Why the Middle East Is Behind: No Joint-Stock Companies

This article is from the archive of our partner .

In its latest Schumpeter column, The Economist serves up a striking statistic: In the year 1000, the Middle East's share of the world's gross domestic product was 10 percent compared with Europe's 9 percent, according to the British economist Angus Maddison. By 1700, the Middle East's share had plummeted to 2 percent while Europe's had soared to 22 percent.

Why did the Middle East fall behind Europe? Schumpeter finds the reasons traditionally given inadequate:

One is that the spirit of Islam is hostile to commerce. But if anything Islamic scripture is more pro-business than Christian texts. Muhammad was a merchant, and the Koran is full of praise for commerce. A second explanation is that Islam bans usury. But so do the Torah and the Bible. A third--popular in the Islamic world--is that Muslims were victims of Western imperialism. But why did a once-mighty civilisation succumb to the West?

Schumpeter finds a more satisfactory answer in Turkish-American economist Timur Kuran's The Long Divergence. Kuran attributes the phenomenon to the Middle East's failure to establish commercial institutions and particularly joint-stock companies, which eventually gave way to limited liability companies and stock markets as business grew more complex. While "today the Islamic world boasts muscular companies and hectic stockmarkets," Schumpeter says, the Middle East still has a long way to go:

Income per head is still only 28% of the European and American average. More than half the region's firms say limited access to electricity, telecoms and transport is a problem for business. The figure in Europe is less than a quarter.

The columnist adds that the region's business community suffers from low rates of entrepreneurship and rampant corruption, and that Kuran's theory also explains, in part, "Islamist rage against capitalism":

Corporations and other capitalist institutions were imported by progressive governments that believed the region faced a choice between Mecca and modernisation. Local businesses--particularly capital-intensive ones such as transport and manufacturing--were dominated by Jews and Christians who were allowed to opt out of Islamic law.

This article is from the archive of our partner The Wire.