Passing thought on capital formation in the historic Middle East

In response to comments about the relatively undeveloped character of Palestine (and much of the rest of the Middle East) previous to, say, 50 years ago, Lounsbury (on whose judgment I rely in such matters) typically notes the lack of capital as a major reason for this and I think that’s probably correct.  However, to the best of my knowledge he has never explained to us why that might be.

I’d like to offer a few speculations:  the Ottoman law on real property, the prohibition against usury (which has, apparently, intermittently been construed as a prohibition against lending money at interest per se), and autocracy.

5 comments… add one
  • Well, the economic history of the region is not yet written in an authoritative manner, but one can point to some generalisations:
    (i) Long term economic decline of the region. [1]European powers excluded Ottoman merchants from trade, [2]Ottoman region kept falling behind through a vicious negative cycle and lacked the institutional strength to break it.
    (ii) Lack of sufficient depth in institutions – those capable of innovating simply were not strong enough; while the strongest interests – magnates e.g. – ran against the kind of changes necessary
    (iii) Much dead capital locked up in Waqfs which had, like much of the Islamic world’s economic institutions, been evolving to be less rather than more economically competitive as the cycle of declining merchant interests (see i.1) tended to see anti-economic trends of thoughts come forward.
    (iv) ecology – issues such as irrigation and soil decline are hard to break w/o serious capital which clearly
    (v) Area specifics: Palestine was a backwater, capital was going elsewhere. Jews had specific ‘uneconomic’ interests to invest in the area. Serious capital was invested in Egypt, in Anatolia.

    The prohibition on usury had by the late Islamic period become a rigid code against lending on interest by the way. However, there were lots of Xian bankers around; by the late 19th c. however such intermediation was either going to feed state spending (crowding out) or foreign (European imperial) interests.

    I tend to see it as based on multiple drivers, the negative cycle of declining economics due to European interests crowding out (recall these are mercantalist beggar-thy-neighbour economics in this period), declining institutions and declining resources (all relative of course).

    Looking at the region one can see how some relatively small initial changes can snowball into either virtuous or negative cycles.

  • Thank you, Lounsbury. That’s a very informative commentary and precisely the sort I’d hoped to draw out. 😉

    In re: usury I was aware of Christian land ownership in the Ottoman Middle East but I was unaware of Christian bankers. Makes sense.

  • Christian Bankers replaced Jewish ones as the European powers came to dominate and began to favour their co-religionists.

    I should have noted also a tax system that was punitive (in a very familiar pattern of declining tax revenues leading to racheting up of rates and to more evasion…. vicious cycles) and property ownership often unclear, again leading to dead capital. In a declining system where the Magnates could exploit more and more leverage, the smaller land-owner could easily find he no longer owned his land, legally.

    Nothing atypical of the entire developing world, of course. Or even much of Europe, but the incremental changes were largely negative.

  • BTW, Waqfs (also known as Habous) are trusts. Somewhat reminiscent of the kinds of institutions that evolved into Trusts in anglo-saxon law, but they went down a blind alley.

    Another important lesson – it’s not always obvious what routes are blind alleys with diminishing returns when one is in the moment. We often forget that looking back (whether 5 days or 500 years).

  • Yes, my understanding was that Waqfs are somewhat similar to fee taille.

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