Islam and economic development

By John Perkins

Many in the Muslim world perceive that their economic circumstances lag behind that of the "West". They may also be aware that in the golden age of Islam, Muslim societies led the world in science, philosophy, culture and prosperity. Since then, Muslim empires have been defeated, Muslim countries invaded and colonized, and humiliation has been suffered at he hands of the Christian West. Since the age of imperialism, independence has been gained, but many Muslim countries still fall into the category of "less developed country". Those that are not in this category generally owe their status to their fortunate possession of natural resources, oil in particular. Many Muslims regard their relative poverty as something that in part at least, has been imposed upon them by the West. They see the distribution of wealth in the world as unjust.
It is possible that some Muslims may see the continuing lack of Muslim economic success as partly a result of incompetence or corruption on the part of their governments. The success of many East Asian countries, with their rapid economic growth, shows that it is possible to narrow the gap in living standards compared to western countries. But many Muslims point to the failure of economic development in their countries as a failure of western policy. They also see Western society as decadent, immoral, inequitable and as something they have no wish to emulate. A return to Islamic values is seen as a solution. To what extent then is the relative poverty of Muslim countries self inflicted or caused by outside factors? To investigate this we first need to review some basic economic findings, the nature of economic development. We need to review the process of wealth creation and the role of Islam in this process.
The economics of wealth generation
The level of income in an economy is related to the volume of goods and services produced. The amount of this production in the long term is determined by three main factors: the availability and exploitation of natural resources; the quantity of productive capacity available in the form of buildings, infrastructure, machinery plant and equipment; and the availability, ability, education, training and resourcefulness of the workforce. In the short term there may be additional factors such as recessions, shortages, price imbalances natural disasters or wars that may also affect the level of production and income.
Essential to income producing capacity then are three "factors of production": natural resources, physical resources and human resources. The natural resource endowment of a county is a matter of circumstance. Such resources must be extracted, processed, exploited or acquired by trade as required. Physical resources however are man-made. The availability of these resources depends on the past accumulation of physical investment in building construction, purchase of equipment and maintenance of the stock of these assets. It is here that culture and religion, Islam in particular, may play a role.
Physical productive assets are what economists call "capital". This represents the physical wealth of society. Without it, income cannot be generated. Creating it is a long process of planning, risk taking, vision and enterprise. Individual investments are not taken in isolation but may require a number of inter-dependent factors. The financial return on such investments may not be realised for years into the future. Undertaking such activity may require an intangible sense of business confidence as well as individuals with business acumen. Governments may see it as their duty to directly participate in such investment themselves or otherwise encourage private investment. An effective financial market is necessary to facilitate it. Accumulating income-generating capital is something like growing a garden – it needs planting and careful nourishment and maintenance for it to flourish. Does Islamic society provide a hospitable environment, or a desert, for the cultivation of this essential factor of production?
The third factor of production is human resources. This is not just a matter of population. People need to be educated and trained in order to make use of the physical capital, as well as maintain society in a situation of security and fulfillment. Education is a form of investment in "human capital". This requires not just technical training but a full range of education serving the enlightenment, service and entertainment of society. It is in the interests of society to maximize the potential of every individual. The capacity of society’s human resources to generate income will be diminished to the extent that those resources are not utilized to their potential. Religion may play a role here – possibly a negative one.
All these factors determine what an economy may produce, and what income it may generate, at a particular point in time. Underlying all these factors is the dynamic driving force of technical progress. The nature of this progress is improvements in physical capital over time that deliver increased output for given amounts of material and labor input – higher productivity. This is the fundamental reason for the success or industrial society and for modern prosperity. It is the fruit of scientific research and development. Historically, freedom of thought was required for the development of scientific knowledge. Science and technology provided the basis for the industrial revolution. This technical progress has for over last two hundred years has provided more or less continuous growth in industrial productivity. Religion may also have an economic impact on this process, again possibly a negative impact.
This productivity – more output for a given level of material and labor input – over time has provided improvement in the standard of living, or an underlying long term increase in average incomes. This role of technology in the economy was not anticipated by anyone at the dawn of the industrial era, including the by classical economist Karl Marx. The class conflict he predicted was avoided by the potentially universal economic improvement provided by technology.
The nature of the modern industrial economy is not inherently immoral or necessarily unreasonably inequitable. Taxation and welfare benefits can be used to redistribute income from rich to poor. The extent to which this is done is a political matter. The prosperity generated by such economies may benefit all citizens. Muslim customs and religious rules and practices may assist a more equal distribution of income, but in doing so may have some unnecessary and negative effects on the successful operation of the modern economy. Muslim society centuries ago surrendered its scientific leadership due to the strictures of Islam. The same forces are still to some extent at work today contributing to the relative impoverishment of Islamic societies.
Religion and income distribution
By analysis of current international financial data it is possible to calculate the average per-capita income for almost all countries in comparable terms. It is also possible to assign most countries to religious groups, depending on the dominant religion in each country. This process highlights the great inequality in income between the peoples of the world. It also shows a great discrepancy in income between the Muslim world and the Christian world. The richest countries in the world are those of Europe, North America and East Asia. Only a small number of Muslim countries approach their income levels, and this is only due to their oil wealth. Data for the last two decades show that in almost all countries, living standards, (average income levels) are rising over time, as a long-term trend. In some cases the incomes of poorer countries such as China, are increasing rapidly, narrowing the gap between them selves and the rich countries. In many poor countries, including many Muslim countries, income growth is low, so that the gap is widening. What factors lead to such differences?
It is possible that the differences in incomes between countries could be caused by factors entirely unrelated to religion. However the nature of income generation indicates that cultural factors including religion may provide some explanation. In understanding the current distribution of income between countries, it is important to recognize the process of wealth generation. The level income of each country for that year does not just represent productive efforts made in that year. It also represents extent to which each country has been able to utilize past income to accumulate productive resources (capital), which are now used to produce current income. In this ability of a society to accumulate productive resources – economic development – that religion and culture may have an influence. It is apparent from the current situation that the Christian countries in general, and over some time, have been more successful at achieving this task and the Muslim countries less so.
The balance of wealth today is largely determined by the location of productive physical capital. The rise in the importance of capital over the last two centuries is the major reason for the relative decline of the Muslim countries. The capital accumulation process, together with wars and depressions, has continued until we arrive at the geographical pattern of global wealth seen today. Because of industrial wealth, the global and religious imbalance in income distribution is greater now than at any time in history.
How did the "Western" countries manage to get into this favorable position? It is not a matter of recent circumstance. The sequence of events – Renaissance, Protestantism, exploration, colonialism, imperialism, Enlightenment, culminating in the industrial revolution and economic development – started in Europe and then spread around the world. No other prior civilization had been able to achieve the momentum of this sequence of historical developments that has lead to such current prosperity, albeit unevenly spread. It occurred in Christian countries, but what were the essential ingredients that generated it? The territorial gains via imperialism no doubt provided some assistance but were not the main factor.
Principally, the necessary historical ingredients were scientific method and the rule of law – market forces then did the rest. The application of scientific method gave rise to discoveries that made the industrial revolution possible. The rule of law, in particular the notion that the that actions of rulers themselves should be bound by law, and the protection of private property rights and later individual rights, enabled a climate whereby the fruits of labor were relatively free from confiscation and destruction. In this benign legal environment, market forces then gave rise to the process of accumulation of physical capital and wealth. The major role that Christianity played in this, by constraining the use of scientific method, was to prevent it happening for centuries. It was the forces of the Enlightenment that finally weakened the power of religion to interfere in this process. The role Islam played in this process was to prevent it developing in its own societies, despite its early lead, and then do delay and hinder is introduction and importation from the West.
Developing country economics
Economists have long theorized about the economics of developing countries, how their situation differs from developed countries and how they may best achieve development. Various development stages are described for the developing economy such as moving from subsistence agriculture, the building of transportation and other social infrastructure, and the developing of export revenue to finance capital imports. The rate of growth that can be achieved is determined by the amount of savings – the surplus of income over consumption. These savings can then be used for investment in physical capital. Over riding this is a constraint imposed by the balance of payments – the surplus of exports over imports. Additional factors such as the natural resource endowment, constraints due to climate and population as well as the institutional environment may also have an impact. This may define a certain income growth potential associated with a region or nation state.
Whatever potential a nation may be considered to have, it may be realised to a greater or lesser extent. When an economic potential is not realised, the reasons may be internal failure or external constraint. Internal or domestic reasons are those for which the domestic government is responsible. This could be a failure of economic policy, misdirected policy or a failure of implementation due to institutional failure such as corruption. Any of these internal factors may possibly be related to religious policies or practices. An external factor may be related to trade, where a country faces barriers to its potential exports, depriving it of financial resources necessary for capital accumulation.
In matters of trade, there are often conflicting economic viewpoints. Since the contribution of David Ricardo, it has been recognized that international trade is not just a game of winners and losers. Through the benefits of specialization, and the international redistribution of production to countries with natural comparative advantage, all parties can benefit from trade. In this view, no country should have barriers to trade, in the form of import restrictions, quotas or tariffs. The 1930s depression was partly caused by a collapse or world trade due to protectionism. The General Agreement of Tariffs and Trade (GATT), now the World Trade Organization (WTO) was set up to safeguard against this.
Current trading rules do not benefit developing countries, but have been manipulated by developed countries to suit themselves. For many developing countries their only hope of exports is that of agricultural goods. Yet the EU, the USA and Japan have systematically prevented the rules of free trade as defined by the WTO from applying to agricultural goods. Instead they subsidize farm inefficient production in their own counties to the value of US$350 billion annually, depriving poor countries of this production, market, and income. By comparison, foreign aid is only US$50 billion. This immoral policy can be described as amounting to a kind of extortion by rich countries against the poor. Many developing countries are quite justified in complaining that for this reason their relative poverty is not their fault. The global distribution of income, and inequality between countries, is partly caused by this inequitable trade policy. But it is not a policy specifically directed at Islamic countries. It is a case of vested interests and national interests overriding what is best for the welfare of the world community.
By policies such as this, many developing countries are constrained from achieving greater economic development by circumstances beyond their control. There are many other circumstances however that are within the responsibility of a developing country government that also lead to development failure. These range from well-meaning mismanagement, to inappropriate objectives, to ruinous corruption. In the first category, many countries have attempted paths of self-reliant development with mixed success. The accepted method now is to try to attract industries that use "world best practice" production techniques to generate export industries. The area of inappropriate objectives is one where religion may have an influence.
Economists have identified a range of social factors that assist development. These include the rule of law, education, health and low rates of fertility. Being more controversial, the status of women and religion have not received the same attention as factors limiting development. These factors are inter-related. If women achieve a high level of education and workforce participation, they may have fewer children. Female employment provides higher family incomes, while lower fertility assists in achieving higher per-capita income growth. Society can then devote more resources to capital "deepening" rather than capital "widening". This means for example that rather than building more roads, houses and schools for a higher population, more high technology factories can be built. Therefore the role of women in society is a critical factor in development.
Islamic constraints to development
In Islam, women are inferior to men, Quran (4:34). No alternative quotations or excuses can prove otherwise. Recent figures from the International Labor Organization, published by the World Bank, indicate that in the Middle East and North Africa, women comprise 28% of the total labor force whereas the world average is 40%. As a group, these countries have the lowest female labor force participation rate in the world. One of the lowest figures is Saudi Arabia with 16%. As distance from the Arabian Peninsula increases, so does the proportion of women in the labor force. In Pakistan the figure is 28.6 percent, whereas in Bangladesh and Indonesia the figures are close to world average. This is a reflection of cultural values regarding women in Muslim countries, values inseparable from religious values. It is also associated with higher birth rate in these countries. This religiously prescribed role for women in society has profound economic consequences.
The major economic impact of low female participation is due to the fact that one-income families have lower incomes than two income families. If these women were engaged in paid employment, increasing the labor force by 30%, it is not unreasonable to assume there would be an additional contribution to national income of around 10%. Whatever the figure may be, if a large proportion of the potential workforce does not work, total national income is reduced by a considerable amount. Furthermore, this is a percentage of national income that is forgone every year. This relative income loss persists every year. Therefore income continually forgone represents an accumulating loss in potential national prosperity.
The limitation on the labor force participation of women reduces potential production and income. The role of women in Islamic society, with its focus on domestic responsibilities, may lead to a high birth rate and population growth rate, a correspondingly lower per-capita income growth rate, further contributing to relative poverty. The role prescribed for women in Islam as outlined in the Quran conforms with Arabic customs in the 7th century. It does not conform to modern standards of equality and objections to sexism. Discrimination against women also contravenes the Universal Declaration of Human Rights and other international agreements. It also contravenes modern standards of morality.
There are many other practices and teachings of Islam that inhibit economic development. The nature of Islamic education may not be helpful in developing open minded citizens fully equipped to fulfill their ambitions and potential. The time devoted to daily religious observances and annual festivals such as Ramadan may detract from time available for economically productive activities to a greater extent compared with other religions. The religion contributes to an attitude of fatalism and complacency. Even in countries with oil wealth, there has been a conspicuous failure to effectively use revenues for the purpose of industrial development.
The constraints and costs imposed on financial institutions by the nominal prohibition on interest payments may preclude a free market in financial capital, causing inefficiency, moral hazard in banking, and limiting the funds available for investment. The prohibition on interests serves no beneficial purpose. Apart from it being banned by the Quran, there is no reason in modern times for the charging of interest to be considered immoral. In ancient times unscrupulous tax collectors may have forced people to pay exorbitant and unreasonable interest on unpaid taxes. Today, there is no compulsion, but rather competition between lenders to offer attractive rates. Those that borrow money receive a service and those that lend it provide one. Elaborate schemes to circumvent such transactions because of their supposed immorality or due to their prohibition in Islam serve no purpose except to increase costs and increase inefficiency.
Islamic tax regimes may negatively effect resource allocation, productivity and innovation. Conflict between secular and sharia law may contribute to an ineffective rule of law, a lack of trust in judicial institutions, moral hazard in judiciary, limitation on property rights and contract law, all of which have negative economic consequences. Religious constraints on the freedom of speech and on the power of the legislature, may impinge on democratic rights, institutions, political freedom and the ability to expose and eradicate corruption, again with negative economic impacts. These can generally be described as factors leading to a lack of motivation. In Islam, it is considered more important to prepare for the next life, by conformance to Islamic morality, than to be concerned with material gain in the current life. This results in an effective and immoral denial of welfare and communal prosperity. This derives from a misplaced belief that the Quran, and its definition of morality, is the truth.
Where religion contributes to the order of society and a feeling of well being amongst citizens, its benefits may seem considerable. When it contributes to ignorance, inefficiency and poverty it becomes a cost to society and a liability. There is no doubt that Islam is an economic hindrance ands a barrier to prosperity and fulfillment of human ambition, potential and welfare. Like all religions it is outdated, unnecessary and divisive. A greater awareness of its deleterious effect on human welfare may help to weaken its unfortunate grip on the hearts and minds of humanity. For no religion is this more relevant than Islam.
(C) Copyright 2003 John L Perkins