Economic Effects of Islam

Economic Effects of Islam

Timothy Taylor 15/12/2018 8

Timur Kuran "critically evaluates the analytic literature concerned with causal connections between Islam and economic performance" in his essay "Islam and Economic Performance: Historical and Contemporary Links," published in the most recent issue of the Journal of Economic Literature (December 2018, 56:4, pp. 1292–1359). He is not interested in sweeping generalizations, but rather in discussing work published in the the last two decades in the professional economics literature. From the abstract:

"Among the findings are the following: Ramadan fasting by pregnant women harms prenatal development; Islamic charities mainly benefit the middle class; Islam affects educational outcomes less through Islamic schooling than through structural factors that handicap learning as a whole; Islamic finance has a negligible effect on Muslim financial behavior; and low generalized trust depresses Muslim trade. The last feature reflects the Muslim world’s delay in transitioning from personal to impersonal exchange. The delay resulted from the persistent simplicity of the private enterprises formed under Islamic law. Weak property rights reinforced the private sector’s stagnation by driving capital from commerce to rigid waqfs. Waqfs limited economic development through their inflexibility and democratization by keeping civil society embryonic. Parts of the Muslim world conquered by Arab armies are especially undemocratic, which suggests that early Islamic institutions were particularly critical to the persistence of authoritarian patterns of governance. States have contributed to the persistence of authoritarianism by treating Islam as an instrument of governance. As the world started to industrialize, non-Muslim subjects of Muslim-governed states pulled ahead of their Muslim neighbors, partly by exercising the choice of law they enjoyed under Islamic law in favor of a Western legal system."

(Side note: The Journal of Economic Literature is published by the American Economic Association, which also publishes the Journal of Economic Perspectives where I work as Managing Editor. JEL is not freely available online, but many readers will have access through library subscriptions.)

Here's some additional detail on a few of these points, but Kuran's article has a wealth of greater detail on history, institutions, and economic studies:

Ramadan Fasting by Pregnant Women

"The timing of Ramadan is based on lunar cycles rather than the solar year. Because lunar months are shorter than solar months, it moves about ten days backwards every year, relative to the solar- based Gregorian calendar. The length of the daily dawn-to-dusk fast also varies, in this case because of interactions between latitude and the time of year when Ramadan falls. Exploiting the variations in time of year and length of fast, researchers have identified both immediate and long- term negative effects on growth.

"Based on cross- country comparisons, Campante and Yanagizawa-Drott (2015) find that longer fasting depresses production and thus economic growth. Several other studies (Almond and Mazumder 2011; van Ewijk 2011; Majid 2015; Almond, Mazumder, and van Ewijk 2015) use intertemporal variations in particular countries to identify how fasting during early pregnancy affects the offspring’s prenatal development, physical attributes, educational achievement, and economic success. Their analyses show that individuals whose mothers fasted while they were in utero have shorter lives, worse health, less mental acuity, lower educational achievement, and weaker performance in the labor market. The magnitudes in question are substantial. Majid’s study shows that adults exposed to the fast while in utero work 4.5 fewer hours per week. The Almond and Mazumder study finds that mental disabilities stemming from exposure to the fast during month one in utero accounts for 15 percent of all mental disabilities among Muslims. The evidence is overwhelming that the fasting ritual, as currently practiced, depresses the global economic competitiveness."  

Islamic Finance

"Islamic finance refers to a class of financial transactions that are ostensibly free of interest and compatible with Islamic teachings. It encompasses Islamic banking, asset- backed Islamic bonds known as sukuk, Islamic insurance known as takaful, along with Islamic credit cards, mutual funds, stock indexes, mortgages, and microfinance. The Islamic finance market was estimated to hold assets around $2 trillion in 2016 (Islamic Financial Services Board 2016). The figure represented 1 percent of the global finance market of around $200 trillion. The global share of Islamic finance pales in comparison to the 24 percent share of Muslims within the global population ... Evidently, only a small share of the financial transactions by or among Muslims follows a self-consciously Islamic template. Nevertheless, in the Muslim world and even beyond, the rise of Islamic finance represents a challenge to conventional finance. ...

"Scholarship on Islamic banking focuses on whether its actual operations differ in any fundamental way from conventional banking, which deals in interest openly and without apology. In practice, various researchers have shown, the returns of Islamic banks are statistically indistinguishable from those of the conventional banks with which they compete. They generally set their “profit shares” in advance through procedures that make simple transactions look complex. Hence, their returns amount to what most economists call interest. The reason why Islamic banks resort to interest is not for lack of commitment to their charter. Rather, like profit- maximizing conventional banks, they consider interest advantageous under conditions of asymmetric information ..."

Islamic Charities

"Self-consciously Islamic charities tend to outperform governments in providing social services. But the same is true of private secular charities. Evidently, the successes of Islamic charities stem from superior organization, rather than Islam itself. Indeed, from an organizational standpoint, today’s Islamic charities harken more to the charities of advanced modern societies than to anything found in seventh-century Arabia. Although Islamic charities generally tout their services to the poor, by and large their beneficiaries belong to the middle class."

A version of this article first appeared on Conversable Economist.

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  • Tom Westbrook

    Without massive oil reserves, you just have to look at places like Pakistan, Bangladesh, Indonesia and so on. Total failure.

  • Yannick Farrell

    There's a reason why there are only a handfull of internationally accredited universities in all of the islamic world and half of those universities are being run with the help of faculty and staff from the non muslim world, without that help they would loose their accreditation.

  • Elisabeth Rogers

    Things aren't looking good for the future either.

  • Liam Mascoll

    1,4 billion muslims, the second largest religion on the planet and they can barely scrape together 1 percent of the banking wealth. That pretty much says all there is to say about their economic viability in the modern world.

  • Ralph Hamilton

    Fake countries built on oil.

  • Sam Miller

    Very interesting, thank you for this article!

  • Danny Owens

    Most Muslims know very little about Islamic Finance and Shariah compliant transactions.

  • Clayton Forrester

    it relies heavily on capitalist societies to plunder, then after they do that, it all slowly goes into entropy

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Timothy Taylor

Global Economy Expert

Timothy Taylor is an American economist. He is managing editor of the Journal of Economic Perspectives, a quarterly academic journal produced at Macalester College and published by the American Economic Association. Taylor received his Bachelor of Arts degree from Haverford College and a master's degree in economics from Stanford University. At Stanford, he was winner of the award for excellent teaching in a large class (more than 30 students) given by the Associated Students of Stanford University. At Minnesota, he was named a Distinguished Lecturer by the Department of Economics and voted Teacher of the Year by the master's degree students at the Hubert H. Humphrey Institute of Public Affairs. Taylor has been a guest speaker for groups of teachers of high school economics, visiting diplomats from eastern Europe, talk-radio shows, and community groups. From 1989 to 1997, Professor Taylor wrote an economics opinion column for the San Jose Mercury-News. He has published multiple lectures on economics through The Teaching Company. With Rudolph Penner and Isabel Sawhill, he is co-author of Updating America's Social Contract (2000), whose first chapter provided an early radical centrist perspective, "An Agenda for the Radical Middle". Taylor is also the author of The Instant Economist: Everything You Need to Know About How the Economy Works, published by the Penguin Group in 2012. The fourth edition of Taylor's Principles of Economics textbook was published by Textbook Media in 2017.


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