In the Name of Allah, the Most Gracious, the Most Merciful
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A Meritocratic Islamic State as Islamic Solution to Current Issues (PAPER)


A Meritocratic Islamic State as Solution to Current Issues
Paper presented at the International Conference on Islamic Solutions to Current Issues in the World based on 1 Malaysia Concept
January 2-3, 2011
Meinhaj Hussain

Speech text available here






ABSTRACT

The application of Islam is presented as the solution to the current issues facing the Ummah.  A political and economic model is examined, within a framework of a paradigm of Islamic meritocracy.  Major issues within a political model are the form of government, checks and balances and government accountability. Major economic issues include an alternative savings-investment model, money supply management and transition economics.


INTRODUCTION

The contention of this paper is that Islam, the primary force within us, can best be articulated and come to its full expression in the embodiment of an Islamic state. Today, we are at a crossroad, with three choices before us. One road will take us to assimilating into the Western civilization and relegating Islam to the role that Christianity today plays in the West or that the religion of the Romans played in their age. The second road leads us to reviving Islam in its true spirit and meaning. The third choice is to decay and die where we stand.

To revive Islam in its true spirit, we need to take the principles given to us from the guidance of the Quran and Sunnah and apply them to the problems that we face today. One set of problems today are related to building a viable Islamic political and economic system.

A political and economic model, built on the basis of Islamic principles is examined within a framework of meritocracy.  Major issues within a political model are the form of government, checks and balances and government accountability. Major economic issues include an alternative savings-investment model, money supply management, transition economics and alternative economic modeling.

A NEW POLITICAL PARADIGM

Meritocracy

Meritocracy as an idea implies that the basis of government is based on the merit of the candidate. The concept of meritocracy is not new, but was talked about as far back as Plato, whose work Republic (Grube & Reeve, 1992) illustrated his ideas of what meritocracy meant to him. Leadership as a concept in Islam resides in merit of the candidate (Bangash, 2000). An Islamic state is meant to be run on the principles of merit. While the term can be subjective, the central concept is that the most able candidate to rule the country should rule. Any political system that is not designed to achieve this principle cannot be considered to be meritocratic.

Democracy makes the assumption that all men are equal in their capacity to judge the most able candidate. However, while all men are equal in Islam, they are not equal in their knowledge and wisdom and therefore, Islam and democracy are fundamentally different from each other (Bangash, 2000). While there may be many possible solutions to build a political model based on merit, this paper looks to create a balance between the quantity factor of universal participation and quality valuation of participation.

All men have some right to a say in government, yet our principles suggest this has to be weighed according to the wisdom and knowledge distributed in the populace. One of the earliest Western thinkers, Socrates, openly considered democracy as a flawed concept; that it required the wisdom of its leaders to be based on the opinions of all citizens held in equal weight (Stone, 1988). Yet today, democracy has become a sacred and blind faith. We as Muslims do not need to hold on to foreign concepts to gain legitimacy. Our discussions need not be burdened by this modern, near-pantheistic religion.

Dissecting Democracy

Today, the overarching dominance of democracy makes political systems one dimensional. Instead, we look to break open the paradigm and look at the mechanism inside. Thus, the paper proposes a multi-dimensional approach to the political mechanism. Once we open the straitjacket of democracy, we find that many of the mechanisms that are given as fixed can be made variable. Some of these mechanisms include:
1.      One vote per voter
2.      Continuous flow process over batch process.
3.      Rule by majority within a first past the post voting mechanism
4.      Checks and Balances

Multiple Votes per Voter

Given that in an Islamic system, all men are not equal in their knowledge and wisdom and thus are not entitled to equality of vote; one vote per voter becomes a redundant concept. Changing this variable, we find a range of new possibilities of weighted voting. Virtually any value we consider of worth can be worked into the system to be a merit. For instance, for Malaysia, being a Bhumiputra can be considered as a merit. Other more general examples can include education level, age, marital status and religious knowledge.

Continuous Flow Process

In Operations Research terminology, voting systems today are essentially batch processes[i]. A batch of votes is selected and counted, gaining the elected representatives a term until the next batch comes about. Today, this system has shown many issues including the fact that while voters can influence their representatives once every election cycle, interest groups can influence them 365 days a year. This can often lead to disenfranchisement.

Instead, one alternative may be to look at elections as a continuous flow process. This process, instead of working in a batch, works continuously. For instance, voting can take place piece by piece, with a few districts at a time, to cover a country over the same period as a batch process would. 



Preferential Voting

A preferential voting system over a first past the post system can ensure that politics does not become polarized in a two-party duopoly and that the voting mechanism is more efficient in utilizing voter data and produces a more accurate allocation of candidates.

There are a large number of possible methods of expressing a preferential voting system. The choice of such a system is only limited by mathematics and capability of computing systems. One example is of a preferential list of candidates ranked by each voter.  For instance, if the candidate who was a voter’s first choice is not the among the two most popular candidates calculated by the voting system, his choice is automatically moved to the next candidate on the voter’s list until he is voting for a relevant candidate and his vote is not wasted. Preferential voting systems are increasingly popular and are most well-known in Australia (Reilly, 2004).

Expanded Separation of Power

The best example and arguably the most successful checks and balances among political systems have thus far been the United States constitution. The US constitution works on the principles of division of power with a separate Judiciary, Executive and Legislature. If we seek to build a better system we can increase the separation of power to include incrementally more divisions. For instance, we may include a constitutionally separate central bank, central statistics and central audit.

For instance, a separate government audit arm can ensure that government does not overstep its boundaries, that checks and balances are not ignored, that government corruption is effectively punished and that the government budget execution tallies.


THE ECONOMIC SYSTEM

The fundamental viability of any state is its economic system. The inability of the Muslim world in creating viable economic models that are not poor replicas of Western economies is perhaps the biggest challenge that we face. Riba (interest) is central to the western economy and for Muslims this is unacceptable. Any models we develop on the lines of their system are therefore, fundamentally un-Islamic.

Riba is well known in Islamic Economics literature as against Islamic values. However, there are a number of other problems that are less well known.  For instance, fractional reserve banking as well as the concept of limited liability are also key elements of the Western economic model, but are again essentially un-Islamic. Fractional reserve banking allows money to be created out of no real economic activity but virtually out of thin air. Limited liability allows businesses to exist without proper assignment of risk to the constituents of the business.

Savings-Investment

The fundamental question for an Islamic economy, or perhaps any economy for that matter, is in defining how savings-investment will work in an alternative framework. That is, how can savings in the economy transform into effective investments? If both interest-based banking and limited liability (thus corporations as we know them, stock flotation and leverage) are taken out, it would seem that the important link between savings and investment becomes tenuous. In the Islamic state, this function can be taken over by creating an alternative venture capital centered investment economy and by redesigning the corporation as we know it to incorporate liability.


Our savings-investment vehicles can include:

1.      Venture capital firms;
2.      Investment banks;
3.      Restructured corporations; and
4.      Restructured stock market.

Corporations would be restructured to include liability. However, it would be the responsibility of the top management to make sure that information is provided accurately. If the company fails because the management was hiding information in any way then the shareholders will not be held liable for the losses beyond the value of the stocks. Any stocks that are showing poor balance sheets, income statements and cash flow statements could be de-listed from the stock exchange mechanism and moved to pink sheets. Investors investing in these pink sheet companies will be fully cognizant that they are dealing with companies that could default and fail, resulting in them being held liable for losses.

Derivatives need to be severely restricted and regulated by the markets to ensure that speculation does not reign. This is important to ensure that the financial system is subservient to the "real economy". Derivatives could be restricted to forwards and swaps of real assets, rather than fiat paper. The Islamic state would need Muslim thinkers and economists who can further analyze where else and how else this can be applied.

Derivatives inherently do not appear to be wrong when connected with real assets rather than paper assets and provides fundamental value for economic activity. They are particularly important in today's times when production activities are highly synchronized and dependent on a vast network of supply activity, all of which have to be made available within complex long-term planning and procurement.

Venture Capital (VC) firms would need to play a key role in the economy, a role that will be far less restricted by regulation and the opportunity costs created by interest (riba) in Western countries. They will therefore need to be structured differently from the VC firms in western markets. They will be larger, more “bank-like” in their investment decisions and willing to take on lower yield investments.

This should be a natural adaptation and evolution for them given that there will be no competing interest-based system to take the lower yield and lower risk side of the market. The financial system will not subsidize interest based lending (as in the west and discussed earlier) and there will be no "risk-less interest" to artificially raise yield requirements for risk-sharing investing.

Money Supply

From an Islamic point of view, money supply should be maintained at a rate that would approximately keep prices constant. One possible reason behind this principle is that inflation is a form of taxation on the populace by a government that does not have the legitimate right to this taxation because of its very nature of being outside the framework of the constitutional process of seeking taxation.

That the value of money should be maintained does not also somehow mean that a gold standard should be sought. A gold standard implies that the value of the currency remain constant to the value of gold, which has its own negative implications, as the value of gold can fluctuate independently to that of the goods and services bought and sold in an economy. Gold prices today can also be highly fluctuating.

For inflation to be controlled effectively in practice, a completely independent monetary authority becomes an imperative and a vital organ of an Islamic state. This has been proposed earlier in the discussion of separation of powers. Another independent institution proposed earlier was a central statistical authority. The function of this organization is of importance because it would be less useful to have an independent central bank if it depended on data that was manipulated by governments as a means to sway the central bank. An independent statistical arm can also provide statistics for all other independent arms of the government.



Money Supply Expansion with Population

There is still the problem that a naturally increasing population would mean that keeping money supply per capita constant would require a natural increase in the money supply. In the Western economy, monetary expansion principally and in its first incidence benefits the banking institution and the government.

One possible alternative is for each individual that comes of age, he/she would be given an endowment equal to the amount that would result in keeping the economy in equilibrium[ii]. This could also simultaneously be a source of financing for young men and women entering the economy needing an initial investment. In addition, such an endowment would strengthen the meritocratic nature of the state, evening the playing field for all future generations.
The nature of the state however must remain fundamentally that of an open economy based on private enterprise and competition. We must not take the route of ever increasing government regulation and government supported welfare projects that take on a political power-base of their own.

In Transition

In transition to an Islamic state, abolishing banking outright would be catastrophic. Money supply would shrink rapidly. Demand and investment would collapse, spiral the economy into a recession. The knee-jerk reaction from the populace would be to increase savings, further reducing consumption, compounding the problem even further.
The correct solution perhaps would be to gradually impair banking. Just as the Communists created a socialist state to achieve Communism, so too must an Islamic state act in staging itself through a transition. Staggered increase in the reserve ratio of banks and changing the regulatory framework can go hand-in-hand in transforming today's banks from caterpillars to butterflies.

The aim, eventually, is to move banking towards a theoretical 100 percent reserve ratio; depositors would have to give the bank consent to invest their money. One option would be that such banks would offer liquidity options with time horizons such as three days, one week, one month, etc. Investments would not have a fixed guaranteed return but rather a risk sharing return. Because of the nature of the investments, greater liquidity options would still generally yield lower returns and thus still maintain those natural patterns of investment that economists have come to consider almost equal to the law of gravity.

Monetary and Fiscal Impact of Transition

We have already touched upon how liquidity would dry up in transition. Even with the most gradual transition it would result in recession, and the more gradual it would be the longer the recession would last. Let us consider three possible policy options: increasing the reserve ratio, curtailing interest-based banking through regulation and restricting and regulating the stock market. All would result in a rapid reduction in the money supply, and a rapid downward projection of the economy towards an inevitable crash; ceteris paribus, deflationary pressures would reduce investment and consumption expenditures and reduce national income.

Keynesian economics dictates that an (read non-Islamic) economy can be revived by public spending to boost consumption and thus inject the system with new demand and new money.

Y=C+I+G+X-M
C▼ and I▼ is counteracted by G▲
Where:
Y is National Income
C is Consumption
I is Investment
G is Government Expenditure
X is Exports
M is Imports

Because an interest-based Western economy is inherently cyclical and dependent on an ever increasing GDP & Money Supply, the Keynesian solution is often the last resort when all monetary and information options have failed. That is, for instance, when simply expanding credit and the money supply either becomes ineffective or becomes untenable.

The great downside of Keynesian fiscal expansion is inflation. Yet, this may not be a downside in deflationary times. Here is the opportunity within our framework of a transitioning Islamic state: if we attempted fiscal expansion during our earlier described banking and stock market transition, we would be ideally placed to carry out our expansionary fiscal policies without paying the price of inflation.

Our Economic System in Comparison

By removing interest, fractional reserve banking and limited liability, our model makes a trade-off that enables us to have a more stable and less cyclic economic model at the expense of being able to inject massive liquidity relatively quickly. This implies that such an economy, while more stable, will be unable to grow at spectacular rates as was observed with such countries as Japan, South Korea, China, etc. This represents the downside of the model, but within a Solow Growth Model context, would become less important as we reach nearer saturation levels of income in the long-run.

CONCLUSION

In summation, the central principle of our economic system is one of free enterprise within the constraints of Islam, making it philosophically an effort towards a meritocracy. Our system is also a welfare state within the limits prescribed in Islam given the Muslim obligations of zakat and alms giving.

We observe the salient of removing riba, fractional reserve banking and inflation as a tax imposed by government. We find a defanged savings-investment system built around equity and an independent state bank to have complete control over the money supply with the central purpose of maintaining the money supply.

A central theme of meritocracy inevitably plays out, given Muslim requirements for alms giving and zakat, the latter incidentally a wealth tax.  Islamic redistribution laws on death and an endowment policy for the young further strengthen the claim of a meritocracy. Linking with free education and a meritocratic political model, we see that the theme for meritocracy would become intrinsic to the Islamic state, politically, economically and spiritually.

The Day of Judgment too will be meritocratic, each soul being rewarded by what it earned. That will be a Day of Perfect Justice. Our meritocracy on the other hand, is a human meritocracy and flawed by our human limits. Yet, it is hoped that a system broadly drawn upon these blue prints can do a better job than our present systems at hand.


REFERENCES

 

Bangash, Z. (2000). The Concepts of Leader and Leadership in Islam. International Conference on The Seerah: A Power Perspective. Colombo: The Institute of Contemporary Islamic Thought.
Grube, G., & Reeve, C. (1992). Plato's Republic. Indianapolis: Hackett Publishing Company, Inc.
Reilly, B. (2004). The Global Spread of Preferential Voting:Australian Institutional Imperialism? Australian Journal of Political Science , 39 (2), 253-266.
Shim, J. K., & Siegel, J. G. (1999). Operations Management. Hauppauge, New York: Barron's Educational Series, Inc.
Stone, I. (1988). The Trial of Socrates. Boston: Little Brown.




[i] For a detailed description of batch processes and continuous flow processes, see “Operations Management” (Shim & Siegel, 1999).
[ii] This is a value dependent on the consumption rate.
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