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Is Islamic law to blame for the Middle Easts economic failures? | TIME.com

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WALL STREET & MARKETS

Is Islamic law to blame for the Middle Easts

economic failures?
By Michael Schuman @MichaelSchuman

Oct. 18, 2011

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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 Europes 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 Easts 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 worlds 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 worlds 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.
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Is Islamic law to blame for the Middle Easts economic failures? | TIME.com

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.
Hows 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 deceaseds 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 didnt work as they did back home. In modern times,
that left the state to play an overly powerful role in the Middle Easts economic development, which didnt
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 Dubais 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 didnt 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 Dubais
example. The Arab worlds 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
wont be able to create the healthy private economies they need to bring the jobs and growth the region so badly
desires. Perhaps theyll copy their institutions from the West; perhaps theyll 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 Easts premodern
institutions set the stage for todays bloated state bureaucracies and, in many places,
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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 regions 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, dont have decades to build the institutions they need to compete
economically. The angry people who brought them into power dont have that much patience. They want jobs
and better living standards now, not in 2060. This leaves the Middle Easts 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.

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