Islam, Economic Freedom, and the Economy of Iraq

Raymond J. Keating

I still remember the first time someone presented me with a real economic problem to ponder. It was in eighth grade. My teacher asked: what ultimately causes economies to grow? She noted that it wasn't about landmass, population, or natural resources, for example. However, she never provided an answer.

The teacher was bewildered. Of course, she was not alone.

What's fascinating and distressing these many years later is how many people, including a wide array of experts, still remain mystified as to the sources of economic growth and prosperity. On CNBC one morning in December, for example, there was some discussion about China eventually overtaking the U.S. as the world's economic leader. The show's host seemed to see it as inevitable that China would surpass the U.S. based mainly on labor costs. Former General Electric CEO Jack Welch countered that places like China and Japan lacked the levels of entrepreneurship, venture capital, and innovation that exist in the U.S. Welch, of course, was correct. But he failed to complete the thought.

That is, long-term, robust economic growth finds its genesis in freedom. The greater the degree of economic freedom (for example, limited government, low taxes, minimal regulation, etc.), the more risk taking, entrepreneurship, investment, innovation and creativity you get, and therefore, the better the economy performs. Of course, such freedom goes hand-in-hand with sound money and the rule of law, including the protection of life, limb and private property.

With this in mind, what should be our outlook for the future of Iraq's economy? No matter what one's position might be on the war in Iraq, seeing Iraqi patriots braving the threat of terrorism in late January to cast votes in that nation's first truly free elections was nothing less than inspiring.

Still, major issues remain for the Iraqi economy, including the continued war against terrorists. But particularly as work is done on creating a new constitution, the question of how compatible Islam is with the free market looms.

Much attention has been given to whether or not democracy can succeed in Iraq and within the Muslim world in general. Salim Mansur, a Muslim, professor of political science at the University of Western Ontario and Islamic scholar, wrote a fascinating paper in 2004 for the Center for Security Policy tracing a bit of Muslim history and concluding that "a politicized Islam became a prescription for Muslim violence against Muslims." He pointed out that both sides in politically organized violence have made appeals to Islam. Mansur sees the need for the Muslim world to engage "in that brand of politics which will guide them to a democratic future and allow them to construct an alternative vision of Islam than the one that has been so destructive and counter-productive in the making of their history." Can it be done? Reporting in September 2004, Peter Brookes of the Heritage Foundation noted that 11 Muslim majority nations were electoral democracies.

But what about economic freedom? The following table looks at where the world's most populous Muslim nations ranked on the 2005 edition of the "Index of Economic Freedom." The Index is published each year by the Heritage Foundation and "The Wall Street Journal," and it gauges 155 nations according to variables that fall into ten categories: trade policy, fiscal burden of government, government intervention in the economy, monetary policy, capital flows and foreign investment, banking and finance, wages and prices, property rights, regulation, and informal market activity.

"Index of Economic Freedom" Ranking of Nations with 50% or More Muslim Population

Source: Muslim population figures from "Analysis of the World Muslim Population by Country/Region," http://www.factbook.net/muslim_pop.php

Of the 46 nations with a majority Muslim population ranked in the "Index of Economic Freedom," only 10 were labeled as "mostly free." While majority Muslim nations accounted for 30% of the nations ranked on the Index, they accounted for 44% of the "mostly unfree" or "repressed" nations, and for only 14% of the "free" or "mostly free" countries. Of the world's 12 "repressed" nations, five, or 42%, have majority Muslim populations. Out of the 17 nations ranking as "free," none have majority Muslim populations. This is not good news, but it also is not a lost cause.

Bahrain, for example, ranked best among the Muslim nations at 20th in the world, while also claiming a 100% Muslim population. The United Arab Emirates came in at a respectable 48th, with a 96% Muslim population.

So, there are a handful of modern-day examples of Muslim nations that rate respectably when it comes to economic freedom. However, the bias currently tilts in one direction against freer markets. Does this tilt reflect an inherent bias in the Islamic faith? Opinions are split on this.

History says there is a chance for success, but one has to go back centuries. For example, writing in "Religion & Liberty" ("Islam and Freedom," Acton Institute, September and October 1993), Dr. Imad A. Ahmad, president of the Minaret of Freedom Institute, a pro-free market Islamic organization, noted that from the eighth to fifteenth centuries "world trade" and "Muslim economy" were almost synonymous. Ahmad observed that back then, "Muslims freely produced and circulated literature including pre-Islamic Greek, Persian, and Hindu works. Muslim creativity was manifested in scientific and technological breakthroughs that included the development of algebra, the invention of spherical trigonometry, the discovery of the circulation of the blood, and the development of the sugar-refining industry. The Muslims introduced pluralism to statecraft by treating peaceful non-Muslim groups as protected minorities. Their internal affairs were governed by their own laws to a degree unmatched even in modern secular states."

Ahmad later made the case that many of the fundamentals needed for a market economy could be found in Islam:

"Because the Qur'an recognizes that man is at once rational, volitional, acquisitive, and ethical, it encourages free trade and economic progress. It prescribes moderation as the means of attaining success in this world and the next (see, e.g., verses 7:31-32, 18:46 and 17:29). It asserts that man can and should act to provide for existence on this material plane without sacrificing his moral sensibilities. Reasonable consumption is encouraged (2:168), while niggardliness (35:29), wastefulness (6:141) and extravagance (17:27) are condemned. The desire for a livelihood (4:5), for comfort (42:36), even for ornament and adornment (18:46) or protection from future uncertainty (4:9) in this world is never called evil. Private property is protected (2:188). The fulfillment of obligations is commanded (2, 177;5:1) and contract law detailed (e.g., 2:282-283). Fraud is prohibited (26:181) and clear standards of weights and measures called for (55:9). These principles were developed by Islamic legal scholars into a politico-economic system that thrived and dominated world markets for over seven hundred years."

An obvious question arises: So, what the heck happened? Ahmad wrote: "Political leaders, then as now prone to corruption, began interventions into the economy, gradually developing a loss of respect for private property and individual liberty. Muslim scholars, who until the thirteenth century had been largely independent of the government, were no longer permitted to engage in original thought (called ijtihad)." That would explain much of the Muslim world's decline, particularly relative to the West. But what about the more recent radicalism?

David Forte, author of "Studies in Islamic Law," explained in one article ("Islam, Past and Future" from the January/February 2002 issue of "Religion & Liberty"):

"Beginning in the late eighteenth century, reactions to the corruption and, later, to the decline of the Islamic empires grew apace. Two forms of Muslim reaction argued that the Islamic world had strayed from its origins. One group believed that the empire had tolerated Sufi mysticism too much. They held that the empire had not been legalistic enough. This group sought to impose the details of the Shari'a in all its rigor, as codified some centuries previously. They were what are now appropriately termed the fundamentalists...

"Another group of thinkers, coming to prominence in the late-nineteenth and early-twentieth centuries, believed that the ulema [the legal and religious scholars, who became, in fact, the court party of the Ottoman Empire] were part of the problem. Many believed that Islam in its creative era, free of the legalism that later concretized around the religion, was what should be revivified. They held that the law should be thought anew, leapfrogging past the later codifications and finding its source in the Qur'an and in those actions of Muhammad (the traditions of the Prophet) that could be validated...

"Beginning in the 1920s much of the Islamic fundamentalist revival was politicized into a new phenomenon: Islamist extremism. Influenced by modern Western notions of state power and of the force of political ideology, thinkers such as Sayyid Qutb of Egypt and Abu Al-Mawdudi of Pakistan held that the Islamic world had fallen into a state of pre-Islamic 'ignorance' or worse, of apostasy. Consequently, a vanguard of true believers was necessary to take power by violent means and to attack those leaders that had fallen away from Islam, no matter how much they claimed to be Muslims. Although the Satanic West was proclaimed the enemy, the true objectives of the extremists were to change Islam into a modernized ideological force."

It also must be acknowledged that there are arguments offered in Islam for wealth redistribution, and against the charging of interest. As Virginia Postrel wrote in "The New York Times" on August 12, 2004: "In recent decades, Islamic economics has come to mean three things, all supposedly rooted in the 'golden age' of seventh-century Arabia: a ban on interest, a wealth tax known as zakat, and honestly and altruism in commercial dealings."

However, as one would expect, people find ways to adapt. Islamic banks do not explicitly charge interest on loans, for example, for purchasing a car. Instead, the bank would buy the car and then sell it to the individual at a higher price -- a mark up -- with the bank keeping title until the loan was paid. Meanwhile, business loans require a share of the enterprise's profits. Obviously, such a system still presents limitations for economic flexibility and dynamism.

In the end, the 10 majority Muslim nations that now rank as "mostly free" on the "Index of Economic Freedom" have overcome some six hundred years of stultification and radical extremism. That's impressive. It also reveals much of what reformers in Iraq face.

If you take the current breakdown of majority Muslim nations according to the "Index of Economic Freedom" as a rough indicator, then the effort in Iraq would seem to have a slightly better than one-in-ten chance at establishing a "mostly free" economy. So, not only when it comes to electoral democracy but also regarding economic freedom, the hope for post-war Iraq is to make history. The perhaps ironic plus for Iraq over some other Muslim nations, particularly in the Arab world, is that it has the opportunity to start with a clean slate, free from the despotism of a Saddam Hussein and free from a fundamentalist religious regime. While Iraq still faces an uphill climb, it has an opportunity to make a run at economic freedom and, therefore, real, lasting prosperity.

Raymond J. Keating is a columnist with Newsday, and a regular columnist for OrthodoxyToday.org. He can be reached at rjknewsday@aol.com.

Posted: 19-Feb-05