ECONOMY

Part 2 (Part 1)
Unquestionably, economic development is not possible without adequate endowment of productive resources such as capital, natural resources. There are many countries, however, that are rich in terms of these resources and still economically undeveloped simply because these resources alone are not sufficient for economic growth if they not utilized efficiently, exploited by human beings and are properly combined with other productive inputs. More importantly, economic growth is not going to be robust without the support of intangible resources such as institutional factors; social, cultural, and political settings that are conducive to long term progress. Even though, these resources are elusive but enormously essential. Even though we may not be able to influence the endowment of natural resources, most other resources are man-made and they can be continuously improved through human endeavors. I believe it is in such areas where cultural values including religion can have a big impact that may be either positive or negative. As such, the issue of compatibility or incompatibility of Islam with economic progress can be examined in the context of a few socioeconomic issues believed be critical to economic prosperity:

Labor force: Many Muslim countries do have a large population and relatively a big labor force. However, when it comes to economic growth, it is not the size of labor force that matters; it is its quality as well as optimal utilization of workforce. Economy may lose a portion of its production capability if labor force, and other resources for that matter, are not used to their full potential.

The quality of labor depends, among other things, on how much a country invests on education and training. Favorable attitudes toward work, production, and material success are also of great significance. I believe religion can play an effective role when it comes to shaping people’s attitudes. To improve productivity of labor, a country needs to investment in physical capital and technology. Physical capital and technology are the necessary complements to labor. Here, In the US, we have at least $50,000 worth of capital resources per every individual worker to work with.

One of the problems that is more unique to Moslem countries is what you call a segregated labor force; very low Labor Force Participation Rate, or LFPR, for female population and relatively high rate for male. In modern era, economic progress is not possible without dynamic participation of women. While women constitute almost one half of their population, there is no comprehensive and reliable data about female employment and the gainful participation of women in labor force for Moslem countries. In many of them, women are openly barred from playing an active social or economic role or working in certain fields because of religious prohibition or because those fields are traditionally reserved for men only. Some countries like Saudi Arabia have specific legislations about limits and restrictions for female employment.

Historically, women have not been taken as seriously as men in many Moslem nations, the idea that has survived even well into twenty first century. The common mentality is that women’s primary duties are raising children and serving their husbands. In other words, they are mainly in charge of family’s logistics; providing support services so that the family can survive. While you can find similar dichotomous mentality in other societies, it is more intense in Muslim countries which can be traced partially back to the textual Islamic documents.

Based on commonly-relied upon interpretations of Koran – see for example: Soureh 4 (AnNessa, Women) Ayah, Verses: 14, 19, 24, 34, and 176, Soureh 2 (AlBaghareh, Cow) Verses 223, and 282 - some Moslem researchers espouse the idea that women are inferior to, and subordinated to, men. In addition, in some Muslim countries, women may be handicapped by being coerced into complying with excessive dress codes, hijab, further limiting their ability to be socially or economically active.

According to the 2007 World Development Indicators published by World Bank, The labor force participation rate for women in the Middle East and North Africa, mostly Muslim countries, is about 31%, compared to world average of 60%. Surprisingly, the same rate for the adult male is larger than the world average implying that working is traditionally the duty of men who are regarded as the bread-winner and in charge of the household’s finance. The low LFPR for women is also the reflection of the low divorce rate in Moslem countries and the resulting low number of families headed by a single female parent.

Some of the prominent Moslem countries have a really low LFPR for women; Saudi Arabia has the lowest, 15%, Iraq 16%, Egypt 21%, Turkey 27%, and Morocco 29%. The female LFPR is reported as 40% for Iran which is one of the highest among Muslim countries in my sample. Understandably, the low LFPR in oil-rich countries believed to be associated with the huge amount of oil revenue earned by these countries, the larger is the oil revenue, the lower is this rate. To reiterate, the low LFPR is also the reflection of the traditional and cultural values pertaining to the place of women in Muslim societies that are mostly based on religious beliefs. Such values have, indeed, serious economic outcomes for these countries.

For instance, bigger number of children per household in traditional Muslim society can be directly linked to low LFPR. As a result, women have to stay home longer to take care of their kids living them no more time to work. The economic costs stemming from low LFPR is the considerable loss of national output. Furthermore, bigger number of children puts additional pressure on social and family food and other scarce resources aggravating the health and malnutrition problems. In some of these countries, like in Iran, this creates huge monetary costs for government in forms of subsidies for basic food and other necessities. There is also a higher probability that a child who is not well cared for grow up to be an ineffective member of the society.

For the past five decades, the LFPR for women has been rising steadily, from 30% in 1950 to 63% today, in the United States. Thanks to advancement in technology that has allowed women to spend a fewer number of hours working at home hence more free time to work or to do other things. Furthermore, the change in social attitudes has made it socially, and otherwise, more acceptable for women to work outside the home. The steady expansion of services industries in modern economies has created ample job opportunities for women, the jobs for which women have innate comparative advantage.

Yielding to the Pressure by their people and by the advocacy international organizations, some Muslim countries have been forced to modify their position on some issues related to women. However, the fundamental bases for differential treatments of women are still intact.

Prohibition of interest: In market economies, interest is one of the most influential economic forces. Even a slight change in interest rates can generate broad-based impact on economic activities. Why is interest rate so critical in market economy? Monetary Incentives are the driving forces of the market economies. Individuals, especially business people, don’t make any economic decision unless there is expectation of monetary reward.

The prohibition of interest in Islam is based on the notion that (excessive?) interest, reba, leads to exploitation of borrowers. While this argument may have some merit under certain circumstances, it should not happen under a competitive market. Remember, interest rate is the price of money, the price you pay if you want to use somebody else’s money. Therefore, like price of other goods and services, price of money is market determined and subject to interaction of supply and demand. Any attempt by a particular lender to charge higher than competitive interest rate will be, theoretically as well as practically, naturalized by the forces of competition.

Remember this famous slogan by an online lender: when banks compete, you win. What they are saying in essence is that competition results in lowest possible price which is good for you as consumer. Now, abolishing the interest rate means eliminating incentive to save money and to lend it to someone who needs it and dismantling the whole system of modern banking and financial intermediation apparatus which are essential to the prosperity of the market economy.

While interest is considered unlawful, haram, by Islamic rules, profit is good and it is encouraged, there no prohibition, as far as I know, against even excessive profit. There seems to be a paradox in here. You can make profit as much as you want from trade and economic activities deemed permissible by Islamic laws. However, making profit from financial transactions is immoral hence prohibited. I understand, of course, that such transactions will not directly contribute to productive activities; however, they will be supportive and indirectly involved and helpful to production.

I think ban on interest rate was practical when societies were simple and economic systems primitive, mainly based on agriculture and manufacturing to a limited extend. But for complex economic systems of modern time that is not practical. Let say you have a good business plan, confident of its success, but you don’t have the start up funds to launch your company. There is nothing wrong with using somebody else’s money for a fee to jump start your business which may later on flourish and develop into a successful company creating employment opportunities and income for the society.

Sociopolitical institutions: In modern era, there is no recourse more vital to economic performance of a nation than knowledge-based capital. To scientific capital is the outcome of investment in research and development, R&D and requires long term commitment to scientific researches. Without democratic institutional settings especially freedom of thought and expression, the development of such strategic assets is highly unlikely.

Numerous researches have confirmed that auspicious political as well as social institutions are indispensable components of successful scientific explorations and consequential economic prosperity. The institutions that are based on the core democratic values; rule of law, respect for and protection of property and human rights, enforcement of business contracts, stability of economic as well as political system, legal process based on common law, restricted power of government, freedom from regulatory burdens, absence of corruption or preferential treatments for certain groups, lack of arbitrariness especially by public officials, and condition of income distribution are considered the indispensable structural foundations for a sustained economic development.

Autocratic institutional settings, whether sanctioned by religion or not, are counterproductive. They make individuals apathetic and unwilling to invest or make any long term financial and economic commitments. Religion wields enormous power in Islamic countries, if used prudently; it can be utilized to generate energy and enthusiasm for scientific researches and inquiries.