ISLAM

AND
ECONOMIC DEVELOPMENT
A Strategy for Development with Justice and Stability

M. UMER CHAPRA
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fPzaiit to c/tftaA, -Cold of tlu rllniuczi£.

oMay £Pcace and ^Piaytn (£n ujion <cHii

\hna[ ZPxofJid and dleiicnyci.

 ISLAM AND ECONOMIC
DEVELOPMENT

And hold fast, all together, unto the bond with God. and do not draw
apart from one another. And remember the blessings which God has
bestowed upon you: how. when you were enemies, He brought your hearts
together, so that through His blessing, you became brethren; and how,
when you were on the brink of a fiery abyss. He saved you from it. In
this way. God makes clear His messages unto you, that you find guidance.
(Qur’an 3: 103)

Verily, as for those who have broken the unity of their faith and have
become sects-you have nothing to do with them. Their case rests with
God and in time He will make them understand what they were doing.
(Qur'an 6. 159)
 To my children
Maryam. Anas. Sumayyah and Ayman
and to all members
of the future generation
whose well-being
depends on the adoption of
the Islamic strategy
for development with justice and stability
 Contents

Preface ix

Foreword xi

Introduction I

ONE: THE KIND OF DEVELOPMENT

Stability and Socio-Economic Goals 3

Goals, Strategy and World-View 3

Islamic World View 5

Goals of Islam lM<u/u>ul al-ShutCuhy

The Basic Thesis 7

Efficiency and Equity 7

Elements of a Successful Strategy s

Need for a New Strategy 9

TWO CAN SECULARISM FOSTER JUST 11

DEVELOPMENT’

Inequity of the Market Strategy 17

The Rationale 13

Unrealistic Assumptions '**

Harmony Between Individual and Social M

Interests

Individual Preferences Reflect Social Priorities 15

Equal Distribution ■'

Pnces Reflect Urgency of Wants <5

Market Imperfections 16

Social Darwinsim 16

Crisis of the Welfare State 16

Inequity of the Socialist Strategy >8

Lessons for Developing Countries 70

 ISLAM AND ECONOMIC DEVELOPMENT CONTENTS V

THREE: The Inconsistency of Development Economics FOUR: The Islamic strategy 59

Pessmist outlook Important Elements of the Strategy 59

Dominat Government Role 1. Equitable Filtering of Excess Claims 59

Neglect of Equity 2. Motivation 60

Sterile Controversies 3- Socio-Economic Restructuring 61

Agriculture versus Industry 4. Role of the State 62

Import-Substitution versus Export Promotion Five Policy Measures 62

Unanticipated Problems 1. Invigorating the Human Factor 64

Inflation Motivation 65

Debt Burden Socio-Economic Justice 65

Planning Difficulties Rural Uplift 66

Resurgence of Neo-Classical Economics Labour Reforms 66

The Crucial Question Fair Return to Small Depositorsand Shareholders 69

Contents of Liberalisation Justice to Producers, Exportersand Consumers 69

Just Development in the Far East Moral Transformation 7t*

Factors Responsible for Just Development Ability 71

Government Role Education and Training

Land Reforms and Wealth Distribution Access to Finance 7'

Social Equality 2. Reducing Concentration in Ownership

Labour-Intensive Techniques Land Reforms and Rural Developmem 74

Cultural Values Size of Landholdings 75

Import Control and Export Promotion Terms of Tenancy ,h

Low Defence Spending Rationale and Objections 7’

A Peep into the Future Rural Development

The Missing Link Proliferation of Small and Micro

EnterprisesfSMEs) S()
vi ISLAM AND ECONOMIC DEVELOPMENT CONTENTS vii

Wider Ownership and Control of Corporations Bureaucratic Controls 102

Activation of ZofaUr and Inheritance Systems Foreign Equity Capital 102

ZaLtii The Social Self-Help Programme Need based Production 103

Inheritance A New Deal for the Unemployed and the

Underemployed 104
Restructuring the Financial System
Promoting SMEs 105
3. Economic Restructuring
Essential Measures 108
Changing Consumer Preferences
4. Financial Restructuring 109
Introducing the Moral Filler
5 Strategic Policy Planning 113
Needs and Luxuries
FIVE Why the failure? 117
Liberalising Need Fulfilment
Need for Political Legitimacy 117
Reforming the Public Finances
Criteria for a Sound Political Order 118
Priorities in Government Spending
Satisfying the Criteria 121
Principles of Public Spending
Role of the 'l/fomd' 122
Where to Cut
Two Forms of Change 123
Corruption. Inefficiency and Waste

Subsidies SIX Conclusion 125

Public Sector Enterprises Suggestions for Further Reading 131

Defence Notes and References 133

Tax Reform Bibliography 155

Restrained Deficits Index 163

Financing Deficits Islamically

Resturctunng the Investment Climate

Removing the Hurdles

Political Uncertainties

Exchange Controls and Currency Depreciation

Tariffs and Import Substitution

 PREFACE
Islamic Economics is now being taught in many universities around the
Muslim world. Hence, the need has increased considerably for studies on
different fields of economics to reflect the Islamic world-view. Since almost
all Muslim countries fall within the category of developing countries, the need
for a textbook on development economics has also been long felt. Although
some textbooks have already become available on the subject, there is still
need for a textbook that critically evaluates the neo-classical and socialist
strategies for development to show why they cannot enable the Muslim
countries to realise their own vision of development, and to help them
formulate a strategy that is in harmony with the Islamic world-view and
ideals. The present book, prepared on the suggestion of some friends, is an
attempt to fulfil this need.

This book is the expanded version of a paper presented by me at a

seminar on Islamic Economics held in Cairo in September 1988 under the
auspices of the International Institute of Islamic Thought. Hemdon. Va.
(USA) and the al-Azhar University, Cairo (Egypt). The ideas expressed in
this paper were derived from my book. Islam and the Economic Challenge.
which was under preparation at that time, but which has now been published
jointly by the Islamic Foundation. Leicester. U.K., and the International
Institute of Islamic Thought. Consequently, the present work also reflects the
ideas expressed in Islam and the Economic Challenge and draws freely on the
materials contained in the chapters relevant to economic development. All
this effort was directed to praducing a book that would at once be of interest
to all those who wish to understand the Islamic perspective on development
and serve as a text-book for use by university students as well.

While all references have been given in the relevant notes, the
references to the Qur'an have been given within brackets immediately after
the citation, the first number referring to the surah (chapter) and the second
to the dyah(verse). The translation is my own; however. I have benefited
from the translations of Abdullah Yusuf Ali. T.B. Irving, and Muhammad
Asad.
 I am particularly grateful to brother Dr. Zafar Ishaq Ansari for the
encouragement he has provided in the preparation of this book and for the
time he has spent in reading the manuscript and making a number of valuable
suggestions for improvement. Hence, if the readers find this book clear and
readable, a substantial part of the credit goes to him. I am also grateful to the
Islamic Foundation and the International Institute of Islamic Thought for their FOREWORD
permission to draw upon some chapters of my Islam and the Economic
Challenge, I wish to take this opportunity to record my gratitude to Mr. One of (he dominant features of the present century is the almost
intermittent rivalry and competition between capitalism and communism. Each
Azmatullah Khan of the Islamic Foundation for his help in preparing the
of the two doctrines did its best to make its vision of socio-economic life prevail
bibliography and to Mr. Mobin Ahmad for the secretarial assistance he has so
in, let alone establish its hegemony over, the whole world. Thanks to lhe
efficiently provided. prominence of these twin ideologies over a vast stretch of time, most human
beings entertained for long lhe belief that they had no other option but to choose
one of the two.

This was natural since no other politico-economic systems were

M. Umer Chapra
effectively in operation in the world; nor were the votaries of any other doctrine
engaged in propagating their doctrine io all mankind.
Riyadh
The first half of the present century saw a great majority of Muslims
9 Rajab 1412
languishing under foreign tutelage. The few Muslim countries that were
13 January 1992 politically independent were steeped in backwardness as were lhe Muslim
couniries under foreign control. As a consequence, the Muslims were in no
position to play an effective role on the stage of history. In such a circumstance
it was not surprising that the Muslims should also feel attracted to the ideologies
which had been accepted by the majority of mankind. Nor was it surprising that
many Muslims should also be inclined to believe, like the rest of mankind, that
their choice was confined to the dominant systems of the time.

Such a trend of thought, however, was not quite tn lune with the genius
of the Muslim ummah which had been taught thai Islam's validity was not time­
bound. Hence, even in the most depressing decades of the present Century, we
find powerful Muslim voices affirming Islam's self-sufficiency, its all-pervading
character, its timeless relevance, and its innate soundness Although such voices
rose from all parts of the world, perhaps the most powerful voice was the one
from the South Asian Subcontinent, the voice of Muhammad Iqbal (d. 1938).

For quite a while lhe Muslim statements which challenged the

hegemony of the dominant secular ideologies might have had a ring of oddness.
To claim that Islam was intrinsically superior to the contemporary systems and
that Islam alone could provide the panacea for the sufferings of all mankind
might have appeared little more than empty, idealistic bombast But gradually
an increasing number of people — both Muslims and others — awoke to the
lacl that the systems currently tn vogue were, to say lhe least, not an unmixed
blessing In fact by the Second World War it became evident that the dominant
xii xiii
materialist spirit and orientation qf the contemporary civilization had brought the post-independence period the desire for the establishment of an Islamic
untold misery to mankind The rank brutality of the modem man, his system of life, which would naturally also embrace the economic sector of life,
conspicuous indifference to the sufferings of others, his potential to wreak became stronger. The desire for building economic institutions in accordance
destruction on a mass scale, his excessive immersion in the pursuit of pleasure, with Islamic principles, (such as interest-free financial institutions, the
his growing indifference to the higher urges of human nature, and his loss of governmental collection of zakah. etc.), gradually led to the emergence of an
direction and purpose were too evident to be perceived by all. even by men of intellectual movement. As a consequence, (he questions pertaining to economic
very ordinary intellect. Hence many of those who had believed in man's matters began to be increasingly discussed at an academic level from an Islamic
inexorable progress were disillusioned. In this changed context, the Islamic perspective. During the last few decades a growing number of Muslim
claims began to make greater sense economists, mostly trained in the Western intellectual tradition, have emphasized
the need for a distinctly Islamic approach to economic questions. This has
As the prospect of the political liberation of Muslim lands seemed to
generated the concern for developing a new approach to economics, and in the
hover over the horizon. Islam's self-sufficiency began to be asserted by Muslim
case of quite a few, the concern for developing a new academic discipline
leaders, thinkers, ideologues and litterateurs with increasing fervour and
generally called Islamic Economics Dr Chapra is in Ihe vanguard of this
vehemence Around the middle of the century when political liberation became
movement and is among the few scholars who have richly contributed to this
a reality for some Muslim countries, and a clear prospect for the rest, this trend
academic effort.
assumed even greater importance and urgency.

One of the fields in which Islamic self-affirmation has been most Even in the early pan of his life Dr. Chapra had faced the question
conspicuous is that of economic doctrine and practice: in other words, the which the Muslims have faced throughout the present century, but especially in
Muslims have become eager and insistent on building lui economy consistent the post-independence period: should they look up to the capitalist "West" or to
with Islamic values and norms. the communist "East" for inspiration and guidance in their effort to build the
This should not have come as a surprise to anyone for there was a great institutionsof their newly-established, independent states? Or should they mainly
deal in both capitalism and communism which had anathematized the Muslims. depend, instead, on their own intellectual resources?
The Muslims did not feel comfortable with the crass individualism which In his student days. Dr. Chapra had made an effort to study the
manifested itself in the cut-throat competition characterizing the capitalist teachings of Islam pertaining to economic life. Not long after his return to
system. Nor were the Muslims impressed by the smug complacence of the Pakistan from USA in 1961. Dr. Chapra joined the Central Institute of Islamic
exponents of capitalism who argued that an unbridled pursuit of self-interest Research and spent two years systematically exploring Ihe ideas and principles
would necessarily lead - thanks to the operation of some "invisible hand" — to enshrined in the Islamic tradition which, in his view, could serve as the
ihe well-being of all. Muslim religious conscience fell particularly ill at case intellectual premises of a healthy economic system. This effort, which was
with interest, the backbone of the capitalist economy The Muslims could not further refined and matured by subsequent study and reflection, led to his first
appreciate that interest, which the Qur’iin had categorically denounced, could be book. The Economic System of Islam — a Discussion of its Goals and Nature
a blessing for man's economic life At Ihe same time, the Muslims also felt (London. 1970).
abhorred by the communist doctrine which envisaged total abolition of private
property. They shared, on the whole, the Western liberal distrust of the In 1964 Dr. Chapra proceded to U.S.A. After teaching Economics in
communist scheme of things. They were no less critical than the Western American universities for a few years. Dr. Chapra joined the Saudi Arabian
liberals of its potential for excessive regimentation, its propensity to smother Monetary Fund as its Economic Adviser. His long association with this
individual freedom and initiative, its being discordant with human nature, and, organization gave Dr. Chapra a first-hand acquaintance with the complex
at least in the long run, its being an unworkable proposition from the economic operational aspects of money and finance in the present times. However, even
point of view. though he has been concerned, by way ol professional duty, with matters
relating to monetary policy. Dr Chapra always remained a scholar. He never
ceased to study and reflect over the characteristicsofa monetary system, in fact,
Even in the forties, therefore, the espousal of an Islamic economic
of an economic system as such that might be at once truly Islamic and
system was not uncommon in the writings of Muslim scholars. Subsequently, in
contemporaneously viable Dr Chapra was convinced ihat a just monetary
xiv xv
system could be established only on the economic principles of Islam The riddled with loo many basic flaws to he capable of providing the foundations ol
doctrines which had come to dominate the world scene - capitalism, socialism, a just socio-economic order
communism and the doctrine of welfare state - were all too Hawed to guide
Coming to the present book. Dr Chapra has taken up a question ol
man in his effort to establish an economic system that would combine economic
vital importance for all human beings, but specially for lhe present-day Muslims
progress with justice and equity and ensure higher standards ol living go hand
The question relates io the current models of economic development evolved in
in hand with high standards of morality This was the focus of Dr. Chapra's
the West Are these essentially good models, models that will indeed lead
thought-provoking book. Towards a Just Monetary System (Leicester, 19851.
mankind to happiness and justice'.’ Or. can a heller model, inspired by lhe
This major work was followed alter a few years by another, and teachings of Islam, be offered to mankind as a workable alternative'’
perhaps an even more stimulating, more mature, and more thoroughgoing work.
It is evident that this is one of the burning questions of the day for the
Islam and the Economic Challenge (Leicester. 19921. These works, in addition
Muslims who are naturally desirous of overcoming their present under
to the several research papers relating to Islamic economy, have made Dr
development Perhaps it is no exaggeration to say that Dr Chapra's book is the
Chapra one of lhe most profound representatives ol the school of thought
first serious and significant effort to develop the intellectual blueprints of an
generally called 'Islamic Economics'. Those who have read Dr Chapra's
alternate. Islamic model of economic development Dr. Chapra is tar loo
writings have found him both profound and provocative, and certainly felicitous
humble, and tar too mature to believe that he has said the last word on lhe
and engaging.
subject However, perhaps few readers will dispute that in Illis book he does
This writer, whose friendship with Dr. Chapra goes back to the fifties, indeed provide ample food for thought and that he marks a significant milestone
has had the pleasure of keeping track of his academic work. Throughout the last in developing the contours of an Islamic development strategy.
twenty five years his writings have displayed a high standard of scholarship
As the work goes to the press, lhe debt we owe at least to those who
combined with courage of conviction. When Dr. Chapra's first book and his
have significantly contributed to the preparation and publication of this work
early papers on the Islamic economic system were published, socialism was very
needs to be acknowledged My colleague. Mr Muhammad Naeem. Assistant
much in fashion. Dr. Chapra's writings, however, envisaged an Islamic
Editor of Islamic Studies, did an excellent job of technical editing His
economic system which rests on intellectual premises significantly ai variance
mcticulousncss is matched only by a sharply perceptible eye for even the most
with those of both capitalism and socialism. During this period — the middle
trivial flaw Mr Tahir Farkhan Ahmad very ably and painstakingly composed
seventies — the present writer has had occasion to hear harsh critical comments
this book, enduring with remarkable patience both the present writer’s and Mr.
about Dr. Chapra's ideas which bordered on disparagement: 'Dr. Chapra's
Naeem's desire to produce, as far as humanly possible, a flawless work Mr
Islamic economic system is nothing but capitalism, duly sanctified by recourse
Zatar All. the Manager of the Islamic Research Institute Press, extended his
to Islamic trappings' Such comments notwithstanding, Dr. Chapra firmly stood
ungrudging cooperation to ensure an elegant production. Mr. Imnaz Zatar. a
his ground.
lecturer in the Da'wah Academy. International Islamic University. Islamabad
Now in the 1990s. we live in a world with a different climate of kindly prepared the index All of these deserve our sincere thanks Last, but not
opinion. The idol of socialism, which once had hosts of lanatic devotees all the least, is the gratitude we owe lhe learned author Dr Chapra has done a
around the world, has been shattered to pieces and has apparently been singular favour by making this line book available for publication io one of Ins
consigned to the dust-bin of history (For this author's somewhat different view, long-time friends, a favour for which he cannot Ise thanked enough. May Allah
see his 'Foreword' to Tahir Amin. Nationalism and Internationalism in Three bless him
Traditions: Liberalism, Marxism and Islam. Islamabad, 1991, p xi). As a
consequence, in recent years capitalism has gained close to universal
respectability It is being played up as the zenith of man's striving for good life;
as the very "end of history'. It is significant that in this changed climate of Islamabad ZAFAR ISHAQ ANSARI
July. 1993
opinion, we find Dr Chapra once again swimming against lhe current. Perhaps
to the surprise of many. Dr Chapra's recent writings present a sustained
argument to establish that capitalism, even in its present, reformed shape, is
 INTRODUCTION
AU Muslim countries fall within the category of developing
countries even though some of them are relatively rich while others are
extremely poor. Most of these countries, particularly the poorer ones, like
other developing countries, are also beset with a number of extremely difficult
problems. One of these problems is their macroeconomic imbalance reflected
in high rates of unemployment and inflation, excessive balance of payments
deficits, continued exchange rate depreciation and heavy debt burden. The
other problem is the extreme inequality of income and wealth among the
different classes of each country, as well as between different Muslim
countries. Consequently, while even the basic needs of a considerable portion
of the population remain unsatisfied, the rich and the upper middle classes
live in great affluence. This tends to corrode the fabric of social solidarity
and serves as one of the prime causes of socio-political instability.

Given this scenario, what is indispensable for the Muslim countries

is not just a reasonably high rate of growth in aggregate output. They also
need to substantially reduce their macroeconomic imbalances and socio­
economic inequalities. Without this reduction in imbalances and inequalities,
even the continued growth of output and the socio-political health and
stability of these countries will, in the ultimate, be seriously jeopardised. The
Muslim countries like all other developing countries are. therefore, looking for
a development strategy that would help them accelerate growth with justice
and reduced instability.

Since Islamic resurgence is gaining momentum in almost all

Muslim countries, five basic questions arise in the mind. The first question
is about the kind of development that Islam envisages. The second and the
third questions are whether this kind of development can be realised with the
secular approach of those who believe either in the market system or
socialism or with strategies formulated by development economises within the
framework of these two systems. If not, then the fourth question is about the
strategy that the Sharfah (Islamic teachings) can help the Muslim countries
formulate in order to actuaJise development of the kind that Islam envisages
with substantially reduced macroeconomic imbalances. If a successful
strategy can be formulated within the framework of the Shan ah. then the
2 ISLAM AND ECONOMIC DEVELOPMENT ONE

fifth question is as to why the Muslim countries have so far failed to THE KIND OF DEVELOPMENT
formulate and implement such a strategy. Each of these five questions has
been discussed in a separate chapter in this book. The concluding chapter STABILITY AND SOCIO-ECONOMIC GOALS
wraps up the entire discussion so as to enable the reader to get a gist of the
If economic resources at the disposal of human beings were unlimited,
whole analysis.
everybody would be able to get whatever he or she desired and there would
be no discussion of either their growth or their allocation and distribution
*** Resources arc. however, limited. This scarcity, on the one hand, necessitates
the expansion and development of economic resources and. on the other hand,
imposes two constraints on their use. Tlte first of these is that relative
stability must be maintained through the attainment of an equilibrium between
the supply of resources and the claims on them so as to avoid prolonged
macro economic imbalances and the problems associated with such
imbalances. However, every society also professes certain socio-economic
goals. Therefore, the second constraint is that stability must be attained in
such a manner that the goals of the society concerned are also optimally
realised. It is generally agreed that stability and goal-realisation are both
necessary for the continued health and development of an economy.

The simultaneous realisation of stability as well as the socio-economic

goals of the society require a strategy and there may be a number of strategies
that could be considered for this purpose. All the available strategics may
not. however, be successful. This brings into focus the choice of an effective
strategy. Since it is an economic system which concerns itself with the
development of a proper strategy, it is not possible to avoid a discussion of
the choice of an appropriate economic system in any discussion or economic
development.

GOALS. STRATEGY. AND WORLD VIEW

The goals of an economic system are essentially determined by its

world-view, which discusses questions about how the universe came into
existence! the meaning and purpose of human life, the ultimate ownership and
objective of the limited resources at the disposal of human beings, and the
relationship of human beings to each other (involving their rights and
responsibilities) and to their environment. For example, if the universe has
4 ISLAM ANO ECONOMIC DEVELOPMENT
THE KIND OF DEVELOPMENT S'

come into existence by itself, then human beings are not accountable to system to realise its goals but will give rise to a number of other difficult and
insoluble socio-economic problems.
anyone and are free to live as they please. Their purpose in life would then
be to seek maximum pleasure, irrespective of how this is realised and how it Therefore, in any discussion of economic development in Muslim
affects others or their environment. The serving of self-interest and the countries, it is imperative to look at the Islamic world-view and the goals that
survival of the finest would then seem to be the most logical norms of conform to such a world-view and the kind of development that this implies.
behaviour If it is believed that human beings are merely pawns on the This will help us examine, in chapters 2 and 3. whether the strategies of the
chessboard of history and their life is determined by external forces over market system, or of socialism and development economics which being
which they have no control, they are. then, not responsible for what goes on based on a secular world-view, are in sharp conflict with that of Islam, can
around them and need have no qualms about the prevailing inequities. help Muslim countries develop a strategy that would enable them to realise
However, if human beings and what they possess have been created by development of the kind consistent with the Islamic world-view. This is
the Supreme Being and they are accountable to Him. then they may not followed, in chapter 4. by a discussion of the strategy that the Muslim world
consider themselves either absolutely free to behave as they please or helpless needs for this purpose.
pawns on the chessboard of history, unconcerned about the direction in which
history is moving. Rather they have a mission to perform and must use the ISLAMIC WORLD-VIEW
limited resources and treat each other and their environment in a way that
The Islamic world-view is based on three fundamental concepts. These
would help fulfil their mission.
are: tawhid (Oneness and Unity of God). khildfah (vicegerency of human
The strategy to realise these goals would also then be determined by the beings), and ‘addlah (justice). Tawhid is the most important of these concepts
world-view. For example, if the survival of the fittest is an acceptable norm because the other two are its logical derivatives. Tawhid implies that the
of behaviour and if the economic system is merely concerned with the universe has been consciously designed and created by the Supreme Being.
function of bringing about economic stability in a smooth manner, then the Who is One and Unique, and that it did not come into existence by chance or
strategy would not be the same as that of a system which has to realise accident (Qur'an, 3:191, 38:27. and 23:15). Everything created by Him has
certain goals along with stability. If both the goals and stability are to be a purpose. It is this purpose which gives meaning and significance to the
realised without unduly sacrificing lhe freedom of the individual, then the existence of the universe, of which human beings are a part. This being the
strategy would be different from that of a system which does not place a high case, human beings by virtue of the fact that they have been endowed with
value on individual freedom. freewill, rationality, and moral consciousness combined with an inherent God­

Both lhe goals and the strategy of an economic system are. therefore, consciousness. are required to live in exclusive worship and obedience to the
the logical outcome of its world-view. It may. of course, be possible for an Supreme Being. Thus tawhid is not merely recognition of reality, but an

economic system to derive its goals from one world-view and its strategy active response to it.
from another. For example, the goals may be derived from a religious world­ The human being is the Supreme Being's khalifah or vicegerent on earth
view that considers all human beings members of a single brotherhood and (Qur'an, '2:30, 6:165. 35:39. 38:28. and 57:7). and the resources at his
holds them responsible for the plight of others, but the strategy may be disposal are a trust (Qur'an. 57:7). Since God has created the human beings.
derived from world-views that stand for survival of the fittest and class He alone possesses the perfect knowledge of their nature and their strengths
conflict world-views that implicitly negate the brotherhood and well-being and weaknesses, and He alone is capable of providing them with guidance
of lhe humanity collectively. In this case, there will be a conflict between the that would be in harmony with their nature and needs. In His infinite mercy.
goals and the strategy. This conflict will not only make it difficult for the God has provided this guidance — consisting of beliefs, values, and laws of
behaviour - through a chain of Messengers, including Abraham. Moses. Jesus
6 ISLAM AND ECONOMIC Of.VH.OTME.VT THE KINO Of DEVELOPMENT 7

and Muhmmad. may the peace and blessings of God be on them all. are adequately fulfilled and there is an equitable distribution of income and
Although human beings are free to accept or reject this guidance, they can wealth. However, since Islam proscribes begging as it is inconsistent with the
attain true well-being (faldh) only by implementing it in their own lives as inherent dignity of man as the khalifah of God. it is the personal obligation
well as in their societies. As His vicegerents, human beings are accountable of every person who is physically and mentally fit. to support himself and his
to Him and will be rewarded or punished in the Hereafter in accordance with family. This may not be possible unless facilities are provided for training
whether they do or do not live in this world in conformity with the guidance him to become more productive through the development of his abilities and.
provided by Him. also, unless there exist opportunities for self-employment and for working on
wages.
Since everyone, rather than any single privileged person or members of
a particular race or group or country, is a khalifah. khilafah essentially stands It is. therefore, the collective obligation of the Muslim society to ensure
for the fundamental unity and brotherhood of mankind. This brotherhood proper training and optimal employment. Moreover, since one of the prin­
would remain a hollow concept devoid of all substance if it is not cipal teachings of the Shari"ah is not to harm others nor to reciprocate the
accompanied by adtilah (justice). Establishment of justice has, therefore, harm done by others? the prevention of excessive depletion of non-renewablc
been declared by the Qur'an to be one of the primary objectives which God's natural resources and pollution of the environment, which harm both the
Messengers seek to achieve (Qur'an, 57:25). In fact, the Qur'an places justice present and the future generations, are also an individual as well as a
"nearest to piety" (5:8) in terms of its importance in the Islamic faith. Piety, collective obligation of all Muslims. Hence, 'development with justice' could
or moral development, implies closeness to God attained through the faithful be considered to have been realised if the dictates of khilafah and adiilah are
implementation of all values and establishment of all institutions prescribed satisfied through the need-fulfilment of all. equitable distribution of income
by Him through the Qur'an and the Sunnah (the Prophet's sayings and and wealth, full employment, and environmental protection.
actions), and is thus extemely important because it serves as a springboard for
all rightful actions, including the establishment of justice. BASIC THESIS

While secular societies continue to belittle the need for moral develop­
GOALS OF ISLAM (MAQASID AL-SHARPAH) ment. all of them now profess commitment to development with justice. It

This intense commitment of Islam to brotherhood and justice makes the is the basic thesis of this book that even material development with justice is
well-being (fahih) of all human beings the principal goal of Islam.1 This not possible without moral development. The rationale for this contention is
well-being includes physical satisfaction because mental peace and happiness that development with justice requires an 'efficient' and equitable use of all

can be achieved only by means of a balanced realisation of both the material resources and both 'efficiency' and 'equity' can neither be defined nor
actualised without the injection of a moral dimension into economic pursuits.
and spiritual needs of the human personality. Therefore, mere maximisation
of total output cannot be the goal of a Muslim society. Maximisation of
output must be accompanied by ensuring efforts directed to spiritual health at EFFICIENCY AND EQUITY
the inner core of human consciousness, and justice and fair play at all levels Efficiency and equity have been defined in a number of ways. From
of human interaction. Only development of this kind would be in conformity the perspective of the Sharfah, the most appropriate definitions would seem
with the maqfaid al-Shan"ah or goals of the Sharfah (referred to hereafter to be those that would help realise the Islamic vision of development. Hence,
as the maqasid or the goals). optimum efficiency may be said to have been achieved in the allocation of

While satisfaction of the spiritual needs requires moral development, resources if the maximum feasible quantity of need-satisfying goods and

satisfaction of the material needs requires the development of all human and services is produced with a reasonable degree of economic stability and a

material resources in such a just manner that the needs of all human beings sustainable rate of growth.
8 ISLAM AND ECONOMIC DEVELOPMENT THE KIND OF DEVELOPMENT 9

The test of such efficiency lies in the ability to attain a socially more claims do not exceed the supply, and the socio-economic goals of the system
acceptable result without creating prolonged macroeconomic imbalances and are also realised; (b) a motivating mechanism, to induce individuals to put in
without unduly depleting non-renewable resources or damaging the their best in conformity with the dictates of such a filter mechanism,
environment. Optimum equity may be said to have been attained in the irrespective of whether this serves their own interest or the interest of the
distribution of resources if the needs of all individuals are adequately satisfied society; and (c) socio-economic restructuring to help transfer scarce resources
and there is an equitable distribution of income and wealth without adversely from one use to another until optimum efficiency and equity are realised.
affecting the motivation for work, saving, investment, and enterprise. The proposed strategy cannot be equipped with these three indispensable
The definitions for efficiency and equity given above, however, cannot elements without injecting a moral dimension into the economic system. Any
exist in a moral vacuum.1 This is because the most important principle of economic system which has secular answers to the metaphysical questions,
physical science is that matter can neither be created nor destroyed. Total raised earlier, about the meaning and purpose of life, the ultimate ownership
output will thus always be equal to total input in physical terms. The correct and objective of the limited resources, and the rights and obligations of all
definition of efficiency would hence be, as Frank Knight has rightly argued, individuals in society, can provide neither a proper filter mechanism nor an
the ratio between useful output and total output or input, and not between effective motivating system and socio-economic restructuring. This will
total output and total input.* This means that a measure of 'usefulness' is become clear in the next chapter.
needed to measure efficiency.
NEED FOR A NEW STRATEGY
If profit-maximisation is considered to be a measure of usefulness, then
all equity-related goals must be treated as residuals and cannot be a part of Muslim countries have, nevertheless, tried to pursue so far the
the economic model. If, however, need-fulfilment is considered to be a development strategies provided by Western development economics.
measure of usefulness, then the satisfaction of all wants according to Development economics, however, does not have a separate identity of its
individual preferences cannot be a goal of the economic system. Wants must, own. It has been conceived within the secular and this-worldly perspective
therefore, be classified according to their ability to satisfy needs. of both the market system and socialism. Their problems have, however,
been aggravated and when Muslims tried to implement Western development
This requires a socially-agreed filter and a strong motivation on the part
strategies, they moved farther and farther away from the realisation of the
of individuals to abide by the verdict of this filter. Similarly, it is not
possible to talk meaningfully about an equitable distribution of income nun/dsid.

without looking at the needs of all individuals and families and determining It is. therefore, important to see why the pursuit of development with
the kind of income distribution and socio-economic organisation that would strategies based on a secular and this-worldly world-view was bound either
lead to the fulfilment of these needs. Any socio-economic organisation that to frustrate their efforts to realise development with justice or to lead to an
does not lead to an income distribution that satisfies the basic needs of all has accentuation of their macroeconomic imbalances. The following chapter,
to be regarded as necessarily inequitable. therefore, looks at the world-view and strategy of both the market system and
socialism and discusses the adverse effects of these on justice. This will
ELEMENTS OF A SUCCESSFUL STRATEGY prepare the ground for a discussion of the strategies proposed by development
economics and Islam in the two chapters that follow.
This indicates that if a strategy is to be successful in realising optimum
efficiency and equity in the use of scarce resources, it must consist of three
important elements: (a) a filter mechanism to enable individuals to choose ***
between the unlimited use of resources in such a way that the aggregate
 Two

CAN SECULARISM FOSTER JUST

DEVELOPMENT?

Secularism is the dominant world-view in the Western world and. as a

result of the Western political, intellectual and economic domination over
other countries, it has also become the prevalent world-view in the Third
World. It is a by-product of the Enlightenment movement, which tried to
undermine the hold of religion as a collective force in society and placed
great confidence in the ability of reason to discover ultimate metaphysical
truths as well as prescribe values for ordering human life. While it does not
necessarily deny the existence of a Supreme Being, it assumes that His
existence does not carry any significance for human life. The business of life
is conducted on the assumption inar there is no life after death and that there
is no accountability before the Supreme Being. Unlike religion, the dominant
world-view concerns itself with only the material aspects of life, and its
essential principle is that human well-being can be brought about only by
material means.

The deep-seated dislike for. or indifference to. religion in the modern

West made it averse to value judgements based on moral considerations.
Human actions were to be judged, instead, in the light of a stark utilitarianism
according to which 'right' and 'wrong', 'good' and 'evil' were to be
determined by the sensations of 'pleasure' and 'pain'. Whatever gave
pleasure was good and whatever caused pain was evil. A logical basis was
thus provided, at least psychologically, for the single-minded pursuit of wealth
and sensual pleasures.

This gave rise to the concept of 'economic man’, which has served as
the kingpin of modern economics. Self-interest was the only well-spring of
his action. Consumption was the highest purpose of his life, the supreme
source of happiness, and the ultimate justification for all his effort.
Maximising earnings and want satisfaction became supreme virtues.
Everything done by the individual towards this end was justified He should,
therefore, be left free to serve his self-interest. Any talk of the 'rights of
man' was plain nonsense? Economic life was conceived as an arena of
12 ISLAM AND ECONOMIC DEVELOPMENT 13
CAN SECULARISM FOSTER 1UST DEVELOPMENT*

competition regulated by a free market system which would ensure the (iii) primary role for market forces in the allocation and
survival of the fittest. Social Darwinism, thus, crept into economics. distribution of resources, and 'minimum' role for government
intervention or collective value judgements.
INEQUITY OF THE MARKET STRATEGY
The Rationale
It is this secularist world-view that has served as the fountainhead of
The pursuit of unlimited self-interest, which the market system stands
capitalism which, in its classical laissez-faire sense, does not exist anywhere.
for. had a religious stigma attached to it. Unless this was removed, it would
It has been modified over the centuries and is now generally referred to by
not have received the social blessings it needed in a Christian society, which
the less opprobrious term of the market system, which refers to reformed
was committed to the safeguard of social interest and the realisation of its
capitalism and embodies the principles of both laissez-faire capitalism and the
humanitarian goals. This was done by Adam Smith. He argued that the
welfare state. Its world-view is. nevertheless, as secular as that of laissez-
serving of self-interest by everyone would ultimately serve the social interest.
faire capitalism. Its goals are, however, more humanitarian. To realise these
goals it has advocated greater government intervention in the market to The rationale behind this assertion of Adam Smith was that the desire
correct some of the shortcomings of the laissez-faire model, and to offset, at to serve self-interest will induce the individual to be most efficient.
least partly, some of its inequities. Competition will, however, serve as a constraint on his greed and prevent him
from exceeding the limits of social interest. Consumers will try to buy at the
Nevertheless, the charismatic appeal of the original model has
lowest price whatever is in accordance with their preferences. These
continued. This appeal has gained further strength from the failure of
preferences will become known to the producers by the votes they cast in the
socialism, the disenchantment with a large government role in the economy,
market place through their willingness to pay the market price determined by
and the backlash against the welfare state. Calls have been intensified in
the interaction of supply and demand. I’roducers will try to produce at the
recent years from both intellectual and political platforms for liberalism, or
lowest cost whatever the consumers prefer, so as to maximise their profits.
a return, as nearly as possible, to the classical model with 'minimum'
This behaviour of both consumers and producers will ensure efficiency as
government intervention. This call, at present, tends to dominate the thinking
well as equity. Therefore, individuals should be given maximum freedom to
and economic policies of not only the Western industrial countries, but also
serve their self-interest through the maximisation of their income,
of a substantial part of the Third World and the now-liberalising Communist
consumption and wealth. The government should intervene only to the extent
countries. It is hence desirable to understand the rationale of the system and
to which it was necessary to ensure competition and orderly markeLs and to
to see whether it is logically possible for this system to realise efficiency,
offset market failure in attaining the desired outcomes in resources use.
which is taken for granted as its hallmark, and equity which, as many
economists have always acknowledged, it cannot realise. Within the perspective of the above rationale, the terms efficiency, and
equity do not have a direct relationship with the egalitarian objectives of
Within the perspective of the prevailing Zeitgeist, which recognises a
removing poverty, fulfilling needs, attaining full employment, and reducing
certain allocative and distributive role for the government to realise socially-
inequalities of income and wealth. It was assumed that these objectives will
desired goals, the market system may be distinguished by its emphasis on:
also be realised as a 'necessary' concomitant of efficiency and equity brought
(i) unhindered individual freedom to pursue pecuniary self- about by the competitive equilibrium. Any outside intervention to change the
interest and to own and manage private property; status quo would necessarily lead to results which are less efficient and less
equitable. The only acceptable way to change the status quo was within the
(ii) accelerated wealth expansion and maximum production and
value-neutral framework of Pareto optimality to make some people better
want-satisfaction in accordance with individual preferences;
and off without making anyone 'worse off.
14 ISLAM AND ECONOMIC DEVELOPMENT CAN SECULARISM POSTER JUST DEVELOPMENT' 15

Thus, the filter mechanism in the market system consists of market- always be feasible or successful because, while the rise in cost brought about
determined prices. These, it is argued, serve as signals to both consumers and by market solutions may not impose a significant constraint on the rich, it
producers and trigger the transfer of resources from one use to another until may considerably hurt the poor.
the supply has become equal to the demand. Since only those who consider
the goods or service 'necessary’ will be willing to pay the market-determined Individual Preferences Reflect Social Priorities
price, market forces will automatically determine the ’necessary’ from die
Secondly, it is assumed that even in a secular system based on
’unnecessary’ and the ’equitable’ from the ’inequitable’ use of resources
utilitarian values, the self-interested sovereign consumer would confine his
without resort to collective value judgements or government intervention.
claims on resources only to need-satisfaction. This assumption has also
The primary motivating force in this entire process is self-interest. The proved to be false. Without the restraint that commitment to moral values
serving of self-interest by everyone in a free and competitive market promotes in the use of resources, the votes cast in the market place may not
environment serves the social interest by leading to a most 'efficient' and reflect social priorities. Why would the rich abstain from diverting scarce
'equitable' distribution. 1 Trying to do this in any other way would require resources from the need-fulfilment of others to the satisfaction of their
value judgement which is an anathema within the framework of the secularist preference for prestige symbols, particularly when the consumer culture has
Enlightenment philosophy. The market system thus sidesteps the crucial created an atmosphere of competition for their acquisition? If the pace­
issues of ethics and socio-economic justice by asserting that market forces are setters in the society have them, others also consider them indispensable even
sufficient to keep self-interest within the bounds of social well-being. if they cannot afford them and have to resort to unscrupulous means to
acquire them.
Unrealistic Assumptions
Equal Distribution
A number of assumptions are implicitly made in the above reasoning.
These are. however, normally not spelled out clearly in the economic writings. Thirdly, it is assumed that there is an equal distribution of income and
Some of these assumptions are: wealth because only an equal distribution would give everyone an equal
weight in influencing the decision making process of the market in a secular
Harmony between Individual and Social Interest
environment where moral values do not serve as a constraint on resource use.
Firstly, it is assumed that everything that is in the interest of the However, since there are substantial inequalities of income and wealth, and
individual is also in the interest of the society and there is no possibility of since the rich are also able to have a far greater access to credit, they are able
conflict between the two. This is a false assumption. The two interests need to buy whatever they wish at the prevailing prices, and to tilt the allocation
not always be in harmony, particularly when there is nothing in a secular of resources in their favour. Accordingly, as Samuelson has rightly indicated,
environment to motivate the utility-maximising consumer and the profit­ market forces will only lead to "starving couples; to malnourished children
maximising producer to serve the social interest when this is in conflict with who grow up to produce malnourished children; to perpetuation of Lorenz
his personal interest. For example, a substantial reduction in luxury curves of great inequality of income and wealth for generations or forever."’
consumption of the rich is in the interest of increased savings and investment
and of bringing about general need-fulfilment and full employment, but may Prices Reflect Urgency of Wants
not necessarily be in the immediate interest of the rich. Similarly, avoiding
Fourthly, it is assumed thal the willingness of consumers to pay the
the pollution of a country's rivers is in the interest of the society, but it might
market price reflects the urgency of wants. This is also false because even
not necessarily satisfy the immediate, this-worldly self-interest of producers
though the urgency for milk is the same for all children, irrespective of
because it raises costs and reduces profits; market forces would lend to benefit
whether they are rich or poor, the amount of dollar voles that a poor family
those who avoid such costs. Market solutions to these problems may not
16 ISLAM AND ECONOMIC DEVELOPMENT CAN SECULARISM FOSTER HIST DEVELOPMENT 17 -

is able to cast for milk is not the same as those that a rich family is able to welfare state was not. however, based on a world-view different from that of
cast for status symbols. Hence Arthur Okun has rightly observed that markets capitalism. All it did was to combine the price mechanism with a greater role
"award pnzes that allow the big winners to feed their pets better than the of the state in the economy to ensure higher economic growth and greater
losers can feed their children.''* stability and equity. The unprecedented growth during the two decades of the
fifties and the sixties and the continually rising welfare spending by the
Market Imperfections governments have, however, failed to remove poverty, fulfil needs and reduce

Fifthly, it is also assumed that there is perfect competition with many inequalities even in the world's richest countries. In fact, as Adelman and

buyers, many sellers, no barriers to entry and perfect knowledge. Perfect Morris have convincingly shown on the basis of a cross-section of data,

competition has. however, remained an unrealised dream and is likely to "development is accompanied by an absolute as well as a relative decline in
the average income of the poor."*
remain so. particularly because of the tendency under capitalism towards the
promotion of big business and concentration of wealth and power. But growth has now faltered and unemployment has become a chronic,

The innumerable imperfections that exist in the market thwart the long-run problem. Economic instability has also heightened and is increas­
efficient operation of markel forces and produce deviations from the ideally ingly reflected in the commodity, stock, and foreign exchange markets. There

competitive marginal cost pricing, thus leading to prices that do not reflect seems to be no hope of faster growth and full employment in the near future
without rekindling inflation and aggravating macroeconomic imbalances and
real costs or benefits. Hence, while prices are not. by themselves, capable of
bringing about a socially-desired allocation and distribution of resources, they economic instability. Moreover, public sector spending to provide welfare
services to the rich and the poor alike — the only feasible option within the
would tend to be more so if they do not even reflect real costs and benefits.
framework of value-neutrality — has in fact helped the rich more than the poor
because of their larger purchases and their easier access to facilities.’
Social Darwinism
Inequalities of income and wealth have also risen in spite of progressive
The price system thus leads to social Darwinism in resource allocation taxation and welfare state services. This indicates that the strategy of adding
and distribution. The rich are able, by the sheer weight of their purchasing just a greater government role to laissez-faire capitalism to realise its goals
power, to get scarce national resources diverted to the production or import
has proved to be ineffective.
of luxuries and false symbols of prestige which do not fall within the category
The welfare state is now facing a crisis. While its goals have remained
of needs The situation is worsened by value-free advertising, which
unrealised, it is under pressure to roll back its frontiers as a result of the huge
promotes the sale of status symbols, and the relatively easy access of the rich
budgetary deficits that the welfare states are now facing. The primary reason
to the enormous financial resources of the banking system through credit.
for these deficits is that the imperative of operating within the framework of
The result is that in the market economies, as rightly indicated by Tawney,
a "part of the goods which are annually produced, and which arc called Pareto optimality deprived the welfare state of socially-agreed moral criteria
for evaluating the various claims on its resources. It was thus unable to offset
wealth is, strictly speaking, waste because it consists of articles which though
the increased public sector spending for both growth and welfare by a
reckoned as part of the income of the nation, either should not have been
reduction in other claims on resources. This led to an avalanche of claims.
produced until other articles had been produced in sufficient abundance or
The satisfaction of these claims by means of deficit financing, excessive credit
should not have been produced at all.”’
expansion, and external borrowing has led to macroeconomic imbalances
which have acquired cancerous proportions in many market-economy
Crisis of the Welfare State
countries.
The inequities generated by laissez-faire capitalism gave rise to the
welfare state, which provided a ray of hope on the capitalist horizon. The
18 ISLAM AND ECONOMIC DEVELOPMENT CAN SECULARISM FOSTER RIST DEVELOPMENT 19

The problem that the welfare state now faces is how to remove the of the whole nation for this purpose? Will the government officials not be
imbalances that it has created. There being no agreed filter mechanism and from the same people who cannot be trusted? If so, what is the guarantee that
motivating system other than prices and self-interest with the help of which they will not exploit the tremendous power exercised by them as the
to reduce aggregate demand, there is a call for placing primary reliance on the controllers of all means of production? What will motivate them to act in the
market and reducing the role of the state. While both of these are undoubted­ interest of society? Even the central planning officials need a filter mecha­
ly necessary, their use within the secular framework of value-neutrality tends nism of prices and values and proper motivation to manage the means of
to reduce, not the spending that benefits the vested interests, but rather the production for actualising both efficiency and equity. Who will provide
spending that hurts the objectives of both growth and equity. these? If they themselves try to set all prices and values, will there not be

This leads one to the conclusion that if the welfare state tries to pursue arbitrariness in their decisions and a conflict of interest, particularly in a

growth and equity within the framework of Pareto optimality, it will system which has dialectics (the counterpart of social Darwinism) as an
automatically get itself entangled in difficult macroeconomic imbalances. essential part of its world-view? Who will check them and correct them if

These will force it to roll back its frontiers. However, if it wishes to raise necessary?

growth and equity without imbalances, it must offset increased spending on Socialism thus failed to provide an effective filter mechanism and
heads that contribute to these goals by a reduction in spending on heads that motivating system for allocation and distribution of resources. Its triggering
do not. Such discrimination requires value judgements based on a socially- mechanism for the transfer of resources from one use to another was also
agreed filter and an effective motivating system that could ensure the needed slow and ineffective. This has been clearly borne out by facts. The record
socio-economic restructuring. This is not possible in a secular framework. of socialism is much worse than that of the market system. It has failed in
all countries where it was enforced. It could not fulfil needs or substantially
INEQUITY OF THE SOCIALIST STRATEGY reduce socio-economic inequalities in spite of the enormous resources of the
countries which adopted it. Moreover, the socialist economies stagnated due
The inequities of laisse:-faire capitalism gave rise not only to the
to lack of motivation among workers as well as executives and the inability
welfare slate but also to socialism. Even though socialism proposed a
of the system to respond to changing realities. The external debt of these
different strategy, it was based on the same world-view as the market system;
countries also rose steeply and is set to rise further at a rapid rate. Their
it was equally, if not more, secular in its outlook on life. However, in sharp
effort to solve the problems, that socialism has got them into, by the adopuon
contrast with the market system, it had an implicit distrust in the ability of
of market solutions, without discarding the diehard secularism of their world­
human beings to act in the interest of society. It. therefore, relied primarily
view. is bound to accentuate the prevailing inequities and to engulf them in
on the curbing of individual freedom and the profit motive and on the
a host of economic problems, including inflation, unemployment and external
elimination of private property. Accordingly, state ownership of all means of
debt, even more serious than what many market economy countries are
production and central planning became the primary instruments of its strategy
experiencing. Unfortunately, the one thing that is conspicuously missing from
for promoting efficiency and equity in resource use.
all reorganisation programmes suggested by both the socialist and the free
The removal of profit as a direct reward for individual effort, however, market circles for the reform of the socialist economies is the injection of a
erodes initiative and efficiency both of which are indispensable for growth. moral dimension into economic reform to ensure that the condition of the
Centralised decision-making also makes the transfer of resources from one use poor improves instead of becoming worse.
to another slow and cumbersome and makes the whole economic machinery
inefficient. Moreover, it was not realised that if individual human beings
cannot be trusted to manage their private businesses within the overall
constraint of social well-being, how can they manage the means of production
20 ISLAM AND ECONOMIC DEVELOPMENT

LESSON FOR DEVELOPING COUNTRIES

Both the systems have thus failed to realise their professed goals of
THREE
need-fulfilment, full employmem, and equitable distribution of income and
wealth. This is because their world-view, and the strategy derived from it. are
INCONSISTENCY OF DEVELOPMENT
not in harmony with their professed goals. The goals are humanitarian, based
on their religious ideals of justice, brotherhood and sacrifice for the good of
ECONOMICS
others. The strategics are. however, based on the concepts of 'survival of the
In spite of the inability of both the market system and socialism to
fittest’ and maximum want satisfaction’ in the market system, and 'class
realise development with justice, all Muslim countries have been pursuing
struggle' and material conditions of life’ in socialism. Within the frame of
policies prescribed by development economics, which is an offshoot of both
reference of their world-views and strategies, these systems are unable to
these systems and has. hence, lhe same world-view. It is. in fact, even worse
introduce the radical structural changes that are needed to realise growth with
because while the market and the sociolist economy countries have
justice and stability. The inevitable conclusion of this discussion is that
consistently pursued a single strategy with modifications over the years in the
systems which have themselves failed to realise growth with justice and
light of their experience, the allegiance of countries following the
stability cannot serve as examples for developing countries, and particularly
prescriptions of development economics has wavered between the two
so for Muslim countries because of the unequivocal commitment of Islam to
mutually conflicting strategies of these systems. The reason for this wavering
socio-economic justice.
allegiance is that development economics itself has so far passed through
three different phases.'

The first of these three phases was the old growth economics of
classical economists who tried to explain the long-run growth of the economy
within the liberal framework of laissez-faire capitalism. This growth econo­
mics remained a leading concern of classical economists for less than a
century after the publication of Adam Smith’s Wealth of Nations in 1776.
Thereafter it went into the background and the centre of classical economists'
attention shifted to other areas of economics. Growth economics regained its
importance in the second phase of development economics, which began after
the Second World War when a number of the 'Third World' countries became
independent and the analysis of problems relating to their development began
to attract attention. However, laissez-faire capitalism had lost ground by that
time as a result of the Great Depression and the problems of post-War
reconstruction; and Keynesian economics and socialism had become popular.

In the second phase of development economics the focus shifted away

from the liberalism of classical and neo-classical economics. It preached a
lesser reliance on the market and a greater role for the government in the
economy. But when the hold of Keynesian and socialist strategies began to
weaken in the West tn the 1970s and there was a resurgence of liberalism and
neo-classical economics, development economics entered its third phase with
22 ISLAM AND ECONOMIC DEVELOPMENT THE INCONSISTENCY OF DEVELOPMENT ECONOMICS 23

another shift of focus. It became increasingly more anti-dirigiste and pro-free PESSIMISTIC OUTLOOK
market. As a result, many of the problems now faced by developing countries
The social-Darwinist approach of development economists along with
are being blamed on the dominant role of the state in the economies and
their ethnocentricity led them to the introduction of a grain of pessimism in
increased public sector spending over the three decades of the fifties, sixties
the development literature. The poverty, underdevelopment and political
and seventies, whether it be the inefficient use of scarce resources, the unduly
subjugation of poor countries, which happened to be primarily non-F.uropean
large macroeconomic and externa) imbalances, the rising inequalities of
and non-white. began to be ascribed to the cultural, racial and even menial
income and wealth, or the social tensions.
inferiority of their peoples.' It was argued that these countries did not fulfil
This wavering allegiance of development economics, from the market lhe preconditions that development required. Their values and social be­
to the state and back again to the market, has deprived it of a firm focus. It haviour patterns were considered a priori to be inimical to the creation of
has led to conflicting analyses and policy prescriptions, and generated these preconditions.
inconsistencies and uncertainties in the development programmes of
The most brazen expression of these views was made by Eugene Staley
developing countries, causing immense harm to the health and development
who said that the development of poor countries could be successful only if
of their economies. The task that these countries now face is doubly difficult.
carried out in the image of lhe United States.' Even Myrdal. a relatively less
They have not only to develop their economies in a way that would lead to
ethnocentric Western economist, believed that the ' modernisation ideals",
greater efficiency and equity in the use of their extremely scarce resources but
which were necessary for development, were "alien" to these countries.* The
also to remove the imbalances that false prescriptions have generated.
United Nations and the World Bank, which were expected to be free from an
The question arises whether the new policies being prescribed in the ethnocentric bias, did not fulfil the expectation.’
light of neo-classical economics will help realise equity along with efficiency
The dominant view thus was that the developing countries would not be
and stabilisation. To answer this question, it would be appropriate to see the
able to advance unless they modernised' themselves. Modernisation did not.
impact that the Western world-view has had on development economics and
however, consist in adopting better technology; it consisted rather in adopting
the problems that it has generated for the developing countries.
Western materialist values and social institutions. These alone would moti­
Since neo-classical. Keynesian, and socialist economics all have their vate lhe people to work harder, to earn, save and invest more, and to adopt
origin in the Enlightenment world-view, they are secular in their approach to modem technology.
the analysis of human problems and the realisation of human well-being.
This undue emphasis on the lack of prerequisites for growth conceived
They place loo much emphasis on consumption and material possessions as
within the image of Western culture led to the widespread acceptance of the
a source of human happiness and are not inwardly committed to human
"vicious circle of poverty" in the development literature It was argued that
brotherhood and socio-economic justice. They disregard the role of moral
developing countries would not be able to overcome the vicious circle of
values in the allocation and distribution of resources, and hence in
overpopulation, lower incomes, lower savings, lower investment, lower
development with justice and stability, and over-emphasise the role of the
exports and lower growth that the lack of "modernisation ideals" created.
market or the state. Their strictly this-worldly perspective does not provide
They would hence be condemned to what Nurkse described as. a low-level
a rationale for anything other than materialism and social Darwinism. Within
equilibrium that perpetuates itself * Even the savings that they did realise by
this framework there is no motivation to serve the social interest except where
squeezing consumption could not be translated into capital goods because of
it is automatically served as an indirect result of serving the self-interest.
their inability to raise their exports and foreign exchange earnings. These
countries would not find it possible to overcome the two gaps saving­
24 ISLAM AND ECONOMIC DEVELOPMENT THE INCONSISTENCY OF DEVELOPMENT ECONOMICS 25

investment and import-export that they faced, and would not therefore be Dominant Government Role
able to extricate themselves from the poverty trap.
The volte-face in favour of a dominant role for the government in
Most of the development literature was thus imbued with a sense of development literature was brought about by the initial success of totalitarian
deep pessimism about the prospects for growth in the developing countries.’ regimes in the USSR and China, and of Keynesian economics in the West.
Since patterns of living and values of life other than those of the enlightened It began to be argued that the neo-classical economic model with its emphasis
West were considered a priori inimical to growth, little thought was given to on markets and marginal economic adjustments in response to price changes
the formulation of a development strategy that would be consistent with the was highly unrealistic for developing countries that were suffering from
resource endowment and values of the poorer countries. Williamson rightly various cultural and structural rigidities." The governments of developing
admitted this in the early 1950s by saying: countries should 'push' for development as hard as they could by playing a
leading role in the economy. Only such a big push' could help them attain
Economists generally have been too much concerned with static
'self-generating' or 'self-sustained' growth and the 'great leap forward'."
models and too culturally bound by a Western European
framework of institutions to make the contribution to the subject
The big push was to be attained by a wave of investments in a number
of the economics of growth that might reasonably be expected
from the profession.' of large-scale, capital-intensive industries. The theory of the big push thus
had a built-in bias in favour of industry as against agriculture. Concentration
Experience has. however, clearly demonstrated that this pessimism on large-scale heavy industry and capital-intensive techniques was considered
concerning the prospects for development was seriously in error and that to be the only way by which a developing country could attain accelerated
substantial growth has taken place in spite of widely varying initial development." Since the minimum economic size of a number of large-scale
endowments and circumstances. What continues to be a problem, however, industrial projects required large investments, it was assumed that private
is that because of policies framed and pursued within the perspective of value­ entrepreneurs would be neither willing nor able to make such investments;
neutrality. poverty has persisted and "the fruit of growth is concentrated in a such projects would hence have to be in the public sector.
few hands" in spite of growth.* In addition, the developing countries have
The outcome of the 'big push' theory was an undue emphasis on the
become engulfed in macroeconomic imbalances and external debt of immense role of the public sector in economic growth. Neo-classical economics thus
proportions. Why this is so will become clear in the following discussion. went into disrepute. It was replaced by the new' economics which placed
The air of pessimism in the early years of development economics gave greater emphasis on planning and government intervention, industrialisation,
rise to the idea of a 'critical minimum effort-. In the absence of such effort, import-substitution, urban development and a host of other policies that led
attempts to develop will fail." But how could this critical minimum effort be to a continually widening role for the government in the economy
mustered when the people were culturally backward and the savings and Development economics generally acquired "a strong dirigiste. anti-free
private initiative needed for this purpose were not available? The discussion market, anti-capitalist bias".15
led to the formulation of two divergent standpoints. One of these favoured Comprehensive planning became increasingly important in country after
adoption of the socialist strategy of a dominant role for the government in the country. Most of these plans called for the government to make virtually all
economy through comprehensive planning, controls, and public enterprises, major investments and to operate all capital goods industries. Many of these
in sharp contrast with the extreme neo-classical view of relying primarily on plans also called for a wide range of director controls. Planning was thus
the private sector and the market" The other consisted of playing down the intended not just to provide guidance and a framework for development to
goal of socio-economic justice for developing countries. maximise efficiency and equity, but was rather directed to the actual carrying
out of investment projects by the government through public enterprises and
the levying of direct controls.
26 ISLAM AND ECONOMIC DEVELOPMENT THE INCONSISTENCY Of DEVELOPMENT ECONOMICS 27

Neglect of Equity possibility that the Kuznets' curve may be the result of the economic system
and the policies pursued, and might not necessarily reflect an iron law of
The other impact of the air of pessimism was the belief dial the goals
nature.”
of economic growth and socio-economic justice were incompatible and that,
if the goal of accelerated growth was to be attained, the goal of equitable One of the most favoured explanations advanced for the rise in saving
distribution must be compromised.1* This could not. however, be stated rate across industrial revolutions has been the nsing inequality. Ever since
openly in development plans because of its adverse political implications. Adam Smith, economic historians have stressed the growth-inequality trade­
Hence, the plans continued to pay lip service to the goal of socio-economic off. which is central to the classical labour-surplus model considered to be a
justice by mentioning it among the objectives of planning. Effective measures priori true for all Third World countries. The evidence, however, has not
were, however, not taken in most developing countries to make the goal of been kind to the trade-off thesis. Rising inequality has accounted for little of
socio-economic justice a reality. America's or of Britain's saving experience. It appears to have made little
contnbution to contemporary savings.”
The anti-equitv tone in development literature was in a way set in 1955
for almost a decade and a half by Sir Arthur Lewis, who wrote: "First it Even a policy of inflation was espoused because it lightens the
should be noted that our subject matter is growth and not distribution".1’ repayment burden of the public exchequer and also 'forces' the public to save.
Bauer and Yamey argued in 1957 that "redistribution of income in favour of It was argued that inflation has the ability to “bring about a redistribution in
the poor is not likely to promote economic growth in the sense of greater favour of individuals and classes who are likely to save a larger part of the
output per head”." Even the United Nations ruled out distribution as a goal income transferred".” Professor Lewis also argued eloquently that price rises
of policy by stating that "the most general objective of economic development resulting from 'mild' inflation serve to increase the profits of the industrial
is to maximise the national income or the rate of economic growth”.1* and mercantile classes, and by so doing, increase their savings, which are
Professor Harry Johnson, writing in 1962. emphasised that it would be invested.” This reasoning was based on the false assumption that every
"unwise for a country anxious to enjoy rapid growth to insist too strongly on penny paid in wages is spent on consumption and that every penny not paid
policies aimed at ensuring economic equality and a just income distribution".1* to labour is necessarily saved and invested productively.
Provcrty. inequality and income distribution were virtually absent from
This trend of thought had its influence on leaders and policy-makers in
consideration in the first edition of the widely used book of readings by developing countries. Even Jawaharlal Nehru, apparently a staunch believer
Gerald Meier, Leading Issues in Economic Development, published in 1964. in socio-economic justice, justified lhe trend towards increasing economic
Even a conference of leaders in the field of economic development held in the inequality in India by saying "To some extent that is inevitable in a growing
mid-1960s made hardly any mention of the goals of reducing poverty and economy' ” Some Muslim economists also joined the bandwagon, in spite
inequality, as is evident from the proceedings published in 1966.” of the clear and unequivocal emphasis of Islam on socio-economic justice, and
Some advocates of accelerated growth went to the extent of arguing in projected the secularist. social-Darwinist view that indulgence in lhe goal of
favour of "greater inequality of incomes on the grounds that the beneficiaries socio-economic justice was a luxury that only developed countries could
are likely to save a larger part of the income transferred to them and so add afford. Dr Mahboobul Haq. who later became the Minister of Finance and
to capital formation".” Misleading empirical support for such views was Planning in Pakistan, wrote:
sought in the inverted-U curve, which has become associated with the name The underdeveloped countries must consciously accept a
of Kuznets. even though it received little empirical support from Kuznets' philosophy of growth, and shelve for the distant future all ideas
own writings or from subsequent data. The Kuznets' curve was taken to of equitable distribution and welfare stale. It should be recog­
imply that inequality is bound to increase in the early stages of development nized that these are luxuries which only developed countries can
afford."
and will decrease only in the later stages. No consideration was given to the
28 ISLAM AND ECONOMIC DEVELOPMENT THE INCONSISTENCY OF DEVELOPMENT ECONOMICS 29

It was probably not realised that within the Islamic value frame it is development, balanced versus unbalanced growth, import-substitution versus
inexcusable for a Muslim to commit, propagate or even condone injustice. export promotion, and market forces versus planning.

The socialist tendency in development economics therefore did not Looked at from the point of view of realising the twin goals of
reflect the concern for equity that it did in Western and socialist countries. efficiency and equity, the controversy appears to be sterile and unproductive.
It reflected only the desire to accelerate growth through the use of planning It reflects the absence of a focus - the focus of socio-economic justice as a
and the coercive power of the state, with an even greater commitment to goal for development. It also indicates a lack of awareness of the different
social Darwinism than was true for neo-classical economics. Socialism in the phases in which developing countries are. the diversity of their socio­
developing countries was "thus of a third type, different form that of the economic circumstances, the complexities of human society, and the factors
Communist countries as well as that of the Western world".” All that which motivate human beings to work for their self-interest without crossing
socialism really connoted in the Third World was a "commitment to the bounds of social interest. The harm that the controversy has done is
nationalisation, and more generally, to state ownership and management of a reflected in the bottlenecks, imbalances, slow growth rates, higher inflation,
large sector of the economy ’.* Socialism thus became "merely equated with burdensome debt and social unrest that most developing countries are now
planning”.’1 facing Had a filter mechanism of agreed values been available and socio­
economic justice had been a clear target of policies, the strategy for
Even though there were a number of economists who continued to be
development would not have been involved in as much controversy as the
concerned about equity even during this period, they were in the minority.
development literature has witnessed.
The prevailing view was that the 'trickle-down' mechanism would ultimately
solve the poverty and income distribution problems if only growth were fast
enough.” The trickle-down mechanism, however, proved to be highly in­
Agricultlre versus Industry
effective. This was bound to be the case. Poverty and income inequality are Since a majority of the population in developing countries lives in rural
so sticky and pervasive that it was highly unrealistic to expect that they could areas, its well-being could only have been ensured through rural and
be removed without making major structural changes in the economy and the agricultural development. Rural development was. therefore, not an option.
financial system, and without creating values and a motivating system that It was indispensable. Rural development could not. however, have taken
would be conducive to their removal. place without support from industrial development. To enable the fanners to
undertake investments in fertilisers, better seeds and improved technology, it
STERILE CONTROVERSIES was necessary to raise their incomes. This was not possible without providing
employment to the unemployed and the underemployed members of rural
The lack of commitment on the part of development economics to a
families. Il would not be possible to do so without simultaneously developing
filter of socially-agreed values, and particularly to socio-economic justice,
small-scale and micro industries in rural areas.
made it difficult to resolve the several hair-splitting controversies which have
plagued it over the last three decades. The twin pillars of materialism and Thus, for a great majority of developing countries, industrialisation, like
inequality on which development economics was founded could not provide agricultural development, was also not an option. It had to be a fundamental
a filter mechanism that could help resolve these controversies on different part of the policy objectives. Il was necessary to attain balanced development
issues of social importance. The whims and personal preferences of the if the objective was to expand employment opportunities, satisfy the basic
discussants, without any agreed criteria to guide them, led the discussion into needs of the entire population, and reduce inequalities. Neither agriculture
an endless circular path. This was clearly the case irrespective of which nor industrialisation could by itself help developing countries realise such

controversy we look at: agriculture versus industrialisation, rural versus urban development. Diversification and modernisation of all sectors of their
economies was necessary.
30 ISUAM AND ECONOMIC DEVELOPMENT
THE INCONSISTENCY OF DEVELOPMENT ECONOMICS 31

Agricultural and industrial development were, therefore, not the

substitution would have been used initially to support primarily agriculture
alternatives to choose from. They were rather complementary and mutually
and small and micro enterprises (SMEs) in developing countries. This would
supporting with respect to both input and output. The issue was not industrial
have helped fulfil needs and expand employment opportunities in rural areas
or agricultural development but rather the human being and his well-being.
and small towns. Workers would have found jobs either in their own villages
Had the well-being of all been the goal, the interrelationship between industry
and towns or near them. They would have thus not been uprooted from their
and agriculture and the contribution that each can make to the other and to the
families and social surroundings.
realisation of agreed socio-economic goals would have been appreciated.
What was done instead was the promotion of large-scale industries in
Within this context any development programme that propounds un­
urban centres through full government support in the form of subsidised
balanced growth and overemphasises industrialisation relative to agriculture,
inputs, overvalued exchange rates, and unduly high tariffs on competing
or agriculture relative to industry, could not but lead to injustice and misery
imports. International support was also available mainly for such industries.
and also create a bottleneck, which it would be difficult to remove without a
Large projects were "eye-catchers and even international agencies tend to
reversal of policies to restore a balance. Such reversals are normally difficult
prefer large-scale projects"
and traumatic.
Agriculture and SMEs suffered from lack of any subsidy or protection
Import-Substitution versus Export Promotion and from overvalued official exchange rates. Techniques remained antiquated,
productivity low. and income, savings and investment could not rise
If industry and agriculture are both to be developed, then the strategic
significantly. Unemployment and underemployment rose. Import-substituting
importance of both import-substitution and export promotion in the socio­
large-scale industries prospered because of the low cost of their capital and
economic advancement of developing countries needs to be clearly visualised.
inputs and the protection they received through high tariff walls and
There is no reason to emphasise one to the exclusion of the other. Both are
overvalued exchange rates. Moreover, since equity and need-fulfilment were
necessary, even though their importance may vary over a longer time horizon
not the primary goals of economic policy, even the selection of import­
corresponding to the different phases in the country's development.
substituting industries did not take this into consideration.
This does not mean that import-substitution should be undertaken at any
If this had been done, there would have been a positive advance in the
cost.” Since the ultimate goal is the efficient and equitable use of scarce
direction of need-fulfilment, although the employment goal would still have
resources to realise general well-being, all tariff and non-tariff barriers must
suffered. Many of the import-substituting large-scale industries were not
be weighed against the realisation of socio-economic justice and the related to needs; they were rather related to luxuries, consumer durable and
promotion of economic development. The rational principles of resource
heavy capital goods — industries in which a need-oriented development
allocation cannot, therefore, be lost sight of; the cost of economic inefficiency programme would not have taken a serious interest in the initial phase of
will be reflected in the non-realisation of goals and will ultimately have to be development. Such industries also became constrained by the size of the
borne by the people. This cannot be justified. Nevertheless, import­
domestic market. Being inefficient, they could not compete in the export
substitution al all cost became an anchor of policy in many developing market. They nevertheless led to an increase in the volume of imports,
countries because it satisfied the vested interest of the rich and the powerful. particularly in the case of industries which had to import not only capital
The slogan of reducing external dependence was used to appeal to the
goods but also raw materials. The imports they needed could not be cut back.
national sentiment of the masses. Hence what many of them accomplished in reality was to substitute one kind
It was therefore not the policy of import-substitution per se which was of imports for another.
wrong; it was rather the way in which this policy was implemented. If equity The growth of large-scale import-substituung industries, many of which
had been one of the primary goals of development, the policy of import­ depended on imported capital goods and raw materials, did not increase
32 ISLAM AND ECONOMIC DEVELOPMENT THE INCONSISTENCY OF DEVELOPMENT ECONOMICS 33

significantly the demand for the output of agriculture and SMEs. The interests of foreign exporters and rich domestic investors. Everything would
'linkage' effect did not therefore take place. The benefit mostly leaked have been done to encourage and help rural and urban entrepreneurs to
abroad through a rise in induced imports. Moreover, the technologies adopted produce the needed consumer and capital goods for the domestic market and
in these industries were predominantly capital-intensive, being designed for for export. The help would have included not only tariff protection but also
countries that have abundance of capital and scarcity of labour.” the creation of an efficient physical, social and financial infrastructure in rural
Employment directly generated by expansion of these industries was, areas in addition to import or domestic development of simple but efficient
therefore, relatively small. technology for the SMEs. This would have enabled them to increase
production and also, ultimately, to compete effectively with foreign goods.
Even a substantial pan of the meagre domestic savings came to be
Employment and income would have risen in rural areas, with less congestion
diverted into these industries at lower or subsidised rates of interest compared
in urban centres. The rising incomes of the rural population would also have
with what prevails in the rural areas. The proportion of savings going into
helped agriculture by enabling the farmers to use better agricultural inputs.
agriculture and SMEs was thus small — not necessarily because of lack of
savings in those sectors but rather because of the misallocation of savings. Import-substitution policy implemented within this framework would
The unduly large support given to large-scale industries, therefore, ruined have enabled the SMEs initially to meet the domestic demand and ultimately
handicraft industries, particularly handlooms. The bulk of the rural population to export. Exports do not necessarily have to be goods which are not also in
had no choice but to remain underemployed in rural areas or to migrate to the demand in the domestic market Production can be for both the domestic and
overcrowded urban centres. the foreign markets. In the first stage, however, production can be for the
domestic market, and later on. when capacity has increased and the external
This is not an argument against large-scale capital-intensive industries
economies have been realised, the fruits of the export market can also be
per se, which do have a place in development. However, since expansion of
reaped.
self-employment and employment opportunities enjoys priority, large-scale
capital-intensive industries should get the green light only when they are Such a policy would have helped developing countries utilise their
indispensable and the job that they can do cannot be done effectively by advantage tn the production and export of simple, need-fulfilling goods and
labour intensive SMEs. services and the capital goods related to these. This course of initial indus­
trialisation does not imply that at a later stage of development, when needs
The particular trend that import-substitution took was natural, given the
have been largely fulfilled and the unemployment problem has been solved,
propagation of Western life-styles, the lack of an indigenous development
import-substitution and export promotion in the field of consumer-durable and
philosophy, and the absence of a motivating system to induce people
heavy capital goods cannot become a target of national policy,
successfully to abstain from unnecessary and conspicuous consumption. This
was exacerbated by the vested interest of Western manufacturers of capital While import-substitution did not take the nght course, export
goods and raw materials in the production of goods for conspicuous promotion did not take place either. Many of the capital intensive industries
consumption. They did effective salesmanship and also arranged financing that were established did not have a comparative advantage in the initial phase
through suppliers' credits and loans from banks and official lending of development and. in spite of overt and covert subsidies, they could not
institutions. Imports therefore rose without a corresponding rise in exports compete in the export market. Agriculture and labour-intensive small-scale
and foreign exchange bottlenecks became more acute. industries, which could have been made to have a comparative advantage, did
not get the needed official support and credit to expand their output. The
However, if the policy of industrialisation and import substitution had
overvalued exchange rate also hurt them and they could not compete
been pursued to promote equity, an entirely different approach could have
effectively in the export market. Exports therefore did not rise as much as
been adopted. The primary objective would have been to fulfil needs, enlarge
they could have.
employment opportunities, and reduce inequalities rather than to serve the
34 ISLAM AND ECONOMIC DEVELOPMENT THE INCONSISTENCY OF DEVELOPMENT ECONOMICS 35

The recent reversal of emphasis on export promotion needs to be UNANTICIPATED PROBLEMS

considered with caution.” If import-substitution at all costs is bad. export
promotion at all costs is also not desirable. The ultimate impact of any policy While the pundits of development economics emphasised a substantially

on socio-economic justice must never be lost sight of. given the fact that a large government role to overcome the prevailing pessimism about the

number of inefficient large-scale industries have been established. A heavy prospects for growth, they did not give any serious thought to the

dose of devaluation of the local currency along with freezing of nominal development of a strategy for making an offsetting reduction in claims on

wages (two of the crutches on which the export strategy stands) may enable resources elsewhere. Wholesale adoption of Western consumer culture was
in fact propagated, and even countries in their initial stages of development
the inefficient urban industries established by the rich and the influential to
export and thus survive, but would hurt the poor by substantially lowering were pushed into the high living and gadgetry of Rostow's fifth stage. Arms

their real wages. It would be at variance with the objective of socio­ build-up was also promoted with concessionary financing. This raised the

economic justice. Thus, before jumping on to the bandwagon of export import of luxury goods and military hardware and unwarrantably widened the
promotion, all necessary measures should be taken to ensure that the benefit import-export gap It also lowered the propensity to save and made the
internally generated savings inadequate to satisfy the rising need for
goes to the poor rather than the rich.
investment. Hence, the savings-investment gap also widened. Squeezing the
Those who over emphasise the strategy of export promotion to the wasteful and inessential absorption would have required value judgement,
neglect of import-substitution, should also bear in mind that the exports of which the value-free development economics could not entertain. Within its
developing countries have always faced and continue to face all kinds of tariff instrument-kit, taxes and inflation were the main tools available for squeezing
and non-tanff barriers in industrial countries and that their imports have been
consumption.
influenced by dumping and predatory pricing by industrial countries.
However, tax revenues could not be raised in step with spending
Government aid to agriculture and industry has grown substantially in the
because of the narrow lax base and inefficient and corrupt tax administration
industrial countries over the last three decades and barriers against imports
have proliferated. in developing countries. Budgetary and current account deficits thus rose
steeply. To finance these deficits. Keynesian economics encouraged monetary
These support programmes and protectionist measures have affected expansion and the 'two-gap' approach pointed towards foreign aid." Those
mainly the imports of developing countries. For example, virtually no rice who encouraged monetary expansion probably did not realise that developing
imports are permitted in Japan and the domestically produced rice is sold at countries, with their structural bottlenecks and supply constraints, were prone
about nine times the world price, despite recent reductions in support prices.”
to a higher rate of inflation and greater import-export gap than the developed
While tariffs have been steadily reduced, protection via non-tariff barriers
industrial countries.
involves major trade, employment and welfare costs for developing
countries.” Moreover, any developing country that tries hard and manages Those who emphasised aid probably did not realise dial only a very
small portion of aid takes the form of grants; most of it is usually in the form
to become a big exporter soon faces iron walls of quota ceilings imposed by
of loans, which must be repaid with interest. Monetary expansion and heavy
industrial countries, thus finding it difficult to expand its exports further.
borrowing (both internal and external) thus became the crotches on which
UNCTAD has estimated the total economic cost of protectionist barriers
governments heavily relied. Once the govemmenLs had become dependent on
against Third World countries to be as high as $700 billion annually in terms
these, it was difficult to reverse the steps; a deep cut in spending or a steep
of export earnings — more than fifty percent of the total current external debt
rise in taxes, which the reversal demands, have always been politically
of these countries.”
unpopular.
36 ISLAM AND ECONOMIC DEVEIOPMENT THE INCONSISTENCY OT DEVELOPMENT ECONOMICS 37

Inflation This encouraged imports and hurt exports by making them

uncompetitive in the international market. Agriculture and SMEs were
Infltion became rampant, but this was also initially justified.'1 The
particularly hard hit because they did not get the support that large-scale
Phillips curve provided policy makers with the needed rationale in the form
industries received. The dependence on imports increased and the foreign
of a trade-off between inflation on the one hand, and higher growth and
exchange deficit rose further. This raised the need for borrowing and
employment on the other. Most Keynesian economists felt little concern
exacerbated the debt-servicing burden. Even though the governments would
about inflation and continued to urge expansionary policies throughout the
now like, under the IMF and World Bank pressure, to remove price controls
post-World War II period." Professor Henry Bruton, in a series of lectures
and subsidies, and to adopt realistic exchange rates, they find it politically
delivered at the University of Bombay in 1961, said that "a case could be
difficult to do so because of adverse impact on cost of living. Sir Arthur
made for making inflation an instrument of policy, rather than the control of
Lewis was thus led to exclaim: "The principal lesson we have all learned,
inflation an objective of policy"." Warnings were, no doubt, usually added
less-developed countries and more-developed countries alike, is that inflation
against monetary mismanagement by saying that "a naive note printing
is a scourge.""
extravaganza does nothing but harm '.**

Such warnings, however, were usually not taken seriously by planners Debt Burden
and finance ministers in most developing countries. Inflation offered a way
As a result of heavy doses of borrowing, both internal and external
of 'covert taxation without consent'. Unlike the higher taxes, it did not
debts of developing countries have risen steeply." This was at first justified
immediately raise the political uproar and was thus an easy way of financing
serenely. But now, lhe internal and external imbalances faced by developing
the burgeoning deficits. If there were any unpleasant consequences, it would
countries have become so serious that they have created a nightmare for all
be their successors and not they themselves, who would have to face them.
those concerned with development policies and the health of the domestic as
Such behaviour should have been expected as the most natural in a system in
well as international financial systems. The use of shallow domestic financial
which socio-economic justice is not a fundamental goal, and the pursuit of
markets for large government borrowing not only crowded out the private
self-interest is the primary objective of life. There was no reason to expect
sector but also made financial institutions weak; loaded down with low-yield
that bureaucrats and political leaders would act differently in a value-free
government debt, they were unable to provide for adequate reserves against
environment.
losses through bad debts. The heavy resort to multinational banks for external
Inflation tended to redistribute income upward, thus tilting the balance borrowing, initially justified on the basis of the supposed insolvency of
against the goal of socio-economic justice. This alone would probably not sovereign debtors, has raised the debt burden to such an unbearable level that
have given development economists pause for thought. There were, however, the inability of debtor countries to service lhe debt is threatening the very
other adverse effects which have affected development adversely and will survival of these banks. Even the developmental process has now become
continue to do so for quite some time in the future. jeopardised. Real rates of growth have slowed down. Efforts to reduce

Inflation led to price controls and subsidies on foodgrains and other inflation and the external imbalance may slow it down even further.

essential items of consumption. While price controls hurt the growth in long­
term supply of these goods, subsidies loaded the government budgets with a Plannlng Difficulties
heavy burden which the governments now find it difficult to bear. Inflation While the problems of excessive government spending were not
also led to overvalued exchange rates which were adopted by governments to anticipated, even the difficulties of comprehensive planning were
hold down inflationary pressures. underestimated and lhe expected results overestimated. The ability to
formulate development plans was severely limited by the lack of requisite data
38 ISLAM AND ECONOMIC DEVELOPMENT THE INCONSISTENCY Op DEVELOPMENT ECONOMICS 39

and the imperfect character of such statistics as are available. Efforts tended removed little will come from capital investment and technical assistance.
to be large because the data were inadequate to calculate such strategic While plans will be big on paper they will be small in result. '*’
variables as total saving, capital coefficients, the extent of underemployment,
or the value of an investment projecL RESURGENCE OF NEO-CLASSICAL ECONOMICS
Moreover, there was a tendency to expect too much from a planning
The difficulties now faced by developing countries have led to a
model. It was not realised that a planning model could not remove or
resurgence of neo-classical economics. The blame is being laid squarely on
simplify the hard choices that policy makers had to make. Conflicts among
the socialist strategy of big government and comprehensive planning followed
multiple objectives that were frequently encountered in development
over a period of about three decades. It is being argued that heavy reliance
programmes could not be resolved without establishing priorities. An
on public sector investments and controls for promoting growth has led not
econometric model could not take the place of a development philosophy
only to distortions in resource allocation but also to macroeconomic and
which provides guidelines in terms of agreed goals and values, that cannot be
external imbalances. It has hindered full realisation of the initiative and
established within the framework of Pareto optimality. A development
investment potential of the private sector. The enthusiasm for large-scale
philosophy and motivation on the part of policy makers and the public were
capital-intensive heavy industries has led to inefficient industrialisation at the
needed to take and accept decisions ungrudgingly in the larger interest of
cost of rural and agricultural development. As Michael Camdessus. Managing
general well-being. The absence of such a philosophy and motivating system
Director of the IMF, has clearly emphasised:
explains why almost all development plans placed equity among the goals of
planning but none of them laid down an effective programme to realise it. Economies that suffer from rampant inflation, large budget
deficits, pervasive trade restrictions, misaligned exchange rates,
Problems of implementing the comprehensive plans were also not given unrealistic interest rates, heavy external debt and repeated bouts
adequate attention. Many development plans met on paper the tesLs of of capital flight cannot and do not grow rapidly for any sustained
period of time.*7
efficiency and consistency (though not equity), but failed in practice due, in
large measure, to deficiencies in political and administrative requirements.
Even more disconcerting than the lagging growth and imbalances has
The implementation of plans tended to be extremely difficult because their
been the failure of poor countries to alleviate the condition of the masses
formulation had been based on the most advanced econometric models. The living in absolute poverty, the increasing number of the unemployment and
plans were too refined for practical implementation. Most developing underemployment, and the persistence of inequality. The problems faced by
countries could have benefited "more from sound application of fundamental
the poor have increased rather than decreased. The expectations, that
elementary principles of economics than from attempts to use the highest style
independence and promises made by national governments had raised, have
theory".*7
remained unfulfilled.
The macroeconomic models had a built-in preference in favour of the The resurgence of neo-classical economics in the wake of failure of the
quantifiable to the relative neglect of components that are not quantifiable but socialist strategy has thus brought the developing countries back to where they
are of crucial importance for realising the plan objectives, particularly socio­
had started from the problem of realising both efficiency and equity in the use
economic justice. The more rigorous an econometric model, the less was it of scarce resources. Development economics, it must be admitted, has a
likely to incorporate non-economic components. As Professor Galbraith
different face this time arounu. at least so it appears. It is not concerned
observed: "On even the most preliminary view of the problem, effective
merely with growth, it is also concerned with equity.
government, education, and social justice emerge as critically important. In
This has been so since the beginning of the 1970s when it began to be
many countries, in diagnosing the barriers to advancement, it is lack of these
that is of critical importance. And it follows that until these barriers are recognised that development must mean not only growth in average per capita
40 ISLAM AND ECONOMIC DEVELOPMENT THE INCONSISTENCY OF DEVELOPMENT ECONOMICS 41

income bul also a reduction in poverty.” It began to be realised that in the The Crucial Question
case of poor and heavily populated nations like India. Bangladesh. Pakistan, Thus we see that socio-economic justice, which had been declared to be
and Indonesia, only long-term, sustained, equitably distributed growth of per an outcast in the interest of rapid capital formation and growth, has been
capita income offers the majority of people any hope of economic readmitted as an objective. This is without doubt a welcome change.
advancement. It simply may not be possible to "grow first and redistribute Development economics now gives at least the same outward appearance that
later."”
neo-classical, Keynesian, and socialist economics have always given —
Development economics is. thus, no longer worshipping merely at the aspiring to realise both equity and efficiency. However, the crucial question
altar of GNP, praying for its growth only, it also claims to be a devotee of is whether the value-neutral neo-classical economics is capable of providing
redistribution. The call is for "growth with redistribution", "reduction of an effective strategy for realising both these goals in developing countries.
absolute poverty", and "meeting basic human needs". Neo-classical The strategy being currently emphasised by neo-classical economists in
economics does not now purport to be just the "guardian of rationality", it every paper and at every international or regional conference, is ’adjustment’.
also wishes to be the "trustee of the poor".”
No one can challenge the need for adjustment. Given the severe imbalances
Addressing the World Bank’s Annual Meeting in Nairobi in 1973. faced by developing countries, adjustment is no longer an option, it has
Robert McNamara, the then President of the Bank, called upon the world to become a must. What is more important, however, is the components of an
focus on those in “absolute poverty" those "who suffer a condition of life adjustment programme, and it is doubtful whether the components that neo­
so degraded by disease, illiteracy, malnutrition, and squalor as to deny its classical economics stands for can help realise both equity and efficiency.
victims basic human necessities".” Theodore Schultz, while accepting the Everyone will probably agree that the ’right’ adjustment is that which
Nobel Prize in 1979, stated: addresses itself to both the demand and the supply sides of the problem in

Most of the people in the world are poor, so if we knew the such a way that there is a ’minimum sacrifice of growth’. On the demand
economics of being poor we would know much of the economics side, it is necessary to reduce domestic absorption, which refers to the
that really matters.” aggregate of private and public consumption and investment outlays (C+/+G).
However, if future growth is to be ensured, then lhe reduction in absorption
Gerald Meier, from the first edition (1964) of whose Leading Issues in
should be primarily in the consumption component of absorption and not in
Economic Development, poverty, inequality and income distribution were
virtually absent, led off the fourth edition (1984) with a substantial emphasis investment. Moreover, if socio-economic justice is also to be realised, then
on income distribution in developing countries; and went even to the extent the decline in consumption needs to be brought about in such a way that the
of saying that "emerging from poverty" is the "economics that really matters" adverse effects fall on those who are better off and strong enough to bear the
(in another book of his. also published in 1984).” This concern for
required austerity, and that the condition of the poor is at least not made
distribution is eloquently epitomised by Dudley Seers when he says:
worse, if it cannot, for some strong reason, be made better, which is the most
The questions to task about a country’s development are desirable alternative. Socio-economic justice also demands that the rise in
therefore: what has been happening to poverty? What has been output be brought about in such a way that needs are fulfilled, employment
happening to unemployment? What has been happening to
rises and inequalities are reduced.
inequality? If all three of these have declined from high levels,
then beyond doubt this has been a period of development for the In contrast, the adjustment programme proposed by neo-classical
country concerned. If one or two of these central problems have xonomics. of which the World Bank and the IMF are the bastions, "will
been growing worse, especially if all three have, it would be
result", as Barber Conable. ex-President of the World Bank, had frankly
strange to call the result development even if per capita income
doubled.” admitted, "in some temporary unemployment, and in real difficult short-term
reductions in living standards — which sometimes affect the poorest segment
42 ISLAM AND ECONOMIC DEVELOPMENT
THE INCONSISTENCY OF DEVELOPMENT ECONOMICS 43

of the population most harshly".” However, an economic system strongly annual consultation reports on member countries ever discusses a member
committed to socio-economic justice cannot permit the poorest segment of the country's progress in removing poverty, fulfilling needs, and reducing
population to be affected “most harshly”. The palliative that the harsh effect inequalities. A country gets full laurels from the IMF if it succeeds in
may be "temporary" or ■'short-term" docs not reduce the shock because the reducing the imbalances irrespective of whether this has been attained with
likelihood is that this effect may not only be permanent but probably also or without an adverse effect on equity.
cumulative. Conable was, however, not wrong in his prediction about the
It is argued that a reduced role for the government in the economy will
impact of adjustment on the poor. His prediction had been made within the
help reduce domestic absorption by introducing fiscal restraint and cutting the
framework of neo-classical economics. It is, therefore, important to see why
budgetary deficit. The private sector will thus be able to play a greater and
the poor, who had been hit harshly by the secularist development economics
more active role in the economy and. being better motivated in its own self­
during the expansion phase, will be hit harshly once again by neo-classical
interest. will contribute to greater efficiency. Restraints on credit expansion
economics during the adjustment phase.
will help reduce private sector absorption. Greater reliance on the market will
help in 'getting the prices right' (including interest rates and exchange rates)
Contents oe Liberalisation
and in giving the 'right' signals to economic agents. This will remove
The adjustment programme offered by neo-classical economics hangs distortions and lead to a more efficient allocation of resources.
mainly by the thread of liberalisation. This call for liberalisation is couched
essentially in the value-neutral terms of Enlightenment philosophy. In spite While such a policy would lead to a rise in the prices of most goods

of a great deal of talk about economists being "trustees of the poor”, there is and services in developing countries, the neo-classical prescription calls for
a restraint on real wages. Although this will "impose hardship on organised
no commitment to a filter mechanism of socially-agreed values or to a
labour.it will ultimately be offset by higher employment and growth.
motivating system that could induce the rich and the powerful to absorb the
Outward orientation will help the adjusting country take advantage of
harsh effect of adjustment, and thus help ensure socio-economic justice. The
international trade to promote growth and to offset the recessionary effect of
harsh effect on the poor is expected to be offset only indirectly - mainly by
reduction in domestic absorption. All import restrictions should be removed
creating an environment for higher growth through the restoration of internal
and imports and exports should both be encouraged. Realistic exchange rates
and external balance.
will themselves go a long way in expanding exports and reducing imports,
The most important components of neo-classical liberalisation, as thus reducing the current account deficit. If tariffs have to be used, they
articulated by the IMF in its adjustment programmes, are: a) reduce the role should preferably be low and uniform. Any discrimination will require value
of government in the economy; b) allow the market to play its role; and c) judgements which are not desirable; it will only lead to distortions which will
liberalise foreign trade. Stabilisation and efficiency, which are the main adversely affect efficiency. Import-substitution, it is argued, has only a
targets, are to be attained by achieving "a sustainable external balance" and limited potential because its target is basically the domestic market, which is
by "restraining aggregate domestic demand, promoting supply, and. most limited, while exports do not face such a quantitative limitation.
important, improving economic efficiency".
While liberalisation calls for a cut in overall government spending, it
It has been honestly admitted that "distributional issues are primarily an does not address itself to a change in the composition of government spending
internal political concern."” Hence, "mitigation of the adverse distributional to improve the equity performance of the budget. There is no discussion of
implications of exogenous shocks or of the economic adjustments necessitated ways of raising the quality and quantity of health, housing, transport,
by past, inappropriate policies has not been an explicit objective of Fund- sanitation and educational facilities for the poor to uplift the quality of the
supported programmes", even though these adjustment programmes have human factor in development. Even a discussion of the supply side and Fund
"important distributional implications."” Consequently, none of the IMF programmes is concerned primarily with providing better incentives to
44 ISLAM AND ECONOMIC DEVELOPMENT
THE INCONSISTENCY OF DEVELOPMENT ECONOMICS 45

promote savings, investments, and exports through realistic prices, interest Factors Responsible For Just Development
rates, exchange rates, and taxes. There is no discussion of economic
While there is no doubt that liberalisation and export-orientauon have
restructuring to increase the supply of need-satisfying goods and services.
played a significant role in the accelerated growth of these countries, it is not
'Getting the prices right' through reliance on the market to give the 'right'
signals to economic agents is thus the linchpin of the neo-classical correct to give the entire credit for their economic success to these two
factors. There are several other factors which were equally, if not more,
prescription for solving the allocation and distribution problems of developing
responsible. Some of these are: substantial government intervention, socio­
countries.
economic justice and social harmony brought about by extensive land reforms
It has already been argued that the reliance on merely the price and social values, high propensity to save and invest, and active support of
mechanism to allocate resources cannot but operate against need fulfilment import-substitution as well as export-promotion for industrialisation. Not all
and equitable distribution of income and wealth. This aspect of liberalisation of these factors fit into the neo-classical model; in fact some of them arc
is not expressly spelt out by neo-classical economists. It is. however, at the clearly in conflict with it.
back of their minds when they make the stark prediction about the effect on
the poor. They assume, and their assumption is realistic within their value- Government Role
free framework, that nothing can be done to avoid the "most harsh" effect on
the poor. Any effort to avoid the result of market forces will create Governments in these countries have played, and continue to play, an

distortions that will lead to inefficiency and lower growth. Accordingly, the important role. Only in the case of Hong Kong has anything close to laissez-
faire been practised. In other countries there is extensive intervention in the
only preferable alternative is to allow higher growth attained through
form of state enterprise, subsidies, regulations and other measures affecting
liberalisation to improve the position of the poor.
the capital market, domestic savings, trade, and almost every aspect of the
However, the question is: will higher growth automatically lead to economy. The governments have also directed private business into targeted
equity? If it could, the rich industrial countries would have long succeeded channels through their control over industrial licences, foreign loans and
in eliminating poverty and reducing inequalities. This clearly shows that technology agreements, and use of selective incentives and threats" It is not
social Darwinism is unmistakenly present at the core of neo-classical possible to call Japan, South Korea. Taiwan, and Singapore liberal in the neo­
economics even though outwardly it presents a smiling face to the poor — a classical sense." With respect to Japan. Yasuo Masai says:
wolf in sheep's clothing.
Although the extent of direct state participation in economic
activities is limited, the government's control and influence over
JUST DEVELOPMENT IN THE FAR EAST business is stronger and more pervasive than in most other
countries. This control is not exercised through legislation or
Nevertheless, the neo-classical prescription is gaining momentum in
administrative action but through constant — and to an outsider
developing countries. In its support are being cited the examples of Far almost obsessive — consultation with business and through the
Eastern countries like Japan. Taiwan, the Republic of Korea (South Korea). authorities' deep indirect involvement in banking. . . . The need
Hong Kong, and Singapore, which resorted to policies of liberalisation and for large-scale government participation in economic activities is
export-orientation to promote efficiency and growth. It is argued that thereby obviated and. unlike many governments in the free-
enterprise world, the state appears to be reluctant to extend its
liberalisation helped accelerate their development by motivating their private
direct role."
sectors to greater initiative and efficiency. The outward-orientation enlarged
their export surplus and increased not only employment opportunities in these It is doubtful if these countries could have achieved as much as they did
countries but also enabled them to meet the foreign exchange needs of their without an active and strong role of their governments.
expanding economies with less heavy reliance on foreign aid.
46 ISLAM AND ECONOMIC DEVELOPMENT THE INCONSISTENCY OF DEVELOPMENT ECONOMICS 47

It must, however, be admitted that the government role in these Republic of Korea, and 3400 percent in Taiwan in 1967. All these factors
countries has not necessarily been restrictive in the form of controls that had the effect of substantially narrowing the gaps in income and wealth
inhibit the initiative and drive of the private sector. It has rather been positive distribution. In the absence of this, liberalisation would have probably led to
to facilitate and encourage the private sector. Of course, the pragmatic, greater inequity.
growth-oriented and dedicated leadership of these countries has made possible
The creation of a large body of small independent proprietary farmers
the taking of right decisions in the interest of the country, and the stability of
in place of a tiny class of rich, unpopular landlords shifted the balance of
government has removed uncertainties about policies and inspired the
political power in favour of the peasantry The peasants could now assert
confidence of investors.
their newly-gained political clout to tilt decisions in their own favour by the
governments which needed their support and which thus became obliged to
Land Reforms and Wealth Distribution
give protection to agriculture and to develop the rural infrastructure. The
Thoroughgoing land reforms were introduced in Japan, south Korea and infrastructure, along with the transfer of land ownership, enabled the peasants
Taiwan after the Second World War by the occupation authorities with the to serve their interests and thus provided the necessary motivation to make
objective of destroying, psychologically and materially, the feudal lords who improvements and long-term investments in agriculture. Given the small size
constituted the driving force behind these countries' war-effort. These re­ of landholdings, the farmers successfully used simple, labour-intensive
forms had the far-reaching side effects of equalising rural income distribution techniques (superior seeds, better methods of crop cultivation, and increased
and keeping rural/urban differentials much narrower than in other countries. input of manure and fertilizers) to generate a substantial rise in output and
incomes. This not only supplied the food needed by the rapidly growing
population but also the savings and the market needed for industrial
In all three cases, land reforms were extensive. They destroyed the
expansion.
power base of feudal lords and virtually eliminated farm tenancy, which was
widespread before the reforms. The land reforms reduced the average family What liberalisation did was that it enabled the nouveaux riches to
holding in Japan to about 2.5 acres and in South Korea to about 2.25 acres become a dynamic element within the economy by making it possible for
of arable land." The scale of landholding has remained unchanged to 1.2 them to invest their savings in Western technology and machinery. This led
hectares (2.9 acres) in Japan, with only 4 percent of all farms operating on to a rapid expansion in industrial output through the establishment of a large
land of more than 3 hectares (7.41 acres)." According to Sacks, land reforms number of mutually competing manufacturing units. There was thus a
in these countries "were probably more extensive than in any other case in simultaneous and balanced growth of both agriculture and industry. In the
modem history and could be accomplished because of the extraordinary absence of liberalisation, the nauveaux riches may have been led into the
national circumstances in each country" — Japan and South Korea were under unproductive fields of conspicuous consumption and capital flight, as has been
U.S. occupation while Taiwan was under the Nationalists. The landlords in the case in many developing countries.
these countries could not therefore effectively mobilise political opposition."
The land reforms in essence also brought about a substantial expropriation of Social Equality
landlords because compensation was cither not paid or was inadequate.
The broad sharing of the benefits of growth that land reforms brought
The redistributive effect of these land reforms was further reinforced by about ushered in greater social equality. This reduced conspicuous
the destruction of wealth by war in all the three countries and the erosion in consumption and the related investments that income inequality usually
the real value of compensation received as well as of financial asseLs (bonds promotes among the rich. It also released resources for the need fulfilment
and cash holdings) by the high rate of inflation. In 1947 the annual inflation of the poor, thus improving their health and educational level, A well-fed.
rates reached 334 percent in Japan, and in 1950 reached 500 percent in the healthy and better-educated labour force established a firm foundation for
48 ISLAM AND ECONOMIC DEVELOPMENT THE INCONSISTENCY Of DEVE1OPMF.NT ECONOMICS 49

faster and sustained growth. Reduction in the suffering of the poor removed Cultural Values
anti-social feelings among them, improved their motivation for work and
The cultural values of these countries and the homogeneity of
efficiency, and reduced the waste resulting from strikes and conflict.
population in most of them also helped promote the growth of a closely-knit
According to Sacks, economic success in Latin America has been impeded by
society with social peace and stability. Their value system is centred on
social conflict over vast income inequalities, the distribution of income in
personal obligation — obligation to one’s parenLs. employer and employees,
Latin America being more unequal than in most other parts of the world. In
friends and neighbours, and the community. These obligations need to be
Brazil the richest fifth have 33 limes as much as the poorest fifth, whereas in
fulfilled in order for one to be accepted as a member of the society. If one
Taiwan they have only a little over four times as much. On an average, the
were to refuse or neglect them, the inevitable consequence was social
richest 20 percent are 21 times as rich in Latin America, but nine times as
ostracisation. In a society where obligation occupies such an important
rich in East Asia"
position, group discipline is strong, the employer treats the employee
humanely and pays due attention to his well-being, the employee works hard
Labour-Intensive Techniques
and conscientiously, and the employer/employee relations are congenial. This
Equity was further reinforced by the choice of labour-intensive policies aspect of social values which keeps self-interest under check and serves social
which have helped the cause of employment in these countries. However, interest even when the two may not coincide, is certainly not in harmony with
unlike Japan and South Korea. Taiwan also opted for an effective role by the value-free liberalisation of neo-classical economics.’*
small enterprises in both agriculture and manufacturing, and did not allow the
The perplexing question, however, is. Why did these cultural values
establishment of large conglomerates in domestic business.** This policy not
remain dormant before the War? The answer is that such values require an
only provided further support to the labour-intensive techniques in reducing
enabling environment for their observance. Two factors created such an
unemployment and under-employment - a constant problem in other industrial
environment in post-War Japan. One of them was socio-economic equality
and developing countries — but also provided small farmers good opportunities
which was brought about by post-War political and economic restructuring.
for rural earnings. This gave a boost to rural incomes; by 1980. almost three-
In such an environment everybody is obliged to conform and is unable to get
quarters of the income of rural families came from non-agricultural income."
away without being castigated, as is possible in an environment of extreme
social, economic and political inequalities, and of common, uninhibited
Thus Taiwan was transformed over lime from an economy having an violation of social mores. The other factor was the difficulties faced by
abundance of labour in the 1950s to one having a scarcity of labour in the people in a war-ravaged economy. Everyone knew clearly what national
1970s. The achievement of full employment in rural as well as urban areas reconstruction required - economy in the use of resources. This realisation
led to a rise in the incomes of all families and further improved the level of provided a binding authority to the cultural values of simple living and
income equality already attained as a result of land reforms.” As a abstinence from conspicuous consumption.” thus leading to their unchallenged
consequence, the Gini Coefficient has continually declined in Taiwan from observance by all without exception. Individual families tended to be
0.56 in the 1950s to 0.31 in the early 1980s.” Taiwan has thus achieved a extremely frugal.
greater degree of income equality than any of the developing economies, the
This helped moderate consumption and generate a high rate of saving
ratio of income of the richest 20 percent of the population to income of the
in these countries. Gross domestic saving as a percent of gross domestic
poorest 20 percent declined from 20.5 in 1953 to 4.2 in 1980 and is probably
product was 33.4. 30.7. 39.9, 37.6. and 37.0 percent in Japan. Hong Kong.
the lowest ratio in the developing countries.”
Singapore. South Korea, and Taiwan respectively in 1987 as compared with
the average of 19.8 percent for Latin America and the Caribbean. 13.0 percent
for Sub-Saharan Africa. 17.0 percent for the Middle East and North Africa.
50 ISLAM AND ECONOMIC DEVELOPMENT THE INCONSISTENCY OF DEVELOPMENT ECONOMICS 51

and 19.3 percent for South Asia.” The high rate of saving provided the Korea. Taiwan and a number of countries which have succeeded in promoting
domestic resources needed for capital formation and expansion of output and their exports have "all initially followed the import-substitution path '.’*
exports.
All these countries resorted to a substantial degree of protection initially,
The contribution that this high rate of saving has made to the economic and only later on was there a shift from import-substitution to export
success of these countries should not be underestimated. It kept the interest promotion, but without any significant change in the development philosophy.
rates in those countries relatively lower than elsewhere and thus encouraged They were almost forced to do so because their limited foreign exchange
investment. It enabled the government as well as the private sector finance earnings had to be diverted to the purchase of foreign technology and
their investments without resort, as in other developing countries, to unduly machinery which they could not initially produce themselves. The whole
large monetary and credit expansion and external borrowing. This kept economy was organized to minimise imports of non-essential goods. While
inflation under control and enhanced their competitiveness in the export protection is not sufficient for successful industrialisation, lhe argument that
market. It also enabled them to enlarge their productive capacity and laid the it is not necessary seems largely an a priori assumption. Most historical
foundation for the success of their outward-looking policy without loading examples from Germany and the U.S. to Japan have involved protection.
their economies with a high debt-servicing burden as has happened in other Even now. all these countries resort to a substantial degree of protection with
developing countries. respect to both industry and agriculture. Asking developing countries to do
what even the developed countries have themselves not done, and are not
Import Control and Export Promotion doing, is unrealistic advice.
While the social values have helped promote savings in these countries,
they have also helped substantially in restraining inessential imports. In other Low Defence Spending
developing countries this legitimate national need has been fulfilled by high A distinguishing feature of Japanese public finance has been the low
import tariffs and stiff exchange controls, which lead to smuggling, under- level of spending on defence. Military spending has been held down to less
invoicing and corruption. In the non-legal consensus societies of these than one percent of GNP compared with an average of around four percent
countries, the need was satisfied by social norms which it is not possible to in industrial countries and about three percent in developing countries.” This
violate without being socially castigated. Therefore, while it might seem that has realised resources for building an efficient infrastructure in spite of the
these economies were outward-oriented they were so primarily in terms of relatively low level of total government spending. Il has also helped keep
exports and not imports, even though the absence of strict import controls taxes at a lower level compared with other countries. In Japan, taxes
may make them appear to be so.” Moreover, as Lester Thurow has observed constituted 21 percent of GDP in 1975 and 31.3 percent in 1988 compared
with respect to Japan: “How does a foreign firm break in as a new supplier with 33 percent and 40.8 percent respectively in the EEC."' While South
of industrial components, for example, when Japanese firms place a premium Korea and Taiwan have maintained a higher profile in defence spending as
on maintaining long-term intimate supply relanonships with nearby suppliers compared with Japan, their fiscal burden has been substantially reduced by
in the just-in-time inventory system?" " foreign aid. primarily from the United States.
Moreover, the role of outward-orientation in these countries is being
unduly overemphasised. Export-led growth is new to Japan. In the 1950s A Peep into the Future
and 1960s Japan had a chronic trade deficit. Companies became successful One may thus see clearly the decisive role that a number of factors have
by winning at home and then, by exploiting economies of sale, to venture played in the rapid growth of these countries, particularly in reducing the
overseas: domestic demand fuelled lhe export drive, not the other way round. conflict between the objectives of growth and equity. It would, therefore, be
improper to attribute the credit for all these factors to liberalisation alone.
52 ISLAM AND ECONOMIC DEVELOPMENT THE INCONSISTENCY OF DEVELOPMENT ECONOMICS 53

even though liberalisation has also played an important role. A crucial In Japan also, the prognosis for the future is a gradual increase in
question that one may wish to raise here is whether it would be possible for inequalities. The post-War dissolution of Zaibatsu (family-controlled groups
these countries to sustain the equity that they were able to realise due to of monopolistic companies like Mitsui. Mitsubishi, Sumitomo and Yasuda)
exceptional circumstances? Some of the factors that have been eroding equity along with land reforms spread economic power more evenly over the
in these countries lead one to a negative answer. population, making it difficult for a small group of people to dominate the
national economy and politics.
South Korea, unlike Taiwan, opted for large family-run conglomerates
(chaebol) in the industrial sector. The chaebol have continually grown bigger This led to a proliferation of small- and medium-scale enterprises and
with the help of Government and financing from banks. By 1984. the 10 created intense competition in all industries. Efficiency increased, making it
largest chaebol accounted for 64 percent of GNP and 70 percent of exports.” possible for Japan to be competitive internationally. However, the law which
Even though preference for labour-intensive techniques generated a substantial led to their abolition (The Elimination of Excessive Concentration of
expansion in employment opportunities, these became available mainly in Economic Power Law) became a dead letter from the late 1940s onwards and
urban centres and not in rural areas. Consequently, unlike Taiwan, there was was finally repealed in the mid-1950s. This rendered ineffective the dis­
a large shift of population from rural areas to urban centres." Almost half of solution of ZaibaLsu. as is evident from the rise of the Mitsubishi. Mitsui and
the country's population is now crammed in four major urban centres (Seoul. Sumitomo companies virtually to their previous positions.*" Even though
Pusan. Taegu and Inchon). This has led to a pressure on housing and other these companies are now structured quite differently from their Zaibatsu days,
facilities in these urban centres, making the life of rural migrants miserable. they still exercise considerable economic and political clout. The Zaibatsu
The chaebol, helped in their expansion by the urban bias and the banking banks, which have been gradually becoming more powerful, have become the
system, have tended to widen income disparities in South Korea. In 1965. the hand-maidens of these companies, and it is most likely that their hold on the
share of income of the bottom 93 percent was 19.3 percent, but by 1987 it economy will increase, gradually but continually.”
had declined to 16.9 percent thal of the top 20 percent had risen to 45.3
While it is true that small businesses proliferate in Japan, they now
percent from 41.8 percent."
account for a much smaller share of sales." Besides, most of these firms are
Thus even though income distribution is more equitable in South Korea company-affiliated stores not having the freedom to set their own prices
than in comparable developing countries, the choice of chaebol as the Thus, the system, aided by the banking setup, is gradually leading to
preferred form of business organisation has sown the seeds of income concentration of wealth which, even though it may not be of the same nature
disparity, conspicuous consumption and industrial strife. From 1981 to 1985, and intensity as that of the Zaibatsu days, is moving closer to it.” No wonder
there were only 100 strikes a year. In 1986. there were 276. But in 1987 the Japan already has six of the world's ten richest men even though only four
number of strikes shot up to 3008.” This indicates that the growing decades have passed since the near elimination of inequalities after the War.”

inequalities and hardships faced by migrant labour in urban areas is eroding Such excessively rich people are able to exercise, as in other countries, an
the harmonious industrial relationship fostered by the socio-economic equality increasing influence on the economy and the polity.” The process of ongoing
created by land reforms and cultural values. "For three decades Korea sought liberalisation may intensify concentration, particularly if the Agricultural Land
economic development regardless of the social consequences. Attitudes are Act. which has prevented the revival of landlord system, and the Large-Scale
now changing".* Parvez Hasan has thus rightly remarked that "the past Retail Store Law. which has impeded the entry of large stores into the retail
experience of lagging rural income and excessive migration to urban areas sector, are repealed or diluted significantly.
has underscored the need for a comprehensive strategy to deal with the A substantial part of the savings in these countries arc now going into
economic imbalance of rural and urban areas ’.*’
stock market and land speculation and boosting share and land values, thus
providing momentum to the trend towards concentration. The Nikkei index
54 ISLAM ANO ECONOMIC DEVELOPMENT THE INCONSISTENCY OF DEVELOPMENT ECONOMICS 55

rose from an average of 102 in 1950 io 1.117 in 1960, 2,193 in 1970, 6.870 speculative boom with its adverse effect on socio-economic equality is also
in 1980. and 26.646 just before the October 1987 crash. Prices, however, taking place in both South Korea and Taiwan *
recovered faster in Japan than in any other major stock market and the index
Thus, even though these countries started after lhe War with relative
rose to the high of 38.916 in December 1989 **
equality, which made it possible for them to realise growth with justice, they
The Japanese stock market has thus seen share prices double on average have found it difficult to sustain this equality within the framework of the
every four years. The average pricc/eamings ratio for Japanese equities has capitalist economic and financial systems that prevail in these countries.
accordingly risen from 10.7 in 1970 to 19.1 in 1980 and the high of 61.4 in
This shows that even if inequalities are minimised initially by unusual
April 1988. Thereafter it declined to 50.4 in July 1989 due primarily to a rise
circumstances, they would re-emerge and lead to concentration of wealth
in interest rates. Comparative price/eamings ratios for other major countries
unless the total economy is restructured and the financial system is
in July 1989 were: United States. 13.3; United Kingdom. 11.7; West
reorganised in a way that would help to sustain as well as promote equity.
Germany. 15.7; and France. 12.5.” The dizzying height of the Japanese
Important elements of such a restructuring, particularly of the financial
price-earnings ratio carries the seeds of a serious crisis, which could unfold
system, which has a strong tendency to promote concentration of wealth, will
at any time and have an extremely destabilising effect not only on the
be addressed in chapter 4 on the Islamic strategy of development.
Japanese economy but also on the world financial markets.

Land values have also risen steeply. The average price of land for THE MISSING LINK
commercial, residential and industrial use in six major cities has doubled on
Thus, while the Far Eastern countries have, to a large extent, been able
an average every four years taking the index of average land prices from 100
to attain higher growth with equity, it would be a mistake to overemphasise
in March 1955 to 12.848 in 1989* Commercial, residential and industrial
the role of liberalisation in this achievement. Even neo-classical economists
properties have hence become so expensive in Japan that they are now beyond
accept that "the emphasis on the market did not mean that the government
the reach of most middle-class families.
must accept the practice and results of laissez-faire, but rather that the
This shatters their dream of one day owning their own business and a government should improve and strengthen the market price system".” The
home. The high cost of office and residential property also adds high answer to the question whether neo-classical liberalisation, along with the
premium to all goods and services purchased by the Japanese, thus reducing 'improvement' and 'strengthening' of the market system by the government,
their real income. Japan has now become one of the most expensive countries can sustain equity is negative, as discussed above.
in the world. The internal purchasing power of the Yen has thus been
The primary reason for greater equity in Far Eastern countries is not
outstripped by its exchange rate.
liberalisation but rather exceptional circumstances which prevailed in these
Speculation in both shares and property, nevertheless, continues to be countries after the War. government polices and cultural values. Such a
fanned by credit extended for this purpose by banks to those who have the combination of equity-creating circumstances cannot be duplicated in other
collateral. Since the value of the collateral (shares and property) was developing countries under normal peace-time conditions. Without the socio­
escalating, credit was also expanding simultaneously. The speculative boom economic equality that these factors created, neo-classical liberalisation will
was thus accentuating wealth inequalities and deeply eroding the socio­ only worsen the equity picture unless it is accompanied by an effective
economic equity that had been realised after the War. This time the shares­
strategy for advancing the cause of equity.
and property-owing nouveaux riches have different attitudes. They are
Even though such cultural values are also present in other countries,
indulging in conspicuous consumption, thus increasing social inequalities and
their effectiveness has been blunted by the prevailing high level of socio­
loosening the social glue that strengthened social solidarity.’' The same
economic inequality, continued moral degeneration, and the onslaught of
56 ISLAM AND ECONOMIC DEVELOPMENT THE INCONSISTENCY OF DEVELOPMENT ECONOMICS 57

Western consumer culture. Hence the challenge that faces us is how to realise is. as Meier has again indicated, that there is "a rare public policy from which
and sustain equity in countries where it has not been created by force of everyone gains. Some in the country will gain and some will lose from the
circumstances. policy action."1” It is hence necessary to have a mechanism by which to

Development economics, in spite of reintroducing equity as a goal, has motivate even those who will be worse off to accept the policies suggested.
been unable, uptil now. to propose an effective strategy for realising it in Neo-classical economics fails here. It can be effective only as long as
countries which do not have the same enabling environment that was created the question is that of serving everyone’s self-interest, which is necessary to
by exceptional circumstances in the Far East. As Morawetz has pertinently induce greater initiative and efficiency. But equitable distribution cannot be
indicated after a study of twenty-five years of development: “There exists a attained by everyone serving just his self-interest, such behaviour in fact tends
vast and easily accessible literature on the subject of how to grow: on what to worsen income distribution. Equitable distribution requires a motivation
policies have been tried, where and with what results. But on the question of to serve social interest even if this involves sacrifice of self-interest. Social
how to redistribute, the contributions though many are more disparate".”*
interest will be served under the neo-classical model only as long as it
Even though this statement was made more than a decade ago. it is still true. coincides with self-interest. The secularist value-free approach of liberalism
Reliance continues to be primarily on growth for improving distribution. But does not have any mechanism to motivate people to sacrifice self-interest for
as Fields has rightly concluded: social interest when the two do not coincide. According to a World Bank
Although rapid economic growth generally reduces poverty, growth Report, if incomes were distributed differently at the global level, the present
is neither necessary nor sufficient for poverty alleviation. . . . output of gram alone could supply every man. woman and child with more
Whether inequality increases or decreases with economic growth than 3.000 calories and 65 grams of protein per day far more than the
depends on the type of growth rather than on the level of GNP or highest estimates of requirements.”4 Compared with this, the daily calorie
the rate of GNP growth per se m
supply per capita was lower in 1985 than in 1965 in most developing
The continued poverty of development economics in suggesting an countries.""
effective programme for reducing inequalities gives the impression that even
Needs remain unsatisfied, not necessarily because of lack of resources
the concern for equity that is now being expressed may be temporary and
to produce a sufficient quantity of need-satisfying goods, but because of
"just one more fashion in a fashion-prone discipline".'" This feeling is
inequitable distribution of wealth. The neo-classical model is not capable of
further reinforced by the widening circle of neo-classical economists who
bringing about an equitable distribution; had it been, it would have succeeded
would prefer equity to remain an indirect goal of policy rather than become
in the rich industrial countries with their far greater resources and growth, and
a direct, express and fundamental goal. For them, the ‘poverty' of
the Development Committee would not have been led to admit that "it has
development economics lies not in its indirect and inadequate discussion of
proved extremely difficult to address poverty problems successfully".'""
equity, but rather in its getting involved in such a discussion.1”
It was the failure of the neo-classical model to promote equity which
An effective strategy for realising equity requires socially-agreed values,
gave birth to socialism. But socialism also failed to promote equity in most
a motivating system and economic restructuring. These are not attainable
countries; it had the added disadvantage that in almost all countries it also
within the value-free framework of neo-classical economics. If appropriate
failed to promote efficiency. Since equity is the most urgent socio-political
policies can be suggested, why should or why would others accept them? As
imperative of developing countries, the present revival of neo-classical
Meier has rightly indicated, the most underdeveloped part of development
economics cannot be expected to promote what it has failed to do in the past.
economics is the question of "how to gain the acceptance of more appropriate
policies?"'"4 Why. one may ask, is it relatively easy to suggest policies but Inequities may hence be expected to persist in developing countries if

extremely difficult to gain their acceptance and implementation? The reason they revert to the neo-classical model. This carries the potential of further
exacerbating discontent, which has already heightened in recent years. The
58 ISLAM AND ECONOMIC DEVELOPMENT

political upheaval that this may initiate may tend to tilt the balance once again
in favour of anti-liberalism, this time with a vengeance. But will such a
revival of anti-liberalism succeed in promoting equity in developing countries FOUR
when it has failed to do so in the past in both the developing and most
socialist countries? Probably not. Hence, instead of being swung like a THE ISLAMIC STRATEGY
football by the two systems from one extreme to the other, the developing
countries need to develop their own strategy in the light of lheir own socio­ The Islamic world-vtew. as discussed in chapter 1. makes it a moral
economic imperatives. imperative of every Muslim society to try its utmost to foster brotherhood and
socio-economic justice, such that their realisation, and not their absence,
become the dominant characteristic of that society. In the economic field, this
*** necessitates development with justice and stability to attain general need­
fulfilment. full employment, and equitable distribution of income and wealth,
without unduly large or prolonged imbalances.

Given the resource constraint and the prevailing imbalances, the pursuit
of such development is not possible without a substantial decline in claims on
resources along with their reallocation from less efficient and less equitable
uses to more efficient and more equitable uses. As discussed in chapters 2
and 3. such a reallocation cannot be realised within the value-neutral and this-
worldly framework of any secularist system in spite of excessive government
intervention in the economy. The Islamic strategy has. however, a greater
potential for success because of its four very effective and interrelated
elements.

IMPORTANT ELEMENTS OF THE STRATEGY

1. EQUITABLE FILTERING OF EXCESS CLAIMS

The first problem that every society faces in actualising its egalitarian
goals is how to filler out the unlimited claims on scarce resources in such a
way that only those claims are left which would pass the tests of both
efficiency and equity. It has already been shown that, while the price
mechanism does perform the filtering function, it does not do so in an
equitable manner. Islam, therefore, complements it by adding another filter
which helps ensure equity.
Tlie moral filter attacks the problem of unlimited wants at the very
source the inner consciousness of the individuals - by changing their
preference scales in accordance with social priorities and making their claims
on resources a function of human well-being. It eliminates, or at least
60 ISLAM AND ECONOMIC DEVELOPMENT THE ISLAMIC STRATEGY 61

minimises, the claims thal are inessential and inequitable from the point of is the approach of Islam. Islam does not prevent the individual from serving
view of realising social goals. It does not, for example, permit the use of his self-interest, but by giving self-interest a spiritual, long-term perspective
resources for morally prohibited activities activities that would only kill or extending its span beyond this life. Even if it is accepted that the
harm human beings, animals or plants, either now or in the future and thereby individual's self-interest in this world may be served by being selfish and
reduce their well-being. It requires a modest life-style and docs not allow unscrupulous, his interest in the Hereafter cannot be served except by
extravagance or the use of resources for ostentation or vain consumption behaving in a way that docs not hurl the interests of others who. being the
uses that do not make a real difference in human well-being It also does not vicegerents of God like him. are his equals and brothers, and whose needs
permit the destruction, or wasteful use. of resources (e.g.. burning food to must be satisfied through a fair share in God-given resources.
raise prices). It also reorganises financial intermediation so as to enable it to
Islam, on the one hand, recognises the contribution that self-interest and
play a role that is complementary to that of the price filter in helping keep
the desire for profit can make towards individual initiative, drive, efficiency
claims on resources within the limits of humanity.
and entrepreneurship. On the other hand, the evils of greed, unscrupulous­
The moral filter thus moderates and humanises the influence that wealth ness and disregard for the rights and needs of others, which the secularist and
and power and financial intermediation are able to exercise in the allocation short-term this-worldly perspective of both capitalism and socialism tend to
and distribution of resources. The introduction or the moral filter implies the promote, arc overcome by introducing an internal self-regulating mechanism
evaluation of claims on scarce resources in the light of socially-agreed moral with its unrelenting emphasis on belief in God. moral values, accountability
values even before the claims arc expressed in the market place. After all before Him. human brotherhood, and socio-economic justice.
claims on resources have been passed through the moral filter, and
The idea of accountability before the Supreme Being can serve as a
unnecessary and inequitable claims thus eliminated or minimised, the price
strong motivating force in inducing individuals to abide by moral values and
filter of the market system takes over. The price filter can then perform more
in preventing them from pursuing self-interest beyond the limits of social
effectively the task of bringing about the allocation of resources that is both
health and well-being. Competition and market forces, which according to
efficient and equitable.
Adam Smith, performed this function, are undoubtedly essential for playing
a complementary role, but arc not effective enough to ensure the interest and
2. MOTIVATION
well-being of all. This is because: firstly, competition can also be unhealthy,
The second problem that every society faces is how to motivate and secondly, this-worldly self-interest, unhindered by moral compunctions,
individuals to serve the social interest in conformity with the moral filter even may tend to find different ways of restraining competition and thwarting the
when doing so hurts their self interest. This is because all individuals wish operation of market forces, particularly when wealth and power are also
to serve their self-interest and. unless they are able to do so. their behaviour unequally distributed.
will not be conducive to the realisation of optimum efficiency in die use of
resources. Any effort to prevent the individuals from serving their self- 3. SOCIO-ECONOMIC RESTRUCTURING
interest. as socialism tried to do. is bound to fail. What Adam Smith did to
Values may. nevertheless, be violated and the idea of accountability
overcome the conflict between the two interests was to try to show that the
before God may. in many cases, be too feeble to have much impact on human
serving of self-interest by every individual also served the social interest.
behaviour. Even in a morally-charged society, individuals may tend to be
Since this is not necessarily true, as we have already shown, therefore, oblivious to the problems of scarcity and to social priorities in resource
in order to realise the harmonization of individual and social interests, the allocation, if the socio-economic environment is not conducive. They may
individuals should be made to recognise the opposite of what Adam Smith simply be unaware of the urgent and unsatisfied needs of others, and. if they
said that the serving of social interest also serves their self-interest. This are well-to-do. may unconsciously follow unhealthy social trends and divert
62 ISLAM AND ECONOMIC DEVELOPMENT THE ISLAMIC STRATEGY 63

scarce resources away from the need fulfilment of others, in order to satisfy interest into account, socio-economic restructuring, and positive role of the
their relatively less urgent wants. government) should prove to be more effective in ensuring the well-being of

It is necessary, therefore, to reinforce moral values by socio-economic all than the single-dimensional capitalist or socialist approach of relying solely

restructuring in such manner that individuals find it possible to serve their either on self-interest and market forces or solely on collectivisation and
central planning. In contrast with this, the governments in poorer Muslim
self-interest, only within the constraints of social well-being and economic
countries have, in general, been inwardly (though not outwardly) secular, in
stability. The restructuring must address itself to:
step with the conventional wisdom borrowed by them from the Western
a) transforming the human factor in development to enable it to play secular culture which occupies a dominant place in the present-day world.
an active and constructive role in the efficient and equitable
They have thus been unable to formulate a strategy for development with
allocation of resources;
justice.
b) reducing the existing concentration in the ownership of means of
Their policies have, therefore, lacked a firm direction and have
production as much as possible to complement the role of moral
transformation in minimising the influence of wealth and power oscillated on the waves of socialism and free enterprise, and controls and
in the allocation and distribution of resources; decontrols that have been in vogue in development literature over the last four
decades. This lack of firm direction, combined with fluctuations and inconsis­
c) eliminating or minimising all ’wasteful' and 'unnecessary'
consumption at the private as well as the public level to raise tencies in policies, has generated uncertainties and caused immense harm to
savings and to make a larger volume of resources available for the developmental process. Whatever development has been achieved has
investment and need fulfilment; been at a high cost in terms of macroeconomic imbalances, increased

d) reforming the financial system in a way that would enable it to inequalities of incomes and wealth, and social tensions.
play a complementary and enabling role in the above What the Muslim countries need, therefore, is to move away from the
restructuring.
secular and inconsistent approach of Development Economics and to reformu­
late their policies within the framework of the integrated approach of Islam.
4 ROLE OF THE STATE
However, while reformulating policies within this framework, it is neither
Such a restructuring may not take place effectively unless all forces possible nor necessary to find a precedent for all of them in the early Islamic
involved in it act in a concerted manner. The government must also, history. Although the Shan ah has prescribed the essential elements of a
therefore, play a positive, goal-oriented role in the economy. This is not the basic strategy, it has allowed flexibility over space and time by not spelling
kind of role that would lead to the establishment of a totalitarian order as out detailed policy measures. These have to be developed. Il may be
happened in the USSR. China and other communist block countries. It is possible to emulate the experience of other countries with respect to specific
rather a complementary role which is to be played by the government through policies.
the internalisation of Islamic values in society, the creation of a healthy socio­
But, while doing so, it is necessary to ensure that the policy measures
economic environment, and the development of proper enabling institutions,
being considered for adoption fulfil two criteria that they make a positive
and not through excessive controls, unnecessary violation of individual
contribution towards the realisation of the maqdsid without coming into
freedom, and abolition of property rights.
conflict with the SharCah. and that they do not lead to an excessive increase
in the claims on resources. The second criterion should not be fulfilled within
FIVE POLICY MEASURES
the framework of Pareto optimality. A strategy that concerns itself with

This four-dimensional approach of Islam (complementing the price increasing resources for a specific purpose without effectively reducing its

mechanism by the moral filter, motivating the individual to take the social availability for other purposes, can only lead to frustrations and imbalances.
64 ISLAM ANU ECONOMIC DEVELOPMENT 65
THE ISLAMIC STRATEGY

Value neutrality must hence be set aside. Policies must be passed through the
Motivation
filter of Islamic values. The testing of all policy measures against these
criteria will strengthen the hand of governments in getting the policies To motivate individuals to render their best and to utilise the scarce
publicly accepted, particularly policies which do not satisfy the enterion of resources with maximum efficiency, it is necessary that their self-interest be
served by doing so. Socialism was naive and unrealistic when it expected
Pareto optimality.
individuals to work efficiently even though it deprived them of the opportu­
Five policy measures are suggested below for development combined
nity to serve their self-interest. It therefore failed. Capitalism is also
with justice and stability. These are: (1) invigorating the human factor; unrealistic in its assumption that self-interest and social interest are always in
(2) reducing concentration of wealth; (3) economic restructuring; <4) financial
harmony. Its secularism and this-worldly perspective do not provide any
restructuring; and (5) strategic policy planning. Some of these policy
mechanism for motivating individuals to serve the social interest when this is
measures may be familiar to those well-versed in development literature.
in conflict with their self-interest.
What is important, however, is the injection of a moral dimension into all
material parameters of development. Without such an integration of the moral Experience has established beyond every shadow of doubt that it is not
possible to motivate individuals to be both efficient and equitable unless a
and the material, it may not be possible to realise either efficiency or equity
moral dimension is injected into their pursuit of self-interest so that social
as defined earlier.
interest is not jeopardised even when it is in conflict with self-interest.

I. INVIGORATING THE HUMAN FACTOR However, there is a two-way link between moral strength and socio­
economic justice; it is not possible to realise one without simultaneous
Human beings constitute the living and indispensable element of any
progress in the realisation of the other. In Muslim countries where lhe moral
development programme. They constitute the end as well as the means of
strength of the society is being sapped by socio-economic injustice, it would
development, and unless they are reformed suitably to enable them to make
be unrealistic to depend primarily on sermons to raise moral consciousness:
a positive contribution to development and to keep their self-interest within
it is necessary to remove the inequities and to establish justice by a thorough
the constraints of social well-being, nothing else can succeed in actualising
restructuring of the economy and lhe society Hence, lhe question of realising
the basic objectives of Islam. Hence, the most challenging task before
justice needs to be addressed even before the imperative of moral
Muslim countries is to motivate the human factor to do all that is necessary
transformation is discussed
in the interest of development with justice. Individuals must be willing to
render their best by working hard and efficiently with integrity,
Socio-Economic Justice
conscientiousness and discipline, and to make the sacrifices necessary to
overcome obstacles in the path of development. They must also be willing Material rewards have become so inequitable that most people are
to change their consumption, saving and investment behaviour in conformity unable to get a due reward for their hard work, creativity, and contribution to
with what is required to raise lhe rate of growth with greater equity and lower output. They have consequently become apathetic and their initiative, drive
imbalances. and efficiency have all suffered considerably. There are two factors responsi­
ble for this: firstly, the lack of realism in official policies, and secondly,
Motivation alone is. however, not sufficient to get the best out of human
concentration of wealth and power in a few hands m both rural and urban
beings. They must also have the ability to use better technology and
areas. The lack of realism in official policies has led to distortion of key
management methods. Tins requires proper training and access to finance.
prices which unconsciously result in lowering the incomes of tenant farmers,
Unless an adequate arrangement is made for both, motivation alone may not
small and micro enterprises (SMEs), and workers, reducing their demand for
be able to take the economic system far in realising the optimum potential of
needs and creating a misallocation of resources against need-fulfilment lhe
the human factor.
concentration of wealth and power, also due partly to official policies and
66 ISLAM AND ECONOMIC DEVELOPMENT THE ISLAMIC STRATEGY 67

partly to the exploitative economic system that has prevailed for centuries, has society should ideally be at least at a level that would enable employees to
restricted competition and created a climate conducive to the misery of the fulfil all their, and their families' essential needs properly.1 They must also
rural and urban poor. This has reduced their willingness and ability to do be provided with training, job security and. preferably, also a share in profits
their best. within the framework of a long-term, harmonious relationship.

In sharp contrast with this, real wages in most Muslim countries arc so
Rural Uplift
low that, in spite of nearly 10—14 hours of hard work, a labourer is unable
The unrealism of official policies is fully reflected in the lack of to meet his own and his family's basic needs. In addition, employees do not
emphasis on rural development. While a preponderant proportion of the enjoy any job security. The reasons for this are not merely low productivity,
population of Muslim countries lives in rural areas, official policies have excess supply of labour, and lack of adequate opportunities for employment,
placed undue emphasis on urban development and on the establishment of as the neo-classical economis's would have us believe. A substantial role is
large-scale enterprises in urban areas, and neglected the development of played by exploitation, which is made possible by a configuration of unjust
human, physical and financial infrastructure in rural areas. This has not only forces, including inappropriate official policies, concentration of wealth and
reduced the rewards for the effort of tenant-farmers and rural workers but also power, and lack of training and financing facilities for workers. Unless the
lowered their ability to invest in better seeds, fertilisers and equipment and in forces of exploitation are substantially weakened, it may not be possible to do
SMEs to supplement their incomes from agriculture. It has also led to an justice to workers and to induce them to work conscientiously and efficiently.
influx of labour to urban areas, thereby depressing wages and living
The prescription of minimum wages may not. nevertheless, be the
conditions there.
immediate solution. It would be difficult to enforce and. if enforced, it could
In contrast with this, the heavy protection, concessionary financing and have two adverse effects. Firstly, it could lead to a difference in wages as
subsidised inputs given to large-scale urban businessess and industries has reported to the authorities and those actually paid. This would imply a
raised the comparative advantage of such urban enterprises, reduced the reduction in the tax liability of the employer without any real benefit to the
competitiveness of rural and urban SMEs, and enhanced the concentration of labourer. Secondly, it could exacerbate the prevailing high level of
wealth and power. While high tax evasion prevents the governments from unemployment.
reaping the benefit of urban development, the urban congestion lowers the
It would hence be better to resort to an entirely different package of
wages and salaries of urban employees, prevents them from being
policies - policies that would blunt the edge of exploitation firstly, by raising
appropriately rewarded for their contribution to urban prosperity, and lowers
the productivity of workers, and secondly, by expanding the opportunities
their ability to save and invest
available for self-employment in both rural and urban areas. Such policies
It is. therefore, necessary to introduce realism in official policies by should include: a) provision of better vocational training to raise productivity;
removing the bias against the development of agriculture and SMEs. This is, b) extension of financing facilities to promote SMEs; and c) restructuring of
however, not enough. It is also necessary to introduce a number of socio­ the entire economy in favour of need fulfilment and a more equitable
economic reforms that would help raise the real incomes of all workers, distribution of incomes and wealth. These policies should be further
savers, investors and exporters, and particularly so if they are poor. reinforced by making profit-sharing schemes as widespread as possible for
enabling the employees to share in the profits of their firms.
Labour Reforms
Every firm should be required to implement a profit-sharing scheme for
Islamic values require employers to consider employees as members of employees. A certain agreed proportion of the firm's net profit should be
their own family. This demands that employees be treated with respect and required to be partly allocated for distribution among the employees as profit-
compassion and that their well-being be ensured. Real wages in a Muslim sharing bonus and partly utilised to provide training facilities, to improve their
68 ISLAM AND ECONOMIC DEVELOPMENT THE ISLAMIC STRATEGY 69

working conditions, and grant medical benefits, educational allowances for Fair Return to Small Depositors and Shareholders
children, housing facilities, and food subsidies.
The low rates of return on deposits and shares in many Muslim
Linking the increase in income and benefits of employees beyond a countries, the result of administrative fiats and corporate corruption, hurt
certain minimum needed for comfortable living to their firm's profitability, mainly lhe small savers and investors. Big businesses use various devices to
should have a number of benefits. These would include: a) reduction in lhe get their due return. They arc. besides, alleged to keep most of their savings
existing apathy through a boost in the employees' morale, thus leading to abroad to evade taxes, to protect themselves from the depreciation of the
greater conscientiousness, less wastage and higher productivity; b) improve­ national currency, and to get a higher international market-related return.
ment in labour-management relations through worker participation in They do. however, borrow from local banks and government financial insti­
management, thus helping revive an important characteristic of an ideal tutions at lower prime or concessionary rates for domestic investment. This
Muslim society; c) keeping the employees' earnings flexible and responsive accentuates inequalities.
to the health of the national economy and the performance of their firms the
This is not a plea in favour of higher interest rates, which hurt
employees sharing amply in their firm's prosperity when profits are good but
investment, but rather a strong case in favour of equity financing and reform
not being laid off when profiLs are low or the firm is suffering losses; d)
of banks and non-bank corporations in conformity with the objectives of the
reduction in tax evasion (provided that lhe tax system is reformed), because
Shan'ah. This will not only enable savers and investors to get a just reward
lhe employees, in their own self-interest, would keep an eye on lhe firm's
but will also help bring about greater allocative 'efficiency', economic
actual profits with respect to which they are currently indifferent; and e)
stability and growth.1
increase in the competitiveness of the economy and lhe firms, thus improving
the general climate for investment and the macro-economic performance of
Justice to Producers. Exporters, and Consumers
the economy. While implementing the profit-sharing scheme, it is necessary
to ensure that this policy does not lead to exploitation. This could happen if Similarly, unrealistic exchange rates and unnecessary price controls hurt
the minimum wage, which is not subject to risk, is not adequate to meet the producers and exporters, while high protective tariffs hurl consumers. The
basic needs of the employee. plea that these measures serve the interest of lhe common man and promote
the country 's development is usually a facade They do not They, rather,
The employees' share of profit, in addition to being distributed in the
serve the vested interest of the rich and the powerful who have been
form of cash bonuses, subsidies and services, could also be distributed in the
continuously growing richer at lhe expense of the masses who have become
form of shares to implement an Employee Stock Ownership Plan (ESOP).
more and more impoverished. They also prevent the authorities from
The introduction of ESOP can enable workers to become equity owners and
adopting healthy policies that would curb inflation, expand the supply of
can go a long way towards reducing concentration of wealth and power. It
need-satisfying goods and services, and expand employment and incomes.
will enable workers to participate actively in the firm's management and
motivate them to be more conscientious and efficient. It will also help reduce All measures that enrich a minority of lhe population at the expense of
industrial strife. It will raise savings, discourage the unproductive alternative the majority cannot be defended in the light of the Shart'ah. It is necessary,
of gold-hoarding and also help raise their social status in the company and however, to take adequate measures to safeguard the interest of the poor
society. ESOP has been adopted in even some capitalist countries like before the exchange rates are realigned and pnee controls arc removed. Such
France, the U.K. and the U S A . and there is no reason why it should not measures may take different forms, including income supplements or relief
receive enthusiastic support in Muslim countries. payments out of :aldh and other funds earmarked for this purpose,
accompanied by incentives and facilities to expand the supply of need­
fulfilling goods and services and income earning opportunities.
70 ISLAM AND ECONOMIC DEVELOPMENT THE ISLAMIC STBATEGY 71

Moral Transformalion that the governments need to perform is to have this material put across in a
simple, effective manner through the network of existing institutions, to
Although a quid pro quo relationship between work and reward is
mobilise the energies of the people for socio-economic reform and
indispensable for eliciting hard and efficient work, it is not necessarily
development.
sufficient for inducing integrity and conscientiousness. It is also not adequate
to motivate people to change their consumption, saving and investment Fears about the time span are. however, realistic. But. if moral reform
behaviour in conformity with what is required for actualising socio-economic is necessary for socio-economic development, then an effort has to be made
goals. Secularism, which, for quite some time, has tacitly been the dominant in that direction. The lack of willingness to initiate the process of social
philosophy in most of the Muslim countries, regardless of their leaning change through moral reform will not reduce the time span. Changing lhe
towards socialism or capitalism, fails to provide the filter mechanism social mood may help reduce the time span substantially.
necessary to serve social goals as well as the charisma that would inspire
Reform movements have been trying to accomplish this in Muslim
people and motivate them to make the sacrifices required. countries but have not been able to make much headway because of the
Islam, however, has a great potential for creating the desired qualities virtual apathy of. in fact antagonism from, governments. If the governments
in people and for making them identify social interest with their personal shed their secular tendency and throw their full weight behind the reform
interest. It not only demands these characteristics in its followers, it also movements, the social mood may change faster and provide the needed
possesses the necessary charisma to inspire and change them? momentum to social change; ultimately leading to the desired quality of
people. If this is not done, the erosion in morals will continue and contribute
However, since the Muslim masses have, to a considerable extent, lost
to a further degeneration in the quality of people accompanied by its adverse
touch with the inner core of their faith owing to the decline which seized the
impact on development and socio-political stability.
Muslim societies in general domination, lhe implementation of a reform
programme based on Islamic values is indispensable. It would help accelerate The effective use of educational institutions and news media may help
development substantially in Muslim countries by improving the quality and the governments accelerate the pace of social change and eliminate or reduce
preferences of the human factor. more rapidly the hold of a number of un-lslamic social values (like
conspicuous consumption and ostentatious ceremonies) that put a heavy strain
Fears may be expressed here about the cost and the time span involved
on resources and hurt the realisation of the maqasid. Such values vitiate the
in moral transformation. Such fears seem to be exaggerated. The imple­
social environment and lead to a consumption pattern that hurts development
menting machinery already exists in the form of mosques (which exist even and need fulfilment. Unless the governments throw their full weight behind
in the remotest villages of Muslim countries), educational institutions, news
social reform, and apply Islamic values uniformly to all - rich or poor, high
media and social reform organisations. or low * it may not be possible to bring about the needed social change.
If all these are properly mobilised and effectively utilised for improving
the quality of the human resources, the cost may not be very high. The Ability
governments need to get the imdms (prayer leaders) of the mosques, school
While socio-economic justice, moral consciousness, and proper social
teachers and social workers involved in the whole process of social change
environment arc all necessary to motivate people, they are not enough to
through their proper training and lhe preparation of necessary literature. The
realise 'efficiency' and 'equity' Two persons may be equally motivated, yet
preparation of this literature may also not require a stupendous effort because, they may be unable to contribute equally to the realisation of the maqdsid
in addition to what is contained in the Qur'an and the Sunnah, a great deal The difference lies in ability which is not only inborn but also acquired, partly
has been written, over the centuries, on the character of a true Muslim and his through education and training and partly through access to finance.
responsibility before God and fellow human beings. Hence an important task
72 ISLAM AND ECONOMIC DEVELOPMENT THE ISLAMIC S1HATE0V 73

Expansion of educational and training facilities and access of the poor to easily able to get technical education for their children at home and abroad,
finance are hence indispensable. the poor, who need it more acutely to raise their income and social status, are
unable to do so. This tends to widen the gulf between the rich and the poor,
Education and Training and to condemn the poor to a position of permanent misery. This is a clear
indictment of the educational systems for not responding positively to the
Tile invaluable contribution that appropriate education and training can
changing economic and political realities of Muslim countries.
make towards improvement in the quality of human beings, greater socio­
economic justice, and faster growth is now universally recognised. Education There is, therefore, a dire need for a substantial change in educational
opens the door to social equality and economic opportunity, and has been curricula with a view to inculcate Islamic values and impart the needed
rightly considered to be the great equaliser of human conditions. technical skills. It is also necessary to establish a widespread network of
institutions so that even a poor man's child in a rural area or urban slum shall
Many Muslim governments have nevertheless been conspicuously guilty
have fair access to technical education and training facilities. This is an
of neglecting this important sector in their resource allocation. Even literacy,
important way of removing one of the primary sources of inequity and
which is the first step on the path of education, has not become universal in
poverty and providing everyone with a chance to push ahead on the basis of
most Muslim countries. Of particular significance is the neglect of female
his innate ability and the training he has acquired.
education, on which depends the character, health and ability of both the
present and the future generations. Such neglect cannot continue for long
Access to Finance
without ruining the fabric of the contemporary Muslim society.
Lack of access of the poor to finance is undoubtedly the most crucial
The primary stress of education has to be on creating a 'good' and factor in the failure to bring about a broad-based ownership of businesses and
'productive' human being. This is what will help mobilise the large pools of industries and thereby realise lite egalitarian objectives of Islam. Unless
zeal and talent that remain untapped in Muslim countries. Every Muslim effective measures are taken to remove this drawback, a better and widespread
student should be taught the qualities of a true Muslim and should be strongly educational system will only help raise efficiency and incomes but be
motivated to create those qualities in himself. But this is not sufficient. It is ineffective in substantially reducing the inequalities of wealth. This would
also necessary to teach him the skills in demand and the most efficient render meaningless the talk of creating an egalitarian Islamic society.
techniques of production, management and marketing. Fortunately. Islam has a clear advantage here over both capitalism and
socialism on account of a financial system which is built into its value system
The secular educational system in vogue in most Muslim countries has
and which provides biting power to its objective of socio-economic justice.
not only failed to make the students better human beings, enriched by the
This will be discussed later.
characteristics of a true Muslim and conscious of their responsibilities towards
society, but has also failed to make them more productive by teaching them
2. REDUCING CONCENTRATION IN OWNERSHIP
the skills in demand. While qualified young men are unable to get admission
in vocational training institutes and engineenng and medical colleges due to The most serious impediment to development with justice is the existing
shortage of facilities, the universities, following loyally the conventional concentration in ownership of means of production in Muslim countries, as
syllabi bequeathed to them by the colonial masters, have been producing it is in all market economy countries. Unless this situation is changed
generations of secularised liberal arts majors for clerical and civil service jobs, through the adoption of certain radical measures permissible within the
which have now become more than fully saturated. There is thus a steep rise framework of the Sharfah. it may not be possible to make a perceptible
in the number of 'educated unemployed' in urban areas in spite of a scarcity progress in realising the egalitarian goals of Islam. The Islamic strategy m
of trained manpower in several sectors of the economy. While the rich are this case is in sharp contrast with that of socialism which, in order to remove
74 ISLAM AND ECONOMIC DEVELOPMENT THE ISLAMIC STRATEGY 75

the distributional injustice of capitalism, reduced human beings to a perma­ separation from their loved ones. Thus social control weakens and. combined
nent state of wage slaver)' and also killed their initiative and spirit of with low wages and other frustrations, contributes to rise in crime and social
enterprise by collectivisation of all means of production and centralisation of unrest.
decision-making.
It is not possible to uplift the socio-economic condition of the rural
Proliferation of ownership and decentralisation of decision-making masses or to strengthen the roots of democratic institutions in Muslim
appear to be more in conformity with the dignity and freedom that are countries without making land reforms the cornerstone of all economic
associated with the status of khahfah, bestowed upon human beings by God. policies. Land reforms, however, hover around the size of landholdings and
This proliferation must be brought about in both the rural and the urban areas the terms of tenancy. Unless both of these are settled in conformity with the
and in agriculture as well as in industry and commerce through land reforms demands of socio-economic justice, it will be difficult to make a significant
and rural development; proliferation of small and microenterprises (SMEs); headway in realising the maqdsid.
broad-based ownership and control of corporations; revival of the Islamic
teachings about :akdh and inheritance; and reorganisation of the financial Size of Landholdings
system in the light of Islamic teachings.
If land had been acquired through fair means and cultivated either by
the owner himself or leased to tenant farmers on just terms, and if the Islamic
Land Reforms and Rural Development
system of inheritance had also been faithfully applied, landholdings would not
A predominant proportion of the population in most Muslim countries have become concentrated in the hands of a few families. However, since
is dependent on agriculture for income, employment and general well-being. land has been acquired for centuries through unfair means in many parts of
However, a constellation of histoneal and political forces has led to a socio­ the Muslim world and the Islamic law of inheritance has been disregarded,
economic structure that is inherently unjust and perpetrates exploitation and landholdings have become inequitably distributed, subjecting most of the rural
misery of the rural population. Nevertheless, in official policies this sector population to lives of virtual slavery, poverty and misery. Given this highly
has failed to receive the priority it deserves for removing the prevailing unjust situation, it is important to set a ceiling on the maximum size of
inequities and inefficiencies. Unless measures arc adopted to make the landholdings and to distribute the surplus equitably among landless peasants.
agricultural sector more efficient and equitable, the poorer Muslim countries
The ShaiTah does not visualise th? setting of such limits on private
will find it difficult to remove poverty and inequalities or to accelerate
wealth in normal circumstances.* Nevertheless, the Shan'ah docs authorise
development.
the state to take all measures that are necessary for realising the nuiqasid.
A small number of absentee landlords controls large tracts of land in provided that they are not specifically prohibited by the Shan'ah.
rural areas and a substantial part of the farming population is either landless
Since land ownership is concentrated in the lands of a few families, the
or has uneconomic holdings. This sets the stage for exploitation by both the
existing exploitation, poverty, and inefficient use of land and labour will
landlord and the money-lender and serves as one of the major sources of
continue, and the goal of realising an equitable distribution of wealth will
persistent economic inequalities and absence of democratic processes. The
remain permanently frustrated as long as the combined monopolistic and
poverty of tenant-farmers and rural labourers prevents them from adopting
monoposmatic power of landlords is not broken by imposing certain reason­
better farming techniques, thus freezing them into a state of permanent
able limits on the maximum size of land held by one family. Even the
poverty and deprivation. It also kills the incentive of the rural population to
enormity of the present rural population relative to the limited size of total
put in their best and creates in them the characteristics of indolence,
available land necessitates the adoption of such a measure for the realisation
dishonesty and apathy. Moreover, it also drives the rural population to urban
of the maqdsid.
areas in search of work, where they face unhealthy living conditions and
lb ISLAM AND ECONOMIC DEVELOPMENT THE ISLAMIC STRATEGY 77

A number of renowned scholars have, therefore, argued in favour of the landlord a fixed return even though the tenant may or may not be able to
such limits to restore an equitable balance in ownership and to safeguard the have any output.
social interest.’ Since the Shari"ah requires the payment of 'just'
To be fair to the jurists who allow fixed-rent tenancy, they have tried
compensation to ‘rightful* owners, the land need not be given away to the
to ensure justice to the tenant by laying down a number of conditions for the
peasants free. It should, rather, be given at a fair price, the entire value being
validity of a land-lease contract. For example, according to Imam Malik, if
realised by the government gradually over a number of years out of the
the output gets destroyed or the lessee is unable to cultivate the leased land
peasants’ earnings, and used partly to compensate the ’rightful' (and only the
due to circumstances beyond his control (e.g. flood or draught), then the lease
‘rightful’) owners and partly to meet some of the costs of rural development.
contract becomes voidable because of excessive risk and uncertainty
(gharar)." In spite of this controversy, a number of jurists find it within the
Terms of Tenancy
competence of an Islamic state to prohibit fixed-rent tenancy, at least
In addition to reducing the size of landholdings it is also important to temporarily, or to regulate it sufficiently, if this is necessary for realising the
reform the terms of tenancy. While the objective of establishing justice egalitarian goals of Islam.11
between the landlord and the tenant remains undisputed by the fuqahd' of all
Since tenants and landless farmers are weak and powerless and. for
schools of Muslim jurisprudence, the nature of land tenancy has been one of
sometime, are likely to remain so in spite of the enforcement of a limit on the
the most controversial issues in fiqh literature.4 A small minority of the
size of landholdings, fixed-rent leasing of land may continue to be a source
jurisLs permits neither share-cropping nor fixed-rent tenancy, and requires that
of injustice and poverty when rents are high and output continues to be
the land-owner should cultivate himself whatever land he can and grant the
uncertain.
use of the balance to someone who can do so.’ A larger minority of the
jurists allows share-cropping but prohibits fixed-rent tenancy.’ Their It would hence be desirable for Muslim governments to make share­
contention is that although initially the Prophet, may the peace and blessings cropping the general basis of land lease and to strive for a just sharing of the
of God be on him, discouraged both share-cropping and fixed-rent tenancy, output between the landlord and the tenant. This should continue at least
later on he allowed share-cropping, and this became a widespread practice until the power base in rural areas has become sufficiently broadened and the
among the Prophet's Companions and their Successors. exploitative edge of landholding families has been substantially blunted. The
radical practice instituted by the Prophet, may the peace and blessings of God
A predominant majority of the jurists, however, allows both share­
be on him. in the early Madman period indicates that the Islamic slate has the
cropping and fixed-rent tenancy, this being consistent with the permissibility
authority to undertake ail measures considered necessary for improving the
of both muddra/xih and leasing in the SharCah. Their rationale is that the
well-being of the peasants and landless farmers and for reducing concentration
poverty of most Muslims in the early Madinan period had led the Prophet,
of wealth in the Muslim society.
may the peace and blessings of God be on him, to discourage both share­
cropping and fixed-rent tenancy. However, later on when the economic
Rationale and Objections
conditions of the Muslims improved, he allowed both, and not just share­
cropping. as is argued by the second group.’ The importance of land reforms for creating the egalitarian and
democratic climate that Islam visualises cannot be overstated. Distribution of
Nevertheless, a number of jurists feel that, even though fixed-rent
land is a major determinant of the distribution of income and the incidence
tenancy is allowed, it is makruh (undesirable).1’ According to them share­
of poverty.15 The role of land reforms in the relatively more equitable
cropping is preferable because, by requiring both the land-owner and the
development of Japan. Taiwan and South Korea has already been discussed
tenant to share in the reward as well as the risk of farming, it is closer to the
in chapter 3. Even other countries, which have combined economic growth
Islamic concept of justice, in contrast with fixed-rent tenancy, which assures
with an equitable distribution of landholdings, have been able to achieve a
78 ISLAM AND ECONOMIC DEVELOPMENT THE ISLAMIC STRATEGY 79

relatively more equitable distribution of income, while those which have Rural Development
allowed the concentration of landholdings to continue are suffering from a
Land reforms, though indispensable for reducing concentration of
higher incidence of poverty and a more inequitable distribution of income.
wealth, will not by themselves take the Muslim countries very far in realising
The creation of a rural sector of small, independent proprietary farmers the maqdsid unless there is a simultaneous effort to remove some of the
would help provide a great boost to farmer incentives in Muslim countries, other disadvantages from which the entire agricultural sector is suffering —
thus raising agncultural output and accelerating development. Combined with disadvantages that reduce efficiency and output in the agricultural sector,
the proliferation of SMEs, it would help reduce the migration of farm aggravate rural unemployment, depress rural incomes, and accentuate
population to urban areas and the associated urban congestion, crime and inequalities.
violence. The reduction of inequalities of income and wealth would also tend
The most serious disadvantage is the absence of external economies of
to strengthen democratic processes in these countries.
an efficient infrastructure (roads, schools, electricity and health facilities) due
Given the flagrant inequities that now exist, land reform is not an option to neglect of the agricultural sector in government budgetary appropriations.
which the governments may or may not consider seriously. If a meaningful Unlike the rich industrial countries, which encourage farmers through various
land reform is not implemented, it will come ultimately through a violent incentives including protection from imports, most developing countries
revolution Historical experience shows that when such revolutions take discriminate against their fanning sector.” They try to offset the inflationary
place, all ethical values get trampled. Landlords may in this case lose not impact of government budgetary deficits through overvalued exchange rates
only their lands through expropriation but also their lives and other and low administered food prices.
belongings. It would hence be in their own larger, long-run interest to strive
Such policies have turned the terms of trade against agriculture and
voluntarily for a just land reform.
SMEs, lowered agricultural output, increased dependence on imports, reduced
It is argued by some that land reforms may tend to make agriculture the exports and depressed rural incomes. The depressed rural incomes,
inefficient by reducing the size of landholdings. Such a contention is not combined with lhe inequitable land tenure system, do not leave an adequate
upheld by a number of empirical studies conducted in different countries. surplus to enable tenant-farmers to undertake the necessary investments in
These studies have confirmed that farm size and output per acre are inversely agriculture and SMEs. This accentuates rural unemployment and under­
correlated. employment.
This implies that small farms arc more efficient than large farms.15 There is thus a vicious circle of poverty, paucity of investments, lower
Empirical evidence that is in conflict with this view, has been explained by output and unemployment. The pressure of population in urban areas has also
the tendency of resources (such as better seeds, credit, water supply and consequently risen, leading to a decline in urban wages and the creation of
fertilizer) to gravitate towards large farms as a result of the ability of big slums with miserable living conditions. Hence, the hub of lhe problem in
landlords to use their wealth as a collateral to borrow from financial insti­ rural areas, as the authors of Poverty and Hunger" have indicated, is income
tutions.1* Even according to the World Bank, "the resilience and productivity distribution rather than agricultural technique.
of small family farms throughout the world is striking", specially in view of
Another serious disadvantage faced by the agricultural sector is the lack
the considerable disadvantages faced by them in terms of limited access to
of availability of financing to small fanners and micro enterprises. Constant
services, markets and productive inputs such as fertilisers.1’ It is important
indebtedness to traders, informal money lenders, loan sharks or relatives,
to bear in mind that implementation of land reforms does not necessarily
perpetuates the poverty of poor people."” The result is that small farmers do
imply that landholdings be reduced below a certain economically viable level.
not have the financing to purchase better quality agricultural inputs and to
80 ISLAM AND ECONOMIC DEVELOPMENT
THE ISLAMIC STRATEGY 81

operate micro enterprises to raise their incomes and to keep themselves fully
relations in the nineteenth century in the capitalist world, has ceased to
occupied. occupy that position?’
Hence an equitable distribution of landholdings would by itself not lead
To solve this problem, socialism brought about state ownership of all
very far unless suitable arrangements are also made to provide adequate
means of production. This has increased wage slavery and intensified
financing not only to finance agriculture but also to small enterprises in rural
alienation. It has also eliminated competition and reduced incentive and
areas so that the farmers have an additional source of employment and income
efficiency. Il is not yet clear what trend the move towards privatisation of
and their economic condition improves?' This should naturally be done
socialist large enterprises will reflect with respect to their size.
within the framework of the alternative to interest-based system that can be
developed in consonance with the values and teachings of Islam.” This may While there may be nothing basically wrong in large enterprises if they
be impossible to achieve unless the governments and commercial banks which are more efficient and do not lead to concentration of wealth and power, it
have subsidised large urban enterprises for decades through concessionary or seems that the adoption of a policy of generally discouraging large enterprises
prime-rate financing now tilt the balance in favour of agriculture. How can except where they are inevitable, and of encouraging SMEs, as much as

this be done will be discussed later. possible, would be more conducive to the realisation of maqasid in Muslim
countries.
Land reforms supported by other measures to liberate the peasants from
the inequities and deficiencies they are suffering from, should not only help This will have a number of advantages besides reducing concentration

considerably expand the productivity of the agricultural sector but also dim of wealth and power. It will be more conducive to social health because
the attraction of the bright lights of the city, thus helping reverse the shift of ownership of business tends to increase the owner’s sense of independence,

population from rural to urban areas and lowering urban congestion and dignity and self-respect. It will induce such owners to innovate and to work

crime. It would, nevertheless, be necessary to bring about a change in the harder for the success of their own business. It will create a healthier en­
vironment for competition and thus contribute to greater efficiency. It will
attitude and work habits in rural areas. This may be attained more speedily
also help expand employment opportunities at a faster rate, as will be
and effectively if social change is inspired by Islam. The mosques already
play an important role in rural life and their proper use could open up an discussed later in this chapter.

effective way of inculcating the desired characteristics in the rural population.

Wider Ownership and Control of Corporations
Proliferation of Small and Micro Enterprises (SMEs) Since SMEs may not be feasible for all types of economic activity, it
may be preferable to choose the corporate form of business organisation for
The counterpart of rural land reforms in the industrial and business
large enterprises wherever they are necessary. This has the potential of
sectors is the proliferation of efficient SMEs in rural as well as urban areas.
making a positive contribution towards the proliferation of ownership.
This would complement land reforms in reducing the prevailing concentration
However, the corporation as it exists in the West is a primary source of
of wealth and power in Muslim countries. It also has other advantages which
concentration of wealth and power?1 Even though corporations constitute the
occupy a place of high priority in the Islamic value frame.
dominant sector of the economy and exercise an immense power to make
The proliferation of SMEs would be in sharp contrast with the basic product, price and investment decisions that affect the entire nanon and.
prevailing situation in the capitalist and socialist worlds. Large businesses in fact, the world?’ they do not reflect the political democracy of the West in
dominate the economic and political scene in capitalist countries and the long­ their decision-making.14 Corporations operate as autocratic institutions; the
term trend seems to be in favour of even bigger businesses and farms. holding of controlling stock by a few families makes it possible for them to
Consequently, competition, which was the predominant form of market have control over all policies?’
82 ISLAM AND ECONOMIC DEVELOPMENT THE ISLAMIC STRATEGY 83

This is the natural consequence of the Western interest-based financial on the public exchequer as socialism and the welfare state have unwittingly
system, which makes a high gearing ratio possible and leads to the inverted done.
pyramid of corporate power based on a narrow equity base. The leveraged
Since it is the obligation of a Muslim to earn his livelihood, it would
takeovers witnessed in recent years have made the situation even worse.
be desirable to give preference even in zakdh disbursements to the objective
The Western corporation does not. therefore, provide a model for of enabling the poor to stand on their own feet. Zakdh should become a
Muslim countries. It must be reformed appropriately to reduce lhe permanent income supplement of only those who cannot be enabled to cam
concentration of power. The abolition of interest and a substantial expansion enough through their own effort. This requirement, implemented in a socio-
of equity in the capital structure of corporations in accordance with Islamic economic environment which encourages SMEs, should make a valuable
values will noi only minimise the leverage of rich families, but also lead to contribution to the expansion of self-employment opportunities and to the
a wider ownership of corporate shares and a more equitable distribution of reduction of inequalities.
power This may not be enough because most shareholders do not participate
The levy of zakdh on ali wealth, including gold and silver and idle
in board meetings. Hence, other reforms may also be needed to reduce the
balances held in safes, should help induce the zakdh payers to seek income
sweeping power of directors.
on their wealth to enable them to pay the zakdh without reducing their wealth.
This should help increase the availability of funds for investment. Thus a
ACTIVATION OF ZAKAH AND ISLAMIC INHERITANCE SYSTEM
society where the Islamic values have been internalised, gold and silver
The above measures for reducing inequalities of income and wealth holdings and idle balances would tend to go down, leading to a rise in
would be more successful if they are further strengthened by the activation of investment and employment.
the Islamic system of zakdh and of inheritance. Unfortunately, even though
the implementation of both these systems is an essential part of the Inheritance
obligations of Muslims and indispensable for the realisation of lhe maqdsid,
The distribution of a deceased person's estate in accordance with
they have remained dormant for ages.
Islamic injunctions should also help reduce, over time, lhe skewness in wealth
distribution. If necessary, the enforcement of inheritance laws should be
Zakdh: The Social Self-Help Programme
carried out in such a way that it does not lead to a rise in unnecessary
Islam requires every Muslim, having resources in excess of a certain consumption but rather to an increase in investment and a proliferation in the
basic amount, to pay zakdh as a given proportion of his or her net worth or ownership of means of production.
agricultural output, for the benefit of mainly the very poor and the destitute.
What would be a stronger rationale for making the needed sacrifice to meet Restructuring the Financial System
one's social obligations than the belief that all resources are a trust from God
The interest-based financial system which the Muslim countries have
and must be used for the well-being of all human beings who belong to the
taken over from the capitalist countries is also one of the primary sources of
one human family of the One God before whom account has to be given
concentration of wealth and power “ Therefore, the Muslim countries may
about how resources are utilised.
find it difficult to bring about a reduction in inequalities and a proliferation
This system of social self-reliance, along with other self-financing of SMEs unless the entire financial system is restructured in the light of
arrangements made in modern societies to provide social insurance protection Islamic leachings. This subject will, however, be discussed later.
for unemployment, accident, old age and health through deductions from lhe
employees' salary as well as the employers' contributions, should enable the
Muslim countries to meet the needs of all without putting the entire burden
84 ISLAM AND ECONOMIC DEVELOPMENT THE ISLAMIC STRATEGY 85

3. ECONOMIC RESTRUCTURING Introducing the Moral Filter

The reallocation of resources needed for equitable development is not It is not possible to cut down consumption in an equitable manner
possible, as indicated earlier, without a thorough economic restructuring that without distinguishing the ‘necessary’ from the ’unnecessary’ claims on
covers all aspects of the economy, including private consumption, government resources. The market system, as discussed earlier, is unable to do this
finances, capital formation and production. Some of lhe relevant aspects of because of its reliance primarily on prices. If the price filter were reinforced
these shall be discussed below. by another filter of socially-agreed values, a substantial chunk of aggregate
demand could be removed even before it gets expressed in the market. The
Changing Consumer Preferences socialist system, with the absence of even the filter of market-determined
price, removes even the secular motivation for efficiency by making resource
Since an accelerated rise in capital formation is indispensable for
allocation subject to the whims and vested interests of the politburo members
attaining higher growth and employment, it is necessary to increase savings
and other power elite.
by squeezing consumption This objective poses a dilemma. The unequivocal
Islamic emphasis on brotherhood and social equality requires that a reduction
Needs and Luxuries
in consumption be brought about in such a way that the standard of need
satisfaction of the poor is not only not worsened but is. in fact, improved. What the Muslim countries need to do. therefore, is to distinguish the
’necessary’ from the ’unnecessary’ by classifying all goods and services into
It is not possible to resolve this dilemma without making a
the categories of ’needs’ and ’luxuries’. The term ’needs’ (including
revolutionary change in the prevailing life-styles, particularly of the rich. The
’comforts’) may be used to refer to all those goods and services which fulfil
inability of the society to fulfil needs is not necessarily the result of a lack of
a need or reduce a hardship and thus make a real difference in human well­
resources but rather of the failure to adopt a consumption pattern which is in
being. The term 'luxuries' may be used to cover all those goods and services
conformity with its resources and goals.
which make no real difference in a person’s well-being and are wanted mainly
for their snob appeal. Everything required for fulfilling needs like capital
Nevertheless, expensive life-styles, which even some of the rich
goods, raw materials, exports, imports, and physical and. social infrastructure
industrial countries can hardly afford, have become a prestige symbol in the
is ’necessary’, while everything that is otherwise, does not fall into this
otherwise poor Muslim countries. This, along with a number of un-lslamic
category.
customs and ceremonies extending from childbirth to marriage and death, has
led to an unrealistic consumption pattern which is unwarranted in the light of Preparing such a classification may not be a simple job. Islamic values
Islamic teachings and the paucity of resources of most of these countries. The could, however, be helpful. There is an intricate discussion in the fiqh
victims of such a life-style are forced to live beyond their means. Aggregate literature about necessities (daruriyydl). conveniences (hSjiyyal), and
consumption has accordingly risen, savings have lagged behind, and capital refinements (tahsiniyyai). All of these as defined by the fuqaha' (jurists),
formation based on domestic savings remains inadequate. Moreover, since fall within the range of what we have termed ’need’ above and do not include
most luxury goods and services carrying a snob appeal are of foreign origin, luxuries or goods which serve primarily as symbols of high status. Anything
the pressure on foreign exchange resources has also risen steeply. The that goes beyond ’needs' has been treated by the fuqaha as prodigality and
resource gap has had to be filled by external borrowing, contributing to a self-indulgence and has been strongly disapproved.” This discussion in the
higher debt servicing burden and further squeezing of resources available for fiqh literature could be developed further to enable Muslim countries to
investment. reduce their prevailing imbalances without compromising their socio-economic
goals.
86 ISLAM AND ECONOMIC DEVELOPMENT THE ISLAMIC STRATEGY 87

Since Islam is not an ascetic religion, the classification of goods and It would, however, be necessary not to liberalise the utilization of
services into needs and luxuries need not remain constant through space or resources for luxuries and inessential goods and services to ensure that the
time. As Islam allows a person to satisfy all his needs and even to go in for imbalances decline and the allocation of resources reflects social and
all those comforts that would increase his efficiency and well-being, and as economic priorities. Moral reform could complement the price system by
the classification of goods and services into the two categories would have to making even the rich to reduce unnecessary consumption voluntarily notwith­
take into account the wealth anc general standard of living in a given Muslim standing their purchasing power. However, moral values may remain dormant
country, the perspective about needs is bound to undergo a change over time as they did in the pre-War Japan. Taiwan and South Korea. It is, therefore,
with the development of technology and the increase in wealth and general necessary to bring about a change in the social mood in the same way as war-
standard of living. In fact, most Muslim countries are richer today and can related austerity did in these Far Eastern countries.
afford a higher standard of need fulfilment than the early Muslim societies.
Without such a change, individuals will conform only under constraint.
What is. however, indispensable is the satisfaction of all basic needs of Two measures could help bring about this change. Firstly, an intensive effort
all human beings in a Muslim society. This goal cannot be realised unless should be made through all the educational media to internalise the Islamic
the differences in consumption level which have been allowed in conformity values in the society to such a degree that violation of the Islamic simple­
with the status and income of individuals do not go beyond what the living norm would be considered a social stigma. Since this will take time,
economy's resources can bear. They should not reflect snobbery or lead to it would be desirable to have the campaign for simple living accompanied, at
wide social gaps that can only weaken the bonds of Islamic brotherhood. least in the early phase, by a second measure consisting of an officially
imposed restriction on luxuries, ostentatious ceremonies, unrealistic doweries.
Tlie objective should not be to create a monotonous uniformity and
drabness in Muslim society. Simplicity can be attained in life-styles without and the display of status symbols.

sacrificing creativity and diversity. The criteria for classification into the two Even the efforts directed towards reducing corruption are bound to fail
categories should hence be the Islamic consumption norms along with the unless the governments first strike at one of the major roots of corruption -
availability of resources and the impact on brotherhood and social equality. the ostentatious life-styles now so common in the Muslim countries. Such
Removal of the prevailing imbalances will also have to be an additional life-styles almost force the people to resort to unfair means of earning. The
criterion as long as these do not become manageable. acquisitiveness and corruption of many people may tend to decline
substantially once they realise that their effort to acquire greater prestige
Liberalising Need-Fulfilment through conspicuous consumption only blemishes their reputation and raises

'Liberalisation' may hence be construed only within the frame-work of questions about the source of financing.

Islamic values related to needs and luxuries. Production, import and

distribution of all goods and services falling within the category of 'needs' Reforming the Public Finances
should be liberalised. Market forces should be allowed to play their full role. Changing consumer preferences in favour of simple living will no doubt
The government should do all it can to ensure healthy competition and free reduce private sector pressure on resources and raise the savings needed for
interaction between a large number of buyers and sellers. The government investment and development. This will, however, not be enough. Govern­
should also do all it can to provide the necessary incentives and facilities to ments in Muslim countries, as in other developing countries, are as blame­
increase the supply of need-fulfilling goods and services. Imposition of worthy as. if not more than, the private sector, for the excessive claims on
indirect taxes on the goods and services, deemed necessary, should be at a resources. They have almost lost control over their public finances. The
relatively lower rate and graduated in the reverse order of their priority result is that, in spite of high rates of both direct and indirect taxes, they have
had to resort to unhealthy levels of budgetary deficits. These deficits have
88 ISLAM AND ECONOMIC DEVELOPMENT I HE ISLAMIC STRATEGY 89

been financed by moneiary expansion and excessive levels of domestic and the absence of an indigenous development philosophy prepared in conformity
external borrowing. These have generated relatively high levels of inflation with the country's own resources and values has led to the absence of well-
and debt-servicing burden which will continue to plague them for a long time. established priorities. Without the establishment of such priorities it is not
possible to set up agreed criteria for judging the 'essential' from the
Priorities in Government Spending 'inessential' and the 'productive' fh m the 'wasteful' use of resources. Unless
a long-run commitment is made to n Islamic development philosophy, it may
In spite of their excessive spending, the governments have neither laid
not be possible to remove the existing confusion and conflict in policies.
down the basic infrastructure necessary for balanced and accelerated
Thirdly, the price system has not been used and resources, particularly foreign
development nor supplied adequately the services indispensable for realising
exchange resources, are acquired or sold by governments and public
the egalitarian goals of Islam. Rural infrastructure and agricultural extension
enterprises at less than their opportunity costs. This contributes to inefficient
services, on which the well-being of a preponderant proportion of the
use of resources. Fourthly, the absence of an elected parliament and a free
population depends, have been neglected. Education, which should constitute
press deprives the public of a forum for the criticism of government policies.
the foundation stone of an Islamic society, has also received inadequate
It is hard to conceive that this problem can be solved without establishing a
attention. Health expenditure has been concentrated mainly in the major
process which would ensure an effective participation of the common man in
cities, in large capital-intensive hospitals and on curative medicine. Yet the
the government.
majority of the population lives in the countryside and needs a network of
simple clinics and paramedical personnel, control of epidemics and. above all.
Principles of Public Spending
the provision of clean water supplies, sanitary services and eradication of
malnutrition “ Housing for the poor has received hardly any public sector Commitment to Islamic values, and specially to the maqasid, should
attention, and slum areas devoid of public utilities and sanitation have help on all four counts. It should, in particular, help reduce the existing
mushroomed. Development of an efficient public transport system has been arbitrariness in government spending decisions by providing the criteria for
grossly neglected causing great hardship to the poor who have no transport establishing priorities. the impact of the maqdsid could be further
facilities of their own. Yet much lip service is paid to Islam and its reinforced by adhering to the following six broad principles adapted from the
imperative of socio-economic justice. legal maxims developed over the centuries by Muslim jurists to provide a
rational and consistent basts for Islamic jurisprudence."
This sorry stale of affairs is bound to perpetuate the existing slow rates
of growth and economic inequalities, thus accentuating social tensions and (1) The principal criterion for all expenditure allocations should be the
unrest. Il is. therefore, necessary for Muslim governments to restructure their well-being of the people (Article 58).
spending, so that they are able not only to reduce their overall spending levels
but also to reallocate spending to concentrate more on projects that will help (2) The removal of hardship and injury must take precedence over the
accelerate development and realise the socio-economic goals of the Shari"ah. provision of comfort (Articles 17. 19—20 and 30-32).

The absence of a serious effort on the part of governments to utilise

(3) The larger interest of the majority should take precedence over the
their limited resources more efficiently is due to a number of reasons. Firstly,
narrower interest of a minority (Article 28).
there is a lack of realisation that the resources at their disposal are a trust
from God. This failing, along with the expensive life-style of government
(4) A private sacrifice or loss may be inflicted to save a public sacrifice or
officials, has contributed to corruption. Only a moral reform of lhe society
loss and a greater sacrifice or loss may be averted by imposing a
along with a change in the life-styles of the people, especially those in
smaller sacrifice or loss (Articles 26-28).
positions of influence and authority, can remove this shortcoming. Secondly,
90 ISLAM AND ECONOMIC DEVELOPMENT THE ISLAMIC STRATEGY 91

(5) Whoever receives the benefit must bear the cost (Articles 87-88). precedence. This will also automatically improve urban life by reducing
population congestion.
(6) Something without which an obligation cannot be fulfilled is also
Inequalities of income and wealth are to be reduced. It becomes
obligatory.”
indispensable, in accordance with maxim 6. to raise the ability of die poor to
earn more through greater and easier access to better educational and training
These maxims have an important bearing on taxation and government
facilities and to finance.
spending in Muslim countries. To clarify some of their implications for
government expenditure programmes, it may be helpful to consider a few This requires that priority be given to government spending programmes
for the establishment of educational and vocational training institutions in
examples.
rural areas so that everyone who qualifies has an equal access to them. It is
Since general well-being has to be an essential objective of all public also necessary to restructure the financial system to make financing available
spending in accordance with maxim I. then maxim 6 would require that all
to a broad spectrum of entrepreneurs in rural as well as urban areas so as to
physical and social infrastructure projects which help realise this objective raise self-employment opportunities and to increase die supply of need­
through accelerated economic growth, and job creation and need-fulfilment
satisfying goods and services.
should be given priority over those that do not make such a contribution.

Maxim 2 would require that from among the infrastructure projects Where to Cut
which are indispensable, preference should be given to projects that would Given the unhealthy fiscal deficits, the socio-economic goals of Islam
help remove the hardship and suffering caused, for example, by the cannot be realised without a reallocation of government spending. A decision
prevalence of malnutrition, illiteracy, homelessness and epidemics, and lack has hence to be taken about areas where spending must be reduced. Without
of medical facilities, clean water supply and sewerage disposal. such a reallocation, either the realisation of the goals will have to be
Similarly, the development of an efficient public transport system should compromised or else spending will exceed the limits of available resources
acquire priority in accordance with maxim 3 because its absence causes and exacerbate the prevailing macroeconomic and external imbalances.
hardship to a majority of the urban population, adversely affecting efficiency Where can spending be reduced? It is important to identify some of the

and development, and leads to an excessive import of cars and gasoline. major areas where savings could be realised.
While these cars provide extra comfort to a small proportion of the suburban
population, a reduction in their imports and diversion of the savings to import Corruption. Inefficiency and Waste
of public transport vehicles could be justified on the basis of the maxim. The first and the most obvious way to achieve substantial savings is to
Such a measure would not only reduce the pressure on foreign exchange minimise corruption, inefficiency and waste, which are seriously eroding the
resources but would also provide comfortable transport services to the ability of Muslim governments to utilise their scarce resources efficiently.
majority, with lower congestion and pollution on urban roads. According to the Chairman of the Pakistan National Assembly's Public

If priority is to be given to serving the interest of the majority in Accounts Committee, "the major part of the development budget is misappro

accordance with maxim 3, then the secondary importance given to rural pirated". Instances cited by him include: defective buildings collapsing a few
years after construction, roads washed away by a single rainstorm, imported
development programmes has no justification. Since the majority of the
railway machinery turning into scrap without being used, imports being sold
population lives in rural areas and the mass uprooting of people from their
elsewhere before reaching Pakistan, and big loans extended by nationalised
families and society causes socio-economic problems, the development of
these areas in order to raise agricultural productivity, to expand self- banks to influential people being written off.” However, the effort to reduce
corruption may have a greater chance of success if it is also accompanied by
employment and employment opportunities, and to fulfil their needs must take
92 ISLAM AND ECONOMIC DEVELOPMENT 93
THE ISLAMIC STRATEGY

moral reform, transformation of life-styles and structural changes in the 'infancy'. However, if the subsidy is used to enable small farmers and SMEs
economy. to adopt better technology and inputs, and to stand on their own feet, it could
be justified on the basis of the fundamental socio-economic objectives of
Subsidies Islam. But the rural and urban poor "tend to be dispersed, unorganized and
A second area where substantial savings can be made is subsidies. politically inarticulate" compared with the urban and rural elite.” Hence they
Even though the welfare of the poor has to be one of the primary rarely get the producers' subsidies of the kind obtained by large-scale
considerations of an Islamic state, a number of subsidies provided by Muslim industries and influential landlords. The poor nevertheless end up bearing the
governments (either directly or through public enterprises, and either tax burden of subsidies because the tax systems in these countries arc usually
transparent or opaque) cannot be convincingly supported. Subsidies are regressive.
usually defended on equity or economic consideration. However, on both
these counts they do not stand up to the test of the maqdsid or the Islamic Publie Sector Enterprises
maxims of public spending stated above. A third important area of saving could be the gradual withdrawal of

If equity is the goal, the subsidy must redirect income towards the truly patronage provided to public sector enterprises as the performance of these
needy It does not. A lower price that does not cover the costs in accordance enterprises has. by and large, been disappointing in developing countries.

with maxim 5 tends to benefit the rich more than the poor because of their They have typically failed to provide the spur to industrialisation and the
larger consumption and easier access.M This is not defensible in a system faster growth that governments had hoped for. Not only have the financial

committed to socio-economic justice. If value judgements are not an returns often been unimpressive but the social returns have also been poor.
anathema, there is no justification for a lower price or subsidy for the rich or This is because they have operated without competition and governments have

those who can afford to pay. Only those who are unable to pay a realistic often placed little emphasis on efficiency and have rarely been prepared to use
price should be helped. Since price discrimination is administratively difficult the sanction of liquidation. Low profitability limits their ability to self­
finance their investments. Consequently, they have often been a cause of
and since it is desirable to make everyone pay the realistic price, the best way
to help the poor is through substantially increased stipends, relief payments large budgetary deficits and external debt. In a sample of twenty-seven
developing countries in 1976-79. the net budgetary payments to non-fmancial
and income supplements paid out of appropriations made for this purpose by
the government or social service organisations, zakah funds, and other state owned companies were more than 3 percent of the GDP.

voluntary or compulsory donations.

Defence
In this way the government may be able to provide more intensive relief
to the needy by using only a proportion of the total amount spent on a general A fourth area where large savings could be made is defence, because
high military spending is the source of substantially large fiscal deficits and
subsidy. The income supplement would give the poor the chance to deter­
of the debt crisis. It complicates stabilisation and adjustment, and adversely
mine their own priorities and the realistic price would help minimise the
affects economic development. Within the framework of Islamic goals and
wasteful use of goods or services brought about by a general subsidy.
of the principles of public spending discussed above, the claim of national
If efficiency is the goal, subsidy must strengthen incentives for the defence for the lion's share in budgetary appropriations loses its rationale in
realisation of the maqdsid and allocate resources more effectively. It does ihe absence of a serious threat of external aggression.38
not. Agricultural subsidy has mainly helped the big fanners "who have
It is often forgotten that defence spending imposes not only monetary
obtained a disproportionate share of it and have used it to amass land and
other assets''.” The subsidy paid to large-scale urban industries on the basis cost but also other costs, including reduced well-being of the poor, leading to
social unrest and political instability. Only a few Muslim countries are
of infant industry argument rarely encourages them to cross the threshold of
94 ISLAM AND ECONOMIC DEVELOPMENT THE ISLAMIC STRATEGY 95

seriously threatened; most of the others usually make undue fuss about availability of borrowed funds due to the Islamic ban on interest should help
defence on the basis of unrealistic assumptions. Moreover, it is always compel Muslim governments to resort to conciliatory and peaceful co­
possible to have better defence with smaller spending if efficiency is ensured existence policies. They also need to derive inspiration from the Prophet,
in the use of resources; if corruption, which is more rampant in defence than peace and blessings of God be on him. who signed a truce agreement with the
elsewhere, is removed; and if a policy of peaceful coexistence is adopted and Makkans on extremely unfavourable terms to secure a period of peace and
unnecessary conflicts with neighbouring countries are avoided. tranquillity.

Since the existence of poverty and extreme inequalities and the absence
of adequate educational institutions, hospitals, and public utilities, particularly Tax Reform
in rural areas, is subjecting majority of the population to hardship and While spending needs to be reduced and reallocated, the tax system,
economic backwardness, there seems to be little moral or economic which is as guilty of fiscal mismanagement as expenditure policies, also needs
justification for spending huge sums on defence hardware. The absence of a to be reformed in the interest of greater equity and higher revenue. Muslim
real threat prevents the government from demanding from themselves and the countries, like other developing countries, are not so much over-taxed as they
rich the financial and economic sacrifices that defence requires. are badly taxed. The tax base is narrow and so the tax rates are high. Tax
Countervailing adjustments are, accordingly, not made in life-styles and base, tax rates and corruption are parts of a vicious circles. The narrower the
government spending, and the needed sacrifice is hence quietly passed on to tax base, the higher must be the rate to achieve a given amount of revenue.
the urban and rural poor through the low priority given to satisfaction of their The higher the tax rate, the greater is the incentive for corruption. This
needs on the basis of the usual plea of 'lack' of resources. vicious circle leads not only to economic distortions but also to a greater
reliance on indirect taxes, it is a well known fact that "tax evasion by the
High defence spending does not even provide the security which the
well-to-do is colossal, and they are anyhow relatively very few. while the
governments claim it does. The 'real' source of security for the poorer
poor are many. Taxation becomes forced to rely on regressive indirect
Muslim countries lies in internal strength attained through moral reform,
taxes.”" The reform of the entire tax system and the collecting machinery arc
economic development and socio-economic justice. No amount of defence
spending can provide security against internal disintegration which is gaining hence indispensable.

momentum in many Muslim countries. Il seems that sometimes even the very
objective of defence build up. ensuring national and territorial integrity, is Restrained Deficits

jeopardised by ’excessive' defence spending. This is because, as Paul Muslim countries have no alternative to expenditure and tax retorm.
Kennedy has rightly argued, a strong economic base is more vital to a nation, Increased reliance on monetary expansion, borrowing and foreign aid is not
in the long run. than military superiority; and nations which stretch feasible. Monetary expansion contributes to inflation. The rate of inflation
themselves militarily beyond what their economies will sustain are looking for in low- and middle-income Muslim countries was 23.8 percent in 1989.
a fall ” Although this rate was lower than that of 78.8 percent in all developing
countries, it was substantially higher than that of 4.5 percent in industrial
One of the most important goals of government policy in Muslim
countries which arc their major trading partners.*'
countries should hence be to minimise defence spending through policies of
conciliation and peaceful coexistence with a view to release resources for This difference in the rates of inflation between the Muslim and the
satisfying the needs of the populace. If the Muslim countries concerned take industrial countries has led to a steep decline in the external value of their
an initiative, there is bound to be public pressure for reduced defence currencies and created a serious dilemma for them. If their governments
spending even in the neighbouring countries from which the Muslim countries devalue their currencies officially to reflect the domestic role of inflation,
feel the psychological threat. Everyone will then be better off. The non­ their rate of inflation accelerates further and accentuates the difficulties of the
96 ISLAM AND ECONOMIC DEVELOPMENT THE ISLAMIC STRATEGY 97

poor, thus creating political problems for the governments. On the other to keep their wasteful and unnecessary current expenditures under control and
hand, if they try to avoid a realistic devaluation, their exports become to apply cost-recovery methods in the pricing of goods and services supplied
uncompetitive in the international market and increase their dependence on by them.
borrowing and aid.
The governments may also have to resort increasingly to leasing of
Borrowing docs not bear a great promise because the debt-service infrastructure projects, financed and implemented by the private sector on a
burden of both domestic and foreign debts of these countries has already risen competitive basis in accordance with government specifications. They may
to an intolerably high level. The external debt of low- and middle-income have to invite private sector participation in the equity of projects which are
Muslim countries rose at the rate of 9.8 percent per annum during the decade commercially viable, but the implementation of which is not desired to be left
from 1980 to 1989 when their gross national product and their exports of to the private sector for some overwhelming reason. They may also find it
goods and services rose at the substantially lower rates of 1.8 percent and 6.3 necessary to encourage private philanthropists to construct and run. as many
percent per annum respectively. Their debt-servicing burden rose at the rate as possible, educational institutions, hospitals, housing schemes for the poor,
of 9.3 percent per annum.41 orphanages and other social service projects by taking effective measures to
revive the institution of awqaf (charitable trusts) which have played an
The prospects for receiving increasing doses of foreign aid are also not
very bright. After the failure of communism, the strategic importance of important role over a greater part of Muslim history.

Muslim countries has definitely gone down. Moreover, the expected increase Since borrowing does not obviate, but rather only postpones, the
in the transfer of resources to communist countries to help them in their ultimate need for sacrifice, the ban on interest should prove to be a blessing
economic reform will also adversely affect the flow of aid to Muslim by removing the long-run heavy debt-servicing burden it normally entails.
countries. The constraint it will impose on government spending in the short-run may
tend to be more than offset by the healthy discipline it will impose on lhe
Muslim countries should consider this change in their international geo­
governments, the sustained, steadier growth it will generate in the economy,
political environment as a blessing in disguise and restructure their economies
the greater cooperation it will bring about between the governments and the
in such a way that their dependence on aid declines. They should make every
private sector, and the much smaller debt-servicing burden it will create in
effort to use effectively whatever aid they are able to get to accelerate
development with justice and to minimise its use for private luxury both the domestic and external sectors of the economy.

consumption and unproductive public sector spending. The Prophet's hadith To avoid an excessive squeeze in the initial stage, the governments may
saying that: "The hand that is above is better than the hand that is below",41 apply the prohibition gradually and not in one stroke. An unscrupulous
should be no less applicable to nations than it is to individuals. government may try to find the easy way out bj) borrowing excessively from
the central bank. This would hurt the Islamic imperative of making money
Financing Deficits Islamically a reliable measure of value through price stability. Accordingly, it would be
unrealistic for a Muslim government to talk of Islamisation without making
The Islamic injunction against interest should prove to be of great help
a serious effort to reduce its budgetary deficits.
in realising greater efficiency in public sector spending. Since interest-based
borrowing may be permissible only in emergencies or extremely difficult
RESTRUCTURING THE INVESTMENT CLIMATE
circumstances, governments will have to raise their tax revenues to be able to
finance their current and unproductive outlays. Implementation of Islamic consumption norms should also help increase
savings. But savings may not necessarily get diverted to capital formation,
Since there is a limit to the extent to which tax revenues may be raised,
and even if they do. just a rise in capital formation is not the apex of
governments will not be able to overstretch themselves. They will be forced
achievement. What is needed is capital formation that would lead to need
98 ISLAM AND ECONOMIC DEVELOPMENT 99
THE ISLAMIC STRATEGY

fulfilment, export expansion and a rapid rise in self-employment and

savers to get into income-earning financial or real assets to be able to offset
employment opportunities. Therefore, it is not enough to cut consumption; the impact of :akdh on their savings.
it is also necessary to foster a suitable investment climate.

In the present-day Muslim societies, a substantial pan of even the Removing the Hurdles
existing low-level of savings goes into unproductive channels like hoardings
However, even these values may, by themselves, fail to promote
(gold, precious stones and jewellery) and capital flight. Capital flight has
productive investment. People tend not to commit funds for long-term
become a serious problem for most developing countries. During the eleven productive investments unless there is a proper investment climate. Some of
years from 1974 to 1985, about $150-200 billion of the total capital outflow
the factors which vitiate the investment climate are the absence of an adequate
of $250 billion from capital importing countries, represented capital flight"
social and physical infrastructure, an unjust tax system, political uncertainties,
Capital flight of this magnitude depresses domestic investment and continuous depreciation in the exchange rate of the country's currency, and
makes sustained growth more difficult to achieve. If the same policies an arsenal of unwarranted controls. A reference has already been made to the
continue, it would be difficult to prevent capital flight and to raise domestic need for infra-structure construction and tax reform. The remaining three
investment, thus frustrating the realisation of the socio-economic objectives factors are briefly discussed below.
of Islam.
Political Uncertainties
In keeping with the already-quoted maxim: "Something without which
an obligation cannot be discharged is also obligatory", productive investment There is no immediate solution to political uncertainties which are the
of one's savings to help bring about need fulfilment and increased self­ result of poverty, socio-political unrest, and absence of democratic processes.
employment or employment is the religious obligation of all Muslims who are These have been further aggravated by shifting loyalties of the ruling elite to
capable of saving. capitalism, socialism and Islam in response to the conflicting demands of their
own vested interest, international power politics and the people's aspirations.
This obligation becomes even more compulsive when we realise that the
This has generated confusion and contributed to an absence of a firm direction
Prophet, peace and blessings of God be on him. himself glorified productive
in policies and strategies. Making a serious commitment to Islam and
effort and investment by saying: "If a Muslim plants a tree or cultivates a
allowing democratic processes to play their full political role should help
field such that a bird or a human being or an animal eats from it. this deed
provide the needed direction and stability of policies.
will be counted as an act of charity."45 The Prophet, peace and blessings of
God be on him, also discouraged disinvestment by saying: "He who sells a The SharCah clearly defines the rights and limitations of property­
house [without need], but does not invest the proceeds in something similar. holders and the legal enforcement of these should help remove the fears of
God will not bless the proceeds."44 Caliph 'Umar used to say: "He who has investors about arbitrary seizures and nationalisation. In his address, delivered

wealth, let him improve [develop] it and he who has land, let him cultivate on the occasion of his Farewell Pilgrimage, the Prophet, peace and blessings
it."41 of God be on him. declared: "Your lives and your properties are as sacred as
this day of the Hajj."'* Accordingly, the jurists have unanimously ruled
Given these values, it should be possible to make productive investment
against arbitrary confiscation and nationalisation of property by lhe state.
take the place of conspicuous consumption as a prestige symbol in a Muslim Abu Yusuf epitomised this ruling in the legal maxim: "The ruler has no right
society such that the benefits that others can derive from savings are to expropriate anything except by a clear and established right"4* Even if
actualised. The levy of zakah on all net worth, including currency hoardings
there is need for nationalisation or public use of private property, the SharTah
and gold and silver jewellery, should prove to be of great help in inducing
requires a just compensation in conformity with the legal maxim: "A public
need does not invalidate a private right."54
100 ISLAM ANO ECONOMIC DEVELOPMENT THE ISLAMIC STRATEGY 101

The clear verdicts of the ShaiTah should become reflected in the legal acquire improved inputs and better technology. Their productivity hence
framework of all Muslim countries, They should define clearly and stipulate continues to remain low.
legally all those sectors of the economy where only public enterprises may be
permissible and sectors where private enterprise will be free to play its role. Tariffs and Import Substitution
Such a classification should be further re inforced by a legal guarantee in
Higher tariffs, unlike.realistic exchange rates, constitute a single-edged
favour of just compensation in case of re-classification.
weapon. If applied effectively, they can discourage imports, but do not
The number of public enterprises will have to be kept at a minimum encourage exports. However, when high tariffs are used in developing
anyway because of the prohibition against interest and the inability of the countries with weak customs administration, and without any attempt to
governments to raise sufficient financing for such enterprises through taxes change the social mood, there is under-invoicing, smuggling and tariff
or sale of shares. Once such guarantees have become integrated into the evasion. This raises the relative profitability of highly taxed, but smuggled,
country's Constitution and legal framework and it is realised that their luxury goods and distorts resource allocation against need satisfaction. Hence
fountainhead is the SharTah. it would be difficult for any government to a more effective strategy would be to ban the import as well as the display
disregard them in the interest of its own domestic popularity and international of luxury goods.
standing.
Promotion of import-competing industries is no doubt necessary to
reduce the pressure on foreign exchange resources and to promote
Exchange Controls and Currency Depreciation
employment and growth. However, in the absence of a consistent develop­
The continuing depreciation of the currencies of most Muslim countries ment philosophy, the selection of import-competing industries is arbitrary with
cannot be prevented without reducing claims on resources, particularly foreign no relationship to the promotion of development with justice or the rational
exchange resources through the restructuring of private and public sector principles of resource allocation.
spending in the manner already discussed. Instead, most Muslim governments
Such arbitrarily selected industries receive maximum government
rely on exchange controls (overvalued exchange rates with import licensing),
patronage in the form of subsidised financing, high tariff protection,
high tariffs, and promotion of import-competing industries.
exemption from duties on the import of capital goods and raw materials, and
Exchange controls, as evidence has indicated, have been largely tax holidays. These industries usually tend to be large-scale and are
ineffective.’1 They lead to the creation of a dual market of official and black established in urban areas. Since most of them are capital-intensive and use
market exchange rates. The overvalued official rate encourages imports and a more sophisticated technology, their contribution to employment is not as
discourages exports, thus worsening the allocation of resources and depressing much as that of labour-intensive SMEs.
the rate of economic growth. They contribute to socio-economic injustice by The high tariffs imposed to protect these industries contribute not only
subsidising recipients of import licences at the expense of consumers and to higher prices for consumers but also, along with other privileges, to the
exporters; the consumers continue to pay for imports at the opportunity cost unearned enrichment of those who receive licences for such industries and
of foreign exchange while the exporters receive less for their output. They resort to under-invoicing. More and more of the nation's resources
also promote corruption and inefficiency. accordingly move into such industries distorting resources allocation against
The various bonus schemes adopted to promote exports in the absence need-fulfilment and enriching the urban and rural rich. Furthermore, in highly
of a realistic exchange rate succeed only in exacerbating injustice and protected industries there is usually little competition.”
corruption. The benefit of these schemes does not permeate to the actual Agriculture and SMEs, which should really be the candidates for
producers; their resources do not consequently increase to enable them to protection because of their great potential for growth, need-fulfilment and
102 ISLAM AND ECONOMIC DEVELOPMENT THE ISLAMIC STRATEGY 103

employment creation, are neglected. They suffer from lack of government and management which are scarce factors in Muslim countries and are needed
support overvalued exchange rates, import subsidies and commodity aid. to raise productivity. It does lead to foreign exchange outflow at a later stage,
but only if the investment earns a positive return. Thus, in contrast with
Since most units operating in these sectors are small, unorganised and
borrowing, the risk is shared with the foreign investor instead of being borne
inarticulate, they are unable to exert any political pressure. Concentration of
entirely by the host country.
landholding and absence of democratic processes worsens their position even
further. The result is the vicious circle of neglect and poverty of these sectors The favourable climate that readjustment of economic policies in the
and their inability to finance investments in improved technology. This is light of Islamic leachings will create, should itself constitute a positive factor
undoubtedly in conflict with the basic socio-economic objectives of Islam. in attracting foreign equity capital, and no extra measures may need to be
adopted. The Islamic emphasis on the fulfilment of all contractual obli­
Bureaucratic Controls gations. if articulated legally, should help provide the reassurance that foreign
investors need. The removal of exchange controls on all current account
Probably the greatest obstacle to investment in Muslim countries, as in
transactions falling within the Islamic value frame, including the ease of profit
other developing countries, is the bureaucratic red-tape. This springs from the
remittances, is what Islam would find desirable under normal peacetime
heavy reliance of governments on controls to realise their objectives, rather
conditions.
than on moral reform and the creation of a proper enabling environment.
Controls lead to waste of time of investors and an unnecessary rise in costs. It would also be necessary to provide assurances about capital
Unless most of these controls are dismantled, it would be difficult to improve repatriation. But how could an Islamic state even consider the idea of
the investment climate even if savings increase. preventing an expatriate investor from getting his right as long as repatriation
is in accordance with agreed terms and conditions? According to the World
The general spirit of Islamic teachings is freedom of enterprise within
Bank; "Countries that have followed a more open development strategy have
the value-frame of Islam. Controls are an inevitable source of corruption and
had fewer problems with direct investment.However, until such time as
even the reform and improvement of morals under the influence of Islamic
the Muslim countries are able to attract more foreign equity investment, it
teachings might not be able to prevent officials from succumbing to
may be unavoidable for them to tolerate conventional borrowing to the extent
temptation. There is. moreover, no justification for controls on the local
absolutely necessary to finance productive, self-liquidating projects that are
manufacture or import of need-fulfilling consumer goods and the raw
truly needed for realising the maqdsid ss
materials and capital goods needed for their manufacture.

Foreign Equity Capital Need-based Production

Restructuring the investment climate can only help increase the volume
The Islamic ban on interest will make it indispensable for Muslim
of investments. It is necessary to adopt measures to ensure that this increase
countries to encourage and facilitate foreign equity investment. This should
in investment does not get diverted to the production of luxury goods and
no doubt be desirable because "equity investment has proved to be beneficial
services, but goes rather to the production of need-fulfilling and exportable
to developing countries’1, and it should be possible to attract it by creating a
goods and services and the capital goods and raw materials needed for this
favourable climate for it.”
purpose.
It would be difficult to defend stipulations against foreign equity
No effort should be made to accomplish this objective by means of
investment which does not conflict with the Islamic values and might even
controls; this would not succeed. The more preferable and effective strategy
help realise some of the basic socio economic objectives of Islam. It also has
would be to change individual preferences, remove obstacles, and provide
the advantage that it makes available foreign exchange as well as technology
incentives and facilities for making long-term commitment of funds. All
104 ISLAM AND ECONOMIC DEVELOPMENT THE ISLAMIC STRATEGY 105

privileges and subsidies, explicit or implicit, which provide an edge to the flagrant inequalities of income and wealth, and the demonstration effect of
production and import of luxuries and status symbols must be withdrawn. western life-style, reliance on demand expansion helps mainly the rich and
Emphasis of government fiscal, monetary and commercial policies should also spills over to a substantial degree into imports of goods and services for
be tilted in favour of need fulfilment, exports and capital formation. conspicuous consumption. Consequently, its full benefit does not go to the
indigenous craftsmen and artisans. The demand for their products does not
The general tendency to resort to price controls on necessities leads to
rise significantly and the goal of expanding employment hence suffers.
long-run shortages in their supply by reducing their profitability and, hence,
discouraging investment in their production. This becomes a permanent However, if this policy were to be pursued within the perspective of
source of injury to the poor. In contrast, the long-run supply of luxury items need-fulfilment and promotion of SMEs, the benefit would tend to permeate
arises, thus serving the interests of the well-to-do. to a larger proportion of the population. Macroeconomic and external
imbalances, which do not make it possible to expand aggregate domestic
Hence the SharCah has not permitted price controls under normal
demand significantly, add further strength to this policy proposal.
circumstances when there is not a national emergency (war or famine) or
when businesses arc not creating an artificial shortage through monopoly, Since the poorer Muslim countries have a surplus of labour, scarcity of
collusion or hoarding. The short term harm that the removal of price controls capital and foreign exchange, and lack the educational infrastructure for
on necessities will inflict on the poor should be undone through the adoption training in complex technology, it would be desirable for them to rely more
of a gradual approach and the use of transfer payments and other measures on SMEs than on large- and medium-scale capital-intensive industries if they
discussed in this book. wish to expand employment and self-employment opportunities. Accordingly.
Hasan al-Banna gave cottage industries a prominent place in his discussion
The support to agriculture and rural development and to SMEs, as
of economic reforms in the light of Islamic teachings. These, he stressed,
discussed later, will play an important role in encouraging need-fulfilment and
would help provide productive employment to all members of poor families,
exports. The restructuring of the banking system along with Islamic lines
and thus help reduce unemployment and poverty.54 Dr. Muhammad Yunus
should also be an essential element of the whole reform programme.
has emphasised another aspect of SMEs by saying: "Wage employment is not
a happy road to the reduction of poverty", and that self-employment "has
A New Deal for the Unemployed and the Underemployed
more potential for improving the asset base of an individual than wage
One of the most constructive ways of accelerating growth with justice employment has."”
is to enable every individual in society to use his or her creative and artistic
There is a growing realisation now that "the large-scale 'modem'
abilities efficiently and productively to the fullest extenL This goal cannot be
industrialisation strategies of the previous decade generally had failed to solve
materialised if the prevailing high levels of involuntary unemployment and
the problems of global underdevelopment and poverty".5* Studies conducted
underemployment continue. The main policy instruments usually adopted to
in a number of countries by the Michigan State University and host-country
reduce unemployment and underemployment are expansion of aggregate
scholars have clearly indicated the rich contribution that SMEs can make to
demand and establishment of capital -intensive large- and medium-scale urban
employment and income. They create new jobs not only directly but also
industries.
indirectly by expanding incomes as well as demand for goods and services,
tools and raw materials, and exports. They are labour-intensive and require
Promoting SMEs
less capital and less foreign exchange. They rely primarily on personal
While the conventional policy of aggregate demand expansion is no savings and retained earnings and need much less access to credit from
doubt useful, it is not sufficient and needs to be strengthened by other governments and financial institutions compared with large-scale industries.
policies. Within the existing scenario of urban bias of government policies. They invent products, revive lost skills and help economies move into new
 THE ISLAMIC STRATEGY 107
106 ISLAM AND ECONOMIC DEVELOPMENT

among the primary reasons for the lowest rate of unemployment in Japan
kinds of work. They can be more widely disbursed and thus help maintain
among industrial countries."
the link between a person's place of work and his home which large-scale
industries and hectic urbanisation have severed to the detriment of social Even in other developed countries where the small firms sector has
health. Moreover, they are at least as efficient as large-scale industries.” A traditionally been weak, high levels of unemployment have made governments
Michigan State University study has concluded that they consistently generate very receptive to their promotion. There has hence been a wealth of public
more output per unit of capital than do their large-scale counterparts.” and private sector initiatives to boost the small entrepreneur.

Little. Scietovsky and Scon have concluded that "large-scale modem The emphasis of policy in Muslim countries on decentralised production
industry is usually much less profitable than the small craft type industries, with a proliferation of capital-saving SMEs may perhaps be the most effective
in addition to being more costly in terms of capital and creating less way of not only gainfully employing a large part of the rural landless but also
employment Some scholars in fact doubt that large-scale industries can be the under-occupied members (husband, wife, parents and children) of rural
suitable at all under conditions of labour surpluses and capital shortages that families having a small landholding.
are typical of most developing countries41 SMEs are hence being widely
This policy will serve as complementary to agricultural reforms
viewed as "an effective way of fostering the private sector's contribution to
discussed earlier and will support rural development by raising the incomes
both the growth and equity objectives of developing countries".43
of rural population and enhancing their ability to purchase better seeds,
Even the OECD countries have realised the job-creating potential of fertilisers and technology, thus raising even their agriculture output. It will
small enterprise.44 Over the last decade they have accounted for a dis­ also reduce the outflow of population to urban centres. This will help
proportionate share of new jobs, and those industrial countries where they maintain family solidarity and be more conducive to moral uplift and crime
play an important role have had a greater success in achieving lower rates of reduction, which are among the important goals of Islam.
unemployment.
While many Muslim countries are critical of the policies of their
Hence, a number of these countries have introduced measures to colonial masters "'who systematically destroyed all the fibres and foundations
promote them “ "No longer are small firms seen as the Cinderella of the of their societies, they have done little after independence to revive the skills
business community, rather they are to be courted and encouraged by and crafts that were destroyed.” On the contrary, in fact almost all measures
politicians of all colours. "” In Italy, artisans, often working in family have been taken which would lead to stifling SMEs and to patronising large-
businesses, are a main factor behind the success of Italian jewellery, gold, scale industries and businesses through a high protective wall, liberal import
silver, leather working, embroidery, glasswork, furniture, pottery, shoemaking, licences, concessionary financing, subsidised inputs and tax holidays.
and cloth manufacturing, to mention just a few sectors.4’ In Germany, where
This is not a judgement against large-scale industry, which will be
the family-owned concern has always played a major pan in the economy, indispensable in certain sectors of the economy and which should be
there is a renewed awareness of the need to create a favourable climate for encouraged and undertaken where necessary, provided that the overall socio­
small enterprise.” Japan’s export success is largely due to the vigour of
economic benefits exceed the costs and a heavy dose of permanent protection
internal competition created by the producing firms through their sub­
is not needed.
contracting of a lot of work to small businesses on a competitive basis.”
Small firms are very important in Japan even domestically. They account for
Essential Measures
fifty percent of Japanese industrial output and seventy-five percent of total
Japanese employment." Three-quarters of retail sales are still made in Japan But how to encourage the proliferation of SMEs in Muslim countries?
It requires a number of revolutionary changes in the socio-economic
through specialty retailers and small family-run stores which are protected by
law." This, along with the widespread use of profit-sharing system, may be environment. Firstly, there must be a change in life-style away from imported
108 ISLAM AND ECONOMIC DEVELOPMENT THE ISLAMIC STRATEGY 109

status symbols and in favour of simple domestically-produced products that 4. FINANCIAL RESTRUCTURING
satisfy needs and utilise more labour. Secondly, there must be a change in
The objective of achieving a proliferation of SMEs in rural and urban
official attitudes and policies towards SMEs such that they are not dismissed
areas to solve the major economic problems of unemployment and
as inefficient small fry and anachronistic leftovers of the past, but are rather
concentration of wealth would remain only a fond dream unless arrangements
encouraged and helped to realise fully their rich potential. Thirdly, they must
are made for their financing. Lack of financing constitutes the most serious
be enabled, through help in acquiring better inputs, appropriate technology,
drawback in the development of small farms and SMEs. The poor are poor
effective marketing techniques, and other extension services, to compete in
not because of their unwillingness to work hard or lack of skill. They in fact
terms of both quality and price with the products of large-scale industries and
work harder than the rich and have more skill titan they can use.
imports. Fourthly, they must also be enabled to upgrade their skills through
better training facilities; this will require a complete overhaul of educational Their main problem is that they do not have access to financial
institutions to remove lhe existing mismatch between the skills in demand and resources necessary'for being self-employed, and wage employment either
lhe education offered. Fifthly, they must also be provided access to finance, does not utilise their skills optimally or does not pay them adequately to fulfil
lhe lack of which constitutes the most serious obstacle to their development. even their needs, leave alone save for investment. Financing is a powerful
Finally, it may also be necessary to eliminate, if not to reverse the direction political, social and economic weapon and plays a predominant role in
of. the existing bias in favour of large-scale industries which is one of the determining the power base, social status and economic condition of a person
major impediments to the expansion of SMEs. tn the modem world. Dr. Muhammad Yunus has hence rightly emphasised
that financing for self-employment should ''be recognized as a right that plays
The objectives of import-substitution and export promotion may not be
a critical role in attaining all other human rights ".’* Reform of the financial
realised through the SMEs unless they are helped to acquire more efficient
system should hence constitute one of the key elements of all socio-economic
technology to enable them to compete effectively. It would, however, be
preferable if such technology is simple, in which case it would have the and political reforms.

following advantages. It would require a smaller capital outlay, thus The Select Committee on Hunger found that "the provision of small
absorbing the growing labour force with a smaller amount of capital. It amounts of credit to micro enterprises in the informal sector economy of
would minimise the demand for high skills and be thus suitable for Muslim developing countries can significantly raise the living standards of the poor,
countries with their relatively lower standards of literacy and technical increase food security and bring about sustainable improvements in local
education. It would enable a greater use of locally available materials and economies". The Committee also concluded that "making credit available to
reduce the claim on foreign exchange resources. It would be possible to entry level micro entrepreneurs is one way to help end the cycle of poverty
develop and produce it locally, thus helping to reduce the dependence on and hunger among urban and rural landless poor in developing countries .
imported technology. It would also be possible to introduce it in small towns However, as the Committee indicate, "formal financial institutions in these
and rural areas, thus reducing regional income disparities and minimising the countries do not recognize the viability of income generating enterprises
concentration of population in a few large urban centres, which large-scale owned by the poor".” Even the Morgan Guarantee Trust Company, the sixth
enterprise with its capital-intensive and complex technology tends to create. largest bank in the U.S., has admitted that the banking system in developing
It would thus be what Schumacher calls a "technology with a human face".’* countries has failed to 'finance either matunng smaller companies or venture
Even such a simple and inexpensive technology has the potential of leading capitalists”, and "though awash with funds, is not encouraged to deliver
to a ' fairly rapid increase in productivity in underdeveloped countries''.” It competitively priced funding to any but the largest, most cash-rich
could not only help raise incomes and standards of living but also help companies”.’"
achieve redistribution.
no ISLAM AND ECONOMIC DEVELOPMENT THE ISLAMIC STRATEGY 111

Since the deposits of commercial banks come from a wide cross-section government policies and budgetary support should help gradually diven more
of the population, it would be rational to consider them as a national resource and more of commercial bank financing to small farmers and SMEs. The
to be utilised for the well-being of all sectors of the population rather than second drawback cannot be removed without reducing the risk and expense
primarily for the further enrichment of the wealthy and the powerful.7* This of commercial bank lending to such units.
is not possible within the framework of the conventional system in which, as
The greater risk of financing SMEs leads to a lough and extensive
Lester Thurow has rightly observed, credit is granted mainly "to those firms
collateral requirement which they are unable to satisfy. This jeopardises their
with large internal savings, regardless of whether they are earning above
growth and expansion in spite of their greater potential for contribution to
average rates of return on their capital investment".
employment, output and income distribution. The financing goes mainly to
The result is that "the winners are. as in lottery, lucky rather than smart the rich who are subjected to a lower collateral requirement and which they
or meritocratic".8" The most telling lesson about the conventional banking are able to satisfy without any difficulty because of their greater wealth.
system comes from Catherine Shaw, a researcher at the London School of Mishan has rightly indicated: "Given that differences in wealth are substantial,
Economics' Business History Unit, who says: "The recruitment of business it would be irrational for the lender to be willing to lend as much to the
leaders from one social class or a narrow social strata is an ominous impecunious as to the richer members of society, or to lend lhe same amounts
symptom. It suggests that society is failing to utilise its total reservoir of on the same terms of each.""
ability.-"
It may be expected that, within the Islamic risk/reward sharing
The adoption of a financial system that is inspired by Islamic teachings framework, banks may tend to be attracted to provide greater financing to
could be more conducive to the harnessing of this pool of ability and the smaller firms because of their well-established greater profitability. Small
bringing to a fruition the rich contribution that SMEs can make to output, firms bear a record of belter performance in terms of growth in real per capita
employment and income distribution. The sharing of risks along with rewards profits in industrial countries where small entrepreneurs have been
by the financial institutions will substantially reduce the precariousness of a encouraged."
small entrepreneur's position - he will save himself from the back-breaking
Even in developing countries with their extremely difficult environment
burden of interest in difficult limes by his willingness to pay a higher rate of
for SMEs, they have consistently generated, according to a Michigan State
return in good times. The financial institution is well qualified to share the
University study, more output per unit of capital and are generally more
risk, and could do so without denting its financial strength if it builds loss­
efficient than their large-scale counterparts. Accordingly, the economic profit
offsetting reserves in good times.
of smaller firms is consistently larger than that of large firms."
However, even if the financial system is reorganized to make it
The risk may be reduced by introducing a loan guarantee scheme
consistent with the teachings of Islam, it would still be necessary to remove
underwritten partly by the government and partly by the commercial banks,
two of the primary causes responsible for the failure or inability of
In the case of Islamic banks, the guarantee scheme cannot ensure the
commercial banks to finance small farms and SMEs. The first of these is lhe
repayment of loans with interest as is the case in the conventional system.
serious economic disadvantages under which this sector operates, and the
The scheme would rather cover the 'moral' risk of financing and relieve the
second is the great risk and expense to which the commercial banks are
bank of the need for collateral from SMEs whose general credentials have
exposed.
been examined and certified by the guarantee scheme. A large number of
The first drawback cannot be removed without eliminating the implicit SMEs would thus be able to get financing from banks without being able to
bias in official policies in favour of large-scale urban enterprises and replacing offer the collateral required by lhe conventional banks. The bank will receive
it by a strong commitment to support small farmers and SMEs. The adoption its money back from the guarantee scheme in case of moral failure of the
and implementation of the programme, proposed earlier, through appropriate business.
112 ISLAM AND ECONOMIC DEVELOPMENT
THE ISLAMIC STRATEGY 113

In case of market failure and the resultant loss, the bank should share
will help mobilise the idle savings in the economy and generate a higher non-
the consequences with the business in proportion to the financing provided by
inflationary rate of growth. It may also help reduce the attractiveness of gold
it. The scheme may also be made to include some other non-commercial
as a store of value and release savings for investment
risks desired to be covered for increasing the availability of funds to SMEs.

This should not create any apprehensions about the viability of the loan 5. STRATEGIC POLICY PLANNING
guarantee scheme due to heavy loan losses. As indicated above, the scheme
will not bear the entire risk of loan losses. It will bear only the moral risk, It will not be possible for Muslim countries to realise the maqasid
within the constraint of their scarce resources unless they take stock of their
lhe business risk being bome by both the bank and the borrower. Hence, the
scheme will not be as heavily burdened with losses as the conventional needs and resources and have a clear understanding of where they are and
where they wish to go. It may be possible to do this more effectively if a
schemes are. Moreover, the experience of International Fund for Agricultural
Development (IFAD) is that credit provided to the most enterprising of the long-term strategic policy plan is prepared.
poor is quickly repaid by them from their higher earnings.” The Report of Such a plan would enable lhe state to take a realistic account of all the
the Select Committee on Hunger also indicates that the "micro enterprise available physical and human resources and to establish, in the light of this,
projects have recorded significant and impressive loan repayment rates".” a set of well-defined priorities. This will help provide a clear direction to
Testimony from the Grameen Bank in Bangladesh indicates a constant government policies and expenditure programmes and initiate effective
repayment rate of 99 percent since the bank’s inception “ Other SME credit measures to set in motion the required structural and institutional changes to
programmes have yielded similar results. Hence there is no need to be unduly enable both the government and the private sector to make their full
apprehensive about loan losses from such financing. contribution.

The additional expense of commercial banks in evaluating and financing The plan should not be comprehensive and dirigiste. trying to achieve,
SMEs may have to be partly or wholly offset by the government in the through a maze of regulatory controls, a balancing of all inputs and outputs
interest of the realisation of the basic socio-economic objectives of Islam. and their allocation among micro units of the economy. The plan should also
Big business has been subsidised by governments for a long time in various not rely on lhe government being the principal source of investments and
ways, including concessionary financing, import licences, overvalued enterprise. This is neither feasible nor necessary. Any move in this direction
currencies, and subsidised inputs. will make the economy less responsive to changing circumstances and stifle
individual initiative and enterprise, and so bury it in the contradictions and
To offset this undue advantage received in the past, lhe governments
insoluble problems that afflicted the socialist and developing countries which
should now turn the table in favour of small farmers and SMEs. Both the
resorted to such planning. Indeed, these countries have all been forced to
maqasid and the principles of public spending discussed earlier justify a
reasonable allocation of government resources for this purpose. Nevertheless, move away from such planning.

a part of the increased cost should also be recovered from banks and SMEs, What is necessary for the Muslim countries to do is to pass all claims
at least for the sake of promoting greater responsibility and efficiency. Il may on resources through the filter mechanism of Islamic values and to motivate
be expected that once the credentials of SMEs have been established and the and activate the private sector, through moral and institutional reform as well
system has started operating, the costs would tend to go down. as economic incentives, to utilise scarce resources with optimum efficiency
and equity in order to realise the maqasid.
The Islamisation of banks and the financing of SMEs may also help
bring into their fold the savings of a large proportion of the rural population The articulation of the Islamic filter mechanism will thus be
not yet absorbed by the banking system because of their lack of trust in indispensable. It will help define the goals of the economy in order of
conventional interest-based banks and lhe apathy of banks towards them. This priority and specify ways of achieving them. The establishment of priorities
 14 ISLAM AND ECONOMIC DEVELOPMENT 115
THE ISLAMIC STRATEGY

within the framework of the Shan'ah will help in the analysis of the existing strategy.. All policies fiscal, monetary, incomes, impon and production -
allocation of resources and in pinpointing the direction of change. It will also should be formulated within the framework of this strategic policy plan.
be necessary to articulate the Islamic values regarding consumption, savings
The production, import, distribution and consumption of what fits into
and investment, and work ethics, and to devise educational programmes to
the strategic policy plan should be permitted freely through the operation of
promote them. The plan will also have to classify goods and services into
the price system without bureaucratic controls. Controls, including those on
needs and luxuries, as discussed earlier.
the use of foreign exchange for current account transactions, should be
The public, in general, and the government officials, in particular, will employed only where, and as long as. indispensable.
need to be motivated to act in accordance with Islamic values. While belief
A general policy of letting social and institutional reform and incentives
in accountability before God is essential, it is not sufficient to motivate them
take the place of controls will help remove inequities in material rewards,
to put in their best and to be more efficient. It is also necessary to inculcate
harness people’s own inner drive for development, and. not only help reduce
simple living and to actualise socio-economic justice. Simple living will
corruption and attain greater efficiency but. also make innovation and
reduce the urge for corruption, and the ability to get a due reward for
adjustment to changing circumstances easier. However, what does not
contribution to output will induce workers, entrepreneurs, investors and savers
conform with the plan should not be allowed irrespective of how rich or
to do their best.
resourceful an individual may be. Special consideration should be given to
Of course, prices and wages must be normally determined by market the adverse effect of any policy measure on the poor, and methods should be
forces. However, in the existing situation, with wealth and power concen­ devised to offset or minimise this.
trated in a few hands, they reflect monopolistic or monopsonistic
There should not be changes in policy from quarter to quarter or year
characteristics and are hence not 'just'. They, therefore, lend to suffocate the
to year because the resource perspective, needs and goals of a country do not
drive, initiative, creativity and enterprise of a large proportion of the
change that rapidly. Frequent tinkering with policies only generates uncer­
population. The plan must indicate the policies and institutional reforms
tainties. and enriches mainly those having insider's knowledge. But errors
needed to remove the existing injustices.
which have been made in the preparation of the plan should be rectified with
The plan must also specify the structural changes required in the an open mind and without undue delay. Since the resource endowment of
economy to fulfil needs, reduce unemployment and raise the growth rate different Muslim countries is different, the same strategic policy of each will
without creating macroeconomic and external imbalances. The plan must also somewhat differ from the other in respect of details. What will confer unity
indicate the institutions that must be established or reformed to reduce on these strategic policies is the fact that all these policies will be oriented to
substantially the inequalities of income and wealth that now exist, and to achieving essentially the same set of socio-economic objectives - the
bring about a broad-based ownership of businesses and income-earning assets. maqasid.
The reform of the banking system in the light of Islamic teachings will
require the special attention of planners because of the great contribution it ***

can make to efficient and equitable allocation of resources. A thorough

reform of the education system is also necessary to make the students better
Muslims and more productive. In sum. the plan should not concentrate on
any single measure or rely unduly on controls; it should rather use a range of
policies and incentives to realise the basic socio-economic objectives of Islam.
Il should reflect a perceptible change in the development philosophy and
 FIVE

WHY THE FAILURE?

If Islam is capable of providing a workable strategy for development

with justice and even to motivate people to fulfil the requirements of such
growth, then the question that inevitably arises is: why have the Muslim
countries failed to formulate and implement policies in the light of such a
strategy? This is a difficult question to answer. A variety of explanations
may perhaps be given, pointing out a number of factors - historical, political,
economic and sociological - which shed light on the question. In fact, it is
hardly possible for us to provide an exhaustive answer to the question, and
such an attempt is even beyond the scope of the book. However, we will
identify and emphasise one factor — the political factor — which, in our
opinion, is one of the most important factors responsible for the failure of the
Muslim countries to implement the Islamic strategy for development with
justice.

NEED FOR SOUND POLITICAL ORDER

Development with justice is scarcely possible unless the people who are
suffering from inequities have a say in the formulation of policies that affect
their well-being, unless they participate in the decision-making process and
the political system makes it possible for them to exert pressure on die
governments for an honest implementation of these policies. As Hasan al-
Banna had rightly stressed, governments are the heart of socio-economic
reform. If they become corrupt, they may be able to corrupt everything and.
if they are reformed, they might reform everything.1

Governments, however, can hardly play an effective role in achieving

development along with justice unless the common people have an
opportunity to freely participate in the political life. Unfortunately, the
political realities of the Islamic world fall short of this ideal. The first of the
Islamic institutions in the history of Islam to have suffered a compromise was
the institution of khWfah (Caliphate) - an institution which reflected the
Islamic principles for political life in their ideal form.
118 ISLAM ANO ECONOMIC DEVELOPMENT WHY THE FAILURE’ 119

The pristine characteristics of Caliphate were gradually replaced by the acquires it deservedly and fulfils the obligations incumbent on him."*
traditions associated with autocratic and hereditary regimes, which draw little Therefore, while the government is accountable to God for its success or
inspiration from the Islamic democratic imperative of shard (consultation), failure in living up to the trust, it is also accountable to the people for
and which accumulated over time some of the evils associated with such rule? realising their aspirations in conformity with the terms of the trust.
Unless a healthy political system, based on freedom from fear, and providing
Human experience shows that governments cannot fulfil their role of
for participation of people in the decision-making process is established. Ihe realising the aspirations of the people unless they are open to the suggestions
Islamic programme for realising the maqasid may continue to occupy only
and criticism of the common people Hence, the Prophet, peace and blessings
an ornamental place in the political scheme of things obtaining in the Muslim of God be on him. emphasised that one of the demands of faith on Muslims
countries. is to render sincere advice to their rulers - an advice that would help them to
perform their duties effectively?
Criteria for a Sound Political Order
But how can people fulfil the obligation of rendering sincere advice to
Islam, however, has its own rigorous criteria for a good government. the rulers if there is no freedom of expression and they are not allowed to
The first of these is that the government is accountable to God. Who is the freely express themselves cohceming the policies being pursued by the
Sovereign Lawgiver. One Who has the right to lay down the guidelines of
government? If the rulers do not consider themselves accountable to the
man's behaviour. This implies that the government's authority is limited and
people and are unwilling to receive feedback from them regarding government
not absolute. The government is required, in the first place, to abide by the policies, the scope of reform will be greatly reduced. Accordingly, when Abu
sharf ah and to do all it can to ensure the realisation of the well-being of the Bakr became the first Caliph, he categorically emphasised this Islamic
people through adoption of all necessary measures, including efficient and imperative in his inaugural address by saying: "If I act rightly, help me. but
equitable use of resources. The Prophet, may the peace and blessings of God if I act wrongly, correct me and set me right."*
be on him. said:
This establishes a two-way flow of rights and obligations. It is the right
Everyone of you is a shepherd and everyone is accountable for his of the people to participate in the formulation of policies and the obligation
flock?
of rulers to enable them to do so. It is simultaneously the right of the rulers

Anyone who has been given the charge of a people but does not to solicit help and cooperation from the people if the former try to implement
live up to it with sincerity, will not taste even the fragrance of the right policies, and it is the obligation of the people to correct them if they
paradise? are not doing so.

The most beloved of men and the nearest to God in rank on the The above policy statement of Abu Bakr represents the general thinking
Day of Judgement will be a just ruler, and the most despised of of the Campanions rather than an isolated opinion of Abu Bakr. This is
them and the farthest from Him in rank will be an unjust ruler? evident from the fact that 'Umar, the second Caliph, also subscribed to the
same principle. When a person tried to prevent someone from criticising him.
The second criterion of of sound political system is that the rulers
'Umar insisted on allowing the person to continue, saying: There is no good
should be accountable to the people. This is so because the government is a
in them if they do not speak out. and there is no good in us if we do not
trust a trust from God as well as the people given to those who manage
listen to what they say."*
their affairs. The Prophet, peace and blessings of God be on him. clearly
emphasised this to Abu Dharr. who wished to acquire a senior government Reports about ordinary people criticising the Caliphs, and the Caliphs
position. "0 Abu Dharr! You are weak and this position is a trust. It will be accepting such criticisms gracefully are so numerous, that there can be no
a source of disgrace and regret on the Day of Judgement except for him who escaping the conclusion that the people's right to freedom of expression and
 WHY THE FAILURE’ 121
120 ISLAM AND ECONOMIC DEVELOPMENT

governmental hierarchy.” Anything other than that is utter injustice and

the leadership's obligation to be open to criticism was an indispensable part
exploitation (zufm). and zulm. as Shaykh Muhammad'Abduh has rightly
of the early Muslim political tradition. In fact, this remained so for quite
emphasised, is the most hideous evil.1* It is important to note here what
some time even after the religiously inspired caliphal system of government
Caliph Abu Bakr declared in his inaugural address: "The weak among you is
which was primarily oriented to pleasing God changed, by stages, into a
strong in my sight until I have obtained for him his right, and the strong
system in which the pursuit of worldly interests began to play an important
among you is weak in my sight until I have taken the right from him."1’ The
role.
message this conveys is that the raison d'etre of the government is the
The third criterion for a sound political order is the prevalence of a establishment of justice and providing assistance to the weak and the poor to
general atmosphere of sliurd (consultation) as required by the Qur'an (42:38). obtain their rights.
That the rulers should manage the collective affairs of Muslims by a process
of mutual consultation is a religious imperative. Hence, to consult others in Satisfying the Criteria
such matters has not been left to the discretion of the rulers. This is rather
The above-mentioned criteria for a sound political order can only be
an established principle of Islamic collective life which has been emphaised
satisfied when those who wield political power derive their authority from the
by religious scholars throughout the fourteen centuries of Islamic history (see
people and are answerable to them for the quality of their performance. In
for instance. Ibn Taymiyyah) and continues to be emphasised by modem
the present times this condition is best filled by free and fair elections. This
scholars (see for instnace. Muhammad ' Abduh). ”
also seems to be one of the implications of the Qur'Jnic imperative to give
What it essentially signifies is that there is no basis in the Shari'ah for the trust to those who deserve it(4:58). People must themselves give the trust
despotism, dictatorship, and autocracy. The reason, as Shaykh Rashid Rida willingly to those whom they consider to be deserving. It should not be
has approvingly mentioned while reporting the opinion of Shaykh acquired merely by dint of brute force or by way of patrimony.
Muhammad 'Abduh. is: "A group is generally farther from error than an
It is significant that the leaders of the Islamic movements in the
individual, and the danger is much greater and for more serious for the
contemporary Muslim world (the founder of the Muslim Brotherhood for
ummah in entrusting its affairs to a single individual '" The shiird that is
instance) have been strongly of the view that a democratic framework is in
required by Islam, however, is not of a cosmetic kind that would rubber-stamp
harmony with the genius of Islam. Hasan al-Banna finds the representative
the decisions of the rulers. form of government to be closest in spirit to Islamic political teachings.'*
What is required is an autonomous institution for a free, unhindered and Similarly. Mawlani Mawdiidi emphasises that: "The government should be
fearless discussion of all issues relating to public well-being within the constituted and run in consultation with the people. Its structure must be such
framework of the Shari'ah. and an earnest implementation by the executive that the people are able to express their viewpoint. It is their will which
of all the policies so formulated. The institution of shurd demands widest should prevail. And this can take place only in a state that is democratic in
possible participation of the people in the affairs of the state, either directly structure and in its working.'"’ Likewise. Shaykh 'AII4I al-FUsI. President of
or through their representatives.11 What specific form the implementation of Hizb al-lstiqlSl. has expressed similar views.” Accountability before the
this imperative may take is for the ummah to decide in the light of the people in a democratic system is likely to ensure that the rulers of a Muslim
circumstances obtaining at a given place and at a given time. country will abide by the SharCah with respect to the well-being of all and

A fourth criterion for a sound political order is the lhe equality of all the enforcement of justice.

before law, and enforcement of incorruptible justice, as required by the This does not necessarily mean that the democratic form of government
Qur'an: "And when you judge between people, judge with justice"(4:58). The in its prevalent form is the ideal one and suffers from no no drawbacks.
rulings of the ShaiTah should be applied equally to everyone, irrespective of These drawbacks do not. however, justify the establishment of dictatorial or
status, wealth, or position of the person concerned in the social or
122 ISLAM AMD ECONOMIC DEVELOPMENT WHY THE FAILURE'' 123

autocratic regimes. To the extent to which Muslims can reform the TWO FORMS OF CHANGE
democratic process and remove, or even reduce, the influence of money,
The absence of socio-economic justice cannot, however, continue for
power and manipulation in the choice of political leadership, they will bring
long in the Muslim world. The masses are becoming increasingly restless and
it closer to the Islamic ideal of shura. This will be an important step in the
are craving for a change. Their restlessness is likely to find any one of two
right direction. It might be difficult to accomplish the ideal in one stroke.
channels for expression. The most desirable of these channels would be to
It is likely to take place over a period of time and pass through a process of
struggle for reform through peaceful and constitutional means. Such a
evolution.
struggle should aim at establishing a political order in which governments
receive their mandate from the people. Once this has happened, the
ROLE OF THE 'ULAMA'
governments will be under constant pressure to strive for development with
While the role of the political leadership has. in general, left much to justice.
be desired, even the highly-placed and influential 'ulama' (religious scholars)
The resurgence of Islamic consciousness and sentiment will not allow
and professionals, who carry considerable clout in the political set-up. have
the governments to continue to pay just lip service to Islam, as they have
generally failed to play their role effectively. Instead of being the standard-
been wont do do. They will be under pressure to formulate and execute
bearers of socio-political reform and of putting their weight behind the moral
policies in the light of the Islamic strategy which, as we have already shown,
and material uplift of the masses, quite a few of them have virtually acted as
would be the best way to achieve the well-being of the common people. If
sycophants, often trying to secure for themselves as large a chunk of the
a sound political order is not established and reform movements are
national cake as possible. suppressed by use of brute force, popular restlessness might lead to the
They have often failed to recognise that Islamic values place a heavy eruption of revolution. This would be unfortunate because it would not only
responsibility on all those who occupy influential positions and require them entail a substantial loss of life and property, as has happened in many
to use their leverage fully in favour of socio-economic and political reform.” countries, but the ultimate outcome of such revolutions would also remain
There is absolutely no justification for such people from the viewpoint of the extremely uncertain.
Shan'ah to serve their this-worldly self-interest by condoning, let alone Political reform, therefore, constitutes the cornerstone of all efforts at
collaborating with or becoming instruments of. the prevailing forces of reform in the Muslim countries. This does not. however, mean that the
corruption and injustice. Such behaviour has been equated by the Prophet, establishment of a sound political order will automatically solve all problems.
may the peace and blessings of God be on him. with disbelief.” In our view a reformed political system will pave the way for other urgently
Within the existing unhealthy environment even those who are selfless needed socio-economic reforms, which will hopefully lead to a solution of the
and conscientious are unable to make significant headway, particularly when problems facing the people and a reduction in the prevailing inequities. The
repressive governments feel threatened by reform and do their utmost to stronger the popular mandate, the more sincere and competent the leadership,
suppress and persecute the reformers. Hence the Prophet, may the peace and and the greater the resources available in a Muslim country, the faster will be
blessings of God be on him. had rightly predicted that: the tempo of socio-economic reforms and the improvement in the overall

condition of the people.

I am apprehensive of three things about my ummah: the lapse of
the 'ulama', the rule of the despots, and the pursuit of worldly If the townsfolk had believed and acted righteously, We would
pleasures.11 indeed have opened out to them all kinds of blessings from the
heaven and earth (Qur'an. 7:96).

***
 SIX

CONCLUSION

While even secular societies profess development with justice to be

among their cherished goals, they continue to belittle the importance of
having a clear sense of values and paying due attention to bringing about
moral regeneration of the individuals and the society as important pillars in
the scheme designed to achieve development in conjunction with justice. It
is. nevertheless, generally acknowledged that development with justice
requires a substantial and sustained increase in the allocation of resources for
this purpose.

However, scarcity of resources does not permit such an increase,

particularly because of the prevailing macroeconomic imbalances. Hence,
what is needed is a reallocation of resources from uses that are inefficient and
inequitable to uses that are efficient and equitable. How to bring about such
a reallocation successfully remains an unanswered question.

The basic thesis of this book is that such a reallocation cannot be

realised without the injection of a moral dimension into all individual and
collective decisions that directly or indirectly affect the allocation and
distribution of resources. In fact, it is not possible even to define efficiency
and equity without the help of moral criteria. The secular orientation of the
market system may enable it to reduce imbalances and foster higher growth,
but it will not make it possible for it to bring about the kind of revolutionary
changes that arc needed in individual and collective behaviour for realising
development with justice.

However, neo-classical economics continues to assert that the market

system can help bring about such a reallocation in spite of its secular
approach to the solution of human problems. It assumes that unhindered
freedom to serve self-interest and to own and manage private property
motivates the individuals to do their best. This maximises efficiency, which
benefits not just the individual concerned but also the society.

All that needs to be done is to allow market forces to play their full role
in the allocation and distribution of resources through market-determined
prices (including interest rates and exchange rates). The policy prescription
126 ISLAM AND ECONOMIC DEVELOPMENT
CONCLtlSION 127

that emerges from this trend of thought is liberalisation of the economy to

stances have not created socio-economic equality and where the values of
allow the market forces to play their legitimate role. There is no need for
hard and conscientious work and of simple living have not yet become
collective value judgements or for government intervention; the government internalised; and secondly, how to perpetuate and enhance the socio-economic
should intervene only where the market fails to realise certain socially-desired
equality once it has been realised?
goals. It should, however, do this as little as possible, and that too within the
Liberalisation alone will not be able to do this job, as we have shown
framework of Pareto optimality.
in this book. A number of other measures need to be adopted. Firstly, the
While liberalisation of the economy to let the individuals serve their
filtering effect of market-determined prices needs to be complemented by the
self-interest does motivate them to render their best, it serves social interest
moral filter to enable individuals and groups to evaluate their behaviour and
only where social interest is in harmony with individual self-interest. For
their claims on resources from the point of view of their impact on social
example, while higher prices may help reduce aggregate demand, they may
well-being. Secondly, individuals and groups need to be motivated
not do this in an equitable manner if income and wealth are not equally
appropriately to keep not just their self-interest but also the collective social
distributed. Higher prices may not create any significant dent in the demand
interest in mind while expressing their preferences in lhe market place.
of the rich, who may continue to buy what they want in accordance with their
Thirdly, lhe economy and financial intermediation need to be restructured in
individual preferences, many of which may not reflect social priorities.
a way that would be conducive to the use of all available resources by the
In a secular society, there is nothing to motivate them to do otherwise. private as well as the public sectors for the realisation of development with
Resources thus get diverted to the production of what is needed by those who justice. The government cannot, in this framework, behave as a passive
can cast more votes in the market place as a result of their own great wealth onlooker. It must play a complementary role to guide and facilitate the
and the credit (that they are able to have access to on the basis of this efficient and equitable use of resources by the private sector.
wealth). Hence the poor get more squeezed. This frustrates the realisation The Islamic strategy is capable of doing this. While Islam has
of development with justice, and also leads to social unrest and political recognised the contribution that the basic tools of the market strategy (profit
instability. motive, private property, competition and decentralised decision-making) can
There is no doubt that some of the Far Eastern countries have been able make to efficiency, it has tried to ensure that human beings, who are the ends
to realise development with justice. This is, however, not due merely to as well as the primary means of development and who arc the ones who use
liberalisation, even though liberalisation has acted as a catalyst. A con­ the tools of the market strategy, arc also reformed sufficiently to enable them
figuration of other forces have played an important role. Some of these were: to use these tools in a way that would serve their self-interest within the
complementary role played by the governments in the economy to help rather constraints of social well-being. It is just like supplying the guns to soldiers
than hinder the private sector, socio-economic equality generated by the in the army. No one is free to use the gun as he pleases. Everyone is subject
drastic land reforms introduced by the occupying authorities, high propensity to certain rules even though the overall discipline of the army may itself be

to save and invest resulting from this socio-economic equality and the cultural capable of ensuring the proper use of the gun. Likewise, while competition
values of these societies, and high level of employment and self-employment does serve as a constraint on self-interest, it may be restrained in a clandestine
facilitated by the labour-intensive techniques adopted by these countries. manner by unscrupulous entrepreneurs in the pursuit of their self-interest,
However, in spite of their initial development with justice, these countries are unless there is an inner urge on their part not to act in a way that hurts the
finding it difficult to perpetuate their socio-economic equality because of their social interest.
adoption of the capitalist economic and financial institutions. Moral reform of the individual, along with his sense ol accountability
The two questions that, therefore, arise are: firstly, how to promote before the Supreme Being. Who can see everything, can help. Islam,

development with justice in countries where unusual war-related circum­ however, docs not confine itself merely to moral reform. Il also introduces
I2< 129
ISLAM AND ECONOMIC DEVELOPMENT CONCLUSION

tha accelerated development. The reduction in inflationary pressures and the

other important ingredients in its economic, financial and political systems to
all< containment of the continuing depreciation in exchange rales should also
ensure that the scarce resources are used in accordance with the requirements
col make a positive contribution to growth and well-being.
of socio-economic justice.
shE
Islamisation, which implies restructuring of the economy and changing Nevertheless, the interest of the poor should be attended to even further,
go:
the behaviour of individuals, institutions and the government in conformity not through a general subsidy, but rather through organised and intensified
fra
with the Islamic strategy, can thus help humanise the market forces and relief payments by the government and social organisations, out of zakah.
enable them to contribute positively to goal realisation by improving and voluntary donations, and maximum possible budgetary appropriations.
sei
strengthening their role in the economy. The Muslim governments have unfortunately used Islam so far only as
onl
Hence, given the prevailing imbalances, inequities and political tensions a slogan, failing to realise the positive contribution it can make towards the
exi
in Muslim countries and the inability of both the market system and socialism betterment of their societies and economies and to their own survival.
noi
to promote development with justice, the only feasible alternative they are left Khurshid Ahmad has rightly indicated that "there is no evidence to conclude
dis
with is to Islamise their economies. Islamisation will not only help reduce the that, generally speaking, the policy makers derived any inspiration worth the
of
prevailing imbalances, but also make a perceptible contribution towards social name from Islam and tried to translate its economic ideals into development
ind
policies.''1
harmony through the actualization of the maqasid. Self-interest, private
property and market-determined prices will all have an important role to play. Even with a change in altitudes and policies, the task of adjustment and
Re
These will, however, be tempered by the humanising influence of other reconstruction is bound to be difficult and time-consuming. The sooner the
car
factors. policy makers read the signs of the times, the better it will be for them and
an<
the ummah. Islamisation should not. however, be conceived as an panacea for
we Of these, the concept of accountability before God will extend self­
all the problems of Muslim countries. Some of the problems created by
of interest beyond the confines of this finite world and serve as a strong
centuries of social and moral degeneration, despotic rule, misguided domestic
ins motivating force in keeping self interest within the limits of social well-being.
policies, and international economic, financial and exchange rate instability
This, along with the filter of moral values, will help eliminate a substantial
part of total claims on resources in an equitable manner by changing are bound to persist for a long time.
10
consumer preferences and government spending priorities before they even get
lib
expressed in the market place. The price filter could then take over, and the ***
fig
two together could help release resources for general need-fulfilment and also
coi
higher savings, investment and exports. Complementing this by a need-based
tha
production system and equitable material rewards should help create a
dra
favourable climate for greater efficiency, increased supply of need-satisfying
to
goods and services, and lower prices for needs.
val
fac Land reforms and the proliferation of SMEs along with a total
He restructuring of the conventional financial system in the light of Islamic
fin teachings should also make a positive contribution by lowering the
ad< concentration of wealth and power, expanding self-employment opportunities,
and reducing poverty. Need-fulfilment and equitable distribution brought
about in this manner should tend to have the effect of invigorating the human
de
factor in development and of harnessing its energies and creativity for
 ISLAM AND ECONOMIC DEVELOPMENT

SUGGESTIONS FOR FURTHER READING

With regard to Chapters 2 and 3. the student may find it profitable
to read anyone of the standard textbooks on development economics and to
supplement it further, in keeping with his or her specific interest, by some of
the books and papers indicated in the references and footnotes. It is.
therefore, not necessary to add to them or to repeat them here. However, with
respect to chapters 4-6 dealing with economic development within the Islamic
perspective, the citations given in the footnotes and references may not be
sufficient. The student may wish to read more to increase his or her grasp of
the subject or to write papers on various issues raised in these chapters. To
help in this task, a bibliography is being provided below which, though not
comprehensive, would hopefully be of significant help. Since the subject is
still nascent, there is a continuous flow of litterature and the interested reader
may be able to keep abreast of the latest development with the help of the
Muslim World Book Review and the Index of Islamic Literature published
quarterly by the Islamic Foundation. Leicester, and the International Institute
of Islamic Thought. Herndon. VA. USA.
 NOTES AND REFERENCES

ONE: THE KIND OF DEVELOPMENT

'The fulfilment of basic needs is now quite widely accepted as a strategy for
development (see Paul Streeten. "A Basic Needs Approach to Economic
Development’', in Kenneth P. Jameson and Charles K. Wilber, cds.. Directions
in Economic Development. Notre Dame: W. Notre Dame University Press.
1973: and Francis Stewart. Basic Needs in Developing Countries. Baltimore.
Maryland: The John Hopkins University Press, 1955). A number of other
authors have also written, over the last decade, on the concept of basic needs
and its implications for development.

The stress on need-fulfilment in Islam should, however, not be construed as

an afterthought arising out of the recent Western discussion of the subject.
It has received an important place in the Fiqh and other Islamic literature
throughout Muslim history. The jurists have unanimously held the view that
it is the collective duty (fard kifdyah) of the Muslim society to take care of
the basic needs of the poor (sec. for example, Abu Muhammad ‘Alt Ibn
Hazm. al-Muhalla. Beirut: al Maktab al-Tijari. n.d., vol. 6. p. 156:725). In
fact, according to Shilibi. this is the raison d'etre of the society itself (Abu
Ishaq al-Shatibi. al-Muwdfaqdt ft Usui al-SharTah, ed.. ’Abd Allah
Dariz. Cairo: al-Maktabah al-Tijariyyah al-Kubri. n.d., vol. 2. p. 177). All
modem writers, including Mawdudi. Sayyid Qutb. MustaD al-Siba'T. Abu
Zahrah. Muhammad Baqir al-Sadr. Muhammad al-MubHrak. and Yusuf
al-Qaradawi. are unanimously agreed on this point (sec. for a brief
introduction, M. N. Siddiqi. "Guarantee of a Minimum Level of Living in
Islamic State”, in Munawar Iqbal. Distributive Justice and Need Fulfilment m
an Islamic Economy (Islamabad: International Institute of Islamic Economics.
1986). pp.249-301; Abd al-Salam al-'Abbadi. al-Milkiyyalifial-Shart'ah al-
Islamiyyah (Cairo: al-Matba'ah al-Salafiyyah. 1349 A.H.); and M Anas
Zarqa. "Islamic Distributive Schemes”, in Munawar Iqbal. Distributive Justice
and Need Fulfilment, op. cit.. pp. 163-219.

’From "Ubadah ibn al-Samit and Ibn Abbas in Ibn Majah, Sunan. Abwab
al-Ahkam. Bab man bana fi haqqihi ma yadurru bi jarihi; also reported by
Ahmad and Dar Qutni. This hadith is considered by al-Qurashl to be
one of the five fundamental ahddith on which the derivative principles of
Fiqh are based (sec. Yahya ibn Adam al-Qurashi. Kitab al-Kharaj. ed.,
Ahmad Muhammad Shakir. Cairo: al-Matba'ah al-Salafiyyah, 1384
A.H.. p.93). The hadith has become Anicle 13 of the 100 maxims of
Islamic jurisprudence embodied in the Hanafi Fiqh compendium called the
Majallah.
134 ISLAM AND ECONOMIC DEVELOPMENT
NOTES AND REFERENCES 135

’See M. Anas Zarqa. "Capital Allocation. Efficiency and Growth in an University Press. 1990). and the review article on this book by Robert
Interest-free Islamic Economy". Journal of Economics and Administrative Dorfman, in the Journal of Economic Literature. June 1991. pp. 573-91.
Sciences (Jeddah). November 1982. p.49; and "Islamic Economics: An
Approach to Human Welfare", in K. Ahmad. Studies in Islamic Economics ’Arndt, H.W., Economic Development. The History of an Idea (Chicago:
(Leicester. U.K.: The Islamic Foundation. 1980). pp. 3-18. See also University of Chicago Press. 1987).
Benjamin Ward. What's Wrong with Economics (London: Macmillan. 1972).
’Eugene Staley, The Future of Underdeveloped Countries (New York. 1954).
p. 211.
pp. 4. 21 and 24; see also Bert F. Hoselitz, Sociological Aspects of Economic
‘Frank H. Knight. "Social Economic Organization", reprinted from his The Growth (New York: The Free Press. 1960). p. 56. Staley has been described
Economic Organization, pp. 3—30. in W. Breit, et al.. Readings in by Arndt as "the man who more than any other brought the theme of
Microeconomics (St. Louis: Times Mirror/Mosley. 1986). p.4. I am grateful economic development into the American discussion". (See H.W. Arndt.
to Dr. Anas Zarqa who drew my attention to this argument. "Development Economics before 1945," in Bhagwati and Eckaus,
Development and Planning: Essays in Honour of Paul Rosentein-Rodan
TWO: CAN SECULARISM FOSTER JUST DEVELOPMENT? (Cambridge. Mass.: The MIT Press. 1972). p.26.

'Bertrand Russel. A History of Western Philosophy (New York: Simon and ‘Gunnar Myrdal, Asian Drama (New York: The Twentieth Century Fund.
Schuster. 1945). p. 775. 1968). vol. 2. p. 73. According to Streeten. Myrdal's Asian Drama, is on the
whole, pessimistic about the development prospects of developing countries.
’There is no doubt that few economists would now be willing to support this Sec Paul Streeten. Development Perspective (London: Macmillan. 1981).
view. It is. however, a logical outcome of the assumed symmetry between p.425. Myrdal's "modernisation ideals" were: rationality, social and economic
public and private interests and was widely held by economists like J. B. equalisation, efficiency, diligence, orderliness, punctuality, frugality,
Clark who felt that factor incomes in the real world closely approximated the scruplulous honesty, rationality in decisions on action, preparedness for
marginal product and its value. See G. Stigler. Production and Distribution change, alertness to opportunities, energetic enterprise, integrity and self-
Theories: The Formative Period (New York: Macmillan. 1941). It. therefore, reliance. cooperativeness and willingness to take the long view" (ibid., vol.l.
provided the rationale for the much-cherished governmental non-intervention pp. 57 ■ 69). It is surprising how Myrdal could believe that all these ideals arc
principle. "indigenous" to the West and "alien" to all developing (including Muslim)

'Paul Samuelson. Economics (New York: McGraw Hill. 1980. 11th ed.), countries.
p.591. ’See. United Nations. Measures for the Econoic Development o)
Underdeveloped Countries (New York: United Nations. 1951). pp. 13-16;
‘Arthur Okun, Equality and Efficiency the Big Trade-off (Washington. DC.:
C.P. Kindleberger, "Review of The Economy of Turkey; The Economic
Brookings Institution. 1975). p.l 1. Development of Guatemala; Report on Cuba. Review of Economics and
SR. H. Tawney. The Acquisitive Society (New York: Harcourt and Brace, Statistics. November 1952, pp. 391 2; and Joseph P. Spengler. IBRD
Mission. Growth Theory". American Economic Review. May 1954.
1948). p. 12.
pp.586-7.
‘I. Adelman and C.T. Morris. Economic Growth and Social Equity in
“Ragnar Nurkse, Problems ofCapital Formation in Underdeveloped Countries
Developing Countries (Standord. California: Standord Union Press. 1973).
p.l 89. (Oxford:Basil. Blackwell, 1953), p.4.

’See Richard Titmus. Commitment to Welfare (London: George Allen and ’For examples of relatively pessimistic predictions for particular countries, see
IBRD, The Basis of a Programme for Columbia (Washington, DC.: IBRD.
Unwin. 2nd ed.. 1976). p. 196.
1950); Willard Thorp. "Some Basic Policy Issues in Economic Development .
American Economic Review. May 1951, pp. 407-17; G. E. Bntnell. "Factors
THREE: THE INCONSISTENCY OF DEVELOPMENT ECONOMICS
in the Economic Development of Ceylon". American Economic Review. May
‘See. Walt W. Rostow. Theorists of Economic Growth from David Hume to 1953. pp. 115-25. See also W. A. Lewis, "A Review of Economic
the Present: with a Perspective on the Next Century (New York: Oxford Development". Manchester School, May 1965. pp.1-16.
 NOTES AND REFERENCES 137
136 ISLAM AND ECONOMIC DEVELOPMENT

’’United Nations. ECAFE, "Crieria for Allocating Investment Resources

*H. F. Williamson in his comments on Moses Abramovitz. "Economics of
among Various Fields of Development in Underdeveloped Countries". June
Growth", in B.F. Haley. A Survey of Contemporary Economics (Homewood.
Ill.: Irwin. 1952). vol. 2. p. 182. ’ 1961. P.30.

"Harry G. Johnson. Money, Trade and Economic Growth (London: George

’Arthur W. Lewis. ‘Reflections on Development." in Gustav Ranis and
Allen and Unwin. 1962). p. 159.
T. Paul Schultz. The State of Development Economics Progress and
Perspectives (Oxford: Blackwell. 1988). pp.3-14 and 16—19. "Irma Adelman and Erik Thorbecke (eds.). Theory and Design of Economic
Development (Baltimore: Johns Hopkins, 1966); sec also. G. Fields. "Income
"Harvey Leibenstcin. Economic Backwardness and Economic Growth (New
Distribution and Economic Growth", in Ranis and Schultz. Sate of
York: John Wiley. 1957). pp.96 and 98.
Development Economics, op. cit.. p.460.
"Some of the economists whose writings were instrumental in providing
“P.T. Bauer and B.S. Yamey. The Economics of Underdeveloped Countries
various elements of the socialist strategy were: Nurkse. Myrdal. Hirschman.
(Chicago: The University of Chicago Press. 1957). p.168. See also
Balogh, Rosenstein Rodan, Chenery. Prebisch, Singer, and Strecten. Those
W. Galenson and H. Leibenstein. "Investment Criteria. Productivity and
who continued to emphasise the superiority of the market were: Haberler.
Economic Development". Quarterly Journal of Economics. August (1955),
Viner. Bauer and Yamey. and Schultz. For detailed references, see Deepak
pp.343-70.
Lal. The Poverty of Development Economics (London: Hoban Paperback
No.16, 1984). p.5. "Simon Kuznets. "Economic Growth and Income Inequality". American
Economic Review. March 1955; "Quantitative Aspects of the Economic-
"See for example. Albert Hirschman. "The Rise and Decline of Development
Growth of Nations: VIII. Distribution of Income by Size”. Economic
Economics", in Essays in Trespassing (New York: Cambridge University
Development and Cultural Change. January (1963); and Modern Economic
Press, 1981); and Gunnar Myrdal. Economic Theory and Underdeveloped
Growth (New Haven; Yale University Press. 1966).
Regions (London; Buckworth, 1957).
"See J. G. Williamson and P. H. Lindert. American Inequality: A Macro-
"See W. W. Rostow. "Take-off into Self-Sustained Economic Growth".
Economic History (New York: Academic Press. 1980); J. G. Williamson. Did
Economic Journal. March 1986.
British Capitalism Breed Inequality? (London: Allen and Unwin. 1985); and
"Myrdal. Asian Drama, op. cit.. vol. 3, pp. 1899 and 1900. J. G. Williamson. "The Historical Content of the Classical Labour Surplus
Model",.Population and Development Review. June (1985). pp. 171 91. See
"Gottfried Haberler. "Liberal and Illiberal Development Policy", in Gerald M. also Williamson's comments on Lewis' paper in Ranis and Schultz. State o.
Meier, (cd.). Pioneers in Development (New York: Oxford University Press. Development Economics, op. cit., p.29.
1987) p. 66.
“Bauer and Yamey. op. cit.. p.206. See also p.168.
"The literature on economic development is full of assertions that an
"Lewis. Theory of Economic Growth, op. cit.. pp.404—406.
improvement in income distribution is in direct conflict with economic
growth. For a summary of these views, see Wiliam R. Cline, Potential ""Strategy of the Third Plan". Problems tn the Third Plan - A Critical
Effects of Income Redistribution on Economic Growth (New York: Praeger. Miscellany, p.50.
1973), chapter 2.
"Mahboobul Haq. The Strategy of Economic Planning: A Case Study of
’’Arthur W. Lewis. The Theory of Economic Growth (Homewood. 111.: Pakistan (Karachi: Oxford University Press. 1963). p.30.
Richard D. Irwin, 1955), p.9.
"Myrdal. Asian Drama, op. cit.. vol. 2. p.740.
’’Peter T. Bauer and Basil S. Yamey. The Economics of Underdeveloped
Countries (Chicago: The University of Chicago Press. 1957). p.168. "Ibid.. p. 808.

"Ibid., p. 807.
138 ISLAM AND ECONOMIC DEVELOPMENT NOTES AND REFERENCES 139

“David Morawetz. Twenty-Five Years ofEconomic Development: 1950-1975 "The average anual rate of inflation has continually risen in developing
(Washington, D.C.: IBRD. 1977). p.9. countries from 10 percent per annum in 1965-73 to 26 percent in 1974 82.
51 percent in 1983-87. and 81.4 percent in 1988-90 (IBRD. World
“This may be clearly seen from the identity. Y=C+/+G+X-iW. where Engross Development Report 1989, p.62, and IMF. International Financial Statistics.
domestic product; C=consumption; /=gross domestic investment; November 1991, p.69).
(^government spending; X=exports; and M=imports. If C+I+G=A. where A
represents gross domestic absorption, then K=(A-M)-rX. For developing "Haberler. in Meier. Pioneers in Development, op. cit.. p.70.
countries, which are encountering both internal and external imbalances, a
"Henry Bruton. Inflation in a Growing Economy (Bombay: University of
successful strategy to raise Y and lower the imbalances would require a rise
Bombay. 1961), p.57.
not only in X but also in (A-M). which is the domestic absorpiton of
domestically-produced goods and services. Since A needs to be reduced to "Ibid., p.58.
remove the internal imbalance, the only way (A-M) may be raised is by
lowering M more than in proportion to the decline in A. Although import­ "Lewis, in Ranis and Schultz. State of Development Economics, op. cit.. p.22.
substitution can be an important way to realise this goal, it would not be
"The total external debt of all developing countries rose from $639 billion in
sufficient. It would also be necessary to substantially squeeze the import of
1980 to a projected $1,341 billion in 1990 (IBRD. World Debt Tables
luxury and inessential consumer goods so that the import of essential
External Debt of Developing Countries 1990-91. vol. I. p. 12).
consumer and capital goods proceeds as desired.

“Douglas Dosser. "General Investment Criteria for Less Developed "Gerald Meier. Leading Issues in Development Economics: Selected Materials
and Commentary (New York: Oxford University Press. 1964). p.563.
Countries". Scottish Journal of Political Economy. June (1962). pp.93-8.

lsHla Myint, "Neoclassical Development Analysis: its Strengths and “J. K. Galbraith, Economic Development in Perspective (Cambridge. Mass.:
Limitations", in Gerald M. Meier. Pioneers in Development, second edition. Harvard University Press. 1962). pp.9-10.
(New York: Oxford University Press. 1987), op. cit.. p. 118. "Michael Camdessus. "Opening Remarks". Vittori Corbo. el. al.. Growth
“UNCTAD's Trade and Development Report 1989 pours some cold water on Oriented Adjustment Programmes (Washington. D.C.: IMF/IBRD, 1987), p.7.

the idea that trade policy reforms necessarily promote the economic growth “Morawetz. Twenty-Five Years, op. cit.. p.10.
of developing countries. A study of thirty-two developing countries which
followed varying trade policies during the 1980s. revealed that favourable "Ibid., p.71.
export performance was not always synonymous with good overall economic
performance. See also. "Export Reforms No Guarantee of Economic Growth”. “Gerald Meier, Emerging from Poverty The Economics that Really Matters
Financial Times. 6 September 1989. p.6. (New York: Oxford University Press. 1984). pp.5 and 184.

’’Peter Winglee. "Agricultural Trade Policies of Industrial Countries", Finance “Cited by Meier. Emerging from Poverty, op. cit.. p.29.
and Development. March 1989. p.10.
“Cited by Meier, Emerging from Poverty, op. cit.. p.2.
"See, Sam Laird and Alexander Yeats. "Non-Tariff Barriers of Developed
“Meier. Emerging from Poverty, op cit., p.2.
Countries. 1966—68", Finance and Development. March (1989), pp.12—13.
“Dudley Seers "The Meaning of Development”. International Development
"United Nations Conference on Trade and Development (CTAD). Trade and
Review, December (1969).
Development Report 1985. pp. 123-4. For the external debt of developing
countries, see note 65. “Barber Conable. "Opening Remarks". Corbo. el. al.. Growth-Oriented

"See Hollis Chenery with A Strout. "Foreign Assistance and Economic Adjustment Programme, op. cil.. p.6.

Development", American Economic Review, September 1966; and Henry “IMF. Fund-Supported Programmes. Fiscal Policy, and Income Distribution.
Bruton. "The Two-Gap Approach to Aid and Development". American IMF Occasional Paper No. 46 (September 1986). p.l.
Economic Review. September (1966).
140 ISLAM AND ECONOMIC DEVELOPMENT NOTES AND REFERENCES 141

”1MF. The Implication of Fund-Supported Adjustment Programmes for ’’Ranis and Fei. in Ranis and Schultz. State of Development Economics,
Poverty: Experience of Selected Countries. Occasional Paper No. 58(1988). op. cit.. p.121.
pp. I and 32. See also Theoretical Aspects of the Design of Fund-Supported
’’See. Meier, Emerging from Poverty, op. cit.. p.63; Tibor Scitovosky.
Adjustment Programmes. Occasional Paper No. 55. September 1987.
"Economic Development in Taiwan and South Korea". Food Research
“IMF, Implication of Fund Supoorted Adjustment. Occasional Paper No. 58 Institute Studies. No. 4 (1985), pp.215-64; and "Unequalled Economic
(1988). p, 17. Failures", The Economist. 17 June 1989, p.83. According to Meier. Taiwan
"is probably the most egalitarian of all capitalist countries" (Meier. Emerging
‘'See Ronald Findlay, 'Trade. Development and the State", in Ranis and from Poverty, op cit.. p.63). This statement is probably inaccurate because
Schultz, State of Development Economics, op. cil.. pp.92 3; see also Myint a number of other countries have a lower Gini coefficient and better welfare
in Meier. Pioneers in Development, op. cil.. p. 117. services than those of Taiwan.

“See Ronald Findley's comments on Haberler. in Meier. Pioneers in ’‘With respect to Japan, see R. Benedict. The Chrysanthemum and the Sword
Development, op. cil.. p.96; see also Bhagwati and Kruger. "Exchange (Boston: Houghton Mifflin. 1946); see also Yoshihara Kunion. Japanese
Control. Liberalisation and Development". American Economic Review. Economic Development A Short Introduction (Tokyo: Oxford University
2(1973). pp.419-27. Press. 1979). pp.80-82.

“Yasuo Masai. "Japan". The New Encyclopaedia Britannica. 15th ed.. vol. 10, ”For Japan, see T. Nakamura, (tr.) J. Kaminski. The Postwar Japanese
p.49. Economy: Ils Development and Structure (Tokyo: University of Tokyo Press.
1981), p.96.
“Marius B. Jansen. "Japan. History of. The New Encyclopaedia Britannica.
15th ed., vol. 10. p.88; Agriculture in Korea (Seoul: Ministry of Agriculture ’‘World Bank. World Tables. 1988-89. vol. 1. pp. 66-9; and Directorate
and Forestry, 1970). pp.5-17; and Oh Young-Kyun, "Agrarian Reform and General of Budget. Accounting and Statistics. Republic of Taiwan, Statistical
Economic Development; A Case Study of Korean Agriculture". Koreana Yearbook of lhe Republic of China. 1988. p. 90.
Quarterly (1969), p.99.
”ln 1983. Japan's average tariff rate was 4.5 percent for dutiable imports and
“Australian Bureau of Agricultural and Research Economics. Japanese 2.5 percent for all imports, lower than in America or Europe. Even in
Agricultural Policies. Policy Monograph No. 3. Canberra. (1988). tcxtitles the tariff of 13.8 percent was lower than America's 22.7 percent and
about the same as in Europe. "An Open and Shut Case'. in Japan: A
“Jeffery D. Sachs. "Trade and Exchange Rate Policies in Growth-Oriented Survey". The Economist. 7 October 1985, p.20.
Adjustment'. in Corbo. et. al.. Growth Oriented Adjustment Programmes,
"Lester Thurow. "A Time to Dismantle the World Economy". The Economist.
op. cit.. p.301.
9 November 1985, p.23.
"Ibid.. p.3O3.
"Findlay, in Ranis and Schultz, State of Development Economics, op. cit..
“Jeffrey Sachs. Social Conflict and Populist Policies in Latin America p.90
(Cambridge. Mass.: National Burea of Economic Research. Paper No.2897).
"See IMF. Government Financial Statistics Yearbook 1989. pp. 92 3. for data
“Pranab Bardhan's comments on Ranis and Fei. in Ranis and Schultz, State on worldwide defence spending, except Japan for which data have been
of Development Economics, op. cit.. p. 138. obtained from other sources.
’‘Meier, Emerging from Poverty, op.cii.. p.61. "OECD. Revenue Statistics of OECD Member Countries. 1965-89 (1990).

’’See Hla Myint. "Comparative Analysis of Taiwan's Economic Development ""Republic of Korea (Sourth Korea|". The Europa Yearbook 1987.
with Other Countries", Academic Economic Papers. March 1982; see also pp.1661-62.
Myint. in Meier. Pioneers in Development, op. cit.. p. 133.
142 ISLAM AND ECONOMIC DEVELOPMENT NOTES AND REFERENCES 143

“See Parvez Hasan. Korea: Problems and Issues in a Rapidly Growing “According to Bill Emmott: “By leading a fancier and more visibly opulent
Economy (Baltimore: The Johns Hopkins University Press, published for the life, the new rich are setting an example to the millions who have only
World Bank. 1976). p.23. moderate wealth. The effect of their riches is trickling down, affecting what
people spend, why they buy and what they aspire to. The old. austere
“Data for 1965 from Michael Prowse, "Unequal Society Rethinking its homogeneity of Japanese life is breaking down." (Bill Emmott. The Sun also
Priorities". The Financial Times. 15 June 1989, p. XII; and those for 1987 Sets: Why Japan will not be Number One (Hampstead. U.K.: Simon and
from the IBRD, World Development Report 1989. p.223. Schuster. 1989).

“Liz McGregor. "Labour Unrest, the Price of Success". The International “See "South Korea: Land to the Dweller", The Economist. 16 September
Herald Tribune. 5 July 1989. p.7. 1989. p. 80; and "A Dangerous Game in Taipei: Taiwan’s Stock Market was
“Prowsc. Unequal Society Rethinking its Priorities, op. cil. once a Sleepy Casino, Now it’s Hyperactive". Ibid.. 9 September 1989. p.l 13.
See also the special surveys on Taiwan and South Korea. Financial Times. 10
“Hasan. Korea, op. cil., p.23. October 1989 and 16 May 1990.
“Kunion. Japanese Economic Development, op. cit.. p. 111. “Meier. "On Getting Policies Right", in Meier. Pioneers in Development,

“The ten largcsl Japanese banks, many of them associated with the names of op. cit.. p.70.
Zaibatsu families, are Dai-Ichi Kangyo. Mitsui Taiyo Kobe. Sumitome. Fuji. ""Morawetz. Twenty-Five Years, op. cit.. p.71.
Mitsubishi. Sanwa. Tokai. Daiwa, Bank of Tokyo, and Kyowa. Some of these
banks are among the largest in the world, (see "Wedding Bells for Japan’s '“Gary Fields. "Income Distribution and Economic Growth", in Ranis and
Big Banks", The Economist. 2 September 1989. p.79; and "Ranking the Schultz. State of Development Economics, op. cil.. pp.468 9.
World's Largest Banks", Institutional Investor, June (1989). pp.l 19 ff.).
'“Morawetz. Twenty-Five Years, op. cit.. p.7,
“Forty-eight percent of all wholesale stores and eighty-five percent of all
retail stores were classified as small-scale in 1985 (i.e.. they had less than five '“See Decpak Lal, The Poverty of Development Economics, op.cit.
employees). These, however, accounted for only five percent of the value of
'“Meier. Emerging from Poverty, op.cit.. p.233.
all wholesale and thirty-one percent of retail sales in that year (Japan:
Ministry of International Trade and Industry. Commercial Statistics and White '"Ibid.. p.228.
Paper on International Trade 1988).
'"ibid.. p.90.
“This is clearly reflected in the Gini coefficient for Japan, which rose from
0.380 in 1965 to 0.420 in 1971 (see Tibor Scilovosky. "Economic '“Development Committee, Strengthening Efforts to Reduce Poverty
Development in Taiwan and South Korea". Food Research Institute Studies, (Washington, D.C.: World Bank. 1989).
4(1985). pp.215-64.
'"Ibid.. p.5.
nForbes Magazine, cited by Arab News. 10 July 1989. p. 14.

’’See Karel van Wolferen, The Enigma of Japanese Power (London: FOUR: THE ISLAMIC STRATEGY
Macmillan. 1989). ‘For discussion, see M. U. Chapra. Objectives of the Islamic Economic Order
(Leicester. U.K. The Islamic Foundation. 1979). pp. 14-16. See also Hakim
“Yamaichi Research Institute of Securities and Economics. Monthly Digest
Mohammad Said (ed.). The Employer and the Employee: Islamic Concept
of Statistics. January and September 1989 and July 1990. p. 1.
(Karachi: Hamdard Academy. 1972).
"ibid.. pp. 6 and 126.
’See M. U. Chapra. Towards a Just Monetary System (Leicester. U.K.: The
“Nikko Research Centre. Analysis ofJapanese Industries for Investors. 1990 Islamic Foundation. 1985). pp. 107-25. See also Mohsin S. Khan and Abbas
(January. 1990), p.202. Mirakhor. Theoretical Studies in Islamic Banking and Finance I Houston,
144 ISLAM AND ECONOMIC DEVELOPMENT NOTES AND REFERENCES 145

Texas: The Institute for Research and Islamic Studies. 1987); Muhammad it himself; if he does not do so. let him have his brother do so” (Sahih
Ariff. Monetary and Fiscal Economics of Islam (Jiddah: International Centre Muslim, p. 1176:88). See also other ahddith of similar meaning in the
for Research in Islamic Economics. 1982); M. Nejatullah Siddiqi. "Rationale sections on lease of land (kira' al-ard). and grant of land (al-ard tumnah)
of Islamic Banking", in Issues in Islamic Banking (Leicester. U.K.: The on pp. 1176-80 and 1184-5). This point of view was held by a number of
Islamic Foundation. 1983). pp. 67-96; and Ziauddin Ahmad. Concepts and jurists like 'Ata', MakhUl. Mujahid. Hasan al-Basrl and. according to a
Models of Islamic Banking (Karachi: Institute of Bankers in Pakistan. 1984). report, also by AwzJT (see Ibn Hazm. al-Muhalld. vol. 8. p.213) See also.
'Abd al-Hamid AbO SulaymSn. "The Theory of the Economics of Islam", in
’For a more detailed discussion of the moral characteristics required of a true Contem-porary Aspects ofEconomic Thinking in /slam (Bloomington. Indiana:
Muslim see. Sayyid Abu'l A'lJ Mawdudi, The Islamic Movement: the MSA. 1976). pp.9-12.
Dynamics of Values. Power and Change (1984), in particular pp.93—192. See
also Marwan Ibrahim al-Kaysi. Morals and Manners in Islam a Guide to "For a strong case in favour of this contention, see Ibn Hazm. al-Muhalld.
Islamic Adah (Leicester. U.K.: The Islamic Foundation, 1986). see particularly vol.8. pp.210-14; sec also QaradawT. al-Haldl wa al-Hardm. op. cit.
the Introduction, pp.13-53. pp.295-99.

‘See "Abd al-Salam al-'Abbadl. al-Milkiyyah ft al-SharTah al-lsldmiyyah *For a strong case in its favour, see Abu Yusuf, Kitab al-Khardj (Cairo: al-
(Amman. Jordan: Maktabah al-Aqsa. 1974-1975). vol. 2. p.400. Matba'ah al-Salafiyyah. 2nd ed.. 1353 A.H.), pp 88 91: and Ibn
Taymiyyah. al-Hisbahftal-lsldm (Damascus: Maktabah Dar al-Bayin. 1967).
’See Hasan al-Banna. Majmu'at Rasd'il al-lmdm al-Shahid Hasan al-Banna pp. 28-31; see also Mawdudi. Mas'alah. op.cit.
(Alexandria: Dar al-Da'wah, 1989). p.266; Sayyid Abu al-A‘la Mawdudi,
who. in his earlier writings, held the opinion that no 'arbitrary' limits may be '•Al- Abbadi. al-Milkiyyah. op cit.. vol. 2. p. 127. and Ibn Taymiyyah. al-
imposed on land ownership, modified his stand later and stated that, in the Hisbah. op. cit.. p.30.
light of the existing unfair distribution of land, the Islamic state may. and
"See the comments of Dr. Anas Zarqa on the paper of Ahmad Mustafa and
even should, impose certain desired limits as a temporary measure to remove
Hossein Askari. "The Economic Implications of Land Ownership and Land
inequities (see Mawdadl, Mas'alah Milkiyyat-i /aimin (Lahore: Islamic Cultivation in Islam ", in Munawar Iqbal (ed.). Distributive Justice, op.cit.
Publications, 3rd ed.. 1969). p.lll. See also Muhammad Qutb. al-lnsdn pp.152 -3. The reference Dr. Zarqa cites for Malik's view is alBajji. al-
Bayn al-Mdddiyyah wa al-lsldm (Cairo: TsJ al-Babi al-Halabi. 4th ed..
Muntaqd Sharlt al-Muwatta. vol. 5. pp. 146 8.
1965)
. pp.160—68 and 200-1; Mustafa al-Sibi'I. Ishtirdkiyyat al-lsldm
(Damascus: Mu'assassat al-Matbu‘at al-'Arabiyyah, 2nd ed.. 1960). p.62; ''Al-'Abbadi. al-Milkiyyah. op cit.. vol.2. p. 128. and M. Anas Zarqa in M.
al-'Abbadi, al-Milkiyyah. op.cit., vol,2, pp.398-520; and Rafiq al-Misri, Iqbal (ed.). Distributive Justice, op. cit.. p. 153. For some of the legal reforms
Usui al-lqtisad al-lsldmi (Damascus: Dir al-Qalam. 1989), pp.53-4. suggested by Mawlani Mawdudi to regulate the relationship between land­
There are many others who have expressed similar opinions, for example, 'All lords and tenants, sec Islam our Jadid Ma'ashiNatariyydt (Urdu). (Lahore:
al-Khafif, MahmOd Abu Sa'ud. Muhammad Yusuf Musa. Wahbah al- Islamic Publications. 1959). pp. 152—4.
Zuhayll, 'Abd al-Hamid Mitwalll. Muhammad Anls Ibrahim.
”N. T. Quan and A. Y. C. Koo. "Concentration of Land Holdings: an
•For a very cogent summary, see Yusuf al-Qaradawi. al-llaldl wa al- Explanation of Kuznet's Conjecture". Journal of Development Economics. 18
Haram ft al-lsldm (Cairo: Dar al-I'tisam. 8th cd.. 1974), pp.290-301; al- (1985). pp.101-17.
'AbbadT. al-Milkiyyah, op. cit.. vol. 2. pp. 113-28; and M. Anas Zarqa. ”al-
Siyasat al-lqtisadiyyah wa al-Takhtlt fi al-lqtisad al-lslamf. al- “See C. Gonzales-Vega and V. H Cespedes. Growth and Equity Changes
Iddrah al-Mdliyyah ftallsldm (Amman: al-Majma* al-Maliki h Buhuth al- in Income Distribution in Costa Rica (New York: United Nations. 1983); K.
Hadarah al-lslamiyyah. 1990). vol. 3. pp. 1259-63. Griffin and A R Khan, " Poverty in the Third World: Ugly Facts and Fancy
Models". World Development. 6 (1978). pp.1271-80; 1LO. Poverty and
’This opinion is based on a number of ahadith, one of which, reported by Landless in Rural Asia (Geneva: 1LO. 1977); A R. Khan and P. D_Weldon,
Jabir ibn 'Abd Allah, says: "The Prophet, may the peace and blessings of God "Income Distribution and Levels of Living in Java. 1963 70 . Economic
be on him. prohibited the taking of rent or share on land"' (Sahih Muslim, Development and Cultural Change. 25 (1985). pp.699 711; S. R. Osmam and
Cairo: 'Isa al-Babl al-HalabT. 1955. vol. 3. p 1186:90). Another hadith. also A. Rahman. Income Distribution in Bangladesh (New York: United Nations.
reported by Jabir ibn 'Abd Allah, says: "Whoever has land, let him cultivate ;
1983) E. Lee. "Egalitarian Peasant Farming and Rural Development, the Case
146 ISLAM AND ECONOMIC DEVELOPMENT NOTES AND REFERENCES 147

of South Korea". World Development, 7 (1979). pp.493-519; D. G. Rao. "See C. Wright Mills. The Power Elite (New York: Oxford University Press.
"Economic Growth and Equity in the Republic of Korea". World 1959). p.l 17.
Development. 6 (1978), pp. 397-409,
“See Gabriel Kolko. Wealth and Power tn America: An Analysis of Social
’’See S. A. Berry and W. R. Cline. Agrarian Structure and Productivity in Class and Income Distribution (New York: Praeger. 1964). pp.68 and 127.
Developing Countries (Baltimore: Johns Hopkins University Press. 1979);
“Andrew Hacker, el. al.. "Corporation. Business'. The New Encyclopaedia
Subrata Ghatak. "Agriculture and Economic Development", in Normam
Gemmell, Surveys in Development Economics (Oxford: Basil Blackwell. Britannica. 15th ed.. vol. 5. p. 187.
1987). pp. 355-6; and P.A. Yotopoulos and J. B. Nugent. Economics of "One percent of all tax-filers in I960 owned forty-eight percent of all stock
Development (New York: Harper and Row. 1976). p.6. held by individuals (Reagan. "What 17 million shareholders share", p.102,
“Ghatak. in Gemmell. Surveys, op. cit.. p.356. cited by Greenberg. Serving the Few, New York: John Wiley. 1974. p.45).
"In the 150 companies on the current Fortune 500 list, controlling ownership
’’See IBRD. World Development Report 1982. pp.81 and 91. rests in the hands of an individual or of the members of a family" (Robert
Sheehan. "Proprietors in the World of Big Business". Fortune. 15 June 1967.
“IBRD. World Development Report 1982. pp.85-109. p.l 79.
’’IBRD. Poverty and Hunger: Issues and Options for Food Security in “See M. U. Chapra. Towards a Just Monetary System, op. cit. pp.l 10
Developing Countries. 1986. and 140.
"U.S. House of Representatives. Report, of the Select Committee of Higher “For the definition of these terms within the perspective of Fiqh. see Abu
Banking for the Poor Alleviating Poverty through Credit Assistance to the Ishaq al-Shatibi. al-Muwdfaqat fi L'siil al-SharTah (Cairo: al-Maktabah al-
Poorest Micro-Entrepreneurs in Developing Countries (Washington D.C.: Tijariyyah al-Kubra. n.d.). vol. 2. pp. 8-12; and Anas Zarqa, Islamic
U.S. Government Printing Office, May 1986). p.I. Economics. An Approach to Human Welfare", op cit.. pp. 13 15. Ahmad
al-Najjar and Anas Zarqa have, in fact, argued that in the light of Islamic
"In Japan three out of four farming households now get most of their income
teachings nothing that a man uses (as a consumer or as a producer) is morally
from outside agriculture. See "When the Sall of the Earth Loses its Savour".
free, even if it is economically free (See Ahmad al-Najjar. al-Madkltal ild
Economist, 20 February. 1988, pp.43—4. al-Nazariyyah al-lqtisddiyyah fi al-lsldm, Beirut: Dar al-Fikr. 1973. pp.32
"The alternative arrangement, in which cooperative societies, commercial ff; and Anas Zarqa. "Islamic Economics", p. 13).
banks, and government sponsored financial institutions will have to play an
“See Thomas McKeown. The Role of Medicine. Dream. Mirage or Nemesis?
important role, must avoid interest and be based on risk/reward sharing
(Princeton. N. J.: Princeton University Press, 1979). and Alastair Gray.
(muddrabalt or mushdrakah), murdbahali (cost-plus financing), leasing or
"Health and Society: Reflections on Policy". IDS Bulletin, October (1983).
bay' salam. Bay' salam refers to a sale where full payment is made in
pp.3-9.
advance against an obligation to deliver the specified tangible goods at an
agreed future date. This is not the same as a speculative forward sale because "Majallat al-Ahkdm al-'Adliyyah. briefly known as the Majallah. states 100
full, and not margin, payment is required. Under this arrangement, the farmer maxims of junsprudence (ai-qawdid al-fiqhiyyah) in its preamble An
may be able to secure the needed financing by making an advance sale of English translation of the Majallah by C. R Tyscr. et al. and entitled I he
only a part of his expected output. This will not gel him into delivery Mejelle was published in 1967 by All Pakistan Legal Decisions. Nabha Road.
problems in case of a fall in output due to unforeseen circumstances. For Lahore. Although the Majallah is a Hanafi compendium codified during the
details on bay' salam see 'Abd al-Rahman al-Jazfri, Kitab al-Fiqh aid al- Ottoman penod. the maxims of jurisprudence are almost universally used by
Madhdhib al-Arba'ali (Cairo: al-Maktabah al-Tijariyyah al-KubrS. 1938). vol. jurists of all schools of Muslim junsprudence. See also Mustafa A. al-Zarqa.
3. pp.3-20 and vol. 2. pp.302-18. al-Fiqh al-lslamifiThawbihi al-Jadid (Damascus: Matabi' Alif B3' al-Adib.
1967)
. vol. 2, pp. 945-1060. The numbers given within brackets after each
“See Paul A Baran and Paul M. Sweezy. Monopoly Capital An Essay on the
principle refer to the articles of the Majallah from which the principle has
American Economic and Social Order (New York: Modem Reader Paperback.
1966)
. p.6. been derived.
148 ISLAM AND ECONOMIC DEVELOPMENT NOTES AND REFERENCES 149

"Bukhari. al-Jdmi' al-Sahih. Kitab al-Zakah. "Bab la Sadaqata ilia min

"See al-Shatibi. al-Muwdfaqdt. op. cil.. vol. 2, p.394; see also Mustafa al-
Zarqa. al-Fiqh al-lsldmi. op. cit.. vol. 2, pp.784 and 1088. Jahri Ghinan"; AbO 'Abd al-Rahman ibn Shu'ayb al-Nasa'i, Sunan al-Nasa i
al-Mujtaba. Kitab al-Zakah. "Bab al-Yadd al-'Ulya".
“'Most of Pak Funds for Development Misused: Ali Shah Details PAK
Findings", summary of a report published on the authority of Reuters by the “See Stephen Fidler. "Third World's Missing Millions'. Financial Times. 7
Saudi Gazeue. 21 June 1987. p. 7. September 1987. See also C. L. Ramirez-Rojas. "Monetary Substitution in
Developing Countries", Finance and Development. June (1986). pp.35-8.
“In Morocco, only sixteen percent of the subsidy on subsidised foods reached
the lowest income group in 1984 (Sec "World Bank Presents its Six Point "Bukhari. Sahih, Kitab al-Harth wa al-Muzara'ah, "Bab Fadi al-Zar' wa
Approach to subsidies in Developing Countries", BIS Review. 8 April 1987. al-Harth idha ukila minhu"; Muslim. Sahih, Kitab al-Musaqat, "Bab
p.5. Fadi al-Ghars wa al-Zar"'.

>slbid., pp. 4-6; see also IBRD. World Development Report 1986. pp.90-104. “Suyuti, al-Jami' al-Saghir (Cairo: 'Abd al-Hamid Ahmad Hanafi. n.d.),
vol. 2. p.167 (see alphabetically under man bd'a Ddran}. on the authority of
“IBRD. World Development Report 1986, p.92. Tabaranl. the expression within parentheses has been added on the basis of
another hadith quoted by Suyuti on the same page.
’’IBRD, World Development Report 1983. p.74. The net deficit of a sample
of Niger’s state-owned enterprises accounted for about four percent of the "M. H. Haykal. al-Fariiq ‘Umar (Cairo: Maktabah al-Nahdah al-Misriyyah.
country's GDP in 1982 (ibid. p.67). Turkish public enterprises averaged net 1964). vol. 2. p.229.
losses equivalent to 3.9 percent of GDP during 1977—9 (ibid. p.74). One
study has found that countries in which slate-owned enterprises accounted for “Muslim. Sahih. Kitab al-Hajj, Bab Hajj al-Nabi sail! Allah 'alayhi wa
higher shares of gross domestic investment generally had lower rates of sallam".
economic growth (see IBRD, World Development Report, 1987. pp.66 7). "Abu Yflsuf. Khardj. pp.65-6. This maxim has been introduced in lhe
"Although the average defence expenditure of industrial and developing Majallah as Article 97 (see note 31 for an introduction to the Majallah).
countries was 16.02 percent and 13.16 percent respectively of total
“See article 33 of the Majallh (see note 49).
government expenditure in 1987. the expenditure of some Muslim countries
was: Pakistan. 29.48 percent (1986); Malaysia. 14.38 percent (1987); Egypt. “See C. L. Ramires-Rojas. "Monetary Substitutions in Developing Countries".
19.45 percent (1987); Oman. 38.16 percent (1988); and Yemen Arab Finance and Development, June (1986). p.37.
Republic. 31.21 percent (1988). See IMF. Government Financial Statistics
“See OECD. The Costs of Restructuring Imports - The Automobile Industry
Yearbook 1989. pp.58-9.
(Paris: OECD. 1987).
"Paul Kennedy. The Rise and Fall of the Great Powers: Economic Change
and Military Conflict, 1500- 2000 (New York: Random House. 1988). pp.XVI “IBRD. World Development Report 1985, p. 125.
and 536—40.
“/«</.. p. 129.
"Gunner Myrdal. "Need for Reforms in Underdeveloped Countries".
“This opinion, held by many fuqaha . is based on lhe Qur anic verse related
Quarterly Economic Journal. National Bank of Pakistan, January March to certain specified items which have been prohibited but the use of which has
(1979). p.29. been allowed in extremely dire circumstances. "He has forbidden carrion,
‘'IMF. International Financial Statistics. Yearbook 1990. p.l 17. The rate of blood, pork and that which has been slaughtered in the name of other than
God. However, if one is forced by dire necessity without wilful disobedience
change for Muslim countries is a weighted average calculated from the data
or transgression of the limit, no sin shall be on him. Certainly God is
on consumer price changes given for twenty-four low- and middle-income
Forgiving and Kind" (2:173). There are a number of other verses of this
Muslim countries in this Yearbook (pp. 117-8). and the data for NNP given
same implication in the Qur'an (5:3.6:145.6:119). By analogy, this principle
in World Bank. World Debt Tables. 1990-1991.
may be applied to interest paid to foreign lenders with whom no alternative
“Calculated from the data given in World Bank. World Debt Tables.
1990-91. vols. 1 and 2.
150 ISLAM AND ECONOMIC DEVELOPMENT NOTES AND REFERENCES 151

arrangement is possible, provided that it is resorted to only to the extent “See " Small Business". Financial Times. 29 April 1987. Section III. p. I.
absolutely necessary. “See "Worker-Friendly Programmes'. Economist. 21 September. 1986. p.20.
“See al-Banna, Majmu'at Rasa'll, op. cit.. p.267.
“Steven Solomon. Small Business USA, op. cit., pp.283 4.
’’Muhammad Yunus. "The Poor as the Engine of Development ", reproduced
“See "Why Japanese Shoppers are Lost in a Maze”. Economist. 31. January
from The Washington Quarterly. Autumn 1987. in Economic Impact. 2
1987. p.64.
(1988), p.3!.
“For a discussion of the Japanese profit-sharing system see Martin L.
“Carl Liedholm and Donald Mead. "Small-Scale Enterprise: A Profile ",
Weitzman, The Share Economy (Cambridge. Mass.: Harvard University Press.
reproduced from their "Small Scale Industries in Developing Countries:
1984)
. It is surprising that while profit-sharing as applied to labour, has
Empirical Evidence and Policy Implication", a Michigan State University
attracted attention of the West, profit-sharing as applied to capital, has not
Development Paper, in Economic Impact. 2 (1988). p. 12.
attracted such attention. Is it because of cultural myopia or is it because
“An expression of this view appears in International Labour Organisation Muslims themselves have not presented the case convincingly?
(ILO). Employment, Incomes and Equality: A Strategy for Increasing
“Paul Baran. The Political Economy of Growth (New York: Monthly Review
Productive Employment in Kenya (Geneva: ILO. 1972).
Press. 1957). p.149.
“Report of the Select Committee on Hunger (1986). p.4.
“Schumacher. Small is Beautiful (London: Blond and Briggs. 1973). p. 18.
*'lan Little. Tibor Scilovsky. and Maurice Scott. Industry and Trade in Some
“See the Repon by the United Nations’ Department of Economic Affairs.
Developing Countries (London: Oxford University Press. 1970). p.9l.
Measures for the Economic Development of Underdeveloped Countries (New
“See Mariluz Cones. Albert Berry and Ashfaq Ishaq. Success in Small and York. 1951). p.29.
Medium-Scale Enterprises (published for the World Bank by Oxford
“Muhammad Yunus. "The Poor as the Engine of Growth", op. cit.. p.31.
University Press. 1987). p.2.
"Report of the Select Committee on Hunger (1986), p.V.
‘'Liedholm and Mead. "Small Scale Enterprise", op cit.. p. 12.
“Morgan Guarantee Trust Company of New York. World Financial Markets.
“A number of books have recently been published indicating the strengths of
January (1987). p.7.
small business. See. for example. Graham Gudgin, Industrial Location
Processes and Employment Growth (London: Gower, 1978); and David Birch. “The non-corporate sector in developing countries generally accounts for
The Job Generation Process (Cambridge. Mass.: M.I.T.. Programme on 60 70 percent of private sector domestic savings. It is the only sector whose
Neighbourhood and Regional Change. 1979); Steven Solomon. Small Business savings exceed its investment (V. V. Bhatt. Improving the Financial
USA (New York: Crown Publishers. 1986); David Storey, er. al.. The Structure ". Finance and Development. June (1986). p.20).
Performance of Small Firms (London: Croom Helm. 1987); David J. Storey
and Steven G. Johnson. Job Creation in Small and Medium Sized Enterprises “Lester Thurow. Zero-Sum Society (New York: Basic Books. 1980). p. 175.
(Luxembourg: Commission of the European Communities. 1987); and Paul
“Quoted by Charles Leadbearer. "Rags to Riches — Fact or Fiction",
Burns and Jim Dewhurst. Small Business in Europe (London: Macmillan.
Financial Times. 30 December 1986, p.5.
1987).
“E. S. Mihshan. Cost Benefit Analysis: An Introduction (New York: Praeger,
aOECD, Employment Outlook (Paris: OECD. 1986).
1971). p.205.
“Burns and Dewhurst, Small Business in Europe, op. cit.. p. 193.
"See Alan Friedman "Italian Small Business: The Backbone of the Economy
“’See Alan Friedman. "Italian Small Business: The Backbone of the Economy Explored". Financial Times. 29 April, 1987, Section III, p. I
Explored”. Financial Times. 15 September. 1987. “Report of the Select Committee on Hunger (1986). p.4 and chart 2 on p.5.
152 ISLAM AND ECONOMIC DEVELOPMENT NOTES AND REFERENCES 153

“Loan guarantee schemes exist in practically all industrial countries which, Nizam al-Siydsi li al-Dawlah allsldmisyah (Alexandria: al-Maktab al-Misri
having realised the potential of small firms, have initiated a programme to al-Hadith. 1975). pp. 105-17.
encourage them. For some relevant details about such schemes in a number
of European countries, sec Burns and Dawhurst. Small Business in Europe, "Rashid Rida. Mandr. op. cit.. vol. 4. pp. 199-200.
op.cit.. pp. 199-200. "See Abd al-A'la Mawdudi. Human Rights in Islam (Leicester. U.K.: The
“Sec The Economist. 16 February 1985, p. 15. Islamic Foundation. 1976). p.37.

’"Report of the Select Committee on Hunger (1986), p.7. "In this connection, the following hadith reported by 'A'lshah should be
very enlightening. She reports that the Quraysh were faced with the problem
“See M. Yunus. "The Poor as the Engine of Growth", op. cit.. p. 12. of a Makhzumi lady who had committed theft. They inquired about someone
who could intervene on her behalf with the Prophet, may the peace and
FIVE: WHY THE FAILURE blessings of God be upon him. They learned that Usamah ibn Zayd. whom
the Prophet, may the peace and blessings of God be upon him. liked very
'Hasan al-Banna, Majmu'at Rasail. op. cit.. p.255
much, may be the only one who could have the courage to do so. Hence
’For the best available analysis of the factors which led to this shift from the Usamah talked to the Prophet, may the peace and blessings of God be upon
him. The Prophet, may the peace and blessings of God be upon him,
system of shdrd to hereditary and autocratic rule, see Sayyid Abu al-A'lft
thereupon said: "Are you intervening to prevent the enforcement of Divine
Mawdudi. KhiUfal wa Mulukiyyat (Lahore: Islamic Publications. 1966).
Law?" Then the Prophet, may the peace and blessings of God be upon him,
pp.103 153. See also Sayyid Muhammad Rashid Rida. Tafsir al-Manar
got up and addressed the people saying: "People before you were punished by
(Cairo: Dir al-Manar. 4th ed.. 1954). vol. 4, p.204, and vol. 5. p. 198.
God because if a highly-placed person stole something they acquitted him. but
’From Ibn 'Umar, in al-Mundhiri. al-Targhih wa al-Tarhib (Beirut: Dar al- if a lowly person committed theft they enforced the Law of God on him. By
Kutub al-'llmiyyah. 1986). vol. 3. p 155: 1. on the authority of al-Bukhari and God! Even if Fatimah. the daughter of Muhammad, steals. I will certainly
Muslim. cut her hand" (Reported from Aishah by al-Bukhari and Muslim. Mishkdt
al-Masabih, Damascus: al-Maktab al-lslami. 1381 A.H.. vol. 2. p.3O2:361).
‘Al-Bukhari, Sahih. Kitab al-AhkAm. from Ma'qil ibn Yasar.
"Rashid Rida. Mandr. op. cit.. vol. 4. p.45.
’From Abu Sa'td al-Khudri. in al-Mundhiri. al-Targhib. op. cit.. vol. .3.
p. 167:7, on the authority of Tirmidhi and TabarSni. "Ibn Hisham. Sirah. op.cit., vol. 2. p.661.

‘Muslim. Sahih. Kitab al-Amarah, from Abu Dhan. “See al-Banna. Majmu'at Rasd'il. op. cit.. pp.192-3 and 239-41.

’The Prophet, may the peace and blessings of God be on him. said: Faith (al- ’’Sayyid Abd al-A'la Mawdudi. The Islamic Law and Constitution (Lahore:
din) stands for sincere advice." The Companions inquired: "For whom. O Islamic Publications, 3rd. ed.. 1967). p.197.
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‘•'Allal al-Fa’Sl. "al-lslam wa Mutalallibat al-Tanmiyah fi alMujiama' al-
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people" (Muslim. Sahih, from Tamlm al-Dari. Kitab al-lman).
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1955). vol. 2, p.661. if there is a government by the people's representatives, elected to assemblies
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“Ihn Taymiyyah, al-Siydsah al-Shariyyali fi lslah al-Rai wa al-Ra'iyyah ’’Said the Prophet, may the peace and blessings of God be upon him:
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consider it wrong in his heart; and this is the weakest faith (Muslim.
154 ISI AM ANO ECONOMIC DEVELOPMENT

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 INDEX
DaruriyySt. 85
Abraham, S, Day of Judgement, 118
Abduh. Muhammad. 120-21 Development Economics, 39. 40.
Aba Bakr. 119, 121 41,56,63
Abu Dharr, 118 Development economics different
Abu Yusuf, 100 phases of outlook of 21-
Accountability before God. 128 23
Adalah. 5-7 East Asia. 48
Adelman. 17 Economic System-goal. 3
Ahmad. Khurshid, 129
al-BannS. Hasan. 105-117.121
A1181 al-FSsI, Shaykh. 121 EEC , 51
America, 27 Efficiency strategy for attaining
Awqaf. 97 efficiency, 7-9
Bangladesh, 40 Enlightenment Movement, 11
Banking system reform. 115 Enlightenment Philosophy. 14. 42
Bauer, 26 Enlightenment World-view. 22
Brazil. 48 God-consciousness, 5
Britain. 27 God-given resources. 61
Caliph. 119 God’s Messengers. 6
Caliphate, 118 Grameen Bank Bangladesh, 112
Caliph Umar. 99 Great Depression. 21
Camdessus. Michael. 39 Hajiyyit. 85
Capital flight. 98 Hajj. 100
Capitalism. 12. 16-17, 65 Haq, Dr. Mahboobul. 27
Casibbean. 49 Hasan, Parvez, 52
Classical Economists. 21 Hereafter, 6
China. 25. 62 High rate of saving in Japan. South
Christian Society, 13 Korea. Taiwan. 50
Cinderella. 106 Hizb al-Istiqial
Communism. 96 Ibn Taymiyyah. 120
Communist Countries, 12. 28. 62 Imams, 70
Conable, Barber, 41-42 Imam Malik. 77
164 ISLAM AND ECONOMIC DEVELOPMENT INDEX 165

IMF, 39. 41-3 Islamic System, 75. 82 Lorenz Curves. 15 Muslim Economists. 27
Inchou, 52 Islamic Teachings. 83-4. 102, 105, Low Defence Spending in Japan, Muslim Governments. 72, 95. 129
India. 40 110. 115, 128 South KoreXaiwan. 51 Muslim History. 97
Individual and social interest. 14, Islamic Values. 28, 62, 64. 66. 70- Madinan period, 76-7 Muslim Jurisprudence. 76
harmony between. 14 1. 73. 82-3. 87. 89. 103. Makkans. 95 Muslim Jurists. 89
Individual preference and social 114, 122 Makruh. 76 Muslim Political Tradition. 120
priorities. 15 Islamic vision of Development, 7 Maqasid al-Shariah, 6. 9, 63. 71, Muslim Society. 6-7, 59. 66. 68.
Indonesia. 40 Islamic World. 117 75. 79. 81-2. 89. 92-3, 70. 72. 77. 86. 98-9
Industries, large scale 31-2 Islamic World-view. 5, 59 103. 112-5. 118. 128 Muslim World. 5. 75, 121. 123
International Fund for Agricultural Islamization. 98. 129 Market Imperfections, 16 Myrdal, 23
Development, 112 Islamization of Banks, 113 Market strategy 12, inequity of. 12 Nationalists, 46
International geo-political Italian Jowellery. 106 Masai, Tasou. 45 Nairobi. 40
environment change for Japan. 34, 44-6. 48-51. 53-4. 77. MawdudT. Mawlaua. 121 Nehru, Jawaharlal. 27
Muslim countries, 96 106-7 McNamasa. Robert. 40 Neo-Classical Economics. 21-2.25,
Inverted U Curire. 26 Japanese. 54 Meier. Gerald. 26, 40. 56-7 28. 39-2. 56-7. 125
Islam, 1,5-7, 9. 20, 27. 59. 61-3, Japanese Industrial output. 107 Middle East. 49 Neo-Classical Economists. 44
70. 73. 77. 80, 86. 88, Japanese Firms. 50 Mishan. Ill Neo-Classical Liberalism. 42, 55
93. 98-9, 102-3. 107. Japanese Stock Market. 54 Mitsui. 53 Nikkei. 53
110. 112. 115, 117-8. Jesus. 5 Mitsubishi. 53 Nobel Prize. 40
120-21, 123. 127, 129 Johnson, Harry. 26 Moral Values. 15 Non-European, 23
Islamic Bank. Ill Kennedy. Paul. 94 Morgan Guarantee Trust Company. Non-White, 23
Islamic brotherhood, 86 Kenesian Economics, 21-2, 25. 35- 110 North Africa, 49
Islamic consumption 98 6.41 Morawetz, 56 Nurkse. 23
Islamic development philosophy. 89 Kalifah. 5-7. 74. 117 Morris, 17 OECD Countries. 106
Islamic Faith. 6 Knight, Frank. 8 Moses. 5 Okun. Arthur. 16
Islamic History, 120 Kuznets Curve. 26-7 Muhammad, 6 Pakistan. 27. 40, 92
Islamic Injunctions, 83. 97 Labour-intensive policies in Japan. Pakistan National Assembly's
Mudarabah. 76
Islamic Jurisprudence. 89 South Korelaiwan, 48 Muslim. 7. 9, 28. 72. 76-7, 82-3, Public Account
Islamic Law, 75 Lainez-faire Capitalism. 16-8, 21 88. 92, 95-6. 98. 100, 115. 119. Committee. 91-2

Islamic lines. 104 Lainez-faire Model. 12 Pareto Optimality. 13, 17-8. 38. 63
120. 122
Islamic Movements. 121 Land Reforms in Japan. South Muslim Brotherhood, 121 Phillips Curve. 36
Islamic Principles. 117 Korea. Taiwan, 46 Muslim Courties, 1, 5, 9, 20-1, 63- Post-War Japan, 49
Islamic Resurgence, 1 Latin America. 48-9 90,94-6.100, 102-3. 105.107,108. Post-World War II period. 36

Islamic Society, 73. 88 Lewis, Sir Arthur. 26-7 114-5. 117-8. 121. 123. 128-9 Pre-War Japan. 87
Islamic State, 77. 92, 103 Little. 106 Muslim countries (low-and middle Prices and urgency of wants, 15

Islamic Strategy. 59. 73. 117, 123, Prophet. 76. 95.98-9. 118-9. 122
Liberalism. 12. 21. 57 income) rate of inflation. 96.
127-8 London School of Economics, 110 external debt. 96
166 ISLAM AND ECONOMIC DE VtrOt'MENT INDEX 167

Prophet’s companions, and their Social Darwinism. 12. 16. 19. 22, United Kingdom. 54. 68
successors, 76 28,44 United Nations. 23. 26
Prophet's Hadith, 96 Social Darwinist. 27 United States. 23. 46. 51. 54. 68.
Pusan. 52 Social-Dawinist approach, 23 100
Qur'in. 5-6. 70. 120, 123 Socialist Economies. 19. 22. 41 Urgency of wants and prices, 15
Qur’inic, 121 Socialist Economy. 21 USSR. 25. 62
Rashid Rids. Shaykh. 120 Social interest and individual. 14. Utilitarian Values. 15
Republic of Korea, 44, 47 harmony between. 14 Value-system in Japan. South
Rostow. 35 Social priorities and individual Korea. Taiwan, 49
Rural development, 29 preferences. 15 Welfare State. 12. 16-8
Sacks. 46. 48 Socialist Strategies. 21, 39 West, 11.21.24-5.81
Samuelson. 15 Socialist System. 85 West Germany. 54
Schumacher, 109 South Asia. 50 Western Consumer Culture. 35. 56
Scietousky. 106 South Korea, 44-6. 48-9. 51-2, 55. Western Countries. 28
Schultz. Theodore, 40 77, 87 Western Culture, 23
Scott, 106 Staley. Eugene, 23 Western Development Economics,
Second world War, 21, 46 Sub-Saharan Africa. 49 19
Secularism, 11. 19. 65.70 Sumitomo, 53 Western Economist, 23
Secular Motination, 85 Sunnah, 6, 70 Western European framework, 24
Secularist Value-free Approach. 57 Supreme Being. 4-5, 11,61, 127 Western Industrial Countries, 12
Secular system, 15 Taegu. 52 Western life style, 32
Secular World-view. 5, 12 TahsiniyySt, 85 Western materialist values, 23
Seers Dudley. 40 Taiwan. 44-8. 51-2, 55. 77. 87 Western Secular Culture, 63
The Select Committee on Hunger, Tawhlh, 5 Western World. 11
109. 112 Tawney. 16 Western World View. 22
Shaw, Catherine. 110, Seoul, 52 Tax base. 95. evasion. 95 Williamson, 24
Shari'ah. 1. 6-7, 63. 69. 73, 75-6, Tenancy, fixed-rent, 76 World Bank. 23. 40-1. 57. 78. 103
88,99. 100. 104. 114. 118, 120-22 Third World. 11-2, 21. 28 World-view. 3-4, 9. 11-2. 19-21
Shuri, 118, 120. 122 Third Wrold Countries, 27, 34 Yamey, 26
Singapore. 44-5. 49 Tatalitasian regimes. 25 Yasuda. 53
SMEs. 31-3. 65-7. 74. 78-81, 83. Thurow. Lester. 50, 110 Yunus. Muhammad. 105. 109
101-2, 104-13, 128 ■Ulami. 122 Zakah. 69. 74, 82-3. 92. 99. 129
Smith. Adam. 13. 21, 27. 60-1 Umar, the second Caliph, 119 Zulm, 121
Socialism. 1. 5. 9, 12. 18-21. 28. Ummah. 120. 122. 129
57. 60. 63.65.73.81.83 Un-Islamic Customs. 89
***
Socialist. 19 UNCTAD. 34
Socialist Countires. 28 University of Bombay. 36

THEOLOGY LIBRARY
CLAREMONT. CA
 All Muslim countries, like
Dr. Muhammad Umcr
most other developing countries, Chapra. bom 1933. has been
are struggling to accelerate the serving as Senior Economic
Adviser to the Saudi Arabian
development of their economies.
Monetary Agency since July
What makes the task difficult is 1965 Pnor io this, he taught
that these countries are also Economics at the University of
Wisconsin. Planevilk and the
suffering from flagrant inequities, University of Kentucky.
which have engulfed them in Lexington. He has also worked
as Senior Economist and
socio-political turmoil. They are
Associate Editor of the Pahitan
also encountering serious macro- Development Review at the
economic imbalances, which have Pakistan Institute of Development
Economics, and at Reader at die
led to high rales of unemployment Central Institute Df Islamic
and inflation, excessive balance of Research, Pakistan He lias
published a number of books,
payments deficits, continued
monographs, and professional
exchange rates depreciation, and papers on Islamic Economics and
heavy debt burden. What is Finance, and has lectured widely
on this wbiect in several Muslim
needed, therefore, is a strategy that countries. His most outstanding
would only accelerate
not works are Towardi a Just
Monetary System <19851 and
development but also help
Islam and the Economic
minimise the inequities and the Challenge (I992». For hts
imbalances. various contributions to Islamic
Economics and his distinguished
The nature and constituents of role in the development of this
subject, he received, in 1990, the
such a strategy are the main Islamic Development Bank
themes of this book. It first Award in Islamic Economics and
the King Faisal International
discusses why it may not be
Award in Islamic Studies
possible to formulate such a
strategy within the framework of the secularist world-view of
capitalism, socialism and the welfare state. It also discusses why the
vacillating strategies advocated by development economics over the
last four decades have led to senous inconsistencies and an
accentuation of the inequities and imbalances in most developing
countries. It then elaborates an Islamic strategy of economic
development and shows why it has the potential for success in
promoting development with justice and stability.