Friday, March 28, 2008

Timur Kuran on Islam and Economic Progress

Interesting panel discussion from CFR;

Muslim societies have always welcomed change. If you look at the last two centuries, you can see this. Two centuries ago nowhere in the Islamic world were there corporations, did banks exist, did stock markets exist, was there standardized accounting. These institutions, these practices have been accepted -- widely accepted all across the Islamic world. And in fact, even Islamists who -- radical Islamists who oppose various elements of modernity accept these. They don't make an issue out of them.

In earlier times, tax systems repeatedly changed. Military technologies were -- new military technologies were generated. Military technologies were borrowed from abroad again and again.

The same token, certain elements of -- certain elements of the infrastructure of the private economy remained stagnant for almost a millennium across the Islamic world. If someone -- if a merchant who had lived in the 10th century came alive in 1800, he would find the types of contracts in use quite familiar. Credit markets would be quite familiar. Economic relations would seem quite similar to those that he had experienced eight centuries earlier.

So the economic infrastructure of the economy had undergone a stagnation. And it turns out that this -- even though changes had occurred in other areas, in this particular area the stagnation mattered dramatically to economic development....

I deliberately used the same examples in the last 200 years -- the dramatic change in commercial life in the Middle East and the rest of the Islamic world came about through transplants. And the transplants occurred, institutions were borrowed from the West at a time of crisis when it appeared that unless major borrowings took place, unless merchants and investors were given ways to pool resources on a large scale to take advantage of modern technologies, that they would all be dominated -- that these societies would be dominated by outsiders.

Now, the big question is: Why did these institutions, these modern institutions -- say, joint stock companies, the corporations, banks, large-scale organizations, stock markets, standardized accounting -- why did these develop organically in Europe and why didn't they develop organically within the Islamic civilization so they have to be borrowed in a period of crisis from abroad with all of the distortions that accompany it? This is the question.

Now, here is where Islam and specific aspects of Islam come into play and that helps us explain why there was a long period of stagnation. Certain institutions that are elements of Islamic law failed to create the incentives for organizational modernization. And parallel institutions in Europe did create those incentives so you have cascading phases of the modernization.

Let me give you an example of an institution that made a difference: Islam's inheritance system. By medieval standards, Islam's inheritance system is highly egalitarian. It mandates a share for all children, male and female -- and surviving parents, sometimes also members of the extended family. It was much more egalitarian than the inheritance systems elsewhere in the world in the medieval period.

One problem that this creates -- that this inheritance system created is it made it very difficult to carry successful enterprises from one generation to the next. And the problem was particularly acute with successful businessmen who left large estates. Why? Because they had -- they typically, as a sign of their success, as a result of their success, they had multiple wives and many children. More surviving children than in the West. They had huge numbers of heirs. So the successful business -- all the assets got fragmented very quickly.

Europe was able to solve this problem, because unlike Islam, in Christianity the inheritance -- there is no inheritance system grounded in the Bible. There's a great deal of flexibility. In some places, and particularly the places that eventually gave us the industrial revolution, primogenitor -- leaving the assets, all the assets to the oldest son -- was adopted as a solution. This enabled successful businesses to be passed to the son.

Now, why is this so important to economic development? Because if you can pass on an enterprise to others, it can grow over -- as an industry grow over time. That growth generates communication and coordination problems that then require the development of new organizational forms. It developed --

for example, a need for standardized accounting develops, a need for stock market develops when people instead of forming short-lived enterprises, they form enterprises that are going to last more than a generation.

So this is a dynamic that was not -- did not take off in the Middle East. And this is not because Islam was designed as an inflexible religion, that there was a certain, you know, rule in Islam that says enterprises have to be small and short-lived. This was an unanticipated, unintended consequence of an inheritance system that served certain needs quite well.

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