Why do cou­ples split up?

The Miracle - - Font Page - By: Mo­ham­mad Omar Farooq

R

ent-Seek­ing: Un­der­stand­ing and Aware­ness

In 2007 an im­por­tant voice in the field of Is­lamic eco­nom­ics and fi­nance, Prof. Mah­moud El-Ga­mal char­ac­ter­ized Is­lamic fi­nance as “rent-seek­ing Shariah ar­bi­trage.” His state­ment found a prom­i­nent place in the dis­course, even though many were shocked and be­came de­trac­tors. Since then the con­cept of rent-seek­ing shows up here and there. Un­for­tu­nately, un­der­stand­ing and aware­ness about the con­cept and the­ory of rent-seek­ing is not that com­mon, even though it is highly rel­e­vant in the con­text of Is­lamic eco­nom­ics and fi­nance and be­yond. It is fur­ther im­por­tant in con­nec­tion with the pro­hi­bi­tion of riba and Is­lam’s fun­da­men­tal con­cern re­gard­ing zulm (in­jus­tice/ex­ploita­tion). The Qur’an’s stern­ness in riba pro­hi­bi­tion (2:279) in­di­cates that it’s not some­thing or­di­nary. Riba in fi­nan­cial trans­ac­tion is a life-ru­in­ing ex­pe­ri­ence; it of­ten puts a weaker party in such trans­ac­tion on the path of ruin. That’s why riba pro­hi­bi­tion must be taken se­ri­ously and in­deed Is­lamic fi­nance emerged to pro­vide al­ter­na­tives to help Mus­lims to avoid riba. How­ever, not prop­erly un­der­stand­ing it or its scope can lead to le­gal­is­tic or mech­a­nis­tic avoidance of riba, with­out avoid­ing the ru­inous im­pact of non-riba sources. This au­thor’s re­search pa­per “Ex­ploita­tion, Profit and RibaIn­ter­est Re­duc­tion­ism” (2013) elab­o­rately deals with this sub­ject.

Un­earned In­come

What is of­ten glossed over in riba re­lated dis­course is that be­sides be­ing ex­ploita­tive, it also has a di­men­sion of un­earned in­come or wealth. One can see in works on Is­lamic fi­nance ref­er­ence to riba and in­ter­est as “un­earned in­come”, “un­earned wealth”, “un­earned gain”, “un­earned cap­i­tal”, etc. Also, in defin­ing riba, the con­cept of counter-value is im­por­tant. Riba is of­ten de­fined as “stip­u­lated ex­cess in a fi­nan­cial trans­ac­tion with­out any counter-value”. That’s why in­ter­est is gen­er­ally equated with riba, be­cause in­ter­est is un­der­stood as a stip­u­lated ex­cess ex­tracted by the lender (sur­plus unit) for which the bor­rower (deficit unit), ar­guably, does not get any ben­e­fit or value. While the un­earned di­men­sion is com­monly men­tioned, nei­ther its scope nor its im­pli­ca­tion is prop­erly iden­ti­fied, ap­pre­ci­ated and de­lin­eated. Rent-seek­ing be­hav­ior pri­mar­ily re­lates to this un­earned di­men­sion of wealth, in­come, gain, etc. In the mod­ern world of in­creas­ing com­plex­ity, the wide­spread and pow­er­ful pres­ence of rent-seek­ing be­hav­ior calls for bet­ter un­der­stand­ing of it, if we re­ally care about in­jus­tice and ex­ploita­tion in gen­eral than sim­ply re­duc­ing in­jus­tice/ex­ploita­tion to riba/in­ter­est. The term rent as in rent-seek­ing be­hav­ior is not the or­di­nary sense in which it is used; for ex­am­ple, rent charged for rent­ing any prop­erty, whether home, au­to­mo­bile or equip­ment. It is also not in the sense of pay­ment for land as one of the four fac­tors of pro­duc­tion. Rent in this con­text is used in a spe­cial eco­nomic sense. In eco­nomic lit­er­a­ture rent-seek­ing is de­fined as “at­tempt to ob­tain eco­nomic rent (i.e., por­tion of in­come paid to a fac­tor of pro­duc­tion in ex­cess of what is needed to keep it em­ployed in its cur­rent use) by ma­nip­u­lat­ing the so­cial or po­lit­i­cal en­vi­ron­ment in which eco­nomic ac­tiv­i­ties oc­cur, rather than by cre­at­ing new wealth.”

Eco­nomic Profit vs. Eco­nomic Rent

In this brief ar­ti­cle I will try to shed light on the con­cept by shar­ing a num­ber of ex­am­ples, so that those who are in­ter­ested can fur­ther study this phe­nom­e­non. An im­por­tant con­cept in eco­nom­ics, with no con­flict with Is­lamic eco­nom­ics, is eco­nomic profit or above av­er­age profit. In a com­pet­i­tive mar­ket eco­nomic profit serves as a sig­nal to at­tract new en­try, while eco­nomic loss causes los­ing firms to exit the mar­ket, so that the long-run out­come of the com­pe­ti­tion is zero eco­nomic profit or nor­mal profit (earned on av­er­age by the par­tic­i­pat­ing firms). In a dy­namic, com­pet­i­tive, en­tre­pre­neur­ial econ­omy, eco­nomic profits are gen­er­ated by cre­at­ing new prod­ucts or meth­ods through dis­cov­ery, in­no­va­tion or im­prove­ment that al­lows the con­tribut­ing firm to earn eco­nomic profit. This is le­git­i­mate and fair for the en­tre­pre­neur­ial value and wealth cre­ation as part of the real econ­omy. Eco­nomic rent is dif­fer­ent from eco­nomic profit. While com­pe­ti­tion can re­duce or elim­i­nate the eco­nomic profit for the ad­van­tage of the con­sumers and the broader so­ci­ety, and thus also cre­ate more in­cen­tive for real value cre­ation (value cre­ators will earn eco­nomic profit for a while), eco­nomic rents are pro­tected by var­i­ous in­sti­tu­tional and le­gal means pre­vent­ing its elim­i­na­tion or re­duc­tion. This is un­just and un­earned, thwart­ing le­git­i­mate com­pe­ti­tion by ar­ti­fi­cially sti­fling the mar­ket. Whether Prof. El Ga­mal’s ob­ser­va­tion about rent-seek­ing through Shariah ar­bi­trage is ques­tion­able, the fact re­mains that the ro­bust pres­ence of Is­lamic fi­nance in­dus­try is in many ren­tier states or economies, where rent-seek­ing be­hav­ior and cul­ture are ram­pant, and the in­dus­try is vul­ner­a­ble to such be­hav­ior and cul­ture. As the con­cept and the­ory of rent-seek­ing de­vel­oped in the west­ern, con­ven­tional econ­omy, it is help­ful to un­der­stand that con­text first. In mod­ern states, lob­by­ing by var­i­ous busi­ness en­ti­ties or con­stituen­cies to in­flu­ence gov­ern­ment’s poli­cies is an im­por­tant ex­am­ple of rent-seek­ing be­hav­ior. An ar­ti­cle in Har­vard Busi­ness Re­view (May 26, 2016) makes the case “Lob­by­ists are be­hind the rise in cor­po­rate profits.” Shouldn’t cor­po­rate profits be from their busi­ness ac­tiv­i­ties? Be­fore pro­ceed­ing fur­ther, let’s note that we are not talk­ing about riba or in­ter­est, rather profit, which is oth­er­wise ha­lal (per­mis­si­ble). The ar­ti­cle iden­ti­fies non-fi­nan­cial cor­po­ra­tions in five in­dus­tries that had the most con­cen­trated lob­by­ing ef­fort and im­pact: phar­ma­ceu­ti­cals/chem­i­cals, pe­tro­leum re­fin­ing, trans­porta­tion equip­ment/de­fense, util­i­ties, and com­mu­ni­ca­tions. In­deed, in the US con­text these in­dus­tries to­gether are known as “rent-seek­ing sec­tor”. In 2016 lob­by­ists in USA spent $3+ bil­lion on lob­by­ing. This is not char­i­ta­ble con­tri­bu­tion. So, what do they get out of it? Ac- cord­ing to the HBR ar­ti­cle cited ear­lier, a good part of lob­by­ing is to seek reg­u­la­tions that “pro­vided them shel­tered mar­kets— rather than com­pet­ing on in­no­va­tion.” In such shel­tered or pro­tected mar­ket, profits are higher than it oth­er­wise would be. The study shows that Reg­u­la­tion and lob­by­ing has con­trib­uted to cor­po­rate profit (1.2%) close to the con­tri­bu­tion of cap­i­tal (1.4%). Thus, profit is ha­lal. But when profits are boosted by ac­tiv­i­ties or ac­tions that are not pro­duc­tive (e.g., lob­by­ing) as part of the profit, the com­pa­nies get eco­nomic rent In ab­sence of eco­nomic rent, costs would have been lower, price would have been lower, and there­fore these rent-boosted profit is a mas­sive trans­fer of wealth from con­sumers (re­gard­less of rich or poor) to the com­pany share­hold­ers. For those with in­ter­est in Is­lamic eco­nom­ics and fi­nance can note that riba is de­fined as “stip­u­lated ex­cess with­out any counter value”, where this stip­u­la­tion is a key as­pect of riba. In case of eco­nomic rent, with prob­a­bly much big­ger neg­a­tive im­pact on the econ­omy and so­ci­ety, the un­earned gain is with­out any stip­u­la­tion, and it should not be dif­fi­cult to un­der­stand and ap­pre­ci­ate that in this kind of “un­earned gain”, it is un­stip­u­lated. In an­other word, wealth or value trans­fer oc­curs with­out even knowl­edge of com­mon peo­ple and con­sumers who ul­ti­mately are the source of ex­tract­ing such eco­nomic rent.

Public Sec­tor Cor­rup­tion

A ma­jor rent-seek­ing prob­lem area is public sec­tor cor­rup­tion. In many coun­tries it is all too com­mon, more so in Mus­lim-ma­jor­ity coun­tries, to award con­tracts to priv­i­leged par­ties based on bribes (eu­phemisti­cally, kick­back or even gift): that’s eco­nomic rent earned by public of­fi­cials. Also, of­ten these con­tracts are at in­flated cost, yield­ing rent for con­tract win­ning par­ties. Such in­flated cost cov­ered by tax­pay­ers’ money is a trans­fer of wealth from peo­ple, with­out ad­di­tion to the real econ­omy. In many de­vel­op­ing coun­tries the poor are more vul­ner­a­ble to the con­se­quences of cor­rup­tion, and the rich and pow­er­ful has an in­ter­est in per­pet­u­a­tion of poverty, so that in­stead of le­git­i­mate profit they can earn eco­nomic rent. In many coun­tries even the law en­force­ment agen­cies are in­volved in ex­tor­tion of com­mon peo­ple. Such un­earned in­come is not just il­le­git­i­mate, but also im­moral, con­sti­tut­ing un­just en­rich­ment at the ex­pense of oth­ers. Let us con­sider an oil rich Mus­lim-ma­jor­ity coun­try, which earns most of his rev­enue from its nat­u­ral re­source. The coun­try has a rul­ing elite and busi­ness oli­garchs that con­trol the vast re­sources of the coun­try. The rich and pow­er­ful get mega projects for which they are will­ing to spend large sum as “gifts”. No one can get any such con­tract with­out the fa­vor of the rul­ing elite. For­eign com­pa­nies also pay large sum in their in­ter­na­tional com­pe­ti­tion to get con­tracts. Most of these con­tracts are also at in­flated costs. All of these are ex­am­ples of eco­nomic rent, which con­sti­tute trans­fer of wealth from that oth­er­wise would have been avail­able to the peo­ple in gen­eral. One might make the ar­gu­ment that one can see the pres­ence of rent-seek­ing be­hav­ior in this ac­tiv­i­ties, but where does Is­lamic fi­nance fit in? Well, in sev­eral ways. The mem­bers of the rul­ing elites are also in the boards and/or man­age­ment of the Is­lamic fi­nan­cial in­sti­tu­tion (con­sider an Is­lamic bank or an Is­lamic in­vest­ment bank). The mem­bers of the rul­ing elites can also be ma­jor­ity share­hold­ers or in the man­age­ment. All of these as­pects can lead to sce­nar­ios or rent-seek­ing can oc­cur, even though the projects or ac­tiv­i­ties can be Shari’ah-com­pli­ant at the trans­ac­tion level. These sce­nar­ios can be­come more pos­si­ble where the own­er­ship of these fi­nan­cial in­sti­tu­tions is highly con­cen­trated, as it hap­pens to be in many Mus­lim-ma­jor­ity coun­tries. What is im­por­tant is to rec­og­nize that in­jus­tice and ex­ploita­tion of in­di­vid­u­als or the public can and does oc­cur that is much more wide­spread in im­pact than merely riba or in­ter­est. Fur­ther­more, even though the fi­nan­cial trans­ac­tions are Shari’ah com­pli­ant, in the kind of sce­nar­ios de­scribed above Is­lamic fi­nance, just like any kind of fi­nance, can be an en­abler for rent-seek­ing. Now let’s take a look at an­other kind of rent-seek­ing. In many oil-rich Gulf coun­tries la­bor visas are sold, even though that should not be the case. Lo­cal spon­sors and their agents of­ten pocket the price of visa, an ex­am­ple of un­pro­duc­tive, un­earned in­come. Sim­i­larly, in these coun­tries for ex­pa­tri­ates to en­gage in busi­ness, there must be lo­cal spon­sors or lo­cals with com­mer­cial li­cense, who earn “rent” on their li­cense. Rent-seek­ing be­hav­ior en­cour­ages pur­su­ing in­come and wealth with­out work or con­tri­bu­tion to the value cre­ation in the econ­omy. The be­hav­ior can be un­der­stood as peo­ple be­ing in­ter­ested in get­ting a larger share of the pie with­out mak­ing an ef­fort or con­tri­bu­tion to make the pie larger. Rent-seek­ing be­hav­ior can hap­pen even in the pres­ence of Is­lamic fi­nance, where pro­hi­bi­tions such as riba, gharar, maysir are re­spected, and they should be, but rentseek­ing is also pur­sued. Part of the prob­lem is that Is­lamic fi­nance and Is­lamic com­mer­cial law is fo­cused on trans­ac­tions, with­out un­der­stand­ing, tak­ing into ac­count or ex­plor­ing the in­sti­tu­tional or sys­temic be­hav­ior and dy­nam­ics. Is­lam and the Qur’an are cat­e­gor­i­cally and firmly against zulm (in­jus­tice, ex­ploita­tion). If our con­cern as Mus­lims is to have a world based on jus­tice and free from zulm, the start­ing point for our ap­proach has to be un­just be­hav­ior, like un­earned in­come, which in­cludes riba, one of the fun­da­men­tal cases of un­earned in­come/wealth as part of rent-seek­ing be­hav­ior. Nar­row fo­cus on riba/in­ter­est may lead us to have a riba/in­ter­est-free world, and Mus­lims need to in­sist on it, but we may not have a world free of zulm, if our un­der­stand­ing, con­cern and pol­icy frame­works and tools do not take into con­sid­er­a­tion rent-seek­ing be­hav­ior. (This ar­ti­cle was orig­i­nally pub­lished in Is­lamic Fi­nance News, Au­gust 2018. An annotated, ex­panded ver­sion of this pa­per is avail­able at https://ssrn.com/ab­stract=3197653. The au­thor is an as­so­ciate pro­fes­sor of Eco­nom­ics and Fi­nance and an Is­lamic fi­nance ex­pert, Univer­sity of Bahrain; fa­rooqm59@gmail.com)

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