Religion and Economic Development

Assoc. Prof. Murat Somer

Intl 450, Koç University

• Why do societies with some religions seem to be more prosperous with advanced economies than others?

• Why are Muslims in general poorer than the rest of the world?

• Middle East and Sub-Saharan Africa , Muslims in India and Europe

• Turkey, Indonesia

Competing Explanations

• Colonialism and imperialism

• Ask why the West developed earlier, not why the rest did not develop

Religion and culture

• Essentialism

– Fixed cultural characteristics

• Islamdom rather than Islam, Christendom rather than Christianity

– culture itself is explained by historical-institutional factors and is not fixed

Protestant Ethic

• People have a duty to work diligently, peruse financial rewards and invest wisely

• “Labor must, on the contrary, be performed as if it were an absolute end in itself, a calling”

• Weber

• Emphasis on honesty lays the groundwork for economic development

Protestant Ethic Theory debated…

• Is there Causality?

• “Those living in Protestant societies today display the weakest work ethic.” – Norris and Inglehart

• Catholic societies actually rate higher than Protestant societies in work ethic, the opposite of what Weber predicted

Other Potential Factors

• Attitudes Towards Capitalism

– Protestants are only slightly more favorable

• Morality and Values?

– Morality issues are not confined to specific theological teachings, but instead reflect a broader and more general ethos…”

» Norris and Inglehart

Timur Kuran

• By 19th century, most of the Middle East’s trade with Europe was in the hands of non-Muslims.

• There were no Muslim-owned banks, large companies

• Efforts for financial modernization

Timur Kuran • Why did the Muslim world experience a commercial

crisis in the eighteenth and nineteenth centuries?

• Why did Muslim companies remain small and based on personal relationships? While the western world developed large and sophisticated institutions such as corporations.

• In the tenth century, Muslims had the same commercial institutions as Europe. They also developed more sophisticated political institutions later. What kept them from developing more sophisticated commercial institutions

• Timur Kuran: historical-institutional explanation based on the political economy of transaction costs

• A society’s commercial capabilities depend on its legal infrastructure

• If two people trade, the one with the more efficient commercial institutions will enjoy advantages

Institutions and Transaction Costs :

Douglas North Nobel Prize Laureate (1993)

Without reducing transaction costs to acceptable levels, economic exchanges will

not take place because they are not profitable.

• Take two countries with same population = 10 million

Country A ► GNP 10 billion USD

Transaction costs 1 billion USD (10%)

GNP per capita $1,000

Country B ► GNP 30 billion USD

Transaction costs 6 billion USD (20%)

GNP per capita $3,000

Example:

• A capital-owner in 15th century Bursa, Ahmet Çelebi, wants to sell silk to Baghdad and buy hurma in return.

• The exchange could be profitable because hurma is scarce (expensive) in Bursa and silk is expensive in Baghdad.

• Goods are transported between Bursa and Baghdad by caravans. The trip takes 6 months each way.

• No international banks, faxes, e-mails, Fed-ex, of course..

1. Ahmet Çelebi has capital but cannot travel

2. Mustafa has no capital but has time. He also knows how to run a caravan

3. How can they build a partnership?

• Simple partnership not desirable

• Personal solutions: – Family businesses

– Ethnic and tribal ties

– The parties are somehow known to each other, whether though repeated personal interactions, kin, or ethnicity. They do not occur between anonymous individuals.

• Mudaraba in Islamic law: An investor or group of investors (principal) extends capital to an entrepreneur (agent). The entrepreneur puts the capital into an agreed-upon production or trade activity, and then returns to the principal(s) a pre-specified share of the profits. Any loss is completely borne by the principals.

• This method facilitates trade and production.

• It facilitates partnerships by reducing the risk borne by agents (which don’t have capital). It enables principals to put their capital into trade or production without traveling with the capital themselves.

Islamic Partnerships “Corporations are people too my friend…” – Mitt Romney

• Musharakah (مشاركة) Musharakah plays a vital role in financing business operations based on Islamic principles, which prohibit making a profit on interest from loans. For example, suppose that an individual (A) wants to begin a business but has limited funds. Individual (B) has excess funds and wishes to be the financier in musharakah with A. The two people would come to an agreement to the terms and begin a business in which both share a portion of the profits and losses. This negates the need for A to receive a loan from B.

Obstacles

• Death of a partner immediately ends any partnership

• Partners can not designate heirs

• Thus, more partners = higher risk of liquidation

• Islamic partnerships lack legal personality – Financial capacity of each partner limits services

– Third parties would insist on advance payment

– Long term loans are a massive liability because death voids contracts

Death and Inheritance

• When you die, you may dictate the recipients of only 1/3 of your assets

• The Quran dictates what happens to the rest (family and relatives)

• This makes it hard to keep property intact across generations (many owners and complications)

Circumvention

• Waqf – a statutorily indivisible trust where the benefactor could designate the heirs

– This means that one could establish a park bench with a million dollar endowment and grant an heir exclusive control

• Pre mortem gift giving

• Arranged marriages

• Side payments

Christian Europe

• More narrow definition of family than Quran

–Primogeniture: oldest son inherits the entire state

Islamic Economics

• Islam as an ethical principle for rational economic actors:

• Homo Islamicus (as opposed to homo economicus)

• Islamic economics (example of modernist Islamism or Islamic fundamentalism?)

• Fundamentalism because it claims to be based on a set of immutable principles drawn from traditional Islam.

– Note: compare to modernist Islamism

• But distinguish rhetoric and practice

Islamic economics

• Interest-free banking

• Why does Islamic economics defend it? Text vs. modern

rationality

• Zakat • Why does Islamic economics defend it? Text vs. modern

rationality

• Pakistan, Iran, Saudi Arabia, Malaysia, Sudan

• How can we explain that Islamic economics rejects modern institutions such as interest-based banking and aims to revive authentic (ancient) economic institutions of a distant past, but at the same time embraces modern values such as economic growth and efficiency?