PPI MALAYSIA

Income Inequality and Zakat

Published by Kajian Strategis PPI Malaysia on

Kevin Govinda   |   Wakil Bendahara Umum PPI Malaysia            

            Recent research show that income inequality has risen compared to past levels and has potential to induce negative spillover effects. The income share of the global 1 percent has risen from 16% in 1980 to approximately 22% in 2007 while the bottom 50% hovers around 9% share with slight increases throughout the same period. High income inequality leads to negative consequences, for example, reduced health care outcomes. Wilkinson and Pickett (2006) reviewed around 150 empirical studies and found that health care outcomes are lower in countries with high income disparities. Consequently, income inequality and its’ negative spillovers must be reduced. In this essay, we argue that mainstream economic thinking exacerbated income inequality and identify zakat as the solution to improving income inequality.

            Neoliberalism—characterized by deregulation of labor markets and reduced government intervention—combined with financialization—increasing role of financial motives in the economy—has affected distribution of resources and resulted in lower labor income share—exacerbating income inequality. According to Hein (2013), Neoliberalism and financialization influence labor incomes through three channels, sectoral composition of the economy, salary increases for management and higher profits, and weakened labor unions. Firstly, the composition of the economy shifted from public sector and non-financial sectors with high labor share of national income to financial sectors with lower labor shares of national income. Secondly, rising compensation for executives coupled with rising profit claims from rentiers—high interest and dividend payments—caused lower compensations for workers. This phenomenon occurred due to companies prioritizing shareholders and pushing down costs, as opposed to worker’s welfare. Thirdly, lower bargaining power of unions—due to globalization, international trade, and deregulation of labor union—made negotiation for higher wages unsuccessful.

            Zakat—an obligatory payment made by Muslims to the poor—could alleviate income disparities through redistribution of income. Admittedly, the purpose of zakat is to help fulfill basic needs for the poor. In addition to economic benefits to the recipients, zakat also serves social objectives—promotes wealth sharing and reducing greediness—and religious objective—purification of income. Consequently, zakat collection will distribute wealth equally to society and foster a healthy economic system—where societal benefits are prioritized and exploitation does not occur.

            Recent literature suggests that zakat distributional programs are able to significantly alleviate poverty and reduce income inequality. Ayunniyah et al. (2018) found that zakat distributions increased the share of income from the bottom 40 percent from 13.89 percent to 15.2 percent. In contrast, the share of income from the top 20 percent was reduced from 48.89 to 47.39 percent—indicating lower gap between the bottom 40 percent and top 20 percent. In a separate study, Ayunniyah et al. (2017) studied the effect of consumption and production-based zakat distributional programs and suggests that both programs had similar effect on reducing income inequality—decrease in Gini coefficient by -0.020 (consumption) and -0.018 (production). However, these studies are conducted solely in Indonesia.

            Hence, Zakat implementation could reduce the income gap present in our current society by allowing for redistribution of income. However, more empirical research on implementation of zakat in other countries is needed since most evidence is obtained in Indonesia.

Words: 519 (excluding title & references)

References

Alvaredo, F., Chancel, L., Piketty, T., Saez, E., & Zucman, G. (2018). The Elephant Curve of Global Inequality and Growth. AEA Papers and Proceedings,108, 103-108. doi:10.1257/pandp.20181073

Ayuniyyah, Q., Huq Pramanik, A., Md Saad, N., & Irwan Ariffin, M. (2017, November 25). The Comparison between Consumption and Production-based Zakat Distribution Programs for Poverty Alleviation and Income Inequality Reduction. International Journal of Zakat, 2(2), 11-28. https://doi.org/https://doi.org/10.37706/journal.v2i2.22

Ayuniyyah, Q., Pramanik, A., Saad, N., & Ariffin, M. (2018). ZAKAT FOR POVERTY ALLEVIATION AND INCOME INEQUALITY REDUCTION. Journal of Islamic Monetary Economics and Finance4(1), 85 – 100. https://doi.org/10.21098/jimf.v4i1.767

Hein, E. (2013). Finance-Dominated Capitalism and Redistribution of Income: A Kaleckian Perspective. SSRN Electronic Journal. doi:10.2139/ssrn.2198919

Herzer, D., & Nunnenkamp, P. (2015). Income Inequality and Health: Evidence from Developed and Developing Countries. Economics: The Open-Access, Open-Assessment E-Journal. doi:10.5018/economics-ejournal.ja.2015-4

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