Saturday, July 10, 2010

Impact of Religion on Economic Growth: USAID Bureau Policy and Program Coordination 2004 Report

Peter Timmer, Development Alternatives, Inc. (DAI Pakistan ) and Center for Global Development
Donald McClelland, U.S. Agency for International Development

The long-standing debate over the impact of religion on economic growth particularly the current debate over the impact of Islamic thought on the economic prospects of Muslim countries—parallels similar debates over the impact of Catholicism, Hinduism, and other religions. These debates have not had much impact on development practice, partly because of their inconclusive nature.

The issue addressed in this paper is whether Islam, as the “religion of practice” in a wide range of countries, poses serious problems for economic growth or whether the undeniably poor economic performance of many Muslim countries stems from sources unrelated to Islamic theology and practice.

Recognizing the tension between progressive and moderate practitioners of Islam and their fundamentalist challengers—a tension that often spills into the political arena—the paper concludes that most Muslim countries face very difficult governance issues that have impeded rapid economic growth

Why do Muslims tend to be relatively poor? The facts are undisputed: Muslims make up 19 percent of the world’s population but earn only 6 percent of its income. The issue is whether there are any causal relationships between religion and economic development. Many scholars suggest that religion is typically not a problem, pointing out that Islamic beliefs and values that appear inimical to growth (e.g., the ban on interest and restrictions on speculation) are routinely circumvented. The corporation is now an acceptable and popular organizational form in most Muslim countries. Insurance contracts are legally enforceable. Banks are integral components in every Muslim country’s economy.

And contracts involving interest payments are commonplace, although payments are sometimes disguised as commissions or fees.

Others believe there are deeper problems. Characterizing an Islamic economic system—
“Islamic economics”— as a middle ground between capitalism and socialism, they cite the Koran’s overriding emphasis on the need for social justice; rejection of severe economic disparities; condemnation of economic exploitation, usury, and dishonesty; call on well-to-do individuals to use part of their wealth to help the poor and support various charitable endeavors; and repeated expressions of concern for those least capable of defending themselves against poverty. Despite the Koran’s emphases, proponents of Islamic economics argue that it can effectively promote both economic development and social welfare in predominantly Muslim countries.

It seems clear that the economic institutions Islamic law prevented—corporate law, banks, stock markets, modern firms, insurance—are all integral parts of most economies of the Muslim world. As a result, economic policy reforms needed to accelerate economic growth in the Muslim world could be adopted without having to confront Islam as a religion.

Although Islam harbors elements inimical to economic productivity and efficiency, these have not formed an absolute barrier to economic growth. In fact, Noland’s recent analysis (2003) of India, Malaysia, and Ghana provides empirical evidence that there is no consistent, systematic relationship between economic growth and the share of a country’s population practicing Islam. He concludes that the impact of Islam on short-run economic performance is as diverse as Islam itself.

The Muslim world is extensive and diverse, comprising 48 countries where at least 50 percent of the population is Muslim. It extends from West Africa (Morocco and Mauritania) to East Asia (Indonesia). The larger Islamic world includes several countries with a significant Muslim minority. India is the most prominent of these countries with a Muslim minority of over 125 million people (12 percent of the population). Others include Kazakhstan, with almost 8 million Muslims (47 percent of the population), and Uganda, with almost 4 million Muslims (16 percent of the population). In France, nearly 6 million people are Muslim (about 10 percent of the French population).

The top five Muslim-country recipients of USAID economic assistance over the five-year period 1997–2001 were Egypt, Jordan, West Bank/Gaza, Indonesia, and Bangladesh. In 2002, Pakistan and Turkey were among the top five recipients; Indonesia and Bangladesh were not, though they were still among the top 10. The top five recipients of USAID assistance per capita in 2002 included Albania, Kyrgyzstan, Egypt, Jordan, and West Bank/Gaza.

Khan (1999) zeros in on the crux of the issue, asking how would one  know what an Islamic economy looks like if there has never been one. He draws a sharp distinction between Islamic countries as political entities, of which there are many, several with very deep historical roots, and Islamic economies, where historical experience is thin. The examples of the latter usually cited—Afghanistan under the Taliban, Iran under the Revolutionary Council of Ayatollah Khomeini, and Sudan under Hassan al-Turabi—certainly give cause for concern that Islamism can be a vehicle for economic growth and improved standards of living. According to MSI (2002), the reason seems deeply rooted in the nature of Islam:

First, economics is, at best, of secondary importance to Islamists. It does not feature prominently in their political agenda, or in the books, articles and pamphlets that emanate from Islamist circles. Islamist thinkers, politicians, and activists are clearly far more concerned with matters of morality, ethics, and piety than with economic questions. Some even express contempt for economics. As Ayatollah Khomeini once remarked when pressed to address economic issues, “the revolution is about Islam, not about the price of melons.” Islamism is driven first by culture (the search for a “moral order,” consistent with God’s will for mankind, as revealed in the Koran) and, second, by politics (the quest for controlling the levers of power that will make it possible to
establish that moral order). Economic concerns are far less central to Islamist thinking and strategizing; they come well after cultural and political objectives.

To understand the impact of Islam on economic growth in Muslim countries, it is necessary to understand this challenge from Islamism and the links between economics and politics (economic governance). Although it is probably fair to say that Islam per se is not a significant impediment to improved economic performance in any Muslim country (Annex 1), it can be a contributing factor.

According to Jabber (2002), poor economic performance in so many of these countries is one of the three basic causes of widespread alienation of the populations of Muslim countries from their governments. This alienation in turn supports fundamental Islamism, which is the main challenge to political authority in Muslim countries. And Islamism’s political challenge— often using violent means—undermines the basic economic environment needed to improve investment returns and to stimulate higher standards of living.

From this perspective, analyses of what went wrong economically in the Muslim world have focused on immediate or proximate causes, rather than deep and fundamental causes. Abed’s review (2003) for the IMF of the Middle East and North Africa region, for example, provides an extensive litany of policy failures and poor governance as the reasons for their “unfulfilled promise.” Islam is not mentioned even once as a factor associated with these problems.

Similarly, a USAID review of lessons learned from USAID and other donor experience in providing economic assistance to selected Islamic countries never mentions Islam as a contributing factor to the success or failure of the ten specific projects reviewed. Moreover, neither the IMF nor the USAID review provides guidance on how to fix poor policies or improve governance, when both may well be held hostage to the political challenge from fundamental Islamists. Specific actions for possible support by USAID are identified at the conclusion of this report.

PETER TIMMER:  In addition to his faculty positions in three schools at Harvard, Timmer has also held professorships at Cornell and Stanford. In 1992, he received the Bintang Jasa Utama (Highest Merit Star) from the Republic of Indonesia for his contributions to food security. He served as the chief outside advisor to USAID for developing their strategy on growth and agriculture for the Natsios Report (Foreign Assistance in the National Interest), and he was one of the key advisors for the World Development Report 2008: Agriculture for Development. He currently serves as an advisor to the Bill and Melinda Gates Foundation on agricultural development and food security issues.

Some Statistics as Annex in this report: 

Annex 1. Countries in the Muslim World1
Middle East and North Africa (18)
Saudi Arabia
United Arab Emirates
West Bank/Gaza
Europe and
Eurasia (7)
South Asia (4)
East Asia and
the Pacific (3)
Africa (16)
Burkina Faso
Sierra Leone

Agrarian Economies (21)                              Oil Producers (22)                            Neither (9)
Ethiopia                                                               Albania                                                Turkey
Burkina Faso                                                      Algeria                                                 Uzbekistan
Niger                                                                     Azerbaijan                                          Kyrgyzstan
Guinea                                                                  Bahrain                                                Maldives
Mali                                                                       Brunei                                                   West Bank/Gaza
Chad                                                                     Egypt                                                     Lebanon
Tajikistan                                                            Iran                                                       Jordan
The Gambia                                                        Iraq                                                       Morocco
Eritrea                                                                  Kuwait                                                Djibouti
Comoros                                                              Libya
Senegal                                                                 Malaysia
Somalia                                                                Oman
Afghanistan                                                       Qatar
Nigeria                                                                Nigeria
Sudan                                                                   Sudan
Sierra Leone                                                       Saudi Arabia
Bangladesh                                                         Syria
Yemen                                                                 Yemen
Indonesia                                                            Indonesia
Mauritania                                                         Tunisia
Pakistan                                                               Turkmenistan
United Arab Emirates1

1. Member of OPEC (10)
2. Both agrarian and oil producing
Note: Agrarian economies are Muslim countries where at least 50 percent of employment is in the agriculture sector; oil producers are Muslimcountries that are members of OPEC and/or Muslim countries categorized in the exporters of crude oil or oil and petroleum products.
Source: CIA Factbook, 2002.

Agriculture         Industry               Services
Middle East and North Africa
Algeria                                                 8.8                          59.7                        31.5
Egypt                                                    16.7                        33.1                        50.2
Iran                                                        17.7                        33.3                        49.0
Jordan                                                   2.2                          24.8                        73.0
Lebanon                                               11.9                        22.0                        66.1
Morocco                                               13.5                        32.2                        54.3
Saudi Arabia
Syria                                                     22.8                        28.7                        48.5
Tunisia                                                 12.3                        28.8                        58.9
United Arab Emirates
West Bank/Gaza                               7.8                          26.6                        65.6
Yemen                                                  14.6                        48.0                        37.4
Unweighted Average                           12.8                        33.7                        53.4

Europe and Eurasia
Albania                                                50.7                        22.7                        26.5
Azerbaijan                                          17.0                        45.3                        37.7
Kyrgyzstan                                        36.8                        29.2                        34.0
Tajikistan                                            29.5                        29.7                        40.8
Turkey                                                  15.4                        25.3                        59.3
Turkmenistan                                    28.1
Uzbekistan                                         34.4                        23.1                        42.5
Unweighted Average                           30.6                        29.2                        40.1

South Asia
Bangladesh                                         24.6                        24.4                        51.0
Pakistan                                               26.7                        23.1                        50.2
Unweighted Average                           25.6                        23.8                        50.6

Asia and the Pacific
Indonesia                                             17.0                        47.1                        35.9
Malaysia                                              8.7                          51.2                        40.1
Unweighted Average                           12.8                        49.2                        38.0

Burkina Faso                                      39.7                        19.1                        41.2
Comoros                                              40.9                        11.9                        47.2
Chad                                                     39.2                        13.8                        47.0
Djibouti                                                3.7                          14.2                        82.1
Eritrea                                                  15.2                        22.9                        61.9
Ethiopia                                               52.3                        11.1                        36.6
Gambia                                                33.2                        12.3                        54.5
Guinea                                                  23.6                        36.5                        39.9
Mali                                                       41.2                        21.3                        37.5
Mauritania                                         21.3                        29.1                        49.6
Niger                                                     37.8                        17.8                        44.4
Nigeria                                                 29.5                        46.0                        24.5
Senegal                                                 18.1                        26.9                        55.0
Sierra Leone                                       47.3                        33.6                        19.0
Sudan                                                   41.1                        18.5                        40.4
Unweighted Average                           32.3                        22.3                        45.4

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