Monday, September 12, 2011
Is Islam Compatible With Capitalism?
This article actually answers the question of the Islamic future and makes recent events clear. Set aside the Islamicist rhetoric and we have backward societies struggling to modernize against the classic resistance of what we call the rent seekers who suppress the entrepreneur.
That has now been decisively overcome in
and the consequence is that it has given the Arab street a clear achievable objective. The Arab spring is about the establishment of
a rule of law and some semblance of equality under that law. Turkey
Radical Islamicism is also clearly losing its audience while attention is redirected to economic development throughout the Arab world. I think we can be nervously optimistic about it all. The multistate framework will allow some states to now surge ahead and this will trigger competitive reforms in lagging states as happened in south
Is Islam compatible with capitalism?
The Middle East's future depends on the reply, which in part has been answered by the experience of Turkey
By Guy Sorman, City Journal September 9, 2011
The development of crony capitalism in many
East countries has long been a drag on their economies.
Photograph by: McClatchy Newspapers, City Journal
The moment you arrive at the airport in
you discover how little
- the heart of Arab civilization - is governed by the rule of law. You line up
to show your passport to the customs officer; you wait and wait and wait.
Eventually, you reach the officer ... who sends you to the opposite end of the
airport to buy an entry visa. The visa costs US$15; if you hand the clerk $20,
though, don't expect any change, let alone a receipt. Then you make the long
hike back to the customs line, where you notice that some Egyptians - important
ones, apparently - have helpers who hustle them through. Others cut to the
front. It's an annoying and disturbing welcome to a chaotic land, one that has
grown only more chaotic since the January revolution. It's also instructive,
effectively demonstrating why it's hard to do business in this country or in
other Arab Muslim lands, where personal status so often trumps fair,
universally applied rules. Such personalization of the law is incompatible with
a truly free-market or modern society and helps explain why the Arab world's
per-capita income is one-tenth Egypt America's
The airport experience, had he been able to undergo it, would have been drearily familiar to Rifaa al-Tahtawi, a brilliant young imam sent to
France in 1829 by the pasha of . His
mission: figure out how Napoleon's military had so easily crushed Egypt three
decades earlier, a defeat that revealed to a shocked Arab world that it was now
an economic, military, and scientific laggard. At the outset of the book that
he wrote about his journey, The Gold of Egypt ,
Rifaa describes a Marseille café: "How astonished I was that in Marseille,
a waiter came to me and asked for my order without my looking for him."
Then the coffee arrives without delay. Finally - most amazing of all - Rifaa
gets the bill for it, and the price is the same as the one listed on the menu:
"No haggling," he enthuses. Rifaa concludes: "I look for the day
when the Paris
cafés will follow the same predictable rules as the Marseille cafés." But
nearly two centuries later, the only Egyptian cafés that live up to Rifaa's
hopes are the imported Starbucks. Cairo
CAN ECONOMIES CHANGE?
Egypt is, of course, a Muslim nation. Should Islam be indicted for what was in Rifaa's time, and remains today, a dysfunctional economy? The question becomes all the more important if you extend it to the rest of the Arab
Middle East as it is swept by popular revolts against
authoritarian rule. Will the nations that emerge from the Arab Spring embrace
the rule of law and other crucial institutions that have allowed capitalism to
flourish in the West? Or are Islam and economic progress fundamentally at odds?
Muslim economies haven't always been low achievers. In his seminal work The World Economy, economist Angus Maddison showed that until the 12th century, per-capita income was much higher in the Muslim Middle East than in
Europe. Beginning in the 12th century, though, what Duke University
economist Timur Kuran calls the Long Divergence began, upending this economic hierarchy,
so that by Rifaa's time, Europe had grown far
more powerful and prosperous than the Arab Muslim world.
A key factor in the divergence was Italian city-states' invention of capitalism - a development that rested on certain cultural prerequisites,
's Avner Greif observes. In
the early 12th century, two groups of merchants dominated Mediterranean Sea
trade: the European Genoans and the Cairo-based Maghrebis, who were Jewish but,
coming originally from Stanford University Baghdad, shared the
cultural norms of the Arab Middle East. The
Genoans outpaced the Maghrebis and eventually won the competition, Greif
argues, because they invented various corporate institutions that formed the
core of capitalism, including banks, bills of exchange, and joint-stock
companies, which allowed them to accumulate enough capital to launch riskier
but more profitable ventures. These institutions, in Greif's account, were an
outgrowth of the Genoans' western culture, in which people were bound not just
by blood but also by contracts, including the fundamental contract of marriage.
The Maghrebis' Arab values, by contrast, meant undertaking nothing outside the
family and tribe, which limited commercial expeditions' resources and hence
The bonds of blood couldn't compete with fair, reliable institutions.
Greif's theory suggests that cultural differences explain economic development better than religious beliefs do. Indeed, from a strictly religious perspective, one could view Muslims as having an advantage at creating wealth. After all, Islam is the only religion founded by a trader - one who also, by the way, married a wealthy merchant. The Koran has only good words for successful businessmen. Entrepreneurs must pay a 2.5 per cent tax, the zakat, to the community to support the general welfare, but otherwise can make money guilt-free. Private property is sacred, according to the Koran. All this, needless to say, contrasts with the traditional Christian attitude toward wealth, which puts the poor on the fast track to heaven and looks down in particular on merchants (recall Jesus's driving them from the Temple).
But Duke's Kuran believes that Islam did play a role in the Long Divergence. It wasn't the Koran, which the Muslim faithful see as written by God and unalterable, that impeded Muslims economically, he argues, but instead Shariah, the religious law developed by scholars after Mohammed's time. Not that Shariah was overtly hostile to economic progress; it established commerce-friendly legal rules that, for instance, allowed for bazaars and for the arbitration of economic disputes. Rather, Kuran maintains, Shariah became economically counterproductive because it was less efficient than the western legal framework.
JOINT-STOCK FIRMS PROHIBITED
The most significant of the Shariahrooted economic liabilities was the Islamic partnership, which proved no match for the western world's jointstock company. Partnerships were short-lived, dissolving with the death of any of the partners, and they tended to be small, often formed among family members. Joint-stock companies, which Shariah prohibited, had much greater reach and risk-hedging power. Shariah inheritance rules were a second drag on economic development, Kuran explains. Since the Koran sanctions polygamy, Shariah required a husband's wealth, upon his death, to go in equal portions to his widows and children, which worked against capital accumulation. In Roman law that held sway in
Europe until the 19th
century, by contrast, the eldest son inherited his deceased father's wealth,
creating vast fortunes that could be put to economic work. Some economists
point to Shariah's prohibition of interest as another hamper on development,
but this is much less significant than it appears. From at least the 12th
century on, Shariah lawyers authorized "fees" that could accompany
moneylending, getting around the ban.
Muslim welfare foundations to aid the poor, called waqf, also undermined economic competitiveness over time, says Kuran. According to Shariah, all money given to these charities was exempt from taxation. But Muslim merchants began to establish waqf as fronts for commercial enterprises, depriving the government of sufficient funds to function properly. This tax evasion contributed to the failure of the Arab kingdoms and the
Ottoman Empire to build a competent minimal state, which
is essential to the effective rule of law.
For evidence that Shariah had negative economic effects, consider the Egyptian city of
Beginning in the 15th century, non-Muslim merchants in the city could opt out
of Shariah's business rules. Those who did and embraced western capitalist
norms quickly grew richer than those who continued to follow Shariah. Alexandria
Over time, however, Shariah adapted to capitalism. In the 19th century, it finally allowed Muslims to form jointstock companies and to borrow other key capitalist institutions from the West. Today, Islamic banks follow the same practices that non-Islamic banks do (including the use of derivatives) but describe them differently, so that they conform with Shariah. Yet despite this transformation in Islamic law, Muslim economies still lag behind western ones. Greif and Kuran may help explain the Long Divergence, but what accounts for the fact that there is no "Arab Tiger" comparable with
remarkable success stories?
Part of the answer may, in fact, be religious: Islam's apostasy law. Shariah holds that a Muslim who breaks with Islam becomes an apostate, an offence punishable by death.
But a bigger reason for the Arab world's stagnation is political. In nearly every Arab Muslim country, the prime enemy of entrepreneurship and the free market is an abusive government. All emerged from the decolonization struggles of the 1950s and 1960s, which, since the primary colonizers were Europeans, provoked angry anti-western and anticapitalist attitudes in Muslim societies. Violent confrontations were the norm, even when full-blown war didn't break out, as happened in
. The upheavals brought
military regimes to power in most of the decolonized Arab states; even when the
military wasn't officially in charge, it controlled puppet governments, as in Algeria . All
these regimes espoused nationalism and resisted any rule of law that might
limit state power - or give entrepreneurs a freer hand. Morocco
Worse, independence took place at a time when the
Union was influential and many believed that centrally planned
socialism was a shortcut to power and prosperity. Arab governments thus found
it tempting to confiscate private property, eradicate the existing bourgeoisie,
and create massive state monopolies in resources like copper, oil and
ARAB CRONY CAPITALISM
After the fall of the
showed communism to be far less efficient than the free market, Arab Muslim
governments began to free up markets somewhat, but without surrendering their
tyrannical authority. This resulted in an Arab crony capitalism, which is now
the dominant economic arrangement in the Muslim Middle
East. In today's pseudo-market Arab economies, it makes little
sense to be an independent entrepreneur. If you want to open a business, you'll
need a licence, and the only surefire way to obtain it is to belong to (or be
close to) someone in the ruling elite; even then, you'll share your profits
with the bureaucrats. It's far easier to seek a rent - a benefit based on your
position in society. Rent-seeking is particularly prevalent in countries
overflowing with natural resources like oil and gas, which bring in massive
revenues that reduce the incentive to diversify the economy.
The authoritarian nature of today's Muslim governments also generates social norms that harm entrepreneurship. For example, a survey conducted by the Casablanca-based business magazine L'Economiste compared the organizational structures of Moroccan firms with those of western companies operating in
found the boss of a Moroccan firm tends to have a larger office and more
assistants, secretaries, and chauffeurs than his western counterpart does and
his behaviour is more autocratic. The reason is the Moroccan boss, mimicking
the king, finds power - and the exhibition of power - more compelling than
The prosperity-crushing influence of government on Muslim entrepreneurship has nowhere been more evident than in
. In the
early 19th century, the Turkish sultan, like the Egyptian pasha, tried to
import western science and military methods without introducing western rule of
When the empire became the
in 1921, little
changed. The republic's founder, Mustafa Kemal (later called Atatürk, a name he
chose that means Father of the Turks), was fascinated by the fashionable
Italian fascist ideal. The Turks lacked entrepreneurial spirit, he believed, so
it was up to the government to act as a collective entrepreneur and pick those
who deserved to start new businesses. Under his regime, which became a military
dictatorship after his 1938 death, the Turkish economy made little progress,
though a group of well-connected businessmen grew extremely wealthy. Turkish
Islam wasn't to blame for
's poor economy. Indeed, the
new republic was fiercely secular; for decades, no openly devout Muslim could
hold any significant position in public service, the military, or even in
business. Modern Turkey started to grow economically only after it began to
free up the market under former World Bank economist Turgut Özal, a devout
Muslim whom the military had installed as prime minister in 1983 to bring
inflation under control. Özal's reforms opened the way for the openly Islamic,
pro-market Justice and Development Party, or AKP, which has ruled Turkey since
2002. Whatever criticisms one might make of the AKP, it has brought about an
astounding transformation of Turkey 's
economy. The state's budget is balanced, prices are stable, free trade is
embraced, and crony capitalism has been constrained. As a consequence, Turkish
growth has been one of the world's highest: eight per cent annually for several
years. Turkey Turkey's
per-capita income is now higher than Saudi Arabia's
has no oil. Turkey
Fuelling this economic expansion is a new generation of entrepreneurs from Anatolia, in eastern
These business people are conservative Muslims, but they aren't extremists. Ask
an Anatolian entrepreneur about this success and he may credit a strong work
ethic, combined with family values ingrained in the Muslim faith. Or he may
mention the business traditions of Anatolia, a crossroads between Asia and
Europe under the Turkey Ottoman Empire.
Turkey now exports 25 per cent of its national production, up from three per cent in 1980. Whatever the reason for the Anatolian breakthrough, Islam has not impeded it.
Will the Turkish model spread to nearby Arab countries? This year's revolutions in
Tunisia and may
answer that question. Remember the man who inspired the revolutions: Mohammed
Bouazizi, a young Tunisian who earned a university degree but could find no
decent formal employment, a situation all too common for educated young Arabs.
Bouazizi sought to make a living from a tiny fruit-andvegetable stand, but last
December, because he hadn't registered it with the authorities, police
confiscated it. Bouazizi then set himself on fire. Egypt
Bouazizi's suicide brought millions of Arabs to the streets because they could identify with him. Human rights leaders didn't start the revolutions; neither did long-banned Islamic movements like the Muslim Brotherhood. No, the dominant message of the Arab Spring was that the Arabs didn't want to remain separated from the rest of the world.
The transition from the Arab world's authoritarian regimes to democracy, markets, and the rule of law is far from guaranteed, of course. For a reminder of the difficulty of installing successful western-style capitalism, consider Rifaa, who returned to
after seven years in
and became the pasha's main adviser - overseeing the translation of French
scientific books into Arabic, founding the first Arabic newspapers, and opening
schools for girls. Though Rifaa faced the hostility of Muslim conservatives,
his reforms, accompanying the era's shifts in Shariah, inaugurated an era of
modernization in France . Egypt
By the late 19th century,
was starting to look like a European city, with electricity, sanitation,
universities, and an independent press. But the renaissance didn't last long,
because Rifaa repeatedly failed to persuade the pasha to accept a
western-style constitution, which would have limited the ruler's arbitrary
power. What kept Cairo
back was its failure to establish the rule-governed institutions familiar in the
Guy Sorman, a City Journal contributing editor, is the author of Children of Rifaa: In Search of a Moderate Islam and many other books.
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