The egalitarian system in the Middle East hinders enterprise growth and capital accumulation.

Today I would like to write about an interview. I deeply recommend you to read the interview with Timur Kuran by Ali Bilge published in Journal of 'İktisat, İşletme ve Finans' October, Issue 295. Timur Kuran studies on the roots of economic underdevelopment in the Middle East. The interview was on the results of this study.

As of the nineteenth century, Middle East is less successful then the Europe in economic terms. Timur Kuran identifies one of the main reasons for this is the failure to establish large and long-term enterprises which could accomplish capital accumulation. In the Middle East are short-living enterprises with a limited number of partners while it is the opposite in the Europe. Then, what underlies this phenomenon?

As Mr. Kuran maintains, one of the main differences between the two regions lies in the law of inheritance: In the Middle East the law of inheritance was established in the seventh century with the birth of Islam. And the norms of the law have not changed until the twentieth century. Islamic inheritance system is much egalitarian than the European system. In the former, all relatives are entitled to share and this share cannot be disinherited. In the North Europe where the Industrial revolution took place, however, the heritage is given completely to the oldest son; the others get nothing.

This non-egalitarian system of North Europe facilitates capital accumulation. Partners know with whom to deal with if one of the partners died. What is more, this partner-to-be is already trained for this job. And thus the enterprises grow, innovation becomes attractive and technological developments can be adapted.

But the egalitarian system in the Middle East hinders enterprise growth and capital accumulation since the partner knows that he will come across with several partners-to-be if the other partner dies. And enterprises are kept small-scale in many cases. 

Role of Waqfs
Timur Kuran states that the waqf system is another element that hindered capital accumulation in the Middle East. Those who are afraid that sultans will expropriate their assets endowed their assets to waqfs, because the expropriation of waqf assets was a bad reputation. However, this system has a drawback in the long term: The revenue earned from waqf assets should be used in line with the rules set by the founder. However, in time technology advances and some functions might evaporate. For instance, though you have to transfer your funds to another sector after five decades, you cannot do so under the waqf system.

Kuran has books published in Turkey on this issue. But even this short interview proves once again that the reasons for the development gaps between countries must be traced at the differences in institutional structure. Kuran identifies that as a 'by-product' systems which might secure the growth of small firms must be sought. For instance access of small firms to finance is of critical importance in this regard.

This commentary was published in Radikal daily on 24.10.2010