390 AN INTRODUCTION TO ISLAMIC FINANCE
Public Finance
One of the key elements for sustained growth and development in any mod-
ern economy is sound public fi nances; that is, adequate public revenues
and prudent public expenditures that promote economic growth and social
welfare. An overbearing government that runs large budgetary defi cits and
fi nances wasteful expenditures does signifi cant harm to both economic
growth and social welfare. An overbearing public sector crowds out pri-
vate sector investment and growth. A government that runs large defi cits
reduces resources for the private sector, damages macroeconomic stability
and reduces available policy options. Wasteful government expenditures,
such as harmful subsidies and excessive military expenditure, reduce eco-
nomic growth and adversely affect social welfare.
On the revenue side, efforts aimed at improving the elasticity and effi -
ciency of the tax system need to be supported by improvements in admin-
istrative effi ciency and tax enforcement. On the expenditure side, an
improvement in the quality of public - expenditure programs, especially the
elimination of indiscriminate subsidies and the adoption of a fair and just
social safety net, would enhance their contribution to economic growth.
However, while not all Muslim countries have warmed to the concept of the
market economy and broad - based reforms, nearly all — to varying degrees —
have taken timid steps to reduce fi scal costs and improve effi ciency by tack-
ling a variety of complex and politically sensitive issues. Such issues include
the need to broaden the tax base and to reduce budget defi cits; to address
spending on subsidies, public - sector employment, pensions, and health; to
use taxation and income transfers to achieve a fairer distribution of income
and wealth; and to introduce greater transparency as part of governance
reform. The attendant benefi ts of the improved fi scal conditions are also evi-
dent in lower infl ation, smaller balance of payments defi cits, more resources
for private sector investment, and, quite recently, better growth rates.
Social Safety Net
While over the last few decades the international community has adopted
the position that broad - based economic growth is necessary for stemming the
effects of systemic poverty, a growing consensus has emerged that social
safety nets and social protection are also essential elements of any com-
prehensive framework for poverty alleviation. Not only are resources that
provide basic services, such as health and education, important in their own
right, they are also critical drivers for economic growth and development
and essential to achieving an equitable distribution of income and wealth.
An adequate social safety net is a central feature of Islamic economic doc-
trines and it is acknowledged to have a positive impact on economic growth
and development.
In the early 1980s, the general prescription for growth in develop-
ing countries was economic reform, focusing on developing a prudent