ISLAMIC LAW

How did it come to pass that the Islamic Civilization, which shone so brightly at a time when Europe was sunk fast in the gloom of the Dark Ages, has come to find itself lagging not only behind the West, but also behind most other regions of the surging developing world?

How is it that minuscule Costa Rica, with a population of less than five million souls, exports more manufactured goods than Egypt, a nation eighty million strong?

The answer broadly boils down to issues of societal law and structure. As Timur Kuran, Professor of Economics and Political Science, and Gorter Family Professor of Islamic Studies at Duke University, sees it, the components for the region's failure to thrive include:

  • the persistent simplicity of Islamic partnerships,
  • the absence of the corporation in Islamic law and barriers to the emergence of a Middle Eastern business corporation, and
  • the drawbacks of Islamic inheritance systems.

The Middle East and North Africa (MENA) did not figure out a way to form large and perpetual enterprises able to take advantage of mass production, mass communications, mass transport and mass finance.

How Islamic business law was developed

As Kuran points out, Islamic business law had originally been developed by judicial experts, merchants, and businessmen to effectively carry out the dominant form of trade at the time, the caravan. The solution they came up with, part of what we now know as Sharia, was an impressive body of business law by the standards of the Middle Ages. It gave the Islamic world a large competitive advantage, making it easy for two or more merchants to join together, fund a caravan, send it across the world buying and selling, and split the profits when it returned. The partnership was then ended.

Armed with this powerful tool, the Islamic world became a huge, prosperous, commercial zone where one could do business under the same legal system from one end to the other.

In fact, what many people don't know is that the Islamic Empire spread across the world through merchants, as opposed to the sword. Millions of conversions occurred in the Middle Ages and later because Islam was associated with a sophisticated legal system. Vast numbers of conversions to Islam were motivated by the lure of joining Middle Eastern trade networks.

  • "Islamic businessmen dominated several of the world's major long-distance trade routes and centers, including East Africa, Central Asia, and the Indian Ocean. Islamic partnership contracts were enforceable over a vast area. Middle Easterners were commercially so successful, in fact, that where they went in large numbers, their commercial institutions, including Islam's law of commercial contracts, went with them.

  • "But it had drawbacks that would later put the Islamic World at a disadvantage to the West. For one thing, it was designed for short-term trading; there was no way to set up any kind of larger, long-lived business. For another, many things made it easy to stop the business. If a partner died before a contract had been fulfilled, the partnership ended, the assets were divided, and the deceased's share was distributed among his or her heirs—thus closing the business."

Sharia business law, originally created as a modern, powerful tool, effectively made it impossible for a business to outlive its founder, or to aggregate large amounts of capital to undertake bigger economic ventures.

Times changed, but Islamic law did not change with the times. The legal system associated with Islam, which we know as the Sharia, was highly suited to commerce in the Middle Ages, but it failed to generate the institutions necessary for modern commercial life.

Islamic Inheritance Law

Another notable component of Islamic society is its inheritance law, which was for centuries distinctly different and more egalitarian than European law. Under European inheritance, primogeniture enabled families to maintain assets across generations. Under Islamic inheritance laws, however, a family's wealth would be immediately, but more evenly, distributed upon the death of the patriarch. Unlike in Europe until relatively recently, under Islamic law women could also inherit.

As Kuran describes, according to rules outlined in the Koran, two-thirds of any estate is reserved for children, parents, spouses, and possibly other relatives. For any category of relatives, the share of a female equals half that of a male. Thus, a daughter gets half as much as a son, and a sister half as much as a brother.

  • "By medieval standards, this system was remarkably egalitarian. It did not allow a parent to favor one child over others. No relative entitled to a share could be disinherited. On the downside, the system made it difficult to keep property intact from one generation to the next. Consequently, successful businesses tended to fragment after their founder's death.

  • "In some places in Europe, however, primogeniture meant that a deceased's business could fall in its entirety to his oldest son. Primogeniture greatly reduced the risks of premature partnership termination. It allowed a partner to pre-commit credibly to having a son take over in the event that he himself could not continue. It made it profitable, therefore, to form large business enterprises expected to last for years, as opposed to mere months.

Over many centuries, European inheritance laws also led to the development of standardized accounting systems, stock markets, and other more powerful economic tools.

Then the West came up with its version of the killer business app, the corporation. This allowed an organization to live on after a founder's death, to raise large sums by selling shares, and to limit liability. It meant that the West could capitalize upon and further develop the technological advancements of the Industrial Revolution, such as the railroad.

Why did Europe develop the corporation?

In the aftermath of the fall of the Western Roman Empire, law and order in Europe was very weak. In the absence of strong central states or authorities, European cities had great difficulty providing law and order. In the corporation, city leaders found an organizational form that could help them supply law and order in limited settings. Roughly 4,000 cities across Europe declared themselves corporations to provide law and order within their cities in the absence of a central state.

Out of necessity in the Dark Ages, the West began to develop the corporation. Western businesses gradually got larger and more powerful. It reached a tipping point for the West in the Industrial Revolution. Mass production, based on new technologies, combined with a powerful economic tool that could develop and support the large organizations needed to exploit them, propelled the world into a period of never before seen widespread prosperity, and healthier, longer, and more comfortable lives.

  • "England, the Low Countries, and the rest of the region could finance mass production. They could mobilize the savings of large numbers and channel them into large projects. And they could pool the labor and capital of large numbers within indefinitely living companies.

  • "The new physical technologies were easily transferable. One can transport a steam engine on a ship, along with the technicians and raw materials needed to make the engine productive. By contrast, the organizational vehicles of economic advancement – the institutions that enabled the West to exploit the new physical technologies – cannot be readily transferred. A viable stock market cannot be established overnight, for it requires an intricate legal system; also a range of specialized professions, including schools to train them, must support its operation."

The Middle East, on the other hand, reached the industrial era with an atomistic private sector unequipped to compete with the giant enterprises that had come to dominate the global economy. This difference became critical in the age of industrialization, when the efficient exploitation of new production technologies required a great deal of capital.

There has been progress

Since the late 19th century, many MENA nations have transplanted commercial codes from the West. These have enabled some Arabs to form large, durable enterprises like major banks, telecommunications giants, and retail chains. Still, Arab companies tend to be smaller relative to global norms, which limits their power vis-à-vis the state.

Turkey is ahead of the other non-oil producing countries because it started modernizing several decades before them. It is the only country of the region to have abrogated Islamic law in its entirety.

All of the basic institutions of the modern economy exist in the other countries of the MENA region. All have banks and stock exchanges, and it's possible to form large corporations there. But only the elites have access to these new institutions. As the documentary shows, de Soto and his researchers found that thousands of small businesses across the region are operating more or less as their ancestors did a thousand years ago. They are excluded from using the modern economic tools that millions in the west take for granted, and hence the region remains mired in poverty.

The lack of capital for energetic entrepreneurs like Bouazizi is not for the lack of capital in the Arab world. Arab petro-states have a huge amount of petroleum wealth to invest. However, they tend to invest mostly in the developed world. Kuran points out that this is because, in developed nations, there is far greater transparency, better legal regulations, and more credibility in the non-Arab world. Arab investors see returns on their investments as being more certain. They don't trust MENA-based institutions. More specifically, banks in the Maghreb don't trust small entrepreneurs--who have the energy and drive the region desperately needs.

Still, Turkey, Morocco, and other countries of the region have undergone a transformation in a century and a half that took Europe more than 1,500 years. The region is changing very rapidly, but because of the speed of the change there are various problems that Europe did not have to endure.

During Islam's golden age, Muslims were quite willing to learn from and adopt institutions developed by other civilizations. The early lawmakers who developed Sharia business law were focused on the needs of merchants, investors, and people who were trying to do business with others and prosper. They were insightful, pragmatic, and progressive men whose focus was on solving the practical problems of their time in a way that was consonant with Islam. Their focus was not, as Kuran points out, on establishing a distinct identity for Muslims. He believes that many Muslims today view Sharia as more of a question of Islamic identity than as a tool to do business in today's world. With their focus on remaining true to the core of what they think is the "real" Islam, they aren't solving the enormous practical problems of entrepreneurs like Bouazizi and the hundreds of millions like him across the region.

There is no quick fix today. Low trust, rampant corruption, and weak civil societies--all characteristic of the region's economies today and all legacies of its economic history--will take generations to overcome.

Other links:

Amazon site for Kuran's book, "The Long Divergence: How Islamic Law Held Back the Middle East":
http://www.amazon.com/The-Long-Divergence-Islamic-Middle/dp/0691156417/ref=sr_1_1?ie=UTF8&qid=1382549535&sr=8-1&keywords=The+long+divergence

A fine essay by Timur Kuran summarizing "The Long Divergence":
http://econ.duke.edu/uploads/assets/People/Kuran/TEFR%20feb-mar%202011%20Legal%20roots%20of%20Economic%20Underdevelopment%20in%20the%20Middle%20East%20.pdf

An op-ed from the New York Times dealing with political consequences:
http://www.nytimes.com/2011/05/29/opinion/29kuran.html?pagewanted=all&_r=0

Another short summary:
http://econ.duke.edu/uploads/assets/People/Kuran/Kornai%20volume%20cha03%20%28Dec%2011%202007%29.pdf

An interview with Timur Kuran in the Turkish paper, Today's Zaman:
http://www.todayszaman.com/news-284962-crescent-moon-capitalism-timur-kuran-weighs-the-legacy-of-islams-economic-divergence-from-the-west.html

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