An Islamic Model for Stabilization and Growth (Political Economy of Islam)

This book argues that the macroeconomic policy adjustment models recommended by the IMF and the World Bank for implementation in many Muslim countries, with substantial donor financial support, have not been effective. Economic indicators show low economic growth, persistent fiscal and external deficits and limited industrialization. Also, these countries are experiencing increases in unemployment, poverty and substantial growth in income and wealth ‎inequalities. These facts ‎underline an urgent need to produce an alternative to the failed conventional macroeconomic model in order to address the challenge of ‎macroeconomic and social adjustment policies. The project posits and investigates the idea that the Islamic economic model prescribed in the Quran and applied by the Prophet (sawa) could be the ideal model for Muslim as well as non-Muslim ‎countries. Adama Dieye is former Director of Department of the Central Bank of West African States (BCEAO), Senegal Praise for An Islamic Model for Stabilization and Growth 6 Foreword 8 Acknowledgments 13 Contents 14 Abbreviations 18 List of Figures 20 List of Tables 22 1 Introduction 23 1.1 Significance of Macroeconomic Adjustment Policy Issues 23 1.2 Senegal in Brief 25 1.3 An Islamic Model of Stabilization and Growth 26 1.4 Chapter Outline 28 References 30 2 Overview of Current Macroeconomic Policy Issues and Challenges in Mainstream Economics 33 2.1 Institutions, Structural Macroeconomic Reforms and Development 34 2.1.1 Institutions and Development 34 2.1.2 Institutions and Culture 37 2.1.3 Institutions and Education 38 2.1.4 Institutions and Media 41 2.1.5 Assessment of the Institutions of Change 42 2.1.6 Public Investment Policy 45 2.1.7 Inequality and Poverty 47 2.1.8 Financial Structure and Economic Development 52 2.1.9 Global Issues on Ethics and Climate Change 55 2.2 Macroeconomic Financial Stability 55 2.2.1 Fiscal Policy Design 56 2.2.2 Monetary Policy 56 2.3 Conclusion 58 References 59 3 Current Economic and Social Challenges and Islam 70 3.1 Economic Growth Policies from an Islamic Perspective 71 3.1.1 Islamic Institutions and Economic Growth 71 3.1.2 Islam and Social Issues 75 3.1.3 The Environmental Challenge 79 3.1.4 Islamic Financial Infrastructure Development 81 3.2 Macroeconomic Stability Policies in an Islamic Economy 83 3.2.1 The Conduct of Monetary Policy in an Islamic Economy 84 3.2.2 Islamic Liquidity Management Issues 87 3.2.2.1 International Cooperation 91 3.2.3 Islamic Fiscal Policies 92 3.3 Survey of Islamic Macroeconomic Modeling Literature 95 3.4 Data and Methodology of Simulation 97 3.4.1 Data Issues 97 3.4.2 Methodology Issues 98 3.5 Conclusion 104 References 105 4 Islamic Institutional Policy Framework 115 4.1 Islamic View of Economic Development 116 4.1.1 Individual Self-development 116 4.1.2 Physical Material Progress and Growth 116 4.1.3 Development of the Human Collective Toward Integration, Cohesion, and Unity 118 4.2 Islamic Institutional Policy Framework 120 4.2.1 Fundamental Axioms 120 4.2.2 Rules Organizing the Legal and Regulatory Economic Environment 125 4.2.3 The Islamic Concept of Economic Relations 147 4.3 Conclusion 151 References 151 5 Rules of Economic and Financial Operations 153 5.1 Production Activities 153 5.2 Expenditure: Consumption and Investment 155 5.3 Rules of External Economic Relations 157 5.4 Rules of Public Finance and Banking 158 5.4.1 Rules of Public Finance 158 5.4.2 Rules of Banking and Finance 159 5.5 The Macroeconomic Policy Framework 165 5.5.1 The Principles of Islamic Economics 165 5.5.1.1 Decision-Making by the Economic Actors 165 5.5.1.2 Functioning of the Economy as a Whole 165 5.5.1.3 Interaction of Economic Actors with Each Other 167 5.5.2 Design of the Macroeconomic Policy Framework 167 5.6 Conclusion 172 References 172 6 Sustainability of the Senegal Socioeconomic Model 176 6.1 Real Sector Development 176 6.1.1 Growth and Inflation 176 6.1.2 Saving and Investment 178 6.2 Fiscal Developments 178 6.3 Money and the Banking Sector 179 6.4 External Sector 181 6.4.1 Senegal’s External Current Account Payments 181 6.4.2 Foreign Debt and Debt Sustainability 182 6.5 Country and Policy Institutional Assessment 183 6.6 Social Indicators: Population, Employment, and Poverty 183 6.7 Current IMF and World Bank Macroeconomic Adjustment Models for Senegal 184 6.7.1 The International Monetary Fund Analytical Framework 184 6.7.1.1 Variables of the Model 185 6.7.1.2 Equations of the Model 186 6.7.2 The World Bank Analytical Framework 188 6.7.3 The Integrated Model of the IMF and World Bank Approaches 188 6.7.4 Critics of IMF and World Bank Analytical Frameworks 189 6.8 Current Macroeconomic Policies in Senegal and Perspectives 190 6.8.1 Background: The Emergent Senegal Plan 190 6.8.2 Macroeconomic Policies and Structural Reforms 192 6.8.3 Recent Macroeconomic Estimations and Projections 192 6.8.4 Country Policy Institutional Assessment 194 6.8.4.1 Overall Islamicity Index Country Score 194 6.8.4.2 Islamicity Indices Ranking 196 6.8.4.3 Examination of Changes in the Sub-indices 196 6.9 Conclusion 198 References 199 7 Counterfactual Simulation of the Islamic Model for Senegal 202 7.1 Synopsis of the Islamic Analytical Macroeconomic Framework 203 7.1.1 Equations of the Model 204 7.1.1.1 Equilibrium Condition in the Goods and Services Market 204 7.1.1.2 Fiscal Balance Constraint 206 7.1.1.3 The Balance of Payments Constraint 207 7.1.1.4 Financial Assets market Equilibrium 208 7.1.1.5 Behavioral Relations 209 7.1.1.6 Calibration of the Model Parameters 213 7.2 Counterfactual Simulation of the Islamic Model of Stability and Growth for Senegal 213 7.3 Conclusion 218 References 219 8 Implementation of the Islamic Model for Senegal 221 8.1 Policy Recommendations 221 8.1.1 Reforms in Institutions (Rules of Behavior) 222 8.1.1.1 Role of the State 222 8.1.1.2 Educational Infrastructure 223 8.1.2 Reforms in the Real Sector and Trade 223 8.1.3 Reforms in Public Finance 225 8.1.4 Reforms of the Money and Banking Sector 226 8.2 Sequencing of Policy Reforms 228 8.3 The Financing of the Policy Reforms 233 8.4 Expected Performances of the Islamic Model in Senegal 235 8.5 Conclusion 236 References 237 9 Conclusion 239 Appendices 243 Appendix A. Glossary of Terms 243 Appendix B 244 Appendix B (continued): Definition of variables (% of real GDP) 244 Appendix C 244 Appendix D. ECM estimation results of ARDL on real economic growth (GYR) 246 Appendix E. ECM estimation results of ARDL on the Investment Rate of Return (IRR) 250 Appendix F. Prohibition of Riba from sayings of the Prophet (pbuh). (Source: Sahih al-Bukhari) 255 Index 257