Princeton, £20.95, 405pp. £18.86 from the Independent Bookshop: 08430 600 030

The Long Divergence: How Islamic Law Held Back the Middle East, By Timur Kuran

Around 300 years ago, the bazaars of the Middle East were overflowing with luxury goods. The commercial centres of the region attracted all variety of fortune seekers, speaking numerous languages. There was nothing to indicate that the region would not continue to be economically prosperous. But then the trajectory changed. The Middle East nosedived into a downward spiral of underdevelopment. So what went wrong?

The major causes of the economic stagnation of the Middle East, which includes Turkey, are not colonisation, or the conservative and anti-scientific attitudes of the people, argues Timur Kuran, a professor of Islamic studies at Duke University. While colonisation certainly played a role, many former colonies, such as Brazil and India, have managed to overcome the historic hurdles of occupation. Conservatism and anti-scientific attitudes are as prevalent in Europe as the Middle East, and they have not been a barrier in the development of the West. The real cause of underdevelopment in the Middle East, Kuran suggests in this meticulously argued book, is the Sharia, or Islamic law.

When it was first formulated, the Sharia developed institutions, such as contract law, that were advanced and sophisticated for its time. But the law has not evolved and adjusted to the new world of business and finance. There have been, throughout history, many attempts to reinterpret it, eliminate ambiguities and resolve contradictions. In some areas, such as tax collection, innovations never ceased. However, the substance of the law was not transformed significantly to cope with radical changes in the range and magnitude of economic activity. The reinterpretations were seldom more than odd ripples in a pond.

Kuran identifies contract law, rules of inheritance, the ban on usury, and the death penalty for apostasy as key elements of Islamic law that thwarted economic development of the Middle East. His goal is not to rubbish Islamic law. Indeed, he takes pains to explore its positive features. But to demonstrates convincingly that lack of innovation generated negative consequences, even from the progressive aspects of Islamic law.

During the Middle Ages, business transactions were based on personal relationships. Islamic contract law, on the other hand, promoted cooperation outside family and kin. Complete strangers could come together to form a business partnership on the basis of mutual interest that was recognised in law and upheld in courts. The problem was that an Islamic partnership could be terminated at will by any partner. The death of a partner also dissolved the partnership, with subsequent profit and loss going solely to the survivor. The children and family of the deceased partner could neither inherit nor automatically take his place.

This meant that durable business partnerships that could last generations did not emerge in the Middle East. The private enterprises in the region became atomistic. When businessmen came together to pool their resources in profit-making endeavours, their cooperation was only temporary and seldom lasted more than a few months.

The problem was compounded by the egalitarian nature of Islamic laws of inheritance. These were designed to dissipate wealth in society and prevent its accumulation in fewer and fewer hands. But it also meant that business empires of successful merchants never survived after them, as their estates were divided and dispersed into several small segments. Recombination and re-emergence of the empire was almost impossible. Everything had to begin again from ground zero with new partnerships.

The ban on usury made it difficult for merchants to obtain credit and suppliers to lend money. Often, it increased the cost as both suppliers and users of credit discovered innovative strategies to bypass the prohibition. The bar on interest also meant that banks could not emerge. There was no incentive to trade shares; or any need for standardised accounting.

The punishment for apostasy made it impossible for Muslims to do business with non-Muslims. They risked life and limb if they conducted business under a non-Muslim legal system, or took disputes to non-Muslim judges.

To make matters worse, social services in Middle Eastern societies were provided by pious foundations, or waqfs. These charitable trusts, set up under Islamic law and supervised by religious officials, provided the region with such essential services as water supplies and looked after orphanages, schools and colleges. They could outlive their founders and continue for perpetuity. But as they were not self-governing, their caretakers could not maximise profits. They thus became an impediment to the growth of corporations.

All this meant that the Middle East was very late in adopting key institutions of modern economy. The laws, institutions and organisational forms, that could mobilise productive resources on large scales within enduring private enterprises, so essential for economic development, just did not emerge in the region.

This is a fresh and thought-provoking argument. But it is based on the assumption that Western financial institutions, and self-serving corporations, are the best possible model for development. Given the havoc that these institutions have caused in recent times, and the fact that injustice and obscene wealth is integral to their make-up, I think it is an assumption too far.

One also needs to consider why Islam insists on the egalitarian distribution of wealth and historically suppressed the emergence of monopoly capital. Perhaps it has something to do with a socially conscience vision of society that emphasises genuine equity and justice? Kuran's thesis is contentious; but it does provide us with an incentive to reformulate Islamic law. It is an excellent starting-point for a debate long overdue.

Ziauddin Sardar's 'Reading the Qur'an' will be published by Hurst in May

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