Sunday, May 22, 2011

Disappointing Economic Condition in Muslim Countries

Reza Varjavand

The evidence of dismal economic condition in Muslim world, compared to the other regions of the globe, is obviously staggering. Even a scant examination of the key economic indicators in prominent Muslim countries reveals abysmal results. I put together a table showing the values of a few such indicators for 17 prominent Muslim countries and carefully examined and compared and contrasted them with those for the industrialized nations. These 17 countries all have a population of more than ten millions, at least 88% of which is Muslim. The findings may be appalling but not totally new or surprising. With the exception of Turkey and a couple of oil-rich counties, namely Iran and Saudi Arabia, almost all the other Muslim countries I looked into have a per capita income level of less than $5,000, in most cases even less than $2,000. To put this in perspective, the per capita income for United States is around $47,000, which is currently ranked number seven in the world. The share of population living below poverty line (defined as the annual income of nearly $20,000 for a family of four according to the US Census Bureau) is another telling statistics. This rate in key Muslim countries ranges from 12% in Syria to as high as 63% in Niger, 53% in Afghanistan, and 45% for both Yemen and Bangladesh. This rate is about 18% for Iran.

One can surmise that the percentage of population living below poverty line should be very low for a rich country like the US or really high for the poor nations. Well, it is not necessarily so. This rate, for example, is currently about 13% for the US simply because income distribution is fairly inequitable in this country and the rich and poor gap has been widening during the last three decades. On the contrary, for a poor country with low per capita income, like Syria, the same rate is relatively low, 12%. This is either due to reasonably even distribution of income or because of statistical inaccuracies.

Often, economists use the combined rates of unemployment and inflation for specific year, known as the misery index, to gauge the extent of economic well being for a country or for international comparison. The lower is this index, the better is economic condition. Rising index, on the other hand, signifies economic stagnation. The misery index of more than 10% is considered unacceptable for the United States. For the past 15 years, the misery index has been around 9% for the U. S. economy in average despite the gloomy economic condition in recent years, thanks to very low rate of inflation. The misery index for the major Muslim countries ranges from 57% for Afghanistan, 58% for Iraq, 46% for Yemen, and 17% for morocco. This rate stands at 27% for Iran. One must also be mindful that all economic statistics in these are published exclusively by government and are subject to manipulation and window dressing.

Lagging behind industrialized nations in production of manufactured products and services, many Muslim countries mainly rely on export of oil, raw materials, and basic agricultural products as the primary source of revenues. The total value of exports of the selected Muslim countries is nearly $708 billion a year including the vast amount of money from oil exports. This number is about 50% of the value of the China’s total exports, and is less than the total value of annual exports by Japan. There is evidently no feasible way to calculate the value of the non-oil exports for all the oil-exporting Muslim countries in my sample because they do not publish any relevant reliable data. However, according to a research conducted by some Arab scholars, the total value of non-oil exports by the entire Arab countries is less than the value of exports by the tiny country of Finland!

Another popular criterion for inter country comparison is a well respected index created jointly by Heritage foundation and the Wall Street Journal called the Index of Economic Freedom, IEF. It is a composite index designed to compares and rank 162 countries in the world using 10 different measures of freedom including; the extend of free trade, business freedom, the degree of government involvement in the economy, respect for private rights and properties, etc. The index is designed to underscore the link between accessibility of opportunities and economic performance. The empirical observations illustrate a significant positive correlation between this index and the degree of economic prosperity such as per capita income, level of employment, and the stability of exchange rate. Not surprisingly, because of low level of economic and social freedom in Muslim countries, they usually ranked toward the bottom of the IEF list.

Disappointingly, Iran and Libya are almost at the bottom of the list with the index of 42.1 1nd 38.6, ranked 171 and 173 among 179 countries investigated in 2010. Other prominent Muslim countries did not score high either: Syria 140th, Algeria 132nd, Yemen 127th, Pakistan 123rd, Indonesia 116th, and Egypt 96th. All the other countries in my sample have similarly low rank. These agonizing facts and figures may lead us to believe anecdotally that Islam is the main cause of economic slump in Muslim countries. Whereas, such idea may have some validity, we should be wary of hasty conclusions and look deeply into this issue from the angle of impartiality. Does economic deprivation in Muslim countries have anything to do with Islam and its teachings? Is it simply by coincidence that Muslim countries are poor. And, more importantly, what at are the possible explanations for depressing economic condition in Muslim countries?

To address these and similar issues, we must first examine the forces responsible for economic advancement in developed courtiers and why such forces are either inadequate or absent in Muslim countries. We must also understand that economic development does not happen overnight. It is an evolutionary process that requires persistent, concerted, and coordinated efforts by both private sector and the government aided by technology, high-quality labor force, supply of capital, sophisticated physical and financial infrastructures, well-functioning communications and transportation networks, and a multitude of other factors. However, I would like to focus on a few other factors that I believe are more relevant to the Muslim nations.

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 such productive 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. Sustainable robust economic development is not possible without the support of intangible resources such as institutional factors; social, cultural, and political settings, and etc. Even though, these resources are elusive to quantify but enormously crucial. 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 instrumental 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 the optimal utilization of workforce that really matter. 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, there is at least $50,000 worth of capital resources per every individual worker to work with.

One of the problems 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 adult 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,) Verses: 14, 19, 24, 34, and 176, Soureh 2 (AlBaghareh) 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 compliance with excessive dress codes, hijab, further limiting their mobility and 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 is believed to be inversely associated with the 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 created huge monetary costs for government in forms of subsidies for basic food and other necessities as well as public utilities. 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 six decades, the LFPR for women has been rising steadily, from 30% in 1950 to 64% 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 also created ample job opportunities for women, the jobs in 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 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 system. We know that 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. There is a famous slogan popularized by an online lender: when banks compete, you win. What they are saying in essence is that competition results in lowest possible interest rate which is good for you as consumer/borrower. Now, abolishing the interest rate means eliminating incentive to save money and to lend it to someone who needs it is tantamount to dismantling the whole system of modern banking and financial intermediation apparatus which is essential to the prosperity of the market economy.

While interest is considered unlawful, haram, under 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 provide support system and indirectly aide production. I think ban on interest rate was practical when societies were simple and economic systems primitive, mainly based on agriculture and trades. 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 single 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 thoughts and expression, business and economic freedom, and freedom from government intrusion development of such strategic assets is highly unlikely.

Numerous researches have confirmed that auspicious political as well as social institutions are indispensable elements 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 burdensome regulatory constraints, absence of corruption and preferential treatments of certain groups, lack of arbitrariness especially by public officials, and fairness of income distribution scheme 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, indignant, and unwilling to assume the risk inherent in any investment or make any long term financial and economic commitments. Religion wields enormous power and respect in Islamic countries, if it is kept in its proper place and utilized prudently to generate energy and enthusiasm for scientific researches and inquiries. ©

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