Wednesday, June 22, 2005

Islam and Economic Solutions -- part III (what makes a solution "Islamic"?)

Over the past half century or more, "Islamic" thought has suggested that the key to improving the situation of Muslims is to find Islamic solutions to all aspects of their lives, political, economic, etc. This gave rise to Mawdudi, Sadr and Qutb coining the term "Islamic economics", the vision of which is still defended today by the likes of Naqvi, Chapra, etc. More pragmatic writers, such as M.N. Siddiqi have argued that the paradigm of "Islamic economics" as an independently aximatized alternative to "secular" or "western" economics is misguided, and argued instead for what amounts to an Islamic filter -- to be used to decide which aspects of conventional economic thought requires adjustment to be harmonized with the Islamic MaqaSid of Shari`a (objectives of the Islamic way of life, as enumerated by Ghazali, Shatibi, and others).

Of course, a careful examination of the Maqasid also illustrates that the bulk thereof are not uniquely Islamic -- with the exception of "preservation of religion", which truly pluralistic societies would also endorse. At least four of the five agreed-upon necessities (preservation of life, property, mind, progeny) can hardly be disputed as social objectives in all sensible social systems. Muslims over the centuries might have devised specific means of protecting those highly valued social assets, but the concept itself is not uniquely Islamic. Moreover, as we examine the historical solutions developed by early Muslim societies, we find that they adopted freely from Persian and Roman legal systems, which were the most advanced systems with which the early Muslims came in contact. In other words, they applied the maxim encapsulated in the Prophet's statement: "Wisdom is the goal of the faithful, his wherever he finds it" (الحكمة ضالة المؤمن أنّى وجدها فهو أحق الناس بها).

ٌYet, we still find Muslims in finance, economics, etc. looking for "Islamic" solutions, and shunning obvious solutions that have been developed by other nations. When pointed to those solutions, they object citing Prophetic traditions that forbid imitating the previous (Jewish and Christian) nations. It is not clear how one can reconcile this attitude with the practice of early Muslims, who borrowed not only from Jewish and Christian (Roman) legal traditions, but also from pagan ones, when the solutions appeared to be in agreement with Islamic principles. One solution is to restrict the general text of the Traditions forbidding imitation of Jews and Christians to matters of dogma/creed, and general approach to religion (excessive veneration of saints and priests, exessive optimism about God's mercy that discourages righteous action, etc.).

In the Arab world, the example of Abdul-Razzaq Al-Sanhuri is quite interesting: When the Azhar scholars refused to codify a new legal system following the fall of the Ottoman empire, Sanhuri undertook the task of applying an Islamic filter to French civil code, giving rise to a legal system that most jurists and legal scholars in Egypt continue to accept as being "in accordance with the Shari`a". Of course, this happened in the early 20th Century, CE, when views of the "west" were quite different. Imam Muhammad Abduh famously said upon returning from Paris: "I went to France, and found there Islam without Muslims, then returned to Egypt to find Muslims, but no Islam". In other words, the general view of the time was that the west prospered precisely because it applied the same basic principles upon which successful Islamic societies were originally built. The solution to the ills of Muslim societies were thus to be found in rediscovering our own heritage, as developed and improved by the currently most advanced societies.

The Islamist program (post Mawdudi, Qutb, Sadr, etc.) rejected this view, and insisted that the only road to reform and progress is through developing genuinely "Islamic" solutions that are derived directly from the Qur'an and Prophetic Tradition. Where this program was taken seriously (e.g. in so-called "Islamic finance"), the result has been at best partial (and grossly inefficient) replication of the western wheel, that has done nothing but enrich a few lawyers and jurists.

In the early days of the 21st Century, CE, it would be to Muslims' advantage to rediscover the pre-Mawdudi program of the early 20th Century, which resembled more closely the example of the early Muslim communities that adopted the best practices that they found -- regardless of origin.

Friday, June 17, 2005

Islam and Economic solutions -- Part II (the tragedy that is "Islamic finance")

In previous posts, I spoke of the ruses (Hiyal shar`iyyah) used in so-called "Islamic finance", including bond structures marketed under the Arabic name Sukuk, which is a synonym of the traditional Sanadat. The problem is not just about a few corrupt people willing to sell their knowledge of jurisprudence to the highest bidder (that has been around for centuries, and prompted the famed "closing of the doors of ijtihaad" in late medieval times). The bigger problem is the marketing of "Islamic finance" as an solution to Muslims' economic malaise.

The history of this thought -- called "Islamic economics" -- is more than 50 years old. Its contemporary proponents, including writers such as Umar Chapra, argued that a financial system based exclusively on equity-financing will lead to higher rates of economic growth, as well as higher rates of income equality. In other words, Islamic economists rejected the classical economic problem of trade-off between efficiency and equity -- arguing that "the Islamic system", which is of course only vaguely based on Canonical Islamic Texts, is simply superior along both dimensions. Much of the argument is based on early Islamic thought, by jurists and others, which claimed that the prohibition of riba (now fashionably equated with all forms of "interest", despite obvious Canonical differences in Hadith; see my paper "An Economic Explication of the Prohibition of Riba in Classical Islamic Jurisprudence") is based on the inequity of exchanging something (interest) for nothing (no tangible compensation).

Needless to say, when contemporary bankers and jurists (e.g. the late Dr. Sami Humud) looked into classical jurisprudence, they found that the leaders of all eight major schools (Sunni and Shi`i) allowed increasing the price in credit sales, as a compensation for time. One would think that this would end the debate: (OK, so not all types of interest are forbidden). However, the rhetoric of "Islamic" meaning "interest free" had sunk too deep into Muslims' psyche. Thus, a new cadre of bankers and jurists came to the fore to disguise interest as profit, rent, etc. In the process, they found the activity quite lucrative:

Now, a typical "Islamic finance jurist" does not make as much money as a successful "Islamic finance lawyer". The latter category consists almost exclusively of New York and London lawyers, mostly non-Muslims, who rely on 'Islamic bank jurists' to legitimize their structures as "Islamic". On the other hand, those lawyers are bona fide, in the sense of having the proper education, licenses to operate wherever they do, etc. Being mostly non-Muslim, there is no problem with them profiteering from the brand-name "Islamic" -- it is merely a job for which they collect fees.

The real problem lies with the "Islamic finance jurists", many of whom have no formal degrees in the area, and many others stretching their areas of expertise to enhance their marketability. The financial incentive faced by those "jurists" is staggering. For Pakistani, Malaysian and Arab jurists, their annual incomes before involvement in Islamic finance would be mostly below $30,000, for successful ones, substantially lower for others. Ones who are successful in Islamic finance can serve on roughly 10-15 "Shari`a boards", collecting retainer fees in the range of $10,000 to $50,000 per year per board (rising in rare instances to $100,000 per year for some board memberships), in addition to daily compensations for attending meetings, etc. in the range of $3,000 to $5,000 per day. Non-pecuniary benefits include flying first-class worldwide, staying in 5-star hotels, and receiving various gifts -- one reported to me that he received a gold Rolex watch from a Gulf prince, which he couldn't wear (Muslim men are not allowed to wear gold!), so he sold it!

So, if you get into "Islamic finance" you can multiply your annual income by a factor of 10-50, or even 100-fold. Once you get addicted to the new lifestyle (and all people are vulnerable to such addiction), how can you resist the temptation to keep this scam going. Yes, I mean to use the word "scam". The complicated structures of "Islamic finance", which use medieval contracts to synthesize contemporary financial transactions, are less efficient than their conventional counterparts. The creation of various special purpose vehicles (SPVs), etc. costs money, which is charged to the "Islamic" customer.

In other words, the "Islamic" customer gets the same financial product or service, but at a higher cost (to cover the expenses of "Shari`a scholars", lawyers, SPVs, etc., that other banks do not have to incur). All they get in return is a certification by those jurists-for-hire that their product is "Islamic". That is similar to indulgences (sukuk al-ghufran) marketed by the Catholic Church prior to Lutheran reformation. Strangely, jurists at various conferences find nothing wrong with that. One jurist at a recent conference in KL chided me and others for raising the issue of their fees and potential conflicts of interest. "The lawyers make much more money", he said. (Yes, but they do not sell religion!). And, he said, "you cannot call anything 'Islamic' unless it is certified by a Shari`a board". Couple this with the fact that the same few jurists are serving on all the different Shari`a boards, and it becomes one of the most self-serving religious-based arguments made in many centuries. Interestingly, those "scholars" are always complaining that there aren't enough "scholars" with knowledge of finance, jurisprudence and English. That, despite Islamic universities around the world producing thousands of graduates each year!!

To end this posting, let me pose the following question: Is the solution offered any better because of its characterization as "Islamic"? The answer has got to be no: the "Islamic" customer gets the same thing for more. This means that financial needs that were not met with the conventional sector are still not met by its "Islamized" version, and there is a dead weight loss (jurist and legal fees, SPV costs, etc.) borne by the very poor Muslim societies that fall prey to "Islamic finance"-vultures (be they London and New York bankers and lawyers, or Pakistan and GCC "scholars").

So, to address our "Islam is the solution" heading, one must qualify what one means by "Islamic" in "Islamic solution", based on the source, and the source's incentives.

Thursday, June 09, 2005

Islam and economic solutions -- part I

For years, we heard the empty slogan of "Islam is the solution", without providing specifics of what the solution would look like. Moreover, the slogan by itself has scared equally non-Muslim Egyptians, as well as secular-minded Egyptians more generally. Thus, Francois Basili wrote summarizing the general view:

اما اذا كان المقصود من الشعار ان الاسلام هو الحل لكافة مشكلات واحتياجات المجتمع كله، والدولة ومن فيها.. ليس في الجوانب الدينية فقط ولكن ايضا السياسية والاقتصادية والاجتماعية والثقافية.. فعندئذ يصبح الأمر من الامور التي تهمني وتهم كافة المواطنين مسلميناً واقباطا، لاننا هنا اصبحنا نتكلم عن الوطن والدولة والمواطنين واحتياجاتهم والمجتمع واحواله الاقتصادية و الثقافية والتعليمية والفنية والأسرية الي اخره.. وهذه كلها تشكل حياه المواطن في وطنه.. فاذا قلنا ان الاسلام هو الحل لكافة احتياجات المواطن في وطنه فنحن هنا نخلط الدين بالسياسة وانت هنا وبهذا تطرح شعارا سياسيا وليس دينيا فقط ومادام الشعار سياسيا فمن حق كافة المواطنين، مسلمين وغير مسلمين، التصدي له بالنقاش والتمحيص والقبول او الرفض.

The last sentence reads: "But if we say that Islam is the solution to all the citizen's needs within its country, then we are mixing relgion with politics; this becomes a political rather than merely religious slogan, and as such, every citizen, Muslim or non-Muslim has the right to confront the slogan with discussion, examination, and ultimately acceptance or rejection".

Francois went on to make a spirited argument in favor of secularism, and -- in western terms -- the separation of church and state. In particular, he ridiculed the notion that gave rise to "Islamic economics":

وهو نفس الفكر الذي يصر دائما علي ان النصوص المقدسة هي ايضا رموز ونصوص العلوم لكافة مناهجها من طب الي صيدلة الي فلك الي كيمياء الي هندسة الي حساب.. ويجهدون في تحميل النصوص مالا تحتمل من التفاسير الملتوية لتطويع العلوم الدنيوية الي النصوص الدينية رغم ان هذه النصوص الدينية نفسها تقول لهم في اكثر من مكان ان البشر هم العارفون بامور دنياهم وتحثهم علي طلب العلم ولو في الصين اي خارج النصوص التي يحصرون عقولهم فيها لعدم فهمهم لها

To translate: "This is the same thought that insists always that scripture constitutes symbols and texts on various sciences, including medicine, pharmacology, astronomy, chemistry and mathematics... Thus going to great lengths to stretch the meanings of Texts beyond their contexts to subjugate worldly sicences to religious texts, even though those same religious texts state on more than one occasion that mankind are most knowledgeable of their worldly affairs, and urge them to seek knowledge even in China, i.e. beyond the Texts to which they constrain their minds, because they didn't really understand them".

Those are obviously very strong words, and the main thesis that Francois proposed: that secularism was successful in Egypt under Nasser, but gave way to "Islam is the solution" Islamism under implicit support by the Sadat and Mubarak government, is likely to face rejection by many Egyptians. Islamists will say that Islam is a complete way of life, and thus the post-reformation Christian notion of separation of Church and state is alien to Islamist minds. On the other hand, this is not my main concern in this blog on Islam and economics.

What I wish to address here is the point Francois made that resonates with me: especially as it pertains to "Islamic economics". This is a vast literature dating back to Mawdudi , Qutb and Al-
Sadr. I had read some of those writings since my student days in the ealry eighties, but more in earnest over the past eight years. I mus confess that Francois's assertion that Islamists stretch the Canonical Texts beyond their intended and reasonable domain rings very true in this area. Much of "Islamic economics" is just bad economics, relying implicitly on the reader's piety to forgive lack of rigor. That which is good economics is not in need of the "Islamic" label, since it should stand on its own validity. Of course, the practical consequence of "islamic economics" has been the current field of Islamic finance, which -- despite its fast growth -- I consider to have been an utter failure in addressing the needs of Muslims or even adhering to the Canonical texts of Islam (see previous and hopefully future posts on this).

One glimer of hope started a few months ago, when Amr Khaled, a populist TV "caller to proper Islam" (as he likes to be called a داعية) morphed from a "feel good preacher" who recounted the legendary stories of early Muslim piety to a social reformer -- through his series "Makers of life" ( صناع الحياة), which has almost morphed into a political movement. He has mainly focused on encouraging global and local Muslim networks to develop small and medium enterprises that can create employment opportunities for the unemployed and underemployed Muslim youth (esp. in Arab countries). Interestingly, reported recently that his increased popularity, and encouragement of private initatives and networking, may be viewed as a challenge to the ruling party in Egypt, and thus he was advised to suspend the program until after the parliamentary and presidential elections in his native Egypt.

It would take longer to address the issue of potential legitimate Islamic contributions (rather than rehetorical theses built on poor economics) to the creation of economic solutions for Muslim societies (see my previous posting on "needed sukuk", and hopefully future ones). However, I must admit that while I found Amr Khaled's initial programs to be pretentious and shallow, I was very impressed by his recent mobilization of his popularity first to convince Muslim youth to stop smoking, and now to encourage the rise of a Muslim entrepreneurial spirit. This is not a new idea per se: early Muslim brotherhood efforts in Egypt (since the late 1920s) included the creation of busniesses and financial vehicles (including many that went bankrupt later in the 1980s and 1990s, often with publicised and scandalous results that served to undermine the legitimacy of Islamism in Egyptian society). This posting is getting a bit too long as it is, so I will end it by saying that those efforts (successful or not) promise to be positive contributions of Islamic principles to economics, whereas the mirage of "Islamic economics" as a separate social scientific discipline inspired by the Canonical Texts of Islam has proven to be a total failure (see Timur Kuran's _Islam and Mammon_, Princeton University Press, 2005) both as a social scientific discipline and as a provider of practical solutions for Muslim problems.

So, to answer Francois Basili: Yes, the solgan "Islam is the solution" is vacuous. However, like all vacuous slogans, its lack of substance means that if interpreted properly, Islam may in fact, and at the very least, provide part of the solution. To the extent that Muslim societies are growing increasingly religious, a purely secularist approach is unlikely to generate sufficient support, and to convince citizens to make economic sacrifices that will improve long term economic growth prospects, whereas the spirit of Islamic teachings can be quite effective in this regard.

Sunday, June 05, 2005

It's the corruption, stupid!

All around the Islamic world, but particularly in the Arab part of the Islamic world, everyone has been talking about attracting foreign direct investment (or FDI, for short): the holy grail of developing coutries. Some have dreams of replicating the successes of Bangalore and Hyderabad, by developing silicon-valley satellites in Jordan, Egypt, etc., while others are content to capitalize on the remarkable consumerism of their societies by attracting the Unilevers and Vodafones of the world. Fortunes have been made in the region, no doubt, but dreams of attracting FDI at a scale that can make a dent in the viscious poverty cycles awaiting those societies have failed at a monumental scale. All those societies remain extremely poor, including the oil-rich gulf states, who have never gone beyond being exporters of primary goods. No matter how expensive oil may be, economic laws dictate that terms of trade will continue to shift against those countries, their oil reserves are not a renewable resource, and their population growth rates are unsustainable, even under the best of circumstances.

So, why can't those countries attract FDI? The simple answer is that there is nothing to buy in those countries, which is a true but superficial answer. A deeper answer (which explains why there is no innovation and nothing to buy in those countries) is that all "businessmen" in those societies seem to be excessively eager to make quick profits. This applies even more strongly for the class of "businessmen" who decide to engage in politics (whereas in the U.S. the best way to ensure political success is to make a fortune, in the Islamic world, the surest way to make a fortune is to get into politics). As a result, the region has developed a complicated web of profiteers who serve the interests of the elite class of "get rich fast" businessmen. In the short term, the existence of those cadres of "facilitators" seems to improve efficiency by circumventing arcane bureaucratic procedures. In the long term, however, it creates three classes of beneficiaries from the corrupt system that evolves: (1) corrupt bureaucrats on the take lie at the base of that pyramid, (2) facilitators with political and economic connections form the middle tiers, and (3) the political and economic elites are naturally at the top.

Foreign investors may indeed come into countries that have that structure, since corruption and over-consumption by elites and elite-wanna-be-s can create profitable opportunities. However, the type of FDI that is driven by such structures is far from the types that developing countries would like to invite: It is hot money, that makes profits by encouraging consumption patterns that far exceed the means of those societies. Moreover, the elite classes made by the inflow of funds from such sources rarely reinvest their money in their countries, preferring to invest their monies abroad -- where they feel that their wealth will be safe from the forms of corruption that they support domestically. In the meantime, established middle-tear facilitators, including not only business-type brokers, but also university professors and administrators, among others who help to maintain and perpetuate the current social structure, ensure that all indigenous economic initatives are aborted -- driving talented citizens either to leave for other countries (if opportunity presents itself), join the middle-tier of corruption-supporters in hopes of joining the elite classes someday, or turning to extremism of religious or other forms.

So, how do we break this vicious circle? The answer is easy: Stop corruption! That, of course, is a tall order. The short term costs of fighting corruption are very high, and may be hazardous to the health of those who attempt it. Moreover, the groups most likely to succeed in fighting corruption are the elites, who owe their current elite status to the very corrupt system they ostensibly would fight.

I don't claim to have an answer. Imam Muhammad `Abduh was quoted to have said: "لن ينقذ الشرق الا مستبد عادل" (only a benevolent dictator can save the Orient). Unfortunately, of course, there is no such thing as a benevolent dictator -- at least one cannot last for long (as the American saying goes: power corrupts, and absolute power corrupts absolutely). Many in the Islamic world seem to be awaiting the benevolent dictator, and many are positioning themselves to be such dictators.

The test is this: when a king, president or heir-apparent abdicates the throne of royalty or presidency voluntarily, that will be the day they prove their credentials as reformers.