Tuesday, July 18, 2006

The economics of middle east turmoil

With numerous self-styled pundits commenting on the current events in the middle east, I am surprised not to have heard anyone yet bring up a simple economic formula: If you are a major oil exporter, and you spend $1 in any direction that increases turmoil in the region, or ensures continuation of turmoil, you are likely to reap the fruits manyfold through higher oil prices.

Wars have always more than paid for themselves from the point of view of arms dealers, etc. Now, they are also an economically profitable trade for oil exporting countries. (Or course, some oil exporting countries in the region are nervous about long-term implications of the fighting, but they cannot deny that the fighting makes them much richer). Some countries lose tourism receipts, of course, but (a la Kaldor-Hicks efficiency analyses), they can be -- and probably will be, directly or indirectly -- compensated for those lost receipts. Construction firms will make huge profits, no doubt...

All in all, the more turmoil there is, the more that the rich will grow richer. The poor and dispossessed will die, but their surviving family members can be fed empty slogans by beneficiaries on all sides. In the final analysis, economists can even celebrate the eventual rise in per capita income, especially if the death tolls are substantial.


Blogger aburajah said...

Though wars may be profitable. They also lead to shifts in balances of power. The results of which may not be entirely desirable to the profiting parties in the long run.

It is better to not be greedy and develop long and lasting trade relations in a peacefull environment.

7:03 AM  
Blogger Mahmoud El-Gamal said...

Of course, as economists and as human beings, that is what we believe in: peace means prosperity. But that is not the case for those involved in the war machine, for whom war is the way that they made their fortunes in the past, and the only way they can continue to prosper, albeit on the ruins of others' lives.

7:34 AM  
Blogger aburajah said...

Bringing the discussion back the note you posted earlier. And your discussion of the exegisis of the verse permitting trade and forbidding riba. Would you agree that true musharaka, mudarabah and ijarah need to be based on the price of the underlying asset in the market. And using the interest rate as a bench mark defeats the purpose of these contracts?

Also, in your article discussing Ibn Rushd's discussion of Riba al fadl you give examples of saudi companies preferring one model over another. But is'nt it the reality that there is no true musharakah or mudarabah product available in the market. That being the case how did you use that example?

(1997) cites a recent survey of 222 companies in 6 manufacturing sectors of
Saudi Arabia, where 83.4% of repsondents rejected mush
¯arakah contracts and
78% rejected mud. ¯arabah contracts, in preference of sole-ownership. However, as
we have seen, firms thus restricting themselves to debt-based financing methods
will – in general – be subject to efficiency-reducing dynamically-inconsistency ...?

12:36 PM  
Blogger Mahmoud El-Gamal said...

Both the price of the asset itself (raqaba) and its usufruct (manfa`a) are important in partnerships and lease (there is really no reason to use the Arabic words musharaka (simple partnership), mudaraba (silent partnership) and ijara (lease), as there are perfectly good English words for those contracs, none of which was in any way "Islamic" in its origin. They were all legitimized Islamically by implicit Prophetic approval (sunnat iqrar)). Given how those contracts are used today to camouflage loan-based finance, using interest rate benchmarks is perfectly reasonable (even musharaka is, as industry participants highlight the fact that sukuk holders hold shares in the SPV, hence there is an aspect of partnership).

There is need to disentangle the rhetoric of Islamic economics and finance from the practice.

With regards to the survey, the companies fully understand what joint venture (musharaka) is, and they rejected it, asking instead for debt financing. So, the absence of this type of equity financing in Islamic finance is a consequence of aversion of reputable partners to sharing profits, in addition to the earlier cases of fraud in the 1970s attempts to use profit and loss sharing arrangements.

In addition, there is of course some mudaraba in Islamic countries, you need only to look at the stock markets that were booming last year. I grant you that most investors in the gulf, unfortunately, treated those markets more like a casino than an investment venue, but still simple shares in company stock are an accepted form of mudaraba.

9:05 AM  
Blogger aburajah said...

There is a news article in Gulf news about the UAE national bonds
scheme. The critical part mentioned is that they intend to invest "in
a private joint stock company that will focus on primary and secondary
school education services." This point gives strong credence to the
argument that this fund is shariah compliant. Reason being, that one
of the requirements of shariah compliancy is that the money invested
should go towards a worthwile "real" halal investment activity.



They are also saying that"Ten per cent of the profit from the investments will be redistributed to shareholders, which Al Shaikh said he expected to be more than three per cent."

My Question to you professor Mahmoud is the following:
"Is this scheme a true joint venture with legitmate profit sharing or is it disguised debt financing?

8:50 PM  
Blogger Mahmoud El-Gamal said...

I have not seen this structure, so I cannot judge. The statement that it involves partnership could be deceptive, since there is always an element of partnership with SPV structures. The allusion to random rates of return may also be deceptive, since many debt-based instruments have a rate of return linked to variable interest rates like LIBOR. Without seeing the formal documents, it is impossible to tell the true nature of the transaction.

That being said, I agree that the substantive differences of funding worthy causes and earmarking part of the proceeds for charity are better justifications of the "Islamic" label.

4:45 PM  
Blogger aburajah said...



There is an interesting article titled, " Dubai Islamic Bank launches Al Islami Shipping Fund"

here which talks about a fund where the profit is derived from

"...pre-determined Charter Hire Rates for the entire period of the term"

12:32 PM  

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