Interest rate and inter-temporal efficiency in an islamic economy: Issue revosited
The main objective of this paper is to critically examine the assumptions, results and arguments forwarded by Naqvi in favour of the need for a positive rate of interest for a capital scarce economy during its transition to a full fledged Islamic state. This critical examination will be done both from a Western economic and Islamic economic viewpoints. It will then set up and analyze an alternative resource allocation model structured on the basis of Islamic economic assumptions and show a discount rate, totally independent of the interest rate, can indeed be constructed in this system for capitalizing the future stream of earnings and returns. The entire trend of argument will be with respect to an economy in the process of transition to a full-fledged Islamic state, which is what Naqvi has tried to look at. It is argued that “Dr. Naqvi’s paper despite all its niceties of analytical modeling suffers from a lack of recognition of the assumptions and norms that would characterize such a model during a transitional stage towards an Islamic state. Such assumptions and characteristics are namely, the Islamic institutions in control ling profit-making, keeping profits at the level of normal profits, the principle of cooperation, Mudarahah, price control and subsidy to eliminate unwanted inflation, the attainment of the Islamic objectives of growth for equity and efficiency rather than for capital accumulation per se and the new framework of inter-temporal welfare maximization based on the menu of investment choices rather than choices of consumption menu. Dr. Naqvi’s model also suffers from the logical contradictions of the neo-classical models in regards to the structurally static form of a system repeating itself over time. This work is a discussion of the paper by Dr. S.N.H. Naqvi, Director of the Institute for Development Studies, Quaid-e-Azam University, Islamabad, Pakistan, titled: “Interest Rate and Intertemporal Allocation Efficiency in an Islamic Economy”, which he presented at the Seminar on the Monetary and Fiscal Economics of Islam held at Makkah, Saudi Arabia, in October. 1978.argued in this discussion paper that such an equilibrium system is logically incapable of ever coming out of that state of equilibrium and into a transition state. Thus, Dr. Naqvi’s claim that his result holds in a stage of transition only to be replaced by a truly zero rate of interest when the Islamic economy will be finally established in its true form, seems to be conceptually erroneous