An Islamic Economic System for Pakistan?

In the?first part of this talk, we explained that one of the biggest obstacles to creating an Islamic Economic system is the mythologies created by capitalist economies to justify the oppression of the poor and wealth inequality. In addition, there is the myth that capitalism is more or less compatible with Islam. It is only after rejecting both that it becomes possible to think clearly about what an Islamic economic system would look like. A writeup/summary of the second part of the talk if given after the video. The video below is a follow-up lecture to this talk, which was delivered (in URDU) at Karachi University on Feb 23rd:

WHAT CAN WE DO?

?What can we actually do now? So I have listed some of the obstacles in the path of creating an Islamic economic system, but there are many more that I have not listed. We have to understand that whatever obstacles we face today are far less than the obstacles faced by our Prophet Muhammad (PBUH). The hostile environment that he faced was much worse than what we face today. But the teachings of Islam transformed ignorant and backward Bedouin into leaders of the world and created a civilization that enlightened the world for more than 1000 years. The final message of God to humanity is complete and perfect guidance for all times. It is just as revolutionary today as it was 14th?century (see?Islamic Knowledge: Still Revolutionary after 1440?Years!).

If we take this as an axiom of faith, we do not have to do very complicated calculations and sophisticated analyses to learn what to do. We have the solution in front of us, but we’re just not looking at it. Today when we have an economic problem, we call in the experts from Harvard. Similarly, in all dimensions of our lives, we’re looking to western books for solutions. When I was VC of PIDE, we had a course on Business ethics. I assigned the course to a teacher who was a bearded man and a very sincere pious Muslim. I looked at his course outline and he was basically teaching business ethics from a western text. Even on our own home grounds of ethics, we are borrowing from the West, instead of looking for solutions from our own intellectual heritage.

DECOLONIZING OUR MIND

To start the process of decolonizing our mind. We need to follow Iqbal who says that

My eyes were not dazzled by the brilliance of Western knowledge – they were protected by the dust of Madina and Najaf (two Islamic centers of learning).

We are in shock-and-awe of Western Knowledge and we need to cleanse our eyes and look at God and his book for his guidance. This requires decolonizing our minds. What is decolonization? The most fundamental is that the colonized mind believes that the most important knowledge that exists today was produced by the West over the past three centuries: Physics Chemistry Biology Political Science Economics Mathematics. This colonization is automatically created by western education where we study for four years in a university and these are all the things that are taught. No mention is made of the Quran and Hadith, and the Islamic intellectual tradition, so the student can only conclude that these are irrelevant to our modern lives.

Anybody who gets a bachelor's or even high school diploma in western education — which is everywhere in the Muslim world — you end up with the automatic idea that knowledge is produced by the West and that the Quran and Hadith are irrelevant to the modern world. Part of this knowledge is economic knowledge it tells us how to conduct our economic affairs. Modern economics seems entirely unrelated to anything produced by the Islamic intellectual tradition, leading to the automatic conclusion that this tradition has nothing to say about our economic affairs today.

WHAT IS THE GOAL OF OUR LIVES?

If you want to break the spell of western knowledge we have to start with the fundamentals and ask: what is the goal of our lives? If you look at economics texts they say that the goal of our life is to maximize pleasure. Why? If you reject God, Afterlife then this is the natural conclusion. In contrast, Islam teaches us that real success is on the day of judgment. Economic theory tells us that society should try to maximize wealth because its goal is this world. But Islam tells us the life of this world is the pursuit of an illusion (see:?The Coca-Cola Theory of?Happiness). Allah SWT created us to see who can do the best of deeds in adverse circumstances. Another significant difference is that economic theory?is outcome oriented – it says that if you eat something then you get pleasure. The process by which the outcome came about doesn’t matter. Allah SWT says this world is meant only for struggle while the rewards are in the hereafter. The fact that our circumstances are adverse is not a serious concern to us because we are here only to struggle and to show Allah T’aala what we can do. The outcomes and rewards are waiting for us in the hereafter.?So Islam is strongly process-oriented, in contrast to economics, which is outcome-oriented.

INTERNAL GOALS: SPIRITUAL PROGRESS

We start the process of change by setting our internal goals and?spiritual progress instead of making money.?Many Muslim students come to ask me for advice on which career should they pursue and what discipline should they study (economics, computer science, etc.) to make the most amount of money.?They have already been indoctrinated into believing the purpose of life is to make money. The Islamic term Nafs e Ammara is in fact the exact description of the homo-economicus, the rational human of economic theory. Our goal is to go from Nafs e Ammara to Nafs Lawwama to Nafs e Mutmainna. And discussion of how this works is given in my paper so this is actually what we call the work of the night. See?Islam’s Gift: An Economy of Spiritual?Progress

EXTERNAL GOALS: COMMUNITY BUILDING

There are also external goals. Economic theory and social science mindset tell us that the government runs the society, so collective action is only possible through the government. Basically, this is a misconception created in a secular society. European religious wars led to the idea of individual freedom, where everyone can pursue their own goals, and collective action is done by the government. The possibility that we can take collective action as a society was erased from the conceptual framework. This has not been the case in Islamic society. In Islamic society, the driver of change is the community. Our target for action is the local community, the family, kinfolks, our neighborhood. The values are taught in the mothers’ lap, within families and within the larger circle of extended family, and within neighborhood communities. Strong families are central to the develop individuals and communities. Today the worship of self is being promoted all over the world by Hollywood and by social media. This is damaging love, commitment, sacrifice, and responsibility which is at the heart of the family. We need to actively counter this because this poison is spilling into Islamic societies, with bad effects on our families and communities.

UNIQUE FEATURES OF ISLAM: NO MONASTICISM

As said that there is a need of putting effort into our individual selves and then there is the effort needed for the community. Sometimes people get the wrong idea that one must go and sit in a cave for forty days and then one can come out and work on the community.?If you work personally to become a saint first, then this will never happen and so you will never be in the position to actually make change. So Islam actually does not teach us monasticism (and this is a unique feature), We work on our souls by struggling to change the community. The efforts of the night (on ourselves) are complementary with the efforts of the day (on the Ummah); the two go together.

CREATING STRONG COMMUNITIES

Shaikh Abdul Hayy once said that the remembrance of Allah and prayers is like the petrol for the car and the activity is like the driving of the car. So without any petrol, you cannot drive but if you just keep filling petrol in the car and never drive it, that’s also useless. You need to create spiritual energy by worship, and use the resulting energy to struggle with transforming the world in the directions desired by Allah. So how can we create strong communities? This is one of the keys to?Islamic revival. We need to support families, to prevent them from breaking up in this environment, which is toxic to family values. We have to especially support mothers, who have been emphasized heavily in Islam, because that’s the basic training ground for society tomorrow. If all mothers ruined their children today, our society will be gone tomorrow. In contrast, if all mothers train their children?well, the society would be wonderful tomorrow. The men have the job of using the mosques to build neighborhood communities. Today we have lost this. The mosques are there but it is not acting to create the community. Today we go and pray in mosques for ten years but we are not aware of the name of the person sitting next to us even though we recognize them by face. So we have to work on creating good communications at the community level and using this information to transform the community.

COMMUNITY BANKS

So community banks are the things that can be created without the government intervention. Basically one of the things I am saying is that because of the secular mindset people?are thinking that first, we need to capture the government position, then we can do anything. This is not true. There are many opportunities that are open at lesser and local levels. By thinking about, and working on, levels outside the reach of our capabilities, we lose the opportunities to create change within our communities, which is where the change process starts.

MULTILAYERED COMMUNITIES: UMMAH

The concept of nation was invented in Europe after the dissolution of the concept of a united society. In the religious era, the society was united on the basis of religion. But afterward, an artificial imagined community was created at the national level. As Iqbal says “The greatest of the new gods of mankind is the Nation; the clothing that it wears is the coffin of religion”. Wael Hallaq has given the same message in a less poetic, and more articulate way; see?The Impossible State. The nation-state has created?an enormous amount of bloodshed unparalleled in history.

KEY TO PROSPERITY: COMMUNITY-DRIVEN DEVELOPMENT

So instead of looking to the nation to change and to transform the world and instead of seeking to capture national government in order to bring about Islamic change we have to work with communities and create change at the community level.

PART 3: STATE LEVEL INTERVENTIONS

In the long run we cannot use the nation-state as a strategy for Islamization, but as a part of any transitional strategy, because nation-states play such an important role today, we have to deal with them. We cannot ignore them and we cannot bypass them but we have to recognize what these things are: these are creations of European politics. They are responsible for enormous amounts of bloodshed and violence all over the Islamic world. Nation states in the Middle East were explicitly created as a part of the?Divide and Rule?strategy.?There is a very important book by Wael Hallaq that should be read by everyone: ‘The impossible state’. He says that the fundamental foundational basis of the nation state is contrary to Islam and cannot be reconciled with it. So the Islamist strategy that we want to capture state power to implement Islam cannot succeed because state itself is in conflict with Islamic ideas. Nonetheless, as I said, you still have to deal with the state.?with the understanding that state is not a permanent solution this is part of a transitional strategy. Today, nation-states are dividing the Muslim ummah and so they are causing very great harm to us. With this warning. we study how and what happens at the state level. So again we deal with economic myths and one of the most popular is that export promotion the path to development and economic growth also that the government must raise money by taxes and borrowing to finance its expenditure, banks do not create money, inflation is due to money creation all of these are totally false ideas.

LIBERATING TRUTHS

The truth is that path to development requires development of local productive capacities and if anyone wants to build an industry in Pakistan today we have to protect it from foreign competition first because it will naturally be weak and imperfect. Free trade which is recommended by economists benefits the strong economies and destroys the weak. See?Free Trade and Economic Development.

THE DEBT TRAP

Today Pakistan is caught in a debt trap,?having exports of 30 billion and imports of 60 billion. So we need to borrow 30 billion USD to finance our imports. When we borrow, we become enslaved by the lenders. Lenders are happy to lend even if they know that this will never get repaid because they get the power to control our?policies and using this control they can get enormous advantages — much more than the money they?lend us, and the money they lend is just paper (see: What they don't teach in economics textbooks). It cost them nothing to lend any amount of money.?Jason Hickel (Aid in Reverse: How Poor Countries Develop the Rich) has calculated that data available for 2012 shows that two trillion dollars were sent by poor borrowing countries to rich lending countries and a large portion of this is in interest payments. So, this interest-based financial system is a tool for trapping poor countries into eternal slavery.

THE WHY OF THE DEBT TRAP

Why we are in this debt trap? This is basically because of false policies recommended by economic theory. There was no significant trade deficit until large BOP deficits that started from 2003.?In 1995 Pakistan joined the World Trade Organization and started lowering the tariffs until they reach a critically low point of?15% (and now they are around 8%).?When our tariffs are low, imports come in heavily, because imports are cheap. There was a point at which we were importing oil seeds from Brazil. Pakistan is an agricultural country; why should it be importing oil seeds from Brazil? Because both our duties and our foreign exchange policy made the dollar cheap, and this destroyed local industry — (see Taimur Rehman slides on?Protectionism) . It is important to understand the history of free trade theory. It was invented by England after England acquired 50 year lead over Europe via the Industrial Revolution.?The European countries implemented free trade this created a recession in Europe and growth in UK. German economist Friedrich List invented the infant industry argument and he protected the German industry via trade barriers. Today WTO which enforces free trade on the weaker nations had brought great benefits to the rich countries and caused losses to the poor countries. Free Trade and low tarriffs ensure that the poor countries never develop their own industries to compete with the rich, and remain locked in dependency forever. See Free Trade and Economic Development.

WHAT CAN BE DONE ABOUT DEBT-TRAP?

Pakistan is really caught in a big crunch now and so there is a short-run solution that has to be political, medium-term?solution can be to develop self-sufficiency in energy and agriculture products. This can be achieved in 3-5 years. In the long run, there is a need to develop local industry. A self-reliance strategy is necessary. There is a drastic alternative in which we can go full Islamic and we can renounce the interest payments of foreign debt but this will have massive political implications (which can be managed: there is a report of the Council of Islamic ideology on Elimination of interest in 1980 which mentions this idea and provides a detailed step-by-step transition plan. It needs to be updated but the outlines are there.) Now in a short-term transition to an interest-free economy modern Islamic banks are the only available option; see?A New Vision for Islamic?Banks?and?Islamic Monetary Policy. But these revolutionary strategies are not currently feasible because of political constraints.

So, how else can we resolve the short-run burning problems facing the Pakistani economy? The main problem is actually Political. We have power struggles between the bureaucracy, politicians, army, and foreign powers pursuing their own agendas with huge amounts of money. So the solutions require engineering a united front, defending Pakistan, and at the same time protecting local industries from collapse, which is happening daily today. In the medium term, we need to put all our efforts into creating energy and agricultural self-sufficiency. This will prevent us from needing so many imports, so we will not need to borrow dollars. Once we do not need to borrow money then we can craft our own economic policies. It is worth noting that we had industries in small mobile, electronics, large electronics telecommunications, and aviation industry. Nearly all of these industries (except aviation, protected by the government) have collapsed due to competition free trade, and other factors. This has caused massive damage to producers' confidence. We need to understand that all of these magic tricks that we are trying to follow – coming from the Washington Consensus – lower corruption, better governance, lower tariffs, encouraging free markets, privatization – all of these are meaningless distractions, which prevent us from doing what is necessary. What we need to do is to develop local productive capacity, protect them from foreign competition, and stimulate them to grow into world-competitive industries. This can be done and there are a number of methods that have been used effectively in other countries.

Zero Inflation Required For Zero Interest

In the long run, if you want to create an Islamic economy we have to eliminate inflation. Because if you want to have zero interest then you need to have zero inflation. The problem is that economists have no understanding of inflation; see?Modern Money and?Inflation. One way to prove this is to note that around the world that they have been unable to control inflation, despite their best efforts. There is a school of thought, not part of orthodox economics, known as Modern Monetary theory. MMT is the intellectual heir to Keynesian Economics. They have a clear understanding of inflation and they have a policy recommendation for zero interest and zero inflation economy. MMT’ers have policy recommendations for how to create it. MMT gives us the framework for how we can create a zero-interest economy. Of course, this is only one element of an Islamic Economic system. Another central?element of MMT is the Job Guarantee program, which ensures that anyone who wants to make productive contributions to society can get a job. This is also in line with Islamic ideas. For more detailed explanations, see?MMT for Pakistan. So, how can we get from here to there? That is a difficult problem. What is the transition process? We can’t just destroy capitalism today and build on the ruins. We have to go smoothly, and prevent major problems. Some aspects of this have been worked out and can be done, but the problem is the implementation stage. Who will create change? One has to look at the political and power aspects. There is no point in sketching a plan for transition if it cannot be followed. But some aspects are worth mentioning. There are things that we can do without making a revolution in the government, and without actually changing very much. One of the key things that come out of the recommendations of MMT?and also coincides with Islamic ideas is that the Islamic banks should have the motive of providing public service, not the motive of maximizing profit – see?A New Vision for Islamic?Banks. If banks are motivated by performing public service, this doesn’t mean that they work for free. This means that everybody gets salaries everybody gets paid, gets perks and benefits, and bank profits go into research – But the job of the bank is, instead of trying to make money for speculation on stocks and real estate, to put money into socially valuable products. There are many ways to do this, but the first thing is to change the hearts of people. To make public service more valuable and to make success in the hereafter more valuable than this worldly life. Islamic banks are supposed to be like that we have to make them live up to their name.

?SO WHAT CAN BE DONE ABOUT THE DEBT-TRAP?

There are two specific suggestions: 1. Islamic banks can get into the business of providing training loans they can take people and finance them enabling them to either run their own businesses or find jobs. They can finance them and then get repaid from the profits that they make. 2. A more ambitious version of this is life loans where every child born gets the financial support that he needs until he becomes a productive member of society and then he can repay this loan. MMT theory which is very much aligned with Islam (not perfectly but sufficiently) provides the theoretical framework for how we can operate in the modern world and how we can implement Islamic ideals. Islamic economics, therefore, is not just making interest rates to zero. It talks about the right to basic needs for all, the provision of equal opportunities such as education so everyone who wants to contribute productively to society must be given the opportunity to do so.