MACROECONOMICS

ZAKAT: IT’S MACROECONOMICS RELEVANCE (PART II)
Lecture Note X of Zakat

Set by:
Ganjar Yuri Rahman




1. SHORT RUN SAVINGS

The saving function in Islamic economy will be of the type:


Where

Remember, when Y is held to be constant (ceteris paribus), therefore




● Case 1
Zakat is treated as tax so that only zakat is paid and there is no God-Consciousness (al-iman wattaqwa). This means no other spending is made in the way of Allah and no restraints on self consumption are exercised and a Muslim behaves as a secular consumer. This means:


TABLE 1
Effects of Introduction of zakat as a Tax on Short Run Savings at Different Levels of Marginal Propensity to Consume (MPC)

Marginal Propensity to Consume before Introduction to Zakat (a1) Value of F1 (Marginal Propensity to Save) after Zakat Value of (1 – a1) Marginal Propensity to Save without Zakat F1S % of (1 – a1) Percentage Decline in Marginal Propensity to Save as a Result of Zakat
1.00 0.000 0.00 0.00 0.0
0.90 0.1998 0.10 99.8 0.2
0.80 0.1990 0.20 99.5 0.5
0.70 0.2977 0.30 99.2 0.8
0.60 0.3960 0.40 99.0 1.0
0.50 0.4938 0.50 98.8 1.2
0.40 0.591 0.60 98.5 1.5
0.30 0.688 0.70 98.3 1.7
0.20 0.784 0.80 98.0 2.0
0.10 0.8802 0.90 97.8 2.2
0.00 0.9756 0.00 (1.00?) 97.0 2.5


The maximum effect will be a 2.5 % decline when the MPC = 0. This simply means that whatever they save from their additional income will be reduced by the amount of zakat at the rate of 2.5% (riqqah). If they were saving all of their additional income, then this saving will be reduced by 2.5% and if they were saving only 20% then this will be reduced by 0.5% of 20% of zakat.


● Case 2
Muslims understand the importance of spending in the way of Allah but their own consumption patterns are the same as of secular consumers. This means


● Case 3
Muslims are not inclined to spend in the way of Allah more than the minimum required. They, however, rationalize their own consumption pattern as taught by the Al-Qur’an wassunnah. This means Z1 = 0, but b = (+). In this case

Marginal Propensity to Save, MPS = F1W, where



Let’s compare this with the secular MPS

 
The restraint on self consumption reduced the overall consumption by a certain factor. But reduced consumption means more zakat. The net effect is shown in the following table the table shows MPS* (i. e. MPS of an economy that has some positive values of ).
The values of MPS* have been shown for different values of b at two alternative levels of MPS (which is the propensity to save in the absence of Islamic injunctions). The two alternatives value has been assumed to be 0.20 and 0.10 which is a range generally observed for the present Muslim’s countries.

TABLE 2
Values of MPS* for Different Values of  when Z1 = 0

 When MPS = 0.20
i. e. when a1 = 0.80 When MPS = 0.10
i. e. when a1 = 0.90
0.01 0.209 0.100
0.02 0.217 0.118
0.05 0.241 0.150
0.10 0.282 0.191
0.20 0.363 0.282
0.30 0.445 0.373
0.40 0.527 0.465
0.50 0.609 0.558


The MPS * will be higher than MPS for higher values of . Cases 2 and 3 are also unlikely in an Islamic economy. Both  and Z1 depend on the level of God-fearingness. It is very unlikely that one of them is zero and the other positive.
In comparing Case 3 with Case 2, we find that one parameter of an Islamic economy (Z1) will have a negative effect on saving propensity whereas the other parameter () will have a positive effect. Their combined effect is considered in Case 4.


● Case 4
Muslims not only spend in the way of Allah but also rationalize their own consumption as taught by the Al-Qur’an wassunnah. A likely reflection of an Islamic economy. In this case:

MPS is MPS* = F1W


Let’s compare this with secular marginal propensity to save, MPS = (1 – a1)W.
MPS* (i. e. marginal propensity to save of an Islamic economy) will be greater than MPS if



It is obvious that the first component is greater than (1 – a1) as (0 < P < 1). But the second part is clearly less than unity because Z1 > 0 and {1.025 – 0.025a1 (1 - ) } > 1 as (a1,  > 0 and < 1). The outcome, whether MPS* > MPS, will therefore, depend on the empirical values of Z and  (which in turn will depend on the level of God-fearingness in the society).

Let’s assume Z1 = 0.025. It should be remembered that this is a proportion of his annual income that a God-fearing man will spend in the way of Allah, in addition to 2.5% zakat that he is obliged to pay on his wealth. Also assume MPS in the economy before Islamization to be 0.20 (i. e. a1 = 0.80). Now, assuming different hypothetical values for  that may be observed after Islamization, the impact on MPS is shown in the following table:



TABLE 3
Values of MPS* for Different Values of  when Z1 = 0.025  
 MPS* when a1 = 0.80 MPS* - MPS i. e. when a1 = 0.90
0.000 0.194 - 0.006
0.005 0.198 - 0.002
0.008 0.200 0.000
0.01 0.202 + 0.002
0.02 0.209 + 0.009
0.05 0.233 + 0.033

It can be seen that when  = 0 (which is same as case 2 discussed earlier), there will be an immediate effect on the MPS. But a very small value of  would make the MPS higher even in the short run. This means that if people are willing to slightly range their life style to reduce what Islam call prodigality (israf), cannot have a negative effect on the (macro) MPS in the economy.
As is evident from the table, even as low, would not allow any negative effect on the propensity to save. A value equal to 0.008 would mean that if a person was having propensity to consume 0.80 when operating in an un-Islamic environment and Islamic values would cause him to reduce this to (at least) 0.794 which is not an unreasonable assumption. The injunction to avoid prodigality can have a much stronger effect on consumption particularly in the modern environment of developing countries where consumption patterns are substantially dominated by conspicuous consumption. The higher the value of , the more the positive effect on the propensity to save.
If Z1 value > 0.025 (i. e. people like to spend more in the way of Allah), a higher value of  will be required to avoid the negative effect on the propensity to save. Since both Z1 and b depend on the level of God-fearingness,  is expected to move with Z1, hence reducing the negative impact on the propensity to save.
Thus, in an Islamic society, the MPS is likely to increase even in the short run.      
     


2. LONG RUN SAVINGS

This part also can be written only after simulations for future can be made by assigning different values to the parameter to see the growth path of savings. Since transfers from muzakki contribute to mustahiq, savings will ultimately be higher in all the four scenarios, compared to the scenario of a secular economy.



3. GROWTH AND INCOME DISTRIBUTION EFFECTS

This part also can be written after simulations are done. Theoretically, it is easy to visualize within the framework of the above model that growth and income distribution implications of Islamic consumption pattern will be favorable i. e. growth (a part of al-imarah) will be higher and income distribution will be more egalitarian.



4. CONCLUSION

Comparison of savings, growth, and income distribution effects by simulating the model under different scenarios can highlight various implications and trade-offs.
For developing countries striving for resource mobilization for development, Islamization provides a “new hope”. The motivation to consume less and save more to improve one’s own economic conditions as well as economic conditions of the lesser privileged in the community comes from one’s conscience (from religion). It can’t be denied that many policies and regulation fail because of lack/ gap in harmony with the social and religious norms, in the scale - scope of micro and macro.
The process of zakat regulation- legislation should be accompanied – collaborated by moment of Islamic value’s inculcating. The speed of achieving favourable effect on growth and income distribution in the long run will be extremely slow if the timing of Islamization of life is constrained. So, the system of Islamic economics must be formed with the totality of Islam original identity (kaffah, syamil mutakamil).    
 


5. REFERENCES

Faridi, F. R. A Theory of Fiscal Policy in an Islamic State. In Fiscal Policy and Resource Allocation in Islam. Ed. By. Ziauddin Ahmed, et. al. Islamabad. IPS. 1983.
Kahf, Monzer. A Contribution to the Theory of Consumer Behaviour in an Islamic Society. Studies in Islamic Economics. Ed. By. Khurshid Ahmed. Islamic Foundation. Leicester. 1980.
Ahmed, Khurshid. Economic Development in an Islamic Framework. In Studies in Islamic Economics. Ed. By. Khurshid Ahmed. Islamic Foundation. Leicester. 1980.
Robb, E. L. and S. Tahir. Does Distribution Matter in Aggregate Consumption Function? A Test in the Context of Permanent Income Hypothesis. QESP Research Report No. 13. Mc. Master University. 1981.
Zarqa, Anas. An Approach to Human Welfare. Studies in Islamic Economics. Ed. By. Khurshid Ahmed. Islamic Foundation. Leicester. 1980.








 
6. APPENDIX

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