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FISCAL POLICY: ISLAMIC VERSUS CONVENTIONAL                 PREPARED BY:ROSWAHIDA BINTI AHMAD SHUBELI            07BB03001 ...
CONTENT  1. ACKNOWLEDGEMENT                                   1  2. INTRODUCTION                                      2   ...
3.2 IN ISLAM PERSPECTIVE                         9           3.2.1 PROPHET YUSUF FISCAL PLANNING   9           3.2.2 SOURC...
1. ACKNOWLEDGEMENTSAll praise to Allah (swt) the most Gracious and most Merciful, by whose grace and blessing toMiss Hafiz...
2. IntroductionFiscal policy is a policy to change tax and government spending to protect economystabilization.Main purpos...
2.1 HOW FISCAL POLICY BEGAN.Classical economyClassical economic theory has always claimed that the economy is always at fu...
2.2 THE ROLE OF THE GOVERNMENT IN ISLAMIn the traditional economic, government is only a tool. Only when market is found i...
3. FISCAL POLICY3.1 IN CONVENTIONAL PERSPECTIVEIn conventional, they only focus on how to increase and protect they materi...
ii) Maximum Price And Minimum PriceThis method would guarantee of price stabilization in economy.During economic boom, max...
iii) Stable fiscal policyThis method are same with expansionary fiscal policy. To prevent deflation and encourageeconomic ...
v) increase government spending and tax in same time.Two possibility may happen:-a) changes in government > changes in tax...
3.2 IN ISLAM PERSPECTIVE3.2.1 Prophet Yusuf Fiscal planningIn Quran has provide a best basic what a goos fiscal policy sho...
In the dream, the King saw seven green ears of wheat and seven withered or dying ears of wheat.Then prophet Yusuf interpre...
Fiscal policy in terms by the government to manipulate taxes and spending such thatconsumption and investment behavior thi...
3.2.3 ZAKAT EXPENDITURERecipients (asnaf)                                    ObjectiveFuqara (very poor)                  ...
Likewise, even at lower interest rates it does not mean that banks are willing to make more loans.The supply of loans too ...
Among the eight asnafs, zakat spending for fisabilillah purpose is so wide that itihad can bemade on how zakat funds can p...
4. CONCLUSIONMacroeconomic policies in Islam can indeed cover a wide array of topics, which this paper hasonly address a f...
5. BibliographyBOOKFOONG, L. M. (2005). DASAR FISCAL. In TEKS PRA-U MAKROEKONOMI (pp. 202-212).SELANGOR : PEARSON MALAYSIA...
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Fiscal policy

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Fiscal policy

  1. 1. FISCAL POLICY: ISLAMIC VERSUS CONVENTIONAL PREPARED BY:ROSWAHIDA BINTI AHMAD SHUBELI 07BB03001 PREPARED FOR: MISS HAFIZAH BINTI ABDUL RAHIM BMES 7003 COMPARATIVE STUDY OF ISLAMIC ECONOMICS 13th August 2010 1
  2. 2. CONTENT 1. ACKNOWLEDGEMENT 1 2. INTRODUCTION 2 2.1 HOW FISCAL POLICY BEGAN. 3 2.2 THE ROLE OF THE GOVERNMENT 4 IN ISLAM 3. FISCAL POLICY 3.1 IN CONVENTIONAL PERSPECTIVE 5 3.1.1 TYPE OF FISCAL POLICY 5 3.1.2 EFFECT OF FISCAL POLICY 7 WITH KEYNESIAN TEORY 3.1.3 EFFECT OF FISCAL POLICY WITH AD-AS 8 2
  3. 3. 3.2 IN ISLAM PERSPECTIVE 9 3.2.1 PROPHET YUSUF FISCAL PLANNING 9 3.2.2 SOURCES OF REVENUES IN 11 EARLY ISLAMIC PERIOD 3.2.3 ZAKAT EXPENDITURE 12 3.2.4 MOBILIZING BAITULMAL‟S ASSETS 12 FOR ECONOMY RECOVERY 4. CONCLUSION 15 5. BIBLIOGRAFY 16 3
  4. 4. 1. ACKNOWLEDGEMENTSAll praise to Allah (swt) the most Gracious and most Merciful, by whose grace and blessing toMiss Hafizah binti Abdul Rahim, our lecture of subject Comparative Study of Islamic Economic,due to the opportunities to us in discussing about fiscal policy in Islamic and conventional.I also thankfully to our college (Selangor International Islamic University College) for allowedus to learn and have the knowledge in this subject matter. And to all the Librarians of ouruniversity college in their co-operations helping us regarding some journal and books aboutfiscal policy.I also take this opportunity, while relying on the instruction of the Prophet to the effect that:“whoever does not thank people does not thank Allah”I indebted to this discussion from online journal, articles and books as supporting to the idea andget all the information from it while writing the assignment.I have given all our effort to this paper work and we hope that this paper work will providelessons and information which will complete the need of this assignment and also answering allthe question of fiscal policy between Islamic and conventional.May Allah (Almighty) reward them all for their contribution and consider our efforts for his sakeonly. 4
  5. 5. 2. IntroductionFiscal policy is a policy to change tax and government spending to protect economystabilization.Main purpose of fiscal policy are to: a) To achieve economic growth continuously without inflation and unemployment. b) To achieve equality in income distribution with to draw nearer the gap between rich and poor people.Type of fiscal policy are: a) Automatic stabilizers b) Discretionary fiscal policyThere are two approaches to analyze fiscal policy.First, about the economics law governing the economy in which these macroeconomics policiesare pursued were made. It can be in two way: a) An economy governed by Syariah principles b) An economy governed by civil or western law while some aspects of Shariah principles are observed in selected economic activities.The first approaches has been a natural choice.Second, much more on research and investigation as it means extracting information andknowledge from real economic life . In Malaysia for example, government have power to controlzakat collection and disbursement, which also control waqaf and faraid management. 5
  6. 6. 2.1 HOW FISCAL POLICY BEGAN.Classical economyClassical economic theory has always claimed that the economy is always at full-employment.Guarantee that, all output produced by firms will be taken up by consumers. So, supply createsits own demand. In the short-run these will be temporary disequilibrium the capital, labor andproduct market, but in long run the economy is always in equilibrium or full employment. Themarket is therefore perfect and there isn‟t need for government to interference in the economy.However classical economy was proven wrong as the US economy got into the Great Depressionin the 1930‟s. Which is huge amount of unemployment due to business shut downs and bankfailures took place. It is clearly shows that is something wrong with the market.Keynesian economicsIn criticizing the classical economist, John Maynard Keynes says that there is not enoughdemand in the market. In his explanation, in short run, it is the demand for goods and servicesthat will determined the level of GDP, rather than the supply of factor inputs. The GreatDepression was a result of low spending. Consumer and business spending not strong enough tobring back the economy to full employment. The only way to rose up demand and GDP is byincreasing government spending.Supply-side economicsIn 1980‟s American economy was hit by stagflation. Most blame on over-regulation, loweringproductivity and motivation to increase output among producers. Neoclassical economic thinkingsurfaced in the disguised of supply-side economics calling for changes in taxes to produce moreoutput then increasing economic activity. 6
  7. 7. 2.2 THE ROLE OF THE GOVERNMENT IN ISLAMIn the traditional economic, government is only a tool. Only when market is found inefficient orfails to generate efficiency, only then, government will intervene to set things straight again.However government in Islam is divinely inspired and thus, inherent in nature. This is because,man as economic agents, consumers and supplier alike, are by nature weak and unstable. Thishas been mentioned in al-Quran(70: 19-21). Another verse is (4:128) man is greedy andselfishness.Therefore, unlike conventional. Islamic economic not just calculate material in fiscal policy butalso spiritual to increase the country performance. 7
  8. 8. 3. FISCAL POLICY3.1 IN CONVENTIONAL PERSPECTIVEIn conventional, they only focus on how to increase and protect they material from goes down.3.1.1 TYPE OF FISCAL POLICYthe way are by automatic stabilizers and discretionary fiscal policy.a) Automatic stabilizersThis is one of government tool to reduce the situation of economic if it in boom or recession byautomatically. When economy in boom, automatic stabilizers will make it reduce the boom. Andopposite, when economic in recession, automatic stabilizers will reduce the recession.Type of automatic stabilizers:i) Progressive Tax And Proportional TaxThis will help government in changes in society income and aggregate demand(AD).When economic in boom, society income would increase and aggregate demand also increaseand price also increase. When government put progressive tax and proportional tax this willreduce society income, AD and price.When economic in recession, society income are become smaller then AD also decrease. In thiscase, firms will reduce supply of the product and employment. This will lead to rose inunemployment. When government put progressive tax and proportional tax, these tax will reducedue to decrease of society income. This mean decrease in income would not so massive. Then,AD will reduce and this will help to reduce unemployment. 8
  9. 9. ii) Maximum Price And Minimum PriceThis method would guarantee of price stabilization in economy.During economic boom, maximum price policy will prevent price increase above maximumprice or ceiling price.During economic recession, minimum price policy will prevent price to goes down below floorprice.b) Discretionary Fiscal PolicyThis method are action by government to changes government spending and tax to overcomeproblem of inflation or unemployment and encourage economic development.Type of discretionary fiscal policy:i) Contractionary fiscal policyThis is use to prevent inflation. During economy are facing inflation, government may reducegovernment spending and increase tax to make AD goes down. When AD goes down, pricewould decrease and this will control inflation.ii) Expansionary fiscal policyThis method are for prevent deflation and encourage for economic growth. During economy indeflation with unemployment rate become increasingly, government may increase governmentspending and reduce tax for rise up AD. This will rise up job opportunity. Lastly, deflation canbe control and economic will growth. 9
  10. 10. iii) Stable fiscal policyThis method are same with expansionary fiscal policy. To prevent deflation and encourageeconomic growth. During deflation, increase government spending and tax. As a result AD willincrease, this will reduce unemployment and will increase income of the country. This lead toeconomic growth.3.1.2 EFFECT OF FISCAL POLICY WITH KEYNESIAN TEORYi) Decrease Government Spending When government decrease government spending, this will also decrease AE and country income. This lead to no more inflation.ii) Increase tax When tax be increase →society consumption decrease →AE decrease → income country decrease → no inflationiii)Increase government spending AE increase → income country increase → no more deflationiv) Decrease tax society income increase → society consumption increase → AE increase → country income increase → no more deflation. 10
  11. 11. v) increase government spending and tax in same time.Two possibility may happen:-a) changes in government > changes in tax or changes in government equal to changes in taxAE will increase → income country increase. Income country in massive if changes ingovernment more than changes in tax.b) changes in government < changes in taxThis will lead to decrease in AE → income country will decrease.3.1.3 EFFECT OF FISCAL POLICY WITH AD-ASa) Contractionary fiscal policyPrice increase → real country output increase → increase in both are depend to economycapacity and slope of AS.b) Expansionary fiscal policyThis lead to price and real country output decrease. The decrease of both also depends oncapacity of economy and slope of AS. 11
  12. 12. 3.2 IN ISLAM PERSPECTIVE3.2.1 Prophet Yusuf Fiscal planningIn Quran has provide a best basic what a goos fiscal policy should be like. In surah Yusuf(12:43-49) tell the story of a Pharaoh in Egypt who had a strange dream.The king (of Egypt) said: "I do see (in a vision) seven fat kine whom seven lean ones devour andseven green ears of corn, and seven (others) withered. O ye chiefs! Expound to me my vision if itbe that ye can interpret visions." (43) They said: "A confused medley of dreams: and we are notskilled in the interpretation of dreams." (44) But the man who had been released, one of the two(who had been in prison) and who now bethought him after (so long) a space of time, said: "Iwill tell you the truth of its interpretation: send ye me (therefor)." (45) "O Joseph!" (he said) "Oman of truth! Expound to us (the dream) of seven fat kine whom seven lean ones devour, and ofseven green ears of corn and (seven) others withered: that I may return to the people, and thatthey may understand." (46) (Joseph) said: "For seven years shall ye diligently sow as is yourwont: and the harvests that ye reap ye shall leave them in the ear― except a little, of which yeshall eat. (47) "Then will come after that (period) seven dreadful (years), which will devour whatye shall have laid by in advance for them, (all) except a little which ye shall have (specially)guarded. (48) "Then will come after that (period) a year in which the people will have abundantwater, and in which they will press (wine and oil)." (49) 12
  13. 13. In the dream, the King saw seven green ears of wheat and seven withered or dying ears of wheat.Then prophet Yusuf interpret the dreams. Prophet Yusuf said that Egypt would enjoy seven yearsof prosperity with abundant harvests. In modern times, this mean high economic growth. Headvised the people of Egypt to hardworking in plant their crop, use a little for food andsustenance and store the rest. This is because after the period of prosperity, Egypt would sufferfrom drought for seven years when no crops would grow. In modern term this mean a bad longrecession. But with the reserve in store, the people of Egypt could survive the seven bad years.Prophet Yusuf add more advice to the King, have to lease the best portions for seeds to plantlater when rains filled the Nile. In other words, people must set aside money for savings andinvestment. To postpone current consumption to make way for production of future goods wasone of the main messages that Prophet Yusuf wanted the Pharaoh to think about.What was tell in Quran was a simple budget policy. During economic booms, when earning ishigh and business secured more profit, the budget should call for higher savings rather thanhigher spending. For example, during good years, government normally earns higher taxrevenues. According to Prophet Yusuf‟s fiscal planning, the government should not forget thatthe economy might eventually slow down one day. So it is good policy not to overspend suchthat more revenues can be set aside as reserve.During a recession however, Keynesian theory suggests higher government spending to helpstimulate aggregate demand. But how can we increase public spending if fewer reserves areavailable for government spending. Bad fiscal policy allows government to overspend duringeconomic booms, leaving them with lower reserves to work with when the country recedes into amajor slow down. 13
  14. 14. Fiscal policy in terms by the government to manipulate taxes and spending such thatconsumption and investment behavior this would help to achieve full-employment level ofoutput and price stability. For example, if the economy hit by a recession with declining sales,output and employment, economic theory suggest more spending. More spending will increaseproduction, employment and income. One way to increase spending is to reduce taxes. Lowerpersonal income tax will increase disposable income and therefore raising consumption. Lowercorporate tax will increase net profit, which can increase more business spending. But does Islamallow manipulating taxes and zakat? Taxes can be manipulate but zakat will fixed every year2.5%.3.2.2 SOURCES OF REVENUES IN EARLY ISLAMIC PERIODZakat Special levy or tax on wealth and agriculture products.Kharaj Land taxJizya Poll tax on non-MuslimsGhanimah Spoils of warFay‟ Properties received from enemies without actual fighting„Ushur Custom duties 14
  15. 15. 3.2.3 ZAKAT EXPENDITURERecipients (asnaf) ObjectiveFuqara (very poor) Elimination of poverty and provisions of basic needsMasakin (poor) Elimination of poverty and provisions of basic needsAmilun (tax collector) Ministry of financeMuallaf (newly converts and those near to Welfare and diplomatic expenditureIslamAl-Riqab (slaves) WelfareAl-Gharimin WelfareIbnu Sabil Highways and roads, motels diplomatic expenditureFisabilillah Military expenditure, education, communication3.2.4 MOBILIZING BAITULMAL’S ASSETS FOR ECONOMY RECOVERYAccording to Keynes, the level of output of GDP is determined by demand. More demand forgoods and services by consumers, business and government means higher spending, which willstimulate production, thus increasing output and employment.To increase aggregate demand, based on monetary policy BNM intervention in the moneymarket in lowering the Kuala Lumpur Inter-bank Offer Rate (KLIBOR). At lower base lendingrate, banks are expected to make more loans as the demand for financing is also expected toincrease. Lower interest rate, investment and the GDP are expected to go up. But what if thecontrary is true, that is investment is interest inelastic or not sensitive to interest rate. 15
  16. 16. Likewise, even at lower interest rates it does not mean that banks are willing to make more loans.The supply of loans too may be insensitive to interest rates due to fear of more bad debts if newloans are made.How Islamic economic institutions in this country could do their part, especially those who arecurrently holding abundant supply of assets and cash. Here the BaituMal (Islamic treasury) cando its noble part, especially in providing capital and land resources.Islamic public assets such as zakat funds and waqf properties on a large scale. If this public assetdifficult to mobilize on a grand scale, which finally all Muslims will stand to lose. If thoseassets are properly utilized so that more benefits can be generated from them, or else, like in ahadith its effect on donors when the charity or waqf properties were not properly mobilized by itstrustees to benefit society.In Malaysia, there are a lot of waqf land that have been misused. Misused is including leavingthem idle, failing to collect rent from tenants and even gazetting these lands for non-religiouspurpose. Education and learning is a scarce commodity today, so those waqf properties may helpto solve the problem.However, without capital, waqaf properties would not can mobilized. Here now are the use ofzakat. Zakat means “growth”. It is actually a tax on assets that are growing or increasing in size.Zakat is obligation not a personal thing. The state has a legal claim on this tax, which includezakat tax on wealth, income and agriculture produce. 16
  17. 17. Among the eight asnafs, zakat spending for fisabilillah purpose is so wide that itihad can bemade on how zakat funds can put on full force to improve the live of Muslims and mankind.Spending for the way of Allah can be mean many things such as education, national defense,communication and infrastructure development.Surplus of zakat and idle of waqf lands are revived to the maximum advantage of Muslims.Doing so will stimulate the demand for raw material and labor, which brings more jobs andvalue-added activities to the local economy and thus help economics recovery. And there will besufficient projects for contractors as well as other interested parties. 17
  18. 18. 4. CONCLUSIONMacroeconomic policies in Islam can indeed cover a wide array of topics, which this paper hasonly address a few. The Islamic economic system must in the first place ensure economic justicein economic transactions. This will make macroeconomic management to be pursued to theminimum while the state will always be in constant surveillance to see that economic growth andstability is guarantees and secured. For example, if governments failed to exercise restraint onexcessive expenditures during good times, they will have no choice but to intensify fiscal policyto stimulate spending when recession hits the country.So now we can see that the different fiscal policy from Islamic and conventional. The theoryfrom conventional are much more on analyze the consumer behavior to protect economy fromhaving economic problem which is inflation, deflation and stagflation. They more to material. Astheir focusing to maximize profit and minimize losses. However in Islam, it not just stress onmaterial but also spiritual. Here we can see the justice in Islam. Stimulate of zakat and waqf toimprove the economic society.Saving and investment are really importance during economic boom as been told in Quran insurah Yusuff. The return from the saving and investment will be use full during economicrecession. This mean that, during in stable position we have to remember the economy is notalways in booms. When the period for economic goes down we must be prepared for what averare up coming. 18
  19. 19. 5. BibliographyBOOKFOONG, L. M. (2005). DASAR FISCAL. In TEKS PRA-U MAKROEKONOMI (pp. 202-212).SELANGOR : PEARSON MALAYSIA SDN BHD.(1999). In A. M. IBRAHIM, ISLAMIC FINANCIAL SERVICES AND PRODUCTS (pp. 43-80).KUALA LUMPUR: IKIM PUBLISHING UNIT.ONLINE JOURNAL1.http://islamiccenter.kau.edu.sa/english/Publications/Ziauddin%20Ahmed/Fiscal%20Policy/FIS CAL%20POLICY%20-%20ZIAUDDIN%20-%20%5BCOMPLETE%20BOOK%5D.pdf2. http://islamiccenter.kau.edu.sa/arabic/Magallah/Pdf/Old-1-1/Faridi_09.pdf3. http://iei.uv.es/~rdomenec/EUbudget/EUbudget.pdf4. http://courses.cit.cornell.edu/tp253/docs/malaysia_pbcs.pdf5. http://www.ief.es/Publicaciones/PapelesDeTrabajo/pt2003_11.pdf6.http://www.emeraldinsight.com/journals.htm?issn=03068293&volume=33&issue=2&articleid =1537573&show=pdf7. http://www.princeton.edu/~erp/ERParchives/archivepdfs/M144.pdf8. http://kisi.deu.edu.tr//yesim.kustepeli/w4499.pdf9. http://abacus.bates.edu/~daschaue/aschauer85.pdf 19

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