Economics
Reprinted from the Middle East Studies Association Bulletin, Summer  2002 (with changes in orthography to HTML standards).
Copyright 2002 by the Middle East Studies Association of North America
The Economy of Iran: The Dilemmas of an Islamic State, edited by Parvin Alizadeh. 303 pages, bibliography, index. New York, NY: I. B. Tauris, 2001. $65.00 (Cloth) ISBN 1-86064-464-3

The Economy of Iran is a collection of eight papers on the economic development in Iran since the Islamic Revolution. It is a welcome addition to the literature on the Iranian economy, particularly because economics research on Iran remains notably limited. All three papers in part one make an attempt to explain the rise and decline of growth in the early 1990s. They show that during 1989-91, increased oil revenues and economic liberalization, which permitted large foreign borrowing, helped the economy recover from the macroeconomic difficulties that it had experienced in the 1980s as a result of the Revolution and war. The three papers further agree that the growth episode was short-lived and ended in a major balance-of-payments crisis after 1993 because of poor macroeconomic policies. The first two papers—one authored by Hassan Hakimian and Massoud Karshenas and the other by Hashem Pesaran—emphasize the role of special interests and the incompetence of policymakers in the government’s failure to pursue more effective policies. In contrast, the third paper, authored by Sohrab Behdad, suggests that the policy choices were the consequences of the revolutionary politicians’ preference for politically expedient tactics and the prevalence of populist ideologies among them. The difference between the two approaches is significant because the analyses of the first two papers imply that better policies will come about when the powers of special interests are curbed and policymaking take better advantage of expertise. In contrast, Behdad concludes that economic policies in Iran will not be conducive to growth as long as the political leaders lack a coherent vision of their regime and fail to establish a ‘pax Islamicus’ in ways that the Umayyad and Abbasids did after the revolutionary rise of Islam thirteen centuries ago. These three papers offer important information and assessments, but also suffer from weaknesses. For example, Pesaran's paper has an econometric section which is rather preliminary and not as good as his usual first-rate work. Another example is a discussion in Behdad's paper on foreign exchange policy, which contradicts itself.

In part two, Suzanne Maloney provides a well-researched account of the Islamic Foundations (Bonyads), which are large public business conglomerates under the control of the Supreme Leader, independent from the government,, and also important agents of rent redistribution with political agendas and strong connections. Maloney shows that Bonyads play complex roles in the economy, which may have both positive and negative aspects. In the second paper of part two, Hassan Hakimian carefully examines the population trends in Iran and shows that after accounting for possible errors in census data, one still finds a sharp rise in fertility around the time of the 1979 Revolution, with a subsequent decline after 1986. The third paper, authored by Seyed Morteza Afghah, presents the results of a 1995 survey of 144 businesses in which the business managers identify policy uncertainty, anti-producer culture, inefficient government and banking, and rigid labor laws as the main obstacles to economic growth. The paper’s analysis is rather thin, and misses much theoretical and empirical literature on the role of non-economic factors in private sector development.

The two papers in part three, by Valentine Moghadam and Parvin Alizadeh, show clearly that women's roles in the Iranian economy was substantially curtailed in the aftermath of the Revolution, and that although things have improved since the mid-1980s they are yet to return to the pre-revolutionary situation. The two papers review the reasons behind these trends and examine the interaction of women's roles with the revolutionary ideologies and nation building.

The data, debates, and discussions in The Economy of Iran are useful additions to the literature on the Iranian economy. Nevertheless, the collection suffers from shortcomings here and there that are symptomatic of that literature. Future research should try to build on the strengths of this book.

Hadi Salehi Esfahani
University of Illinois at Urbana-Champaign

Islamic Finance in the Global Economy, by Ibrahim Warde. 256 pages, index. Edinburgh, Scotland: Edinburgh University Press, 2000. $90.00 (Cloth) ISBN 0-7486-1216-5

Islamic Finance in the Global Economy is a well-researched and concise book on a fluid, complex, and sometimes misjudged concept. The author holds that Islamic finance, which to some extent grew out of the petrodollars of the 1970s, is not a passing fad; nor is it limited to traditional interest free banking and profit and loss sharing devices. Warde offers a non-essentialist reading of Islam. Islam is not inherently conservative and, indeed, even some Islamic ‘fundamentalists’ have selectively internalized certain secular, modern ideas. Authenticity and traditionalism are not synonymous. For instance, when socialism was strong, many Islamic thinkers borrowed from socialism. And today, given the strength of deregulated globalism, Islamic ideologues are adopting a rather free market outlook. The more recent versions of the ‘Islamic third way’ reflect the currency of global neoliberal trends. Ultimately, Islamic finance attempts to conciliate cold, rational utility maximization with religious and communitarian concerns. Quoting Timur Kuran, Warde reminds us that Islamic finance is based upon the premise that ‘homo ecomicus’ and ‘homo Islamicus’ do not perfectly coincide.

According to the author, recent developments in the global financial system have facilitated the growth of Islamic finance. “Where interest income was once the cornerstone of banking, its relative importance has steadily declined in recent years…more significantly, banks are now engaged in financial operations such as the creation and sales of derivatives and other new products that do not directly involve interest” (p. 102). It should also be noted that while Islam is definitely hostile to usury, it may be more hospitable to certain types of interest earning capital, provided that the interest is not excessive and is rewarded for socially desirable and productive endeavors. The author contends that the search for the Islamic bank is futile. One must rather ask what could be an Islamic bank, an institution which may be compatible with Islam in our time.

Warde admits that, overall, the record of Islamic finance is mixed. Interest free banking has frequently been an exercise in semantics. Islamic banks are not always so easily distinguishable from conventional banks. And “profit and loss sharing constitutes only a small part (about five percent) of the activities of Islamic banks” (p. 136). Mark–up schemes, where the risk incurred by the bank is minimal and profit margin is determined in advance and hence resembles a fixed interest rate, have been the dominant tools of Islamic banks. And while initially many Islamic banks were established as community based organizations to serve the poor and marginalized, they have in practice been forced to operate in more profitable and affluent areas of the economy and at least partially abandon their early idealism.

Although Warde’s book overall is interesting and informative, he tends to understate the dangers of Islamic fundamentalism and overstate the hazards of secularism. He also tends to identify secularism with ‘market fundamentalism.’ In other words, the author presents a kind and gentle version of Islam along with a heartless and individualistic version of secularism. While seculars have at times been intolerant, it is difficult to imagine democracy and religious tolerance in a non-secular environment. Finally, will Islamic finance be a transitional phenomenon and integrate into the mainstream or will it survive? And in case of survival, what will be its role and scope?

Massoud Fazeli
Hofstra University