Why the Middle East Fell Behind

Post date: Feb 15, 2017 8:42:50 PM

One of the great questions in economic history – indeed, in all of economics – is “What Caused the Rise of the West?” The converse of that question is equally interesting: “Why Did X Fall Behind?,” where X could be China, India, or the Middle East (it is a little less interesting why sub-Saharan Africa or the pre-colonization Americas fell behind; here, Jared Diamond’s “geography hypothesis” laid out in Guns, Germs, and Steel is both fascinating and likely correct). One conventional answer to “Why Did X Fall Behind?” is that X never really fell behind; it was Europe and its offshoots that took off. And this to a large extent is true; while European economies grew at unprecedented rates in the 19th century, the Middle East, China, and India largely continued the trajectory that they had been on for millennia, with minimal rates of long run economic growth punctuated with sporadic bursts in per capita income. But this raises the question, “Why Didn’t X Pull Ahead like (northwestern) Europe Did?” Either way you slice it, it is an important question to answer.

Before digging into this question a little further, I want to address one issue: yes, the Middle East did in fact fall behind the West, and no, it has not come close to catching up. This seems like a straw man argument – most people with some knowledge of world affairs and/or history would not deny the basic premise that the Middle East fell behind Europe at some point in the last few centuries, if not before. I wish it were a straw man. And while I do not know of any serious academic works that make this point, I have been approached at enough conferences and over enough unnecessarily aggressive emails that I feel I need to get this out of the way at the beginning. Even with oil wealth – which is a one-time (though multi-generation) boon, there is nothing to suggest that the Middle East is close to the “West” in terms of any measures we generally associate with economic well-being.

Of course, it was not always this way. Under the height of the Abbasid Empire (eighth and ninth centuries), Middle Eastern economies dominated western Eurasia, if not the world. So, the question “Why Did the Middle East Fall Behind?” is no straw man. If we want to know why parts of the world pulled ahead, it is just as useful to know why other parts of the world that were once in a better position to pull ahead did not.

This post is not going to cover all of the reasons why the Middle East fell behind. There are a lot of reasons for the reversal of fortunes between (northwestern) Europe and the Middle East, most of which complement each other. I will discuss what I believe to be the two most important reasons: what I will call Timur Kuran’s “demand side” argument and my “supply side” argument (it is my post after all … of course I think the argument in my book is right!). I will also dismiss one argument which simply cannot account for the main historical facts: what I will call the “weak colonization” argument (as opposed to the “strong colonization” argument; I will define both terms below). I will refrain from discussing many alternative hypotheses which I do think shed some light on the divergence between northwestern Europe and the Middle East. For example, the relative political fractionalization and frequent interstate warfare that embroiled Europe for most of the medieval and early modern periods may have set it up to have greater fiscal capacity than the Middle East (or China). This makes sense to me, and it seems to be part of the explanation. Likewise, differences in family structures (nuclear vs. clan) may have encouraged different types of institutional formation in Europe and the Middle East (or China), with the more individualistic Europeans forming institutions more conducive to inter-group commerce than the more “collective” Middle Easterners. This too makes sense to me, and it was likely an important aspect of the divergence. The point here is that such a large scale event like the divergence between two sets of economies over centuries is almost certainly multi-causal. It is true that these causes all interacted with each other – sometimes as substitutes and other times as complements – and pinning down the direction of these interactions is an important part of the story. But that is indeed another story.

Let’s start by addressing the elephant in the “divergence debate” room: colonization. For the Middle East-Europe comparison, I think it is important to distinguish between what I call the “strong colonization” and “weak colonization” arguments. The “strong colonization” argument, in my view, states that Europe pulled ahead due to its plundering and enslaving various parts of the world (including, later on, the Middle East). A more nuanced version of this argument is found in Kenneth Pomeranz’s excellent The Great Divergence, where Pomeranz argues that the New World gave Europe new markets and raw materials while relieving population pressures. I call this set of hypotheses “strong colonization” because they try to explain why Europe pulled ahead in general – they are not specific to the Middle East. There is a very heated debate on the veracity of the “strong colonization” argument, and it is not one I plan on entering into here.

What I do want to address is what I call the “weak colonization” hypothesis. This is, namely, that European colonization of the Middle East is responsible for the relative economic stagnation of the region. The most common trope among those putting forth this argument is that the carving up of the Middle East under the Sykes-Picot Agreement of 1916 – without regard to tribal, ethnic, or religious identities – set the stage for internal conflicts from which the region has yet to escape. I think this hypothesis is ridiculous. This is not to say that Europeans colonized with the best of intentions or that colonization was even a mixed blessing. Nor is it to deny the fact that the political fallout in the post-colonial Middle East – namely, dictators and princes buoyed with oil money ruling with little regard for the bulk of the population – is a result, either directly or indirectly, of colonization (although Noah Feldman’s The Rise and the Fall of the Islamic State provides an interesting counterpoint, pushing the blame back to the decline of religious authority in the late Ottoman period, as the religious elite were best positioned to check rulers’ powers). The simple point is that the timing does not work. The West was already well ahead of the Middle East by almost any conceivable metric well before it colonized the Middle East. Unlike colonization of the Americas or parts of south and southeast Asia, European colonization of the Middle East commenced well after industrialization and well after a large divergence emerged in wages, capital accumulation, fiscal capacity, military might, technology, science, and so on. So it may certainly correct to say that European colonization of the Middle East exacerbated the divergence (and I buy that this is the case, particularly for the latter half of the 20th century), but it is inconceivable that it was the root cause.

Now let’s turn to the two arguments I like the best for why the Middle East fell behind. Both of these arguments satisfy one key criterion: they explain both why the Middle East pulled ahead for centuries following the spread of Islam and why it ultimately stagnated. The first of these arguments is what I call the “demand side” argument made by Timur Kuran is a series of articles and his stellar book, The Long Divergence. The second is my own “supply side” argument, first made here, and expanded significantly upon in my forthcoming book, Rulers, Religion, and Riches (out in two weeks!). I call these “demand-” and “supply-” side arguments because Kuran’s primary focus is on the demand for change in Islamic law (or lack thereof), and my focus is primarily on the supply of change in law and institutions. We both of course consider the other side (equilibria require understanding both demand and supply-side forces, after all), but our focus is different. I think our two theories complement each other nicely, and combined paint a compelling story for why (in part) the Middle East fell behind.

Let’s start with Kuran’s demand-side hypothesis. Kuran argues that numerous economic aspects of Islamic law served the pre-modern economy well. Among the most important he cites are a relatively egalitarian inheritance law (at least women got something!), simple partnership law (that reflected the simplicity of 7th-century partnerships), and waqf law which facilitated the provision of public goods in perpetuity. These laws were “cutting edge” when first formulated in the 7th-9th centuries and flexibly accommodated the most advanced business practices of the time. Certainly, they were better than anything that was known in the pre-Islamic Middle East or early medieval Western Europe, which was suffering from a long political and economic decline following the fall of the Roman Empire. However, these once cutting edge Islamic laws remained intact long after the conditions under which they were a best response had past. The best example Kuran points to is the lack of the corporation in the Middle East – or any other type of organizational form which incentivizes people to pool their money/capital together for a large enterprise. Kuran argues convincingly that Middle Eastern partnerships remained small and simple well into the early modern (and perhaps even modern) period, well after large enterprises in Europe such as joint-stock companies, and eventually the corporation, permitted the agglomeration of capital beyond what would have been possible without a legal and organizational structure incentivizing the pooling of funds (such as limited liability). Given its head start, why did Middle Eastern partnerships remain simple (i.e., between 2-3 persons for a limited time horizon)? Kuran argues convincingly that the interaction between various types of Islamic laws diminished the demand for more advanced organizational forms, and hence all of the other advancements that come with it, like double-entry bookkeeping. A simple example suffices to explain Kuran’s logic. Imagine a merchant that knows of a big opportunity to trade in a faraway land. He could certainly make much more by pooling capital with many other merchants. But this would be risky because of the interaction of Islamic partnership law, which dictated that partnerships were dissolved at the death of one member, and inheritance law, which split the proceeds of inheritance among many heirs according to a pre-determined formula. Hence, if some of a partner’s heirs decided they needed their inheritance immediately upon that partner's death, the partnership might have to be disbanded, especially if most of the capital was tied up in the goods being traded (as one would expect). One way to avoid this was to avoid taking on many partners (thereby decreasing the probability one partner would die) and keeping the duration of partnerships to one or two voyages.

Kuran’s argument is a demand side one. Because of the constraints placed by Islamic law, Islamic merchants, money-changers, and other commercial elite had little incentive to demand vastly new techniques, or even to adopt more advanced techniques they eventually saw in dealings with Europeans. This lack of demand for change also entailed that none of those other changes associated with a dynamic economy ever occurred – such as more advanced financial instruments, the growth of larger institutions such as banks, or the emergence of a culture more conducive to large-scale borrowing and lending. But even if there were little demand for such changes, there must have been some demand for changes in laws that would have facilitated trade, protected property rights, provided impartial jurisprudence, and all of the other hallmarks of modern states. And such changes could have been beneficial for rulers; they would have expanded the tax base, and the economic elite would have likely been glad to pay those taxes in return for greater legal flexibility and protection of rights. So why did Middle Eastern rulers rarely augment laws in favor of the economic elite in the medieval and early modern periods? In other words, why did the supply of laws pertaining to commerce also remain relatively stagnant after the 10th century or so?

The answer has little to do with the inviolability of Islamic law. Middle Eastern rulers found ways around all sorts of laws, and they often found religious authorities willing to sanction their actions (Ottoman rulers were particularly famous for this). Instead, the answer I propose in my book is that rulers have desires beyond simply increasing tax revenue; above all, they want to stay in power. And, for reasons I delve into in my book, religious legitimacy was a particularly effective way of staying in power in the Islamic Middle East, especially for a ruler who might want to take actions that would otherwise be considered “unIslamic” (such as conquering another Muslim empire). One way to think about this is as a bargaining game: rulers bargain with the players in society that may be able to keep them in power (e.g., religious elite provide legitimacy, military elite provide coercion, economic elite provide revenue, etc.) and the outcome of the bargain is laws and policies. These laws and policies end up reflecting the bargaining power of the relevant players as well as their desires. Since religious legitimacy was particularly effective in the Islamic Middle East, the bargaining power of religious authorities was particularly strong. This actually served Middle Eastern economies well in the centuries following the spread of Islam. Many types of economic transactions fell under the purview of Islamic law, including laws pertaining to contracts, partnerships, and interest. As the religious establishment consolidated in the 8th and 9th centuries, a relatively uniform set of laws emerged under the banner of Islam (in addition to a uniform set of languages and currencies). This occurred over a wide expanse, and as a result the transaction costs associated with conducting trade dropped immensely. In turn, Middle Eastern economies prospered for centuries following the spread of Islam.

Yet, the arrangement where Middle Eastern rulers relied heavily on the religious elite for legitimacy also meant that they were hesitant to take actions that would undermine the religious establishment. This included intruding on the religious establishment’s authority over commercial law. So long as Islam remained a powerful source of legitimacy, the benefits to employing religious legitimacy outweighed its relatively modest costs (i.e., ceding authority over certain aspects of the law) to such a degree that Middle Eastern rulers did not feel the need to bring the economic elite to the bargaining table. Indeed, merchants, money-changers, and others engaged in large scale commerce rarely had political power in the Islamic Middle East. This is certainly true of the Ottoman Empire, where military elites, religious authorities, and local notables were the primary power brokers. One important ramification of this power structure is that the interests of the religious elite were often enacted into law. While their interests were not always antithetical to economic development, they were not necessarily favorable to development either. Importantly, the religious elite strongly desired to maintain purview of Islamic law over as wide a spectrum of life as rulers would permit. Middle Eastern rulers tended to not want Islamic law to dictate taxation, politics, or military activities – all important arenas to rulers who wished to rule effectively, but where their desires often conflicted with religious law. Yet, in return for public legitimizing displays, rulers were generally willing to cede to religious authorities purview over the realms of morality and commerce. Purview over morality and commerce was an immense source of power for the religious elite – indeed, it is an important part of what made them “elite” in the first place. So this arrangement worked for both parties: rulers received a relatively cheap source of legitimacy, and religious authorities received an important source of power and income. The losers in this deal were the economic elite, who found it fruitless to challenge Islamic laws pertaining to commerce. They instead generally focused on finding workarounds to the existing set of laws. Why should they challenge the religious elite, when the ruler was unlikely to support their challenge? And without such a challenge, why would the religious elite modify the laws, when the “eternalness” of religious law is one of their primary sources of authority? In the absence of such challenges, the supply of laws tends to stagnate. Over time, this feeds into Kuran’s argument regarding the stagnation in the demand for changes to Islamic law. If religious and political elites are unlikely to change the law, there is little reason for the economic elite to push for change. Instead, they simply view the laws as constraints, and act as a manner suggested by Kuran’s analysis (e.g., they kept partnerships simple and short in the face of Islamic partnership and inheritance law). The interaction between the demand and supply for changes in laws can therefore explain why Middle Eastern laws and institutions stagnated for centuries despite a changing world. The fact that (northwestern) European institutions ended up being more flexible – for reasons completely consistent with my and Kuran’s arguments – meant that in the long run, the region (Europe) that was once an economic laggard ultimately far surpassed the region that was once far ahead (the Middle East).

The question “Why Did the Middle East Fall Behind?” is a big one. What I have tried to argue here is that it is impossible to answer without a framework for thinking through the determinants of long-run economic development, and it is difficult to provide such a framework without considering the role of politics. On the supply side (of political institutions, laws, and policies), there is little incentive to change if the status quo benefits those in charge. On the demand side, if those people affected by the laws and policies see pushes for change as fruitless, and they are able to find workarounds in any case, demand for change will be low. This has (negative) dynamic consequences. All of those “institutional elements” that are key to the proper working of institutions, but might not be obvious until one has experience living with the institution, will be lacking. In the long run, therefore, what might start as small differences can build on themselves and snowball into much larger differences. Understanding how and why this happens is key to understanding why the Middle East fell behind (although I do not wish to go as far as to say that it sheds significant light on how the Middle East, or other economies, can catch – this is a story for another day).