Islam per se is not harmful to development. But certain interpretations of the religion do harm by keeping people from thinking straight and by blocking policies in everyone’s economic interest. Tensions grounded in sectarianism, such as Sunni-Shia conflicts, harm economic activity by driving away capital. And historically, Islamic law (sharia) harmed economic development by blocking the emergence of modern economic institutions indigenously.Until a few centuries ago, the Middle East was a prosperous part of the world. Only China might have been richer. Travelers marveled at the variety of goods and volume of commerce. Although they were critical about certain aspects of the region, they did not consider the economy backward. By the nineteenth century, the region looked economically backward relative to Western Europe. The Middle East had fallen behind principally for two reasons.
First, its businesses remained small and short-lived at a time when Western Europe was forming huge and perpetual companies, including profit-seeking corporations. For this reason, the Middle East was unable to exploit the technologies of the Industrial Revolution. Its indigenous people could not compete in the most lucrative sectors of the era, such as mass manufacturing, mass transportation, banking, and insurance. Two Islamic institutions kept the region from developing the institutions necessary for the formation of large and perpetual companies: Islam’s quite egalitarian inheritance system and its marriage system. These institutions contributed to fragmenting successful businesses and limiting capital accumulation. The small scale and lifespan of companies blocked innovations of the type that arose in Europe to serve the needs of large and long-living companies. Stock markets, banking, and modern accounting offer examples of the sorts of innovations that were absent in the pre-modern Middle East.
The second basic problem is that Islam’s main vehicle for providing social services, the trust known as a waqf, was by design a rigid organization unsuitable to times of rapid technological change. The waqf served the institutional role that the corporation, a self-governing and thus far more flexible organization, did in Western Europe. Whereas European universities were corporations, Middle Eastern madrasas were waqfs. Waqfs large and small provided the services supplied in Europe by municipalities. A lot of capital was tied up in large waqfs, which had another drawback. The commercial sector was starved of capital.