Knowledge-Based Islamic Economics for Sustainable Economic Development
EFFICIENCY, PRODUCTIVITY AND INNOVATION:
EVALUATING THE FOUNDATIONS OF KNOWLEDGE-BASED
ISLAMIC ECONOMICS FOR SUSTAINABLE ECONOMIC
DEVELOPMENT IN OIC COUNTRIES
Paper proposed for the
9th International Conference on Islamic Economics and Finance (ICIEF) on
9-11 September 2013,
in Istanbul, Turkey.
Organized by the Statistical, Economic & Social Research and Training Centre for
Islamic Countries (SESRIC), the International Association for Islamic Economics
(IAIE), and Qatar Faculty of Islamic Studies (QFIS).
Mehmet Asutay1, Ercument Aksak2*
1
2
Durham Islamic Finance Programme, Durham University, UK
Durham Islamic Finance Programme, Durham University, UK
* Corresponding Author. e-mail: e.a.aksak@durham.ac.uk
Tel: + (44) 780 9709930
ABSTRACT
With the help of favourable macroeconomic conditions during the last two decades, the
Muslim societies have intensified their efforts to transform themselves to knowledge based
economies, while at the same time also successfully become financial hubs. These efforts aim
to create thriving economies based on innovative management of knowledge based assets.
Efficient educational institutions and intellectual property industries are of particular
importance to this new economic philosophy and infrastructure.
However, the main issues of this process, such as; research and development, innovation,
intellectual property and copyright have not yet been discussed in the current state of Islamic
economics. Today, Islamic economics has no prospects for the issues mentioned above, which
are crucial for economic development and sustaining such development.
As a result, this study aims to address this extremely important weakness and be the first to
open the discussion from an Islamic economics perspective. In the initial stage, the paper will
provide a review of the existing literature on the knowledge creation, R&D, innovation and
economic efficiency in the conventional economics theory and maps the strengths,
weaknesses and potential outcomes of the alternative models suggested. In the second stage,
these models will be empirically examined by implementing them to the economies of the
Muslim geography. In order to achieve the desired results, first the Total Factor Productivity
values of the Organization of the Islamic Conference (OIC) members will be produced.
Second these results will be further scrutinized by contrasting them to the results derived from
the Knowledge Assessment Methodology (KAM) developed by the World Bank Institute.
Finally the results will identify the opportunities and the possible problems the Muslim
countries face, and where they may need to focus their policy attention and future investments
to achieve a successful KBE. The study will conclude to show how Islamic economic theory
making can endogenise knowledge creation and its economy as an integral part of its political
economy framework for sustainable development. Considering that Muslim societies enjoyed
substantial development in the past when they were at the pick of generating knowledge, it is
essential, hence, that knowledge economy in the post-industrial economy must be internalised
for future achievements.
Keywords: Islamic economics, economic growth, development, economic efficiency, productivity
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Knowledge-Based Islamic Economics for Sustainable Economic Development
1. Introduction
The emergence and significant growth of Islamic finance in the last two decades has
started a new strand of theoretical and empirical research. Innovations in financial
markets and instruments, as well as regulations and financing channels have affected
not only the financial system, but also numerous industries of the real economies.
Today, followed by its double digit annual growth through the last twenty years,
Islamic finance is one of the major components in the global financial system.
However, this glamorous growth has been limited to the innovations and development
in financial markets and instruments, rather than improving the broader economic
thought and thus come with a price. As the recent developments indicate, today
Islamic finance does not share the theoretical backing of a broader Islamic economics
theory and, therefore, it is on the path of being the second-best alternative in
comparison to the teachings and the moral code of Islam. As a result of this lacking of
a broader Islamic economic thought, most of the criticisms on Islamic finance are
based on the lack of novelty and that Islamic finance is becoming an adaptation of the
conventional finance within Islamic principles.
Breaking out of this cycle and taking the initiative rather than remaining as a follower,
on the other hand, is also in the hands of the Islamic finance and economics scholars.
In order to achieve this, research on Islamic economics should evolve in a direction,
where it can itself contribute to the current academic discourse and present solutions
to the unsolved problems of economics theory; rather than waiting for western
academia to provide the solutions and then adapting these suggestions through the
fiqh-centred principles of Islamic finance.
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Knowledge-Based Islamic Economics for Sustainable Economic Development
Following the argument above, it should be remembered that the original aspirations
of the founding fathers of Islamic economic thought were; but not exclusively limited
to, entrepreneurship, innovation, trade and economic livelihood, all of which are to
provide and stimulate social and economic growth, development, social justice and
prosperity within the religious, ethical and moral codes of the teachings of Islam.
In the current competitive economic and business climate, it is almost impossible to
achieve these targets set by the founding fathers of Islamic economics without a novel
competitive advantage. This kind of competitive advantage, in most of the recent
examples, comes from either innovations based on creation of new knowledge or
other factors, which are mostly in contradiction to the ethical and moral teachings of
Islam. As a result, in this study we have focused our attention to one of the topics
which has been hotly debated in the economics theory, especially following the
current advancements in information technologies; innovation and the creation of
knowledge based economies.
The knowledge based economy is the one that emphasizes and makes full use of the
role of knowledge in social and economic growth. This target is achieved through
development in two main areas: technology and human capital. In a knowledge-based
economy (KBE), the development, production, growth and dissemination of
information and technology and development of human capital is essential. Thus,
special emphasis is given to the efforts on creating an economic climate encouraging
research and development, protecting intellectual property and improving education.
With the help of favourable macroeconomic conditions during the last two decades,
the Muslim societies have intensified their efforts to transform themselves to
knowledge based economies, while at the same time also successfully become
financial hubs. These efforts aim to create thriving economies based on innovative
3
Knowledge-Based Islamic Economics for Sustainable Economic Development
management of knowledge based assets. Efficient educational institutions and
intellectual property industries are of particular importance to this new economic
philosophy and infrastructure.
However, the main issues of this process, such as; research and development,
innovation, intellectual property and copyright have not yet been discussed in the
current state of Islamic economics. Today, Islamic economics has no prospects for the
issues mentioned above, which are crucial for economic development and sustaining
such development.
As a result, this study aims to address this extremely important weakness and be the
first to open the discussion from an Islamic economics perspective. In order to
achieve this result, the paper will be presented as follows: In Section 2, a critical
review of the existing literature is going to be provided. In Section 3, the dominant
methodologies employed in examining the relation between development of KBE and
broader macroeconomic performances will be presented. In Section 4, the sample and
data will be presented. Finally in Section 5, the findings of our analysis will be
presented. The paper will conclude with Section 6, summarising the results and
discussing the possible further studies.
2. Review of literature
The review will first start with presenting the original aspirations of the founding
fathers of Islamic economics and how Islamic economic theory has developed since
then, with emphasis on economic growth and development. However, as Islamic
economics cannot be considered in isolation from the rest of the economic system, the
focus will then move to the conventional economic development literature, with
special emphasis on the mechanisms how financial development can have a part in a
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Knowledge-Based Islamic Economics for Sustainable Economic Development
sustainable economic development. Finally, the findings of these initial stages will be
contrasted to the current developments in Islamic economics and finance.
2.1. Islamic economics: Aspirations, emergence and current developments
Early writings in Islamic economics depicted a grand and, some would say, utopian
type of social development that would result from implementing Islamic social and
economic theory (Asutay, 2007a, Asutay, 2007b and Asutay & Zaman, 2009). In
order to achieve a societal change of that magnitude, Islamic economic thought
anticipates a number of foundational axioms based on the epistemological references
in the Qur’an and Sunnah that can distinguish itself from the conventional economic
systems.
Although there are numerous studies on these axioms in the Islamic economics
literature, most of them simply refers to the early works in the field. Today, there
seems to be a consensus on these axioms amongst Islamic economics scholars. For
example, Ahmad (1980), Siddiqi (1981), Naqvi (1981) and Chapra (1992, 2000);
amongst others have listed such axioms as follows:
Tawhid (unity); indicating the vertical dimension of the Islamic ethical system;
Al-‘adl wa’l-ihsan (equilibrium); providing for the horizontal dimension of equity;
Ikhtiyar (free-will);
Fard (responsibility), implying that individuals and society need to conserve the
public good;
Rububiyyah; implying divine arrangements for nourishment, sustenance,
improvement and directing things towards their perfection;
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Knowledge-Based Islamic Economics for Sustainable Economic Development
Tazkiyah; implying growth with purification, which should endogenise the good of
the others and has to be conducted with ethical and moral considerations;
Khilafah; indicating individual’s role as God’s vicegerent on earth;
Tazkiyyah (growth with purification), implying efforts for a wealthier and more
prosperous society which is achieved through the ethical and moral codes of Islam;
Maqasid-al Shariah, as the last axiom, aiming to interpret the text in relation to the
objectives of the Shari’ah and restore the principles of Islamic economics. This
further is interpreted in a way that Islamic economic principles must lead to ‘human
well-being’.
This list is by no means exhaustive and other major principles can be added such as
sabr (patience), ubudiyyah (servitude), shukr (thankfulness) and ijz (humility), as
important foundational axioms of Islamic economics that have implications for socioeconomic and spiritual development.
As can be seen, Islamic economics, in essence, provides foundational axioms and
proposes an ethical and systemic understanding of economics and finance based upon
the ontological and epistemological sources of Islam. In addition, from the
interpretation of these axioms, we believe, Islamic economics depicts a socioeconomic system based on free-will, entrepreneurship, innovation, trade and
economic livelihood, all of which are to provide and stimulate social and economic
growth, development, social justice and prosperity within the religious, ethical and
moral codes of the teachings of Islam.
As a result, it shouldn’t be surprising that the modern variant of Islamic economics is
a development that began in the 1970s with an alternative system understanding to the
existing capitalist economic order. In this new discourse, Islamic economics held the
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Knowledge-Based Islamic Economics for Sustainable Economic Development
capitalist economic order responsible for the poverty, failure of economic
development and environmental issues in developing countries. In other words, in the
eyes of the modern Islamic economics, the aim was to suggest, develop and present an
alternative socio-political system complimented by its’ own economics theorey basis
and in turn cure the failures of the capitalist economic order (Asutay, 2007b).
Following this initial spark, Islamic economists have devoted most of their energies to
enumerating and elucidating these axioms in an attempt to distinguish the aims and
justifications of Islamic economics as a valid alternative order (Asutay & Zaman,
2009). However, as Asutay (2007b) notes, in the means of Foucaltian philosophy,
power is central to the definition of social and political meanings, actualisation and
knowledge; Muslims not having such global power were deprived of establishing
their political and, hence, economic order. This weakness, in turn, has consequences
for Islamic finance and its idle development in the recent decades, which will be
briefly discussed in the following section below.
2.2. A path to the second best? Emergence of Islamic finance
The last three decades have witnessed a substantial growth in financial markets
through means of information technology and telecommunications improvements,
regulatory easing and global integration (Rajan, 2005). As a parallel development, and
despite the weaknesses summarised above, Islamic finance industry has also achieved
significant growth at the same period. Today, Islamic Banking and Finance (IBF)
industry is accepted as an integral part of the global financial system and achieved a
certain level of maturity (Asutay, 2011). This strong growth on four bases: First, is the
strong demand from a large number of immigrant and minority Muslims for Shari’ahcompliant financial services and transactions. Second, is the growing windfall profit
from natural resources demanding suitable investments out of the GCC region; and
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Knowledge-Based Islamic Economics for Sustainable Economic Development
third, is the improved competitiveness of Islamic banking and finance products (El
Qorchi, 2005) and finally, fourth, is the increasing concern over the issues such as,
corporate governance, corporate social responsibility and ethicality and morality of
investment strategies (Asutay & Aksak, 2011). As a result of these reasons, Asutay
(2011) argues Islamic banking and finance industry is reaching mainstream relevance
in global economic and financial system by answering the financial requirements and
religious concerns of Muslims; and it will inevitably widen the stakeholder base of
society in economy.
However, this relevant success has come with a price. As Asutay (2007a) notes, with
the rapid development of Islamic finance, research focusing on the foundational base,
namely Islamic economics, has been largely ignored. The main vein of the research
has been devoted to the development of financial assets and instruments. However, as
Islamic economic theory has not developed its operational axioms adequately (which
would have provided the normative framework within which IBF could have
functioned) (Asutay, 2007a), the IBF has implicitly adopted neo-classical assumptions
of the capitalist economic order. The result being that IBF, rather than realizing the
axiomatic aspirations of pioneering Islamic economists and helping to establish socioreligious norms in the form of a moral economy, has actually achieved little more
than a re-marketing of the capitalist debt-peddling model as a pseudo-Islamic
alternative. This failure of IBF has drawn the criticisms of many Islamic economists
recently (Siddiqi, 2004; Hasan, 2005; El-Gamal, 2006; Asutay, 2007a and 2007b and
Nagaoka, 2007). These criticisms can be summarised in two distinct groups. Firstly,
the concept of interest-free banking and finance has been criticized on the grounds
that it is economically not feasible, raising concerns over the issues of efficiency and
costs. It is often highlighted that such an approach would lead to more costly products
making them even less accessible to those in need. If one of the oft-quoted aims of
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Knowledge-Based Islamic Economics for Sustainable Economic Development
Shariah is to safeguard the wealth of the people, then IBF certainly fails here. Another
economic challenge for IBF is the fact that very little of the large amounts of wealth
associated with it have actually reached the Muslim societies in need of such
resources the most.
Secondly, a growing criticism against the process of re-engineering financial products
to make them Shariah-compliant is focussed on the actual validity of the fiqh
(jurisprudence) involved. Some sceptics, such as El-Gamal (2006), have expressed
sound concerns about the governance issues and raised questions about potential
conflict of interests for Shariah scholars who authenticate such contracts as employees
of the industry themselves. In addition, another criticism has risen that such contracts
are designed to circumvent Shariah laws and so violate broader principles or real
maqasid (aim) associated with the prohibition of riba (Asutay & Zaman, 2009). The
consensus of critics in this category is that fiqh is restrictive, outdated and unable to
meet the challenges of the modern capitalist-dominated world economy; and therefore
remains only as a technical approach to economic issues rather than taking into
account policy dimensions which can provide the essential solution for the
development problems of Muslim societies and communities.
To summarise, in its’ current state, IBF is not an integral part of Islamic economics
thought, and thus realising only a small portion of its’ potential affecting
macroeconomic conditions, especially with regard to producing and preserving
wealth, encouraging equity ownership and entrepreneurship, offering financing
channels for the economic actors in need and stimulating economic growth and
development, promoting social justice and prosperity within the religious, ethical and
moral codes of the teachings of Islam. Today, Islamic finance, as the IBF industry,
seems not to be the financing arm of Islamic economic thought which supports
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Knowledge-Based Islamic Economics for Sustainable Economic Development
operations within a broader economic setting, but an independent financialization and
securitisation structure itself. As a result, the dire need for efforts investigating
potential theoretical frameworks for economic settings in parallel to the aspirations of
the founding fathers of Islamic economics, such as economic growth and development
and promoting social justice and prosperity is undeniable. However, as Kahf (2003)
among others, rightfully suggests that Islamic economics cannot be considered
outside the main discipline of economics theory, the conventional economics theory
tackling these issues should be best starting point for the first attempts to establish an
alternative economic thought. In the next section, the original aspirations of economic
growth and development and social justice will be discussed from the conventional
economics point of view.
2.3.Growth and development in economics theory
The quest for explaining the reasons and the mechanisms of continuous growth in
general economies and in per capita income has been one of the oldest in economics
theory tradition. Although these questions were much older, the transformation of
world economic system into industrialisation and beyond has intensified the efforts
for finding the answer for these historical phenomena. Scottish Enlightenment
philosophers David Hume and Adam Smith1 were among the very first to suggest the
accumulation of productive capacity, through the means of improving and increasing
itself, in turn would lead into a wealthier economy.
However, modern economic theory needed to wait for the seminal works of Solow
(1956) and Swan (1956) to formulate this set of age old questions. Their notion of
growth as increased stocks of capital goods showed the relationship between labour,
capital, output, and investment. The main assumption of this model was that countries
1
An Inquiry into the Nature and Causes of the Wealth of Nations
http://econlib.org/library/Smith/smWN.html
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Knowledge-Based Islamic Economics for Sustainable Economic Development
use their resources efficiently and that there are decreasing marginal returns to capital
and labour. From these two premises, the neoclassical model makes three important
predictions. First, since people can be more productive with increasing capital,
increases in capital would provide higher growth than increases in labour. Second, as
a result of the first prediction, poor countries with less capital per person will grow
faster as a result of higher marginal returns of investment in capital in comparison to
richer wealthier countries with higher capital per person. Third, because of these
diminishing returns, economies will eventually reach to a point at which any increase
in capital will no longer create economic growth, called steady state. However, Solow
and Swan suggested that countries can still overcome the steady state plateau and
continue growth by inventing new technology and create knowledge. Technology by
improving the efficiency and effectiveness of the economy increases the steady state
level and the country can still continue investing and grow.
However this treatment of technology and knowledge as exogenous factors of growth
also points out a possible weakness. In addition, various growth rates among the
countries in the long run and the growing attention about the under growing countries
have risen important questions about the model in 1970s and criticisms grew further.
Finally the moral questions about linking the advancement into a mere number of
economic output have also been risen more strongly and the term development has
become more visible.
Tackling the first problem, Romer (1986) and Lucas (1988) have developed the
endogenous growth theory endogenizing technology into the neo-classical model.
Their model also incorporated a new concept of human capital, the skills and
knowledge that make workers productive. More importantly, human capital has
increasing rates of return, providing constant returns to capital, and thus preventing
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Knowledge-Based Islamic Economics for Sustainable Economic Development
economies reaching to steady state. As a result, research investigating the optimal
allocation of investment within different types of capital has flourished. Studies on
this new strand have focused mainly on the reasons that increase human capital (i.e.
education) or technological change (i.e. innovation).
Responding to the second question, especially after the impressive performance of
East Asian economies, economic growth studies have also investigated the variations
in economic growth performances of different economies (Cakota, 1995). One
possible explanation takes its roots from Solow-Swan model and was that the
countries are in constant transition back to their long-run parallel growth paths
(Kocherlakota & Yi, 1995). As a result, if one country performs below its steady state
path, high rates of growth may occur; or alternatively, if performs above the long-run
path, the performance is meant to slow down. A second explanation in the same lines
comes from Ciccione & Matsuyama (1996), which views high growth as a
technological “catch-up” and low growth as technological “falling-behind”.
Another alternative explanation is that the countries are indeed performing to their
long-run growth paths, but these growth paths are not parallel. Application of
endogenous growth theories to individual countries in isolation can make differences
and institutions across countries lead to differences in long-run growth rates (Klenow
& Rodriguez-Clare, 1997).
Finally, and in line with the emergence of the term human capital, measuring the
achievement of the economy strictly with the growth of output has become more
obsolete. As a result, the term “economic development”, incorporating economic
performance with policymaking, community structures, infrastructure, economic
competitiveness, health, education and environmental sustainability has become more
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Knowledge-Based Islamic Economics for Sustainable Economic Development
visible. Today, in the words of Nobel laureate Amartya Sen (1983) “economic growth
is one aspect of the process of economic development”.
2.4. Innovation and KBE: A Viable Alternative?
The review of the literature above shows significant fault lines in between the original
aspirations of the founding fathers of modern Islamic economics and the current state
of the flourishing Islamic banking and finance (IBF) industry. Despite its current
success and impressive growth performances through the last three decades Islamic
finance as a whole has failed to provide the mechanisms to fulfil the original
aspirations of Islamic economics. However, it should be remembered that this
detachment is mutual in the current state. While IBF has failed to answer to the
aspirations of Islamic economic thought, failed to provide mechanisms beyond the
adoption of conventional finance instruments and have become fiqh oriented and
limited itself to the prohibition of riba; Islamic economic thought has also failed to
develop its operational axioms adequately and provide the theoretical basis for IBF to
grow into the direction of the original aspirations. Today, there is no modern links in
Islamic economic thought that can link the current relevant success of IBF into the
aspirations of free trade, entrepreneurship, innovation and economic livelihood, all of
which are to provide and stimulate social and economic growth, development, social
justice and prosperity within the religious, ethical and moral codes of the teachings of
Islam. As a result, a new attempt to establish a economic development theory from
Islamic perspective in line with the current developments in economics theory is
essential. This theory should endogenize technology and human capital development
in a way that can promote efficiency and effectiveness in economies as well as
employing the current relevant success of IBF in itself.
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Knowledge-Based Islamic Economics for Sustainable Economic Development
Putting human development into its core is in no terms foreign to the Islamic
economic thought. In exact opposite, the concept of development permeates through,
and is entwined within, the fabric of Islamic ontological standpoint on the nature of
human being (Asutay & Zaman, 2009). Supporting this view, El-Ghazali (1994) states
“the whole concept of development needs to be reviewed in order to incorporate
human being’s basic needs and not just the rates of growth of simplified development
components”. It is actually note worthy that the emergence of modern Islamic
economic thought coincides with developments in economics theory, where the
shortcomings of neo-classical model excluding the human developments have become
more apparent.
On the other hand, it should be noted that Muslim economies have been aware of such
a necessity for some time now. With the help of favourable macroeconomic
conditions during the last two decades, the Muslim societies have intensified their
efforts to transform themselves to competitive economies in the new globalized world
economic system in order to achieve better development. However, while achieving
better competitiveness position, the efforts were focused mainly on the
macroeconomic stability, building infrastructure and establishing institutions,
especially financial markets. As a result, if The Global Competitiveness Index
Methodology2 of World Economic Forum (Table 1), where Muslim economies have
shown relative success in the last decades, is used as a benchmark, it can be seen that
the competitiveness mainly comes from the basic requirements including the areas
counted above. However, the higher pillars, efficiency and innovation and
sophistication indicators cannot repeat the impressive performance of the first pillar.
2
World Economic Forum and Global Competitiveness Report committee define competitiveness as the
set of institutions, policies, and factors that determine the level of productivity of a country. The level
of productivity, in turn, sets the sustainable level of prosperity that can be earned by an economy. This
set of definitions is in parallel to the development view in Islamic economic thought, and thus is
employed in the paper.
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Knowledge-Based Islamic Economics for Sustainable Economic Development
Table 1: Three main pillars of competitiveness
Source: World Economic Forum, Global Competitiveness Index, 2012-2013 (p: 8)
The latest picture shows that, with the continuation of favourable global
macroeconomic conditions, Muslim economies have also intensified their efforts for
achieving success for the second pillar. Improvements in the market conditions and
efficiencies, investments in high tech industries in order to gain know-how and
establishment of adequately funded higher education institutions.
However, as can be seen in Table 2, despite these continuing and intensifying efforts,
Muslim economies are still gaining their competitiveness from the basic requirements,
but fail to achieve success, with a few exceptions, in the second and third pillar. These
numbers suggest that, although basic institutionalisation and development efforts have
provided results, these are still not been used efficiently. Moreover, the Innovation &
Sophistication factor results, strongly suggest that there is a long way to go for
achieving success in that pillar.
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Knowledge-Based Islamic Economics for Sustainable Economic Development
Table 2: The Global Competitiveness Index of Muslim economies, 2012-13
Country
Overall
Basic
Efficiency
Innovation &
Ranking
Requirements
Enhancers
Sophistication
Qatar
11
7
22
15
Saudi Arabia
18
13
26
29
U.A.E.
24
5
21
25
Malaysia
25
27
23
23
Brunei
28
21
68
62
Oman
32
15
45
44
Bahrain
35
25
35
53
Kuwait
37
32
75
86
Turkey
43
57
42
50
Azerbaijan
46
56
67
57
Indonesia
50
58
58
40
Jordan
64
66
70
52
Iran
66
59
90
77
Morocco
70
68
79
84
Egypt
107
110
101
96
Algeria
110
89
136
144
Bangladesh
118
119
107
122
Pakistan
124
134
98
75
Source: World Economic Forum, Global Competitiveness Index, 2012-2013 (p: 14-15)
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Knowledge-Based Islamic Economics for Sustainable Economic Development
One can suggest, after a more detailed analysis of the Global Competitiveness Report
and indices, that the most successful economies after decades of development efforts
and in the current economic climate are the ones that have successfully managed to
transform themselves into Knowledge-based economies. The knowledge based
economy is the one that emphasizes and makes full use of the role of knowledge in
social and economic growth. This target is achieved through development in two main
areas: technology and human capital. In a knowledge-based economy (KBE), the
development, production, growth and dissemination of information and technology
and development of human capital is essential. Thus, the necessity of transforming
into a knowledge-based economy, at the same time becoming financial and business
hubs is apparent. The higher numbers of the GCC economies in Table 2 also point this
argument. Thus, special emphasis should be given to the efforts on creating an
economic climate encouraging research and development, protecting intellectual
property and improving education. These efforts should aim to create thriving
economies based on innovative management of knowledge based assets. Efficient
educational institutions and intellectual property industries will be of particular
importance to this new economic philosophy and infrastructure.
As a result, this paper aims to assess the current development efforts of Muslim
economies, and their successes and failures in achieving success for the complete
competitiveness picture, discussed above, with special emphasis on Innovation and
Sophistication factors. Mapping the successes and failures, then, the paper is going to
address if there are any characteristic points help Muslim economies for achieving
success or prevent them to develop further. By doing so, the aim extents itself into a
critique of the neo-classical and euro-centric development models and suggesting a
frame for achieving a Knowledge-based economics within the Islamic economic
thought.
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Knowledge-Based Islamic Economics for Sustainable Economic Development
3. Methodology
In order to achieve the aims mentioned above, the paper will first investigate the neoclassical Slow-Swan model as the basic benchmark, where information, knowledge
and innovations are completely exogenous. Second, the paper will contrast these
results with the Knowledge Economics Indicators (KEI) using Knowledge
Assessment Methodology (KAM) of the Worldbank, where the excluded knowledge
and innovation based factors are treated endogenous, in order to assess the influence
of these factors on the economic growth and development of Muslim economies. By
doing so, the paper will be able to map out the characteristics strengths and
weaknesses of Muslim economies from economic development perspective, with
special emphasis on Knowledge-based factors. This mapping will in turn enable us to
evaluate the euro-centric nature of conventional theories, and provide a successful
critique of their shortcomings, especially in relation to Islamic economic thought.
Finally, in the light of these criticisms and analysis, the paper will provide an
alternative paradigm of development from the view of Islamic economic thought.
In order to achieve these, two methodologies, which are both widely used in
conventional economics theory, will be employed as starting benchmarks. The first
methodology will be Solow-Swan model of neo-classical economics, where
knowledge-based factors are treated exogenous.
3.1 Total Factor Productivity
Total Factor Productivity (TFP) is the portion of output not explained by the amount
of inputs used in production in a Solow-Swan economic growth model. As such, its
level is determined by how efficiently and intensely the inputs are utilized in
production (Comin, 2006). Capital and labour services measurements allow to assess
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Knowledge-Based Islamic Economics for Sustainable Economic Development
the contributions of capital and labour inputs to economic growth and to estimate the
contribution of total factor productivity (TFP) (Biatour, Bryon & Kegels, 2007).
This model, pioneered by Solow (1956), starts with a neoclassical production
function;
Y = Af(K,L)
(0.1)
where Y is the GDP, A is the technology level, K is the capital input and L is the
labour input.
∆Y =∆ Af(K,L) + G 
A
K
L

 (1   )
(0.2)
A
K
L
Then the growth rate, G becomes;
G
FK K K
FL L L
Y A
(0.3)



Y
A f ( K , L) K
f ( K , L) L
Under the assumptions of competitive product and factor markets and constant
returns to scale, the production factors are remunerated at their marginal productivity,
which means;
w  AFL
r  AFK
We can then rewrite the growth rate of the economy as;
G
A
K
L

 (1   )
(1.4)
A
K
L
where α is the share of capital in the GDP and (1-α) is the share of labour in the GDP.
19
Knowledge-Based Islamic Economics for Sustainable Economic Development
The part of GDP growth that is not explained by the capital and labour rates of growth
is assumed to be the TFP growth and is called the Solow residual. As discussed
above, this residual allows measuring the amount of economic growth achieved by
innovation, technology and knowledge creation.
3.2 Knowledge Assessment Methodology
The second methodology employed in this research is The Knowledge Assessment
Methodology (KAM) which is developed by the Worldbank’s Institute for Knowledge
programme. KAM is a benchmark tool that enables to measure a country’s position in
relation to the others from a knowledge-based economy perspective. In total KAM
uses 80 structural and qualitative variables that serve as proxies for the four
knowledge economy pillars for 128 countries and 9 regions. Since these 80 variables
span over different ranges of values, they are all scaled from 0 (weakest) to 10
(strongest) and the 128 countries are ranked on an ordinal scale. This research will
employ the variables which are also employed in the World Competitiveness Report
methodology in order to keep its focus in consistency with the other benchmark
studies.
4. Sample and data
The sample which is going to be examined in this study will consist of the 57
members of the Organization of the Islamic Conference (OIC) from the period of
1980 to 2010, depending on the availability of high quality and consistent data. The
data which is going to be used in the TFP analysis will be gathered from Thomson
Reuters Datastream economics and finance database. In order to achieve consistency
and quality data standardized by international organisations, such as Worldbank,
United Nations Development Programme and the IMF will be given priority.
20
Knowledge-Based Islamic Economics for Sustainable Economic Development
In the second stage of our analysis, the KEI of KAM methodology developed by the
Worldbank will be used. The data is available to international research community
and is a useful tool as a common benchmark.
5. Findings and analysis
The findings and analysis section will start by the measurement of TFP values of the
members of OIC and these values are going be contrasted to the KEI values of the
Worldbank for the same sample of countries. Then finally at the third stage, the
results will be further scrutinised by mapping of the common potential weaknesses
and strengths of Muslim economies, and investigate the possible reasons underlying
and supporting them.
5.1 Total Factor Productivity
Our Total Factor Productivity results generated using the methodology discussed
above, are summarised below in Table 3.
The results in Table 3 are indeed provides us a very disappointing picture. First of all,
the TFP values of the OIC member countries do not seem to be improving, but rather
following a steady trend. As a result, they do not show any hope of catching up with
the developed countries. Second, and even more discouragingly, the trends for the
developed countries sampled in two distinct groups in our analysis, OECD member
countries3 and EU-15 countries4 both show relatively positive trends.
3
Only countries with an existing membership in 1995 are included in the analysis. These countries,
are; namely, Australia, Austria, Belgium, Canada, Czech Republic, Denmark, Finland, France,
Germany, Greece, Iceland, Ireland, Italy, Japan, South Korea, Luxembourg, Mexico, Netherlands, New
Zealand, Norway, Portugal, Spain, Sweden, Switzerland, Turkey, United Kingdom and the U.S.A.
4
Namely, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg,
Netherlands, Portugal, Spain, Sweden and United Kingdom
21
Knowledge-Based Islamic Economics for Sustainable Economic Development
Table 3: Total Factor Productivity comparisons
1
0.9
0.8
0.7
0.6
OIC AVERAGE
0.5
OECD AVERAGE
0.4
EU-15 AVERAGE
0.3
0.2
0.1
1961
1964
1967
1970
1973
1976
1979
1982
1985
1988
1991
1994
1997
2000
2003
2006
2009
0
However, these positive trends are also in line with the developments in the
information technologies in 1970s and 1990s. Both groups seem to have benefited
from these technological innovations and made better use of them in comparison to
OIC members and hence the TFP gap between them and the OIC countries are
increasing, with a widening trend.
Another interesting feature of Table 3, is the relatively steady trend for these two
groups during the 1960s. This period also coincides with the time when the economic
growth theories were stagnated and became temporarily insufficient, as discussed
above in the literature review section. However, the following improving trend also
suggests that developed countries of these two groups have benefited from the
academic discussions which transferred the focus from economic growth to a rather
comprehensive term of economic development. This suggestion obviously requires
further discussion
22
Knowledge-Based Islamic Economics for Sustainable Economic Development
5.2 Knowledge Assessment Methodology
Knowledge Assessment Methodolgoy (KAM) frame is developed by Worldbank in
order to assess the current situation and the potential of the countries worldwide.
Starting from 1995, Worldbank reports a set of indices within the KAM frame. The
two main indicators of the KAM frame are Knowledge Index (KI) and Knowledge
Economic Index (KEI). These two indices apart from the Economic and Institution
Regime Index included in the KEI are consisting of the same variables. These other
three mutual indices are; Education Index, Innovation Index and Information and
Communication Technology (ICT) Index. These three indices form the KI alone.
Table 4: Knowledge Assessment Methodology (KAM) frame
Source: Worldbank (2012)
The analysis will be based on the comparisons between the three main distinct groups
employed in this research; OIC, OECD and EU-15 member countries and is going to
start with KEI, the most comprehensive among all.
The results of the KEI index averages of these three international institutions suggest
a disappointing picture, as seen in Table 5. The average values for EU-15 and OECD
23
Knowledge-Based Islamic Economics for Sustainable Economic Development
are much higher in comparison to the average values of OIC member countries.
Moreover, even there has been a slight improvement for the OIC sample, the value
still below the average reported in 1995. In other words, there hasn’t been a
significant improvement since 1995 for the OIC member countries. Our unreported
detailed analysis of individual countries by each of the three criteria presented above
in Table 4, however suggest a mixed picture. First of all, some of the OIC member
countries have achieved much higher results from the general average, especially on
Tariff and Nontariff Barriers criteria. With the increased number of World Trade
Organisation (WTO) memberships among OIC member countries this should be
expected. However, if the attention has moved to the other two criterion; Regulatory
Quality and Rule of Law indicating the legal and regulatory strength of countries, the
gap is still significant. In other words, the KEI suggest there is still a long way to go
for OIC countries on their efforts on institutionalising their regulatory and governance
systems.
Table 5: Knowledge Economic Index averages
10
9
8
7
6
OIC AVERAGE
5
OECD AVERAGE
4
EU-15 AVERAGE
3
2
1
0
1995
2000
2012
If the analysis is moved into the more KBE focused KI, the results presented in Table
6 are indeed suggesting a very similar picture. However, it should also be noted that,
24
Knowledge-Based Islamic Economics for Sustainable Economic Development
albeit slightly, the average values of KI is lower than of the average values of KEI. In
other words, although it is very limited, Economic and Institutions Regime Index
improves the values for OIC member countries. However, as discussed above, this
slight improvement is mainly based on removal of barriers to entry, mainly caused by
WTO membership requirements. The more detailed analysis of these indicators will
be analysed below individually in Tables 7, 8, 9 and 10.
Table 6: Knowledge Index averages
10
9
8
7
6
OIC AVERAGE
5
OECD AVERAGE
4
EU-15 AVERAGE
3
2
1
0
1995
2000
2012
One interesting note on both KEI and KI averages is the slight decrease for both EU15 and OECD member countries. However as shown in Tables 5 and 6, the decline
for OECD countries between 2000 and 2012 has been far more significant.
Unreported country analysis suggest this widening gap is actually the poor
performance of a group of OECD countries, such as; Australia, Switzerland, the
U.S.A., South Korea, Japan, Mexico and Turkey (which is also an OIC member). On
the other hand, the latest results also indicate some OIC member countries have
achieved improvements in the results. For example, Saudi Arabia, Oman, U.A.E.,
Algeria and Azerbaijan are among the countries with highest improvements. In a
specific case Saudi Arabia is the country with highest improvement. However, it also
25
Knowledge-Based Islamic Economics for Sustainable Economic Development
should be noted that, despite these strong performances, none of the OIC member
countries have achieved a place in the top 40.
A parallel picture can be seen for the Economic Incentive Regime Averages reported
in Table 7 below. Because of poorer performances from the countries mentioned
above, there has been a widening gap between OECD member countries and the EU15 members, for the benefit of the latter. In addition, there is a slight improvement
and a continuous increasing trend for the OIC member countries. However, as
mentioned above this improvement is mainly the result of improvements in barriers to
entry, and regulatory and governance structures of OIC member countries still have a
long way to improve in order to continue this improving trend and achieve levels
similar to those of the OECD and EU-15 member countries.
Table 7: Economic Incentive Regime averages
10
9
8
7
6
OIC AVERAGE
5
OECD AVERAGE
4
EU-15 AVERAGE
3
2
1
0
1995
2000
2012
When the analysis shifts to the Innovation Factor Averages as reported in Table 8,
similar results appear again. However, this time the gap between the EU-15 countries
and the OECD member countries is narrower and this is mainly because of slightly
better performances of OECD members in comparison to the previous comparisons.
However, the results for OIC member countries seem to follow a similar route to the
26
Knowledge-Based Islamic Economics for Sustainable Economic Development
KI and KEI averages and indicate a decline in the performances for the period
between 1995 and 2000. In addition, the improving upward trend presented for the
Economic Incentive Regime averages is not present for the Innovation Factor
averages, further supporting the analysis about the relatively stronger performances of
OIC member countries on the economic openness indicators.
Unfortunately, if the analysis is directed to the Education Contribution comparisons,
the same disappointing performance for the OIC member countries is repeated again,
as seen in Table 9. However, this time the performance is steady, and does not show
any indication of decline. On the other hand, this lack of decline does not present a
positive outlook, since the huge margin between the OIC members and the EU-15
countries and OECD members.
Table 8: Innovation Factor averages
10
9
8
7
6
OIC AVERAGE
5
OECD AVERAGE
4
EU-15 AVERAGE
3
2
1
0
1995
2000
2012
The average results for the EU-15 and OECD member countries also show, albeit
very slightly, a decline as well. However, this time the gap between the performances
of these two groups is the minimum of the all six indicators employed. In other words,
it appears that there is slight decline in the performances of these two samples, but the
27
Knowledge-Based Islamic Economics for Sustainable Economic Development
importance given and efforts focused on education contributions are constant for all
countries of these two groups.
Table 9: Education Contribution averages
9
8
7
6
5
OIC AVERAGE
4
OECD AVERAGE
3
EU-15 AVERAGE
2
1
0
1995
2000
2012
The comparisons on the Information and Communications Technology Averages
provide a different story. First of all, the decline for the OECD countries after 2000
again reaches to an important level. However, this time country performances within
the group diversify much more significantly. Although, Australia, New Zealand,
Japan, Switzerland and South Korea show very strong performances, disappointing
performances from Turkey, Mexico and the U.S.A. widens the margin for the benefit
of the EU-15 countries. When it comes to the OIC members, the performances are
again disappointing. First of all, it appears that initially, this was the indicator that the
OIC member averages show the strongest performances and the gap between the OIC
member averages and the other two groups were the minimum. However, the poor
performances of OIC member countries between 1995 and 2000, shifts this initially
promising position to the averages of the other six indicators. On the other hand, this
indicator is the one with the most diverse performances from the OIC member
countries. For example, ICT is the only indicator that has one OIC member, Bahrain,
28
Knowledge-Based Islamic Economics for Sustainable Economic Development
in the top-40. In addition, countries such as Oman and Saudi Arabia also provide
stronger results in comparison to the other OIC members. However, in unreported
country analysis, the Gulf Cooperation Council region countries are the only ones
with significant improvements, whereas the other members are performing in the
same line with the other six indicator averages. In addition, this still provides a
disappointing result, and even with stronger performances, the OIC member countries
does not seem to catch up with the developed members of the EU-15 and OECD in
the near future.
Table 10: Information and Communication Technology averages
10
9
8
7
6
OIC AVERAGE
5
OECD AVERAGE
4
EU-15 AVERAGE
3
2
1
0
1995
2000
2012
Overall, the analysis of Total factor Productivities and six different indicators of
KAM of the Worldbank provide results that are both disappointing and discouraging
for the OIC member countries in comparison to the more developed EU-15 and
OECD member countries. First of all the Total Factor Productivity results indicate
that instead of narrowing, the gap between the capital and labour productivities of the
OIC countries and EU-15 and OECD members is widening for the benefit of the latter
two. Second, the gap between the KEI and KI averages of these three groups seem to
remain on a steady course, which is also suggesting that catching up is not going to be
possible in the near future. However, two areas, Economic Incentive Regime and
29
Knowledge-Based Islamic Economics for Sustainable Economic Development
Education indicators for OIC countries show a slightly upward trend. However, this
upward trend is still inadequate for achieving the levels of the developed economies.
Third, the Innovation and ICT indicator values suggest a sharp decline for the OIC
member economies between 1995 and 2000. This decline is especially significant for
ICT, the factor which had the most promising initial values in 1995. On the other
hand, it should also be remembered that this also coincides with the East Asian and
Russian economic crises, both of which had much more significant impact on the
developing economies, such as the OIC members, instead of more developed
economies of EU-15 and OECD members. It is also promising that, after the affects of
these negative factors have disappeared, the efforts from the OIC countries on these
two indicators seem to have reached to the pre-crises levels. Finally, the diverse
values of performances from OIC member countries which are unreported in this
study, it is necessary to have detailed analyses of individual country performances for
all sub sections of Human Development Index and KAM.
6. Conclusion
It is evident that Islamic economics and finance has progressed a long way in the last
couple decades. Today Islamic finance is one of the hottest topics in the banking and
finance industry, with almost double digit annual growth through the last decade. In
parallel, the wider macroeconomic performances of the OIC member countries also
show promising results. Within the last decade three OIC members, Saudi Arabia,
Indonesia and Turkey achieved strong economic growth and have solidified their
positions among the twenty largest economies globally. Moreover, if the analysis
moves to the wealth and prosperity per person, there are also impressive performances
from OIC members; Qatar, United Arab Emirates and Kuwait are among the top 20
globally for per person income.
30
Knowledge-Based Islamic Economics for Sustainable Economic Development
However, when the focus moves from the growth to development of the countries and
societies, this rosy picture of impressive performances becomes pale and fades away.
United Nations Human Development Index, the most comprehensive benchmark for
development of economies suggest that, even the richest of the OIC members have
achieved level of developments only comparable to economies much smaller and
much less wealthy. Remembering the paramount importance of development in Islam
and the aspirations of the founding fathers of the modern Islamic economic thought,
these results suggest stark contrast and a bitter feel of failure.
The analysis of Solow residual, which is a measure of innovation, development and
technological achievement supports the analysis above, but also provides another set
of results for Muslim economies. Even worse, instead of suggesting an improvement
for the OIC member countries side, the gap between the developed world and the
developing economies of the OIC members is constantly widening with the support of
increased number of innovations, technological developments, improved efficiency
and productivity.
As suggested above, the path to development seems to be running on the grounds of a
knowledge based economics frame. It is not a coincidence that the indicators that are
employed constructing the Human Development Index are almost exactly the same as
the indicators that construct the Knowledge Assessment Methodology frame and
Knowledge and Knowledge Economy indices.
However, the poor performances of the OIC member countries, despite individual and
temporary improvements in all six sections of KAM prove that, unfortunately the path
for the ultimate aim of human development for Muslim economies is still far away.
However, the diverse results within the member countries for different indicators
prove that a further and more detailed analysis is required on the subject.
31
Knowledge-Based Islamic Economics for Sustainable Economic Development
The authors of this study suggest that establishing an economic development model
based on the frame of Knowledge-Based Economics is of a paramount importance. It
should not be forgotten that the emergence of modern Islamic economic thought in
the 1960s and 1970s was mainly a reaction to the neo-classical growth models
suggesting an ever existing gap between the rich and the poor and that cannot provide
a solution narrowing this gap. Since the macroeconomics theory has moved its focus
to development rather than growth, while endogenousing innovation, knowledge
creation and technological improvements. It is clear that the move for Islamic
economics should be in the same direction. However, creation of knowledge,
intellectual property rights, such as; patents, copyrights as well as the monopolistic
rights provided to the developer in the conventional economics do not have a
reflection in the Islamic economics yet. This limitation is still the biggest obstacle
against establishing an Islamic development economics based on knowledge based
economic frame.
32
Knowledge-Based Islamic Economics for Sustainable Economic Development
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