A report authored by a group of Arab scholars in 2002 has pointed out broadly, the reason why the Middle East and the Islamic world by extension had fallen behind the West in the last few centuries. The chief culprits as stated by the report were the deficits in knowledge and freedom. A salutary debate ensued. Now Timur Kuran, a Turkish-American economist has come out with an equally if not more bold book entitled “The Long Divergence: How Islamic Law Held Back The Middle East”. Let us hope that another equally salutary debate ensues once again.
For the period since the beginning of Islam up to 17th century, the Middle East was a dynamic place comparable to the Europe of today. Muslim traders flocked various parts of the region trading in items ranging from spices and silk to imported prostitutes and slaves. But somehow, the Middle East’s share of world economic activity has gown downhill since the year 1000. At that time, the Middle East Gross Domestic Product (GDP) was 10% compared to Europe’s 9%. By the year 1700 the Middle East was a paltry 2% compared to Europe’s 22%.
The standard explanations offered for this have mostly till date been unsatisfactory. It is widely believed that Islam by its very nature is hostile to commerce. But if anything, Islamic scripture is more business friendly than Christian or Hindu texts. The prophet Muhammad was a merchant and the Koran is full of praise for commerce. The second perceived reason is that Islam bans usury. But so do the Torah and the Bible. A third widely perceived belief is that Islamic countries fell behind as they were victims of Western imperialism.
Mr. Kuran’s work goes down to the very core of the problem. He reasons that the principle underlying reason for the fallback of the Islamic countries was because these countries failed to build commercial institutions – most notably Joint Stock Companies which are capable of mobilizing large quantities of productive resources over a period of time.
Europeans on the other hand inherited the Joint Stock Company from Roman Law. They built on this concept to form the modern day corporations of the 19th and 20th centuries. Islamic law on the other hand has queasy rules when it comes to managing commercial institutions. For example, according to the Islamic partnership law, a partnership can be dissolved simply by the whim of another partner. Obviously, these kind of quirks cannot work in a modern day business environment. Moreover, the widespread practice of polygamy led to the dispersion of wealth among many inheritors descending from the same paternal ancestor.
None of these things mattered when business was simple. But as business grew with more advances in technologies and the resultant technological and legal complications, these laws became a thorn in the path of developing the business. While the western concept of the joint stock company evolved along with time, the concept in Islamic law didn’t adapt itself to the changing conditions.
From the 19th century, the Middle Eastern rulers with a more outwardly looking take on things started to adopt Western style companies and institutions at home. They imported the concepts, the technologies, the people and in many cases even the style of government. The most notable example of this is the Ataturk’s introduction of a secular legal system in Turkey in the 1920s. Countries whose rulers adopted similar importation of business ideology from the West have benefitted the most (notable examples include Turkey, Egypt, Iran and the UAE).
Still, the Middle East has a lot of catching up to do. Its income per capita still remains less than 30% of Europe’s, the infrastructure in many countries is quite weak, economies are heavily dependent on export of commodities like oil instead of value adding industries and political stability is but a rarity.
Business remains complicatedly intertwined with the state as the region lacks strong commercial institutions. The Global Entrepreneurship Monitor suggests that rates of entrepreneurship are particularly low in the Middle East and north Africa. Transparency International’s corruption-perceptions index suggests that corruption is rife: in 2010, on a scale from one (the worst) to ten, Western Europe’s five most populous countries received an average score of 6.5, whereas the three most populous countries in the Middle East averaged 3.2 (Turkey scored 4.4, Egypt 3.1 and Iran 2.2)
Culture’s long shadow
The “long divergence” also helps to explain some of the Islamist rage against capitalism. Traditional societies of all kinds have been uncomfortable with corporations which, according to Edward Thurlow, an 18th-century British jurist, have “neither bodies to be punished, nor souls to be condemned”. But that unhappiness has been particularly marked in the Middle East. Corporations and other capitalist institutions were imported by progressive governments that believed the region faced a choice between Mecca and modernisation. Local businesses—particularly capital-intensive ones such as transport and manufacturing—were dominated by Jews and Christians who were allowed to opt out of Islamic law.
Mr Kuran’s arguments have broad implications for the debate about how to foster economic development. He demonstrates that the West’s long ascendancy was rooted in its ability to develop institutions that combined labour and capital in imaginative new ways. The Protestant work ethic and the scientific revolution no doubt mattered. But they may have mattered less than previously thought. People who want to ensure that economic development puts down deep roots in emerging societies would be well advised to create the institutional environment in which Thurlow’s soulless institutions can flourish.
Mitul Choksi
31-January-2011
2:37 PM Indian Standard Time
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