The economic impact of the coronavirus is unprecedented. At the same time, an economic paradigm shift is underway. Like its effects, the results may also be unexpected. After easing the lockdown, the global economic situation could go either way: towards a more people-centric paradigm or away from it. This column will look at what the paradigm shift in economics might look like after the lockdown eases.
The new environment will be unprecedented and will force many countries to think outside of the normative economic methodologies. In fact, it has already challenged some of the key foundations of the contemporary free market economic model articulated by Milton Friedman. According to Friedman, the most serious problem of western economies was high inflation, which was caused primarily by “printing too much money.” In fact, this is exactly what many governments did. They injected billions into circulation through various mechanisms and ignored the inflation factor which is often used as an excuse not to spend money on social and public projects. Public bailout which many governments had to adopt, was a serious challenge to neo-liberal economic logic. The US regime utilizing the enforced dominance of its currency (the dollar) after WW-II went into overdrive to digitally create money. This policy was supposedly to be avoided as much as possible.
The non-mainstream economic policies of various countries came under the radar of many mainstream organizations. The Economist pointed out that “the Covid-19 pandemic policymakers are launching even bigger, more radical interventions… the policy response has been swift and decisive. Globally, central banks have cut interest rates by more than 0.5 percentage points since January and have launched huge new quantitative-easing schemes (creating money to buy bonds). Politicians are throwing open the fiscal spigots to support the economy… to focus just on the numbers misses something crucial, though. There are important qualitative changes under way in how policymakers manage the economy—the responsibilities they have seized for themselves, what is seen as a legitimate action and what is not, and the criteria used to judge policy success or failure. On these measures, the world is in the early stages of a revolution in economic policymaking.”
Ideas like universal basic income (UBI) and modern monetary theory (MMT), once seen as utopian, peddled by idealists, are now becoming part of the mainstream economic discourse and policies. These tools are not simple policies; they are paradigm shifts, away from the profitability narrative towards social cohesion. Both UBI and MMT make sense within Islam’s economic framework where the obligation of state institutions is to make life easy for people by providing services efficiently. While capitalism looks at policies primarily from a profitability angle, Islamic economic perspective evaluates policies based on benefit to society and comfort for its members.
Within the Islamic economic paradigm, well-paid maternity leave and higher salary for a nurse are more important than hedge-fund earnings or massive paychecks given to adult men chasing a basketball on the TV screen. Also, theologically speaking, the concept of “money tree” has basis in Islamic eschatology, where during the reign of Imam Mahdi (as) and Prophet Isa (as), there will be excess of wealth. A hadith reported in both Sunni and Shia sources states that the Messenger of Allah (pbuh) said: “When Hadrat al-Mahdi (‘atfs) rises up… Properties and zakat will be brought in the alleys, but one could hardly be found who would be willing to receive them.” The concept of free money is not just discussed in Islamic eschatology, but also by a free market friendly and mainstream institution like the BBC, with a specific case study example.
With this in mind, today what is preventing most economies from complete collapse are policies of government intervention and tools outside of the standard capitalist toolkit. Once governments and people in affected countries accept this reality, there will be push for a paradigm shift, which the above cited article from the Economist acknowledges.
Governments will find it difficult to justify their “inability” to finance free healthcare, education, public infrastructure and affordable housing. The argument loaded with economic jargon that governments must be cautious when spending on people’s well-being will not be perceived as credible. This in turn can lead to a paradigm shift. There are already signs of a political paradigm shift. On May 19, seven members of the ruling party in France, frustrated by the French president’s sole decision-making and pro-business policies, left the party and joined a parliamentarian group pushing for more people friendly policies. This has robbed Emmanuel Macron’s governing party of absolute majority.
The path to reach the new economic paradigm will not be smooth, especially for most Muslim countries. After the collapse of the Ottoman sultanate and imposition of the Western concept of nationalism on Muslim societies, many of these societies became more nationalistic than even the European states. Countries like Turkey, Pakistan, Egypt, Jordan and many others stubbornly cling to nationalist narratives while the Europeans have moved towards supranational concepts by building the EU. The only exception to this phenomenon were legitimate socio-political Islamic movements which always functioned as transnational players. A similar approach was adopted in the field of economics. Pursuit of material prosperity and import of Western educated economists into Muslim policy-making institutions turned many of these bodies and policymakers into even more hardcore capitalists than the capitalists themselves. A trip to Dubai will confirm this phenomenon.
Muslim countries tied to the established profiteering framework of economics will find it particularly hard to adjust to post-coronavirus economic realities. The economic blows inflicted on the Saudi regime that proudly flaunted its connection to profiteering circles in the West is a clear example. The economic downturn caused by the coronavirus has revealed many flaws of the dominant economic narrative. Thus, it should not come as a surprise to read how the Tehran Stock Exchange has seen gains of 225% in the last year and Iran introducing new Islamic oil and gas funding mechanisms. Being one of the few countries not fully integrated into the profiteering global economic system, Iran might see its economic isolation as a blessing in disguise in the long-term.
Specifics of the post-lockdown economics will of course vary based on each country’s economic and political set-up. However, as people are told to stay at home and in some countries, they receive relatively effective financial assistance from the government, new economic policy benchmarks and expectations will be created. These expectations and benchmarks will significantly reconstruct the mainstream economic narrative. One of the political casualties of the potentially new paradigm shifts in economics will be the acceleration of the political demise of the United States which today resembles Britain after WWI, doing all it can to cling to its global power status. The US is associated with cut-throat free market policies which will no longer be the benchmark in economics and give way to systems more resembling Germany, Sweden or Norway.