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Global Economic Crisis in the Light of Islamic Economics

Global Economic Crisis in the Light of Islamic Economics

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Published by azamkha
Written By: K.H.Azam Ahamed
Written By: K.H.Azam Ahamed

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Published by: azamkha on Oct 01, 2009
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06/14/2010

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Global Economic Crisis
In the Light of Islamic Economics
By: K.H.Azam AhamedGlobal Economic Crisis
; Almost all the Medias around the world have talked on it. Vast numberof Economists have criticized, argued and proposed some solutions & alternatives for this. Butyet the impact of this crisis is spreading over every tiny part of the world.
Prof.Michel Chossudovsky 
, professor of Economics at the University of Ottawa and the Directorof the “Centre for Research on Globalization (CRG)” stated that “The real economy is in crisis.The resulting increase in unemployment is conducive to a dramatic decline in consumerspending which in turn backlashes on the levels of production of goods & services”.Many governments called upon economists and experts to find a way out. Financial institutionsand their agents began to think about rescue plans. Many people rushed to draw their depositsfrom banks. At the same time, several financial institutions have frozen the process of granting loans to companies and individuals for fear that it might be difficult to take them back.The drop in the circulation of money among individuals, companies and financial institutionshas given rise to a sharp slowdown in the economic activity. As a consequence, debtors havebecome unable to pay back their debts.Bankruptcies are occurring in all major sectors of the economy. Trillions of dollars disappearedas the Dow Jones lost six years worth of growth. America’s three largest automobile producers,namely General Motors, Chrysler & Ford are under threat of this prevailing crisis. In November08, US automobile production has been dropped by 41% and General Motors has alreadyceased some of its business units. These three firms have warned the US government of hugenumbers of potential job cuts.General Motors has confirmed that "it could run out of cash within a few months, which couldprompt one of the biggest bankruptcy filings in U.S. history". (USNews.com, November 11,2008) In turn this would backlash on a string of related industries. Estimates of job losses in the US auto industry range from 30,000 to as much as 100,000.According to the US Bureau of Labor Statistics, an additional 240,000 jobs were lost during themonth of October alone. Employment has fallen by 1.2 million in the first 10 months of 2008;over half of the decrease has occurred in the past 3 months.The official figures do not describe the seriousness of the crisis and its devastating impact on the labor market, since many of the job losses are not reported. The situation in the EuropeanUnion is equally disturbing. In Germany, a report published in October, suggests that 10-15% of all automotive jobs in Germany could be lost. Job cuts have also been announced at GeneralMotors and Nissan-Renault plants in Spain. Sales of new cars in Spain plummeted by 40percent in October in relation to sales in the same month last year.Azam Ahamed is a freelance writer and can be contacted via his email:azam.ahamed@gmail.com or blog: www.azamahamed.blogspot.com
 
As a consequence of the crisis, many nations try several alternative economic policies, regionaleconomic partnerships & new agreements, etc. Thus, the new partnership of BRIC conceivedrecently. It is a new economic move of Brazil, Russia, India & China (BRIC).Prime Minister Vladimir Putin said earlier this month the crisis had shown the BRIC nationswould be “the locomotive of the world economy in coming years. We are going to coordinate ourmoves with the leading emerging economies. We are in direct contact with India, China andBrazil; we are interacting in the BRIC format.”Doug Bandow, a Washington based Political Writer & Policy Analyst said that over the last sixyears the US has tossed away its moral superiority, diplomatic indispensability, and militaryinfallibility. Now it has lost its economic security. Instead of attempting to micro-manage globalaffairs, America should again become a normal country, strong enough to protect itself, but nolonger claiming responsibility for maintaining global security, stability, and prosperity.
Causes of the Crisis:
Prof.Michel Chossudovsky 
argues that the driving force behind the meltdown is speculative trade. While most individual investors loose when the market falls, the institutional speculatormakes money when there is a financial collapse.One important instrument used by speculators to make money out of a financial meltdown is"short selling". "Short selling" consists in selling large amounts of stocks which you do notpossess and then buying them in the spot market once the price has collapsed, with a view tocompleting the transaction and cashing in on the profits. The role of short selling in bringing down companies is well documented. The collapse of Lehman, Merrill Lynch and Bear Stearnswas in part due to short selling.As Doug Bandow pointed out that, the other main cause of the crisis is excessive debts. He says“Even before the economic crisis spiraled out of control, the US government was effectivelybroke. The national debt currently stands at $9.8 trillion, up $4 trillion since George W. Bush took office.”As the government attempts to finance its interest payments by issuing more debt, the rise indeficits accelerates. That, in turn, leads to a vicious circle in which the government issues ever-larger amounts of debt in order to pay ever-higher interest charges. In the end, the costs of servicing the debt outstrip the economic resources available for financing those expenditures.In summary, it is well apparent that the two main causes of the crisis are:“Interest” suffered as the outcome of excessive debts. US government has issued more & moredebts in order to pay the higher interest charges of their existing debts. Thus the US governmentis suffering with the accumulated debts due to its high interest payments. Therefore it isobvious that interest is one of the strong causes which led to this crisis.The other cause is the “Moral Economic Corruption” such as exploitation, lying, circulation of prejudiced rumors, cheating, monopoly and the engagement of nominal transaction with no realvalue which was well illustrated by “Short Selling”.
 
The View of Islamic Economics
Maurice Allais, an expert on world economy and a Nobel Prize winner in economics, said, “Theworld economic system is based on some concepts and rules that will be the very cause of itsdestruction unless treated and rectified quickly.”Islam strictly prohibits the use of Interest in all kind of financial transactions. It considersinterest as an evil to the mankind and as a self destructive tool.In May 2000, Saudi Islamic banker Dr. Nayef bin Fawaaz ibn Sha'alan warned that the USeconomic system was on the verge of collapse because of its cumulative debts, ever-increasing deficit and the interest on that debt. "When the debts and deficits come due, they just issuenew Treasury bonds to cover the old bonds due, with their interest and the new deficit too." Thecycle cannot be stopped or the debt cancelled because the US would no longer be able toborrow. The consequence of relieving this cycle would be a total collapse of their economicsystem as opposed to the crash of 2008.Actually, some economists believe that no real development or wise employment of the meansof production could be achieved unless the interest rate is zero. This view was held by AdamSmith, the Father of modern economics. Furthermore, economists think that the alternative isbased on participating in profit and loss, because it brings about stability and security. Inaddition, interest-based system results in the accumulation of wealth in the hands of few peoplewho will thus be in control of the world’s fortunes.In addition, the world financial system rests on the basis of the financial derivatives system thatdepends mainly on nominal transactions, with no real exchanges of goods or services. What iseven worse is that most of these transactions are based on credits taken from banks in theform of loans, and when things develop unfavorably all that collapses triggering the financialcrisis.Islamic economy promotes participation in profit, loss, and actual exchanges of money andassets. In fact, there should be real interaction between the wealthy, employers, the employees,and financial experts. There is no party who is a constant winner or a constant loser; yet profitand loss is mutually shared.The Islamic economic and financial system is based on a set of values, ideals, and morals, suchas honesty, credibility, transparency, clear evidence, facilitation, co-operation, complementarity,and solidarity.These morals and ideals are fundamental because they ensure stability, security and safety forall those involved in financial transactions. Furthermore, the Islamic Shari`ah prohibits theeconomic and financial transactions that involve lying, gambling, cheating, monopoly,exploitation, greed, unfairness, and taking people’s money unjustly.Shari`ah allows for a system of funding and investment based on participation in both profitand loss and interaction between capital and labor. Shari`ah calls on the parties involved in transactions to behave in a truthful, honest, clear and transparent way by prohibiting cheating,gambling, lying, rumors, exploitation and taking people’s money unjustly."Islamic banking", said Dr. Al-Sha'alan, "always protects the individuals' wealth while putting acap on selfishness and greed. It has the best of capitalism - filtering out its negatives - and thebest of socialism - filtering out its negatives too." Both systems inevitably had to fail.

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