www.khilafah.com June 2008
1 Contents Introduction 03 Global Credit Crunch 05 Oil: The crude facts 11
Global Food Crisis 19 Understanding the Fragility of Capitalism 22 The Islamic
economy 36 Capitalism: A history of financial crisis 48 Conclusions 52 Glossary
57 Bibliography 61 Introduction Capitalism (economic Liberalism) has been
credited for generating wealth that has been unprecedented in history. For many
historians the struggle between Capitalism and Communism for global supremacy
was settled through the ability of Capitalism to generate vast amounts of
wealth and prosperity for its people. The battle between the two ideologies
resulted in free markets, free trade, financial markets and the removal of
state intervention in the economy becoming prerequisites for 21st century
economies. Proponents of Capitalism continue to hold the development of South
East Asia especially Japan as well as Germany were a direct result of the
adoption of Capitalism. The Third world has also not been spared, Indonesia,
Pakistan, South America, Africa as well as the Middle East were all sold the
idea of free markets, and all of these regions and nations now have Western
style financial markets where large sums of wealth are the subject of
speculation on the state of the economy and future revenue flows.
Malaysia was the first of the Muslim world to set up Western style
financial markets which attracted many Western companies, hedge funds and even
George Soro’s (world renowned speculator). Pakistan’s KSE 100 Index was the
best‐performing stock market index in the world as declared by the
international magazine “Business Week” in 2004 It is currently valued more then
$30 billion. The remainder of the Muslim world also have financial markets,
with the Gulf States having the largest. However only those aligned to the
rulers or from their families have benefited from the financial markets.
Although the Western world led by the US continue to sell Capitalism and its
adoption as the only way for progress Capitalism has come to be characterised
with the regular boom and bust, recession and even economic collapse. The 1997
Asian financial crisis has been attributed to liberal style financial markets,
speculation and many nations such as Indonesia and Thailand a decade later have
been unable to recover from the crisis. The world is once again in the midst of
a global crisis which began with the financial crisis, that engulfed the world.
The ‘Credit crunch’ as it has come to be known brought panic and
turmoil in the summer of 2007 to the world’s financial markets causing the US
housing market bubble to burst. The crisis threatens a worldwide economic
recession, potentially bringing to a halt more than a decade of increasing
prosperity and employment for Western economies and potentially wiping a
staggering $1 trillion off of the value of the world economy. Many experts have
commented on individual factors that caused the crisis, once again steering
well clear of blaming Capitalism. As each month commenced from the summer of
2007 more and more information become clear about the extent of the problem.
The collapse of Northern Rock, the 5th largest bank in the UK, the bankruptcies
of nearly all of the Sub‐ prime providers in the US, the continued
coordinated actions by the world’s central banks in pumping billions into the
financial markets and the stunning meltdown of Bear sterns, the 5th largest
investment bank in the US in March 2008.
Whilst many individuals in the West were reeling from the credit
crunch and contemplating queuing outside their bank to withdrew their savings
in case their bank was next to collapse disturbing headlines made the front
pages of all major newspapers in the West about the soaring cost of basic food
commodities. The World Bank warned that these price levels will be maintained
until the year 2015. Many poor people around the world who already spend most
of their disposable incomes on food are suddenly finding it impossible just to
feed themselves. With riots and protests seen as far wide from Haiti to
Indonesia, the lack of food has the potential to create geo‐political
upheaval.
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