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Monday, 29 September 2008

Need to Combine Islamic Economic History with Islamic Institutional Economics

Prof. Murat Cizakca
- Interviewed by: Dr. Shariq Nisar

Born in 1946, Prof. Cizakca is one of the leading faces of Islamic economics from the land of Ottoman. An author of six books and over 45 research papers to his credit, Prof. Cizakca obtained Ph.D. in Economics from the University of Pennsylvania and recognized as “internationally distinguished scholar” by the Turkish Higher Education Council. He has about three decades of teaching and research experience and presented over fifty research papers in various international conferences. He is also Member of the Selection Board, Islamic Development Bank Prizes in Islamic Economics and Banking. In an interview with Dr. Shariq Nisar, Prof. Cizakca shares his thoughts and experiences (Editor).
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Emergence of Islamic economics has given a new dimension to the subject of economics Please comment.
Initially, that’s during the seventies, there was hope that indeed this would happen. Some well-known western economists, such as professors Weitzman and Schlicht, had already been working on what they called “share-economics” and it was thought that application of the basic principles of share economics by the bulk of the Islamic world would provide a global boost to the idea.
But two impediments surfaced. First, some of the theoretical problems of share economics, such as the reluctance of hard working workers to share the profits they generate with those who work less could not be solved (This is not surprising, for had it been solved, socialism would not have collapsed either). Second, the principles of share economics have not been applied by the Islamic countries themselves.
Consider, for instance, the problem Saudi Arabia faced after the first Gulf war. When, after the war, Americans forced the Saudis to purchase all the military material they had transported to the region, the Saudi budget went overnight into the red. Thus, for the first time in its history the Saudi state was forced to borrow. But how was this to be realized? How could an Islamic government borrow from the public without interest? An intense debate materialized within the Saudi ruling family. Led by Prince Mohammed b. Faisal, a segment of the family was in favor of borrowing from the public resorting to the interest free instruments of public finance. For this purpose the Prince even consulted Ottoman economic historians, who were familiar with the Ottoman methods of interest free domestic borrowing. But under pressure from the American government and banks, the Saudi state was forced to borrow resorting to conventional methods. Had Prince Mohammed’s vision accepted by the Saudi state, Islamic economics would have received an immense boost.
How far Islamic economics has been able to fulfill its promises and what are the major concern areas that still need attention?
To answer this question we need to look at the basic instruments of Islamic economics. What exactly are these instruments? We all talk about Islamic banks. It is as if Islamic economics is tantamount to Islamic banks. This is, of course, not true. The most urgent problem, therefore, must be first of all, to review the basic principles of Islamic economics and then identify the basic institutions, which would translate these principles into reality. A redesigning or even a process of invention of the pertinent institutions should then follow. Concerning the fulfilling of the promises, we must face the fact hat even countries such as Iran and Saudi Arabia, which declare themselves as Islamic, cannot be considered as truly Islamic economies: Saudi Arabian government has been borrowing with interest and has been quite inhospitable to Islamic banking and Iran, nor for that matter any other Islamic country, has been able to eliminate interest. Therefore, we need to look into Islamic economic history. The three great Islamic empires of the relatively recent times, the Ottoman, the Safevid and the Mughal may yield important insights. Of these the Ottoman is the most promising one thanks to the enormously rich archives that have survived in Istanbul.
These efforts should strengthen, what we may call, Islamic Institutional Economics. Much of Islamic Economics has concentrated so far on the theory, itself greatly influenced by abstract western economic theory. We even emulate the methodology of western economics and try to write essays as mathematically sophisticated as possible. In view of this, there is an urgent need to combine Islamic Economic History with Islamic Institutional Economics. We should take notice that even the Nobel committee is trying a balanced approach and granting its prizes not only to theoretical economists but also to institutional economists (Coase, North), economists/economic historians (North, Fogel, Friedman, Kuznets, Hicks) and even to social (Becker) and psychological economists (Kahneman). In short, as acknowledged by the Nobel committee, western economics is a synthesis. This is at least equally true for Islamic economics, which should encompass not only the disciplines just mentioned but also traditional Islamic wisdom such as fikh, tafsir and kalam. If even the western economics needs synthesis, the need is far more urgent for Islamic economics, which has its own formidable tradition.
Waqf has been your special interest area. How do you see its potential as a tool for economic development?
This question leads us directly to Islamic economic history and confirms the point I was trying to make above. You see, in order to envisage about the current potential of the waqfs, we need to understand its achievements in the past. If we look at Islamic/Ottoman economic history, we would note that throughout the Ottoman realms, the waqf, was without any doubt, the most important philanthropic institution. For six centuries, the Ottomans tried and largely succeeded to eradicate poverty through this institution. It was primarily through the waqfs that a voluntary transfer of wealth from the rich to the poor took place and the latter were fed and taken care of. More importantly, health and educational services, essential conditions for the development of human capital, were provided by this institution. Moreover, it was thanks to the waqfs that property rights violations by a powerful state were avoided; magnificent architectural heritage of Islamic civilization was financed and maintained through the centuries; urban districts could cope with the crashing tax burden imposed by an occasionally desperate state; excessive fragmentation of land could be avoided; old age and disability pensions were provided; in an age when insurance as an institution was unknown, rudimentary insurance for the members of a guild or an urban district was provided; infrastructure projects such as bridges, roads, ports, lighthouses, libraries, water conduits, aqueducts, public fountains and pavements were built and maintained; in short practically all the services one can expect to have in a civilized society, save defense, were financed, organized, built and maintained by this system. The waqfs, actually, even aided the defense effort by building and maintaining urban walls and fortresses. Finally, it was through the waqfs and the services they provided that Islam could spread first in Anatolia and then in the Balkans.
Waqf ships even made the pilgrimage possible by providing a regular transport of the Egyptian grain from Suez to Mecca’s port Jeddah. Moreover, all these services were provided through de-centralized decision-making, i.e., not by a powerful but aloof central authority but by concerned philanthropists determined to address social and economic problems in their own neighborhood.
All of this means further that with a well functioning waqf system bulk of the government expenditure can be substantially reduced. A reduced government expenditure leads to a lower government borrowing, a reduced crowding-out effect and a reduced rate of interest. A reduced rate of interest, on the other hand, leads to higher private investment and finally growth. Moreover, cash waqfs are structurally very close to banking. Indeed, if we look at western economic history, we would note that deposit banking in the West had developed from the Italian cash foundations, Monti di Pieta. American economic historians have discovered direct linkages between the American philanthropic foundations in the northern states and massive capital accumulation that led to the northern industrial revolution and eventual victory of the northern states versus the South (McCarthy, 2003, ch.4). In short, there is a very serious potential for waqfs as a tool for modern economic growth in the Islamic world. But recent research has shown that with the possible exception of Turkey and India, waqfs are largely forgotten in the Islamic world. Everywhere, including Turkey, the states have replaced bulk of the functions of the waqfs with the result that decisions to provide services are taken by indifferent and often corrupt bureaucrats, quality of the state provided services are often dismal and the costs are sky high. Moreover, to finance these dubious results, the states either borrow with the consequences I have just explained or impose taxes. Taxation, on the other hand, curbs private initiative, reduces consumers’ and producers’ surplus and impedes growth. The situation is much more acute in the rest of the Islamic world. A thorough waqf reform sensitive not only to the formidable waqf tradition in the Islamic world but also to the achievements of this institution in the West is therefore urgently needed.
Islamic economics is said to have re-emerged in the 1970s. Being a student of Islamic history as well, do you believe Islamic economics was ever practiced before?
The first century of Islam probably witnessed the true Islamic economy. But our knowledge of Islamic economic history in this period is unfortunately very inadequate. We are probably best informed about the Ottoman economy as I mentioned above. So, was the Ottoman economy an Islamic economy? The answer is a frustrating “yes and no”. Ottomans certainly were devoted Muslims and respected Islamic law. But, at the same time, they were engaged in a constant struggle of life or death vis a vis the entire Europe and therefore had to form a powerful state. In this, they were influenced by the Roman and Sasanid empires with the result that they deviated from some of the basic teachings of Islam, which promotes private initiative and entrepreneurship. I have described the Ottoman economy as “proto- pseudo socialist”: proto because it antedated Marx by several centuries, and pseudo because rather than being based on class conflict, it promoted harmony between the classes. Our challenge as Islamic economists/economic historians is therefore to look at our own past with a critical perspective and observe where we failed. If we can do this adequately, we can then begin to attempt institutional reforms with the goal of creating modern economic systems, which can both be more loyal to the Islamic economic principles than those in the recent past and at the same time be more efficient to face the challenges of the modern times.

(Finance in Islam)

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