Tuesday, November 18, 2008

Why has the Muslim world failed to develop?

Before we proceed reading this article, let us refrain from any misconception regarding Islam from the Westerners.
Islam is not only teach religion. Islam teach ideology, economics, trades, law, theology, rituals, human relations and all other aspects of life. Just wondering how Islamic Banking existed in Europe.
For more info on Islam please refer to http://islam101.org/ or any related websites.
I have no intention to give any opinion on this but just to share this information to see either any solution to World Financial Crisis that have started in USA - I leave to you to analyze it. Started since 1971 the world have face again and again the problem that I guess never exist before that time -'Financial Crisis'. All Policies that mostly invented after it, have proven to be failure. - RedzuanK

Why has the Muslim world failed to develop?
(source: http://www.khilafah.com/)

The Muslim world with its vast resources continues to generate much interest among economists, thinkers and policy makers. The Muslim world since the end of the Uthmani Khilafah has had its borders drawn and redrawn after various powers interfered in the running of its affairs. The Muslim world includes the Arabian Peninsula, Turkey, North Africa, Pakistan, Bangladesh and the south eastern countries of Malaysia and Indonesia.

Development economics is a branch of economics, which deals with how simple forms of organisation can transfer to complex forms of organisation and production. Development is seen as the ability to increase production without any consideration applied to its distribution. Economists do make a distinction between growth and development - growth is seen as more of the same goods and services whilst development is the structural and technological infrastructure behind the production. In terms of GDP, the measurement used to calculate the value of total production of goods and services, the Muslim world is second only to China with growth rates of 7% in some countries. These are growth rates most European countries would be proud of. However reading between the figures reveals many problems.

If we define development as the building of the necessary infrastructure to fulfil the basic needs of the people such as food, clothing, shelter, security and education, here the Muslim worlds comes in at the bottom of the list. Wealth in the Muslim world suffers from huge misdistribution.

The Middle East for example relies heavily upon oil revenue's therefore it is affected greatly by changes in oil prices. Very little oil revenue actually trickles down to the population but rather ends up in US bank accounts. Prince Alwaleed Bin Talal Alsaud of the Saudi monarchy is valued at over $20 billion with half of his wealth invested in the US.

In the Arab world one in five Arabs still live on less than $2 a day. And, over the past 20 years, growth in income per head, at an annual rate of 0.5%, was lower than anywhere else in the world except sub-Saharan Africa.

In Pakistan 40% of land is in the hands of 23 families.

Government investment in infrastructure and public services is minimal considering the large population of the Muslim world.

The Muslim world's elections are at best a farce, with autocratic kings and presidents only rescinding their authority when they die.

Half of the Muslim world is treated as lesser legal and economic beings, and more than half the young, burdened by joblessness and un-Islamic economic policies want to get out of their country as soon as they can.

The role of the IMF and World Bank in countries such as Pakistan, Turkey, Indonesia, Bangladesh and Egypt has directly aided some of the underlying economic problems. The general solution provided by such institutions is the engaging of trade to climb out of poverty and for development. In reality there are a number of obstacles placed by the developed nations that ensure developing nations will never reach a level where they can compete. What this actually means is that Western goods should be imported rather than allow imports from poorer countries. The theory is that only via trade will nations pull themselves out of poverty. Whilst encouraging the third world to lower their market barriers such as tariffs and quotas on various goods, the Western nations do not do the same for their markets. Western economies have not been developed by such subscribed policy, as outlined by Dr Ha Joon Chang in his book "Kicking away the ladder." The continued failure of the World trade organisation clearly shows the unwillingness by Europe and the US to lower its trade barriers whilst at the same time lobbying India and China to remove their barriers.

This situation in the Muslim world stems from the colonial era and is summed up best by David Fromkin, Professor and expert on Economic History at the University of Chicago: "Massive amounts of the wealth of the old Ottoman Empire were now claimed by the victors. But one must remember that the Islamic empire had tried for centuries to conquer Christian Europe and the power brokers deciding the fate of those defeated people were naturally determined that these countries should never be able to organize and threaten Western interests again. With centuries of mercantilist experience, Britain and France created small, unstable states whose rulers needed their support to stay in power. The development and trade of these states were controlled and they were meant never again to be a threat to the West. These external powers then made contracts with their puppets to buy Arab resources cheaply, making the feudal elite enormously wealthy while leaving most citizens in poverty.

"The absence of any organised way of generating wealth and allocating wealth has created a situation where everyone in the Muslim world needs to fend for themselves and attempt to make the best out of a chaotic situation. This just compounds the problem further as many resort to bribery, stealing and fraud to make ends meet. This shows that the people in the Muslim world are not inherently corrupt or born to steal, rather as can be seen with the Gulf States many Muslims when given the opportunities are hard working and can be relied upon.

The question that really needs to be answered is where we begin to develop the Muslim world. The Muslim world fails in applying a set of consistent polices and this has resulted in such nations being unable to unify the populace on the direction of the economy. Many policies by the rulers are time specific or usually motivated by the political climate of the time. The unfortunate result of this is that a whole host of contradictory policies are applied within the Muslim world and hence the nation doesn't move in the same direction. Although Pakistan has the worlds largest untapped coal reserves it imports over 2 million tonnes of coal a year to meet its energy needs. Across the Muslim world there exist manufacturing companies and mining companies. However the contract to mine the Muslims world's precious resources always go to foreign companies.

The development of the Soviet Union is a good example of how consistent polices lead to development. Socialism emerged as a very powerful force across Europe and many were attracted to it after witnessing the wide disparities in wealth distribution in Capitalist nations. The Communists after gaining power due to the failures of the Tzar set about implementing a five year plan starting in 1928, in order to build a heavy industrial base.The five year plan was a list of economic goals that was designed to strengthen the USSR's economy between 1928 and 1932, making the nation both militarily and industrially self-sufficient.

The five year plan was to harness all economic activity to the systematic development of heavy industry, thereby transforming the Soviet Union from a primitive agrarian country into a leading industrial and military power. Carrying the plan out, the Stalin government poured resources into the production of coal, iron, steel, railway equipment, and machine tools. Whole new cities, such as Magnitogorsk in the Urals, were built with enthusiastic participation of young workers and intellectuals. This ambitious plan fostered a sense of mission and helped mobilise support for the regime. The Soviet Union played a direct role in the defeat of Hitler in World War 2 - which launched the Soviet Union to superpower status.

Islam is the only common denominator between everyone in the Muslim world. Islam has a glorious history in the region and propelled the Muslims from the deserts of Arabia to the far reaches of the earth. Therefore this would be the place to begin deriving economic policies for the Muslim world. These policies would be accepted by all Muslims as they are from Islam and would actually bring confidence in the Islamic rules once people see they can work.

Practically this means that Islam should be applied in the Muslim world and Islam's polices on trade, ownership, companies, public finance, investment, currency and poverty elimination would need to all be applied. The derivation of such polices from the same foundations would ensure no contradictions occur as they are all coming from the same basis. All foreign policies from Socialism, the Capitalist free markets, Nasserism, Kemalism and any other ‘ism' should be removed as these have proven to be failures.

Friday, November 7, 2008

Financial Crisis

The term financial crisis is applied broadly to a variety of situations in which some financial institutions or assets suddenly lose a large part of their value. In the 19th and early 20th centuries, many financial crises were associated with banking panics, and many recessions coincided with these panics. Other situations that are often called financial crises include stock market crashes and the bursting of other financial bubbles, currency crises, and sovereign defaults.[1][2]
Many economists have offered theories about how financial crises develop and how they could be prevented. There is little consensus, however, and financial crises are still a regular occurrence around the world.

Type of Financial Crisis:
  • Banking crises

    When a commercial bank suffers a sudden rush of withdrawals by depositors, this is called a bank run. Since banks lend out most of the cash they receive in deposits (see fractional-reserve banking), it is difficult for them to quickly pay back all deposits if these are suddenly demanded, so a run may leave the bank in bankruptcy, causing many depositors to lose their savings unless they are covered by deposit insurance. A situation in which bank runs are widespread is called a systemic banking crisis or just a banking panic. A situation without widespread bank runs, but in which banks are reluctant to lend, because they worry that they have insufficient funds available, is often called a credit crunch.
    Examples of bank runs include the run on the Bank of the United States in 1931 and the run on Northern Rock in 2007. The collapse of Bear Stearns in 2008 is also sometimes called a bank run, even though Bear Stearns was an investment bank rather than a commercial bank. The U.S. savings and loan crisis of the 1980s led to a credit crunch which is seen as a major factor in the U.S. recession of 1990-1991.

  • Speculative bubbles and crashes

    Economists say that a financial asset (stock, for example) exhibits a bubble when its price exceeds the value of the future income (such as interest or dividends) that would be received by owning it to maturity.[3] If most market participants buy the asset primarily in hopes of selling it later at a higher price, instead of buying it for the income it will generate, this could be evidence that a bubble is present. If there is a bubble, there is also a risk of a crash in asset prices: market participants will go on buying only as long as they expect others to buy, and when many decide to sell the price will fall. However, it is difficult to tell in practice whether an asset's price actually equals its fundamental value, so it is hard to detect bubbles reliably. Some economists insist that bubbles never or almost never occur.[4]
    Well-known examples of bubbles (or purported bubbles) and crashes in stock prices and other asset prices include the Dutch tulip mania, the Wall Street Crash of 1929, the Japanese property bubble of the 1980s, the crash of the dot-com bubble in 2000-2001, and the now-deflating United States housing bubble.[5][6]

  • International financial crises

    When a country that maintains a fixed exchange rate is suddenly forced to devalue its currency because of a speculative attack, this is called a currency crisis or balance of payments crisis. When a country fails to pay back its sovereign debt, this is called a sovereign default. While devaluation and default could both be voluntary decisions of the government, they are often perceived to be the involuntary results of a change in investor sentiment that leads to a sudden stop in capital inflows or a sudden increase in capital flight.
    Several currencies that formed part of the European Exchange Rate Mechanism suffered crises in 1992-93 and were forced to devalue or withdraw from the mechanism. Another round of currency crises took place in Asia in 1997-98. Many Latin American countries defaulted on their debt in the early 1980s. The 1998 Russian financial crisis resulted in a devaluation of the ruble and default on Russian government debt.

  • Wider economic crises
    Main articles: Recession and Depression (economics)
    A downturn in economic growth lasting several quarters or more is usually called a recession. An especially prolonged recession may be called a depression, while a long period of slow but not necessarily negative growth is sometimes called economic stagnation. Since these phenomena affect much more than the financial system, they are not usually considered financial crises per se. But some economists have argued that many recessions have been caused in large part by financial crises. One important example is the Great Depression, which was preceded in many countries by bank runs and stock market crashes. The subprime mortgage crisis and the bursting of other real estate bubbles around the world is widely expected to lead to recession in the U.S. and a number of other countries in 2008.
    Nonetheless, some economists argue that financial crises are caused by recessions instead of the other way around. Also, even if a financial crisis is the initial shock that sets off a recession, other factors may be more important in prolonging the recession. In particular, Milton Friedman and Anna Schwartz argued that the initial economic decline associated with the crash of 1929 and the bank panics of the 1930s would not have turned into a prolonged depression if it had not been reinforced by monetary policy mistakes on the part of the Federal Reserve,[7] and Ben Bernanke has acknowledged that he agrees.[8]

* [source: wikipedia]

Now let us see what are they say on the Financial Crisis:

1. Muhammad Yunus

A Nobel Prize-winning academic turned micro-finance banker for the poor has important advice for Washington. Muhammad Yunus believes that the government bailout of the banking system is but the first step in redesigning the global credit system. In the end, Yunus believes that a new self-correcting market system will have to be created.

In 1983, Muhammad Yunus set up the Grameen Bank in Bangladesh and ushered in the era of micro-finance and social entrepreneurship. By offering tiny amounts of credit to poor people, mostly women, to finance small businesses, he contradicted the established banking norms of the day. As a consequence, he received an unrelenting barrage of criticism from bankers and economists. Today, however, Grameen Bank, which won the Nobel Peace Prize jointly with Yunus in 2006, has a portfolio of loans a lot more solid than the portfolios of most large, global commercial banks—and Dr. Yunus is smiling. "Our system is based on trust, not collateral or guarantees, and still the people pay back," he said recently in an interview with BusinessWeek. "Conventional banking has always been represented as a perfect, self-correcting system. We see that it is not. It is collapsing as banks run to the government for a bailout."

And that is a huge mistake, says Yunus, who holds a PhD in economics from Vanderbilt University. In the past, government charity didn't help alleviate poverty in Bangladesh or most of the Third World. Instead, market-driven micro-finance offerings from Grameen Bank and others have enabled millions of people to get themselves out of poverty. It's also a system with a very good pay-back history: Poor people pay back their loans at average or above-average rates.

In the same way, government bailouts of the existing banking system are not a long-term solution either, says Yunus. "The solution is for the market to find a solution, not for the government to bail out a defective system." Yunus argues that a new banking system, based on market principles, with proper government regulations, but not ownership, needs to emerge from the current crisis. In the same way, the financial system, working through the markets, has to be enabled to redesign itself and emerge as a regulated system that operates outside of government control.

2. Tun Dr Mahathir Mohammad (Malaysian 4th Prime Minister)

Indeed West banks & financials system already failed. The World has to evaluate to replace it to other system such as Islamic banking and trading with peculiar currency such as Gold Dinar.
Gold will have value anywhere in this world. Gold Dinar is suggested to payment purposes only on international trade.

Bail-outs are not going to work. We have seen that already. Even partial or complete nationalization of banks and other financial institutions will not really help in turning things around.

3. Harun Yahya (Adnan Oktar - A prominent Turkish intellectual)

The situation that has appeared in the markets as a result of the recent economic crisis in America especially and the developed countries of Europe, has been seen as “Darwinism finance - literally the survival of the fittest for the banks,” by some sections of the foreign press. Some press organs have even claimed that “Darwinism rules the market” in the countries in question.

This description stems from the concept of the “strong overcoming the weak” that lies at the root of Darwinian thinking. The fact is, however, that the concept of the strong overcoming the weak is not one that came into being just when Darwin said it. It is not Darwinism that brought the concept into being. Therefore, an imaginary Darwinist concept is not justified by the survival of the strongest banks in the market, and the situation does not constitute an example of Darwinism.

The first cause of the financial crisis that has hit the entire world is the interest system. This, made unlawful by our Lord, has been shamelessly implemented as it has been depicted as attractive in societies based on self-interest only, and people thought they would never come to harm from it but would always make profits. Under the attractive-seeming appearance of the interest system, people were encouraged to invest their money in banks rather than in the direction of production or investment. Since there is no production or flow of capital in a system in which people hide their money in banks, in safes or under the mattress, financial troubles such as high costs of living, inflation or economic collapse are the inevitable result. That is what happened in the global financial crisis in question; the halt in production, the absence of a money flow and money being kept in banks to earn interest caused the economy to collapse.

Some people, greedy to accumulate goods and money out of concern for the future and a love of material things, are unwilling to spend the money they possess, and are parsimonious with it. These people’s policies are generally built on the increasing weakening and elimination of the weak while they save and become increasingly strong and rich. For that reason, they have no compunctions about exploiting the poor, never give alms, never behave generously, never spend money even on themselves, but constantly save up against some unknown day in the future. The fact is, however, that because of the lack of production, this money that they generally keep in reserve and think will bring them profits through the interest system is unable to keep pace with inflation and loses value. This money has never produced the anticipated abundance. Stagnant production has always been the consequence of this money excluded from the markets out of parsimony.

It is impossible for such a financial crisis to arise in the absence of an interest-based financial system, where people are not parsimonious and hide their money away, when they employ it generously for production, when they make proper use of the money in their possession, when they give alms and, most important of all, when they submit to Allah and believe with all their hearts that it is Allah Who will bestow money and wealth. It is impossible for people to become poor under such a system. When the rich help the poor, the poor will also have purchasing power. That will make production necessary. When manufacturing rises and people have purchasing power, factories will operate and sales will rise to high levels. The markets will immediately revive and money kept in banks and under mattresses that benefits nobody at all will enter the markets again. The poor will grow richer, and the rich will grow richer still. The abundance caused by the re-emergence of money that had been hidden away will, of course, be very great. This is the only solution capable of solving the problems facing all the countries of the world.


Well that are what they says.
I believe the world can look for solution to seek for the justice-based financial sytem.
What say ya? any opinion?