An interest-yielding perspective

Islamic law is not the cause of poverty in the Middle East, this repetitive but important study argues.

By GLENN C. ALTSCHULER
Dubai bank arabs gulf robe 521 (photo credit: Bloomberg)
Dubai bank arabs gulf robe 521
(photo credit: Bloomberg)
Critics of the “backwardness” of the Middle East – in living standards, technology and legal and financial institutions – often point the finger at imperialists. Through practices known as “capitulations,” specified in treaties which allowed Westerners (or their agents, many of whom were Greek, Armenian or Jewish) substantial discretion in conducting commercial transactions and avoiding proceedings in Islamic courts, they argue, the English and French plundered the region and retarded the process of modernization.
This interpretation, according to Timur Kuran, a professor of Islamic studies at Duke University, “misses vital ingredients of the historical record.” The decline of the Middle East (defined to include the Arab countries, Iran, Turkey and the Balkans), whose economy rivaled that of Europe in the year 1000, he claims, was due neither to colonialism nor an inherent incompatibility between Islam and capitalism. It occurred because medieval Muslims adopted laws, regulations and organizational forms for economic activity that served laudable purposes, but became self-reinforcing and self-perpetuating.
As entrepreneurs in the West developed institutions to facilitate saving, borrowing, investing, producing and trading, their counterparts in the Middle East ran – or walked – in place. As a consequence, by 1750 the purchasing power of a worker in London or Amsterdam was about double that of a laborer in Istanbul.
The Long Divergence is awkwardly written and repetitive. But it provides an important, though controversial, perspective on the forces that caused relative economic stagnation in the Ottoman Empire until the 19th century, when increasing contact with foreigners ignited an attitudinal – and institutional – transformation.
Islamic laws, Kuran demonstrates, inhibited large-scale economic activity and global competitiveness. Inheritance laws protected the financial security of extended family members, including females, but failed to preserve estates intact across generations. Primogeniture (preference to the oldest son), which had become the norm in Europe in the 1600s, did not take hold in the Middle East.
Equally important, Kuran indicates, the Islamic ban on interest-bearing loans made it difficult to mobilize significant sums of capital over extended periods of time. The law regulating contracts did not shield active partners from full liability; gave each member a unilateral right to force a dissolution; mandated that the entity could be terminated at the death of a single partner; and privileged oral rather than written agreements. When combined with polygyny, which multiplied the number of heirs, these laws vastly increased the likelihood that partnerships would be short-lived.
Finally, the wakf, the Islamic form of trust, designed to deliver social services, was far less flexible than European-style corporations. Lacking legal personhood, a wakf was controlled forever by its founder, who had to be a single individual; its purposes and rules of operation could never be changed, even by him.
Since these laws functioned rather well inside the rather insular Ottoman Empire, Kuran emphasizes, there was little incentive to push for a more flexible or innovative business infrastructure. Merchants and investors did not develop or use stock markets, standardized accounting and bookkeeping methods or a business press that could disseminate reliable commercial information. “Right up to modern times,” Kuran concludes, exchange remained largely personal, and the region’s indigenous enterprises “were all small, simple and ephemeral.”
Although Kuran acknowledges that “the question of whether Islam’s original institutions are compatible with modern economic life admits no categorical answer,” he insists, emphatically, if not entirely persuasively, that with the possible exception of apostasy law, which makes it practically impossible for Muslims to do business under a non-Muslim legal system, “not one of the institutions that turned the Middle East into an economic laggard” remains an obstacle in the 21st century. Although inheritance systems and a ban on interest, grounded in the Koran, remain in place in some countries, he writes, corporations and a massive Islamic finance sector now flourish throughout the Middle East. And no substantive impediments now exist to additional legal transplants.
A conservative religious ethos, according to Kuran, cannot be a fundamental cause of the failure of the Middle East to catch up. Were conservatism “a significant factor,” he maintains, without adequate elaboration, “adjustments would lag across the board.”
Perhaps. But one might argue as well that poorly organized and fragile civil societies; corrupt bureaucracies; a trust in strangers and organization, “essential to impersonal exchange,” that is low in comparison to the West; resistance to learning and borrowing from abroad; and “the limited rhetorical toolkit” of advocates of globalization are caused, directly or indirectly, by that very religious ethos.
Perhaps debates over the key institutions of modern capitalism can be conducted, even by self-consciously anti-modern Muslims, “in isolation from public controversies over what Islam represents.” Given the current political realities in the region, the all-encompassing rhetoric of Islamic fundamentalists and “sterile” (but widespread) discussions of the role of Islam in solving problems of poverty and powerlessness, however, it’s by no means a safe bet.
The writer is the Thomas and Dorothy Litwin Professor of American Studies at Cornell University.