AN ANALYSIS OF ZAKÓT EXPENDITURE AND REAL OUTPUT: THEORY AND EVIDENCE

Abstract

This study advocates zakEtas the major and potent fiscal policy instrument in an Islamic state. ZakEt plays its role in macroeconomic stabilization through nondiscretionary and discretionary fiscal policy. The built-in stabilizer mechanism occurs when zakEtcollection is automatically reduced during recession, giving more money to the people to spend—which tends to stimulate the economy—while during the boom period more zakEtis collected, reducing the ability of people to spend—which tends to dampen economic activities. These reduce macroeconomic fluctuations. As a discretionary fiscal policy, the government varies the disbursement of zakEt to the recipients whenever necessary during the phases of the business cycle. During the expansion phase, the government decreases zakEtdisbursement to reduce aggregate spending. Likewise, zakEtdisbursement is increased when the economy is in the downswing to increase aggregate spending. Empirical evidence using Malaysian data supports the hypothesis that zakEt spending is a potent fiscal instrument to improve economic performance. The results of panel data regression analysis indicate that zakEtexpenditure can significantly explain the variation in real output. This suggests that Muslim countries should make serious effort to improve the efficiency of zakEtcollection and spending to generate growth and development of the ummah.

JEL Classification: C3, E12, E62

Key words: ZakEt, Fiscal policy, Real output, Panel data, Malaysia.