Thursday, February 16, 2012

The Long Divergence (3)

This is the third part of my review of Timur Kuran’s excellent economic history The Long Divergence: How Islamic Law Held Back the Middle East. The first part was in my previous two posts.


Having set the analytical framework for analysing the economic history of the Islamic Middle East in Part I, and how interlocking incentives blocked institutional development in Part II, Kuran considers the role of non-Muslim minorities in Part III The Makings of Underdevelopment.

Converging practice
Until the C18th, the various religious communities were broadly even economic development. Then, as economic modernisation began to seep into the region, Greeks, Armenians and, to a lesser extent, Jews became disproportionately important in finance and commerce, particularly in cities. To explain why many centuries of no particular advantage suddenly shifted to notable non-Muslim advantage, Kuran starts with Islamic legal pluralism, where non-Muslims could use autonomous court and legal systems for non-criminal matters. As Europe began to develop the legal infrastructure of economic modernity, Jews and Christians could take advantage of these opportunities when Muslims—required to use Sharia—could not (Pp169-71).

Choice of law came down to choice of forum, since each religious community’s courts applied their own laws: an arrangement that had Roman precedents but became regularised under Pact of Omar, whose alleged origins under caliph Omar I or Omar II (d.720) gave it great legitimacy. The Pact permitted interactions among non-Muslims to choose which law they wished to apply, though interactions with Muslims had to be dealt with via Sharia (Pp172-3).

Choice of law can exercise ex ante (at the time of negotiations) or ex post (at a later date). The former is consensual; the latter might be unilateral, to secure some advantage. The Pact permitted both to non-Muslims. Muslims were limited to choices between different schools of Islamic law: though the differences were minimal in most commercial and financial matters. Since apostasy was punishable by death, Muslims could not opt out of Sharia while dhimmis, in their transactions amongst themselves, could chose to use it or not. So the militarily and politically dominant Muslims had fewer legal choices than their non-Muslim subjects. Given legal choice was not binding ex ante, the normal economic literature on the efficiency benefits of such jurisdictional choice do not apply. How things turned out becomes a purely empirical issue (Pp174-6).

Despite the existence of rabbinical courts (for Jews) and ecclesiastical courts (for Christians), both Jews and Christians made extensive use of the Muslim legal system for commercial and financial matters while continuing to also use their own courts. Any interactions with Muslims was supposed to be dealt with by Sharia while Muslim courts had much better capacity for enforcement—the non-Muslim courts were more like arbitration boards than full courts—greater authority and provided third party courts for interactions across religious communities. In some areas, notably partnership, Sharia handled such matters at least as well as Christian courts and better than Jewish ones. The result was a tendency for legal homogenisation towards Sharia, which meant the institutional and incentive blockages which affected Muslim commercial and financial life also affected those of non-Muslims (Pp180-1).

Christian and Jewish inheritance law differed considerably from Islamic inheritance law: so many dhimmi families took steps to block relatives taking disputes to Islamic courts (such as allowing daughters to inherit and restricting bequests to non-relatives). The effect was to have inheritance patterns converge towards those of Muslim law. Though communal leaders also took steps to discourage use of Muslim law (up to, and including, excommunication). The net effect of this convergence was to lessen the advantage in choice of law. The dominance of Sharia thus blocked legal pluralism from being a vehicle for institutional innovation (Pp182-5).

Rulers recognised minority communities as groups only to the extent that it advantaged the ruler. So the power of the state blocked that path to organising as a corporation (Pp186-7).

Religion mattered for economic life since legal rights and obligations depended on faith. But, for centuries, Islamic legal pluralism was “self-undermining”, operating in the direction of a legal homogenisation that blocked modernisation (p.188).

Advantage emerges
Up until the C18th, non-Muslims had no particular advantage in commerce and finance over Muslims. This then changed dramatically: non-Muslim minorities began to shoot ahead of Muslims in commerce and finance. It started with non-Muslims becoming dominant in trading interactions with Europeans and then spread. By 1912, the non-Muslim 19% of the (shrinking) Ottoman Empire made up 85% of major local traders: 66% were Greek or Armenian (Pp189ff).

Non-Muslims also came to completely dominate new sectors such as insurance:
In Istanbul, as late as 1922, not one insurance company had been founded by Muslims or counted Muslims among its managers (p.194)
Non-Muslim dominance in finance also extended to industrial concerns: steam-powered factories, water, gas, electricity, tram, subways—these were founded by non-Muslim capital and overwhelmingly managed by non-Muslims. The income and wealth of non-Muslims shot ahead of Muslims, with major land-transfers from Muslims to non-Muslims. Muslims were dramatically under-represented in residents of prestigious new neighbourhoods, bank customers, buyers of insurance and in business-ownership in new commercial centres outside the traditional guild system (Pp194-5).

Any explanation has to focus on what changed: why did this non-Muslim commercial and financial dominance suddenly emerge from the C18th onwards? It starts with:
By the eighteenth century the organizational revolution in the West was generating an explosive growth in global commerce (p.197).
This included soaring trade between Europe and the Middle East which accelerated in the C19th. European advantages became increasingly obvious:
European companies and businessmen had access to cheap credit from financial enterprises that pooled the savings of thousands. They could raise capital through stock markets. They could have their disputes resolved by courts familiar with the ongoing organizational advantages and accustomed to dealing with legal persons. Because companies were long-lived, they could establish reputations that would not vanish with the death of a shareholder or employee. Europeans also benefited from the assistance of consuls posted in commercial centers of the Middle East. These consuls gathered information about bureaucratic procedures, local customs, commercial opportunities, and individual reputations. They helped to settle the estates of Europeans who died in the Middle East according to European inheritance systems. They resolved conflicts under the laws of their own countries … they enabled foreign merchants and companies to operate, to a degree, within an institutional framework transplanted from Europe (p.198).
As so often in serious economic history, one is struck by how things so much anti-market, anti-private property analysis ignores, dismisses or rejects have been crucial to the creation of mass prosperity. (Though this agreement in a single village which set off China’s march to mass prosperity is probably the most striking historical example.)

How did this come to so advantage non-Muslims in the Middle East? Because:
Exposure to the West’s steadily developing commercial culture expanded the jurisdictional choice set of the Middle East’s local Jews and Christians. It permitted them to overcome the limitations of indigenous legal systems by exercising their legal choices differently, in favour of the modernizing systems of the West. So it is that their choice of law, which was denied to Muslims, enabled them to pull ahead in the new global environment produced by the West’s organizational revolution (p.198).
To use European law, Jews or Christians had to acquire its protection. Originally, this was done by a letter of patent (berat), an extension of the older habit of hiring dragomans (from tercümans, interpreters). Consuls charged fees for their services. The interactions grew, giving Jews and Christians a path to economic modernisation (Muslims had rarely been hired, probably because their testimony would count more in an Islamic court). By the end of the C18th, the Austrians were protected 200,000 subjects in an empire of 30m. Merchant houses grew up, which could appeal to Western courts. Muslims were blocked from this route since it would have involved a radical challenge to Islamic law. The pattern of commercial success reflected these pressures: Muslim merchants remained successful in inland cities, non-Muslims did not flourish particularly in coastal cities without consuls (Pp196ff).

What Kuran outlines is the use of jurisdictional choice, as outlined by Tiebout. Islamic legal pluralism violated two of Tiebout’s assumptions—ability to choice jurisdictions was not symmetrical (Muslims could not opt out of Sharia) and choice of jurisdiction was not binding (people could appeal to Muslim courts after a contract had been entered into). The latter generated uncertainty that encourage homogenisation (including in inheritance practices) with Islamic law and undermined organisation innovation. As the process of protection expanded from the C16th onwards, European powers sought to shield their citizens and protégés from Islamic trials while the kadi monopoly over adjudication involving Muslims came to block Muslims from the most dynamic sections of the Middle Eastern economy (Pp206-8).

Capitulations
And so it is one to the capitulations, which grew out of medieval trade treaties, expanded considerably until they were abolished by the Ottoman government (to much popular rejoicing) at the beginning of the Dynast’s War (aka WWI). The capitulations allowed Western merchants to operate in the Middle East under the rules and organisational forms Europe was developing (Pp209-10).

As with many Islamic practices, they had Christian roots, developing out of the treaties the Eastern Roman (“Byzantine”) Empire made with Western merchants from 1082 onwards whereby Western merchants could operate according to their own laws. French and Italian cities made similar arrangements, albeit on a reciprocal basis. In early Islam, Muslim traders paid lower tariffs than Christian or Jewish subjects who paid less than non-Muslim foreigners. In the C12th and C13th, Fatimid, Ayyubid and Seljuq rulers began to grant treaties giving foreign merchants tariff relief or exceptions (there were imtiyãzãt or privileges in Arabic; ahidnâmes or covenant letters in Turkish). These were often reciprocal arrangements—Arab merchants in Corsica and Sicily could use their own courts while, in the Eastern Roman Empire, visiting Turkish and Arab traders lived in their own enclaves. By reducing tariff discrimination and permitting choice of jurisdiction, the treaties enhanced economic efficiency (Pp210-2).

The Ottoman capitulations began with a 1536 treaty between Süleyman the Magnificent and Francois I of France, allowing the French to become the dominant “nation” in Mediterranean commerce. In 1580, the English secured similar rights. As the Ottoman Empire began to shrink, operating from a position of diminishing military strength, the number and extent of the capitulations began to expand. The importance of maintaining trade flows made unilateral abrogation increasingly implausible. By the early C19th, the capitulations (from the Latin capitula or chapter) were providing foreign nationals and local protégés privileges denied local residents. They came to extend to domestic policy forcing the abolition of various local monopolies and, in the 1838 Anglo-Ottoman Commercial Convention, imposing higher duties on exports than imports. The capitulations became increasingly associated with a loss of local sovereignty (Pp212-3).

The faltering Mamluk regime signed treaties (Venice 1442, Florence 1497) the granted privileges that the Ottomans withheld until the C17th. While the Ottoman capitulations began with reciprocal elements, more and more they focused on foreign concerns:
as the economic institutions of the two sides diverged, reciprocity became increasingly symbolic (p.214).
Increasingly, the capitulations gave signatories “most favoured nation” status with tariffs and expanded exemption from Islamic law and courts—to the extent that, while the kadi monopoly over Muslims was never formally infringed, increasingly there were ways around even that (Pp214-5).

Taking us through various explanations for the capitulations (coalition forming, limiting the political capabilities of potential domestic rivals, revenue generation, protection of trade routes and securing strategic goods) Kuran notes that none explain the specific pattern of privileges granted (and not granted) and have limited value in explaining the expansion in capitulations over time (Pp215-8).

Many of the provisions were clearly about increasing the predictability of returns from trade and reducing commercial risks: such as shielding European merchants from ad hoc taxation, banning collective punishment for actions of delinquent individuals, applying European inheritance laws, protection from friviolous lawsuits. As the balance of power shifted against the Ottomans, Europeans increasingly sought privileges which ended up with foreign nationals avoiding (for example) charges for municipal services they would pay back in Europe and an Ottoman subject could avoid a tax, fee or fine by simply transferring the asset to a foreigner. Locals complained about foreign advantage, the foreigners about real or imagined inequities: the complaints of the locals generally overlooked that expanding trade required limiting opportunism and arbitrariness in taxation, foreigners generally failed to acknowledge that the drive for predictability had evolved into outright privilege (Pp219ff).

Foreigners moved in significant numbers to the Middle East to take advantage of the commercial opportunities opened up while compensating levies by the Ottoman government fell increasingly on unprotected locals, increasing the uncertainty they laboured under. Both pressures gave locals even more incentive to seek European legal protection. A complicating factor was that that writ of the Ottoman government ran unevenly in the Empire, leading to significant local variations in enforcement. This then led to complaints by foreigners that fed back into expansion of the capitulations negotiated by European governments (Pp223-4).

While early treaties could be rationalised by the sanctioned legal pluralism of dhimmi status and acceptance of (up to 10 year) truce status of Islamic law, these rationalisations became increasingly thin as the treaties expanded in ambit and security. Yet Islamic religious functionaries went along, or even participated in, the process. While never completely in agreement, they never formed organised opposition to the expansion of foreign and foreign-protected local rights. The implication is that ruling groups saw advantages in the treaties (Pp225ff).

The capitulations had effects beyond the fiscal: they also facilitated the importing of European institutions of impersonal exchange to the Middle East. Starting with the requirement that evidence be supported by documentation, not merely oral testimony. While the possibility of differential evaluation of evidence (Muslims have a greater presumption of credibility in Islamic courts) undermined foreign confidence in Muslim courts, this was a constant factor. As European institutions developed, the divergence between them and Islamic courts grew, increasing pressure to block use of them in disputes with Europeans. This started with bans on kadis adjudicating on co-nationals. Then the right to have their cases of a set value (whose comparative value eroded over time due to inflation) heard before the highest tribunal. This was extended to their protégés, who could thus operate as intermediaries, interacting with Muslims in Muslim courts and foreigners under European laws (Pp228ff).

Court processes
Operating in a system of personal exchange, in closed communities dominated by dense webs of interaction where reputation mattered, Islamic courts overwhelmingly relied on oral testimony. As Europeans shifted to impersonal exchange supported by documentation their complaints against Islamic courts mounted. Even if corruption was not involved, assessing the reliability of witnesses in cities with large, floating foreign populations was difficult for a kadi. Rather than using the system of “mixed” tribunals, such as operated in medieval northern Europe, the capitulations instead imposed special procedures for dealing with foreigners (Pp236ff).

Oral testimony was used rather beyond Quranic injunctions (which requires documentation in cross-time transactions) not merely because scribes cost but because:
documentation carried the risk of transferring information to state officials prepared to grab resources wherever possible. Oral contracting kept financial information private except in the event of a dispute requiring litigation by a kadi (Pp247-8).
Documentation was normally required to be supported by credible oral witnesses: while this could be waived by invoking the necessity principle (darûra based on the Quran “Allah desires your well-being, not your discomfort) , it was the presumption Islamic law operated under (Pp246ff).

The legal process elements of the capitulations had a range of effects:
In shielding foreigners from undocumented claims, the capitulations lowered the cost of interregional exchange. In stimulating document use, they facilitated the introduction of organizations that pool the resources of strangers and enjoy legal standing, such as the incorporated banks established in the nineteenth century. They also extended the planning horizons of foreigners and enhanced the credibility of their long-term commitments (p.249).
Europeans operated in enclaves that adapted to European institutional advances while local institutions stagnated: advantages that encouraged minorities to share via legal protection. (Muslims were blocked via being obligated to use Islamic courts.) The capitulations contributed both to European commercial domination and the ascent of non-Muslim minorities. Rulers achieved increase trade, some of which they appropriated through taxes and fees, without having to tackle shifting Islamic law. Thus, they chose a different path to dealing with bias against foreigners and differences in legal systems than European rulers. The unintended consequence was the advantaging of non-Muslim minorities over Muslims (Pp249ff).

A further unintended consequence was the de-Islamization of commercial life:
foreign economic success gave Muslims an appreciation for institutions developed outside the realm of Islamic law. For example, they demonstrated the advantages of binding the tax-collecting hand of the state and of pooling savings within banks (p.252).
Eventually, this led to the creation of special commercial courts (a practice even in Saudi Arabia “whose economy is nominally under a divine and time-invariant law”). Interim attempts, such as creating “Europe merchants” (Avrupa tüccaris) for non-Muslims and “auspicious merchants” (hayriye tüccaris) who were given tax breaks and the right to have their disputes before the highest tribunals either failed, or had little success outside the Balkan and Anatolian hinterlands, because they did not give access to the organisational forms that European merchants and their protégés could use. Though a rising use of documentary evidence is evident in Istanbul courts from the C17th onwards. The Islamic Middle East did adapt, though with a considerable time lag (Pp249ff).

Unsupported merchants
European merchants ventured far more to places where they could find protection against local predation than those they could not. One of the striking absences of Islamic Middle Eastern history is the lack of organisational support for Middle Eastern merchants venturing to Europe. This is in contrast to the institutional support networks, based on officers who became known as ‘consuls’, that European merchants established in the Middle East. Attempts at founding Middle Eastern merchant colonies in Europe were few and generally short-lived. Notable exceptions were merchant enclaves in reconquered areas of Spain, the Turkish merchant enclave in Venice from the 1570s to 1838 and the Armenian commercial network based in New Julfa. Despite provisions for their merchants in Europe in the various capitulations, Middle Eastern rulers failed to provide organisational supports to Middle Eastern merchants in Europe. The only case of a Middle Eastern consul was a Venetian Greek appointed to serve Ottoman Greek merchants in Crete but without any special rights (Pp254ff).

After critiquing various received explanations (Pp260-3) Kuran points out the incumbency advantages the French trading networks in the Middle East (the first supported by an extensive treaty) possessed. As trading expanded, the advantages of incumbency eroded, leading to establishing of rival networks and supporting consuls (English, Dutch, etc). Except for the New Julfa Armenians, the Middle East lacked organised mercantile communities while the institutional stagnation of the Middle East meant that Middle Eastern merchants lacked the organisational basis for enduring commercial arrangements of the Europeans: such as trading under the same name indefinitely (Pp264ff).

European merchants had the crucial ability, and willingness, to organise collectively to protect their interests: Middle Eastern guilds were far more creatures of rulership. Within the Middle East, the vast web of waqf-funded protected caravanserais and Muslim rulers interested in promoting (and profiting from trade) kept private predation down while competition between rulers limited official predation. The commonality of Islamic law and the short tenures of kadis (which limited incentive to favour locals) encouraged accessible adjudication of disputes over long distances. None of these factors operated for Middle Eastern merchants in Europe. While, to the South and East of Islam, Islamic institutions provided trading advantages which led to expansion of local areas using Islamic law, creating incumbency advantages to Middle Eastern Muslim merchants (Pp271ff).

Europe’s varied laws and fragmented political authority gave European merchants far more incentive (and capacity) to organise. Conversely:
Although the Middle Eastern solution worked reasonably well in parts of the world with inferior commercial institutions, it was less well suited than the western solution to legally alien territories already equipped with efficient commercial institutions. Precisely because it was designed to counteract local judicial biases, the western approach provided the means for bargaining with rulers over extraterrestrial legal rights and privileges. When Venetian merchants negotiated collectively with Mamluks over legal protections, they did something to which they were already accustomed (p.274).
Muslim merchants lacked equivalent organisations, skills or outlooks.

Kuran argues that, as European commercial advantage (and trade) expanded, the incentive to invest in extra effort for Middle Eastern merchants in Europe weakened further: why bother when Europe came to you and the organisational gap was large and increasing? The European incumbency advantage increased, with any competitive pressure coming from other Europeans. The institutional blockages already identified produced very different capacities of merchants to organise, including to elicit the support of their own rulers (Pp275-6).

In conclusion
Having taken the reader on this analytical journey, Kuran draws it together in Part IV Conclusions which is a single chapter: Did Islam Inhibit Economic Development?. This is not a simple question, as Islam had many institutions that worked well. Indeed, there were few signs of any serious economic disadvantage until the C17th, however blindingly obvious such disadvantage may have become by the second half of the C19th. It is only by looking at what economists call relative and dynamic efficiency that this pattern can be understood (Pp279-80).

Islamic law carried Muslim commerce across Africa and Eurasia. Nevertheless, it also created commercial stagnation:
The partnership termination rule, like the lack of entity shielding, thus discouraged the formation of large and long-lived partnerships. … In allowing polygyny, Islam compounded the incentives to keep partnerships atomistic and ephemeral. …
The stagnation in size and longevity of Middle Eastern partnerships had dynamic consequences. Exchange remained largely personal, removing the need for transformations essential to the modern economy (p.281).
Such as standardised accounting, business press, incentives to trade in shares:
In sum, several self-enforcing elements of Islamic law—contracting provisions, inheritance system, marriage regulations—jointly contributed to the stagnation of the Middle East’s commercial infrastructure (p.281).
The increasing complexity commercial organisations in Europe underwent from the C10th to the C19th did not happen in Islam. For the reasons already explored in the analysis but very usefully summarised (Pp281-3).

Conversely, because Europe led the process of economic modernisation, it came to dominate global trade. A process which then, from the C18th onwards, lifted up non-Muslim minorities in the Middle East because they could choose non-Muslim law due to the capitulary process (Pp283-7).

Kuran divides the Islamic institutions into those present in Islam’s first few decades—inheritance system, acceptance of polygyny, the ban on ribã, absence of corporation, choice of law limited to non-Muslims, prohibition of apostasy, absence of merchant organisations—and those that developed mostly or entirely later—contract law, waqf, court system, capitulations. He provides a brief discussion of each of the former features, if and how it (eventually) blocked economic modernisation plus whether and how that has been overcome or bypassed (Pp287-92).

Kuran turns to the current scene, where the Middle East remains economically backward even though:
With the possible exception of the Islamic apostasy law, not one of the institutions that turned the Middle East into an economic laggard by delaying its organizational modernization remains an obstacle to economic development in the twenty-first century (p.293).
His answer involves various forms of path dependence covering missing complementary institutions, weak civil society and reactions to economic failures. The emigration of economically advanced minorities has been part of the problem. But so has the persistence of the apostasy ban (Pp293-7).

Islamism Kuran regards as mixed in consequences. It has contributed to political uncertainty but it has also attended to marginal groups and its attacks on modernisation are limited to:
a few pet issues: the immorality of interest and insurance, the unfairness of certain inequalities, the mixing of the sexes that accompanies tourism, and the destructiveness of unregulated advertising and consumerism (Pp297-8).
With division between Islamists on even these issues. But the Middle East would have to grow faster than Europe to catch up: in failing to do so, gaps that opened up centuries ago persist (Pp297-8).

The economic transformation of the West provides the Middle East with both great problems and great opportunities (since institutions can simply be imported). Kuran considers Islam and the capacity for change. He concludes that the evidence is that institutional change is eminently possible (Pp298-301).

Kuran concludes that substantial blockages still exist, including the notion that outsiders are responsible for the Middle East’s underdevelopment. Still, his final conclusion is that:
A predominantly Muslim society is not inherently incompatible, then, with an economy based on free competition, openness to borrowing and innovation, and a government eager to support, rather than stifle, private enterprise (p.302).
The economic success of, for example, Malaysia supports this contention.

Kuran’s fine study is immensely informative about the drivers of economic history, the interaction between law and economic development and the processes of institutional change. Profoundly informative on Middle Eastern it is hardly less so on European history. It is economic history at its best.

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