Consequences and Prospects of Islamization An Applied General Equilibrium Approach with reference to Pakistan economy

Abstract

Pakistan is passing through a difficult phase of its history. Its economic performance has not been very encouraging during the past half a century. Phenomena like mass poverty, income inequalities, fiscal deficits and indebtedness have become its identification. The nation is detracted from its ideological course of action and embarked on socialist and capitalist models from time to time with changing perspectives. Every experiment proved to be a failure and terminated with new issues and additions to grievances of masses. The last ray of hope is embedded in restructuring of the social life according to the tenets of Islam. The objective of this study is to demonstrate empirically, that injunctions, when carefully translated into public policies, are capable Islamic to solve the socioeconomic problems of the nation. The primary focus of research is to evaluate the implications of public policies destined to eliminate interest-based transactions and to enforce Zakah as the instrument of redistribution. The study adopts the computable, general equilibrium framework for the purpose and uses the fisca' yearl 989-90 as the base for all the simulations and projections into the future. The model is moderately disaggregated. The product market incorporates eighteen producer goods and ten consumer goods. The households are divided into four major groups according to their income level and consumption pattern. The model employs two primary factors, the labour and capital. The relevant data is derived from official sources. Parameters of the model are obtained partly from available literature and partly through calibration. The first simulation provides the replication check and serves as the benchmark equilibrium for further analysis. In the first stage, the model is applied to evaluate various fiscal reforms. It is assumed that each option is targetted to eliminate the budget deficit in the short run. The comparative statics reveal that a fiscal policy-mix, that allows a 5% reduction in recurring expenditure, a 10% increase in commodity taxation and nearly 50% enhancement in direct taxes, can best solve the problem with minimum welfare costs. iii In the second round, the model is used to study the impact of alternative policies on the dynamic performance of the economy. Four perspective plans have been proposed to facilitate comparison of the policies concerned in terms of selected micro and macro indicators. The 'status quo' refers to the scenario if the economy is allowed to operate for the specified period with all the conditions of the base-year in tact. The 'semi-lslamic' set comprises two separate options, the first dealing with enforcement of 'Zakah only' and the second with 'profit sharing only'. The 'full-scale Islamic' plan annexes the two instruments to work simultaneously. All other conditions of the base year have to remain undisturbed. It is shown that the 'full scale Islamic plan' ensures the best results within a moderate span of time as compared to maintaining the secular traditions or going through the semi-lslamic experimentation haphazardly. The empirical evidence so emerged prepares a strong case for Islamization of the economy and leaves no scope for skeptical reservations regarding the feasibility of the programme. It is however, beyond the scope of present study to provide the details of technical procedures and/or to advise on specific modes of operation of the system.