Pillars of an Islamic Welfare State!

Finding an Answer to Iqbal’s Question – in the Footsteps of Jinnah

In my previous article I pointed out that Iqbal had noted in his letter (dated 28^th May 1937) to Jinnah: “The atheistic socialism of Jawaharlal is not likely to receive much response from the Muslims. The question therefore is how is it possible to solve the problem of Muslim poverty? And the whole future of the League depends on the League’s activity to solve this question.” With this in mind I went on to say that the Muslim League’s future was therefore only till what they had managed to answer and was destined to see its end when the time for the next question came – a course which the coming years had taken and are now a part of League’s history.

The Planning Committee which Jinnah had formed in 1943 with the aim to chart out a five year plan for the socio-economic uplift of Pakistan could not complete its objective due to the turn of events in the short span of time. Taking lead from Jinnah’s advice that in any such plan ‘our ideals should not be capitalistic but Islamic,’ we must return to completing this work initiated by Jinnah so as to find the answer to Iqbal’s question.

Saleena Karim in her book ‘Secular Jinnah’ (2010) attributes the usage of the term ‘Islamic socialism’ to Jinnah himself ‘as well as the early leaders of Pakistan.’ Furthermore, she states: ‘Liaquat Ali Khan considered the abolition of landlordism a necessary step towards establishing this Islamic Socialism.’ But the certainty in the need of abolishing ‘landlordism’ is not enough unless one comes up with an alternate which is consistent with the ideological foundations of the country and thus the constitution. Similar is the case in dealing with every other economic malaise – which will not go away unless a more feasible and consistent alternative is put forward.

UNDERLYING FRAMEWORK of ‘ISLAMIC WELFARE STATE’

The concept of ‘Islamic socialism’ or more recently ‘Islamic welfare state’ (IWS) has often resurfaced and mostly as a campaign mantra of the political parties. However, its specific pillars largely remain undefined. A stop gap measure has often been Islamicizing the welfare model of Scandinavian countries by introducing zakat and other such Islamic features to it. But doing this is largely plagiarizing what may look similar but is distinctly different from the principles of IWS which evolved during the time of the Prophet, peace be upon him and his family, and on which the earliest Muslim Caliphate was based.

As the term suggests, a simple but technical definition of a welfare state is where State manages the economy so as to maximize the overall welfare of the society with the objective to fulfill the basic needs of its citizens and ensure an equitable distribution of wealth.  The ‘Islamic welfare state,’ as understood from the hadith literature, is explicitly different from the ‘modern welfare state’ in that it is extremely market based – forbidding majority of government interventions in the market mechanism except regulatory and what has been declared illegal by the religious law. For example, the fundament pillars of IWS do not allow for either minimum support prices or minimum wages which must be determined by the market. However, this presumes a competitive market mechanism rather than a monopoly/monopsony – not to be allowed by the State.

State intervention, with respect to achieving its welfare goals, takes the form of lump-sum transfer – in the form of social security (via zakat and taxes) and providing for the needs of basic health, education and public goods (via taxes and interest free borrowing) – only after market has allocated the resources. Furthermore, nationalization of all sorts of private property (eg. farms and industry) and similarly privatization of all public property (eg. parks, natural resources and dams) is discouraged and not allowed unless under special circumstances and at the discretion of the head of the state. Thus the state has no role in directly intervening in the markets and running businesses unless the social returns are greater than private returns in which case the entity should be run as a public service with no profit/loss orientation.

REGULATORY REGIME

Land and Agriculture: While there is almost no state intervention in the markets, there is strong underlying regulatory framework which surfaces after a closer look. For example, with respect to land reforms, in an IWS any state land can be utilized by anyone of the citizens for agriculture without any formal permission - although State can formalize this if it wants to. More importantly, if the land remains un-utilized for 2 years (or 3) then the state is required to take it away and give it to others for cultivation or keep it to itself. Much emphasis is also laid on the appropriate distribution of farm income between land owner and farmer – from 1/3 to 1/2 going to the famer depending on who provides the water etc. Similarly, towards the revenue side, the farm output is taxed from a minimum of 5 to 10% of the output depending on if the water is provided through rain or irrigation, respectively.

Corporate Finance and Banking: Other such regulations include that any CEO or Board members of the company – who make business decisions – have to be shareholders at the same time. Simultaneously, such decision makers (who are also shareholders and thus have their incentives aligned) must be given autonomy in their decision making. Moreover, forward buying and selling are considered against the Islamic principles which do not allow an object to be sold as long it is not in the possession of the seller. Similar is the case about Options pricing. Both these transactions are viewed as a transfer of risk such that one person’s benefit is other’s loss and thus equivalent to gambling. By the same principle applicable to forward buying and selling, banking practices of fractional reserve banking where an X amount of cash deposit is made to lend a total of roughly 10X, given a reserve ratio of 10%, also requires considerable review.  In all likelihood, an X amount can only be used to make a total loan of X amount under the Islamic framework.

Other Interventions and State Finances: Last but not least, State is expected to assist the poor in paying back their loans if they fail despite all efforts. In this regard, if the State decides to pay off the loans itself, it is to be paid back in full irrespective of the interest payment. It is beyond the State’s jurisdictions to get any part of the loan written off unless voluntarily undertaken by the lender. Although the State itself is not allowed to fund its expenses from the interest based borrowing, it can raise revenue through taxation before undertaking the intended project. Other sources of government finances are income from natural resources etc and interest free borrowing primarily from its Central Bank and from the public through non-interest bearing prize bond schemes.

ECONOMIC PROFESSION and the ISW PILLARS

These are just some of the key pillars of ISW, based on the extensive hadith literature, expressed in the language of modern economics. Many of the theoretical economic foundations of these pillars are well known and agreed upon by the majority while others remain disputed between the academic circles, eg. economics of minimum wages. Few on the other hand, such as interest free financing of government expenditure, are too alien to even be considered in the economics profession such that I do not expect any serious research on this subject in any near future. However, the intention is not to replicate the West or the East but to innovate our own system so as find an answer to Iqbal’s question of ‘Muslim Poverty’ based on Jinnah’s words: ‘our ideals should not be capitalistic but Islamic.’

note: picture from lyndit.com