The crescent and the company

A scholar asks some profound questions about why the Middle East fell behind the West IN 2002 a group of Arab scholars produced a brave report, under the auspices of the United Nations, on the Arab worlds twin deficits, in freedom and knowledge. A salutary debate ensued. Now Timur Kuran, a Turkish-American economist based at Duke University, has written an equally brave book on how Islamic law held back the Middle East. One can only hope that the result will be an equally salutary debate. For most of its history the Middle East was just as dynamic as Europe. The great bazaars of Baghdad and Istanbul were full of fortune-seekers from hither and yon. Muslim merchants carried their faith to the far corners of the world. In the 1770s Edward Gibbon had little difficulty imagining Islamic theology being taught in Oxford and across Britainif only the battle of Tours-Poitiers in 732 had turned out differently. But even before Gibbon the balance of power had shifted. Angus Maddison has calculated that in the year 1000 the Middle Easts share of the worlds gross domestic product was larger than Europes10% compared with 9%. By 1700 the Middle Easts share had fallen to just 2% and Europes had risen to 22%. The standard explanations for this decline are all unsatisfactory. One is that the spirit of Islam is hostile to commerce. But if anything Islamic scripture is more pro-business than Christian texts. Muhammad was a merchant, and the Koran is full of praise for commerce. A second explanation is that Islam bans usury. But so do the Torah and the Bible. A thirdpopular in the Islamic worldis that Muslims were victims of Western imperialism. But why did a once-mighty civilisation succumb to the West? In The Long Divergence Mr Kuran advances a more plausible reason. The Middle East fell behind the West because it failed to produce commercial institutionsmost notably joint-stock companiesthat were capable of mobilising large quantities of productive resources and enduring over time. Europeans inherited the idea of the corporation from Roman law. Using it as a base, they also experimented with ever more complicated partnerships. By 1470 the house of the Medicis had a permanent staff of 57 spread across eight European cities. The Islamic world failed to produce similar innovations. Under the prevailing law of partnerships, businesses could be dissolved at the whim of a single partner. The combination of generous inheritance laws and the practice of polygamy meant that wealth was dispersed among numerous claimants. None of this mattered when business was simple. But the Wests advantage grew as it became more complicated. Whereas business institutions in the Islamic world remained atomised, the West developed ever more resilient corporationslimited liability became widely available in the mid-19th centuryas well as a penumbra of technologies such as double-entry book-keeping and stockmarkets.

How much does this matter for modern business? From the late 19th century onwards Middle Eastern politicians borrowed Western institutions in order to boost economic growth. In the 1920s Ataturk introduced a thoroughly secular legal system in Turkey. Today the Islamic world boasts muscular companies and hectic stockmarkets (the market capitalisation of the regions three biggest countries, Turkey, Egypt and Iran, doubled between 2003 and 2008). Dubai is laying out a red carpet for the worlds companies. Turkey is growing much faster than Greece. Yet the long divergence continues to shape the regions business climate. Most obviously, the Middle East has a lot of catching up to do. Income per head is still only 28% of the European and American average. More than half the regions firms say limited access to electricity, telecoms and transport is a problem for business. The figure in Europe is less than a quarter. There are more subtle echoes. Business across the region remains intertwined with the state while the wider commercial society is weak. The Global Entrepreneurship Monitor suggests that rates of entrepreneurship are particularly low in the Middle East and north Africa. Transparency Internationals corruption-perceptions index suggests that corruption is rife: in 2010, on a scale from one (the worst) to ten, Western Europes 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). Cultures 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 manufacturingwere dominated by Jews and Christians who were allowed to opt out of Islamic law. Mr Kurans arguments have broad implications for the debate about how to foster economic development. He demonstrates that the Wests 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 Thurlows soulless institutions can flourish.