Friday, February 10, 2012

The Long Divergence (1)

I love (good) economic history. It explains how things work. Particularly if it is done with the understanding that the history of what did happen is also the history of what did not happen.

Timur Kuran’s The Long Divergence: How Islamic Law Held Back the Middle East is good economic history. Part I (Introduction) sets out the question to be explained: why and how, after an initial, lengthy period of Islam being as economically successful (often more so) than Western Christendom, did it come to fall so far behind (the “Great Divergence”)? Why did it take so long to begin to adapt Western institutions, and why did it do so when it did? Questions of not only what did happen, but also what did not (e.g. a blanket refusal to adapt, an willingness to adapt appearing earlier). Another of the virtues of Kuran’s study is providing maps defining what he means by ‘Islamic Middle East’, as this changed somewhat over the centuries.

Institutions matter
This is a study centred on the evolution and effect of institutions. Kuran defines an ‘institution’ as:
a system of socially produced regularities that shape, and are in turn shaped by, individual behaviours (p.6).
Such incorporates:
consciously created social regularities, such as state-imposed litigation procedures and tax regulations. It also encompasses patterns that emerge as byproducts of other choices, such as procedural expectations based on history, customary contractual practices and organizational norms (p.7).
The institution that Kuran most focuses on is Islamic law (i.e. Shar’ia), something he displays a very nuanced understanding of:
In principle, Islamic law covered all human activity. As a matter of practice, certain spheres of life were governed by rules divorced from religious considerations. In the political discourse of the Ottoman Empire (1299-1922) there was even a category of law known as “ruler’s law” (kanun), as distinct from Islamic law, and also a third category, customary law (orf), which rested on precedent rather than religious scripture or learning (p.7).
He is not interested in what theory said, but in what actually happened in practice:
In commerce and finance, two areas in which the Middle East fell conspicuously behind, right up to modern times Islamic law played a key role. People entered into contracts that followed an Islamic template and enforced through Islamic courts. They apportioned estates according to Islamic inheritance rules. Residents of the region’s great cities obtained services mostly from waqfs, which were trusts formed under Islamic law and supervised by officials with religious training. Almost all lawsuits involving at least one Muslim were litigated by Muslim judges, under Islamic legal principles (p.7).
with a lively sense of what did not happen:
The domains of the three bodies of law were not immutable. Where Islamic law created identifiable handicaps for investors, merchants, artisans, or moneylenders, efforts might have been made to facilitate the circumvention of problematic provisions (p.7).
By, for example, developing their own specialised courts: something that did not happen prior to the C19th (Pp7-9).

Kuran gives short shrift to attitude explanations (“conservatism”, “fatalism”) pointing out that such features common to many societies and enduring features of human societies cannot explain variations between them (or across time). The issue is the resilience of private institutions when innovation and borrowings in other fields (e.g. tax collection) never ceased. Where C16th Islamic merchants and financiers gave no sign of finding traditional arrangements problematic, their C19th European found such increasingly inadequate. Once the greater wealth and success of Europeans became increasingly obvious, that then created pressure for change in the Middle East (Pp10-1).

The result was, from the mid-C19th onwards, a series of importings, adaptations and innovations as merchants, financiers and others in the Middle East attempted to replicate European success. This was the local reflection of the modern economic epoch whose:
chief characteristic is self-sustaining economic expansion at an unprecedented rate; although contractions can occur, they amount to temporary reversals along an upward path. This epoch has additional characteristics: rapid technological change, a doubling of life spans, massive urbanization, and the means of mobilizing abundant capital through complex private organizations (p.13).
Contemporary Muslim reformers may have not understood the full package (scholars are still arguing over it) but they had some sense that new things were required and were willing to agitate for them.

Organisational capacities mattered. There may not be a single path to mass prosperity but what is required is:
fundamental institutional transformations to enable savers, investors, lenders, borrowers, merchants and producers to operate on a much larger scale than ever before, through organizations incomparably larger, and over time horizons far longer than would have made sense in the Middle Ages. If this is granted, it is simply a matter of historical record that until well after 1750, considered the star of modern economic growth, the Middle East lacked the organizational forms and techniques that distinguish the present epoch from the two previous epochs—prehistory to 8000BCE and settled agriculture from then to 1750 (p.14).
Kuran notes that first Arab Human Development Report (pdf) (2002) pointed to a “freedom deficit” and a “human capabilities/knowledge deficit” as characteristics of the contemporary Arab world:
Two centuries ago, observers of the region would have recognized instantly what they meant (p.14).
Kuran then examines causality in history as part of establishing his case of why institutional factors, specifically private organisations, were so important in explaining the economic divergence and patterns he is interested in, (Pp14ff).

Stuck in the personal
While Europe was moving from personal to impersonal exchange, the Middle East remained dominated by personal exchange, with courts often deciding cases purely on oral testimony. From the C16th onwards, the Ottoman Empire signed various “capitulations” which allowed foreign merchants to have their property dealt with under their law: this, for example stopped the break-up of estates which was a feature of Islamic law—advantages which were not passed on to local merchants. Kuran notes that, except with regard to Europe from the C16th onwards, Islam often had institutional advantages compared to other cultures that fostered spread of Islam and Islamic institutions (since Muslims were expected to live according to the dictates of Islamic law) (Pp19ff).

But such dictates did not constrain non-Muslims who, outside the areas of taxation and security, were able to follow their own laws. In 1844, the first full Ottoman census, 45% of the population of the Ottoman Empire were Christian; in the C16th they were 35% of the population of Istanbul (p21). So, how the economic life of non-Muslims operated matters in explaining the historical outcomes. Given the balance of advantage in institutions shifted over time, Kuran provides a discussion of the difference between static and dynamic features (Pp22-4).

Religion matters
Having framed the question of the “Puzzle of Economic Underdevelopment” so well in the first chapter, Kuran moves on to considering the economic role of Islam. This mattered because:
certain institutions of great significance for investment, productivity and exchange were grounded in Islamic teachings (p.25).
He notes the primary nature of religious status in Islamic societies and that the ruling dynasties all consulted Muslim scholars even as they adapted to changing circumstances. He also warns against the tendency to read secular classifications back into a (religious-status dominated) past. As Kuran’s concern is with comparative outcomes, he focuses on the most advanced institutions: the places where there would be the most pressure for institutional adaptation, noting that such centres moved over time in the history of the Middle East, as they did in European history. The Ottoman dynasty was the most durable rulership as it was quickest to adapt, but tendencies to secularisation only developed after the comparative economic underdevelopment of the Middle East became clear. One of Kuran’s persistent targets is Islamist claims about the past, that the problem was the failure to adhere to “properly” Islamic institutions:
Prior to the mid-nineteenth century, the Ottomans tried to extend the reach of Islamic institutions and raise awareness of them … So links between Islam and economic performance, where present, should be observable in the Ottoman context (p.28).
One of Kuran subheadings is ‘Unintended Consequences and the Potency of Minor Distinctions” (p.29):
Until modern times Middle Eastern cities lacked a corporate status; none of them had standing before the law as an organisation, as thousands of Europeans already did in the Middle Ages. To make sense of the Middle Eastern pattern, we need to pinpoint a social mechanism that kept them wedded to a traditional form of administration. Likewise, explaining why their financial markets remained atomistic requires finding one or more mechanisms that prevented the emergence of banks (Pp29-30).
Kuran regards exaggerating what individual actors could have foreseen and willed as “a common error”. The question is why folk in the Middle East acted differently than, for example, English kings, merchants, financiers and borrowers (p.30):
… the institutions of early Islam had unintended effects … the Islamic inheritance system lowered the Muslim share of global commerce and delayed Middle Eastern industrialisation. The effects were not planned, and neither became an issue during the rise of Islam, as the inheritance rules took shape. They are among the unintended consequences of institutions meant to spread wealth, strengthen families, and promote political stability (Pp30-1).
Yes, the rules benefited wives and daughters but they also had other second order effects:
A full-blown inquiry into the economic effects of a religion must look beyond short-run and direct effects to longer and indirect consequences … Second-order effects are often more significant for economic development than the corresponding first-order effects (p.31).
Kuran emphasizes that small differences can prove historically very significant over the long run of history, which makes unintended consequences loom large:
Identifying initial institutions, relationships, and incentives without prejudging whether they affected later developments, we must look for social mechanisms that made certain factors self-amplifying, triggered chain reactions, and fostered rigidities (p.32).
This means that both past failures and past successes can limit future options. In Islam, the waqf, or trust, was a highly effective way to provide services. Its very success blocked the development of municipalities and corporations. Other processes can, however, lead to accelerating development:
Societies that achieve a critical mass of ideas experience self-sustaining growth; others stagnate (p.33).
In particular, some regions led the way to impersonal exchange while others stagnated. Modernising defensively and by imitation means one tends to remain an organisational laggard. In understanding such patterns, the analytical trick is to explain both change and stagnation (Pp33-4).

Considering causation
Kuran discusses briefly the problems with various approaches to explaining historical causation on the scale he is concerned with:
the key to the West’s observed process of modernization is that its institutions were self-undermining and ultimately self-transforming. The corresponding institutional complex in the Middle East proved generally self-enforcing, if not self-reinforcing (p.36)
Kuran is very much interested in dynamic analysis, in changes (or lack of them) over time.

Kuran rejects analyses based on fixed advantages or disadvantages, for:
The usefulness of a stable institution will vary over time, depending on the evolution of other institutions, relative prices, and technology (p.36).
Kuran notes that the colonial period provided many benefits to the Middle East. (Those who doubt that might consider Afghanistan: never colonised, and with the most pathetic levels of infrastructure in the region.) The Islamist view of the problem as being a decline from successful Islamic purism:
invokes a timeless and context-independent concept of efficiency … it thus overlooks that useful institutions might become dysfunctional as the global economy evolves (p.37).
A point that Australian economic reformers have regularly made: that reform is a continuing imperative because there is no permanent “best practice”, or even “good enough”. More broadly, the question of why the West became the most dynamic of civilisation is also the question of why others did not.

But, as Kuran notes, analyses based on permanent Islamic inferiority have exactly same failing and so are unable to explain early Islamic success. The entire historical trajectory has to be explained (Pp37-8).

Kuran distinguishes between local and global optimality: one judges between possibilities that one is aware of. This changes both due to changes in geographical and temporal breadth of view. Hence, Turan informs us, that:
I point to dynamic disadvantages of institutions that distinguished scholars have characterized as evidence of economic success. Likewise, I identify as globally inefficient practices that, from a strictly local perspective, look very useful (p.39).
Institutional advantage is very much a moveable feast.

This review continues in my next post.

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