Now Middle East is widely considered an economic laggard, and a plethora of statistics support this consensus. More than half of its firms consider their limited access to electricity, telecommunications, or transport a major obstacle to their business, as against less than a quarter of those in Europe. In the region, life expectancy is 8.5 years shorter than in high-income countries, consisting mainly of North America, western Europe, and parts of East Asia. Its per capita income equals 28 percent of the average for high-income countries. Only three-quarters of the adults in the region are literate, as compared with near-complete literacy in advanced countries (table). This is brought out in The Long Divergence : How Islamic Law Held back the Middle East, by Professor Timur Kuran, in the book published by Princeton University, USA in 2011. The following write up is based on the above volume.

TABLE
Comparative Indicators of Economic Performance (2007) 

Measured as a ratio, in the early twenty-first century the per capita income gap between the West and the Middle East remains what it was a century before. The Middle East fell behind the West because it was late in adopting key institutions of the modern economy. These include : laws, regulations, and organizational forms that enabled economic activities now taken for granted in all but the most impoverished parts of the globe. The mobilization of productive resources on a huge scale within long-lasting private enterprises and the provision of social services through durable entities capable of transformation were essential parts of the process of modernization. Most of the now-advanced countries had developed institutions essential to the mass mobilization of savings, the lengthening of individual planning horizons, and the exploitation of new technologies through structurally complex organizations. Therein lies a key reason why the Middle East fell behind in living standards and why it succumbed to foreign domination. As the institutional complex of the West gave rise to progressively more advanced commercial and financial institutions, that of the Middle East produced organizational stagnation within those sectors beyond direct state control. The institutions under which Middle Easterners borrowed, invested, and produced did not spawn more advanced institutions; they did not galvanize structural transformations that enabled those functions to be performed more efficiently, over longer time spans, or on a larger scale. In failing to generate major organizational innovations from within, the Middle Eastern institutional complex also hindered opportunities to benefit from innovations produced elsewhere. The term Middle East itself is subject to many definitions. Professor Kuran has used it in an elastic sense to include the entire Arab world and Iran, but also Turkey, along with the Balkan peninsula, which Turks ruled during a period when key Islamic institution remained stagnant.

Islamic Institutions and Their Mutability

Institutions : Institution is another slippery concept that requires definition. By institution he means a system of socially produced regularities that shape, and are in turn shaped by individual behavior. An institution of great importance to Middle Eastern daily life was the holy law of Islam (shariea), also known as Islamic law. In principle, Islamic law covered all human activity. In the political discourse of the Ottoman Empire (1299 AD-1922 AD) there was even a category of laws 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.

Commerce and Finance :

The two areas in which the Middle East fell conspicuously behind, right up to modern times were : People entered into contracts that followed an Islamic template and were 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 law suits involving at least one Muslim were litigated by Muslim judges, under Islamic legal principles. Cracking our puzzle thus requires close attention to the practical consequences of Islamic law. With respect to economic institutions, the eighth and ninth centuries saw the emergence of an Islamic law to govern the trusts known as waqfs as well as the refinement of the Islamic law of partnership. Successful imitation of foreigners required the transplantation of alien institutions, such as stock markets, municipalities, and laws supportive of large companies capable of outliving their founders.

Evidence of Institutional Underdevelopment

Whereas commercial partnerships formed under Islamic law typically involved a few partners who pooled resources for short-lived ventures, westerners were forming indefinitely lasting enterprises with tens, hundreds, and even thousands of shareholders. In traditional Middle Eastern credit markets, suppliers typically were individuals capable of making small loans. Westerners had access to commercial banks that could channel capital mobilized from the masses into large-scale productive ventures. No stock markets existed for trading shares of indigenous Middle Eastern companies, which tended to be ephemeral. Stock markets were gaining prominence in the West, where investors in long-living enterprises liquidated shares at will.

Supply of Social services :

The supply of urban social services offers another contrast. In the Middle East, the traditional provider was the waqf. In the face of breathtaking technological advances, this form of trust proved inadequate as a vehicle for keeping services up to date. The municipality, a standard instrument of local governance in western Europe, was better suited to the rapidly changing needs of cities. Institutions borrowed from the West were used also to limit western influences, preserve old customs, and even invent new traditions. 

Islamic bank :

From a historical perspective the concept of an "Islamic bank" is a contradiction in terms. An Islamic bank operates on a scale far larger than any private enterprise the Middle east knew before the nineteenth century. It is a corporation, an organizational form alien to Islamic law. Islamic banking thus constitutes an "invented tradition." Its architects have used western institutional models not to make Muslim economic life more "western" but, rather, to encourage saving, investing, borrowing, and lending in ways at least cosmetically "Islamic." Their shared goal was to replicate specific western achievements, not to appropriate western culture indiscriminately. 

Modern Economic Growth :

By the mid-nineteenth century, which marks the initiation of major reforms, the world had entered a new economic epoch, that of modern economic growth. Its chief characteristic is self-sustaining economic expansion at an unprecedented rate; although contractions can occur, they amount to temporary reversals along an upward path. If this is granted, it is simply a matter of record that until well after 1750 A.D., considered the start of modern economic growth, the Middle East lacked the organizational forms and techniques.

Other Sources of Underdevelopment

Freedom and human knowledge deficits : The first Arab Human Development Report, issued in 2002 by a commission composed entirely of Arab thinkers, points to a "Freedom deficit" and a "human capabilities/knowledge deficit" as two characteristics of the Arab world today. The former deficit refers mainly to governance patterns inimical to civil and political freedom and the latter to low educational attainment, access to information, and intellectual creativity. The Middle East had become a technological laggard, its states discouraged investment, its inhabitants were poorly educated, and its intellectual life lacked vigor. 

Technology and Organizational Capacity : In the nineteenth century the Middle East was a laggard on both counts. It lacked the know-how essential for mass production as surely as it lacked a law of corporations. England, Germany, and France had both, which enabled their entrepreneurs to form huge companies capable of exploiting new technologies. Hence, Middle Eastern entrepreneurs had trouble competing in the global economy because of both technological and organizational stagnation. The absence of markets for trading company shares posed a more intractable obstacle to the Middle East's economic advancement than its delays in mechanizing. 

Private Organizational Development versus Evolution of the State 

For institutions of governance are no easier to transplant than those of commerce or civil society. Witness the Arab Middle East's persistently low international rankings relating to civil rights, government effectiveness, and rule of law, in spite of political reforms over the past century (table ). 

TABLE

Comparative Indicators of Political Performance (2008-2009)

It is in turning our gaze to segments of the social system beyond direct state control that stagnant practices become salient. Insofar as inertia explains the Middle East's failure to keep up with western Europe, it is private economic life, not public administration, that calls for primary attention. To put it in terms of the tripartite legal categorization familiar to historians, religious law and customary law merit analytic priority over ruler's law. 

Interactions with Other Regions : In discourses on why the Middle East became underdeveloped, a commonly articulated explanation points the finger at outsiders. The machinations of Europeans, the author says, turned the region into a "dependent," "plundered," and "self-doubting" part of the world. Still, interpretations that attribute the region's underdevelopment to foreign meddling miss vital ingredients of the historical record. 

Understanding the factors responsible for the West's dynamism will help to isolate obstacles to self-generated development in the Middle East. They will elucidate also why Islamic institutions well adapted to medieval conditions seemed impoverished a millennium later. The heart of the agenda is to examine the dynamics of private economic organization in the premodern Middle East. Why critical transformations failed to occur is the question we seek to answer. Where the particulars involve religion, it is to religion that the argument must lead.

Unintended Secondary Consequences Of early Islamic Institutions

The Islamic inheritance system spread wealth by providing mandatory inheritance shares to all sons and daughters, and Islamic polygamy had the same effect by enabling the wealthiest merchants to have unusually numerous heirs. What could scarcely have been understood in the early Islamic centuries is that, in the face of outside developments, these institutions would eventually incapacitate Muslim merchants in their dealings with the West, in world markets, and even at partnership.

Madrasas : Over time the curriculum changed less in madrasas than in universities, helping to turn the Middle East into an intellectual backwater. Although many factors contributed to the region's lack of intellectual prominence after several bright centuries under Islamic rule, a basic cause lies in the waqf's organizational limitations. Madrasas and universities were both non-profit organizations. The waqf became Islam's main organizational form for providing social services at a time when western Europe deployed the corporation for many the same ends. The organizational gap widened in the late sixteenth century, when the West began applying the corporate form of organization to profit-oriented production, finance, and commerce. In contrast, the universities of Paris and Oxford initially set up as trusts, in the 12th and 13th centuries had become self governing and selfrenewing in due course.

Inheritance System : Islam's relatively egalitarian inheritance system raised the costs of liquidating a partnership prematurely, thereby limiting the size and duration of partnerships, fragmenting the estates of successful merchants, and hindering the preservation of businesses across generations. The dynamic consequences are critical here. Members of small and short-lived partnerships felt no urge to develop sophisticated accounting methods or to obtain greater liquidity through tradability. An unintended consequence of such stagnation is that the business community could not even contemplate using an organizational form akin to the corporation.

If the structural stagnation of commercial partnerships constituted one reason for the dearth of organizational innovation in general, another was that successful merchants, tended to convert their wealth into real estate, for reconversion into the corpus of a waqf. They did so for the very reason why founding waqfs gained enormous popularity among high officials: the weakness of private property rights. Like other wealthy groups, prosperous merchants sheltered wealth within waqfs.

Why the Middle East-entered the nineteenth century as an underdeveloped region? The critical deficiencies were :

-frozen waqf assets, atomistic financial markets, courts unsuited to impersonal exchange-none comprehended how such features were mutually reinforcing, or how they were blocking transformations essential to global competitiveness. Through waqfs, residents benefited from subsidized social services. Economic disputes were settled informally through arbitration or formally through courts that rendered judgments quickly. Islamic law, was not considered harmful to economic progress. By the same token, the reasons why the Middle East fell behind would have remained a mystery, To explain the lag in the region's modernization, and Islam's role in this delay, we have had to focus on aspects of the Middle East's organizational heritage that turned into weaknesses gradually, through transformations elsewhere. 

An Islamic partnership lacked entity shielding, in that any member could force its dissolution unilaterally, and its assets were exposed to demands from third parties. The death of partner terminated the partnership automatically, giving his heirs an immediate claim on a share of the assets; all surviving members incurred costs. The number of heirs could be large, because Islam's inheritance law assigns mandatory shares to designated relatives of the decedent. The partnership termination rule, like the lack of entity shielding, thus discouraged the formation of large and long-lived partnerships. Merchants and investors would form small and short-lived partnerships in order to lesson the risks of untimely dissolution. In allowing polygyny, Islam compounded the incentives to keep partnerships atomistic and ephemeral. This is because merchants with multiple wives tended to have more heirs. Rarely did the business empires of the most successful merchants survive them, because their estates got divided into too many pieces to make recombination practical. Incentives to trade shares were dampened. 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. (Table)

TABLE

Islamic Institutions that Helped to Delay Economic Modernization

The Islamic inheritance system delayed organizational modernization only because, with the corporation precluded, the partnership remained the only possible starting point for developing durable and large commercial organizations.

The third of the seven problematic institutions present from the beginning, the ban on riba, was a steady irritant to suppliers and users of credit. By requiring the use of stratagems, it raised credit costs. Although Islamic banks ostensibly do only interest-free business, in reality they give and take interest through means resembling the stratagems used in medieval financial markets.

That the Islamic legal system emerged without a concept of corporation contributed to keeping Middle Eastern businesses atomistic. The final problematic pattern that was present at the birth of Islam is the absence of merchant organizations serving them in foreign lands.

The choice of law, might have benefited the region by making courts compete for clients. In fact, in restricting Muslim options, allowing Islamic law to trump the legal systems of non-Muslims, and permitting anyone to sue in Islamic court at will, it depressed the competition faced by Islamic courts.

Both the Quran and the remembered sayings of Prophet Muhammad contain references to apostasy as a religious offense. On the basis of these references, Muslim jurists of the seventh century declared apostasy punishable by death. The severity of this punishment doubtless contributed to the outcomes of Islamic legal pluralism.

To recapitulate, the question whether Islam's original institutions are compatible with modern economic life admits no categorical answer. Along with traditional institutions that are incompatible with economic success in the modern world, there are those that pose no significant problems. The Islamic inheritance system and its marriage regulations jointly hindered indigenous organizational modernization, but once modern organizations were transplanted from abroad, they ceased to harm economic performance.