By Jerry Bowyer
There’s nothing wrong with hope, but it should always be balanced with a little truth. But the optimism which has been hanging over so much of the discussion about the middle east and central Asia, has been a bit long on hope and short on truth.
The Arab Spring has more than lived down to the predictions of critics, but no one had any long-term reputation invested in that. However, the much vaunted ‘Turkish Model’ is another thing altogether. It is has long been the great multicultural hope for mankind, an Islamic modern democracy. Investors were told to get on board before losing a great chance. The rest of the equatorial world was told to behold the new world of Islamic modernity. The recent ordeal of oppression and uprising more impression, must come as a crushing disappointment. That could have been avoided by simply consulting history.
Islam is not necessarily incompatible with economic prosperity, but the way things have worked out historically, it is the principle factor which explains why the Middle East has fallen so far behind. According to Duke Professor Timur Kuran, who has been kind enough to be my guide to understanding Islamic economics, during the Middle Ages, the Islamic world was ahead of the Christian world in economic development, but something began to happen in the late Middle Ages which caused what he describes in his excellent book,The Great Divergence, as a vast and growing gap between the Islamic world and the world of the West.
The divergence has been a puzzle for historians for quite a long time: Professor Kuran believes the puzzle remained unsolved for so long because historians tend to look at political history and ignore religious history. Political history documents are easier to get to; emperors and caliphs keep official chronicles. But the religious life of the people is often not as readily documented. I would add a factor: religion just might not seem to be such a large factor in the life of mankind to academics, who might have not given it as much role in their own lives as it plays in the lives of the people they study.
Whatever the reasons that the link between Islamic law and economic stagnation have been missed, Professor Kuran has identified them clearly for us now, and we would be fools to ignore them. InThe Wealth of Nations, written by Adam Smith and published in the fortuitous year 1776, Smith casts his eyes toward the Islamic world and sees there a system of prohibitions against riba (interest). Smith concludes that the Islamic world will tend to have higher interest rates than the West, because a nation which outlaws interest will by definition place certain risks on those who lend at interest, and they will need higher yields to compensate themselves for those higher risks. Whether Smith’s reasoning was correct or not, the Islamic world is in general plagued by higher interest rates. Professor Kuran sees that as only one of several problems driving higher interest rates in Muslim nations, and a relatively small one at that.
Far greater than usury laws, Islamic inheritance and corporate formation laws have impeded capital market development. Islam requires the equal division of inheritable assets among all male heirs, and equal division of inheritable assets between female heirs as well, but at half the level of male inheritance. In and of itself this makes it difficult for large scale multi-generational asset accumulation to some degree. But given traditional Islamic attitudes towards polygamy, the effect is intensified. A wealthy man may accumulate dozens of wives and scores of children. Osama Bin Laden was the son of his father’s tenth wife and he lived with four other siblings. Polygamy plus a strict religiously imposed inheritance code prevented something which we’ve seen in the West: the multigenerational family business, which lies behind many of the great business successes of the world.
In addition, Islamic law requires that business partnerships dissolve at the time of the death of ANY of the members of the partnership. This means that businesses under Sharia face enormously higher truncation risks than those under, say, the Common Law tradition which developed in Western Christendom. It means that one would be foolish to initiate any business plan which is materially likely to require more time than the likely life expectancy of its most aged and/or sickly investors.
And it’s not just a problem of duration which is driving risk; it’s also a question of the reach of the partnership. The more investors, the higher the possibility than one of them will die within the time frame of the project. Imagine if GM had to shut down, dissolve its corporate charter, and start over again every time one of its shareholders died. Of course that would never happen in the way I described. What would instead occur is that in a nation under Islamic law, such a large enterprise with such a long time horizon would never be formed in the first place. And, as one would expect, it never was. There is no Islamic GM.
So, what is done with accumulated capital? Well, the religious trust, or waqf, is more favorably treated than business entities. A waqf receives favorable tax treatment compared to a profit-seeking entity, as non-profits do in the United States. In addition, waqfs are easier to set up, being encouraged under Islamic law. More importantly, when a tyrant decides to confiscate property, the consequences to him are more severe in the case where he ‘nationalizes’ assets from a religious trust than from a profit-seeking business. Waqfs are politically sacrosanct, businesses are not.
So, while very small proportions of national wealth are held in trusts in the U.S., far larger proportions are held in the Middle East. However, this creates problems all its own. Large proportions of assets are held in institutions which are not controlled by shareholders disciplined by the profit motive. In addition, waqfs have their own duration problem. While the problem with business partnerships is that they have short lives, the problems with waqfs is that they have eternal life. They have infinite duration.
Making matters worse, the original mission of the waqf goes on forever. If one forms a waqf for the purpose of providing lodging to Muslim traders to return to Mecca along the silk road, the mission of that waqf set in 1100 AD is by law the same mission in 2013 AD. In other words, the waqf model assumes a stagnant world and makes no provision for and does not anticipate the upheavals associated with economic progress. It freezes time. And this freezing of vast quantities of assets leaves very little left for commercial and technological development.
In short, the capital-impeding effects of Islamic law can be captured in one word: banks. Banks require large scale capital accumulation in order to diversify risk, and banks require by their nature long spans of time in order to match the duration of savers’ needs with borrowers’ needs. No diversification and no long-term orientation means no modern banking and no modern economics.
The consequences of all this are far reaching. For example, if Sharia law makes the formation of corporations impossible, or even difficult, this goes beyond business implications. It’s not just businesses which have corporate status; many more forms of human cooperation take this form. For example, local units of governments are corporations, so are labor unions, schools and religious institutions. That’s right: churches are typically incorporated. In fact, the Christian church is the origin of the concept of a corporation. It is the Corpus Christi, from which the idea of an organization which outlives any of its members arose in medieval Europe. Once there was something like that, accountable directly to God and not via the state, that created the intellectual space into which other independent entities could form themselves. Universities, for example, arose this way.
With no choice between short term joint ventures lasting a year or two on the one hand, and religious trusts frozen in amber for all eternity, the formation of adaptable long-lasting institutions becomes very difficult. Mediating institutions between the individual and the state do not flourish. Before the U.S. places more diplomatic, financial and even military bets on the ‘Arab Spring,’ we’d better take a long look at whether the Sharia-dominated regimes which are likely to follow are able to create the kind of civil society necessary to sustain liberty beyond the fleeting moment of revolution.
Jerry Bowyer was the founding president of the Allegheny Institute of Public Policy, and has been the host of WorldView, a Sunday-morning political talk show syndicated on approximately two dozen TV stations. Mr. Bowyer is a weekly contributor to Forbes.com.
This article was originally published on Forbes.com.