14th April 2023
Naosheyrvaan Nasir, Australia
The past few years have been anything but ordinary, and there is no need to repeat what others have said regarding the pandemic and the post-pandemic environment we are currently in. This is true from an economic perspective, as much as any other perspective. However, given the high inflationary environment that advanced economies are currently experiencing, and the fact that Ramadan has now dawned on us once again, it made me think about how an external event like Ramadan would affect an economy. From a microeconomic perspective (i.e., the individual), it makes logical sense that consumption habits would differ during Ramadan, with more time allocated towards spirituality and less time towards buying goods and services. However, how this plays out on a macroeconomic scale (i.e., how it affects the entire economy) is something worth exploring.
The book, The Economic System of Islam, written by Hazrat Mirza Bashiruddin Mahmud Ahmadra, is more oriented to the study of political economy. Huzoorra makes the case for the Islamic economic system as the most just to all the market participants, compared to both capitalism and communism. In contrast, the modern study of economics demands mathematics and statistics to explore the relationship between economic variables and economic theories. An introduction to the book can be found here; www.alhakam.org/the-economic-system-of-islam/ (Al Hakam, 12 October 2018, Issue 30, p. 12), while Investopedia provides a good explanation of the difference between the political economy and economics. I, however, want to explore the way economic indicators respond when an entire economy is going through Ramadan. This makes sense on a micro-level since individual households will adjust their consumption habits to accommodate the demands of fasting from dawn till dusk.
In any economics model, be it theoretical, empirical (i.e., derived from mathematical relationships), or a hybrid of the two, one constant feature is that it always relies on a set of assumptions. These assumptions allow us to study the impact of an event or stimulus on an economic model without having to factor in every variable, and it is also much easier to wrap your head around a few variables when everything else is assumed to be static.
The list of assumptions for this model is as follows:
Our hypothetical economy will be an open economy, that is, imports and exports will influence the outcome of our analysis, but the exchange rate will remain an exogenous (constant) variable.
Interest is an exogenous variable, that is, it is a constant and does not affect our analysis. This is especially important as to consider the true economic benefits of Ramadan the influence of interest must be kept out of our model as interest is something that Islam has forbidden.
Institutions such as banks and the government are stable, but there will be no intervention from them at all.
The main marker of growth or decline in this economic analysis will be inflation, which ultimately will affect our interpretation of the model.
The unemployment rate will be constant, i.e., it will not be affected by our analysis. Everyone in the economy that has a job will continue to have one, and anyone unemployed will remain unemployed.
Everyone in the economy is fasting (with the exceptions of children, the aged, mothers of newborns and mothers-to-be, the sick, the injured, travellers etc.).
The analysis will look at the month before Ramadan, the month of Ramadan, and the month following it. The month before Ramadan will resemble the high inflationary period that advanced economies are currently in. The origins of this high inflation will mirror the post-Covid economic environment where stimulus money played a role in creating high inflation.
The stimulus money given during the pandemic was not spent during the pandemic, i.e., we assume that there was no online shopping.
So, now that the assumptions have laid the groundwork, we now have an economy one month out from Ramadan. The main characteristics are that inflation is yet to increase, the pandemic-era restrictions on social distancing have been eased for the population and the stimulus money provided during the pandemic is yet to be spent. From a microeconomic perspective, the stimulus that has been paid to workers during the pandemic is now facilitating a consumption boom, where individuals suddenly have an increased level of purchasing power. An increase in purchasing power results in more demand for goods and services than the supply available, resulting in higher revenue for businesses. Naturally, on a macroeconomic scale, this incentivises businesses to increase their prices until the supply and demand are at even levels. Businesses across the economy that raise their prices will start to erode the purchasing power of individuals as more money is paid for the same quantity.
Should this pattern of price increases continue, then a decreased purchasing power will incentivise competition between workers and their employers, with the former threatening to leave unless their wage is increased to restore their purchasing power. Once wages are increased, purchasing power is restored, which incentivises businesses to continue raising their prices contributing to what is known as the wage-price spiral. (https://www.investopedia.com/terms/w/wage-price-spiral.asp) This pattern continues until other expenses, such as utilities and rent start becoming too expensive to afford, creating a cost-of-living crisis. Any emergencies requiring a household to pay a large sum of money upfront (surgery, insurance claims, etc.) would most likely drag that household deep into poverty. From a macroeconomic perspective, the economy is now overheating as a high level of inflation lowers the purchasing power, which is increasing the conflict between employers and employees and dragging more households into poverty.
Now, as Ramadan starts, and the population (minus the exceptions) is fasting, naturally, consumption starts to decline as their attention is drawn more towards their spirituality, leaving them less time to utilise their purchasing power. From a macroeconomic perspective, the whole population beginning to neglect their purchasing power at its current rate reverses the incentive businesses once had to raise prices. Rather, it incentivises them to either maintain prices at their current rate or begin lowering them to continue attracting customers and prevent their revenue from drying up. Since businesses no longer have the incentive to raise prices, this disincentivises workers from demanding higher pay, which puts a stop to the wage-price spiral from the previous month. This behaviour continues for an entire month, and inflation starts coming down simply because the population is not utilising all its purchasing power, nor are workers demanding a premium on their wages to compensate for the erosion of their purchasing power that was caused by high inflation.
Now that Ramadan has passed, and inflation is lowering by the day, more households are regaining their purchasing power after having it eroded. Inflation will not decrease forever and will eventually plateau, providing stability to both businesses and consumers on the price of goods and services. The wage-price spiral that once threatened to implode the economy has now gone and workers are content with their wages, businesses are happy with their revenues and consumers are happy with the post-Ramadan cost of living. This shows the Islamic month of Ramadan has the potential to positively impact the population from an economic perspective and cool down an overheating economy without the need for any expensive (and potentially counterproductive) government intervention.
With any economic model, there will always be flaws. If any of the assumptions fail to hold, then this analysis fails to hold. The assumptions, being very specific and many, may seem very unrealistic, but I have deliberately set it this way so readers from a non-economic background can follow along without too much difficulty. Another fault of this model will be a lack of consensus, as this analysis is very subjective and I have not cited any quantitative data to back up the various relationships and assumptions I have made. Lastly, I was very specific in setting the economic environment before Ramadan began, whereas any other environment would violate the whole model. My analysis also assumes that Ramadan is not a profitable time for businesses, however, in the real world, the concept of fairs, bazaars and night markets after iftar is very common, and my model assumes that after iftar everyone stays home and spends more time focusing on their spirituality.
Feel free to disagree with me, as the beauty of a discipline like economics is that you know the answer to whatever model or theory you come up with once that event or timeline passes, and you have concrete data to compare your forecast against.