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Economic Development

By:
Timur Kuran, Jeffrey B. Nugent
Source:
The Oxford Encyclopedia of the Islamic World What is This? Provides comprehensive scholarly coverage of the full geographical and historical extent of Islam

Economic Development

In the course of the second millennium, the Islamic world failed to match the institutional transformation through which western Europe greatly expanded its capacity to pool resources, coordinate production, and conduct exchanges. By the nineteenth century it had become “underdeveloped” relative to western Europe and its offshoots in the New World. The key indicators of this state of economic backwardness lay primarily in the private economy. In 1800 credit practices in Cairo, Istanbul, and Lahore hardly differed from those of the Middle Ages. Investors, producers, and merchants pooled resources mainly through small and short-lived partnerships based on classical Islamic law. Trade with the outside world, and increasingly also local trade, was under the control of foreigners and foreign protégés. Public goods continued to be delivered mainly through waq   fs (Islamic trusts), which lacked the flexibility of corporations. With few exceptions, school curricula remained wedded to medieval teachings, and Muslims were still overwhelmingly illiterate. Partly because the private economy had failed to modernize, states of the Islamic world had to go abroad for resources to modernize their bureaucracies, armed forces, and economies.

Two centuries later, some Muslim countries are on the World Bank's roster of high-income countries, with many others in the middle-income category. They all feature stock markets and banks that finance both trade and a wide range of investments. Some have rapidly growing and increasingly diverse industries that export heavily to the West. Most boast firms that rank among the world's largest. All have sophisticated product markets, and operate modern facilities such as dams, power grids, mass transportation and communication networks, hospitals, and universities. Yet, the Islamic world also includes some of the world's poorest countries, including a few that remain in the earliest stages of economic modernization.

The economic transformations of the past two centuries have been neither continuous nor free of conflict. Along with periods of feverish reform, there have been times of resistance to institutional change, global economic integration, and resource reallocation.

Economic Modernization.

In the nineteenth century the Islamic world was rocked by an invasion of mass-produced goods from Europe. The inflow of industrial commodities dealt a blow to the profitability of various craft guilds. Some succumbed quickly to the competition, and the survivors lost both market share and political clout. By and large, they reacted to the competition by seeking to strengthen their customary rules through legal codification. They were generally slow to reorganize and change their production methods. Under the circumstances, it was entrepreneurs operating outside traditional craft guilds who introduced the technologies of mass production into local economies. Initially these entrepreneurs belonged mostly to non-Muslim minorities, who found it easier to operate under European or European-inspired institutions. With very few exceptions, all of the joint-stock companies and corporations formed in the Islamic world before World War I drew their capital overwhelmingly from local non-Muslims, except insofar as they relied on foreigners.

Meanwhile, agriculture became increasingly commercialized, with certain crops cultivated primarily for export to Europe. Largely through the initiative of European trading companies, silk became a major export commodity in Syria, Lebanon, Turkey, and Iran; olive oil in Tunisia; cotton in Egypt, Syria, Turkey, and Yemen; wine in Algeria and Tunisia; tobacco in Turkey, Iran, and the Dutch East Indies; rubber in Malaya and the Dutch East Indies; palm oil and groundnuts in Central and West Africa; tea and jute in India; and coffee in Yemen and the Dutch East Indies. An indigenous development of the period was the emergence of the Jaffa orange as a lucrative export commodity in Palestine. Outside of agriculture, pearls became a leading export commodity throughout the Persian Gulf.

These transformations in the private economy were accompanied by revolutionary changes in the scope and character of government. Until the nineteenth century, the economic functions of Muslim governments went scarcely beyond the enlargement, exploitation, and protection of their revenues; modest efforts at redistribution to preserve social stability; and the monitoring of the vast waq  f sector. Governments undertook few infrastructural investments and left many matters now considered essential government functions to local communities and a vast array of waq    fs. Their revenue came mainly from land taxes, although at various times and places substantial additional sums were raised from poll taxes, the sale of commercial and artisanal licenses, and transit taxes.

By the mid-nineteenth century, large regions of the Islamic world, including India, Indonesia, Malaysia, Algeria, and much of sub-Saharan Africa had fallen under European rule. The economies of these regions thus came to be administered by Europeans. Around this time, in the noncolonized parts of the Islamic world, governments became increasingly active in the economic sphere. With Muḥammad ʿAlī's reforms in Egypt (1805–1849) and the Tanzimat in Turkey (1839–1876), independent and semi-independent Muslim governments started promoting new industries; codifying financial, commercial, and administrative procedures; using municipalities to deliver urban services; relying increasingly on indirect taxes for revenue; and establishing secular schools to train specialists and civil servants. It is in this period that both Turkey and Egypt adopted commercial codes and courts modeled after those of France, mainly to accommodate modern organizational forms and business practices. A related legal development of the period was the introduction of the first Islamic legal code, the Ottoman Mecelle. Drawing creatively and selectively on the sharīʿah, the Mecelle deals with various aspects of economic contracts. In instituting wide-ranging reforms, the governments of the Islamic world became increasingly centralized.

The nineteenth-century reformers understood that sustained development would require much new infrastructure. They had neither the funds nor the know-how, however, to undertake major investments on their own, and the atomistic nature of local credit markets limited opportunities for domestic borrowing. Under the circumstances, they borrowed heavily from Western financiers and relied on foreign enterprise. Some of the great infrastructural projects of the period—including the Suez Canal; the Berlin-Baghdad Railway; the ports at Port Said, Beirut, and Haydar Paşa; the gas, water, and power systems of Istanbul, Cairo, Baghdad, Damascus, and other cities; and some of the early irrigation systems in Egypt—were undertaken through foreign loans and with technical and administrative guidance from abroad.

The first half of the nineteenth century saw the establishment of private banking firms, mostly British, in major cities of the Islamic world. With government debt rising, several foreign-owned incorporated banks came on the scene in the middle of the century, including the Ottoman Bank, the Bank of Egypt, and the London and Baghdad Association. Shortly thereafter the leading European banks opened their own branches in major cities of the Middle East. These banks allowed local government debt to grow enormously, and before long one government after another found itself unable to meet its interest obligations. The standard European response was to put an international commission in charge of the defaulting government's finances. Some countries, such as Turkey and Iran, continued to retain their political independence even as they lost financial autonomy. Others, notably Algeria, Morocco, Tunisia, and Egypt, endured foreign occupation.

Scant industrial investment took place in the Islamic world until World War I, both because international treaties precluded local governments from imposing tariffs on imports and promoting local industries, and because the organizational forms needed to mobilize the necessary capital and use it efficiently were lacking. During World War I, certain local governments found their supplies of industrial commodities cut off, so they began producing domestic substitutes, generally at high cost. After the war, and the Ottoman Empire's disintegration, many independent governments and also some colonial administrations continued to promote local industries through subsidies and preferential buying schemes. A highlight of this era of economic nationalism is the opening of the first banks owned and managed by locals: Bank Misr in Egypt and İş Bank in Turkey.

With the onset of the Great Depression, the drive toward self-sufficiency accelerated. Declining world prices for the Islamic world's traditional export products prompted governments facing trade deficits to give their industries high tariff protection. With trade severely restricted during World War II, and then the adoption of import substituting industrialization strategies throughout much of the Islamic world, protection for infant industries continued. These strategies were generally pursued until the late twentieth century.

Oil.

The most significant economic development of the post-World War II era has been the emergence of oil as a source of massive revenue and foreign exchange in Saudi Arabia, Kuwait, Qatar, Oman, the United Arab Emirates, Iraq, Iran, Algeria, Libya, Nigeria, Brunei, and Indonesia. All these countries have become major exporters of oil.

The oil industry of the Islamic world had its beginnings in the late nineteenth century in exclusive concessions granted to foreign oil companies in Iran and the Dutch East Indies. Its rise to global prominence came much later. As late as 1940 Muslim countries accounted for only 8 percent of the world's oil production. By 1970, however, their share surpassed 40 percent.

Prior to the early 1970s, the foreign companies that ran much of the Islamic world's oil industry adhered to common rules with regard to production, marketing, and host country rights. In effect, they acted as a buyer's cartel that limited the returns of producers. Iraq and Iran attempted to nationalize oil in the 1950s and 1960s, but they failed to break the power of oil companies enjoying the support of their powerful home governments. The Organization of Petroleum Exporting Countries (OPEC) was formed in 1960 to facilitate cooperation among major producers in their dealings with oil companies. Though initially ineffective, OPEC's power began to grow by the 1970s. Several developments contributed to the process.

In the early 1970s, the Middle East's rising share of global oil supplies allowed major oil producers to dictate price increases to individual importers. In the wake of the Arab-Israeli War of 1973, OPEC's sister organization, the Organization of Arab Petroleum Exporting Countries (OAPEC) imposed an oil embargo on certain countries deemed to have supported Israel, including the United States. This embargo contributed to a quadrupling of the price of crude oil. A further tripling was triggered by the Iranian Revolution of 1978–1979, which resulted in a temporary cutoff of Iranian oil exports, followed by Saudi Arabian production cuts.

These price shocks stimulated oil production outside of OPEC. Partly as a consequence, OPEC's share of global oil production fell to 30 percent by 1991, well below its almost 70 percent share of proven oil reserves. Energy conservation and investments in alternative sources of energy, both induced by the oil-price rises of the 1970s and early 1980s, caused oil prices to fall back to the levels of the mid-1970s by the late 1990s. As the country with the largest oil reserves and hence the most to lose from alternative sources of energy, Saudi Arabia contributed to the price declines by increasing its output continuously. However, with world energy demand growing rapidly, and Saudi Arabia producing at capacity, concerns about the security of future oil supplies in Iraq, Iran, Nigeria, and even Saudi Arabia itself induced oil prices to triple once again between 2001 and 2007.

The flow of oil revenue to OPEC's Islamic members served to finance enormous economic development programs. It allowed them to raise their investment rates to unprecedented heights; gain access to advanced technologies; make major improvements in their infrastructures; and provide upgraded and expanded public services. The low-population oil producers, which have few complementary resources, have gained, in addition, the ability to invest substantial sums in world markets. Most of their investments are in Europe and North America, but increasingly also in the newly industrialized countries, including those of the Islamic world. The oil-poor countries of the Islamic world have also benefited from the boom in the oil-rich countries, primarily through higher export earnings, aid, direct investment, and remittances from guest workers.

Along with the many positive economic effects of the periods of sharply increasing oil prices, there have also been some negative consequences for the oil exporters. Their production of other internationally traded commodities, including agricultural goods, has tended to decline. Wage increases in the private sector have outstripped productivity gains, thus limiting private non-oil production. Female labor participation rates have fallen, causing fertility rates to rise. With the local investments of all oil exporters concentrated in industries whose demand suffers from high energy prices—petrochemicals, aluminum refining, dry docks—much established capacity has remained underutilized. Extensive state subsidies to individuals have undermined work effort as well as the incentive to acquire marketable skills. Consequently, despite massive efforts at economic diversification, most of the oil exporters remain as dependent on oil as they were forty years earlier. The exceptions are the United Arab Emirates and Indonesia.

Global Integration.

The oil booms have also discouraged economic reforms. The Islamic countries that have undertaken the most ambitious economic reforms have been oil-poor countries, including Malaysia, Turkey, Jordan, Tunisia, and Egypt. In these countries, market-oriented reforms, including trade and capital liberalization, generally followed balance-of-payment crises. The pro-market drive also drew strength from the emergence of East Asia as an economic powerhouse through export-driven growth policies and from the deepening economic crisis of the Soviet bloc. On the whole, however, liberalization and privatization have proceeded slowly, mainly because of resistance from civil servants, labor groups, and industrialists long-accustomed to protection. The largest increases in industrial exports have been achieved by Turkey, Tunisia, Malaysia, Indonesia, and Kuwait (in the latter case, they involve mainly energy-based industries).

Industrial ownership exhibits variation, though small, family-owned firms are common everywhere. In Turkey, Pakistan, India, and Lebanon, many large enterprises belong to highly diversified private conglomerates; others are state-owned. In much of the rest of the Islamic world, including most oil-exporting countries, almost all large enterprises belong to the state.

At the start of the twenty-first century, the economic achievements of the Islamic world present a decidedly mixed picture. The oil-rich states of Saudi Arabia, Kuwait, the United Arab Emirates, Qatar, Libya, and Brunei enjoy per capita incomes that place them among the world's high-income countries. Most of the remaining Arab states fall in the middle-income category, as do several other predominantly Muslim countries: Malaysia, Turkey, Iran, Kazakhstan, and Albania. Yet six of the eight countries with the largest Muslim populations—India, Indonesia, Pakistan, Bangladesh, Nigeria, and Egypt—are among the world's poorest, as are certain smaller Muslim or semi-Muslim states of Africa and Asia. Life expectancy at birth exceeds 70 in the richer Arab countries, Turkey, Albania, Bosnia-Herzegovina, Azerbaijan, Malaysia, and Brunei, but remains below 60 in Afghanistan, Yemen, Sudan and several other largely Islamic countries of sub-Saharan Africa. Adult literacy stands above 85 percent in Turkey, Lebanon, Jordan, Malaysia, Bosnia-Herzegovina and the central Asian republics, and above 60 percent in most of the other high- and middle-income countries.

Within individual countries, certain inequalities are very pronounced by global standards. The distributions of wealth and income are highly unequal in most countries because of disparities in land ownership, inequalities in access to education, credit, government services, and opportunities to trade. Most of the large countries show huge inequalities between regions and between cities and the countryside. Finally, there are massive inequalities based on age and gender. Where in most parts of the world life expectancy at birth and child survival rates tend to be considerably higher for females than for males, in parts of the Islamic world, including Bangladesh, India, and Pakistan, they are lower for females. In some countries, males outstrip females in literacy and years of schooling by more than 50 percent, although the gaps have been shrinking rapidly in most countries.

Although interactions with the West have influenced the ideas, priorities, and apprehensions that have undergirded the Islamic world's development drive since the nineteenth century, local sensibilities, intellectual traditions, and political conditions have colored every concrete reform. Starting in the second half of the twentieth century, attempts have been made to base economic transformations on self-consciously Islamic principles. Some countries, most notably Iran and Pakistan, have tried to eliminate the use of interest and to institute Islamic redistribution schemes. Such efforts have had no major impact on any key indicator of development.

The early twenty-first century has witnessed efforts to deal with home-grown shortcomings of the Islamic world. Most significantly, the annual “Arab Human Development Report,” whose inaugural issue appeared in 2002, promotes the view that Arab economies suffer from three self-sustained deficits: freedom, empowerment of women, and knowledge.

See also BANKS AND BANKING; INTEREST; and MODERNIZATION AND DEVELOPMENT.

Bibliography

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