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How Islamic law has affected Middle East economics
Timur Kuran
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TEXT OF INTERVIEW
Kai Ryssdal: The economic roots of the protests in the Middle East are pretty well known by now. Frustration over the lack of jobs, low and stagnant wages, and no real economic opportunity in most places.
To understand why this is the case, Duke University economics professor Timur Kuran says you need to look at history. Religious history, in particular. His new book on Islamic law and how it has affected economic development is called "The Long Divergence." Welcome to the program.
Timur Kuran: Thank you for inviting me on your show.
Ryssdal: Is there something about Islam and Islamic law that prevents or has prevented economic development in the Middle East?
Kuran: There are problems that are rooted in traditional Islamic law, which govern business until the 20th century that have kept businesses small and short-lived. It impeded private capital accumulation, it prevented the emergence of modern capital markets. So the Arab world and the wider Middle East modernized economically quite late; it's still at the beginning of a transition out of Islamic law into what we might call modern, commercial and financial law.
Ryssdal: Some of those historical aspects we're familiar with: the prohibition against lending at interest and laws on inheritance. Your point though, in your book, is that Islam has really overcome those, and it's the lag between the modern economies of the rest of the world and the Middle East that cause some of the problems we're seeing today.
Kuran: That is correct. Business in the Middle East is conducted everywhere in the Middle East under laws more or less transplanted from Western Europe in their entirety. Now, the region remains underdeveloped; the reason is the level of trust in the region is low and the scale of business tends to be quite small for historical reasons.
Ryssdal: The level of trust? So you mean interpersonal and intercorporate relations?
Kuran: I do. Trust is high among acquaintances, but people do not trust strangers and they don't feel comfortable dealing with corporations.
Ryssdal: So as you look around at the modern Middle East today, give me the big industrial survey: what are the General Motorses of the Middle East? What is the Intel, or the Google, of the Middle East? Do they exist?
Kuran: No companies exist that have been that innovative, at least in the Arab world. We do have big and long-living Arab companies, as we did not a century ago. We have them in the media sector, also in steel, construction, textiles. So the problem is no longer the inability to form large and durable companies. The problem is political instability, which greatly limits the amount of investment and greatly limits the amount of risk that people are willing to take. A related problem is that political connections still matter; there are many people who have good ideas who would be willing to take risks, but they do not because they lack connections and they cannot borrow adequately.
Ryssdal: So as that political instability that we've all seen over there the past six weeks or two months reaches the endgame in some countries, does that necessarily mean that they will be able to catch up quickly from the drag that Islamic law has put on?
Kuran: For the short run, I'm quite pessimistic. It's not possible to move from autocratic regime to a fully democratic system overnight. This is going to take generations. Turkey started the process about 70 years ago -- Turkey has a form of democracy now, it's still not a perfect democracy. I think that the Arab countries are going to move to democracy in fits and starts. In the long term, I'm quite optimistic about the region. And the reason is, that all of the key ingredients for economic modernization and political modernization are there. What's lacking right now is the will and leadership.
Ryssdal: The book by Timur Karan is called "The Long Divergence" about Islamic law, and the economics of the Middle East. He is a professor of economics and Islamic studies at Duke University. Professor, thanks so much for your time.
Kuran: Thank you.
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I was particularly interested in Dr. Kuran's emphasis in this article on the issue of trust and how
the lack of it in Middle East economies is hampering their growth. This interested me because I
have developed a theory of economics that hinges on the understanding of money which is
founded on our trust and on nothing else. It allows us to work together in economic enterprises
within which we would not otherwise even consider participation. This is the primary wonder of
money; a property that we should recognise and exploit properly.
A correct understanding of poverty will elucidate a correct understanding of economics as
well as a correct understanding of our current economic situation.
While I am not an Austrian proponent I have made the subjective basis of economics the
foundation of the economic theory laid out in the ebook referenced below. But I come
to very different conclusions regarding monetary policy, credit operations, taxation, and the
definition of individuals and enterprises in any economic system. I also compare communist
economic systems to our current western credit economic system and believe that Keynes
made an invaluable contribution to economics with his concept that an economy can function
at any level of production. But I also support market mechanisms as the driver of any
successful economy instead of government spending.
Given the plethora of ideas about just how we should proceed in order to improve our
current economic situation, I've added my own. I would really appreciate your review of
the economic principles proposed in the following ebook
http://www.smashwords.com/profile/view/povertyandthefoundationofeconomics
and your comments on any errors that you find. If you do not have the time to do
this, I would appreciate your assigning the task to your students as an exercise.
As long as we continue to use the western credit system as the primary driver of
economic production the wealthy will continue to control the means of economic
production and poverty will be a guaranteed result. The link above describes an
alternative economic system that will eliminate poverty and maximize economic
production.
Thank you for your time and attention in this matter.
The way the interview was projected is that for some reason the problem of Middle East is the religion. The Islamic law is based on 4 principles. Quran, Hadith (Prophet Mohammad's sayings & actions), Consensus, and Interpretations. The first two provide the basic guidelines which are based on justice and morality. Usury is considered illegal even in US but its definition needs to be understand and implemented by the government. It is interesting to note the Islamic law provided the women inheritance during the times when women were not considered even having a soul in other Abrahamic religions. Also Algebra was created by Mohammad Alkhwarismi (Algorithm) when he was trying to solve inheritance issues according to Islamic laws. Few decades ago the Middle East was under colonial rules and there is not enough skills and understanding among the religious scholars to interpret the moral teachings into the law relevant to the modern times. Most of the governments are corrupt and the overall corruption is high in the society of the followers of a religion which asks for a corrupt free society and mandates its followers to be just. So please don't blame the religion for the miseries of its people who are not following its teachings. Can you have a viable society or economy if US constitution is not followed?
It's worth noting that the speaker prescribes democracy as the solution for the Middle East problem. I do agree since the problem is not in the financial system as much as it is in the bigger political environment, mainly corruption.
Trying to blame the current situation in the Middle East on a law that has not been enforced in centuries is naive and misguided.
In addition to the comments above, the author may not be aware of how the wealth should be moved between individuals with fair trade and 0% interest under the Islamic laws. To allow for economy growth, individuals must have two things i.e. enough wealth and secure source of wealth. The author did not study very well why the money must move between people in order to have growth for all and that is what the Islamic laws are requiring us to do. When individuals have a secure source of wealth such as jobs, businesses, trades, and other income sources, they contribute to the economy very well. Under the Islamic laws, individuals do not pay taxes; however, they pay obligatory charity between 2.5% to 10%. With the current European and American economies, individuals pay higher taxes and interest in almost any loan. If the wealthy world wanted to stabilize the economy, two things must be done, eliminate taxes and eliminate the interest. One may ask if there are no taxes and no interest, how would a bank survive, the answer is very simple banks can charge reasonable fees for services and manufactories can apply the delayed pay method for all transactions. This will narrow the gap between the rich and the poor and that what Islam is asking us to do.
A wise person should not blame Islam for any of this; he(s) should look at Islam to find a way out of this.
In addition to the comments above, the author may not be aware of how the wealth should be moved between individuals with fair trade and 0% interest under the Islamic laws. To allow for economy growth, individuals must have two things i.e. enough wealth and secure source of wealth. The author did not study very well why the money must move between people in order to have growth for all and that is what the Islamic laws are requiring us to do. When individuals have a secure source of wealth such as jobs, businesses, trades, and other income sources, they contribute to the economy very well. Under the Islamic laws, individuals do not pay taxes; however, they pay obligatory charity between 2.5% to 10%. With the current European and American economies, individuals pay higher taxes and interest in almost any loan. If the wealthy world wanted to stabilize the economy, two things must be done, eliminate taxes and eliminate the interest. One may ask if there are no taxes and no interest, how would a bank survive, the answer is very simple banks can charge reasonable fees for services and manufactories can apply the delayed pay method for all transactions. This will narrow the gap between the rich and the poor and that what Islam is asking us to do.
A wise person should not blame Islam for any of this; he(s) should look at Islam to find a way out of this.
I was thinking...How can one be a Professor of Economics & Islamic Studies and not know of the golden age of Islam when Islamic laws were applied and the religion and people prospered...until greed and autocratic regimes took over the helm.
Is Islamic law also to be blamed for financial crisis and stagnated business development in Europe and America??? Let us be objective here, it's all about our greed which Islam already warned us against , for Islamic law is a balanced and effective solution for all times and ages. Please identify one country of those Middle East countries that implements Islamic economic principles the way it is prescribed. Allah knows best
The link Mr. Kuran is making between Islamic law and the economic conditions in the Middle East is weak if not irrelevant. There is however a stronger correlation between autocratic regimes and stagnant economies. Its the policies of autocrats that affect economic growth. The local customs, not religion inhibits innovation and entrepreneurship. Transplanting financial laws from Western Europe does not sound innovative to be frank. The really problem is the miss allocation and mismanagement of scarce resources by corrupt officials. Red tape and bribery is the order of the day, and that indeed has roots in no religion.
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