Islamic Economics

Picture it. In the not-too-distant future, the US economy is teetering after decades of debt accumulation. Paper transactions and excess consumption carry on relentlessly despite the growing depletion of real capital. Speculation spirals out of control just as banks start calling back their credit. Policymakers disregard financial prudence in their pursuit of Pax Americana. And then a worldwide plague or a terrorist attack provides the tipping point for total economic collapse.

What then? Will economists have learned any lessons? To answer this, we might begin by examining the ethics of capitalism. Or rather the lack thereof. Capitalism is famous for being free of moral considerations. To neo-liberal economic guru Milton Friedman, the expectation that business bears any “social responsibilities is a fundamentally subversive doctrine.” Capital’s only expectation is to increase profits. As a result, we operate in an economy where business administration students are taught that “greed is good,” competition is stressed over solidarity, and the poor are left largely to fend for themselves.

In light of this moral vacuity, it doesn’t come as a surprise that the world’s rich have rigged the global economic game in their favor. People in the north sit back and enjoy their treasures while their southern neighbors struggle to survive. Even ostensibly well-intentioned efforts to alleviate global poverty like the World Bank and the International Monetary Fund (IMF) manage to make things worse. Since the establishment of these financial institutions 60 years ago, the income gap between the first and third world has widened, and today 1.5 billion people live on an income of less than $1 a day.

The people of Argentina know all about the dark side of World Bank/imf prescriptions. They don’t need to imagine what an economic collapse might look like. In 2002, after years of following directives to deregulate markets, reduce public spending, and liberalize trade, Argentina found itself in a financial mess. A country that had been trumpeted as a great success found itself reeling as austerity measures caught up, investors got scared, profits fled the country, and the national debt-load mushroomed. Argentinians watched helplessly as their banks were closed and their savings evaporated.

World Bank prescriptions elsewhere have been equally devastating. Under Structural Adjustment Programs (SAPS), developing countries have been required to devalue their currencies, slash their civil services, privatize state assets, and remove price controls and import tariffs designed to protect local industries. In a country like Zambia, the effects have been so overwhelmingly negative that many people are convinced sap stands for “Satani ali pano” (Satan in our midst). Thanks to the World Bank, young children often can’t attend public school because fees are required, purchasing power has taken a nosedive thanks to the devaluation of the currency, and curable diseases are left untreated because of depleted health services. The policies have literally killed people. Even the bank is conscious of the dark cloud hovering over its saps and has changed their name to Poverty Reduction Strategy Papers.

The irony of course is that rich countries force poor ones to open up their markets and liberalize their trade policies but don’t adhere to their own exhortations. Perhaps the most egregious example of this is the $300 billion doled out in farm subsidies every year by the EU and the US. With so many third world inhabitants engaged in subsistence farming, the elimination of agricultural protectionism would do wonders for southern economies.

Can such a corrupted economic system be redeemed? The World Trade Organization has chided the US for its cotton subsidies, and Americans may eventually be forced to abide by their free trade rhetoric, but such minor corrections will do little to improve the long-term prospects for global economic justice. Any real effort to address third world poverty will require a sweeping economic paradigm shift. And a cataclysmic collapse might be the only way to bring that about. But what if, up from the ashes, a new economy infused with a moral compass emerged?

The growing discipline of Islamic economics hints at the potential to hardwire an economy with ethical considerations. For centuries, Muslims have blended economic principles with religious law, known as sharia. In the past few decades, this synthesis has evolved into a formal system of Islamic economics. Under this arrangement, the basic framework of the economy is left up to the market, but it is also organized around ethical investment rules that prohibit putting money into companies that profit from alcohol, gambling, tobacco, weapons or pork-related products. Islamic economics also mandate participatory arrangements between capital and labor and a ban on interest. This rule stems from the understanding that since Allah determines the failure of a financial venture, the borrower should not be the sole bearer of the cost.

As formalized Islamic economics has gained adherents, Islamic financial institutions (IFIS) have enjoyed enormous growth rates. IFIS engage in real economic activity – as opposed to passive speculation – and make money work as capital, not debt. Even though Islamic banks are beholden to principles of social responsibility that make them less profit-driven than western interest-based banks, they have proven to be quite lucrative. There is even an International Islamic Financial Market charged with charting the course for about 200 Islamic banks and financial institutions around the world. And the principles of Islamic economics don’t just apply to banks. Sharia insurance firms are also gaining popularity.

Concepts like ‘no interest’ might seem fanciful to western skeptics, but an economy with a moral code could provide a refreshing relief for the world’s poor. Unfortunately, it might take an economic collapse to make it happen. But once we’ve dusted ourselves off and begun to rebuild, there will be no place for neo-classical financial thinking. Thankfully our Muslim brethren will be ready to provide us with the tools for an alternative system.

- Nicholas Klassen

(detail of painting by Shirana Ahahbazi)
dicomot dari: Adbusters magazine #54 - 2004

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