Terry Lacey

Development Economist

By the time President Obama is elected the United States will be a different country in a different world. There will be no going back and no return to business as usual. What began as the sub-prime housing market crash has become a generalized banking crash, leading to a world financial crisis, and then into a world economic recession.

There is no avoiding the impact of this series of financial and economic downturns and the associated stock market crashes and wild currency fluctuations. However for the developing economies of Asia, the Middle East and Latin America, and even for Africa , these changes represent new opportunities as well as short-term problems.

These events are symbolic of a changing global balance of power where the United States and Europe have to adjust to the rising economic power of Asia, the Middle East and the BRICs ( Brazil , Russia , India , China ).

More than half the Muslim population of the world is concentrated in a handful of larger states, most of them facing problems of mass poverty, illiteracy, and poor economic development performance often alongside weak political development and insecurity.

These states include Bangladesh , Egypt , Nigeria , Pakistan as well as India , Indonesia and Turkey . The last three are in a different position because they have, until now, higher economic growth and are consolidating political democracy.

The rest of the Muslim world is mostly focused in the Middle East, in North Africa and the Sahel, and the new Central Asian Republics .

So 80% or more of the Muslim world is located in the countries of the South, or the developing countries, including a relative minority of smaller population richer states mostly in the Gulf, but including Brunei and Malaysia .

How will the economic, financial and institutional changes that will follow on from the global financial turmoil affect the Muslim world and the issues of economic, social and political development of importance to the wider Muslim community?  

Possible answers can be projected through the impact of the crisis on three great issues :

First the crisis will accelerate demands for economic and social progress within Muslim states and societies, but not on the basis of simply bowing down to Western theories of liberalization and globalization.

Second the crisis will foster greater trade and economic co-operation between Southern States who will no longer want to depend so much on the USA and Europe .

Thirdly the crisis will place the Palestine-Israel confrontation within far more realistic and updated parameters and force it to a conclusion.

Muslim countries need no longer feel out of step if their governments and people are not overwhelmingly convinced on the benefits of simply replicating Western liberalization and globalization.

This was a crisis of capitalism and even the greatest advocates of the free market are forced to face reality that when capitalism fails it has to be bailed out by the state.

It is capitalist when it goes up and socialist when it comes down.    

This does not mean, as suggested by the Indonesian Vice President Kalla, that sharia banking can suddenly present the comprehensive alternative to capitalism.

The reality is that so far Islamic finance has been very integrated into global capitalist structures, with little emphasis on extending the more radical and unique profit and loss sharing concepts to poorer Muslims in poorer countries.

Attempts to turn Islamic finance into a comprehensive alternative to capitalism have been pursued by Muslim economists in Iran and Sudan but with little support from the rest of the Muslim world.

Nonetheless one consequence of the crisis is that Arab sovereign funds will become more important and shariah banking can play an increasing role in global financing, its expansion relatively unaffected by the financial crisis.

The Muslim fundamentalist fringe might think that the impending collapse of capitalism affords them a great opportunity, both to take advantage of instability and to pose some utopian impractical Muslim economic theory based on theocratic dictatorship.

However the lesson of the crisis will be the reverse of such utopian dreams. The reality is that support for Islamic parties will decline unless they can greatly improve their skills in economic management.

Perversely, like the rise of the dollar in the midst of chaos, liberalization and globalization will emerge from the crisis reorganized and stronger, but based on a more equitable distribution of power.    

Indonesia is an interesting example of a large Muslim state which can resist the negative impacts of the financial crisis. It has a large enough population and state budget to propel steady economic growth, even faced by a financial tsunami, and every prospect of diversifying export markets and funding sources reasonably fast.

Most Indonesians will have their jobs and incomes reinforced by a strong decisive state, based on the minimum of bailing out and the maximum of pushing infrastructural investment, especially in energy, with state development budget disbursements helping to maintain the rate of growth and consumption.

The Indonesian example may inspire other Muslim led states to do likewise and not be demoralized by the bursting of an Anglo Saxon ideological bubble based on easy and endless access to cheap credit, an unsustainable housing and credit boom, and on living beyond your means.

The change in the balance of international economic power will bring with it a more stable global system, based on the new power balance and a stronger state regulatory framework, with much better enforcement in future than in the past.  

Alongside reform of globalization will come the second great change that the Southern economies, while still seeking strong relations with the United States and Europe , will now seek to avoid becoming over-dependent upon them again. Better to globalize strengths rather than weaknesses.   

The Organization of Islamic Conference (OIC) has already declared, in the earlier Dakar Summit and elsewhere, that Muslim economies should co-operate in support of mutual trade and investment, the strengthening of Small & Medium Enterprises (SMEs) and expansion of Islamic Finance in banking services and investment.

The great convergence of interest would come if the Islamic Banking Institutions (IFIs) would grasp the opportunity presented by the current financial crisis to greatly expand joint investments with governments and other financing sources, including multilaterals and bilateral aid funds, to finance the power stations and water and sanitation projects which the Muslim world lacks. This would be a great spin off from the financial crisis.

The third great area where we can expect some positive impact from the financial crisis is on the resolution of the Palestine-Israel dispute.

Frankly not very many people care any more whether or not Israel and Palestine   are going to agree to one state, two states, three states, or three-and-a-half (as in the case of Great Britain and Northern Ireland).

Most sane people in the Muslim world just wish that whatever they are going to do they should get on with it before they miss the bus for ever, and become a sad and marginalized side-show in a very busy circus.

The point of the impact of the global financial crisis is precisely that Israel and the Palestinians risk finding themselves marginalized and increasingly irrelevant to the main thrust of the critical problems facing most Muslim states, namely economic survival and development, addressing climate change, and strengthening civic culture, political structures and political institutions.

The arrival of Mrs Tzipi Livni as Prime Minister of Israel would be a very welcome change and hopefully she can drag the Kadima party back to its original idea, to try and find a way out of the impasse by doing new things. Like a non aggression pact with Lebanon , a peace treaty with Syria and finally a deal with the Palestinians.

Now is the time for Hamas and Fatah to agree a new deal and new elections, even though the treatment of the democratically elected Hamas government was a disgrace.

It's also time for the Palestinians and Israelis to astonish the world with some new thinking. The level of settlements and balkanization of Palestine , plus prevarication on the twin state, is already such that a unitary state with Israel may be the only possible outcome.

One joint confederation comprising two states with a single economic union would be a better response to the global financial crisis and end the protracted agony on the classic two-state solution.

Or extend the confederation and invite Jordan to join it. Israelis might feel safer and have better prospects for more rapid economic prosperity in a three state confederation.

Alternatively drop all the fuss about nation states, find any workable solution for the Palestinians and Israelis to live together (cantons, unification, whatever)   and focus on a single free trade area and economic union from the Mediterranean to the Persian Gulf, and let everybody who wants to join it. Crazy ? No more crazy than what the Europeans have done since 1945.

The financial crisis means that we need some really fresh thinking from Muslim states, political parties and economists. Now is the time to build the new world.

Dr Terry Lacey is a development economist who writes from Jakarta , Indonesia , on modernization in the Muslim world, investment and trade relations with the EU and Islamic banking. terrylacey2003@yahoo.co.uk

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