Why Is the Middle East Economically Underdeveloped? · conversion of immoveable property into an...
Transcript of Why Is the Middle East Economically Underdeveloped? · conversion of immoveable property into an...
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Why the Middle
East Became
Economically
Underdeveloped:
Historical Role of
Islamic Law
Timur KuranIznik tile, 1575 Garner Museum
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Industrial Revolution
18th-19th c.: Technologies of mass production emerged in W.
Europe ….
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Industrial Revolution
18th-19th c.: Technologies of mass production emerged in W.
Europe ….
… which possessed the organizational means to exploit them.
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Industrial Revolution
18th-19th c.: Technologies of mass production emerged in W.
Europe ….
… which possessed the organizational means to exploit them.
Middle East lacked organizational capabilities to use new technologies.
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Lack of industrialization in Middle East
Physical technologies are easily transferable,
organizational capabilities are not.
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First modern Ottoman company
Şirket-i Hayriye (“Auspicious Company”), 1851.
A Şirket-i Hayriye passenger ship
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First modern Ottoman company
Şirket-i Hayriye (“Auspicious Company”), 1851.
Joint-stock company (“kumpaniye”)
1500 shares
Predominantly Muslim-owned
Largest shareholder: Sultan Abdülmecit
Abdülmecit,
Ottoman Sultan
(1823-61)A Şirket-i Hayriye passenger ship
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Abdülmecit’s motive
Through Şirket-i Hayriye, Abdülmecit tried to break a vicious circle that kept Muslim businesses minuscule.
Şirket-i Hayriye ships
Istanbul
(1890)
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Basic organizational forms
Form of
organization
Shares
tradable
Legal
personUsual characteristics
Partnership No NoMinority has veto power.
Suitable to small, short-lived
ventures.
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Basic organizational forms
Form of
organization
Shares
tradable
Legal
personUsual characteristics
Partnership No NoMinority has veto power.
Suitable to small, short-lived
ventures.
Joint-stock
companyYes No
Suitable to larger, longer-lived
ventures. Third parties can
sue only individual partners.
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Basic organizational forms
Form of
organization
Shares
tradable
Legal
personUsual characteristics
Partnership No NoMinority has veto power.
Suitable to small, short-lived
ventures.
Joint-stock
companyYes No
Suitable to larger, longer-lived
ventures. Third parties can
sue only individual partners.
Corporation Yes Yes
Can outlive owners and
managers. Can sue and be
sued. Shareholders have
limited liability.
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Publicly traded Ottoman companies
Source: Akyıldız, Ottoman Securities
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Commercial partnerships, c. 1000 (1)
Mudaraba (type of partnership) labor of merchant or producer +
capital of passive investor
Profit shares negotiated freely in
advance
Losses shared up to a point
investors had limited liability
Judge’s decision on a partnership
dispute: Galata (1682)
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Commercial partnerships, c. 1000 (2)
Eight major trade circuits of the world, 1300s
Mudaraba (type of partnership)
labor of merchant or producer +
capital of passive investor
Profit shares negotiated freely in
advance
Losses shared up to a point
investors had limited liability
Contracts enforceable over
vast area
Source: Chaudhuri, Trade and Civilisation in the Indian Ocean
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Commercial partnerships, c. 1000 (3)
Medieval ship
Mudaraba (type of partnership) labor of merchant or producer +
capital of passive investor
Profit shares negotiated freely in advance
Losses shared up to a point investors had limited liability
Contracts enforceable overvast area
Similar partnership form in W. Europe: commenda
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Scale, longevity
No limit on number of
partners or duration
In practice,
usually 2
enterprise limited to
single trade mission /
production project
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Partnerships in Istanbul, 17th century
No
statistically
significant
difference
between
distributions
in two halves
of the century
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Recontracting
• Recontracting possible
• Partnership not a
durable enterprise
If a partner dies,
partnership ends, his
assets pass to heirs
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Islamic inheritance system
• At least 2/3 of estate reserved for extended relatives
• Female share = ½ (male share)
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Islamic inheritance system
• At least 2/3 of estate reserved for extended relatives
• Female share = ½ (male share)
• Hinders keeping property intact over generations
Heirs could reconstitute a dissolved business, but cost rose with
numbers
Probability of fragmentation greatest for most successful
merchants
Multiple wives more children more heirs
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Choice of size, longevity
• Risk of premature dissolution rises with
Partnership size
Anticipated duration of partnership mission
• Merchants and investors minimized risk by keeping
partnerships small, ephemeral
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Choice of size, longevity
• Risk of premature dissolution rises with
Partnership size
Anticipated duration of partnership mission
• Merchants and investors minimized risk by keeping
partnerships small, ephemeral
• Same threat to continuity in W. Europe
• Variety of inheritance laws
Primogeniture: business falls to oldest son
• Enterprise continuity through side-agreements
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Effects on organizational development
• Stagnation in enterprise size
• No need to improve organizational techniques, develop new
occupations
No standardized accounting
No stock markets
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Effects on organizational development
• Stagnation in enterprise size
• No need to improve organizational techniques, develop new
occupations
No standardized accounting
No stock markets
Stagnant division of labor in commerce, finance
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Distinct occupations in Arab Middle East
Sectors 8th-11th c. 12th-15th c.
Commerce
Bureaucracy, military 97 303
Education, law, religion 33 180
Data: Shatzmiller,
Labor in the
Medieval Islamic
World (1994)
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Distinct occupations in Arab Middle East
Sectors 701-1100 1101-1500
Commerce 233 220
Bureaucracy, military 97 303
Education, law, religion 33 180
Data: Shatzmiller,
Labor in the
Medieval Islamic
World (1994)
Division of labor lags in commerce at 99.9% level of
statistical significance
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New occupations in Arab Middle East, 1101-1500
Sectors % pre-existing % new
Commerce 50.9 49.1
Bureaucracy, military 10.9 89.1
Education, law, religion 16.1 75.3
ALL 24.7 75.3
Data: Shatzmiller,
Labor in the
Medieval Islamic
World (1994)
Commerce least innovative part of economic system at
99.9% level of statistical significance
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The onset of underdevelopment
A. Commerce between Middle East and Europe fell under control of Westerners
B. As West industrialized, Middle East could not exploit new technologies
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The onset of underdevelopment
A. Commerce between Middle East and Europe fell increasingly under control of Westerners
B. As West industrialized, Middle East could not exploit new technologies
Organizational forms could not be borrowed, because complementary institutions were lacking
Firms require modern bookkeeping
Capital limited in absence of stock markets, banks
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Alternative path to organizational
modernization?
Differences in inheritance systems Delayed
organizational development in Middle East
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Alternative path to organizational
modernization?
Differences in inheritance systems Delayed
organizational development in Middle East
Middle East might have developed large and
durable organizations suitable to modern
commercial life through a distinct path.
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Rise of the waqf and the corporation
І527-65
Justinian
622-32
І
Muhammad’s
rule at Medina
І
1100s
Emergence of modern economic organizations
Development
of Islamic law
Roman church
declares itself a
corporation
І
700-900
Waqf
emerges
1600s
І
First business
corporations
І
Corporation
enters local
legal systems
c. 1900
Early
corporations
Western Europe
Middle East
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Waqf
Unincorporated trust founded by an individual through conversion of immoveable property into an endowment to finance a designated service in perpetuity.
Principal vehicle for providing social services, including those provided in West through corporations
Al Azhar College and Congregational Mosque (975)
Oxford University (1096), All Souls College
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Possible services
• Anything allowed under Islamic lawMosque, school,
hospital, lighthouse, ….
• Permitted private provision of public goods now commonly supplied by governments
Karl Streit (1874), Sabil [Drinking fountain],
Abou Nabout Courtyard, Jaffa
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Medrese (college) of Çoban Mustafa Paşa,
Gebze, Turkey (1524).
Financed by a waqf.
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Rear: Medrese [College] of Ahmet I (1610) / Front: Haseki Sultan bathhouse (1540s), Istanbul
Photo: Rossi
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Sarı Han, Kayseri, Turkey (1238)
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Caravanserai of Zazadin (Konya, Turkey), 1237.
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Charitable complex (külliye) of Seyyit Battal Gazi, Eskişehir, Turkey (1208): Built and financed through a waqf
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Origins of waqf
• Earliest evidence: 8th c.
• Private property insecure During fiscal crises, expropriations & new taxes
• Property holders sought wealth shelter Richest people were high officials
• Older civilizations had developed forms of trust
• Creative response to weak property rights
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Sacredness of waqf
Waqf assets considered sacred
Rulers unlikely to confiscate its assets
People endow waqfs to protect property
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Material advantages
• Founder of a waqf could appoint him/herself as its manager for life
• Manager empowered to set own salary
make appointments
designate successor
• Endowed assets could be used to circumvent inheritance law
Selimiye mosque and bridge,
Edirne, Turkey (16th c.)
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Broad benefits
• Wealthy obtained material
security
• State did not have to supply
public goods
• Local needs served at low cost
Detail of water fountain, Cairo
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Organizational consequences over long run
• Corporate characteristic
Could outlive its beneficiaries
Caravanserai of Aksaray (Turkey), 1229.
Financed by a waqf for use by merchants.
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Organizational consequences over long run
• Corporate characteristic
Could outlive its beneficiaries
• Static organization
Not self-governing
Not profit maximizing
Courts enforce waqf deed
Vested interests
Prone to becoming
dysfunctional
Caravanserai of Aksaray (Turkey), 1229.
Financed by a waqf for use by merchants.
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Organizational consequences over long run
• Corporate characteristic
Could outlive its beneficiaries
• Static organization
Not self-governing
Not profit maximizing
Courts enforce waqf deed
Vested interests
Prone to becoming
dysfunctional
• Wealth-sheltering function
sucked capital out of
commercial sector
Caravanserai of Aksaray (Turkey), 1229.
Financed by a waqf for use by merchants.
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Lack of demand for business
corporation (c. 1000-1850)
• Corporate form could have been borrowed from
abroad, invented
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Lack of demand for business
corporation (c. 1000-1850)
• Corporate form could have been borrowed from
abroad, invented
• Critical institutional ingredients lacking
Persistently small partnerships, due to inheritance law
No standardized accounting
No stock markets
Legal system unaccustomed to legal personhood
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Beginnings of divergence (c. 700-900)
Codification of Roman Law by Justinian (560),Nebraska State Capitol, outer wall
Roman law
Trust
Corporation
West Corporations proliferate to
provide order in face of weak states
Middle East Waqfs proliferate as
protection against strong states
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The beginnings of re-convergence
Waqfs: Resources
used as specified by
founders
Municipalities:
Can devise own budgets
Impose ordinances
Reallocate resources
Impose / change fees
• 19th c.: New urban services supplied through
municipalities with corporate powers rather than waqfs
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Attitudes toward innovation
• Region not opposed to
innovation per se
As commercial
organization stagnated,
government organization
evolved
tax system evolved
• Islamic institutions not
inherently static
• Stagnation in commerce
was an unintended
consequence of early
institutions
Topkapı
Palace,
Istanbul,
seat of
Ottoman
sultans
until 18th c.
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Islam and commerce
• Islam not inherently hostile to
commerce and enterprise
• Founder was a merchant
• Inheritance system contributed to
underdevelopment as an
unintended consequence
Al-Balah market, Cairo, Egypt
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Summary
Large, long-lasting, and self-governing private organizations
are critical to success in a modern economy
In the Middle East they failed to emerge indigenously because
1. Inheritance and marriage laws created incentives to keep
partnerships small
2. Islamic law designed as individualistic, with no room for
corporations
3. Public services organized as waqfs, which lacked self-
governance, sucked capital out of commercial sector, and
were prone to becoming dysfunctional.