Kuran-Economic History of The Middle East, 622-1914

Economic History of the Middle East, 622–1914

Timur Kuran, Economics and Political Science, Duke University
https://doi.org/10.1093/acrefore/9780190625979.013.683
Published online: 20 September 2023
Summary
In the Middle Ages, the Middle East was an economically advanced region. Driving its successes were an essentially
uniform legal system that supported intra- and interregional commerce, partnership rules that supported
commerce among nonrelatives, and a form of trust known as waqf, which served as both a wealth shelter and a
vehicle for endowing social services with protections against state predation. These same institutions
disincentivized the institutional advances needed to generate the modern economy’s infrastructure indigenously.
Home-grown innovations, such as the tradable equity known as gedik and a form of waqf used for moneylending
(cash waqf), were ill-suited to large-scale and perpetual enterprises. Partnerships used to form small and
ephemeral enterprises did not spawn organizational forms conducive to pooling resources on a large scale and
perpetually. The waqf’s rigidities led to increasingly serious capital misallocation and misuse with changes in
relative prices and the emergence of new technologies. Thus, the Middle East reached the Industrial Era
institutionally unprepared. Sensing an existential threat from the West, its ruling elites launched massive economic
reforms in the 1800s. These reforms involved transplanting Western economic institutions to the West in a hurry.
Although the Middle East’s economic performance improved greatly in absolute terms, it remained underdeveloped
in 1914, and the catch-up process has continued. Until the 1700s, the economic fortunes of the Middle East’s
religious minorities generally tracked those of its Muslims. Thereafter, non-Muslims pulled ahead. As the global
economy modernized, they benefited from a right that, from the early years of Islam, was denied to Muslims: choice
of law. With the development of modern economic institutions by Europeans, choice of law enabled non-Muslims to
increase the efficiency of their business operations. In the century preceding the Industrial Revolution, non-Muslims
benefited also from international treaties that strengthened their property rights vis-à-vis those of Muslims.
Keywords: Middle East, economic development, Islam, Islamic law, partnership, waqf, gedik, interest, banking,
capitulations
Subjects: Economic Development, Economic History, Law and Economics
Introduction
The Middle East, used here as a shorthand for “Middle East and North Africa,” covers an area
split in the early 21st century among 22 members of the Arab League, plus Iran, Israel, and
Turkey. The account starts in 622 CE, which marks the founding of the first Islamic state; and it
goes to 1914, the start of a world war that gave Western Europeans control over most majority-
Arab territories. The interval from 622 to 1914 can be divided into three periods.
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In the first period, from 622 to around 1600, the Middle East was an economically advanced part
of the globe; only China might have had a generally higher living standard. Its entrepreneurs
dominated several of the world’s major long-distance trade emporia, which testifies to the
sophistication of its commercial institutions. It boasted some of the world’s largest cities and
libraries. During at least the first half of this first period, the Middle East was also scientifically
advanced by the prevailing global standards. The second period, which ran from around 1600 to
the mid-1800s, is one of worsening institutional dysfunction. Within that quarter-millennium,
the rise of the West turned the Middle East into an economically underdeveloped region. This is
not to say that living standards slipped. As Figure 1 shows, real wages in Ottoman Istanbul rose
during the 1800s. Slower institutional development relative to some other region is compatible
with absolute economic growth. Finally, the period from the mid-1800s to 1914 saw feverish
campaigns to boost the region’s economic fortunes. Momentous reforms were launched to
modernize its economies, with varying levels of success. As of the 2020s, the overarching goal of
the early modernizers—to catch up with the West—remains unachieved. The Middle East still
suffers from economic handicaps rooted in its institutional history, stretching back to 622.
Up to the region’s economic modernization drives, many of its core economic institutions were
anchored in Islamic law, which achieved its classical form around 1000 CE. Some of its core
economic institutions, most significantly the Islamic inheritance and marriage systems, were
based on the Quran. Others, including the Islamic trust known as the waqf and various tax rules,
were inspired by institutions found in pre-Islamic civilizations, especially those of the Roman
and Persian empires. The Islamic institutional complex contributed critically to the Middle East’s
economic successes during its early centuries under Islamic rule. That complex evolved over time,
but its adaptations were not sufficiently innovative to prevent the region’s slip into a state of
underdevelopment.
Figure 1. Real daily unskilled wage in Istanbul, 1480–1914 (1489 = 1.0).

Source: Based on data reported in Özmucur and Pamuk (2002).
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At least since the Middle East started to discard its Islamic economic institutions, a popular view
has been that Islam bears responsibility for the Middle East’s economic backwardness. A long
string of observers held that Islam fosters conservatism (Cromer, 1909; Renan, 1883) as well as
aversion to learning about non-Islamic societies (Lewis, 1982). These claims oversimplify the
historical record. The Islamic institutional complex was responsive to widely felt needs, and
resistance from Muslim clerics was not unassailable. Hence, stagnation per se is not what
requires explanation. Rather, it is that certain institutional advances failed to occur and that
adaptations realized within the confines of the broader Islamic institutional complex proved to be
less efficient over the long run than analogous institutional responses in Western Europe. As for
the incuriosity claim, it is falsified by the remarkable openness of Muslims to outside influences
during Islam’s formative period. In certain areas, Muslims never lost interest in learning from
outsiders, including Westerners. Also significant is the receptivity of Muslims, after the Middle
East became an economic laggard, to a wide range of technological and institutional transplants.
The puzzle, then, is not lack of interest in the West, generally. What requires explanation is
incuriosity about Western economic institutions specifically and during a long but finite period.
Incuriosity turned into immense curiosity around the Industrial Revolution, when Middle Eastern
elites came to view the West as an existential threat. Until that point, institutional innovations in
Western economies received remarkably little attention from the Middle East’s ruling elites, who
were almost exclusively Muslim. A sub-puzzle is that the region’s non-Muslims started to take
an interest in Western economic institutions, and even benefiting from them, several generations
before its politically and militarily dominant Muslims.
Another cluster of common explanations dismisses altogether the notion that Islam, or Islamic
institutions, had any influence. It blames outside interventions. The Mongol invasion of the 1250s
is one prominent event on which certain scholars pin blame (Jackson, 2017); another is Western
imperialism in the 1800s and early 1900s (Rodney, 1982, chapter 6; Wallerstein, 2011, chapter 3).
Neither claim holds water. The Mongol invasion harmed just parts of the Middle East directly; it
did not reach Egypt, for instance. Yet, signs of underdevelopment appeared throughout the
region. Likewise, major parts of the region, including Yemen, Saudi Arabia, Iran, and Turkey,
escaped Western colonization. In any case, efforts to recover the Holy Land had a history
stretching back to the Middle Ages. Between 1095 and 1291, eight crusades ended in failure, as
judged by its overarching territorial goal (Cobb, 2014). Meanwhile, Muslims conquered territories
in Europe, notably Arabs in Iberia and Ottoman Turks in the Balkans. If in modern times
Westerners achieved territorial ambitions that eluded them for more than a millennium, the
reason lies in a reversal of interregional economic fortunes. The Middle East’s military setbacks
were among the manifestations of its institutional weaknesses.
There are scholars who reject the notion that the Middle East was underdeveloped prior to the
1800s. Apart from spurts of growth during the preceding centuries, they point to cases of
institutional dynamism as proof that the Middle East had not yet fallen behind (Pamuk, 2012). But
the innovations in question were suboptimal adaptations that blocked reforms of greater
usefulness over the long run. Institutional change per se is not necessarily optimal. It will
contribute to economic underdevelopment if other parts of the world are developing institutions
that are relatively advanced in terms of the economic activity that they enable. A shortcoming of
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works that consider the Middle East’s state of underdevelopment to have started in the 1800s is
that they lack an explanation for why the region’s elites chose at that juncture to transplant
Western economic institutions in toto. Had prior institutional adjustments been optimal, these
transplants would have been unnecessary.
The inadequacies of widely popular explanations have stimulated multi-pronged research

agendas aimed at producing more accurate and deeper explanations for the Middle East’s
economic trajectory. Beginning in the 1990s, the qualitative and quantitative tools of institutional
political economy have been applied to Middle Eastern historical data, much of it based on fresh
archival research. And careful descriptive works by scholars of the past have been reinterpreted
analytically through new lenses. A basic finding is that the Middle East’s classic economic
institutions, those in place by the end of the 1st millennium, failed to generate more advanced
institutions conducive to scaling up in production, finance, commerce, and transportation.
Commercial laws and techniques remained stagnant because, until modern times, private
merchants and investors lacked reasons to demand the sorts of changes that generate economic
modernization; and, in turn, institutional stagnation kept enterprises atomistic and short-lived.
As the Industrial Revolution unfolded in Western Europe, the Middle East still lacked large and
perpetual indigenous enterprises. It remained in an institutional equilibrium that reflected the
conditions of a millennium earlier. Indefinitely living private organizations did exist, but outside
of commerce. These were waqfs, trusts that provided social services according to stipulations of
their founders. Though waqfs were often efficient at their founding, they lacked the right to
reallocate resources, adjust prices, and change technologies. Hence, they were poorly suited to
providing social services in a dynamic economy.
As these organizational handicaps became clear, the more efficient organizational forms
developing in Europe could not be transplanted to the region immediately, because
complementary institutions were absent. Middle Easterners started forming large enterprises
under a local legal system only after the adoption of incorporation laws, in stages beginning in
the 1850s. As a self-governing organization with an indefinite life, a corporation enjoys legal
personhood. Conducive to scaling up, it can adapt to changing conditions. Its forms include
nonprofit corporations, which can be philanthropic and charitable, and business corporations,
known in economics as firms (Harris, 2020, chapters 9-11).
Understanding the causes of the Middle East’s economic rise, stagnation, and reinvigoration
requires going back to the end of the 1st millennium, when the Middle East and Western Europe
had similar organizational capabilities. Given that the economies of these regions diverged
institutionally during the 2nd millennium, differences must have been present in other respects.
Certain critical differences were responsible for the Middle East’s successes as well as its
subsequent failures.
Islamic Partnerships
By the end of the 1st millennium, an Islamic law of contracts had been instituted across the
Muslim world to facilitate the pooling of labor and capital through formal partnerships. In the
Middle East, as elsewhere, it was easier to pool resources within families than among unrelated
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persons, because trust among family members tended to be greater than among nonrelatives.
Aiming to broaden the range of cooperation, the architects of Islamic law produced, by the
standards of the Middle Ages, sophisticated contracting rules. These would regulate partnerships
among workers who could not finance their endeavors and investors who, for one reason or
another, wanted to leave physical work to others.
The Legal Contract

Known as mudaraba, the typical Islamic partnership involved one or more passive parties, who
provided capital, and one or more active parties, who carried out the physical work, such as
joining a caravan to carry goods among faraway places. The sides agreed in advance on how to
share any profits achieved. The formula could depend on contingencies. Whatever the profit-
sharing arrangement, losses of capital were borne by the passive investors alone; any losses of
the workers were limited to the opportunity costs of their labor (Udovitch, 1970). Islamic courts
enforced Islamic partnerships in places populated at least partly by Muslims. As merchants
moved into new territories, they carried Islamic law with them, along with Muslim judges. In
time, it became possible to do business under an essentially uniform legal system over a vast area
stretching from Spain and Morocco in the West to China’s coastline and Indonesia in the East. In
the early 2nd millennium, essentially the same type of partnership, known then as commenda
and in modern economies known generically as a limited partnership, saw use among Western
Europeans (Harris, 2020, chapter 5).
Neither form of the limited partnership—mudaraba or commenda—restricted enterprise size or

longevity. Under either form, 150 people could pool labor and capital for a trading mission
expected to last 8 years (Çizakça, 1996, chapters 1–2). In practice, though, an Islamic partnership
typically brought together two people for a mission expected to last at most a few months. In
premodern court records of the Islamic Middle East, three- or four-person partnerships are
uncommon, and those with five or more members are rare. A partnership for long-distance trade
was established for a single round-trip mission. At the end of the mission, the partners would
settle their accounts, ending their contractual obligations to one another (Kuran, 2011, chapter 4).
The members of a completed Islamic partnership could pool resources repeatedly for new
missions. However, under the law, each new enterprise would rest on its own separate contract.
An Islamic partnership had no life of its own; it lacked even legal standing. Accordingly, if some
member of an ongoing Islamic partnership died, the partnership became null and void; and, at
that point, its assets needed to be liquidated under judicial supervision. The deceased partner’s
share of the obtained sum would be distributed to that person’s heirs. The heirs and surviving
partners could decide to resume the interrupted business activity, as a fresh partnership. The
likelihood of such resumption depended on the applicable inheritance rules, among other factors.
The greater the number of inheritors, the more people had a say in the estate’s distribution;
hence, the greater the difficulties of negotiating a new partnership to restart the suspended
enterprise.
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The Islamic Inheritance System and Islamic Polygyny

After the rise of Islam, the dominant inheritance system in the Middle East was the Islamic
inheritance system. According to rules stipulated in the Quran, two-thirds of any estate are
reserved for extended relatives, male and female, with the male share twice as large as the
corresponding female share; thus, a son received twice as much as a daughter, and a father
received twice as much as a mother. Islamic jurists took these rules to mean that one cannot
disinherit a child or other relative entitled to a share (Fyzee, 1964, chapters 11–14). By medieval
standards, this system was strikingly egalitarian. In many other inheritance systems around the
globe, females did not inherit at all; if certain females had entitlements, they were to
maintenance and not to shares of their own (Bahrami-Rad, 2021).
An unintended consequence of the Islamic inheritance system was difficulties in keeping

commercial assets undivided across generations. Ordinarily, successful enterprises got
fragmented after their founders. In principle, a deceased partner’s heirs, however numerous,
could reconstitute the partner’s liquidated enterprises. However, the more an entrepreneur’s
heirs, the harder it was to reach agreement on reaggregating divided assets; hence, the greater
was the probability of failure. To make matters worse, entrepreneurs with the largest commercial
operations tended to have many more heirs than the average number. Their dependents were fed
better. A more important reason, though, lies in another element of Islamic law, its permission of
polygyny. The number of heirs would have correlated positively with the number of wives,
predeceased or surviving. In brief, polygyny compounded the difficulties of preserving successful
businesses across generations.
Insofar as premature dissolution was costly, members of Islamic partnerships would have tried to
reduce its likelihood. This probability rose, on the one hand, with the partnership’s size, and, on
the other, with the anticipated duration of its mission. Entrepreneurs would have minimized
these risks by limiting the number of partners in any given enterprise as well as its scope. In fact,
premodern Middle Eastern entrepreneurs formed small and ephemeral enterprises (Kuran, 2011,
chapter 4).
The entrepreneurs of medieval Europe endured the same two risks. As with an Islamic
partnership, its counterparts in medieval Europe became null and void at the death of a partner.
However, if only because the Bible is silent on the specifics of inheritance, practices could differ
radically across time and space. Indeed, on estate settlement, there was much more
experimentation in Western Europe than in the Middle East (Goody, 1983, pp. 93–94, 118–125,
238–239; Platteau & Baland, 2001). Under one of Christian Europe’s common inheritance
regimes, primogeniture, a deceased man’s businesses fell entirely to his oldest son. In places
where primogeniture was practiced, partners prearranged to have their oldest son step in. This
practice was not necessarily good for later sons, to say nothing of daughters. But it had a silver
lining. By reducing the risk of terminating a successful venture prematurely, it facilitated
enterprise growth and preservation (Kuran, 2011, pp. 88–89).
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Consequences for Organizational Advancement

The foregoing interregional differences in partnership size and longevity fueled the divergence in
enterprise scale and complexity that unfolded over the 2nd millennium. Where scale and
longevity are increasing, coordination and communication difficulties create pressures to develop
more complex enterprise forms and more advanced business techniques. By contrast, where
enterprises remain minuscule and short-lived, no need arises for structural innovations or new
routines (Kuran, 2011, pp. 89–92). Consider accounting. If partnerships consist of few people and
are expected to last just a few months, no demand emerges for an accounting method readily
comprehensible to third parties. But if the partners might include dozens of people at any one
time, and memberships are transferable across generations, standardized accounting becomes
useful. In fact, double-entry accounting became the norm in Western Europe as enterprises grew
in scale and longevity. In the Middle East, though double-entry accounting had been invented as
early as 1383 (Solas & Otar, 1994), it failed to gain widespread adoption. Tellingly, until the 1800s,
accounting practices remained unstandardized (Güvemli, 1998; Zaid, 2004). At that juncture, the
spread of more complex organizational forms generated a demand for standardized account
keeping.
Effects on the Division of Labor

The persistent smallness and simplicity of Middle Eastern enterprises also limited the division of
labor, which is among the correlates of rising productivity. Between 701 and 1500, the number of
distinct occupations in the bureaucracy and military tripled. The pattern accords with the
phenomenal expansions of Middle Eastern empires during this period. Over the same interval,
though, the number of distinct occupations in commerce and finance was stagnant (Kuran, 2011,
pp. 68–71). Jointly, the two patterns confirm that the stagnation of Middle Eastern organizational
forms did not stem from religion-based conservatism. Organizational stagnation was limited to
certain sectors where incentives to innovate were absent.
Enterprise Forms and Economic Development

During the 2nd millennium, as the West formed perpetual enterprises with hundreds, if not
thousands, of employees and shareholders, the Middle East’s indigenous enterprises remained
small and ephemeral. Consequently, as the West industrialized, it needed massive structural
reforms even to begin the process of replicating the transformation. Precisely because of a
millennium of organizational sluggishness, institutions complementary to complex
organizational forms had not emerged. To the absence of standardized accounting, a couple of
ancillary examples may be added. Judges lacked familiarity with modern accounting conventions,
which limited their capacity to resolve various new types of commercial disputes. Just as
seriously, Islamic courts could not handle cases involving a modern enterprise, if only because
Islamic law gives legal standing only to natural persons (Kuran, 2011, chapter 6).
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Among the consequences of the Middle East’s failure to scale up its commercial and financial
institutions is a decline in its share of world trade. Figure 2 shows that in the middle of the 2nd
millennium the Middle East’s share of global trade was around 9%. Over the next four centuries,
this share dropped precipitously, to about 2%. Moreover, by World War I, much of the Middle
East’s trade with Western Europe was being financed and conducted by Westerners.
Figure 2. The Middle East’s share of world trade, 1500–1914. The 1500 and 1700 data points are inferred, using the
gravitational model of Isard (1954), from data of Bolt and van Zanden (2020). Estimates for 1850, 1900, and 1914
come from Federico and Tena-Junguito (2019).
The Islamic Waqf
In terms of scaling up in economic sectors critical to industrialization, the Middle East did not
match the institutional evolution of the West. Might the Middle East have prepared itself for
industrialization through a different path? As an alternative starting point for developing the
institutional preconditions for organizational modernization, the Islamic waqf comes to mind,
because it was designed for perpetual existence. It differs fundamentally from the modern waqf,
which, in spite of its name suggestive of a long Islamic heritage, actually resembles a Western
charitable corporation. In what follows, “waqf” refers specifically to the Islamic waqf.
Emergence, Characteristics, and Intended Functions

In its classical formulation, a waqf was established under Islamic law to provide designated social
services in perpetuity through revenue generated by an endowment consisting of real estate. Any
Muslim of sufficient wealth could become a founder at will; and a non-Muslim could do so with
permission from the ruler (Kuran, 2023, chapter 3; van Leeuwen, 1999). The waqf permitted
individuals to supply, in a decentralized manner, social services now commonly provided by
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governments, nonprofit organizations, and private utilities. The absence of centralized control
over the specifics of its stipulations made it responsive to local needs. For more than a
millennium before the modernizing reforms of the 1800s, vast resources flowed into founding
waqfs. By 1700, depending on location, waqfs owned between one-quarter and half of all real
estate (Blaydes, 2019; Kuran, 2016, Table 1). Their revenues were used partly to provide social
services, generally within cities or on major trade routes. In the region today, most surviving
urban buildings from before 1800 were financed through a waqf. The major exceptions are palaces
and military structures, both built directly by rulers.
The earliest evidence of the waqf’s existence is from the 700s, about a century after the birth of
Islam. Its creation was stimulated by the weakness of private property rights (Verbit, 2008).
Arbitrary taxation and expropriation were threatening high officials, who tended to be major
landowners. These dignitaries looked creatively for a wealth shelter. Pre-Islamic civilizations of
the Middle East had financed temples through various forms of the trust, a legal contract whereby
a person (the trustee) manages property on behalf of its creator (the trustor) for the benefit of
specified causes or persons. Building on Roman and Persian models of the trust, Islamic jurists
developed a distinctly Islamic variant, which came to be known as a waqf.
Property became more secure when placed in a waqf’s endowment because, regardless of the
financed services, it was considered sacred. Given this widely held belief, whose origins must lie
in Roman and Persian uses of the trust mainly to finance temples, rulers were reluctant to
expropriate waqf assets, for fear of developing a de-legitimizing reputation for impiety.
Waqf founders obtained social prestige, and Islamic teachings promised them rewards in
afterlife. But their returns could include significant material gains, too. For one thing, a waqf’s
purpose could include the provision of housing and living expenses for the founder and/or his
family. For another, the founder could appoint himself for life as the waqf’s initial caretaker. In
that capacity, he could draw a salary, fill other paid positions with relatives and friends, and
designate his successor. Choosing a child as the waqf’s next caretaker would effectively
circumvent Islam’s inheritance rules. Thus, establishing a waqf was not necessarily, or simply, an
act of charity or philanthropy. Often, the sheltered revenue accrued partly, if not mostly, to the
founder, his family, and his descendants (Kuran, 2023, chapter 3).
No hard rule limited the share of a waqf’s income that the caretaker could reserve for himself.
Local social norms determined the limits. If the caretaker went way beyond the customary level, a
court could object either at the stage of filing the deed or, after the founding, on the grounds that
the founder’s stipulations were being violated.
Widely Shared Economic Benefits

The waqf provided identifiable benefits to major players across the region. In return for
contributing to the delivery of social services, wealthy state officials obtained considerable
material security. In fulfilling critical social needs, such as healthcare, education, worship spaces,
potable water, and commercial infrastructure, waqfs gave rulers legitimacy. In fact, waqfs came
to provide most social services, some to satisfy the state’s strategic objectives. Lesser elites than
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members of the sultan’s inner circle gained the right to shelter wealth without necessarily
financing significant social services (Adıgüzel & Kuran, 2023). For their part, the masses
benefited from sundry waqf-subsidized services. From their vantage point, the waqf was an
institution that promoted philanthropy and charity. Jointly, all these benefits kept the waqf
popular and its rules stable for many centuries.
Mounting Economic Costs

For all its benefits, the waqf also had economic costs, and these grew over time. Under the law,
the waqf’s functions were fixed in perpetuity. Whatever the founder’s instructions in the waqf
deed, they had to be followed to the letter. In the Middle Ages, when demand patterns and
opportunities changed slowly, the costs of mandated rigidity were limited. However, as physical
technologies and patterns of global comparative advantage started to change rapidly in the run-
up to the Industrial Revolution, the fixity rule became a growing handicap. Specifically, it kept
resources locked in increasingly inefficient uses.
In practice, it was not impossible to reallocate waqf resources. All waqf deeds contained
ambiguities that caretakers could exploit. Some also included escape clauses that allowed asset
sales or swaps in the event of dire necessity. Still, the costs of adaptation were not trivial. Changes
to a waqf’s asset portfolio required judicial authorization. Commonly, judges withheld approval
until bribed. Consequently, a waqf-financed school, hospital, mosque, or public kitchen was more
rigid than if it was self-governing—in other words, a nonprofit corporation. A broader social cost
is that the bribes required for judicial authorization fueled a culture of corruption. By no means
were waqfs the sole source of corruption in the premodern Middle East. However, given their
enormous economic weight, they must have helped to shape and sustain the pertinent social
norms (Kuran, 2023, chapter 5).
An interregional comparison puts these observations in perspective. The waqf supplied services
delivered in the West largely through corporations. In the Middle East, urban services were
supplied by multitudes of waqfs. Although the Western analogues of the waqf—trust, foundation,
entail—also delivered services, already in the Middle Ages thousands of towns established
municipalities, which were self-governing entities. In urban governance and various other
contexts, the corporation-based Western institutional choice proved advantageous over time,
partly because it lowered the costs of switching to new technologies and adapting to changing
relative prices (Berman, 1983, chapter 12; Greif & Tabellini, 2017). As Figure 3 shows, during the
millennium from 800 to 1800, urbanization was faster in Europe than in the Middle East (Bosker
et al., 2013). Differences in adaptability between the waqf and the corporation contributed to this
pattern. Urban waqfs inevitably became inefficient even when efficient at the outset.
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Figure 3. Urbanization rates for the Middle East and Europe, 800–1800.
Source: Bosker et al. (2013, Figure 3).
Two other interregional contrasts merit coverage. Whereas the corporation was suitable to
profit-driven business, the trust was not. Indeed, waqfs generated nothing analogous to the giant
overseas trading companies formed as global explorations created new trade routes; the English
Levant and East India companies are examples. Europe’s overseas trading companies, some of
them massively capitalized, were corporations (Harris, 2020, chapters 9–12). A second contrast
involves political influence. Whereas corporations participated in politics and contributed to
strengthening civil society, waqf deeds precluded political activity. In any case, their lack of legal
personhood denied them influence as organizations. Waqfs kept civil society anemic through
several other mechanisms, too. Designed as organizations to supply services on their own, they
could not form lasting coalitions. Their beneficiaries had no formal say in the selection of officers.
Their caretakers were not required to share pertinent financial information with their
beneficiaries. Finally, their beneficiaries lacked a forum for deliberation, which kept them from
organizing as political communities. These obstacles to political activity on the part of
beneficiaries facilitated waqf mismanagement as well as corruption (Kuran, 2023, chapters 4–6).
Scientific Decline
Yet another major long-run economic effect of the Islamic waqf operated through higher
education. Whereas the medieval universities of Western Europe were founded or rechartered as
corporations, their Middle Eastern counterparts, known as madrasas, were financed through
waqfs (Makdisi, 1981). The static nature of the waqf predisposed madrasas to intellectual
dormancy, which had adverse effects on scientific productivity. Between 800 and 1200, the
Middle East made major contributions to many areas of science and engineering, including
mathematics, optics, astronomy, navigation, and shipbuilding. At the time, madrasas were in
their infancy, and their curricula were roughly up to date. Over time, though, established
madrasas failed to keep up with ongoing discoveries, leaving their graduates unprepared for
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further scientific advances of global significance (Huff, 2017, chapters 4–6). The Middle East’s
decline in scientific innovation was accompanied by falling production of original scientific
manuscripts, as opposed to reproductions (Chaney, 2016). Revealingly, these patterns of
scientific decline predated the Mongol invasions.
The Dismantling of Waqfs

In the 1800s, foreign-based firms and Western-style municipalities established under special
laws started to supply social services once delivered exclusively by waqfs. As self-governing
organizations, the new service suppliers exhibited greater flexibility than waqfs. With demand
patterns evolving rapidly, they were able to reallocate resources far more quickly than waqfs
could. The new suppliers were also accountable to the constituencies they served. Unsuccessful
mayors could be removed from office by superiors or, later, through elections. Regulators or the
market punished poorly performing firms.
Beginning in the early 1900s, as it became easier to form locally based corporations, indigenous
entrepreneurs formed more and more firms that fulfilled functions historically served by waqfs.
And charitable corporations emerged to replace waqfs as the providers of other services.
Meanwhile, the stock of waqfs continued to shrink through nationalizations and privatizations,
each conducted under the guise of restoring them to financial health. The region’s reformers
supported each of these processes, partly to move resources to more productive uses. And, with
variations in timing, they formalized nationalizations through ministries empowered to manage
waqfs centrally and, as a matter of practice, to override founder instructions at will. Turkey
essentially completed its waqf nationalizations in the early 1920s, Egypt and Tunisia in the 1950s
(Dönmez, 1991, pp. 30–61; Duwaji, 1968, p. 130; Moustafa, 2000, p. 5). The modernizers who
supplanted the venerated waqf system aimed to improve resource use. But they sought also to
weaken clerics, whose economic base consisted of the waqfs that they managed as caretakers or
supervised as judges. Clerics by and large opposed economic modernization, which threatened
their long-standing sources of rent (Cansunar & Kuran, 2023, section 9).
Shifting Economic Fortunes of Religious Minorities
As late as 1200, non-Muslims formed a majority of the Middle East’s population (Tannous, 2018,
chapter 11); and though their share fell over time, it was around 9% on the eve of World War I
(Kuran, 2023, chapter 9). Most of the region’s non-Muslims consisted of Eastern Christians; and
Jews comprised much of the rest. Although quantitative evidence is sparse and no systematic
region-wide study exists, scores of area-focused studies suggest that until the late 1700s, no
appreciable sectarian differences existed in region-wide rates of participation in commerce or
finance (Jennings, 1973; Kuran, 2011, chapter 9). Moreover, the living standards of Christians and
Jews generally matched those of the politically and militarily dominant Muslims, except at the
apex of the income scale. High state officials, almost exclusively Muslim, were prominent in what
modern economics dubs the “top 0.1%.”
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Economic Advances of Christians and Jews

Subsequently, the region’s Christians started to play increasingly prominent roles in commerce
and finance. They also pulled ahead in living standards (Göçek, 1996, pp. 92–116; Mestyan, 2019).
With a half-century lag, Jews, too, began advancing relative to Muslims.
The economic ascent of the minorities was not uniform either geographically or temporally.
Besides, even in 1914, large numbers of Christians and Jews remained mired in poverty. But
specialists essentially agree that, about a half-century before Europe’s Industrial Revolution, a
break occurred in the fortunes of the Middle East’s indigenous non-Muslim communities.
Choice of Law
Multiple mechanisms drove the shift in fortunes within the Middle East itself. One involved a
feature of Islamic law that, paradoxically, played a role also in keeping Muslims and non-
Muslims on par economically in earlier times. The long-lasting parity pattern requires an
explanation itself because, in Islam’s early decades, the interpreters of Islam gave non-Muslims
living under Islamic rule a potentially valuable privilege that they denied to Muslims: choice of
law on civil matters, including commerce and finance. By virtue of this privilege, non-Muslims
were free to conduct exchanges among themselves according to whatever rules they wanted. In
organizing joint ventures with other Christians, an Ottoman merchant of the Greek Orthodox
faith could follow Islamic partnership rules and take his disputes to Islamic courts. Alternatively,
though, he could form partnerships under Greek Orthodox rules and have priests adjudicate his
disputes accordingly. An implication is that the Middle East’s Christians and Jews could have
escaped the economic drawbacks of Islamic law. For instance, the region’s Greeks could have
practiced primogeniture, setting in motion an institutional dynamic of the sort that fueled the
economic rise of the West.
Islamization of Non-Muslim Practices

Nevertheless, until the 1800s, non-Muslim Middle Easterners usually did business and ran their
financial affairs under Islamic law (Kuran, 2011, chapter 9; Kuran & Lustig, 2012, pp. 645–649).
Two efficiency motives drove their choices. First, Islamic partnership rules were at least as
flexible as those developed by medieval Christians, and more so than their Jewish variants.
Second, unlike Christian and Jewish courts, Islamic courts were backed by state power, which
made Islamic contracts relatively more credible. Unilaterally, any party could challenge a contract
drawn outside of Islamic law. Many segments of the non-Muslim population also had
distributional motives for favoring Islamic law. Women, second and later sons, and other
relatives fared better when estates were divided according to Islamic law than under the rules of
their own communities. These factors would have incentivized adherence to Islamic law on the
part of religious minorities. This is reflected in the Islamization of the Middle East’s non-Muslim
legal systems. Doubtless to keep their co-religionists content and reduce out-conversions,
priests and rabbis harmonized their legal interpretations with Muslim practices.
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New Legal Options During the West’s Economic Modernization

As Western Europe developed the institutions of the modern economy, attractive new options
presented themselves to the Middle East’s Christians and Jews. Simply by exercising their
customary choice of law in favor of some Western legal system, they could overcome handicaps
rooted in their traditional legal options—Islamic law and the legal systems of their own
communities. As individuals, they could partner with Westerners and do business under one or
more Western legal systems. Making jurisdictional switches did not require communal action;
nor did it require a comprehensive jettisoning of Islamic commercial practices (Artunç, 2015).
Many Christians and Jews prospered as commercial intermediaries between Europeans and the
Middle East’s Muslim majority, dealing with Europeans under a European legal system and with
Muslims under Islamic law (Artunç, 2019; Kuran, 2011, chapter 10). Although the institutional
changes that underpinned the ascent of the Middle East’s minorities are not yet understood fully,
it is uncontroversial that they took the lead in modernizing business practices. They formed a
vastly disproportionate share of the “merchant houses” that existed in a gray zone between the
Islamic and various European legal systems. Formally limited partnerships, the agreements
undergirding merchant houses were meant to renew repeatedly and indefinitely (Der Matossian,
2007; Moutafidou, 2008).
Muslims could not make adaptations as individuals without risking accusations of apostasy.
Hence, they needed to reform their laws through collective action. It took a century to galvanize
the necessary political support. Thus, Muslims of the Middle East started to use transplanted
Western economic institutions with a lag of several generations relative to their non-Muslim
neighbors. This explains, in part, the region’s sectarian economic divergence that was already
underway as Europe’s Industrial Revolution unfolded.
Educational Differences
In the 1800s, a complementary driver of the sectarian divergence within the Middle East was that
Christians and (with a lag as well as especially sharp geographic variations) Jews started earlier
than Muslims to favor schools teaching modern sciences and Western languages. Differences in
employment opportunities were at play. As European-based companies entered Middle Eastern
markets, non-Muslims were attracted to new positions that required familiarity with one or more
European languages and in Western modes of thinking. Meanwhile, Muslims flocked to rapidly
expanding public sectors, where a religious education sufficed. Hence, education choices were
dictated by differences in opportunities (Al-Shamat, 2009; Saleh, 2015). It mattered that
European companies could generally avoid entanglements with Islamic courts by favoring non-
Muslim employees and that Muslim-dominated states favored Muslims in their bureaucracies.
Egypt’s largest religious minority, its Coptic Christians, had already pulled ahead of its Muslims
in education a millennium earlier, and for a different reason. A regressive poll tax was imposed on
Copts following the Arab conquest of Egypt in 640. Converts to Islam could escape the poll tax.
Poor Copts converted disproportionately, and the remaining Copts turned into a wealthier
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minority for that reason alone. Wealthy Copts invested heavily in their children’s human capital,
if only to keep them from converting. By virtue of their higher literacy, Copts ended up filling
most positions in Egypt’s mid-level state bureaucracy (Saleh, 2018).
The poll tax was imposed on non-Muslims throughout the Middle East under Islamic rule. No
systematic research exists on whether, and the extent to which, the latter mechanism operated
outside of Egypt, too.
Christian Gains in Equity Markets

Among the functions of Islamic courts was what is known generically as notarization. For a fee,
Muslim judges would record contracts and settlements, to have a reference in the event of discord
among the parties. The classes of commonly notarized actions included the interpersonal transfer
of a guildsman’s rights, which consisted of his guild membership plus ownership of his
professional equipment. Around 1600, the typical transfer of these rights, known as gediks, was
from a retiring father to his son. Over the following century, gediks started to be divided into
tradable shares; and, with increasing frequency, the purchasers were investors without any
interest in becoming a guildsman. These outside shareholders passively received dividends.
Although the transformed gedik trade violated Islamic law in several respects, courts registered
the transactions, probably because the original fractional sales were made to gain liquidity at a
time of scarce credit. The gedik market was decentralized. It was not a formal stock market that
recorded transactions systematically and in a single database. By the mid-1700s, gediks were
being issued for enterprises outside the guild system, even for rental real estate (Cansunar &
Kuran, 2023, section 2).
Gediks were highly profitable, because they represented equity in sectors that enjoyed some
monopoly power through government regulation, or protection by wayward soldiers, or both. At
least in Istanbul, at the time the world’s largest city and the Eastern Mediterranean’s leading
commercial center, local Christians came to dominate the gedik market. The disproportionately
Christian ownership of gediks was linked to an international development. Throughout the 1700s,
the Ottoman Empire was at war with the Russian Empire. As part of a strategy of weakening its
rival from within, Russia started championing the rights of Ottoman Orthodox communities,
including Greeks and Armenians. A milestone was reached through a 1774 treaty that concluded
an Ottoman defeat. Through this treaty, Russia obtained the formal right to protect Ottoman
Christians. Until that point, the Ottoman sultan was entitled to confiscate the private property of
any of his subjects at will. Now, he would think twice before expropriating an Eastern Christian.
Through this treaty, the property rights of Christians strengthened relative to those of Muslims
and Jews. Within decades, France became the protector of the empire’s Catholics and Britain of its
Protestants (Cansunar & Kuran, 2023, section 2).
Meanwhile, long-term investments formed almost exclusively by Muslims—wealth shelters

consisting of waqfs—were becoming less profitable. One reason is that, as military expenses rose
with advances in military technology, rulers started to expropriate waqfs more readily. Another is
the acceleration of illicit privatizations. Both processes diminished the waqf’s reliability as a
wealth shelter, shrinking incentives to found new waqfs. But the shift of Muslim investors from
Page 15 of 33
waqfs to other investment instruments was a gradual process; it was guided by the emergence of
viable alternatives. For one thing, it took a century or more for Muslim investors to achieve the
material security that Christians enjoyed through foreign protection. For another, Muslim-held
gediks were more vulnerable to confiscation than those held by Christians.
Demonstration Effects of Christian Economic Gains

The rising prosperity of the Middle East’s Christians demonstrated to its diverse communities the
advantages of general property rights and of being able to invest securely in emerging markets.
Extending general property rights, as opposed to property rights restricted to a specific form of
investment, required convincing the Ottoman sultan to relinquish his age-old privilege to
confiscate the private wealth of his subjects. By the 1830s, high officials, too, could see that the
empire had more to gain from incentivizing all subjects to invest in creating taxable wealth, as
Christians already were. Like other non-Western empires, his empire had low fiscal capacity,
which impeded military modernization as well as economic reforms (Karaman & Pamuk, 2010).
Strengthening general property rights would raise fiscal capacity through reduced wealth
sheltering and faster economic expansion.
It was such reasoning that motivated a momentous act, the Gülhane Edict of 1839, which jump-
started economic, political, and legal modernization in the Ottoman Empire, with profound
effects down to the 21st century. This edict marks the beginning of state-promoted and
comprehensive modernization in all its successor states—not only Turkey but also those of the
Balkans and the Arab world. The edict broke with the past in three respects. As in all preceding
Muslim-governed empires, Ottoman Muslims had legal privileges that were denied to non-
Muslims, local or foreign. For example, only Muslims could testify against another Muslim as a
witness (Kuran & Lustig, 2012, section 6). Now, subjects would be equal before the law,
irrespective of religion. The meaning of religious equality spawned Middle Eastern controversies
that remain unresolved. But certain effects were immediate. For instance, well-connected non-
Muslims received appointments to government positions that had long been reserved for
Muslims. The second major change involved taxation. Until 1839, the Ottoman population was
divided between tax-exempt officials and tax-paying commoners (İnalcık, 1994, pp. 16–17).
Thenceforth, all subjects of sufficient means would pay personal taxes. Finally, the sultan ceded
his entitlement to expropriate at will.
The Gülhane Edict was not the first Ottoman attempt at top-down reform. Though no social
transformation as ambitious had been tried anywhere in the region for a half-millennium, many
modest reforms had failed in the face of fierce resistance from conservative clerics and soldiers.
On this occasion, conditions were ripe for monumental change. The most threatening anti-
reformist military units had been eliminated through a bloody showdown in 1826. In addition,
clerics were economically weaker, mainly because of the waqf’s declining economic significance.
Traditionally, clerics had derived much of their income from supervising waqfs. As the stock of
waqfs under their control fell, they became poorer and lost political influence. The weakening of
clerics and taming of the military allowed Ottoman modernizers to pursue transformations that
were once unthinkable.
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By 1839, Egypt was de facto an autonomous Ottoman province. Gedik markets existed also in
Egyptian cities, though no study exists on their operation, let alone how they might have affected
the sectarian distribution of wealth. Whatever their roles, in the century preceding World War I,
Egypt’s non-Muslims, especially European immigrants, came to play a highly disproportionate
role in commerce and finance. But, in other respects, Egypt’s economic evolution tracked the
Ottoman pattern, sometimes with differences in timing. In the century preceding World War I,
Egypt’s non-Muslims, including European immigrants, were prominently represented in upper
echelons of its largest private companies (Artunç, 2019, section 3). Already by the early 19th
century, Egypt’s de facto rulers were acutely aware of their country’s loss of economic
competitiveness with respect to Western Europe. They recognized, too, that local religious
minorities partnering with foreigners had become an engine of economic growth.
The End of Gedik Markets

Although the freely transferable gedik met the liquidity needs of atomistic premodern
enterprises, it was poorly suited to large-scale enterprises issuing hundreds if not thousands of
shares. As Middle Eastern economies started to feature large-scale enterprises, whether
headquartered domestically or abroad, a demand emerged for formally regulated and centralized
stock exchanges of the sort existing in Amsterdam and London. A stock exchange opened in
Istanbul in 1866 and in Alexandria in 1899 (Al & Akar, 2013; Raafat, 2020, pp. 6–12). Meanwhile,
gedik markets faded away—evidence of their incompatibility with the scale and accountability
needs of players in a modern economy characterized by growing reliance on impersonal
exchange.
Finance and Banking
The Middle East’s early stock exchanges followed the opening of its first banks, the Bank of Egypt
in 1855 and the Ottoman Bank a year later. These first banks and those that followed over the next
quarter-century drew capital almost exclusively from Western Europe, and they were
headquartered in major centers of modern finance. Foreign financiers were attracted to the
Middle East partly by its extremely high interest rates. In the early 1850s, commercial rates were
around 20% in Istanbul, as opposed to around 5% in major Western cities. Through interregional
arbitrage, Western financiers profited handsomely, as did their local agents; and, in the process,
they played a critical role in lowering Middle Eastern credit costs.
Effects of Banking
The earliest banks lent primarily to states and secondarily to large commercial, agricultural, and
industrial private enterprises. Gradually they increased the share of private loans in their
portfolios, including consumer credit at rates well below those in preexisting markets dominated
by local lenders. Within a couple of decades, specialized banks came on the scene, including
strictly commercial banks, mortgage banks, and agricultural banks. All accepted local deposits.
And they paid and charged interest.
Page 17 of 33
Among the lasting contributions of foreign banks was the dissemination of banking skills. As in
other nascent sectors, religious minorities, especially those with foreign protection, led the way.
They rose to high positions in foreign banks, and, later, founded domestic private banks. But by
the late 1800s, Muslims, too, were serving as banking executives, generally at domestically
capitalized state banks.
Banking failed to emerge indigenously in the Middle East for the same reason that Islamic
partnerships did not generate modern firms. It had to be transplanted from abroad because the
region’s traditional economic institutions had not generated new enterprise forms compatible
with the scales and lifespans needed for efficient financial risk pooling. The absence in Islamic
law of a concept of corporation compounded the difficulties, as it denied investors an
organizational form intrinsically well suited to pooling capital on a large scale. What was not an
obstacle is Islam’s interest ban, which is based on a misreading of the Quran (Kuran, 2004, pp. 7–
19; Rahman, 1964, pp. 12–37). Certain Quranic verses prohibit a pre-Islamic lending practice that
frequently led to the enslavement of defaulters. Although many medieval Islamic jurists
interpreted these verses as a categorical ban of interest in all its forms, Islamic courts never
enforced the prohibition anywhere. Like the medieval Church, Muslim judges allowed interest,
provided it was disguised through a legal ruse. Middle Easterners were fully accustomed to
borrowing and lending at interest. Never was it unusual for the price of a good or service to vary
with the timing of payment (Kuran & Rubin, 2018; Rodinson, 1973, chapter 3).
Accordingly, when banks opened in the Middle East, lending at interest was a novelty only
because of its transparency. Their low rates and many new financial services quickly earned them
widespread acceptance. They received requests from far-flung localities to open local branch
offices. Decades before the arrival of online banking in the 1990s, banking was part of the local
economic fabric in all but the most impoverished parts of the region.
Until the opening of banks, credit relations were personal, with one partial exception. Most
financial transactions were between individuals, without intermediation by organizations. By and
large, credit supply was a side activity of individuals smoothing consumption over time, or of
professionals seeking short-term returns in between activities, as with traveling merchants
between voyages or farmers between seasonal plantings. When it occurred, capital pooling was
limited to a few individuals, which constrained the size of supplied loans.
Transferring Money
Like medieval Europeans, Middle Easterners of the early Islamic centuries developed instruments
for transferring money across long distances without moving it physically. Typically, traveling
merchants provided money transfer services between the locations on their itineraries, for a fee.
Under Islamic law, the currency delivered at the destination had to match that received at the
origin. Thus, a bill of credit purchased for 500 dinars needed to be settled in dinars. This currency
restriction distinguished the Islamic bill of credit from its European equivalent, the bill of
exchange. A bill of exchange allowed the deposit and repayment to differ in currency. The service
Page 18 of 33
provider earned a return partly, if not fully, by adjusting the exchange rate. That is precisely why
early Islamic jurists insisted on fixing the currency. They reasoned that exchange rate
fluctuations could result in “unearned gain” for one side or the other (Udovitch, 1979).
Whatever the morality of benefiting from exchange rate movements, treating it as legitimate was
instrumental in getting European moneylenders to form perpetual long-distance partnerships.
The resulting financial webs spawned the precursors of modern international banks, such as the
Florence-based Medici conglomerate (1397–1494). Not until the 1800s did the Middle East
develop anything analogous. By no means was the restrictiveness of the bill of credit the main
obstacle to the indigenous evolution of banking (Kuran, 2011, pp. 150–158). Yet, restricting
money transfers to a single currency deprived the Middle East of a stimulus for financial
development. It dampened the need to form financial organizations with large geographic
footprints (Rubin, 2010).
The Cash Waqf

The partial exception to the personal nature of financial relationships was the cash waqf, a waqf
with an endowment consisting of currency, as opposed to real estate. Arising in the 1400s in the
Balkans, Anatolia, and northern Syria, the cash waqf became a significant player in their local
credit markets even as, in most Arab lands and Iran, the immovability requirement for waqf
endowments continued to be enforced. This geographically based difference in waqf practices
persisted for a half-millennium. In northern territories of the Ottoman Empire, as the cash waqf
gained popularity, judges learned to accept liquid endowments; and, in turn, the cash waqf’s
legalization made waqf founders feel freer to endow cash. In most Arab lands and Iran,
meanwhile, no notable movement emerged to liberalize the immovability rule, and the real estate
requirement endured. Two distinct geographically based equilibria coexisted until the 1800s.
The legalization of the cash waqf in northern Ottoman provinces came in the 1500s, at the end of
a massive legal controversy spanning decades (Mandaville, 1979). On the conservative side were
clerics who stood on principle. Unlike real estate, they reasoned, currency can disappear; hence, a
cash endowment would make it difficult to keep stipulated services perpetual. They also feared
that bending on classic waqf rules would put Islamic morality on a slippery slope; it would
encourage new demands for relaxing Islamic requirements. As for the cash waqf’s proponents,
they were mainly providers and users of credit. The very fact that many cash waqfs were being
founded, claimed the clerics who represented them, proves their usefulness. Besides, Muslims
would be the main beneficiaries, for waqfs served them disproportionately.
The constituencies in the pragmatist coalition wanted their liquid wealth to be treated as sacred,
as the immovables of classic waqfs already were. Sacredness would shield lenders from state
predation, they thought. Borrowers would also gain through the founding of more cash waqfs.
Indeed, in Istanbul, the number of new cash waqfs per year rose for more than three centuries to
1800, at which point it exceeded the number of new classic waqfs per year (Adıgüzel & Kuran,
2023, Figure 2). Although no comparable quantitative study exists for other localities, various city
monographs suggest that the upward trend in new cash waqfs was shared widely.
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Measured by assets, most cash waqfs were much smaller than even a tiny neighborhood bank.
They lent primarily to consumers rather than entrepreneurs and on scales sufficiently small to
enable risk diversification. Even after the pragmatic reinterpretation of the 1500s, waqf rules did
not exempt cash waqfs from the ban on pooling capital across waqfs. The prohibition’s effect was
to hinder the forming of organizations capable of challenging the state (Kuran, 2023, chapter 4).
Like a modern bank, and unlike a classic waqf, a cash waqf could transfer capital across economic
sectors simply by redirecting loans to a new set of borrowers. Given enough time, and without the
disruption of European global hegemony, it might have acquired other characteristics of a
modern bank through a distinct evolutionary path. Eventually, a new waqf controversy might
have broken out, this one centered on issues such as giving waqf caretakers greater discretion and
allowing mergers among cash waqfs. But to make a full transition to banking, the cash waqf
would have needed, in addition to acquiring self-governance and capital pooling rights, to
overcome an aversion to legal personhood for fictitious persons, which had been baked into
Islamic law during its formative decades. That was no small challenge.
The cash waqf’s consequent rigidities undoubtedly contributed to its failure to develop into a
lending organization able to raise abundant capital. Precisely because it lacked too many
ingredients, Middle Eastern reformers of the 1800s opted, rather than trying to build on the cash
waqf, to transplant the bank in its European variants (Kuran, 2011, pp. 158–161). Besides, even
before the region’s first modern banks, the cash waqf was losing popularity as a financial
instrument. The arrival of banking sealed its fate.
Public Debt
Like the cost of credit, that of public debt is sensitive to the risk of non-restitution, willful or not.
This is evident in the trajectories of Middle Eastern sovereign borrowing rates in international
bond markets. Between 1860 and 1877, the Ottoman Empire’s perceived default risk drove the
interest it had to pay; the rate on Ottoman bonds ranged between 8% and 11.5%. Over the same
period, the spread between Ottoman and British bond yields ranged between 5 and 8 percentage
points—a sign that investors considered default chances much higher for the Ottomans. In fact,
the Ottoman Empire defaulted on its European debt payments in 1875. European creditors then
forced on it a reform package designed to raise Ottoman fiscal capacity, but also to secure their
own loans. Toward the latter end, in debt restructuring negotiations, they made the Ottomans
accept the earmarking of certain reliable revenue streams—for instance, returns of the salt and
tobacco monopolies, the stamp duty, and fishing taxes—for debt repayment. The consortium of
European creditors also created a largely autonomous tax administration to increase the revenues
earmarked for foreign debt repayment. In response to these measures, the Ottoman-British bond
spread fell to 2 percentage points; and it hovered around that level up to 1914 (Birdal, 2010,
chapters 3–4).
Historically, opportunities for domestic borrowing were scarce. As in other states with weak rule
of law, they were unable to commit credibly to restitution, which drastically cut the numbers of
willing lenders. A complementary problem lay in a Middle Eastern pattern that was a basic
obstacle to the region’s indigenous modernization: the evanescence and atomism of the region’s
Page 20 of 33
private enterprises. Lenders with enough capital to meet the state’s needs for long-term credit
failed to emerge indigenously because of the very factors that blocked the emergence of local
banks. In the late 1700s, what may seem like an exception emerged with the rise of professional
moneylenders in Istanbul, who lent to the state for short terms (Clay, 2000, pp. 14–25; Pamuk,
2000, pp. 200–204). Even this development reconfirms several points developed earlier.
Increasingly, these moneylenders were non-Muslims with foreign connections. Benefiting from
relatively stronger property rights, they also had access to European capital markets. By and
large, they prospered not by aggregating domestic savings but, rather, by arbitraging between
European and local capital markets. In any case, for all the wealth they accumulated, local
moneylenders lacked the financial capacity to finance modernizing Middle Eastern states and
their skyrocketing costs of governance. It fell to Europeans to raise the bar in public lending
another notch, through banks capable of making large loans for long terms.
Institutional Change and Economic Modernization
Banking arrived in the Middle East during feverish campaigns to modernize local economic
structures. But the region’s economic modernization did not begin with the state-endorsed, if
not state-directed, institutional reforms of the 19th century. For all its limitations as a financial
instrument, the cash waqf was an act of liberalization. The waqf itself was an ingenious and
momentous innovation. Six centuries earlier, it had strengthened the property rights of elites and
incentivized philanthropy. As the gedik evolved, it expanded the options of private investors.
Another context featuring successive institutional changes is taxation.
Taxation
Taxation is among the economic matters on which the Quran contains explicit rules. The Quran
mandates a transfer system known as zakat. Zakat dues were fixed in proportionate terms, as a
set of flat taxes. The taxes were to be paid annually on the most common sources of income and
wealth in the milieu where Islam was born. Exemption thresholds made zakat levies mildly
progressive. The collected state revenue was to finance eight missions enumerated in the Quran,
each corresponding to the customary state functions in Antiquity. On the collection side, this
transfer system made state levies predictable, established personal property rights, and
constrained the state’s fiscal arm. However, mere decades after the Quran became a closed book
with Muhammad’s death in 632, zakat lost its relevance to Islamic rule. One reason is that the
meteoric spread of Islam way beyond Arabia, into relatively more urbanized and economically
more advanced territories, made zakat’s tax coverage seem archaic. Another is that wealthy
constituencies gained asset-based exemptions for one reason or another, shrinking zakat’s
resource base even relative to its original form implemented under Muhammad’s leadership.
These two transformations opened the door to arbitrary government takings (Kuran, 2020). From
the 660s to modern times, Middle Eastern tax policies evolved without being limited by zakat in
any meaningful way.
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In any given sector of locality, the form of taxation generally followed precedenteven after the
660s. Over long periods, though, it was responsive to economic conditions, but also to the needs
of rulers. Tax rates could increase during a war, when rulers sought additional revenue in a hurry,
or decrease during a famine, when tax potential fell manifestly (Darling, 1996; Løkkegaard,
1950). And, at any given time, huge variations were common across income types, wealth
categories, and places. For example, although the Islamic agricultural tax (ʿushr) was formally
capped at one-tenth of the harvest, in practice it was often as high as one-third; besides, farmers
paid many other taxes. In setting tax policies, rulers did not feel constrained by equal-treatment
principles that are implicit in the Quran and explicit in exegetical treatises on taxation (Coşgel,
2005; Faroqhi, 1994, chapter 18; Şener, 1990, pp. 91–187). Efforts to squeeze the peasantry were
the prime cause of countless rural uprisings (Chalcraft, 2016, pp. 66–71; Özel, 2016, chapters 3–
5).
Among the reforms of the Arab empires that succeeded the original Islamic state (622–661) was
the adoption of tax farming as an instrument for raising taxes from constituencies that rulers
understood poorly. By auctioning off the right to collect taxes from a particular “farm,” which
could be a geographic area or an economic sector, the state exploited the private information and
expertise of investors. Ordinarily, a farm’s winner was the bidder most knowledgeable about its
sources of wealth and income. Ottoman rulers experimented with diverse forms of tax farming.
Their boldest new initiative came in 1695, with the conversion of farms meant to last 1–12 years
into life-term tax farms. As expected, the bids for these farms rose, boosting tax revenue. An
unintended effect was to give political clout to life-term tax farmers, who began asserting
bequest rights and, eventually, even full private ownership. Over the long-term, such conversions
resulted in revenue losses in territories featuring life-term tax farms (Balla & Johnson, 2009;
Çizakça, 1996, chapter 5; Darling, 1996, chapters 4–6). Waiting for an opportunity to regain lost
tax capacity, the Ottoman state began in 1812 to confiscate life-term tax farms. Among the
downsides was a loss of credibility. In financial dealings, the Ottoman state’s promises counted
for even less than before. As Western states improved their ability to borrow locally, that of the
Ottoman state remained very limited.
Fleeting Efficiency of Reforms

Reforms that solved immediate problems were not necessarily optimal in the long run. Extending
tax farming periods did serve pressing state needs; state revenue increased, and longer terms
incentivized bidders to keep an eye on farm productivity. But, as just mentioned, the extensions
also triggered a chain of actions that harmed the state and made it lose financial credibility.
Institutional innovations implemented before the 1800s also addressed major problems—the
material insecurity of elites with the waqf, credit shortage with the cash waqf, and demand for a
liquid and tradable financial asset with the gedik. But none of these innovations retained its
usefulness. Each became dysfunctional as economic conditions changed, most glaringly with the
emergence of alternatives better suited to a modern economy.
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Radical Reforms of the 1800s

In three essential respects, reforms initiated in the 1800s differ from institutional innovations of
earlier times. First, they were undertaken in response to an existential threat from abroad, as
opposed to a long-simmering domestic problem. Their promoters considered radical reforms
necessary to maintaining sovereignty. Second, they consisted of wide-ranging structural
changes, introduced in short succession, sometimes even simultaneously. Third, they entailed
wholesale transplants from abroad. The innovations of earlier centuries had evolved organically
and over decades, through the tug and pull of diverse domestic constituencies. Although certain
innovations, such as the waqf and tax farming, emulated non-Islamic prototypes, Middle
Easterners developed distinct variants of their own. In any case, certain other earlier reforms
were home-grown. Neither the cash waqf nor the gedik had a foreign analogue.
The state of underdevelopment that triggered wide-ranging modernization campaigns was

evident in the deepening chasm between Western and Middle Eastern living standards, military
power, literacy, state capacity, and more. The most expeditious way to catch up, ruling elites
came to believe, was to borrow Western technologies and institutions. Unsurprisingly in
retrospect, borrowed physical technologies proved easier to graft onto the prevailing domestic
systems. Machines could be transported from the West as necessary, along with technicians to
operate them. But transplanting the laws, social norms, and organizational forms needed to use
machines efficiently posed colossal challenges. They required unprecedented coordination, new
pedagogies, radical changes in educational content, alien laws, unfamiliar markets, and
transformations in governance. Vested interests put up resistance. Appreciation of various
difficulties developed gradually, partly through disappointments (Anscombe, 2010; Çiçek, 2010,
chapters 1, 3–4; Cole, 1993, chapters 1–4).
As rulers gained awareness of obstacles to speedy and comprehensive institutional change, they
pursued top-down measures designed to accelerate the process. A momentous initiative was the
founding of the region’s first modern company capitalized entirely by domestic investors. This
trailblazing company was Şirket-i Hayriye (literally, Auspicious Company). Based in Istanbul, it
was established in 1851 to provide marine transportation under the patronage of the reigning
Ottoman sultan. It would have an indefinite existence and publicly traded shares registered
centrally. The Sultan himself became the largest shareholder. His trigger was that the Ottoman
economy was falling rapidly under the domination of perpetual and large enterprises owned by
foreigners, or religious minorities, or some combination thereof. The sultan considered it urgent
for Turks, mostly Muslim and the empire’s politically dominant nation, to begin pooling capital
within modern companies. Şirket-i Hayriye would provide an inspiring model for private
entrepreneurs (Tutel, 1997, pp. 18–24).
This initiative illustrates that the region’s elites were coming to grips with the limitations of
traditional economic institutions grounded in Islamic law. Evidently, they could see that the
Islamic partnership was ill-suited to forming and running the sort of enterprise that prevailed in
new economic sectors such as banking, insurance, mass transport, and mass manufacturing. The
1851 initiative is instructive for another reason, too. Although Şirket-i Hayriye became a
profitable company, it took more than a half-century for Muslims of the Ottoman Empire or
Page 23 of 33
elsewhere in the region to begin emulating its organizational features widely. A basic problem
was that installing a law of business corporations was a piecemeal affair that extended well into
the 20th century.
Modernization of Economic Laws

The first mention of a corporation in any Middle Eastern legal system was in the Ottoman
Commercial Code of 1850, but it did not define the term. In any case, various complementary laws
were absent. Specificity came through successive amendments, and the missing complementary
institutions required separate initiatives. Nevertheless, even before it became possible for
indigenous private enterprises to incorporate at will, local corporations were formed under
provisional laws, special arrangements, or the sultan’s patronage. A mini-explosion of Muslim-
financed modern companies occurred between 1908 and 1914, under a constitutional government
that made it easier for Ottoman citizens, and especially its Muslims, to form modern companies.
Non-Muslims able to partner with foreigners under a foreign legal system also took advantage of
the new Ottoman laws, armed sometimes with monopoly privileges (Ağır & Artunç, 2021;
Akyıldız, 2001, pp. 19–44).
Egypt, the co-engine of the Middle East’s economic modernization, followed a largely similar
pattern with respect to instituting a legal infrastructure for modern companies. Even as it made a
point of charting an independent course in many arenas, it treated the Ottoman Commercial Code
of 1850 as applicable in Egypt as well. A quarter-century later, Egypt initiated a string of
amendments and extensions that resulted in a viable law of business corporations. Like the
Ottoman Empire, Egypt also took nationalist measures to ensure domestic participation in the
ownership and governance of its corporations (Artunç, 2019, pp. 979–984; Artunç & Saleh, 2022).
The first wholly Egyptian-owned and administered modern company, Bank Misr, was established
in 1920 (Davis, 1983, chapters 1, 4–5).
The opening of secular commercial courts (known in some cases as mixed courts) constituted
another key initiative aimed at defensive economic de-Islamization. At least up to World War I,
these courts enforced a European commercial code transplanted with only minor touches. They
gave Middle Easterners of all creeds opportunities to conduct their commercial and financial
affairs under contemporary global rules, without hindrance from medieval restrictions. They
allowed credit transactions to involve interest transparently and were suitable to banking. They
accommodated risk reallocation through insurance contracts.
A complementary motive for establishing secular commercial courts was the growing economic
clout of religious minorities and non-Muslim foreigners. To catch up economically, Muslims
needed to interact with economically more successful groups; and simultaneously, they had to
increase their participation within expanding sectors of the unfolding modern economy.
Impartial conflict resolution systems would facilitate this communal objective. In the 1850s, as in
earlier times, Islamic courts were inherently biased in favor of Muslims. Staffed exclusively by
Muslims, they weighed evidence with a systematic pro-Muslim bias. Insider bias was nothing
unusual; even in the early 21st century, judges across the world tend to favor domestic litigants in
disputes that pit them against foreigners. More critical is that the Islamic judicial system lacked
Page 24 of 33
instruments to mitigate sectarian insider bias, such as appeals tribunals and anti-favoritism
norms. A judge’s rulings were final. The Islamic legal curriculum taught officials to treat Muslims
as more trustworthy than non-Muslims. On that basis, judges considered a Muslim’s testimony
more credible than that of a non-Muslim, all else being equal. Basic economic logic suggests that
in their legal affairs, Muslims would have tended to exploit their judicial advantages. Indeed,
Muslim litigants did so commonly (Kuran & Lustig, 2012, sections 3, 6). An unintended effect was
to taint Muslims generally as market participants. This happened even in the eyes of fellow
Muslims. Evidence lies in religion-based variations in the interest rates that borrowers paid in
competitive credit markets. Muslim lenders lent to fellow Muslims at higher rates than they did to
non-Muslims (Kuran & Rubin, 2018). Among the major functions of secular commercial courts
was the leveling of the legal playing field across religious communities. Muslims were among the
main beneficiaries, as they gained credibility in accepting contractual obligations.
Broader Effects of Economic Secularization

In the 20th century, several countries of the region—Turkey, Iran, Tunisia, Iraq, Syria, Algeria,
Egypt—had periods of state-promoted social and political secularization. Their leaderships
deliberately shrank the roles of religion in daily life, especially in public settings. These
campaigns were enabled by, and they advanced, transformations that amounted to economic
secularization. The decline in the popularity and then the nationalization of waqfs are examples;
another is the flourishing of gedik markets. The opening of commercial courts constituted an
even bolder case, as it explicitly transferred various economic functions from clerics to
professionals with credentials unconnected to any religion. Even though commerce and finance
remained within the jurisdiction of Islamic courts, as a matter of practice, the economic roles of
Islamic courts shrunk measurably. Where commercial courts opened, they attracted most legal
business with financially high stakes.
From the birth of Islam onward, Islamic teachings treated Islamic law as a comprehensive system
for regulating life in a Muslim-governed society. Although clerics had exempted rulers from
standards applied to most of their other subjects, they had never ceded a domain of life to a rival
legal system. The sustained economic secularization initiated in the 1850s established a visible
precedent for narrowing the domain of Islamic law. In reducing clerical responsibilities and
sources of income even further, it also dealt further blows to the ability of clerics to block
modernizing reforms (Platteau, 2017, chapters 9–10; Rubin, 2017, chapters 8–9).
The Capitulations
Although the economic reforms of the 1800s produced tangible benefits for the Middle East’s
indigenous peoples, the resulting opportunities were not new to the region. Foreign settlers and
their local protégés were already familiar with the institutions that defined economic
modernization. Known as “capitulations,” these treaties enabled Westerners to exchange with
Middle Easterners under the commercial cultures of their own countries (Liebesny, 1955).
Page 25 of 33
A salient common characteristic of the capitulations that Middle Eastern rulers granted to
Western powers is their almost exclusive focus on the needs of Western entrepreneurs. Thus, in
the 1400s, the rulers of Mamluk Egypt and, starting in the 1500s, Ottoman rulers gave Western
merchants rights that they denied to their own subjects. For example, even as arbitrary levies
remained an irritant to indigenous communities, they restricted the fees and taxes due from
Westerners. The capitulations also gave foreigners immunity to lawsuits based on oral claims
alone, without documentary support (Hurewitz, 1975, docs. 1–7, 9, 10, 14). Four centuries after
the capitulations made oral contracts unenforceable in Islamic courts against foreigners, in the
early 1900s, it remained possible to sue an Ottoman subject in an Islamic court for breach of an
alleged oral commercial agreement.
Such foreign privileges reflected Western Europe’s institutional evolution. The emergence of
parliaments and other political checks and balances were reducing arbitrary exactions.
Concomitantly, literacy and the spread of impersonal market exchanges were augmenting
reliance on written contracts in economic life. Impersonality could stem from the absence of prior
bonds between the parties trading with each other. It could stem also from the presence of
organizations, as opposed to flesh-and-blood individuals, among economic players. Through the
capitulations, Western powers transplanted to the Middle East institutions essential to
impersonal exchange. Initially, these institutions, such as consular courts familiar with legal
personhood, supported only the dealings of foreigners and their local protégés. Middle Eastern
rulers accommodated the wishes of European merchants for the sake of keeping them motivated
to finance and conduct interregional trade (Kuran, 2011, chapters 11–12). An unintended
byproduct was the deepening of Middle Eastern reliance on Western merchants. As finance
became a specialized sector of the Western economy, Middle Eastern rulers became dependent on
Western financiers, too. The foreign role in transplanting modern finance has already been
covered.
By the 1800s, the capitulations had turned into an instrument of discrimination against the
Middle East’s indigenous peoples. As a case in point, foreigners were invoking immunity to
arbitrary taxation to escape payment for new urban services. When the Ottomans abolished the
capitulations in 1914, the region erupted in celebrations. Even before then, the key economic
institutions that the capitulations brought to the Middle East were part of the local economic
fabric. Their demonstration effect had run its course. None of the successor states of the Ottoman
Empire reinstated the capitulations.
Challenges Ahead
Over the past 3 decades, the study of Middle Eastern economic history has deepened our
understanding of patterns that earlier generations of scholars had described in broad generalities.
Social scientists have used the methodologies of institutional political economy to explain
systematically the region’s economic past, including cases of both institutional stability and
institutional change. Concepts such as individual incentives, institutional complementarities,
transaction costs, equilibria, unintended consequences, and informational asymmetries are now
common in the subfield. Theorizing is moving conjointly with collecting archival data and
Page 26 of 33
hypothesis testing. These research types are stimulating each other as they correct
misconceptions, fill gaps in our knowledge, and fuel demand for new databases. The subfield is
advancing measurably.
Nevertheless, Middle Eastern economic history remains well behind its area-based counterparts
focused on Western Europe or North America. A critical problem lies in the range of available data.
Until the late 1800s, and in certain places until well into the 1900s, the scale and longevity of
indigenous enterprises obviated record keeping within private sectors of the Middle East.
Consequently, Middle Eastern economic history lacks the rich private commercial and financial
archives that have contributed immensely to advances in Western European and North American
economic history. On the brighter side, vast public archives, including court data that provide
glimpses into private economic life, have begun to be analyzed only recently. Diverse state
records, too, remain untouched by analysts equipped with modern analytic tools.
A stimulus to researching Middle Eastern economic history is growing interest in the drivers of
economic development and the dynamics of underperformance traps. The Middle East offers a
fascinating laboratory on both counts. Insights from studying the Middle East can furnish clues to
solving historical puzzles in faraway places. A barely pursued line of inquiry consists of
comparative economic history with an “East–East” focus—“Middle East versus China,” “Middle
East versus India,” “Middle East versus Japan,” and the like. Deep East–East comparisons can
serve to refine theories concocted in the context of a specific industrial laggard. They can also
help separate location-specific responses to underdevelopment from ones shared universally.
Analytic Middle Eastern economic history consists very disproportionately of works on Turkey
and Egypt. Research on premodern Iran is relatively scarce, partly because its Islamic courts
tended not to keep systematic records. Within Turkey and Egypt, most work to date focuses on
either major cities or the agricultural sector. Consequently, little is known on geographic
variations, to say nothing of explaining them. On such matters as contract types, waqf use, the
roles of religious minorities, and financial development, a challenge is to identify variations
across space and time, but also to uncover the underlying mechanisms.
All the main topics of Middle Eastern economic history require more research. The interactions
between state economic policies and private economic practices call for additional thinking and
testing. Voids exist in our understandings of the advantages that European legal protections
conferred to the Middle East’s indigenous religious minorities. Other broad topics that present
intriguing questions include technological and institutional innovation. In specific cases, what
explains why innovations were made or successfully resisted? Similar questions remain
unanswered for borrowings from outside the Middle East. Even the 277-year gap between the
start of Europe’s Printing Revolution and the opening of the first printing press for Muslim use
has not been studied comprehensively, with attention to both demand and supply factors.
Historical research is intrinsically valuable in its own right, but also as a source of insights into
the present. Abundant economic studies in various locational and temporal contexts show that
institutions can foster behavioral patterns that then continue to influence outcomes long after
their demise. Two salient patterns in the Middle East are low trust in strangers and a preference
for personal exchange (Bohnet et al., 2010; Kuran, 2023, chapter 3). The underlying historical
Page 27 of 33
causes have been explored. But formal testing of the historical links awaits further research.
Related scholarship on historical human capital shows, amazingly, that its effects can persist for
generations. In contemporary Turkey, towns with Armenian communities until World War I or
Greek Orthodox communities until the Greek–Turkish population exchange of 1922 continue to
benefit from the human capital of the departed communities (Arbatli & Gokmen, 2023). As in
other fields of economic history, in Middle Eastern history, efforts to measure persistence benefit
from the availability of digital tools for including geographic information into comparative
analysis. Studies that include geographic data among their variables are bound to generate novel
findings and open new research directions.
Further Reading
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Kuran, T. (2018). Islam and economic performance: Historical and contemporary links. Journal of Economic Literature,
56, 1292–1359.
Kuru, A. T. (2019). Islam, authoritarianism, and underdevelopment: A global and historical comparison. Cambridge
University Press.
Owen, R. (1981). The Middle East in the world economy 1800–1914. I.B. Tauris.
Tignor, R. (1966). Modernization and British colonial rule in Egypt, 1852–1914. Princeton University Press.
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Kuran-Economic History of The Middle East, 622-1914

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Kuran-Economic History of The Middle East, 622-1914

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Economic History of the Middle East, 622–1914

Economic History of the Middle East, 622–1914

Subjects: Economic Development, Economic History, Law and Economics

Figure 1. Real daily unskilled wage in Istanbul, 1480–1914 (1489 = 1.0).

The inadequacies of widely popular explanations have stimulated multi-pronged research

The Legal Contract

Neither form of the limited partnership—mudaraba or commenda—restricted enterprise size or

The Islamic Inheritance System and Islamic Polygyny

An unintended consequence of the Islamic inheritance system was difficulties in keeping

Consequences for Organizational Advancement

Effects on the Division of Labor

Enterprise Forms and Economic Development

The Islamic Waqf

Emergence, Characteristics, and Intended Functions

Widely Shared Economic Benefits

Mounting Economic Costs

The Dismantling of Waqfs

Shifting Economic Fortunes of Religious Minorities

Economic Advances of Christians and Jews

Islamization of Non-Muslim Practices

New Legal Options During the West’s Economic Modernization

Christian Gains in Equity Markets

Meanwhile, long-term investments formed almost exclusively by Muslims—wealth shelters

Demonstration Effects of Christian Economic Gains

The End of Gedik Markets

Finance and Banking

The Cash Waqf

Institutional Change and Economic Modernization

Fleeting Efficiency of Reforms

Radical Reforms of the 1800s

The state of underdevelopment that triggered wide-ranging modernization campaigns was

Modernization of Economic Laws

Broader Effects of Economic Secularization

Akyıldız, A. (2001). Ottoman securities. Tarih Vakfı.

Cromer, E. B. (1909). Modern Egypt (2 Vols.). Macmillan.

Dönmez, A. R. (1991). Cumhuriyet Devrinde Vakıflar [PhD dissertation, Ankara University].

Duwaji, G. (1968). Land ownership in Tunisia: An obstacle to agricultural development <https://doi.org/

Lewis, B. (1982). The Muslim discovery of Europe. Norton.

Raafat, S. (2020). The Egyptian bourse. American University of Cairo Press.

Rahman, F. (1964). Ribā and interest <https://doi.org/10.1080/20780389.2012.657481>. Islamic Studies, 3, 1–43.

Renan, E. (1883). L’Islamisme et la Science. Calman Lévy.

Şener, A. (1990). Tanzimat Dönemi Osmanlı Vergi Sistemi. İşaret Yayınları.

Tutel, E. (1997). Şirket-i Hayriye. İletişim Yayınları.

Early and Medieval Periods in German Economic History

Financial History of Sub-Saharan Africa

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