Islam and Economic Development in Malaysia

Contemporary Islamic Economic Thought and Policy:

Policies and Institutional Reforms in Malaysia[1]

By

Mohamed Aslam Haneef

Abstract

For the last 3 decades, the resurgence of Islam has led to reforms in many Muslim countries, promoting- at different levels- policies and institutions related to Islamic economics, banking and finance. The development experience in many Muslim countries over this period has clearly challenged the modernization/ secularization thesis of the 50s and early 60s that proposed a declining role of religion in society. This paper will attempt to deliberate the case of Malaysia, where its development experience will allow us to provide a possible case-study of the development of contemporary Islamic economics and Finance, especially on the policy and institutional reforms that were undertaken and their impact on economic development. The paper argues that the development of these policy and institutional reforms in Malaysia had the four important ingredients necessary for reforms, namely, political will, credible initiators and communicators of Islamic reforms, the establishment of Islamic economic and financial institutions and supporting legal/educational/social/ reforms, undertaken in a relatively accommodative and flexible manner, reflective ofthe plural nature of Malaysian society. The paper is divided into 3 sections: Section 1 provides a brief overview of the Malaysian economy and surveys the role of Islam over the last five decades. It also shows that the simple ‘decline in religion’ hypothesis of modernization/secularization theses may not apply in the case of Malaysia. Section 2 presents some of the Islamic institutional and policy initiatives since the 1980s, a period that could be seen as a watershed in the official Malaysian government’s position on religion and its role in development. Section 3 attempts an analysis of these reforms and policy initiatives, in light of some scholarly debates on the role of religion, Islam and economic development, followed by a conclusion.

Introduction

Malaysia is a country of 27 million of whom about 65% are Muslims (9th Malaysia Plan), which in the period 1981 to 1998,had become one of the leading Muslim nations in terms of its economic development record and ‘Islamic institutional reforms’. The paper argues that the development of these institutional and related reforms in Malaysia have, as with most things in the nation, been largely accommodative, flexible and pluralist in nature. While data related to financial statistics and figures may show one dimension of the impact of these reforms, the paper also takes a look at some seemingly non-economic measures that have been implemented in Malaysia since 1981 that have had economic outcomes. In the case of Malaysia, the paper agrees with Nasr (2001)[2] that the state has played a key role in ‘embedding Islam to politics’ and, to a lesser degree, in economics. We also acknowledge the analysis of Lawrence (1998)[3] who described the Malaysian model of Islamic reforms as representing the ‘corporate Islam model’ that has uniquely stressed the economic dimension of jihad in its quest for development.

Section 1: Brief Overview of Malaysian Economy and Policy Framework

Malaysia has always had a capitalist, market-based economy, although the level of state involvement in the economy has varied over the last 43 years ranging from a generally ‘laissez-faire’ approach from 1957 to1969 to one with greater state domination from 1970 to1985. From about the mid 1980s to 1998, Malaysia followed many of the prescriptions of the neo-liberal market proponents of ‘deregulation, liberalization and privatization’. Briefly, during the East Asian crisis of the late 1990s, Malaysia went ‘unconventional’ by imposing selective capital controls, fixing its exchange rate and adopting a very ‘anti-west, anti-globalization’ stand.[4] Nevertheless, the market based, capitalist system is very much intact.

These changes apart, one must realize that from 1970 to1990, the over-riding, dominant policy in the country was the New Economic Policy (NEP), a major ‘social-engineering’ exercise that set out to achieve the goal of ‘national unity’ (in the aftermath of the 1969 riots) via two sub-objectives of eradicating poverty irrespective of race, and restructuring society to eliminate the identification of occupation with race.The NEP was an ethnic based policy, where goals and their targets were formulated and implemented according to the bumiputera- non-bumiputera categories[5]. Till today, despite it being 18 years since the end of the NEP, these categorizations still persist in public discourse and continues to be one of the most sensitive topics in Malaysia and Malaysian politics.

The NEP was replaced with the National Development Policy (NDP) that covered the period from 1991 to 2000. It had the overall objective of attaining balanced development to achieve national unity and to provide the continuity in Malaysian development objectives of achieving 'developed' status by the year 2020.[6] Many Chinese and Indian Malaysians were hoping that the NDP meant the end of the ethnic based policies of the NEP[7]. This ultimate goal has been promoted under the more popular banner of Vision 2020, underlying the various challenges that must be faced by the country and its peoples. In March 2001, the Third Outline Perspective Plan (OPP3) was presented in Parliament and saw the birth of the National Vision Policy (NVP) 2001-2010, which can be seen as a continuation of the NEP and NDP, but with modifications incorporating globalization and lessons from the economic crisis of 1998.

Throughout the period of the first three Prime Ministers (1957-1981), no express mention was made about Islam playing any role whatsoever in economic policy and activity. Despite being stated as the 'religion of the Federation’ (of Malaysia), Islam was limited to 'ceremonial' functions (Roff, 1980) In fact the first Prime Minister, Tunku Abdul Rahman- a Malay aristocrat- never hid his preference for a secular development policy, consistently warning of the dangers in any attempt to create an Islamic state.Some would even say that Malaysian independence was achieved without the bloodshed of countries like Indonesia because the British were confident that the future leadership of (then) Malaya, would continue to implement policies that were in line with the general tenets of the modernization thesis to be discussed later.[8]

Hussin Mutalib (1990)[9]was of the view that during the early days of independence, Islam ‘was not granted a prominent role in the governance of the state’, similar to that in many other Muslim nations.

The need to address the more pressing issues of nation-building also resulted in government policies which did not pay much attention to Islamic principles, nor to the development of Islamic socio-economic infrastructures and institutions. This is evident from the extent to which Islamic principles were incorporated into the Constitution….The first Malay Chief Justice after independence, Tun Mohamed Suffian Hashim, interpreted in 1962, the type of role that Islam should play under the terms of the Constitution: ‘primarily for the ceremonial purposes, for instance, to enable prayers to be offered in the Islamic way on official public occasions such as the installation or the birthday of the Yang diPertuan Agong (king), Independence Day and similar occasions. (1990, p. 23)

However, as in many other parts of the Muslim world, changes were in motion. Besides the Islamic Party of Malaysia (PAS), other Islamic groups like the Persatuan Kebangsaan Pelajar-Pelajar Islam Malaysia, PKPIM (Malaysian National Association of Muslim Students), Angkatan Belia Islam Malaysia, ABIM (Muslim Youth Movement of Malaysia) and Darul Arqam were formed in the late sixties and early seventies, demanding a greater role for Islam in Malaysia. This was also due to the Islamic resurgence that was beginning to gain momentum all over the Muslim world. Although there was an increasing awareness about Islam and its worldview, the Federal government was not prepared to entertain any thoughts on an Islamic state. Following the first Prime Minister, the third Prime Minister, Tun Hussein Onn (1976-1981), made his pessimism about the idea of an Islamic state for Malaysia clear and reminded government officers to take heed of religious extremism.

Section 2: Development in Malaysia: A Role For Religion?

While the sources of Al-Qur'an, hadith and Sunnah of the Prophet give us guidance, details must be deduced through the use of aql....Islam gives us flexibility....In Malaysia, our administration is not against Islam and takes into consideration the environment specific to Malaysia.

Dr.MahathirMohamad,

Prime Minister

36 AGM of UMNO, 27 Sept. 1985.

There are many institutions and activities and services in the economy which do not carry Islamic labels and nomenclatures. They are no less important, from an Islamic point of view, than specific institutions with Islamic appellations....What is important in evaluating these institutions and activities is whether they serve the interests and needs of the ummah... to enhance the quality of life and well being of the ummah.

Anwar Ibrahim

Minister of Finance, July 1992

Malaysian Economic Development: From the Secular Phase to the 1980s

In his 1968 article in the International Encyclopedia of Social Sciences, Daniel Lerner (1968) characterized modernization as a process in which less developed countries acquired the characteristics of developed countries. Among these characteristics was the diffusion of secular norms including personality transformation. The secular mind was seen as an important ‘attitudinal’ ingredient in modernization, being rational and progressive as opposed to the irrationality of religious (and mythical/magical) predispositions. Von der Mehden (1986, p.12)[10] succinctly summarizes the view prevalent in western scholarship as follows

In sum, then, modernization literature, particularly in the 1950s and 1960s, pictured a decline in religious values, attitudes and practices, and legitimacy as modernization proceeded in its inevitable forward progress. With this would come the weakening of the traditional, irrational, unscientific, or pre-scientific attitudes and behaviour that had permeated pre-modern society and the acceptance of ‘modern’ foundations of reasoning.

When Malaysia achieved independence in 1957, the government under then Prime Minister Tunku Abdul Rahman generally continued to work within the framework set up by the British, a framework that was generally seen to be effective. Nevertheless, the world and scholarship has changed in the last three decades and has seen instead of a decline, a resurgence of religion, especially led by Islam. Haynes (1999) discusses the impact of religious resurgence in various parts of the world in an era of globalization, and relates it to politics. Giving examples of the ‘Christian liberation theology’ movements in Latin America, the Islamic movements in the Middle East and Indonesia, the Hindu resurgence in India and the Buddhist revival in Thailand and Burma, he posits the view shared by some that we are witnessing ‘an un-secularization of the world’ (Weigel quoted in Huntingdon, 1993)[11]. This trend has not changed in the Muslim world.

In certain Muslim countries like Malaysia, religious resurgence has also occurred in an era of tremendous economic growth and transformation. This period of sustained economic growth, reduction of poverty, diversification of the economy and improved social and infrastructural facilities has been termed the ‘Asian Miracle’ by the World Bank (1994). Although the 1997-98 financial/economic/political crisis that hit Malaysia and much of East and Southeast Asia (and continues to plague some countries) called into question many aspects of the ‘Asian Values-Development Model’, the official incorporation of religious/moral values as a basis of economic development in the region in the last 30 years seems to question the modernization thesis.

While personality transformation and science/scientific methods have, and are, being promoted, religion- in our case Islam- was used as an ingredient in the sought after personality and attitude transformation. This can be seen very clearly in the following quote from Dr. Mahathir Mohamad.

Religion is another established force with the Malays. No change, no plan and no ideology which runs counter to the religion of the Malays can succeed.... In fact, Islam must be upheld and even further propagated if success is to be assured.

Dr. Mahathir, The Malay Dilemma, (1970: p.104)

There were some studies in the 1990s that tried to look at the relationship between Islam and economic development in Malaysia[12]. Wilson’s (1998) study of the Islamic reforms, while providing a general description and analysis of developments in Malaysia, it is limited primarily to developments in the banking/financial sector and would have been more appropriately titled ‘Islamic Banking and Finance in Malaysia’. His conclusion, based mainly on the data of the growth and performance of Islamic banking and finance, is that while Malaysia’s economic success is a model for others, the ‘specifically Islamic’ influence on it is marginal. Islam, he concluded, has not had a very great impact and effect on Malaysian economic development. However, ala Rodinson, he also states that there is no evidence to show that Islam has hindered economic development.[13]While Wilson’s conclusion may not be incorrect, the evidence he puts forward is limited to a rather narrow scope of Islamic economic thought and policy. In this context, Haneef (2001) pointed out that there is no development and utilization of a coherent, logical and consistent Islamic framework to effectively answer this question. Finding an ‘Islamic dimension of economic development’ means looking at Islam not just as a ‘set of rituals’, or as an ‘inherited culture’, but as a basis for thought and action. Islam becomes also a worldview with an economic/development vision from which economic thought and policy framework proceed.[14]

However, notwithstanding the absence of such a framework, this paper argues that in order to help evaluate the role of Islam in Malaysia’s economic development, we have to go beyond finance data and even direct economic policies. Some important aspects of Islamic policy and administrative reforms in Malaysia that are very relevant to understand the developments in the economic sphere have to also be analyzed.These policies and developments have largely been ignored by most studies on Islam and Development in Malaysia. For this we turn to the 1980s to discuss the new era of Islamic reforms in Malaysia.

The Years of Islamic Reforms: 1981-1998

Official contemporary writings place the genesis of Islamic economic institutions in Malaysia in the 1960s, with the establishment of Tabung Haji or Pilgrim’s Fund in 1963. However, the present writer is more inclined to view actual planned Islamic economic reforms as having started in 1981 when the Mahathir Administration came to power. Unlike its predecessors, and relating to the demands of the time, the Mahathir administration decided to utilize Islam as a positive ingredient in the development of the nation and its peoples, especially the Malays. The role of Islam, at the state level, went beyond ceremonial purposes. Political will to push through the subsequent reforms certainly was an important factor in the 1980s. This would be in line with the views of Chapra (2000), who viewed the future of any meaningful reform to begin with political will and change for the better.

In March 1981, Dr. Mahathir (then Acting Prime Minister) announced that the government would be setting up an 'Islamic Consultative Body' (ICB) to ensure that national development programmes conformed to Islamic values. This committee,made up of Islamic experts in administration, law, economics, medicine, engineering, agriculture, sociology, Islamic philosophy and politics had the task of analyzing and evaluatingthe then policies and technology with the intention of modifying them to ensure that they were in line with Islamic values. The ICB was to discuss and deliberate on various issues concerning Islam and development and to put forward these proposals to the government for consideration.Looking at the aims and general scope of the ICB, it would give the impression that the Government was attempting some kind of 'sifting' or quality testing for all development policies at the national level and seemed to indicate that the NEP was being Islamized or at least being injected with Islamic values. This would also imply that meeting the 'Islamic standard' was going to be the requirement of all policies, thus elevating Islam to a central role in policy formulation and decision making.

Later in 1981, the government announced its Inculcation of Islamic Values (IIV) Policy, which was meant to cover government administration. Over the years, the government crystallized this policy and it became clear that it was meant to instill universal Islamic values which would enable the country to have an effective, strong, just and progressive administration. This was to create a dynamic work ethic which would increase productivity. The important values stressed were Trustworthiness, Responsibility, Sincerity, Dedication, Moderation, Diligence, Cleanliness, Discipline, Cooperation, Integrity and Thankfulness.[15]Rather than imposing Islamic law or some other external aspects of Islam, the IIV policy was an attempt at improving individuals in their thinking, behaviour and value orientation. In this sense, Mahathir’s views certainly are not neo-classical economic views that look at economics as an independent, objective discipline. Instead, culture (including values and attitudes) and religion play an important role in determining the success or failure of economic policies, something that Fukuyama (1995) refers to as ‘social capital’[16].