IDEAS home Printed from https://ideas.repec.org/p/pra/mprapa/68744.html

Equitable Distribution of Income with Growth in an Islamic Economy

Author

Listed:
  • Shaikh, Salman Ahmed

Abstract

In classical and neoclassical growth theory, it is argued that inequality is necessary to kick-start economic growth. In the Lewis model (1954), the capitalist class is expected to instigate economic growth through production in modern manufacturing sector. Kuznets (1955) argues that economic growth will trickle down to the masses once economic growth is sustained and allowed to mature. Solow (1956), Romer (1986), Lucas (1988) and Romer (1990) had emphasized on capital formation, technical progress, human capital, ideas and strong public and social infrastructure to achieve economic growth. Later on, economists like Meadows et al (1974) cautioned on the limits to growth amidst finite resources. However, since the policy direction did not take much notice of these concerns, the rapid growth in monetization and international trade has now put the future economic growth in serious jeopardy. An even bigger challenge is to ameliorate the great gap between rich and poor countries that has happened in the course of twentieth century economic growth program. In this study, we identify specific institutions in Islam that can help in achieving egalitarian distribution of income along with continued growth. We discuss that the principle of risk based productive enterprise can foster capital formation and entrepreneurship in an Islamic economy that disallows fixed return on money capital in the form of interest. We discuss that interest free financial intermediation can stabilize the economy from credit default shocks by ensuring broad risk sharing and linking monetary payments to factors of production with the result of productive enterprise. We discuss that a uniform Zakat levy on wealth and produce can result in tax rate smoothing, automatic stabilization of business cycle and encourage long term investments and decision making without leaving the long term planner in private sector to worry about fiscal policy reversals (i.e. Ricardian equivalence). In this paper, we also highlight the effects of inheritance laws of Islam on intergenerational redistribution of endowments. We argue that endowment redistribution in every generation in each family unit will automatically keep the inequitable distribution of resources in check without depending on the pace, nature and distribution of economic growth. We use mathematical modeling to show the effects of these institutions on economic outcomes.

Suggested Citation

  • Shaikh, Salman Ahmed, 2015. "Equitable Distribution of Income with Growth in an Islamic Economy," MPRA Paper 68744, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:68744
    as

    Download full text from publisher

    File URL: https://mpra.ub.uni-muenchen.de/68744/1/MPRA_paper_68744.pdf
    File Function: original version
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Romer, Paul M, 1986. "Increasing Returns and Long-run Growth," Journal of Political Economy, University of Chicago Press, vol. 94(5), pages 1002-1037, October.
    2. Robert M. Solow, 1956. "A Contribution to the Theory of Economic Growth," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 70(1), pages 65-94.
    3. Persson, Torsten & Tabellini, Guido, 1991. "Is Inequality Harmful for Growth? Theory and Evidence," CEPR Discussion Papers 581, C.E.P.R. Discussion Papers.
    4. Asli Demeirgüç-Kunt & Ross Levine (ed.), 0. "Finance and Growth," Books, Edward Elgar Publishing, number 17119.
    5. Easterly, William, 2002. "How Did Heavily Indebted Poor Countries Become Heavily Indebted? Reviewing Two Decades of Debt Relief," World Development, Elsevier, vol. 30(10), pages 1677-1696, October.
    6. Robinson, Sherman, 1976. "A Note on the U Hypothesis Relating Income Inequality and Economic Development," American Economic Review, American Economic Association, vol. 66(3), pages 437-440, June.
    7. Cecilia Garcia-Penalosa & Eve Caroli & Philippe Aghion, 1999. "Inequality and Economic Growth: The Perspective of the New Growth Theories," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1615-1660, December.
    8. Stanley L. Engerman & Kenneth Lee Sokoloff, 2002. "Factor Endowments, Inequality, and Paths of Development Among New World Economies," Economía Journal, The Latin American and Caribbean Economic Association - LACEA, vol. 0(Fall 2002), pages 41-110.
    9. repec:dau:papers:123456789/10091 is not listed on IDEAS
    10. Romer, Paul M, 1990. "Endogenous Technological Change," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 71-102, October.
    11. Barro, Robert J, 2000. "Inequality and Growth in a Panel of Countries," Journal of Economic Growth, Springer, vol. 5(1), pages 5-32, March.
    12. Kristin J. Forbes, 2000. "A Reassessment of the Relationship between Inequality and Growth," American Economic Review, American Economic Association, vol. 90(4), pages 869-887, September.
    13. Daron Acemoglu & Simon Johnson & James A. Robinson, 2002. "Reversal of Fortune: Geography and Institutions in the Making of the Modern World Income Distribution," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 117(4), pages 1231-1294.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Kholeka Mdingi & Sin-Yu Ho, 2023. "Income inequality and economic growth: An empirical investigation in South Africa," Cogent Economics & Finance, Taylor & Francis Journals, vol. 11(2), pages 2230027-223, June.
    2. Vincenzo Lombardo, 2008. "Income distribution and Growth: A Critical Survey," Working Papers 11_2008, D.E.S. (Department of Economic Studies), University of Naples "Parthenope", Italy.
    3. Xu, Cheng-Gang & Guo, Di & Jiang, Kun & Yang, Xiyi, 2017. "Clustering, Growth, and Inequality in China," CEPR Discussion Papers 12543, C.E.P.R. Discussion Papers.
    4. Bourguignon, Francois, 2005. "The Effect of Economic Growth on Social Structures," Handbook of Economic Growth, in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 1, chapter 27, pages 1701-1747, Elsevier.
    5. Cook, Paul & Uchida, Yuichiro, 2008. "Structural change, competition and income distribution," The Quarterly Review of Economics and Finance, Elsevier, vol. 48(2), pages 274-286, May.
    6. Martin Ravallion, 2013. "The Idea of Antipoverty Policy," NBER Working Papers 19210, National Bureau of Economic Research, Inc.
    7. Mthanti, Thanti & Ojah, Kalu, 2017. "Institutions, Human Capital and Entrepreneurial Orientation (EO): Implications for Growth Strategy," MPRA Paper 89551, University Library of Munich, Germany.
    8. Veronica Amarante, 2014. "Revisiting Inequality and Growth: Evidence for Developing Countries," Growth and Change, Wiley Blackwell, vol. 45(4), pages 571-589, December.
    9. Madsen, Jakob B. & Islam, Md. Rabiul & Doucouliagos, Hristos, 2018. "Inequality, financial development and economic growth in the OECD, 1870–2011," European Economic Review, Elsevier, vol. 101(C), pages 605-624.
    10. Juin-jen Chang & Chia-ying Liu & Hsiao-wen Hung, 2013. "Does Performance-Based Compensation Boost Economic Growth or Lead to More Income Inequality?," The Economic Record, The Economic Society of Australia, vol. 89(284), pages 72-82, March.
    11. Svedberg, Peter, 2003. "World Income Distribution: Which Way?," Seminar Papers 724, Stockholm University, Institute for International Economic Studies.
    12. Seher Gülşah Topuz, 2022. "The Relationship Between Income Inequality and Economic Growth: Are Transmission Channels Effective?," Social Indicators Research: An International and Interdisciplinary Journal for Quality-of-Life Measurement, Springer, vol. 162(3), pages 1177-1231, August.
    13. Panagiotis Pegkas & Constantinos Tsamadias, 2017. "Are There Separate Effects of Male and Female Higher Education on Economic Growth? Evidence from Greece," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 8(1), pages 279-293, March.
    14. Emmanuel SENZU, 2018. "Investment Attraction, Competition And Growth; Theoretical Perspective In The Context Of Africa," Theoretical and Practical Research in the Economic Fields, ASERS Publishing, vol. 9(1), pages 92-102.
    15. Cecilia García-Peñalosa & Stephen Turnovsky, 2006. "Growth and income inequality: a canonical model," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 28(1), pages 25-49, May.
    16. Iancu, Aurel, 2009. "Real Economic Convergence," Working Papers of National Institute for Economic Research 090104, Institutul National de Cercetari Economice (INCE).
    17. Adelaide Duarte & Marta Simões & João Sousa Andrade, 2014. "Estado Social, Quantis, Não-Linearidades e Desempenho Económico: Uma Avaliação Empírica," GEMF Working Papers 2014-21, GEMF, Faculty of Economics, University of Coimbra.
    18. Chen, Binkai & Lin, Justin Yifu, 2021. "Development strategy, resource misallocation and economic performance," Structural Change and Economic Dynamics, Elsevier, vol. 59(C), pages 612-634.
    19. Amparo Castelló-Climent, 2004. "A Reassessment Of The Relationship Between Inequality And Growth: What Human Capital Inequality Data Say?," Working Papers. Serie EC 2004-15, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
    20. Carmela Martin & Francisco J. Velazquez & Bernard Funck, 2001. "European Integration and Income Convergence : Lessons for Central and Eastern European Countries," World Bank Publications - Books, The World Bank Group, number 13968, April.

    More about this item

    Keywords

    ;
    ;
    ;
    ;
    ;
    ;

    JEL classification:

    • I3 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty
    • L38 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Public Policy
    • O1 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:68744. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Joachim Winter (email available below). General contact details of provider: https://edirc.repec.org/data/vfmunde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.