Is Islamic law to blame for the Middle East’s economic failures?

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One of the great mysteries of economic history concerns how the Islamic world lost its mojo. A thousand years ago, the Middle East was richer and more influential in the global economy than Europe. According to data compiled by the late economist and statistical wizard Angus Maddison, the Middle East accounted for about 9.5% of global GDP in the year 1000 while Western Europe’s share was less than 9%. By 1700, however, the situation had totally reversed, with Western Europe commanding a hefty 22% of global GDP and the Middle East a pathetic 3%. The Arab world had controlled many of the lucrative trade routes between Asia and the West, but that role got usurped first by the Portuguese, then by the British and Dutch. What went wrong?

Economists and historians have struggled over that question for centuries. The answer is not just of academic interest. The revolutions that have swept through the Middle East, toppling dictators in Libya, Egypt and Tunisia, got a good part of their momentum from the widespread public frustration over the persistent lack of economic progress and opportunity omnipresent in the Middle East. Perhaps the biggest challenge facing the new governments that have emerged from the Arab Spring is providing the jobs and higher incomes all of those young people who participated in the rebellions desperately expect. If the new political leaders fail to deliver, the Arab Spring, which has brought such hope to the region, could deteriorate into a cycle of protest and political upheaval that will only set back its economic development.

There have been many theories of how the Middle East lost out economically to the West. But they have generally felt unsatisfactory. One argues that European colonialism suppressed the economic progress of the region. However, the dominance of the West is a symptom of the Middle East’s economic decline, not a cause. If the Arab world had maintained its edge over the West in economic clout, it is unlikely that European imperialists could have advanced very far in the region. Another theory claims that Islam itself is biased against economic progress. This argument, too, falls very flat. If Islam was inherently un-economic, how can we explain the vibrancy of the Muslim world’s economies in the centuries after the Arab conquests? And in modern times as well, certain Islamic nations, especially Malaysia and Indonesia, have been among the world’s best economic performers. Remember, Mohammad himself was a merchant before he became the Prophet, and Mecca, the first city of Islam, had been a major center of the caravan trade.

A much more compelling argument was outlined by economist Timur Kuran in his 2010 book The Long Divergence. He makes the intriguing case that Islamic law was at the root of the problem. Its strictures, he claims inhibited the emergence of the institutions of modern capitalism as they developed in Europe. And the Middle East is suffering for that failure to this day.

How’s that? When first developed, Islamic law was actually quite progressive for its time on economic matters, allowing, for example, for the easy formation of partnerships and clear rules to guide commercial behavior in a fair fashion. However, over the centuries, it fell out of touch with the times and failed to adapt to the new world economy being designed by European capitalists. While Europeans were creating innovative types of institutions that allowed them to amass and mobilize resources on a mammoth scale – such as joint stock companies and modern banking systems – Islamic law in the Middle East prevented these same institutions from forming. Partnership practices, which allow any partner to dissolve the arrangement, and inheritance laws, which mandate the deceased’s assets go to certain family members,  discouraged the emergence of the modern corporation, for example, by restricting the Muslims’ ability to form long-standing business organizations. Ordering the death penaly for apostasy made it extremely difficult to do business in non-Muslim legal systems.  The new institutions of capitalism gave the West an edge that it has never relinquished. Even after strict Islamic law was eventually liberalized in many parts of the Muslim world, its strictures had already done their damage, leaving the Middle East devoid of the strong private economies it needed to compete. When Arab countries then tried to copy Western economic institutions, like courts with European commercial codes, they proved a poor fit. Having not emerged naturally from society, the imported institutions didn’t work as they did back home. In modern times, that left the state to play an overly powerful role in the Middle East’s economic development, which didn’t produce the same, amazing results of the Asian model based on trade and entrepreneurship.

We can see the consequences by looking at the shape of Middle East economies today. I personally cannot think of one private company from the Arab world that holds a significant international presence. Those corporations that do play on the world stage – like Dubai-based airline Emirates, for example – are owned by the state. And those small parts of the Islamic world that have developed modern, competitive economies have done so through building better institutions. Take, again, Dubai. As I detailed in a recent story for TIME magazine, the secret behind Dubai’s success is, to a degree, due to its ability to import Western-style economic institutions and make them work. Yes, Islamic finance is a powerful economic force in the emirate, and will only grow further, but Dubai didn’t become a wealthy city by sticking to Islamic law. The forward-looking leadership in Dubai launched a stock market, created special zones for finance and media with Western-style regulatory systems to govern them, and backed it all up with a level of religious and cultural tolerance that is rare in much of the region. And when Dubai has stumbled – most notably with its colossal property bust – the factors behind those failures can be found in the incomplete development of these institutions of capitalism, such as insufficient transparency and weak corporate governance. Dubai is an institution-building experiment in progress.

So what does all of this mean for the Arab Spring? The rest of the Arab world is going to have to follow Dubai’s example. The Arab world’s incoming leadership has been left with the unenviable task of first building the foundation necessary for vibrant, modern, competitive economies. Without that, the emerging governments won’t be able to create the healthy private economies they need to bring the jobs and growth the region so badly desires. Perhaps they’ll copy their institutions from the West; perhaps they’ll find a new route, through modernized Islamic-style systems. But the process could be painful and slow. Kuran, though writing before the Arab Spring emerged, had the foresight to recognize the problems the revolution faces:

In leaving its private sectors and civil societies weak for centuries, the Middle East’s premodern institutions set the stage for today’s bloated state bureaucracies and, in many places, government policies and social norms harmful to creativity. Consequently, with a few exceptions, the countries of the region are uncompetitive in the global marketplace for industrial products and services, and, again with few exceptions, their civil societies are too poorly organized, and too beaten down, to provide the political checks and balances essential to sustained democratic rule. If the region’s autocratic regimes were magically to fall, the development of strong private sectors and civil societies could take decades. (p. 301)

The Arab Spring governments, however, don’t have decades to build the institutions they need to compete economically. The angry people who brought them into power don’t have that much patience. They want jobs and better living standards now, not in 2060. This leaves the Middle East’s new leaders in a dangerous mismatch between what people expect and the tools they have to deliver it. Whether we should blame Islamic law or not, how the Arab Spring leaders solve this problem could very well determine their success or failure.