“Islam, Economic Justice and Economic Development in the Arab world”

By: Dr. Paul Sullivan, National Defense University, Washington, DC November 17, 2004

Good Afternoon. Salaam Aleikum. I would like to start with two caveats. First: The opinions expressed here are my own and do not represent those of the National Defense University or any other entity of the U.S. Government. Second: I am not a sheikh or an Imam. I am just someone trying to figure this out in a complex world that seems so full of misunderstanding.

So here we go:

Adel, justice; mizan, balance or equilibrium; and ihsan, compassion are crucial words to understand in a search for what economic justice could mean in an Islamic context. Without justice, balance and compassion there is not economic justice.

Hayyat Tayibba, the good life, or La Dolce Vita: this is what the elite in these countries have and what the average people can only dream about, without much hope of obtaining it.

In Islam everything is a hibba, a gift from God. ( Al-Lah means The God, The same entity worshipped by Christians, Jews and others. The similarities across the religions are as striking as the misunderstandings that emanate from those who do not understand them. )

In Islam people could be seen as the stewards of God’s gifts. We are accountable for the proper stewardship of those gifts and that wealth. Leaders, in particular, are accountable. Massooliyya, responsibility, is another one of those terms that resonate in a truly Islamic environment.

With ijma, concensus, and democratiyya, democracy, there should be more accountability than within the usual dictatorial states. In reality, however, there is often a continuum of accountability no matter what a system is called. Accountability is never perfectly at hand. But without accountability there is hardly much of a hope for either the maximization of the goods and services available for the people, for the just production and distribution of those goods and services, or for the just distribution of the wealth accumulated and incomes generated from those productions.

Temporal accountability can lead into inter-existential accountability. I believe it was Caliph Omar who said that any Muslim leader who does not lead his people to greater prosperity and peace will not share a place in heaven with them.

Clearly it is not up to me to decide how the Arabs should define economic justice. It should be up to the Arabs to do this. As an aside: dictators are usually not the best people to define economic justice. Economic justice will likely not occur in the region until more democracy is developed by the Arabs, and in their own ways. The Arabs should be able to judge their own societal welfare functions. They should also be able to judge their own inter-existential, inter-temporal, and other tradeoffs within their definitions of economic justice.

There is no one definition of economic justice. Through the concepts of shura, consultation, injma, concensus, and through the opening of the door of ijtihad, interpretation, to apply Koranic economic concepts to the context of today there may be some hope for those who may want to go in this direction.

My sense is that economic justice as defined by most Muslims probably looks a lot like economic justice as defined by most Christians, Jews and others.

Let us now try to get a handle on the concept of economic leadership. I do not just focus on governmental economic leadership, but also on leadership in industry, education, agriculture, technology and other economic aspects of a country.

Economic leaders need to consider the common everyday tradeoffs of production and consumption. Such leaders also need to look into the inter-temporal tradeoffs as well: tradeoffs between consuming now and investing for the future.

A Muslim economic leader could also be one who needs to look at inter-existential tradeoffs: those tradeoffs between this life and the next one.

There are economic relationships like the tradeoffs between unemployment and inflation, trade deficits and capital flows, and supply and demand that need to be considered in order to merge the religious, the just, and the economically developmental. This is not an easy task.

There are many prescriptions and descriptions of proper behavior, consumption and production in the Koran and the Sunna. Zakat, charitable giving, is an example of this. It is one of the pillars of the religion. There is a much-repeated ayat (passage) in the Koran that one should be charitable and take care of the people in need. Riba , interest, is another example of the very complex and sometimes emotion-laden tradeoffs that occur both across time and across existences.

Zulm, tyranny, is clearly another side of the issue. Tyranny is not acceptable in Islam. That holds for economic tyranny as well. (Westerners when looking at the Islamic world should try to separate out what is truly Islamic and what happens to be the sad fate of those subject to dictatorial and tyrannical regimes, or any continuum that can be an extraction from that. The economic and political systems of many Muslim countries, it could be argued, have little to do with Islam.)

Misusing of resources seems to be non-Islamic. It could also be seen as a form of tyranny if the resources are used to make the rich richer and more powerful – as the average people and the poor see little change in their often miserable economic existences.

Again, all resources are gifts from God in Islam. It is wajib, required, for economic leaders to make sure those resources are used appropriately. Economic and human developments are required for any Muslim leader. The leader’s people, Muslim or not, must be cared for. This is yet another example of the “Big Jihad” in a world that focuses too much on the “little Jihad”. The “little Jihad” is “holy war”. The “Big Jihad” is the effort, and jihad means effort or struggle in Arabic, to be a good Muslim – to be a good person .

For those who think that companies should simply maximize their profits and all will gain from that, and that countries should move as quickly as possible towards wealth without other considerations: they should take a look at the world as it is. They should take a look at some of the reasons behind, for examples, terrorism and extremism.

Sometimes more sharing of the wealth and opportunities can lead to a safer world. How valuable is safety and security? The return to a more reasonable and just approach could be enormous.

This should not be misunderstood as a call to nationalize industries and the like. The socialist approach failed miserably in the Arab world. Also, private property is protected in Islam. Making money is not per se a sin in Islam. Doing well, while at the same time being charitable and just, is something of an Islamic ideal. Mohammed’s wife was a successful businesswoman. Mohammed was a successful trader, but one who was known as a just and honest trader. In the modern terminology we could say this was “doing well by doing good”. (Again, it is a sad fact that the realities of the Arab world often do not get near this goal.)

An economic leader is far more accountable than the average person. Simply handing out charity during the Eid is not enough. Simply handing out money to a less developed country is not enough.

Responsibility is greatest for those who have the most: the most resources at their command; the most knowledge at their command; and the most people at their command.

Let us now take a look at how Arab economic leaders have done in the recent past. Let us take a look at the use of resources, especially oil resources.

Surely there are external factors associated with the use of resources, like the world price of oil being determined by world markets. Oil revenues for a country are determined by a combination of the price trajectory of oil and the production pattern of oil within the country. One is determined by world prices. The other is determined by internal as well as external decisions.

One might argue that the greed of the late 1970s and early 1980s caused the subsequent downfall in the real value of oil. Even at $50 a barrel the price of oil today is not near the equivalent in 2004 dollars of the $68 or so barrel (depending on the quality and type of oil) in 1981. (In nominal terms the high point for prices before now was about $40 in early 1981. But if we take into account inflation then we need to look at the real value of the oil.)

To see how the oil price changes have affected some of the basic data of the Arab countries we can first look at the oil exports per capita in real (2000 dollars ) terms comparing 1980 to 2003. Yes, things have changed over the last year as oil prices have climbed. But this could be a short burst in oil revenues much like what happened in the late 1970s and early 1980s. The oil consuming countries can once again move toward less intensive uses of oil, and once again move toward energy conservation. The US economy, for example, uses much less oil per dollar of GDP than it did in the 1970s. The same is true for all of the countries in the OECD. Most of that change in oil intensity occurred in the first 5-6 years after the oil price leaps in 1979-1980. Oil consuming countries can react to sharp rises in oil prices a lot faster than most people think. The engines of invention, innovation and public policy can be revved up pretty quickly when the opportunities driven by oil price hikes are present.

Possibly even more than before oil consuming countries will look for options to oil because of the seriously deteriorating political atmosphere in the Arab world, where most of the world’s oil reserves can be found.

Oil export revenues per capita in real (2004 dollars terms) for all of OPEC were about $1700 in 1980. In 2003 they were just $500. Not all oil-exporting countries are rich. Some of them are in deep economic trouble.

Total oil export revenues for OPEC in constant 2004 dollars were $556 billion in 1980. In 2003 they were just $300 billion. In 1998 they were just $120 billion.

Looking at the oil export revenues per capita for certain countries can give us a real intellectual double espresso. Kuwait’s real (2000 dollars) per capita exports were about $28,000 in 1980, but were just $7,500 in 2003. Iraq’s real (2000 dollars) per capita oil export revenues were about $3,400 in 1980. Now they are about $500 if the better days are averaged over the year. (One has to wonder where some people got the idea that Iraqi oil revenues will be enough to redevelop the country.) Saudi Arabia’s oil export revenues per capita were $23,000 in 1980, and dropped to $3,500 by 2003.

These are shocking losses in real per capita terms. They can be partially explained by the drop in the real price of oil over the time period. The major explanatory factor is that the populations of these countries (and most others in the region) have doubled over the time period from 1980 to 2003.

These losses in per capita oil export revenues are reflected in the overall wider economic losses in per capita terms for these countries. This can be explained by the drop in the real price of oil, the doubling of their populations, the lack of proper economic diversification at many levels (even with some valiant attempts in those directions), and, in some cases, poor economic management and poor economic leadership.

Arab oil exporting countries on average have experienced significant drops in their overall real per capita incomes during the time period. Some had rather precipitous losses. A startling example of this is that Saudi Arabia’s real per capita income dropped from $29,000 in 1980 to $6,500 in 2003. Iraq’s real per capita income today is about 1/8 of what it was in 1979. But that is another story, but it is also about oil. Oil is a magnet for trouble and strife.

The years when much of the rest of the world, especially East Asia, had superb growth on average, the 1980s to the mid-to-late 1990s in particular, the entire Arab world fell behind economically in relative terms. The fastest growing countries in the world were almost always those without huge oil reserves. The real beneficiaries of the oil wealth of the Arab countries were more often than not the oil-consuming countries of the non-Arab world.

Unemployment in oil producing states and oil remittance sensitive states is a key issue. Some have unemployment rates as high as 20-40 percent or more. Algeria’s unemployment rate could be as high as 40 percent; Saudi Arabia’s 30 percent; Morocco’s 15-20 percent; Libya’s 30 percent; and the Palestinian Territories are looking at about 50-80 percent in some places. Along with unemployment there is vast underemployment.

Then there are the vast hordes of the underproductive in government service in some of these countries. The oil revenues and their replacement debt instruments have allowed the government payrolls to swell with those who sometimes contribute little to their societies. Some of these government jobs are nothing more than sinecures. Work ethics have suffered.

In Islam work is prayer, not the collecting of a check because you happen to have the right connections.

Total oil export income for the AOPEC countries in nominal terms since the 1960s has been about $3.2 trillion dollars. In real terms (2004 dollars) that is probably closer to $4 trillion dollars. Where did it all go?

A lot went to importing weapons and building security and intelligence infrastructures. Much more went to these than to education, the environment, health care, training and other things focusing on human development.

Hundred of billions of petrodollars and the returns accrued from them reside outside the Arab world. They are invested in other countries’ stock exchanges, companies and debt instruments, like US Treasury Bills. These are yet other examples of how the oil “bonanzas” in the oil-exporting countries have helped those outside of these countries more than those within them.

What countries have grown the fastest? What countries have produced the most jobs based on the use of oil? The answer is very clear: the oil-consuming countries. The rentier incomes to the oil-producing states seem often more of a curse than a blessing. Moreover, the Arab non-oil states grew at a higher average rate than the Arab oil states from 1980-2003. Arab oil states had on average negative growth from 1980-2003. Productivity growth rates in Arab oil states have been on average negative since 1980.

Only Egypt, Syria, Oman, Tunisia, and Morocco have shown positive productivity growth on average since 1980. This productivity growth can be mostly attributed to economic reforms, diversification, economic restructuring and liberalization of internal and external trade regimes, and the investments and other changes related to these legal-social-political reforms.

Many countries with vast oil resources opted for the development of welfare states, which have been proven to be mostly unsustainable. There were no taxes, free education, free medical care, free electricity, and even free housing. In economic terms these are subsidies to have more children.

The demographic transition was thwarted, in part, by these subsidies. Such extensive population growth rates also wore away at the ability of many of these countries to invest in the non-oil industries and in labor using industries, which could have absorbed some of the excess labor. The demographic bulge of those who are to enter the workforce in the next few years is a significant economic and political threat in some of these countries.

Over 50 percent of the populations of many Arab countries are under the age of 25. In some, like Saudi Arabia, it could be more like 60 percent or more. The mean age of a Saudi is around 15 years. The average Saudi woman has 7 children.

Where will the jobs come from for these young people? Yes, population growth rates have dropped in recent years in some Arab countries, but the cohorts of the earlier high-growth years are still there and are about to increase the demand for jobs in countries where jobs production is often lacking.

Real wages for the average Arab are not much different today from what they were in 1973. The actual unemployment and underemployment rates for young people from 15 to 25 years old are horrendous in countries like Algeria, Syria, Saudi Arabia, and even in Egypt.

In Algeria we have the hittistes, hitt is wall in Arabic, whose job is to “hold up the walls they are leaning upon”. In Saudi Arabia we have the “hang-around guys”, a term coined by the journalist Tom Friedman, who spend their days unproductively.

There is also the disconcerting result that within all of this underemployment and unemployment millions of workers are imported into Saudi Arabia, Libya, and other countries in the Arab world who face serious employment challenges.

The medium run decline in oil revenues has seriously affected the Arab countries that could be called remittance sensitive economies. Guest workers, remittance workers, are the push side of the international Arab labor markets. Places like Egypt, Jordan, the Palestinian Territories, for examples, rely much on the millions who work in the Gulf oil states. This is especially so after 9-11 when many other opportunities to vent excess labor have been constricted. 9-11 did great damage to the economic prospects for this and many other reasons.

As oil revenues went down so did the demand for labor for Arabs from outside the oil states. This prompted declines in the remittance incomes being sent back to the labor exporting countries. This, in turn, also caused declines in investment and consumption in these countries. Unemployment goes up in the labor exporting, remittance sensitive countries when real oil incomes decline in the oil-exporting countries – all else being equal.

Arab labor has also been facing greater competition from labor imported into the oil states from Africa, East Asia, South Asia, and Southeast Asia. These non-Arab countries are then ties to the remittance incomes.

You see the remittance connections go well beyond the Arab region. Ripples and waves from oil revenue changes can affect more than just the labor markets of the Arab states. (Financial markets in the OECD can also be affected, but that is for another paper.)

Let us not forget that many of the Arab states have had considerable progress in education, health, access to clean water, sanitation, life spans, and other measures in a macro view since the 1960s.

However, one has to wonder how really terrific these countries would have been if they had better economic and political leadership. One could wonder how they would have turned out if they focused more on economic and political reform and development, rather than on the construction of welfare states, the development of security and intelligence apparati to keep their people down, and the support to revolutionary and other causes of people other than their own. One could also wonder how things would have turned out if they diversified more, and did not rely so much on a volatile and uncertain source of income and wealth: the price of oil.

Oil has been in many ways a drug to keep these great countries sleeping on their needs for political, economic and social reform.

The overriding issue that will determine success and failure for a country could be its ability to reform and focus on being more competitive, more developed, and more diversified in many ways.

These are not reforms necessarily in the western American way. Such reforms will need to be done in a way that is best for the security, prosperity and development of the people of each of the countries that want to take these routes. Such reforms will effect, for examples, education, industrial structure, taxation, rule of law, contract law, invention, innovation, and freedom of economic and technical expression – as well as freedom of speech and democracy in the Arab ways. Such reforms could ease the transition from now until the new future. This future will have many challenges and many changes, which the Arabs need to face successfully.

The changes needed may be foreshadowed in the changes that have occurred in Bahrain, the UAE, Qatar and Oman. These are four possible winners from the transformations that need to be done. Tunisia, Egypt and possibly Libya may also be winners. Syria, Saudi Arabia, Yemen, Algeria and some others may be looking at a very tough slog if they do not focus on serious economic and political reform. There are gigantic economic and political pressures building, which only proper reforms can help absorb or alleviate.

Within all of the economics and business of the possible changes we cannot forget the following: there are some so-called religious elites who are making creativity and change, and reform, seem like a sin. Some of these groups want to go back to the 7th century. If they win then everyone else will lose, most particularly the many oil-exporting and remittance-sensitive countries in the region, which are being increasingly populated with these backward extremists. These countries do not need any more unemployment and poverty. But that is what they will get if these people win.

If the transitions that may happen in the future (mostly due to changes in the world economy and technology base, world politics and the military), move too fast for these countries to adjust properly then we can be assured that one or more of them will fall to these intellectual, economic and technical luddites.

They are people who barely understand their religion, but castigate those who do. Islam is a religion of knowledge seekers and developers. It has a great past of invention, innovation, science, medicine, technology, art, architecture, and more. Frankly, these are the same sorts of people who have kept this region from fully developing since the heydays of the 16th century.

Islam is a religion of moderation and decency, peace and prosperity. It is time for it to get back on track and to leave the munifiqoon, hypocrites and muharribbeen (fighters without religious justification) behind. It is time for the Muslims to cast aside the erhabeen (terrorists) and put scientists and scholars, business people and great leaders in the places that should be there for them.

If the leaders in the region and beyond deal better with Adel, Mizan, and Ihsan, then we could be one or two steps closer to neutralizing the support for the extremists, the demagogues, the murderers, and those who insult a great religion with their blind and ignorant anger, those who eat the wealth of others and, and those who cause more anger and hopelessness to build.