ISLAMIC ECONOMIC CO-OPERATION

Transcription

1 ISLAMIC ECONOMIC CO-OPERATION

2 Also by Masudul Alam Choudhury CONTRIBUTIONS TO ISLAMIC ECONOMIC THEORY POLITICAL ECONOMY OF DEVELOPMENT IN ATLANTIC CANADA (editor) POLICY-THEORETIC FOUNDATIONS OF ETHICO-ECONOMICS (editor) THE PARADIGM OF HUMANOMICS AN ISLAMIC SOCIAL WELFARE FUNCTION MANPOWER PLANNING AND POLICIES IN SAUDI ARABIA

3 Islamic Economic Co-operation Masudul Alam Choudhury Associate Professor of Economics University College of Cape Breton Sydney, Nova Scotia, Canada Preface by Ozay Mehmet Professor of International Affairs The Norman Paterson School of International Affairs Carleton University, Ottawa, Canada Foreword by Syed Ahmad Professor of Economics McMaster University Hamilton, Ontario, Canada Palgrave Macmillan

4 ISBN ISBN (ebook) DOI / Masudu1 Alam Choudhury, 1989 Preface Ozay Mehmet, 1989 Foreword Syed Ahmad, 1989 Softcover reprint of the hardcover 1st edition 1989 All rights reserved. For information, write: Scholarly and Reference Division, St. Martin's Press, Inc., 175 Fifth Avenue, New York, N.Y First published in the United States of America in 1989 ISBN Library of Congress Cataloging-in-Publication Data Choudhury, Masudul Alam, Islamic economic co-operation/masudul Alam Choudhury. p. em. Bibliography: p. Includes index. ISBN (est.) 1. Islamic countries-economic policy. 2. Islamic countries -Economic intergration. I. Title. II. Title: Islamic economic co-operation. HC499.C '671-dc CIP

5 To my parents who have shown me the light of day

6 0 mankind! We created You from a single (pair) Of a male and a female, And made you into Nations and tribes, that You may know each other (Not that you may despise Each other). Verily The most honoured of you In the sight of God Is (he who is) the most Righteous of you. And God has full knowledge And is well acquainted (With all things). Quran (s.xlix, v.13)

7 Contents List of Tables List of Figures List of Meanings of Arabic Transliterations Acknowledgements Notes on the Contributors Preface by Ozay Mehmet Foreword by Syed Ahmad Introduction ix xiv xvii xviii xx xxiii xxvn xxix 1 The Humanomic Structure of Islamic Economic Theory 1 Technical Appendix 20 2 Decision-making under Consensus: The Case of Economic Co-operation 23 3 Critique and Alternatives to Contemporary Approaches in International Economic Co-operation 42 4 The Idea of Islamic Economic Co-operation in Contemporary Perspectives 66 Technical Appendix 89 5 Principles and Instruments of Islamic Economic Co-operation 94 6 Resource Endowment and Allocation in Islamic Countries for Economic Co-operation 133 Technical Appendix 151 Appendix M. Anuar Adnan and M. Zainuddin Saleh Some Critical Issues in Development Financing for the vii

8 viii Contents Low- and Middle-Income Countries with a Special Reference to Selected Islamic Countries 159 Technical Appendix Inter-Islamic Economic Co-operation and Integration: Institutions, Strategies and Obstacles Volker Nienhaus Appropriateness of the Basic Needs Approach to Regional Economic Co-operation among Islamic Countries Application of Optimal Debt Financing and Managed International Trade Arrangements to Islamic Countries Privatisation of the Islamic Dinar as an Instrument for the Development of an Islamic Capital Market The Potential for Labour Mobility Between Islamic Countries as an Example of Islamic Economic Co-operation: the Case of the Arab Gulf Region in the 1980s Manpower Exchange and Social Security System for Islamic Economic Co-operation 316 Technical Appendix The Potential Impact of Islamic Economic Co-operation on the World Economy Volker Nienhaus and Masudul A. Choudhury Islamic Economic Co-operation in the South-South Context Uzir A. Malik Conclusion 411 Notes and References 420 Index 443

9 List of Tables 2.1 Volume of inter- and intra-trade for industrial and developing countries, 1984 (millions of US dollars, percentages) Bilateral and multilateral ODA to LDCs, by purpose, Distribution of total ODA to LDCs, required and forthcoming, by purpose, ODNGNP ratios of DAC, , projections to 1985 (percentages) ODA shares for selected Islamic developing countries, (percentages) ODNGNP ratios for selected developing countries, (percentages) Comparative statistics on government expenditure and GDP, Sub-Saharan Africa and other countries (percentages) Distribution of financing commitment by sector and institution, Projections on the resource position of the Islamic Development Bank and the resulting use of foreign trade financing funds (millions of US dollars) Comparative trends in principal modes of project financing by the Islamic Development Bank in view of their potential in creating an Islamic capital market (millions of US dollars) Operations by type of financing by the Islamic Development Bank (millions of US dollars) Sectoral percentage distribution of project financing by Islamic Development Bank Growth of production by sectors for selected Islamic countries, , I (average annual growth rate of GDP) Growth of production by sectors for selected Islamic countries, , II (average annual growth of GDP) Structure of production by sectors for selected ix

10 X List of Tables Islamic countries, , I (GOP in millions of US dollars; sectoral distribution in percentage) Structure of production by sectors for selected Islamic countries, , II (GOP in millions of US dollars; sectoral distribution in percentage) Structure of labour force in selected Islamic countries (percentages) Structure of demand for selected Islamic countries I, (percentage distribution of GOP) Structure of demand for selected Islamic countries II, (percentage distribution of GOP) Growth of merchandise trade for selected Islamic countries, , I (trade in millions of US dollars; average annual growth rate of exports, imports) Growth of merchandise trade for selected Islamic countries, II (trade in millions of US dollars; average annual growth rate of exports, imports) External sector indicators for selected Islamic countries (millions of US dollars; percentages) Official development assistance net disbursements to selected Islamic countries (millions of US dollars) Relationship between OOA and current account balances for Islamic countries (millions of US dollars) Gross domestic product by selected sectors for Bangladesh, Indonesia and Malaysia, 1983 (millions of US dollars, percentages) Share of intra-trade in Islamic industrial and developing countries (percentages) Some principal economic indicators for the lowincome countries, , actual and estimates, , projections Some principal economic indicators for the middleincome countries, , actual and estimates, , projections Tests of statistical reliability for the regression coefficients of estimated equations for the low-income countries Tests of statistical reliability for the regression coefficients of estimated equations for middle-income countries Average annual rate of growth of GOP in industry

11 List of Tables xi and manufacturing, Bangladesh, Malaysia and Turkey, 197(} Working age population and labour force growth for Bangladesh, Malaysia, Turkey, 197(} Total net disbursement of external resources to Bangladesh, Malaysia, Turkey, Malaysia: gross domestic product by sector of origin, 197(}-90 (M$ million in 1970 prices) Trends in capital expenditure, lending and interest payments, Malaysia, (millions of ringgit) Malaysia: employment growth, 198(} Malaysia: structure of gross manufactured exports, 1975, (millions of ringgit) Sectoral distribution of gross national product for Turkey, 1978, 1983 (amounts in 1978 constant prices, billions of Turkish lira) Turkey: financing of investments by SEEs (billions of Turkish lira) Membership of OIC countries in economic cooperation and integration groupings (February 1986) Summary of approaches for economic co-operation and integration among Islamic countries Basic economic data of Islamic countries, Selected economic indicators comparing the situations of developing and industrialised economies, Selective indicators on trade and OPEC-ODA flows in developing countries, 198(} Annual percentage changes in exports, imports and terms of trade for selected low- and middle-income Islamic countries, 196(} External sector indicators for selected low- and middle-income Islamic countries, 198(}-3 (millions of US dollars, percentages) Principal external accounts statistics for producers of manufactures in the developing countries, Principal external accounts statistics for producers of primary products in the developing countries, Savings from export revenue derivable through debt cancellation using ODA in developing countries,

12 xii List of Tables (bilateral ODA only) Savings from export revenue derivable through debt cancellation using ODA to Islamic low- and middle-income countries, ECU and SDR denominations in private markets (millions of SDRs) Turkish emigration to European, Middle East and North African regions (thousands) Estimates of national non-national breakdown of the labour force in selected oil-rich Arab states, 1980 (thousands) Saudi and non-saudi composition of sectoral employment, Saudi Arabia, and (thousands) Major capital projects profile in the United Arab Emirates Estimates of the inter-country breakdown of construction labour demand for the UAE, Financial requirements for economic resource development under the Saudi Third Development Plan Estimated labour demand profile by industries and occupations, Saudi Arabia, (thousands) Estimates of labour demand by nationalities in the capital-rich Middle East countries, (thousands) Branches of social security covered in the member states (as of end 1979) List of ratifications of the Convention (No. 118) on the equality of treatment (Social Security), as of December Origin and destination of merchandise exports Origin and destination of manufactured exports Structure of merchandise exports I Structure of merchandise imports II Balance of payment and reserves for selected countries External public debt and debt-service ratio Official development assistance Organisations and memberships of Arab economic co-operation Basic socio-economic indicators of LAS and CAEU member states 394

13 List of Tables xiii Values of merchandise trade of LAs-CAEU for the years 1978, 1981, 1984 (US dollars, millions) Shares of main categories of exports in total exports for selected OIC countries Shares of main categories of imports in total imports for selected OIC countries Financing approved by Islamic Development Bank for selected years (Islamic dinar, millions) 408

14 List of Figures 1.1 Principle of Ethical Endogeneity Interrelationships among principles and policy instruments in an Islamic economy Mappings between social consensus sets and between social conflict sets Shape of the social welfare transformation in an Islamic economy Condition for optimal trajectory of state variables in the Islamic economy Dynamic version of the Islamic social welfare transformation Consensus formation through interactive decision process in co-operative projects with socio-economic indi- ~~ ~ 2.2 Social pricing principle in the simplified case Social pricing principle in the general case Social welfare mapping on consensus decision-sets Selected interrelationships among economic principles and instruments in the Islamic economy The economic benefits of foreign trade financing The Islamic implications on resource mobilisation and modes of project financing A diagrammatic view of trends in principal modes of project financing by the Islamic Development Bank in regards to their potential for creating an Islamic capital market An adverse benefit situation in international trade through high commodity-specific differential import tariff A case of immiserizing growth resulting from high commodity-specific differential import tariff Effects of sudden and adjusted return to free trade Net gains from international trade with negotiated tariffs Short-run and long-run pricing of an Islamic co-operative good 107 XIV

15 List of Figures xv 5.6 Short-run and long-run pricing of an ordinary co-operative good Inter-temporal allocation of resources to consumption and investment Responses to external sector policies in a profit-rate regime of resource allocation Dynamic effect of foreign trade financing instrument in accelerating the process of tariff reduction in a regime of negotiated tariffs Typical organisation chart for PBME (Project Benefit Monitoring and Evaluation) unit and consultative committee Policy implications relating to exports, production, external resources and external debt for the low- and middle-income countries Interrelationship among the derived relationships in capital, employment, export revenue and external resources, for low-income countries Interrelationship among the derived relationships in capital, employment, export revenue and external resources for middle-income countries The structure of the OIC system Protection and stimulation in a CDU Productive transformation of labour across stages of economic development Establishing equity-efficiency simultaneity through incomes policy Imports and external borrowing as principal factors in the improving current account balances of the principal producers of manufactures, developing countries, Imports and external borrowing as principal factors in the improving current account balances of the principal producers of primaries, developing countries, Price setting and benefits in a critical commodity board arrangement Integration among the goods market, investment market and money (/D) market in an Islamic economic union 277

16 List of Figures 11.2 Macroeconomic aggregation from country level to the level of Islamic economic union Economic equilibrium in the Islamic capital market FF-curve as a relationship in national income and exchange rates set by TB- KB FF-curve as a relationship in national income and interest rates Optimal portfolio mix for an Islamic capital market Destabilising effect of crowding-out investment in the Islamic capital market A.1 Optimal choice of reserve and relative risk-pricing for Islamic mutual insurance; (a) family of reserve-profit rate combinations and optimal choice of insurance reserve; (b) choice of optimal relative risk-pricing corresponding to the optimal reserve Sets and intersets of Muslim co-operation 390

17 List of Meanings of Arabic Transliterations Bait al-mal Falah Hiba lbadah Ijtehad Israf Muamalah Mudarabah Murabaha Quran Rib a Salam Sarf Shariah Shura Sunnah Sura Taqwa Taw heed Tazkiyah Ulema Umma Waqf Zakat(h) Public treasury during the early Islamic period. Welfare Gift Islamic worship Authoritative Islamic research that must be ratified for validity by the Islamic community or the Islamic learneds. Wasteful consumption Knowledge of worldly affairs Islamic profit-sharing in joint ventures Foreign trade financing The revealed book to Prophet Muhammad as eternal guidance to all of humanity and to Muslims in particular Financial interest Exchange of monetary value for determinate thing Exchange of one monetary value for another monetary value Islamic law Democratic consultative body in the Islamic state Practices of Prophet Muhammad, extendable also to 'hadith', the sayings of Prophet Muhammad, that elaborate on various verses of 'Quran' and principles of Islamic practices Chapter of Quran God consciousness Unity of God Purification of self Islamic scholars The Islamic nation Islamic endowment property Islamic wealth tax xvii

18 Acknowledgements This book consists of several chapters that were developed as major conference papers written and presented over a period of time and I remain thankful to my travel grantees, the University College of Cape Breton, the Third World Academy of Sciences (Trieste, Italy) and the Canadian Economics Association, who made it possible for me to present the papers at the learned conferences. I am grateful to UCCB for partially funding the production of the manuscript and to Macmillan Press Ltd for advancing a portion of royalty on this book towards covering the remaining cost of producing this manuscript. I also thank Macmillan Press Ltd for setting up the Memorandum of Agreement on this book early enough to enable me to start work on it swiftly. My thanks go also to Professor Volker Nienhaus, Professor Uzir A. Malik, Professor Anuar Adnan and Professor Zainuddin Saleh, for their contribution of chapters to this book. In all other cases, I have duly acknowledged the journals and books in which portions of other chapters of this book had earlier appeared. Finally, I remain grateful to Professor Ozay Mehmet and Professor Syed Ahmad for their considered preface and foreword to this book. MASUDUL ALAM CHOUDHURY XVlll

19 The Contemporary Islamic World "' \;1 l-..., ' d,. _..., (.,.,-.. _l,.,, t:-'-...,... J,...,- \ ---} ~ ~--\.., r' '1,-'- tj L._~ \--... Nouakchott Libreville <il Capital of Member Ststes of the Islamic Development Bank. D Member States of thll Organization of the Islamic Conference. Areas with Pre-dominsr'ltly Muslim Communities. Areas wi th Majot Muslim Communities. Source: The Islamic Development Bank (Jeddah, Saudi Arabia, 1986) The Eleventh Annual Report. ><I ~

20 Notes on the Contributors Dr Muhammad Anuar Adnan is Associate Professor in the Department of Economic Development and Planning, the National University of Malaysia (Universiti Kebangsaan Malaysia). He earned his doctorate degree in economics from the University of New South Wales, Australia, writing his thesis on 'The Petroleum Industry in Malaysia'. He spent his sabbatical between 1985 and 1986 at the Imperial College, University of London, and at the Institute of Petroleum, London, of which he is a Fellow. Dr Anuar Adnan also taught at the Universiti Brunei Darussalam during Dr Mohammad Zainuddin Saleh is Lecturer in the Department of Economic Development and Planning, the National University of Malaysia. He earned his Masters in Economic Development from the University of Leicester, UK, in 1977 and his Doctorate in Economics from the University of Colorado at Boulder, USA, in His doctoral thesis was entitled 'A Structural Model for Malaysian Balance of Payments'. He has written several economic papers in national journals. Dr Uzir Abdul Malik is Associate Professor in the Department of Agricultural and Resource Economics, the National University of Malaysia. He has held various academic positions as head of department, deputy dean and dean of economics between 1974 and He earned his doctorate degree from the University of London and has also done graduate work at the Department of Economics, University of Hawaii. His major areas of research interest are resource economics, agricultural economics and Islamic economics, and he has published papers in these areas in national and international journals. Currently he is on sabbatical secondment as Deputy Vice-Chancellor, Student Affairs, to Universiti Uttara, Malaysia. Dr Volker Nienhaus is Professor of Economics at the Faculty of Economics, University of Bochum (FR Germany). His main fields of research are political economy, international economics, comparative economic systems and Islamic economics. He has authored six books, subjects including an introduction to Islamic economics (1982, XX

21 Notes on the Contributors xxi German), Islamic banking (1984, German) and economic cooperation among Islamic countries (1986/7). He has also written numerous articles and conference lectures on Islamic economics and finance in European and Muslim countries.

22 Preface Economic co-operation amongst Muslim countries is an important subject and this book by Dr Masudul Alam Choudhury is a welcome addition to the literature. Good theory must always precede good policy design. Before Islamic economic co-operation is applied to its fullest potential, it is essential that the principles of such co-operation are clearly spelled out to guide realistic policy-making. This book is an introduction to the required theories and principles. But it is not a purely theoretical study. The book provides some quantitative analysis, especially on the topics of development finance, labour mobility and industrial development. It deserves careful attention by all who are concerned with the subject of Islamic economic cooperation. In Islam, time is both an economic resource as well as an ethical value. Man is not only an 'economic man' concerned with production, consumption and material ends; he is also a pilgrim travelling on the True Path in submission to God through Ibadah and Muamalah, always searching God for his final and permanent reward after the Day of Judgement. Therefore, for Muslims economics is 'social economics'. One of the major attributes of this book is the fact that the chapters in it are squarely placed in the context of an 'ethico-economic' model to guide Islamic economic co-operation consistent with the universality of Islam implied in Tawheed. Modern economics is a relatively new discipline for the Muslim countries. This is a major deficiency, especially in view of the fact that one of the greatest economists of all time was Ibn Khaldun ( ). His great study, Muqaddimah, besides being a pioneering work of history and sociology, was also a major treatise on economic theory. Ibn Khaldun's economics was 350 years ahead of Adam Smith, who is generally regarded as the 'father of modern economics'. In fact, the Muqaddimah contained several economic theories generally attributed to Adam Smith, ideas which included early statements of the principle of division of labour, the labour theory of value, competitive pricing, absolute and comparative advantage, etc. Unfortunately, however, traditional Ulemas dismissed Ibn Khaldun as a 'nonconformist', lost to Islamic scholarship. Until very recently, he has found more respect in the West than in such Islamic centres of learning as the AI Azhar. xxiii

23 XXIV Preface The contemporary relevance of Ibn Khaldun's economics lies in the fact that he provided a solid foundation of economic theory which other Ulemas could, but regretably failed to, build upon. Specifically, Islamic economic theorising has failed to move beyond the perfect competition model. Perfect competition is an ideal. It does not exist in reality. Markets, especially international markets, are imperfect, dominated by monopolies, oligopolies and cartels. In neoclassical economics, Joan Robinson and Neil Chamberlin have pioneered the development of monopolistic or imperfect competition to deal with the realities of modern markets, and arguably the most fertile frontier of modern economics is in the domain of imperfect competition. Islamic economists have to develop similar theories. The theory underlying Islamic Economic Co-operation is that of perfect and modified perfect competition (the competitive-cooperative model in Chapter 5). The neoclassical general equilibrium model is first utilised to demonstrate the theoretical benefits of trade financing between Islamic countries (Chapter 4). But, quite properly, the perfect competition model is modified to accomodate Islamic principles (Chapters 1 and 2). This modified perfect competition or the competitive-co-operative model is then applied to a number of development policy issues such as debt and trade financing, economic integration, basic needs, currency and capital markets based on an Islamic Dinar, and manpower policy. The Islamic system of international trade which is designed is a 'managed' system, lying mid-way between a competitive free trade model and a protective model (Chapter 10). Elsewhere a Cobb-Douglas-type macro model is constructed to evaluate the patterns of industrial development in Turkey, Malaysia and Bangladesh (Chapter 7). Additionally, a common manpower exchange and social security system for the Islamic countries is proposed (Chapter 13) and the case of labour mobility in the Gulf is empirically examined (Chapter 12). There is a wealth of information, both theoretical and empirical, which has been assembled in this volume, and, for those who are more technically oriented there are several technical appendixes. The authors have done a commendable job and, hopefully, their efforts will lead to further related research. In this spirit, it is hoped that future studies will highlight the obstacles and impediments which limit Islamic economic cooperation. In some cases Islamic countries are competitors. The economic impoverising effect of inter-communal competition in international trade is studied in this book (Chapter 5). For example, Indonesia and Malaysia are both producers of natural rubber and

24 Preface XXV palm oil, and, just a few years ago India, which traditionally purchased these commodities from Malaysia, got better prices and terms and switched her large contract to Indonesia. Price- and qualitycompetitiveness cannot be expected to be abandoned for religious considerations. This book treats the topic of economic complementation and consensus formation among Islamic countries in Chapter 2. Now that Muslim countries, such as Turkey and Malaysia, are emerging as Newly Industrialising Countries, the potential for priceand quality-competitive goods and services amongst Muslim countries is expanding. There is no reason why Islamic economic co-operation should not be tapped to the fullest degree of trade diversion and creation. This means more emphasis needs to be placed, not on trade finance, but on marketing, advertising, transportation, joint ventures, counter-trade and other forms of non-price competition. These are topics in the modern theory of imperfect competition. As always, good policies require first good theory. What is most urgently required is an Islamic theory of imperfect competition to guide future Islamic economic co-operation. Islamic Economic Co-operation views its approach to this issue in terms of a competitive-co-operative model, a model midway between perfect competition and imperfect competition as known in neoclassical economic theory. The traditional Islamic approach to monopolies and cartels is to ban them on the ground that they are unlawful. In fact, these are economic institutions which, as OPEC itself demonstrates, exist and have come into existence in the natural course of market development. In the same way as there is a cartel of oil producers, there are natural monopolies which efficiently and equitably provide public utilities (e.g. public transportation) or essential services (e.g. education). What is 'unlawful' about monopolies and cartels is the abuse of their market power, such as profiteering, speculation, deception, etc. These undesirable consequences, however, can be controlled by proper regulation. The intent of anti-monopolies, anti-trust laws and unfair trade practice regulations is precisely such regulation in the public interest. These laws and regulations need to be based on empirical and theoretical findings derived from the theory of imperfect competition. Now the time has come when Islamic economists need to devote increasing energy on the development of such a theory. 0ZAY MEHMET Professor of International Affairs The Norman Paterson School of International Affairs Carleton University, Ottawa, Canada

25 Foreword Most Islamic economists, of whom Dr Choudhury is a prominent member, have presented, or at least conceived, Islamic economics as a self-contained ethical-economic system. No doubt, for a full understanding of any system, a comprehensive view is essential. Even so, relating Islamic economics at its simplest level to traditional economics may be of help to those who have been brought up on the neoclassical tradition, but wish to use it as a stepping-stone to Islamic economics. The following few words provide some examples of such relationship. Hence this is a 'foreword' to Dr Choudhury's work in a literal sense. Islam (or any other religion) can play at least three distinct, not mutually exclusive, roles that may be expressed in terms of neoclassical economics. The first and the most distinctive is what may be called the 'inspirational' role. A religion may inspire its followers to work better and harder, to be more reliable and honest, and cooperate better with others as well as with each other. A neo-classical economist would see this as an increase in the quantity of resources, and an improvement in their quality. Working harder, of course, directly increases effective labour, but greater honesty and cooperative attitudes also increase resources available for producing final output, by reducing the resource cost of policing, monitoring and inducing co-operation. A neo-classical economist may attempt to see all this as 'factor-augmenting' technical change or invention; but then the 'patents' of such inventions may not be bought in the market and paid for by the improved production; the only acceptable coin here is the required religious conviction of the participants in the process! The second role is what we may call 'reallocational'. It can take many forms, including redistributional. One simple example of reallocation is the prohibition of alcoholic beverages in Islam - which implies a shift of resources to other economic activities. A more substantial example, as Dr Choudhury points out, and also the Calvinist, as Max Weber claimed, is the Islamic injunction against excessive expenditure on personal 'consumption', the Islamic Israf, which may cause the reallocation of resources towards capital formation. A final example is the Islamic, but not the Calvinist, injunction in favour of distributive justice (for which the institution of Zakah xxvii

26 xxviii Foreword sets the tone). For Islam, the injunction against Israf may also be related to this objective. Such redistribution is likely to raise aggregate consumption, and may, to that extent, modify the increased capital formation resulting from the preceding injunction. The third role may be called 'institutional restrictions'. An example of this is the Islamic prohibition of 'Riba', which Dr Choudhury and many others have translated in modern terms as payment of any fixed rate of interest, either real or nominal. A simple neo-classical economist who is not familiar with the idea of 'induced innovation', or does not believe in its efficiency-increasing property, will consider this restriction simply a reduction in the institutional options available to the system, which, of course, has the potential for making it less efficient. Others, who believe in such induced innovation may consider the institution of 'Mudarabah', the use of' risk capital' even where it has not been traditionally used, an 'induced institutional innovation' that may increase efficiency because of the restriction. These brief remarks do little more than scratch the surface of the Islamic approach to economics, and even less of the broader humanistic approach. The central concept of neo-classical economics is the individual as a simple maximising machine, while the religious and humanistic approaches take account of the social, ethical, religious circumstances, inclinations, and beliefs in determining the behaviour of individuals and groups, which cannot be suitably described by any meaningful sense of maximisation. In this book, Dr Choudhury, after first drawing our attention to these aspects of human life and their significance to Islamic and humanistic economics, has proceeded to deal with the issue of economic co-operation in Islam. In the process he has provided us with extensive factual material on aid and trade of Islamic countries, their economic relation with one another, and with other underdeveloped countries, and the potential for the development of such relations in the future. These are matters that will be of interest and concern for even those who have not seen the light! SYEDAHMAD Professor of Economics McMaster University Hamilton, Ontario, Canada

27 Introduction This book has three main objectives- to develop the idea of Islamic economic co-operation based on the principles of Islamic economic theory; to develop the analytics of the principles and instruments of Islamic economic co-operation; and to make a quantitative policytheoretic study of some important issues in Islamic development co-operation in contemporary times. In all of these areas a constant reference is made to the principles or implications of Islamic economics. Thus the study of Islamic economic co-operation is treated here as an application of Islamic economic principles to the area of international economics and economic development. While applying Islamic economic principles to the study of economic co-operation, a distinction is made between theory and thought, the emphasis here being on theory. Consequently, where selected economic ideas, models and analyses are developed in this work, their relevance to fundamental sources alone is necessary, that is, to 'Quran', 'Sunnah' (traditions of Prophet Muhammed) and 'Shariah' (Islamic Law). Within this framework the intensely analytical, empirical and applied nature of economic co-operation in general is maintained. The first main scope of this work, that is the development of the idea of Islamic economic co-operation based on the principles of Islamic economic theory, is served by delineating the ethicoeconomic structure of Islamic economic theory within the broader scope of a humanistic approach to the study of political economy. Since the topic of economic co-operation is an important part of international political economics, the humanistic elements of Islamic economic theory are shown to influence the study of Islamic economic co-operation. The focus here is not merely on Islamic intercommunal co-operation, but also on Islamic economic co-operation in the context of the South-South relationship and the North-South relationship. In this coverage of humanistic approach to the study of political economy, Islamic economic theory is shown to emanate from the general ethico-economic paradigm termed humanomics. An introduction to humanomics is, therefore, relevant here. Humanomics can be considered as a branch of social economics that is devoted to ethico-economic inquiry in social theory and policy in world perspective. Upon this field of inquiry a scientific basis is imparted by its goals, a set of consistency postulates and a unique xxix

28 XXX Introduction methodology. In addition, the world community being the principal unit of its analysis, humanomics searches for universal truths that underlie a complex of social malaise, rather than for some temporal facts confronting only certain groups of people, nations and circumstances. The goal of humanomics is to discover the ethical foundations of socio-economic theory and, thereby, to develop a viable policy framework addressing critical socio-economic problems. Of interest to humanomics are truths that are common to all religions, cultures and people of good will. They take the form of ethical values in preference to segmented religious, cultural and political overtones. They are values that promote co-operation among and within peoples. They are common values for the common good, for the founding of the 'Good Society'. Examples of such goals are equitable distribution of resources and opportunities in society; altruistic norms of consumption, production and distribution; social controls over the appropriateness of production; sharing of world resources which are seen as social as opposed to private goods, merit wants (serving elitist achievers) or purely public goods; the role of religious values in public choice theory. Humanomics relies upon consistency postulates rather than on the neo-classical concept of economic rationality. These are postulates that tap ethical as well as purely economic values underlying social theory and policy. In fact, since the humanomic approach is based on the treatment of both economic and non-economic phenomena, it would be seriously restricted if the postulate of economic rationality alone was accepted per se. The consistency criterion in humanomics is meant to show how the assumptions and analyses of a humanomic study are consistent with the stated ethico-economic goals of particular investigations and how this can yield an ethico-economic framework of analysis. In the search for means of developing a viable policy-theoretic framework of ethico-economic analysis, the methodology required must be wider than that used in economics. It must also yield quantitative or inferential answers. This analytical and empirical nature of humanomic studies makes the methodology of the social sciences a viable one to expand upon, so that the new methodology encompasses a scientific analysis of non-economic (that is, ethical) imponderables in socio-economic studies. An example of a topic of humanomics is the reformulation of development criteria based on ethico-economic goals. In the after-

29 Introduction xxxi math of attaining independence from colonial dominance after the Second World War, the developing countries found themselves in the grip of two opposing types of economic planning paradigms. On the one hand, the intellectual colonial vestiges in developing countries stuck to the paradigm of economic growthmanship acquired from abstract models of the industrialised economies. This 'led to the belief that models of economic growth designed for the more advanced countries should easily be applied to developing countries'. However, the attempt to sway economic development programmes in this direction resulted in fiasco in the developing countries. It was found that although the esoteric mathematical models were made to fit the real world facts, the real world facts could not be attuned to the growth models. This was particularly true of the least developing countries (LLDCs), steeped as they were in serious problems of structural imbalances and paucity of statistical data to make the technical use of growth models of any worth. On the other hand, a proposed mode of economic planning was based on policy-oriented approach to development. The principal actors in this were the international development organisations. They considered the great problem of the developing countries to be their structural imbalances. Among the types of developmental programmes proposed by international and national development organisations were the basic needs programme, North-South relations, and the long list of policy-theoretic contributions in the area of development with growth. Through such innovative approaches the area of development economics broadened to include economic as well as non-economic dimensions of the socio-economic problems. Considerations of equitable distribution of incomes, wealth, resources and opportunities for mitigating poverty and squalor, the indigenisation of technology, self-reliant development, ethical concerns regarding problems of ecology, co-operation in the world and among nations, became some of the predominant issues. The trickling-down postulate of economic growth was thus being replaced by the principles of economic efficiency and distributive equity. In this way the field of development economics showed signs of increasingly incorporating an ethical and ameliorative approach as well as the socioeconomic development of world communities. The principle of sharing resources in the context both of national economies and of the world economy as a cornerstone for development co-operation can be seen to be well-shaped in the crucible of ethics and values. In the analytical framework of humanomics it can

30 xxxii Introduction be shown how the ethical, holistic and ameliorative approach to development co-operation can translate itself into a new concept of social welfare. The idea of social welfare in this context would necessarily abstract away from the notion of economic rationality found to underlie the neo-classical theory of social welfare. As we mentioned earlier, in ethico-economic studies of socio-economic issues it would be more appropriate to talk about the consistency principle rather than that of economic rationality. The new concept of social welfare and social choices with ethical considerations will depend upon interdependent welfare indices formed by collective social preferences based on societal choices of value perspectives in consumption, production and distribution. Individual preferences in the context of consumer sovereignty of traditional micro-economics are played down for the good of higher abstraction in collective social preferences. Chapter 1 sets this work in the perspective of humanomics treating Islamic economic theory as a definite humanomic approach to the study of political economy. The principles of Islamic economic theory expounded in this chapter evolve later on into the Islamic ideas of economic co-operation and are used in the policy-theoretic analysis of the models developed in this work. This chapter develops the humanomic Principle of Ethical Endogeneity, which in turn is shown to be the powerful decision-making structure in Islamic economic theory leading to complete consensus formation in social and developmental issues. One such important issue is international and regional economic co-operation. In Chapter 2 we relate the resultant goal of complete consensus formation to the structural development approach to economic cooperation. (A similar issue is focused upon in the idea of formula financing in development co-operation introduced in Chapter 3.) The important contribution of Chapter 2 lies in the formulation of a theoretical model establishing the process towards complete consensus formation in economic co-operation. This same idea of complete consensus formation is central to the decision-making framework in Islamic economic theory and to the structural development approach in the study of Islamic economic co-operation. Chapter 3 further develops the humanistic aspects of economic co-operation. The elements of Islamic economic co-operation are implicit in this formulation of the humanistic alternative to the study of international political economics. The proper starting-point in this chapter is the critical study of the growth-oriented economic para-

31 Introduction xxxiii digm in economic co-operation, and its replacement by what is termed a structural development approach. This chapter brings out the relevance of an ethico-economic approach to the study of development co-operation. In Chapter 4 we unfold the idea of Islamic economic co-operation based on the principles of Islamic economic theory and the structural development approach to development co-operation. Two important instruments of Islamic economic co-operation are analytically examined in this chapter. These are foreign trade financing of capital goods and the determination of the 'mark-up' added to the free-onboard prices of tradables. The main contribution of Chapter 4 is a precise formulation of the idea of Islamic economic co-operation based on the principles of Islamic economic theory. In Chapter 5 we further develop the analytical foundations of Islamic economic co-operation showing how the principles of Islamic economic theory can play an important role in critical contemporary issues of international trade and development economics. The chapter develops a theory of negotiated (optimal) tariff settlement among trading partners leading to the establishment of a preferential tariff regime in the Islamic economic bloc. The instruments of Islamic economic co-operation used by the Islamic Development Bank are critically examined and their policy-theoretic options provided. Chapters 2 to 5 serve to cover the second main objective of this work, that is, to develop the analytical foundations explaining the principles and instruments of Islamic economic co-operation. While accomplishing this, a constant link is maintained with the first objective of this work, that is, invoking the principles of Islamic economic theory in the study of Islamic economic co-operation. The third main objective of this work, to undertake a quantitative, policy-theoretic examination of some important contemporary issues of Islamic development co-operation, is accomplished in Chapters 6 to 14. Chapters 6 and 7 are devoted to a quantitative analysis of critical issues in development financing confronting the middle- and low-income Islamic countries. Chapters 8 to 14 are devoted to a policy-theoretic study of some critical recommendations made here for the promotion of Islamic development co-operation in contemporary perspectives. Chapter 6 is a statistical study of resource endowment, the production pattern, the external sector and the trend in industrial transformation in Islamic countries. The chapter takes an aggregate view of the Islamic economic bloc, while the analysis involves disaggrega-

32 xxxiv Introduction tions to the middle-income and low-income Islamic countries. The problems and prospects of industrial development in Islamic countries in general which are brought out in this chapter serve as a logical prelude to the more quantitative depth of Chapter 7 in these same areas. In Chapter 7 we develop a multi-equation regression model for studying the interrelationship between external flow of resources, capital formation in the public sector, exports, external debt accumulation and economic growth in the middle- and low-income developing economies, with a particular study of selected Islamic countries belonging to these groups. The statistical analysis of Chapter 6 and the specific country study in Chapter 7 support the aggregate econometric results in this chapter. The principal contribution of Chapter 7 is to lay the groundwork for a policy-theoretic analysis of industrial development in the middle- and low-income Islamic countries in particular, and such developing countries in general, that critically affects development co-operation in the developing region. Chapter 8 is yet another look at Islamic economic co-operation and integration, but this time from a contemporary institutional viewpoint. The emphasis in this chapter is on contemporary facts of institutional developments in the Islamic region that give rise to policy analysis related to Islamic development co-operation. Both capital and labour mobility are examined within the context of Islamic economic co-operation. The chapter introduces the policy prescription of an automatic 'conditional' trade liberalisation using the idea of customs-drawback union. Chapter 9 develops the idea of economic co-operation from the basic needs viewpoint. The basic needs approach is shown to be an aspect of the structural development approach to economic cooperation. This issue presents a policy-theoretic prescription for Islamic development co-operation. A theory of the basic needs approach to development co-operation, showing the application of the humanomic principle of equity - efficiency simultaneity, is formalised. Consequently the substance of this chapter links up with the humanomic structure of Islamic economic theory presented in Chapter 1. Chapter 10 develops another policy-theoretic prescription for Islamic economic co-operation under international trade. This is based on a theory of managed international trade applied to the case of countries where tariffs and industry protection remain high and a swift change to trade liberalisation would prove to be costly. (The idea of managed international trade using negotiated tariffs is intro-

33 Introduction XXXV duced in Chapter 5.) The idea in this chapter provides a theoretical formulation with implications for developing economies in general and Islamic countries in particular. The reality of high tariffs and industry protection in Islamic countries suggests a policy-induced application of the managed trade regime leading to a regional preferential tariff arrangement. This proves to be an important aspect of Islamic economic co-operation. Chapter 11 introduces a critical topic of capital market instrument for Islamic countries - the privatisation of the Islamic Dinar in line with the now existing privatised SDR (Special Drawing Right) and ECU (European Currency Unit). The potential for the privatised Dinar, based on an independent basket of currencies of Islamic countries for generating economic development, is brought out. The stability effects of the Islamic Dinar in the macroeconomics of a global capital market are studied. Chapter 12 continues with the study of the impact of contemporary institutional developments and current economic changes in capitalsurplus Arab countries on labour migration. We look at the developmental and social effects of labour migration to the Arab Gulf Region as a result of the changing economic circumstances there. A critical examination is made of the Islamic institutional policies towards economic co-operation based on this labour migration. The study is made with respect to selected countries, but the conclusions are broad-based. The important contribution of this chapter is in providing a logical wholeness to the study of Islamic economic co-operation through the examination of labour mobility in the Islamic economic block. Chapter 13 provides a logical continuation to Chapter 12 through the study of an important institution in the inter-islamic communal labour market. This is the institution of social security for expatriate labour perpetually in a state of migration across some Islamic countries, particularly in the Middle East. This chapter first introduces Islamic views on the contract of insurance in general. It then broadens out to the study of Islamic concepts of social insurance, linking up risk-evaluation to the risk-diversification elements of the institution of 'Mudarabah'. Mathematical models are developed for explaining the risk-evaluation involved and the distribution of claims to expatriate labour, subject to the occurrence of various contingencies of claim. Chapter 14 deals with the topic of Islamic economic co-operation in the North-South context. Here the potential of the Islamic coun-