1.5
Notes:
1. Calculated by dividing the total number of women borrowers by total number of borrowers.
2. Calculated by dividing total loan loss by total portfolio in each region.
3. Includes Bank Rakyat in Indonesia and Grameen Bank in Bangladesh.
4. USAID 2002 sample plus Grameen Bank.
Sources: USAID Microenterprise Results Reporting for 2001 and 2002; The Mix Market, and Grameen Bank Annual Report 2002.
4
The results are shaped by the statistical influence of Indonesia’s Bank
Rakyat, in which the proportion of women borrowers is only 16 per-
cent out of a total of over 2.9 million clients. The size of this institution
significantly affects the worldwide proportion of female borrowers.
14 Issue Paper Number 3corruption criterion.
5
The three qualifying areas
and the 16 specific selection criteria are as follows:
■ Ruling justly: Civil liberties, political rights,
voice and accountability, government effective-
ness, rule of law, control of corruption
■ Investing in people: Primary education as a per-
cent of GDP, primary education completion
rate, immunization rate, health spending as per-
centage of GDP
■ Economic freedom: Country credit rating, infla-
tion, three-year budget deficit, trade policy, regu-
latory quality, number of days to start a business
Radelet found that the Muslim countries tended to
score badly in all three areas when compared to the
average scores for all developing countries. In fact,
based on his analysis and the data available, only
Senegal and Jordan of the 36 Muslim countries
would qualify for MCA funding. Muslim countries
did particularly badly on individual criteria for civil
liberties and political rights. Radelet’s findings sup-
port the argument that the basic obstacle to
Muslim economic growth stems from governance
issues, not economic policies per se—with one
exception: in one crucial economic freedom area,
trade policy, Muslim countries fare poorly.
Islam and Economic
Growth
“Little else is requisite to carry a state to the
highest degree of opulence from the lowest
barbarism than peace, easy taxes, and tolerable
administration of justice; all the rest being
brought about by the natural course of things.”
—Adam Smith, Lectures on Jurisprudence, 1775
What Accounts for Economic
Growth?6
Adam Smith was making several points about eco-
nomic growth when he spoke these prescient
words in 1775 (Jones 1981, 235). The unit of
observation is the state, which is also the decision-
maker in Smith’s world because it provides what
are now considered key elements of good econom-
ic governance—“peace, easy taxes, and the tolera-
ble administration of justice.” Democracy is not
mentioned in Smith’s list. As the political mecha-
nism to ensure good economic governance,
democracy comes much later. Smith’s final point
is among the most controversial: economic growth
will be “the natural course of things” because of
people acting in their own best interest and the
pressures of competition from the “invisible
hand.” An important question is whether Muslim
countries systematically prevent the key elements
of good governance from emerging.
The human behavior that led Smith to make these
observations seems to be wired very deeply in our
brains (Diamond 1997, Jones 1988). From this
behavioral (and historical) perspective, develop-
ment is seen as a long-run sequence of decisions
by economic agents, acting in their self-interest,
that culminate in rising investment and higher
labor productivity. The “miracle” of advanced liv-
ing standards is the set of institutions that permit,
even encourage, these decisions for very long peri-
ods of time—a century or longer (Jones 1981). At
a growth rate of just two percent per capita per
year, a $1,000 income becomes $8,000 in a centu-
ry and $64,000 after two centuries. That is how
the United States and Europe became rich—two
major wars and, in Europe, increasingly heavy tax
regimes notwithstanding.
The Evolution of Thinking on
Economic Growth
Economists have conceptualized the process of
economic growth around three basic models: spe-
cialization and trade, investment in machines, and
increasing returns to knowledge. Although the
models overlap to an extent and are potentially
complementary, each has been held out at some
point in the history of economic thought as the
fastest road to riches. The basic principles of
Islamic governance affect these three models in
fundamentally different ways. In general, Islam
accorded at least modest support for the trade
Economic Growth in the Muslim World 15
5
Failure on “control of corruption” automatically disqualifies a
country from MCA funding, no matter how well it scores on the other
categories.
6
Major elements of this discussion draw on Timmer’s background
paper for USAID’s Foreign Assistance in the National Interest (2002).model and relatively active discrimination against
the knowledge model.
Specialization and trade. Much of classical eco-
nomics was devoted to understanding the process
of economic growth. As noted, Adam Smith was
highly optimistic about the prospects for higher
living standards, to be achieved primarily by high-
er labor productivity resulting from specialization.
However, specialization could only succeed
through trade, with the process limited by the size
of the market. By lowering trade barriers—
whether artificially imposed by governments or
naturally caused by long distances or difficult ter-
rain—larger markets became accessible to manu-
facturers. Competition—the invisible hand—
would force manufacturers to more and more spe-
cialized forms of production and thus raise labor
productivity and living standards.
To be successful, the trade-intensive strategy of
economic growth required many transactions,
increasingly at long distance, so the institutions—
such as rule of law—defending property rights
and lowering transaction costs came to be seen as
the foundation of a market economy. That is, eco-
nomic governance has long been seen as an essen-
tial starting point for the economic growth
process, not something tacked on in midstream.
The Koran strongly defends property rights and
the efficacy of (fair) exchange, and Muslim traders
historically have been very successful.
Investment in machines. The visible success of the
Industrial Revolution in the 19th century, first in
Britain and then in France and Germany, changed
how economists thought about the growth
process. Technological change, created by new sci-
entific enterprise and embodied in machines,
came to be seen as the driving force of develop-
ment (Landes 1969, 1990, 1998). And even if not
all countries could invent and produce their own
machines, all were free to import them and repro-
duce the factory system that was making Europe
so rich and powerful. A “capital fundamentalism”
emerged that stressed the accumulation of savings
to invest in machines that embodied the latest
technologies, the origins of which were exogenous
to the day-to-day activities of factory managers or
national economic planners.
The “machine model” was available to countries in
a hurry to catch up with their rich neighbors or
distant trading partners. Many institutional ele-
ments of Adam Smith’s “trade model” could be cir-
cumvented, or substitutes found, if the investment
and production process could rely directly on deci-
sions of national planners rather than the profit
motive of private investors. Early German industri-
alization was a “deliberate act of policy” (Cole and
Deane 1965), and by the end of the 19th century,
it had changed the balance of both economic and
military power in Europe. The pace of Soviet
industrialization changed the balance of power
again during the middle half of the 20th century. A
similar strategy was followed by Turkish étatisme
before World War II, by “Arab Socialism” in the
Middle East from the 1950s onward, and as
“Islamic Socialism” by Kaddafi, Zulfikar Ali
Bhutto, and others.
The “machine model” worked reasonably well
when two conditions held. When relatively little
trade was needed to achieve labor specialization as
the source of higher productivity, higher productiv-
ity could be generated through intensive use of cap-
ital goods with production primarily for domestic
markets. This stimulated the popularity of import
substitution industrialization. The second condition
was the ready availability of appropriate technology
in the form of capital equipment domestically or
from the world market that did not have to be
invented or developed locally.
Increasing returns to knowledge. As the pace of scien-
tific innovation accelerated in the advanced coun-
tries, productivity growth relied increasingly on
direct knowledge rather than on technology embod-
ied in machines, and the machine model stumbled
in country after country. In those countries—such
as Korea, Taiwan, Israel, and Brazil—with nascent
institutions to support low-cost trade and absorp-
tion of Western knowledge, not just machines, the
transition to export-led growth was feasible if not
always smooth. In countries without these institu-
16 Issue Paper Number 3tions, which included nearly all countries in Africa
and most in the Muslim world, the failure of eco-
nomic governance led to rapidly failing economies.
After years—even decades—of steady economic
growth, they have slipped back into economic
decline and rising levels of poverty. Some have
slipped even further, into chaos and conflict.
The new economic growth model that explains this
performance is based on increasing returns to
knowledge. That is, instead of a given labor force
receiving diminishing marginal returns as laborers
use more and more identical machines, marginal
returns to knowledge actually increase with greater
use because of spillovers, at no marginal cost, to
additional users. There are large economic payoffs
from new knowledge, especially in the early years of
application when patent rights provide market
power, encouraging economic entrepreneurs to take
advantage of it by using the fundamental science
produced in modern research universities and cor-
porate research centers.
Thus, economic growth, instead of depending on
exogenous technical change, is now seen as an
endogenous process of response to incentives
throughout the entire economic system, not just at
the level of company investments or consumer
decisionmaking (Easterly 2001). The modern con-
cern with enforcing intellectual property rights, as
well as property rights for land, goods, and finan-
cial assets, is easy to understand from the perspec-
tive of this “knowledge model.” A failure to defend
intellectual property rights will slow the search for
useful new knowledge and, consequently, the rate
of economic growth.
The difficulty of relying on endogenous growth in
poor countries is that knowledge generation and
development of sophisticated human capital
depend at least as strongly on the “foundation insti-
tutions” that ensure property rights and low trans-
action costs as the Smithian “specialization and
trade” model that gave rise to them. It was the long
time needed for each society to evolve its own such
institutions and investments that gave rise to the
search for substitutes that could speed the econom-
ic growth process (Gerschenkron 1962), a search
that largely failed in the third world. There is an
uneasy sense in the development profession that we
are back to square one (Landes 1990, Easterly
2001). As Easterly reminds us, the “quest for
growth” in this world of increasing returns to
knowledge is elusive.
Although Islam is characterized by immense diver-
sity through space and time and has always had a
pragmatic side, some Islamic societies may be slow
to respond to new and external knowledge or
assimilate new technologies. This may be explained
in part, by their strict adherence to theocracy and
written scripture as the basis of all knowledge. The
Economist, quoting the UNDP’s Arab Human
Development Report (2002), writes, “There is little
Arab writing, or translation from other languages:
in the 1,000 years since the Caliph Mamoun,... the
Arabs have translated as many books as Spain trans-
lates in a year” (2003, 6).
The Empirical Record of Economic
Growth
Given the diversity of experience with economic
growth—over time and across countries—diligent
researchers can show that most “sensible” variables
can influence the growth process under some set of
circumstances. For example, capital, labor, educa-
tion, government investment, low inflation, macro-
economic stability, openness to trade, quality of
institutions, and democracy have all been shown to
contribute positively to economic growth in some
set of countries or time period.
Specialists, with insights based on years of experi-
ence combined with hard work, are often able to
assemble the necessary datasets to help identify the
specific factors contributing to economic growth.
For example, unstable prices for commodity exports
slow down economic growth (Dawe 1993, 1996;
Collier and Denn 2001). A favorable balance
between rural and urban education, serving as a
proxy for reduced “urban bias,” speeds up economic
growth (Lipton 1977, 1993; Chai 1995). Trade
openness was bad for economic growth in the 1930s
and 1940s, of little importance one way or the other
in the 1950s and 1960s, but highly significant in
the 1970s and 1980s (Vamvakidis 1997).
Economic Growth in the Muslim World 17One factor crucial to sustained growth emerges
from both the long-run historical record of individ-
ual countries and the shorter post-World War II
cross-section record of developing countries. Rapid
factor accumulation, driven by high domestic sav-
ings rates or foreign capital inflows, can lift a poor
country onto the first rung of the development
process. But eventually, improvements in total fac-
tor productivity, or the efficiency with which all
inputs are used, including capital, must become the
main source of higher incomes. This realization was
the real driving force behind the development of
the “knowledge model” (Romer 1986, 1990;
Prescott 1998).
The difficulties in making the transition from the
“machine model” to the “knowledge model” in a
trade-driven global economy are clearly seen in
the growth record of the 1990s. According to the
World Bank’s World Development Report, 2003,
more than a third (44) of the 127 developing or
transition economies had lower per capita incomes
in 2001 than in 1990, and none of these countries
was directly affected by the Asian financial crisis
that started in 1997. The decade saw some of the
fastest growth on record in global output and in
volumes of international trade, so the external
environment was favorable to growth. Although
trade protectionism on the part of the United
States, Europe, and Japan was no doubt one
source of poor performance, the principal sources
must be sought within the countries themselves.
None of the 44 poor performers are in Asia. Of
the 44, one-third (16, 5 Muslim) were part of the
former Soviet Union, testifying to the difficulty of
transitioning to a market economy in the absence
of market institutions. Sub-Saharan Africa
accounts for another 17 countries (6 Muslim), tes-
tifying to the continuing, widespread difficulty in
arresting the economic erosion that has persisted
continent-wide for decades. The Muslim countries
of sub-Saharan Africa seem to be slipping even
faster than the rest of the continent. And despite
reasonable economic performance for the region as
a whole, 5 countries in Latin America and the
Caribbean suffered decade-long declines. Of the
44 countries, 18 are classified as Muslim, a propor-
tion about in line with the number of Muslim
countries in the total.
Long-term economic problems point to deep-seated
failures to establish the core elements that support
modern economic growth. The list of these core ele-
ments is not long, but the elements are basic: pro-
vision of public goods and social infrastructure, a
stable macroeconomic environment, and a busi-
ness climate conducive to growth. Why do gov-
ernments fail to provide these essentials for
growth? Indeed, why do some governments active-
ly seek to undermine them? And, specifically, why
are Muslim countries so much worse at providing
these basic elements than others?
Modern political economy—a new academic
discipline—has evolved to help answer these ques-
tions, including in the context of Islamic societies.
Rational choice models of political actors explain
why state agents collect private goods from public
resources, but they are less successful in explaining
how to correct the vicious circle of corruption
within the dynamics of a society’s own political
system (Srinivasan 1985, Alesina and Rodrik
1994, L. Diamond 2002). Even democratic sys-
tems with regular elections have not been immune
from these dynamics, so it is not possible to rec-
ommend with confidence any single approach as a
short-run remedy.
Currently, there is an especially intense debate over
whether external pressure on Muslim countries to
democratize by forming political parties and hold-
ing free elections offers an effective way forward. In
the very short run, fundamental Islamist parties
might well win office and displace the secular and
corrupt incumbent. But, as already noted, the eco-
nomic policies likely to be put forward by such par-
ties are, at best, not well thought out. At worst, the
fear is that Islamist parties would abolish democra-
cy after attaining office—the common refrain
expressing this fear is “one man, one vote, one
time” (MSI 2002, The Economist 2003).
18 Issue Paper Number 3Key Issues Facing Muslim
Countries
The Muslim share of global population is 19 per-
cent; its share of global income is 6 percent. As
noted, most countries where Muslims live in sub-
stantial numbers are generally poorer than non-
Muslim countries. In fact, quantitative analysis pro-
vides some evidence that there is a statistically sig-
nificant, negative relationship between per capita
income and Islam (the share of Muslims within the
total population of 132 countries) (Kuran 1997b,
43). Of course, factors other than Islam affect
income, and analyzing these often eliminates the
significance of Islam in the correlations. Other fac-
tors include membership in OPEC, which is associ-
ated with significantly higher income due to oil
revenues, and being located in sub-Saharan Africa,
the world’s poorest region, which is associated with
significantly lower income. In the short run, what
can be done to improve incomes in Muslim coun-
tries, as opposed to African countries or non-oil
exporters, for example?
The analysis so far has examined the general factors
associated with economic growth, whether in
Muslim or non-Muslim countries. Within this
general context, four key factors seem to be most
important in understanding how to help the
economies of Muslim countries move forward
■ the banking system and quality of investment
■ trade policy and economic openness
■ human capital and the role and status of women
■ poverty reduction and the Millennium
Development Goals (including the distinction
between public and private responsibilities for
providing social safety nets and the role of
poverty in causing political conflict)
In all four areas progress can be made without con-
fronting religion in a direct way. In each area, “best
practices” in more successful Muslim countries can
serve as a guide for reforms in relatively backward
Muslim countries. In the face of rising expectations
from their populations and the challenge from
political Islam, a number of Muslim countries may
be prepared to start serious and systematic reforms
in these areas, thus making them attractive partners
for USAID assistance.
The Banking System and Quality of
Investment
Sala-i-Martin and Artadi (2003) focus their analysis
of economic growth in the Arab world on the
quantity and quality of investment. Documenting
the relatively poor economic performance, they
note that lack of investment cannot be the reason
because investment rates in the Arab world are not
low. What is low, however, is the rate of investment
by the private sector: an unusually high proportion
of total investment in Arab countries occurs in the
public sector. As Sala-i-Martin and Artadi point
out, public investment is likely to be a drag on eco-
nomic growth because government revenues must
be raised to pay for it, and this has a distorting
effect on economic decisionmaking in the rest of
the economy; and because much—but not all—
public investment is unproductive and wasteful,
especially in countries with autocratic regimes and
little input from the population.
The tiny share of savings mobilization and finan-
cial intermediation that takes place in public capi-
tal markets, such as stock exchanges, is partly a
cause, and partly an effect, of this phenomenon.
“Capital markets are either underdeveloped or
nonexistent. Most have low levels of trading and
very few listed companies” (Sala-i-Martin and
Artadi 2003, 28). As a consequence, the formal
banking system totally dominates the financial
sector in Arab countries, but according to
Sala-i-Martin and Artadi,
lending remains predominantly short-term and
trade-related; very little lending is directed at
long-term productive investments….
Governments have protected the banks from
competition by restricting entry at the local and
international levels, and this has made them
inefficient (28).
In sum, although the banking system is the
most important part of the financial sector, its
Economic Growth in the Muslim World 19extraordinary inefficiency does not lead it to
allocate national savings to their most produc-
tive uses. Without proper channeling of savings
into productive and efficient investment, economic
growth is impossible [emphasis added]. Thus,
continuing reform of the banking sector is a
necessary process for the Arab world. These
reforms must include the: (a) further elimina-
tion of abusive and inefficient regulation; (b)
opening of financial markets to domestic and
foreign entrants in order to promote competi-
tion, financial innovation, and modernization;
(c) strengthening (public or private) supervision
to achieve sound corporate governance and
accountability; (d) privatization of the remain-
ing state banks, ensuring that the right incen-
tives for sound commercial policies are in place
(i.e., shifting commercial operations away from
housing finance at subsidized interest rates to
productive long-term investment); and (e)
incorporation of the new technologies that are
already changing the nature of the financial sec-
tor worldwide (28–29).
None of these recommendations speaks to whether
Islam as the prevailing religion is in any way associ-
ated with the poor policies or an impediment to
reform. Certainly the injunction against “unpro-
ductive” forms of income, such as interest on loans,
could stifle the development of a modern financial
sector with its futures markets, hedging instru-
ments, and esoteric risk management strategies. But
the basic reforms, especially those introducing more
competition into the domestic banking system,
would seem to have substantial payoff without
challenging basic Islamic principles.
Trade Policy and Economic
Openness
Based on the Index of Economic Freedom
(Heritage Foundation 2003), government interven-
tion—one measure of economic openness—was
significantly greater (in a statistical sense) in
Muslim countries than in non-Muslim countries.
This same conclusion is also seen in the rankings
for the Millennium Challenge Account, where—
measured on a scale of 1 to 5 where 1 is most con-
ducive to economic freedom—non-Muslim coun-
tries scored 2.65 and Muslim countries scored 3.04.
International trade, also a measure of economic
openness, was significantly less in Muslim countries
than in non-Muslim countries in 2002. International
trade, measured as the sum of exports and imports as
a percent of GDP, was 82 percent of GDP in
Muslim countries and 97 percent in non-Muslim
countries. This difference was statistically significant.
There is no Islamic injunction against trade. Indeed,
the Koran, which supports private property rights
and defends trade among equal partners, would
seem to favor trade as a mechanism for achieving
economic growth and higher incomes. The relatively
closed nature of Islamic economies, then, is not
based on religious principles but reflects the nature
of the governments in these countries. Again, trade
reforms and increased economic openness should
bring substantial rewards in faster growth without
challenging Islamic principles.
Human Capital and the Role and
Status of Women
In 2000 the status of women, as measured by liter-
acy rates, participation in the labor force, and
female seats in parliament varied by region. The
ratio of female to male literacy rates, as measured
by the literacy gender parity index, was lower in
Muslim countries in the regions of Africa (0.84),
the Middle East and Northern Africa (0.84), and
South Asia (0.65) than in non-Muslim countries
(0.92). Nevertheless, in Europe and Eurasia (0.97)
and East Asia (0.99), these ratios were higher than
in non-Muslim countries.
Women’s participation in the labor force in the
Middle East and North Africa was 27.5 percent,
the lowest in any region, but reached about 41
percent in Muslim countries in the regions of
Europe and Eurasia and in East Asia, almost on a
par with EMU countries, where it was 41.3 per-
cent (see Table 2).
Women’s participation in parliament in Muslim
countries, as measured by the proportion of female
20 Issue Paper Number 3seats, was also lowest, 4.1 percent, in the Middle
East and North Africa. However, in all other
regions it was above the 7.1 percent found in
EMU/OECD countries.
The findings for some regions, especially the
Middle East and Northern Africa, are consistent
with those in The Arab Human Development Report
(UNDP 2002), which identifies women’s empow-
erment as one of the three “deficits” in the Arab
world.
7
The women’s empowerment deficit is typi-
cally the result of legalized discrimination, such as
laws that prohibit women from participating in
public life, attaining education, or competing in
the labor market.
Changing the status of women in some Muslim
societies involves changing internal values.
Inglehart and Norris (2003), in particular, cautions
USAID about an open strategy to improve
women’s status in countries where fundamental
Islam is already putting pressure on existing gov-
ernments. However, the United States has a deep
concern for basic human rights and gender equali-
ty in education, work force participation, and
political life. Inglehart and Norris suggest that if
there is a conflict between Western and fundamen-
talist Islamic values and approaches to develop-
ment, it is here. They report that the cultural
divide between Islam and the West is greatest on
matters of gender equality, divorce, abortion, and
homosexuality, but both societies value democratic
ideals equally highly. Perhaps more importantly,
young adults seem to share the same restrictive
values as their parents.
The short-run impact on economic growth of
holding these restrictive values is unclear. Yet Japan
became a highly successful and wealthy economy
while vastly underutilizing its women in roles out-
side the household economy, including agriculture.
Only now, after a decade of stagnation, falling
population, and the “graying” of agriculture, is
Japanese society reexamining its attitudes toward
women. Although some significant short-run gains
in economic performance and human welfare may
be possible for a society that does not fully inte-
grate women into its economy, the long-run conse-
quences are likely to be severe.
Poverty Reduction and the
Millennium Development Goals
The international donor community has commit-
ted itself to achieving an ambitious set of develop-
ment goals by 2015. The income and human
poverty aspects of these goals will be addressed pri-
marily through Poverty Reduction Strategy Papers
(PRSPs) to be developed jointly by individual
countries and donors, usually under the leadership
of the World Bank. All national leaders agreed to
this effort at the Millennium Conference at the
United Nations in 2000, and their support offers
an important vehicle to discuss the economic,
political, and social reforms needed to improve the
welfare of their citizens.
Dialogue between donors and governments about
approaches to poverty reduction naturally tend to
focus on activities in the public sector. However, in
Muslim countries there is a widespread network of
private charities enjoined by the Koran to share
wealth among the poor. This network offers an
additional avenue in the PRSP process. Nearly all
PRSPs make some attempt to engage civil society
in the discussions, and nongovernmental organiza-
tions (NGOs) often play a very active role. Little is
known about the role of Islamic charities in this
process, however, and further research is needed to
determine whether these charities could play a vital
role in poverty reduction in Muslim countries. The
evidence Chen (2003) presents from Indonesia on
the links between economic distress and resort to
more fundamental Islamic values suggests it would
be a promising line of research.
Economic Growth in the Muslim World 21
7
The others are the freedom deficit and the knowledge deficit.S
everal factors may hamper economic growth in
the Islamic world. These include a social sys-
tem that values “unchangeability” and thus has
a diminished capacity for adaptation and innova-
tion; an emphasis on communalism rather than
individualism; a reduced role for public discourse
that inhibits individuals from questioning; an educa-
tional system that may limit curiosity; “Islamic eco-
nomics,” which forces economic decisions to pass
through an ethical or moral Islamic filter; poor eco-
nomic policy; a difficult geographic “neighborhood”;
women’s inferior position in society; and culture.
Many of these factors no doubt play a role in
explaining why Muslim countries tend to be poorer
than non-Muslim countries. None alone seems to
provide an adequate explanation for Muslim coun-
tries’ relative retardation, because there are likely to
be powerful interactions among these factors. But
changing them all in any society is impossible in
the short run—and will likely be highly specific to
history and events even in the long run.
What is USAID to Do?
It seems clear that any prescription requires dual
reforms—in both governance and economics. In
the case of economics, over the next 5–10 years sev-
eral relatively tractable opportunities appear to offer
scope for important interventions in partner coun-
tries, without challenging Islamic governance or
orthodoxy.
■ Economic policies. Sound economic policy in
general and promoting increased economic
openness and trade reform should provide the
right incentives for increased investment and a
level playing field for increased trade, bringing
faster growth without challenging Islamic prin-
ciples. Specific donor interventions might
include support for trade capacity building,
flexible exchange rates, and trade deregulation
and liberalization.
■ Banking systems. A strong banking and financial
system and sound monetary policy are needed
to improve the efficiency of private investment
allocations. Thus, basic financial reforms, espe-
cially introducing more competition into the
domestic banking system, could have substantial
payoff, again without challenging basic Islamic
principles. Specific interventions might include
support for transparent corporate governance
and more competition.
■ Social safety nets. Islamic charities can provide an
important social safety net for the poor, espe-
cially in times of significant economic reform.
■ Women’s roles. Participation of women in the
labor force and in the political process is increas-
ing in some regions of the Muslim world. In
Muslim countries worldwide, women constitute
55 percent of total borrowers in microfinance
institutions (comparing favorably to 59 percent
in all countries). This shows that women could
be a more significant force in their economies.
Recognizing that there must be sensitivity to
national cultural morés, USAID should be
prepared to strengthen social and economic
integration of women into Muslim societies.
Such integration can only prove to be a positive
influence on economic growth.
Donor programs and policies designed to acceler-
ate the rate of economic growth in Muslim coun-
tries should focus on these areas—the economic
policy environment, the banking system, the
design and implementation of social safety nets
for the poor, especially through private charitable
Islamic organizations, and women. Specific areas of
intervention will, of course, depend on each coun-
try situation—no single blueprint applies to all.
Conclusions and Policy
Recommendations
Economic Growth in the Muslim World 231
Muslim countries are those where at least 50 percent of the population is Muslim.
2
Member of the Arab League (22)
Source: UNDP, The Arab Human Development Report, 2002.
Annex 1. Countries in the
Muslim World1
Middle East and
North Africa (18)
Algeria2
Bahrain2
Egypt
2
Iran
Iraq2
Jordan2
Kuwait
2
Lebanon2
Libya2
Morocco2
Oman2
Qatar2
Saudi Arabia2
Syria2
Tunisia2
United Arab Emirates2
West Bank/Gaza2
Yemen2
Europe and
Eurasia (7)
Albania
Azerbaijan
Kyrgyzstan
Tajikistan
Turkey
Turkmenistan
Uzbekistan
South Asia (4)
Afghanistan
Bangladesh
Maldives
Pakistan
East Asia and
the Pacific (3)
Brunei
Indonesia
Malaysia
Africa (16)
Burkina Faso
Comoros2
Chad
Djibouti
2
Eritrea
Ethiopia
Gambia
Guinea
Mali
Mauritania2
Niger
Nigeria
Senegal
Sierra Leone
Somalia2
Sudan2
Economic Growth in the Muslim World 25Agrarian Economies (21) Oil Producers (22) Neither (9)
Ethiopia Albania Turkey
Burkina Faso Algeria1
Uzbekistan
Niger Azerbaijan Kyrgyzstan
Guinea Bahrain Maldives
Mali Brunei West Bank/Gaza
Chad Egypt Lebanon
Tajikistan Iran1
Jordan
The Gambia Iraq1
Morocco
Eritrea Kuwait
1
Djibouti
Comoros Libya1
Senegal Malaysia
Somalia Oman
Afghanistan Qatar1
Nigeria1,2
Nigeria1,2
Sudan2
Sudan2
Sierra Leone Saudi Arabia1
Bangladesh Syria
Yemen2
Yemen2
Indonesia1,2
Indonesia1,2
Mauritania Tunisia
Pakistan Turkmenistan
United Arab Emirates1
1.
Member of OPEC (10)
2.
Both agrarian and oil producing
Note: Agrarian economies are Muslim countries where at least 50 percent of employment is in the agriculture sector; oil producers are Muslim
countries that are members of OPEC and/or Muslim countries categorized in the CIA Factbook as exporters of crude oil or oil and petroleum
products.
Source: CIA Factbook, 2002.
Annex 2. Agrarian Economies
and Oil Producers
Economic Growth in the Muslim World 27Annex 3. Indonesia and OPEC:
Two Case Studies
This annex summarizes two case studies. The
first draws lessons from the Indonesian
experience and may suggest “what to do” in
other countries whose economies are predominant-
ly agricultural. The second sets out lessons from the
Middle Eastern OPEC (Organization of Petroleum
Exporting Countries) member countries whose
experience may provide insights on “what not to
do” in designing growth strategies for the Caspian
republics.
Agrarian Economies: Lessons from
Indonesia
Indonesia had one of the best-performing
economies in the developing world for over 30
years (until the 1997 Asian financial crisis).
Economic growth averaged 7 percent per year
between 1966 and 1994, 4.3 percent per capita per
year. The proportion of Indonesians living in
poverty fell from 60 percent in 1965 to 14 percent
in the early 1990s. The country shifted from being
the world’s largest rice importer to being rice
self-sufficient in 1984.
When the U.S.-trained team took over manage-
ment of the economy in 1965, the economy was in
chaos, inflation was 650 percent annually, food
shortages were rampant, and the country was
effectively bankrupt. The Suharto team instituted
a long-run strategy for the country’s development.
Economic policy embraced three elements: a
balanced budget, rural investment, and free con-
vertibility of the currency.
Local currency generated from the sale of U.S. food
aid commodities provided critical additional spend-
ing for development purposes. Much of the money
was invested in activities with a high payoff (Green
Revolution technology, irrigation facilities, and
rural roads) that led to increased rice yields. The
food-for-work program also supported labor-inten-
sive rural infrastructure development in the late
1960s and early 1970s. When oil revenues began
pouring in during the mid-1970s, the food-for-
work program was transformed into the “Inpres”
program, a government-supported cash-for-work
program. This major effort has been credited with
creating rural prosperity by generating income and
improving infrastructure.
The benefits of economic growth have been widely
shared in Indonesia, and the Suharto government’s
growth strategy was central to this achievement. Its
highest priorities were increasing food production,
maintaining stable rice prices (at a level higher than
world prices), and investing in rural infrastructure.
Initially, the beneficiaries were poor smallholders,
largely rice producers; over time, the majority of
low-income people benefited.
The emphasis on agriculture and rural investment
was an important element in the country’s out-
standing economic performance. It led to fast
growth in rural incomes, greater equality in income
distribution, and political stability (which depends
on an adequate rice supply).
Lessons from OPEC
According to Amuzegar (1998), OPEC’s miscalcu-
lations and economic mismanagement caused rising
budgetary shortfalls, runaway inflation, mounting
external debts, delays and cost overruns in poorly
designed projects, and an enormous waste of
resources. Yet that experience is valuable because it
provides insights of what not to do in the four
Caspian republics of Azerbaijan, Kazakhstan,
Turkmenistan, and Uzbekistan. In a word, they
should not mimic the experience of the OPEC
countries in the 1970s, because that experience
only took them from riches to rags.
Economic Growth in the Muslim World 29Almost all OPEC members have experienced rapid-
ly rising populations together with relatively mod-
est GDP growth rates, resulting in a slow increase
or actual decline in per capita income. Real per
capita income fell in the 1990s in Iraq, Kuwait,
and Venezuela to levels not seen since the 1960s.
Libya and Saudi Arabia also had their highest real
per capita incomes in the 1960s. Algeria, Gabon,
Iran, Nigeria, and the United Arab Emirates had
their highest income levels in the 1970s and
Ecuador had its in the 1980s. Indonesia is the only
OPEC member whose real per capita income
peaked in the 1990s.
According to the World Bank, unemployment
rates in the Middle East and North Africa (except
for some Persian Gulf countries) were the highest
in the world during the early 1990s. Moreover,
year after year the entire OPEC membership
incurred budget deficits, which were caused by ris-
ing social welfare expenditures, bloated bureaucra-
cies, limited tax bases, project cost overruns, and
large military outlays. Countries with trade restric-
tions and multiple exchange rates experienced high
domestic inflation. Inflation was held in check
only in the small Persian Gulf monarchies that
maintained relatively stable currencies and pursued
liberal trade policies.
While all OPEC countries did poorly, some did
more poorly than others. Those that did better
had low population growth, high rates of invest-
ment in both human and physical capital, low
government consumption (including military
expenditures), minimal wage-price distortions,
large domestic markets, and efficient, clean gov-
ernment. Those that did worse had excessive state
intervention in the economy, poorly chosen
development strategies, unsustainable services
and subsidies, political volatility, and excessive
tolerance of rentseeking activities, corruption,
and waste.
The lessons are clear. To avoid repeating OPEC’s
mistakes, the Caspian states should develop market
mechanisms. Key measures would likely include a
liberal trade and exchange rate system, privatiza-
tion, and deregulation of prices, wages, and interest
rates—all of which will help reduce state domi-
nance over the economy.
30 Issue Paper Number 3Table 4. Structural Characteristics of Muslim Countries, 2000
(value added as a percent of GDP)
Agriculture Industry Services
Middle East and North Africa
Algeria 8.8 59.7 31.5
Bahrain
Egypt 16.7 33.1 50.2
Iran 17.7 33.3 49.0
Iraq
Jordan 2.2 24.8 73.0
Kuwait
Lebanon 11.9 22.0 66.1
Libya
Morocco 13.5 32.2 54.3
Oman
Qatar
Saudi Arabia
Syria 22.8 28.7 48.5
Tunisia 12.3 28.8 58.9
United Arab Emirates
West Bank/Gaza 7.8 26.6 65.6
Yemen 14.6 48.0 37.4
Unweighted Average 12.8 33.7 53.4
Europe and Eurasia
Albania 50.7 22.7 26.5
Azerbaijan 17.0 45.3 37.7
Kyrgyzstan 36.8 29.2 34.0
Tajikistan 29.5 29.7 40.8
Turkey 15.4 25.3 59.3
Turkmenistan 28.1
Uzbekistan 34.4 23.1 42.5
Unweighted Average 30.6 29.2 40.1
South Asia
Afghanistan
Bangladesh 24.6 24.4 51.0
Maldives
Pakistan 26.7 23.1 50.2
Unweighted Average 25.6 23.8 50.6
Annex 4. Statistical Characteristics
of Muslim Economies
The tables in this annex provide statistical data describing the structural characteristics of Muslim
countries, per capita income, and population growth.
Economic Growth in the Muslim World 31
(continued)Table 4. Structural Characteristics of Muslim Countries, 2000 (continued)
(value added as a percent of GDP)
Agriculture Industry Services
Asia and the Pacific
Brunei
Indonesia 17.0 47.1 35.9
Malaysia 8.7 51.2 40.1
Unweighted Average 12.8 49.2 38.0
Africa
Burkina Faso 39.7 19.1 41.2
Comoros 40.9 11.9 47.2
Chad 39.2 13.8 47.0
Djibouti 3.7 14.2 82.1
Eritrea 15.2 22.9 61.9
Ethiopia 52.3 11.1 36.6
Gambia 33.2 12.3 54.5
Guinea 23.6 36.5 39.9
Mali 41.2 21.3 37.5
Mauritania 21.3 29.1 49.6
Niger 37.8 17.8 44.4
Nigeria 29.5 46.0 24.5
Senegal 18.1 26.9 55.0
Sierra Leone 47.3 33.6 19.0
Somalia
Sudan 41.1 18.5 40.4
Unweighted Average 32.3 22.3 45.4
Source: World Bank, World Development Indicators, 2002.
32 Issue Paper Number 3Table 5. Per Capita Income in Muslim Countries
(in U.S. dollars)
Per capita Per capita
Country income Country income
High income (2) Low income (22)
Kuwait 18,270 Indonesia 690
Bahrain 11,130 Azerbaijan 650
Upper middle income (3) Uzbekistan 550
Saudi Arabia 8,460 Senegal 490
Lebanon 4,010 Yemen 450
Malaysia 3,330 Pakistan 420
Lower middle income (13) Guinea 410
Turkey 2,530 Comoros 380
Tunisia 2,070 Bangladesh 360
Maldives 2,000 Mauritania 360
Jordan 1,750 Sudan 340
Iran 1,680 The Gambia 320
Algeria 1,650 Nigeria 290
Egypt 1,530 Kyrgyzstan 280
West Bank/Gaza 1,350 Mali 230
Albania 1,340 Burkina Faso 220
Morocco 1,190 Chad 200
Syria 1,040 Tajikistan 180
Turkmenistan 950 Niger 180
Djibouti 890 Eritrea 160
Sierra Leone 140
Ethiopia 100
Note: The eight Muslim countries not reporting (including those whose population is less than 1 million) are Iraq, Libya, Oman, Qatar, United
Arab Emirates, Afghanistan, Brunei, and Somalia.
Source: World Bank, World Development Indicators, 2003.
Economic Growth in the Muslim World 33Population
growth rate, Population Population Population
1990–2000 0–14 15–64 over 65
(%) (% of total) (% of total) (% of total)
Middle East and North Africa
Algeria 2.0 36.1 60.0 3.9
Bahrain 3.2 29.3 71.3 2.5
Egypt 2.0 35.4 60.5 4.1
Iran 1.6 33.8 61.5 4.7
Iraq 2.5 41.6 55.5 2.9
Jordan 4.3 38.6 58.4 3.0
Kuwait –0.7 33.1 64.7 2.2
Lebanon 1.7 32.1 62.0 5.9
Libya 2.0 33.9 62.7 3.4
Morocco 1.8 34.7 61.2 4.1
Oman 3.9 44.2 53.4 2.4
Qatar 1.9 26.5 71.5 2.2
Saudi Arabia 2.7 40.9 56.2 2.9
Syria 2.9 40.8 56.1 3.1
Tunisia 1.6 29.7 64.4 5.9
United Arab Emirates 4.6 26.8 70.7 2.5
West Bank/Gaza 4.1 47.3 49.3 3.4
Yemen 3.9 46.7 50.4 2.9
Europe and Eurasia
Albania 0.4 29.3 64.0 6.7
Azerbaijan 1.2 29.2 63.8 7.0
Kyrgyzstan 1.1 34.3 59.8 5.9
Tajikistan 1.5 39.7 55.9 4.4
Turkey 1.5 28.5 65.8 5.7
Turkmenistan 3.5 37.6 58.1 4.3
Uzbekistan 1.9 37.6 58.0 4.4
South Asia
Afghanistan 4.1 43.5 53.7 2.8
Bangladesh 1.8 37.8 59.0 3.2
Maldives 2.6 42.0 54.0 4.0
Pakistan 2.5 41.7 55.0 3.3
East Asia and Pacific
Brunei 2.7 32.5 65.1 2.4
Indonesia 1.7 30.6 64.9 4.5
Malaysia 2.5 34.0 61.9 4.1
Table 6. Population Growth (1990–2000) and Age Structure (2000) in Muslim Countries
34 Issue Paper Number 3
(continued)Population
growth rate, Population Population Population
1990–2000 0–14 15–64 over 65
(%) (% of total) (% of total) (% of total)
Africa
Burkina Faso 2.4 47.3 50.1 2.6
Comoros 2.6 43.9 53.6 2.5
Chad 2.9 50.4 46.5 3.1
Djibouti 3.0 43.4 53.6 3.0
Eritrea 2.7 45.4 52.0 2.6
Ethiopia 2.3 46.2 51.0 2.8
The Gambia 3.4 40.2 56.6 3.2
Guinea 2.5 44.7 52.7 2.6
Mali 2.5 47.1 49.7 3.1
Mauritania 2.9 44.1 52.7 3.2
Niger 3.4 49.0 48.6 2.4
Nigeria 2.8 44.0 53.4 2.5
Senegal 2.6 44.9 52.5 2.6
Sierra Leone 2.3 45.0 52.4 2.6
Somalia 2.0 47.9 49.7 2.4
Sudan 2.2 40.1 56.4 3.4
Source: World Bank, World Development Indicators, 2002.
Table 6. Population Growth (1990–2000) and Age Structure (2000) in Muslim Countries
Economic Growth in the Muslim World 35
(continued)Annex 5. The Status of Women
in Muslim Countries
Europe
EMU/OECD
weighted average6
3.1 41.3 99.9 1.00 81 7.1
Middle East and North Africa
Algeria –0.08 27.6 57 .903 76 6.0
Bahrain 20.8 6.0
Egypt 3.1 30.4 44 .829 69 2.4
Iran 3.9 27.1 69 .953 70 4.1
Iraq 19.7 46 .496 62
Jordan 0.8 24.6 84 1.002 73 3.3
Kuwait –1.4 31.3 80 1.018 79 0.0
Lebanon –1.3 29.6 80 .959 72 2.3
Libya 23.1 68 .937 73
Morocco –0.8 34.7 36 .779 69 6.1
Oman 17.1 62 .972 75
Qatar 15.0
Saudi Arabia 1.8 16.1 67 .956 74
Syria 0 27.0 60 .834 72 10.4
Tunisia 3.5 31.7 61 .920 74 11.5
United Arab Emirates 14.8 79 1.079 77 0.0
West Bank/Gaza 2.9 74
Yemen 1.1 28.1 25 .580 57 0.7
Weighted Average 1.9 27.6 54 .839 69.6 4.5
Europe and Eurasia
Albania 6.9 41.3 77 .975 76 5.7
Azerbaijan 10.2 44.6 75 10.5
Kyrgyzstan 3.9 47.3 72 6.7
Tajikistan 8.1 44.9 99 1.000 72 12.4
Turkey 5.6 37.6 77 .954 72 4.4
Turkmenistan 15.3 45.9 70 26.0
Uzbekistan 2.5 46.9 99 .999 70 7.2
Weighted Average 5.8 41.1 84 .969 71.8 7.8
Table 7. The Status of Women in Muslim Countries
GDP growth
per capita,
1999–20001
(%)
Females in the
labor force2
(%)
Female
literacy rate,
all ages3
(%)
Female literacy
parity index,
4
15–24 years
Female
life expectancy
from birth
(age in years)
Female seats
in parliament
5
(%)
Economic Growth in the Muslim World 37
(continued)Table 7. The Status of Women in Muslim Countries (continued)
GDP growth
per capita,
1999–20001
(%)
Females in the
labor force2
(%)
Female
literacy rate,
all ages3
(%)
Female literacy
parity index,
4
15–24 years
Female
life expectancy
from birth
(age in years)
Female seats
in parliament
5
(%)
South Asia
Afghanistan 35.5 43
Bangladesh 4.1 42.4 30 .706 62 2.0
Maldives 43.4 69 6.0
Pakistan 1.9 28.6 28 .600 64 20.6
Weighted Average 3.0 36.4 29 .652 61.2 11.5
East Asia and the Pacific
Brunei 35.6
Indonesia 3.1 40.8 82 .989 68 8.0
Malaysia 5.7 37.9 83 1.002 75 14.5
Weighted Average 3.4 40.6 82 .99 68.7 11.5
Africa
Burkina Faso –0.04 46.5 14 .524 45 11.7
Comoros 42.3
Chad –2.1 44.7 34 .830 50 5.8
Djibouti 55 47 10.8
Eritrea 7.8 47.4 45 .761 53 22.0
Ethiopia 3.0 40.9 31 .809 43 7.8
The Gambia 2.3 45.1 29 .764 55 13.2
Guinea –0.3 47.2 47 19.3
Mali 2.1 46.2 34 .540 44 10.2
Mauritania 1.7 43.6 30 .720 53 3.0
Niger –3.2 44.3 8 .436 48 1.2
Nigeria 1.3 36.5 56 .947 48 3.3
Senegal 2.9 42.6 28 .715 54 19.2
Sierra Leone 4.9 36.8 41 14.5
Somalia 43.4 50
Sudan 6.4 29.5 46 .874 58 9.7
Weighted Average 2.1 39.2 42 .837 48 9.7
Notes:
1. Calculation based on the total population.
2. Proportion of women in the total formal labor force in percent.
3. Female literacy rate is the percentage of all women who are literate in each country.
4. Female literacy parity index is the ratio of the female literacy rate to the male literacy rate for the 15–24 age group. (A parity index of
less than 1 indicates that the proportion of literate females is less than that of males. For example, if 50 percent of women are literate with
a parity ratio of .9, it would indicate that 55 percent of males were literate.)
5. Percentage of seats in the lower house of parliament held by women.
6. Europe is represented as the EMU countries (European Monetary Unit countries, which are the EU members excluding Great Britain), except
for seats in parliament which uses the OECD countries as a base.
Sources: World Bank World Development Indicators, 2001 and 2002; UNDP Human Development Report, 2003; CIA World Fact Book,
2002 and 2003.
38 Issue Paper Number 3Middle East and North Africa
Egypt 70,283 50 42.9 .14
Jordan 10,637 81 11.6 .51
Lebanon 3,927 35 7.4 1.95
Morocco 48,868 60 15.4 .06
West Bank/Gaza 3,306 65 .5 3.37
Regional Total 130,362 55 82.5 .54
Europe and Eurasia
Albania 1,235 20 13 7.3
Azerbaijan 4215 43 2.3 3.85
Kyrgyzstan 21,780 89 4.5 .80
Tajikistan 5,326 82 1.2 1.36
Uzbekistan 228 72 .02 0
Regional Total 32,784 69 21.1 5.17
South Asia
Bangladesh 2,585,472 95 32.1 2.03
Pakistan 3,764 99 14.9 1.67
Regional Total 2,589,236 95 47 1.91
East Asia and the Pacific
Indonesia 477,388 16 1,347 1.55
Regional Total 477,388 16 1,347.2 1.55
Africa
Eritrea 125 90 .01 0
Ethiopia 9,257 50 1.6 9.2
Guinea 9,497 70 1.5 4.3
Mali 133,616 65 13.8 4.92
Nigeria 29,911 97 1.8 2.71
Senegal 40,347 75 16.6 2.44
Regional Total 222,753 69 35.3 3.8
Total Muslim World (3) 3,452,523 55 1,553.2 1.61
Total Muslim and
Non-Muslim World (4) 4,790,754 59 2,635.2 1.48
Notes:
1. Calculated by dividing the total number of women borrowers by total number borrowers.
2. Calculated by dividing total loan loss by total portfolio in each region.
3. Includes Bank Rakyat in Indonesia and Grameen Bank in Bangladesh.
4. USAID 2002 sample plus Grameen Bank.
Sources: USAID Microenterprise Results Reporting for 2001 and 2002; The Mix Market, and Grameen Bank Annual Report 2002.
Table 8. Female Clients of Microfinance Institution in the Muslim World
by Number and Quality of Portfolio
Women borrowers
(millions)
Proportion of women to
total borrowers1
(%)
Total portfolio
($ million)
Loan loss rate2
(%)
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PN-ACY-1011. Footnote 4 on page 7 should read as follows:
It is worth noting in this context that the corporation, with the legal rights of a “fictitious,” infinitely-lived
person able to function in perpetuity as a financial intermediary, took a long time to have a major
impact on Western economic growth. The modern corporation emerged from church and guild organi-
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England, in the late 16th century.
ERRATA
2. Table 8 on page 39 should read as follows:
Middle East and North Africa
Egypt 65,624 50 42.9 .14
Jordan 10,637 81 11.6 .51
Lebanon 3,927 35 7.4 1.95
Morocco 46,868 60 15.4 .06
West Bank/Gaza 3,306 65 .5 3.37
Regional Total 130,362 55 82.5 .54
Europe and Eurasia
Albania 1,235 20 13 7.3
Azerbaijan 4215 43 2.3 3.85
Kyrgyzstan 21,780 89 4.5 .80
Tajikistan 5,326 82 1.2 1.36
Uzbekistan 228 72 .02 0
Regional Total 32,784 69 21.1 5.17
South Asia
Bangladesh 2,585,472 95 32.1 2.03
Pakistan 3,764 99 14.9 1.67
Regional Total 2,589,236 95 47 1.91
East Asia and the Pacific
Indonesia 477,388 16 1,347 1.55
Regional Total 477,388 16 1,347.2 1.55
Africa
Eritrea 125 90 .01 0
Ethiopia 9,257 50 1.6 9.2
Guinea 9,497 70 1.5 4.3
Mali 133,616 65 13.8 4.92
Nigeria 29,911 97 1.8 2.71
Senegal 40,347 75 16.6 2.44
Regional Total 222,753 69 35.3 3.8
Total Muslim World (3) 3,452,523 55 1,553.2 1.61
Total Muslim and
Non-Muslim World (4) 4,790,754 59 2,635.2 1.48
Notes:
1. Calculated by dividing the total number of women borrowers by total number borrowers.
2. Calculated by dividing total loan loss by total portfolio in each region.
3. Includes Bank Rakyat in Indonesia and Grameen Bank in Bangladesh.
4. USAID 2002 sample plus Grameen Bank.
Table 8. Female Clients of Microfinance Institution in the Muslim World
by Number and Quality of Portfolio
Women borrowers Proportion women to total
borrowers1
(%)
Total portfolio
($ million)
Loan loss rate2
(%)