Joint Publisher THE INTERNATIONAL INSTITUTE OF ISLAMIC THOUGHT The International Institute of Islamic Thought was founded in 1401AH/1981 AC to revive and promote Islamic thought and strive for Islamization of knowledge in the contemporary disciplines. It also explores the potential to package knowledge in specifically Islamic disciplines derived from Tawhid and the Shari‘ah. The Institute publishes scholarly works from its own programmes as well as contributions from scholars around the world. It also makes important Islamic scholarly works available in Arabic, English and other major languages of the world. The Institute welcomes all kinds of academic cooperation and contributions from all sources concerned with the progress of Islamic thought and knowledge. ISLAMIC RESEARCH INSTITUTE Islamic Research Institute Islamabad was established in 1960 with a view to undertake and publish research in Islamics and interpret Islamic teachings in the context of the modern world: to identify the problems facing the Muslim ummah and to develop a methodology of research adequate for the Institute's areas of interest. Apart from publishing, three research journals, al-Dirasat al-Islamiyyah in Arabic, Fikr-o-Nazar in Urdu. and Islamic Studies in English, which have been appearing regularly for about thirty years, the Institute has also published more than one hundred research works, monographs and translations in different fields of Islamic learning. It has a particularly outstanding record of research and publication in the field of Islamic law and jurisprudence. The Institute has also been cooperating with other learned bodies in Pakistan and outside to promote Islamic scholarship. With its publications, seminars and workshops, the Institute has continuously assisted people in their quest for a better understanding of Islam and the Muslims. ﻓﺈﻣﺎ ﻳﺄﺗﻴﻨﻜﻢ ﻣﻨﻲ هﺪى ﻓﻤﻦ ﺗﺒﻊ هﺪاى ﻓﻼ ﻳﻀﻞ وﻻ ﻳﺸﻘﻰ وﻣﻦ أﻋﺮض ﻋﻦ ذآﺮى ﻓﺈن ﻟﻪ ﻣﻌﻴﺸﺔ ﺿﻨﻜﺎ (ﺳﻮرة ﻃﻪ ، ١٢٣-١٢٤) Should My guidance come to you, whoever follows My guidance shall not go astray, nor suffer from hardship. However, whoever turns away from My Message, for him there will be a life of distress. (Qur’an 20:123-24) واﺑﺘﻎ ﻓﻴﻤﺎ ﺁﺗﺎك اﷲ اﻟﺪار اﻵﺧﺮة وﻻ ﺗﻨﺲ ﻧﺼﻴﺒﻚ ﻣﻦ اﻟﺪﻧﻴﺎ و أﺣﺴﻦ اﷲ إﻟﻴﻚ وﻻ ﺗﺒﻎ اﻟﻔﺴﺎد ﻓﻲ اﻷرض ، ان اﷲ ﻻ ﻳﺤﺐ اﻟﻤﻔﺴﺪﻳﻦ. (ﺳﻮرة اﻟﻘﺼﺺ،٧٧) And seek the abode of the Hereafter by means of what God has given you, but do not neglect your share in this world. Do good to others just as God has done good to you. Do not aim to cause mischief on earth, for God does not love mischief makers. (Qur’an 28:77) ﻋﻦ اﺑﻦ ﻋﺒﺎس رﺿﻲ اﷲ ﺗﻌﺎﻟﻰ ﻋﻨﻪ ، ﻗﺎل ﺳﻤﻌﺖ اﻟﻨﺒﻲ ﺻﻠﻰ اﷲ ﻋﻠﻴﻪ وﺳﻠﻢ ﻳﻘﻮل : ﻟﻴﺲ اﻟﻤﺆﻣﻦ اﻟﺬي ﻳﺸﺒﻊ و ﺟﺎرﻩ ﺟﺎﺋﻊ . ( رواﻩ اﻟﺒﺨﺎري ﻓﻲ اﻷدب اﻟﻤﻔﺮد ، ﺑﺎب ﻻ ﻳﺸﺒﻊ دون ﺟﺎرﻩ ) The Prophet, peace and blessings of God be on him, said: “He is not a Muslim who eats his fill when his neighbour his is hungry” (Reported by al-Bukhari from Ibn ‘Abbas in al-Adab al-Mufrad, “Bab la Yashba‘u duna jarihi”) ISLAMIC AND ECONOMIC DEVELOPMENT ISLAMIZATION OF KNOWLEDGE -14 Series Editor in Pakistan: Zarar Ishaq Ansari ISLAM AND ECONOMIC DEVELOPMENT A Strategy for Development with Justice and Stability M. UMER CHAPRA International Institute of Islamic Thought and Islamic Research Institute First published in Pakistan in 1993 by the International Institute of Islamic Thought, Islamabad and Islamic Research Institute, Islamabad c 1993 All rights reserved. International Institute of Islamic Thought. P.O Box 1959. 28. Main Double Road. F-10/2, Islamabad,. Pakistan. Phone 92-51-851621 Fax: 92-51-280489 Cataloguing in Publication Data Chapra. Muhammad Umer, 1933 Islam and Economic Development: A Strategy for Development with Justice and Stability/ M. Umer Chapra (Islamization of Knowledge-14) Notes and References :pp. 133-154 ISBN 969-462-006-6 1. Economic Development - Religious Aspects - Islam. 2. Economic development 338 .9 dc 20 Printed in Pakistan by Islamic Research Institute Press Islamabad To my children Maryam, Anas, Sumayyah and Ayman and to all members of the future generation whose well-being depends on the adoption of the Islamic strategy for development with justice and stability CONSENTS Preface ix Foreword xi Introduction 1 One: The Kind of Development 3 Stability and Socio-Economic Goals 3 Goals. Strategy and World-View 3 Islamic World-View 5 Goals of Islam (Maqasid al- Shari‘ah) 6 The Basic Thesis 7 Efficiency and Equity 7 Elements of a Successful Strategy 8 Need for a New Strategy 9 Two: Can Secularism Foster Just Development? 11 Inequity of the Market Strategy 12 The Rationale 13 Unrealistic Assumptions 14 Harmony Between Individual and Social Interests 14 Individual Preferences Reflect Social Priorities 15 Equal Distribution 15 Prices Reflect Urgency of Wants 15 Market Imperfections 16 Social Darwinism 16 Crisis of the Welfare State 16 Inequity of the Socialist Strategy 18 Lessons for Developing Countries 20 i Three The Inconsistency of Development Economics: 21 Pessimist outlook 23 Dominant Government Role 25 Neglect of Equity 26 Sterile Controversies 28 Agriculture versus Industry 29 Import-Substitution versus Export Promotion 30 Unanticipated Problems 35 Inflation 36 Debt Burden 37 Planning Difficulties 37 Resurgence of Neo-Classical Economics 39 The Crucial Question 41 Contents of Liberalization 42 Just Development in the Far East 44 Factors Responsible for Just Development 45 Government Role 45 Land Reforms and Wealth Distribution 46 Social Equality 47 Labor-Intensive Techniques 48 Cultural Values 49 Import Control and Export Promotion 50 Low Defence Spending 51 A Peep into the Future 51 The Missing Link 55 ii Four: The Islamic Strategy 59 Important Elements of the Strategy 59 1. Equitable Filtering of Excess Claims 59 2. Motivation 60 3. Socio-Economic Restructuring 61 4. Role of the State 62 Five Policy Measures 63 1. Invigorating the Human Factor 64 Motivation 65 Socio-Economic Justice 65 Rural Uplift 66 Labour Reforms 66 Fair Return to Small Depositors and Shareholders 69 Justice to Producers, Exporters, and Consumers 69 Moral Transformation 70 Ability 71 Education and Training 72 Access to Finance 73 2. Reducing Concentration in Ownership 73 Land Reforms and Rural Development 74 Size of Landholdings 75 Terms of Tenancy 76 Rationale and Objections 77 Rural Development 79 Proliferation of Small and Micro Enterprises (SMEs) 80 Wider Ownership and Control of Corporations 81 Activation of Zakah and Inheritance Systems 82 iii Zakah: The Social Self-Help Programme 83 Inheritance 83 Restructuring the Financial System 83 3.Economic Restructuring 84 Changing Consumer Preferences 84 Introducing the Moral Filter 85 Needs and Luxuries 85 Liberalising Need Fulfillment 86 Reforming the Public Finances 87 Priorities in Government Spending 88 Principles of Public Spending 89 Where to Cut 91 Corruption, Inefficiency and Waste 91 Subsidies 92 Public Sector Enterprises 93 Defence 93 Tax Reform 95 Restrained Deficits 95 Financing Deficits Islamically 96 Restructuring the Investment Climate 97 Removing the Hurdles 99 Political Uncertainties 99 Exchange Controls and Currency Depreciation 100 Tariffs and Import Substitution 101 Bureaucratic Controls 102 Foreign Equity Capital 102 iv Need-based Production 103 A New Deal for the Unemployed and the Underemployed 104 Promoting SMEs 104 Essential Measures 107 4. Financial Restructuring 109 5. Strategic Policy Planning 113 Five Why the Failure? 117 Need for Political Legitimacy 117 Criteria for a Sound Political Order 118 Satisfying the Criteria 121 Role of the ‘Ulama’ 122 Two Forms of Change 123 SIX: Conclusion 125 Suggestions for Further Reading 131 NOTES AND REFERENCES 133 BIBLIOGRAPHY 155 INDEX 162 v PREFACE Islamic Economics is now being taught in many universities around the Muslim world. Hence, the need has increased considerably for studies on different fields of economics to reflect the Islamic world-view. Since almost all Muslim countries fall within the category of developing countries, the need for a textbook on development economics has also been long felt. Although some textbooks have already become available on the subject, there is still need for a textbook that critically evaluates the neo-classical and socialist strategies for development to show why they cannot enable the Muslim countries to realize their own vision of development, and to help them formulate a strategy that is in harmony with the Islamic world-view and ideals. The present book, prepared on the suggestion of some friends, is an attempt to fulfill this need. This book is the expanded version of a paper presented by me at a seminar on Islamic Economics held in Cairo in September 1988 under the auspices of the International Institute of Islamic Thought, Herndon, Va. (USA) and the al-Azhar University, Cairo (Egypt). The ideas expressed in this paper were derived from my book, Islam and the Economic Challenge. which was under preparation at that time, but which has now been published jointly by the Islamic Foundation, Leicester, U.K., and the International Institute of Islamic Thought. Consequently, the present work also reflects the ideas expressed in Islam and the Economic Challenge and draws freely on the materials contained in the chapters relevant to economic development. All this effort was directed to producing a book that would at once be of interest to all those who wish to understand the Islamic perspective on development and serve as a text-book for use by university students as well. While all references have been given in the relevant notes, the references to the Qur’an have been given within brackets immediately after the citation, the first number referring to the surah (chapter) and the second to the ayah (verse). The translation is my own; however, I have benefited from the translations of Abdullah Yusuf Ali, T.B. Irving, and Muhammad Asad. ix I am particularly grateful to brother Dr. Zafar Ishaq Ansari for the encouragement he has provided in the preparation of this book and for the time he has spent in reading the manuscript and making a number of valuable suggestions for improvement.