12th Distance Learning Program by IRTI, Fall 2010
Macroeconomics in Islamic
Economy: A Theoretical Perspective
Prof. Dr. Sayyid Tahir
IIIE, International Islamic Univ.
Islamabad
Lecture Date: 30 November 2010
Learning Outcomes*
1. Understanding macroeconomic dimensions of an
Islamic economy
2. National Accounts of an Islamic economy covering all
its macroeconomic dimensions
3. Goals of Analysis: [Among the others:] Employment,
Inflation, Poverty Alleviation  Growth & Stability and
Growth &Equity
4. Monetary Policy;
5. Fiscal Policy; Zakah and Fiscal Policy;
6. Labor Policy;
7. Exchange Rate Policy;
8. Macroeconomic objectives of Shari'ah within the
overall perspective of objectives of Shari'ah.
*Set by the Sponsor of this lecture.
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Outline
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Distinguishing characteristics of an Islamic economy
Blueprint of an Islamic economy
Nature and role of government (remembering that all
macroeconomic policies are conceived and implemented at the
government level)
Rationale for macroeconomic analysis of an Islamic economy
Principal macroeconomic aggregates (target variables)
Macroeconomic data
Macroeconomic dimensions of an Islamic economy
Macroeconomic policy framework and goals
Macroeconomic policy goals in an Islamic economy
Monetary Policy
Fiscal Policy, while taking into account the institution of zakah
Labor policy
Exchange rate policy
Maqasid-e-Shari’ah and macroeconomic policy
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Distinguishing Characteristics of
An Islamic Economy
• Terms of Reference: The Qur’an and the
Sunnah
• Supremacy of the Shari’ah
• Equality of Man
• ῾Adl (justice)
• Emphasis on economic efficiency as well as
distributional equity
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Blueprint of An Islamic Economy
• Focus: “An” Islamic economy
• Individualism ─ with socially responsible and
Shari’ah-bound individuals
• Market-based economy with a unique
transactions matrix and associated institutional
set-up
• Financial transactions/Intermediation in Shari’ahbased ways whereby financial institutions act as
economic agents, and financial and real sectors of
the economy are closely integrated.
• Nature and role of government
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Government – Its Nature & Role in the
light of the Shari’ah Principles
• Whatever one might say, in the end those in the seat of Government
are individuals. Of course, there occupation in different: to do things
associated with the persona of “government”.
• There is “Shari’ah” for the rulers in the same way as for an individual
or the common man. Of course, due to unique occupation, the
Ahkam would be somewhat different.
• Government has dual character:
1) Wali al-Amr (Representative of the Shair’ah in matters of the
individuals’ rights and obligations vis-à-vis the Shari’ah), and
2) Representative of the people in their collective matters.
• All prohibitions of the Shari’ah (e.g., no riba) automatically apply to
the government.
• Government has to protect the interests of the individuals, both this
worldly and those in the hereafter.
• Government cannot favor one over another without the latter’s free
willing consent.
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Government (contd.)
• Government may play the role of facilitator or adjudicator in
economic activity.
• The government to stay away from direct participation in
economic activity.
─ There is question mark on public sector economic enterprises.
• The government may be responsible for provision of pure public
goods.
• For all non-pure public goods, the government may come into the
picture, albeit temporarily, to fill in the gap.
• Role of government may be limited to human resource
development, of course, on behalf of the citizenry.
• Government should leave all welfare-oriented activity to the
private sector, i.e. in the individuals’ hands.
• No interest-based borrowing or lending by the government.
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Rationale for Macroeconomics of an
Islamic Economy
1. Basis: Different macroeconomic framework in
which economic agents make their choices
2. Concern: Performance of an Islamic economy on
both economic and the Shari’ah grounds
3. Macroeconomic policy in an Islamic economy
4. Macroeconomic policy for non-Islamic economies
5. Comparison of macroeconomic performance of
an Islamic economy with other economies with
similar resource endowments but non-Islamic
architecture
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Principal Macroeconomic Aggregates
(Target Variables)
• Aggregate output and income
• Price level
• Employment level ─ Entrepreneurship/Selfemployment might be subsumed here.
• Variables related to Islamic Financing modes
• Income inequality and poverty
• Inflation (Secondary concern for an Islamic economy)
• Exchange Rate
“Growth with Stability” and “Growth with Equity” are
built-in characteristics of the Islamic macroeconomic
set-up. No separate focus might be necessary.
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Macroeconomic Data: National
Income & Expenditure Accounts
• Measure of economic activity: GNP or GDP
Measurement through expenditure (value at
market prices) or income (factor cost) method
• Other Aggregates: NNP, Personal Income,
Personal Disposable Income
• Measures of Inequality (in distribution of
personal income and personal disposable
Income), Poverty and Disparity
• Zakah ─ Both collection and disbursement
• Indebtedness at micro and macro levels
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Other Macro Data
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Employment
Entrepreneurship
Indebtedness at micro and macro levels
Realized rate of profit  overall as well as in
various economic sectors
• The margin in murabahah financing, the rental
in ijarah financing
• Relation between profits and profit-sharing
ratio  overall as well as in different sectors
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Macroeconomic Dimensions of an
Islamic Economy – 1
• Goods Market─ The economy may be perceived as s
mega goods market with producers on the supply side
and the public (consumers), investors (another
acronym for ‘producers’) and government on the
demand side.
• Financial Side:
(1)
Source of Outside Money: Government/Central
Bank
(2)
Financial Assets: Money, Mudarabah Deposits,
Islamic Securities, Islamic Stocks
(3)Financing Modes: Murabahah, Salam, Ijarah and
Musharakah
• Labor Market
• Institution of Zakah (the medium for welfare agenda)
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Macroeconomic Dimensions – 2
The Institution of Zakah:
• Government as the sole body for assessment, collection and
disbursement of zakah
• One the collection side: Extensive setup needs to be in place
in order to cover the economy across:
(1) population (rural, urban, mining and nomads),
(2) economic zones (agricultural, minerals, industrial and
commercial), with due margin for the type of economic
activity at the micro level in each zone
(3) Institutionalized economic activity (personally and
publically owned businesses)
(4) Financial institutions
• On the disbursement side: Zoning of the economy according
to poverty and other concerns where zakah can be utilized,
according to a well-developed criteria.
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Macroeconomic Policy Framework
and Goals
Framework for macroeconomic policy
• Islamic Economy
── Analysis for non-Islamic economy also to
be carried out against this backdrop
• Zakah (for distributional concerns)
── Institutional framework for assessment,
collection, preservation and disbursement of
zakah──Economic topography
• Monetary framework
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Macroeconomic Policy Goals in an
Islamic Economy
• Fulfillment of fundamental economic rights ─
minimums of food, clothing & shelter and
inheritance rights ─ of the people
• Preservation of the Islamic character of an Islamic
economy or Islamisation of the economy in other
cases
• Keeping the economy afloat and facilitating its
growth through non-fiscal measures except in
extreme cases
• A credible deterrent is deemed to be a part of
Islamic economy. Necessary action may
sometimes be called for at the policy level.
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Macroeconomic Policy Goals in an Islamic
Economy – Further Considerations
• The goal of reduction in economic disparity and inequality to
be addressed largely through the institution of zakah and
regulatory measures at the government level.  Activist
fiscal policy may be pursued to reduce inter-regional
economic disparities in the interest of unity of the state.
• Direct market intervention to promote unemployment,
control inflation, etc., not on policy agenda.  Activist fiscal
policy that involves current or future taxation to promote
not possible.
• Monetary policy action to influence murabahah-financing
margins, etc., may work through manipulation of highpowered/outside money.
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Monetary Policy
• Monetary policy to work in tandem with the fiscal policy with
the Shari’ah considerations providing justification for fiscal
action by the government. Technically speaking, central
bank would be just an organ of the state like the government
(finance ministry): no independent central bank.
• Difference to be maintained between (1) the process of
generating claims, i.e. transactions at the micro level, and (2)
facilitation of the said process in a highly efficient manner
• Focus of monetary policy to be on quantity of outside money
 with efficient Islamic bank, inter-bank market and other
financial markets streamlining the flow of money to
accommodate the transaction needs in the economy
• The last point also implies targeting of the velocity of outside
money.
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Fiscal Policy
• Welfare side to be left to state-managed zakah institution and
private initiative  The Islamic approach to poverty is
basically grassroots approach with both the initiative and
necessary action taken at the micro level.
• Scope for fiscal action (through budgetary measures) likely to
be limited to:
 Fulfillment of fundamental economic rights (in case of
systemic failures)
 Development of economic infrastructure at the micro
level (safe-drinking water, streets, etc), local (roads and
other means for transportation) and national levels
(highways, bridges, dams, etc.)
 Maintenance of a credible deterrent
• A small space for public works programs
• Fine tuning of the economy through review of existing action.
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Labor Policy
• Significance: Wage-based/salaried employment is the largest
source of income in virtually all modern economies.
• With the integration of real and financial sectors, availability
of opportunity for employment would be better.
• With the Shari’ah-constraints in place, government is not
expected to directly participate in economic activity. This
may limit the scope for direct employment generation at the
government level.
• Focus on human resource development holds the key to
solve labor market problems. Education and training may
increase mobility of labor and, thereby, lessen structural
employment problems
• Due to the Shari’ah restrictions for wage contracts and the
long-term nature of employer-employee relations, the
regulatory role for government will become important.
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Exchange Rate Policy
• No foreign exchange controls  exporters to be free to
hold their export earning, importers to be on their own
to meet their foreign exchange needs, investors
operating freely in the foreign exchange market and
government meeting its foreign exchange needs
through taxation  taxation of exports and imports in
foreign currency, acquiring foreign exchange with local
currency resources at the expense of the government
• Government needs to keep a distance from the fiscal
action that may distort the working of foreign exchange
markets.
• In principle, no direct intervention in the foreign
exchange market at the government/central bank level
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Maqasid-e-Shari’ah and
Macroconomics of an Islamic Economy
• Maqasid-e-Shari’ah are originally conceived in terms of
protection of five things:
Religion (Deen), Life (Nafs), Progeny (Nasl)
Intellect (‘Aql) and Property (Maal)
• Promotion of the above Maqasid is the ultimate goal of
macroeconomic policy.
• The goals of various policies, spelled out earlier, work
toward the fulfillment of the Maqasid.
• Focus on human source development, along with the
enforcement of the Shari’ah, holds the key to the
achievement of the Maqasid at the macro level.
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Thank you.
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