ECONOMIC DEVELOPMENT. As Europe’s Industrial Revolution got underway, the Islamic world was in the final phase of a protracted decline that began around the twelfth century. The slide had appeared to be over with the rise of the Ottoman Empire, but the Turkish defeats of the seventeenth and eighteenth centuries made it plain that the balance of power now favored the industrializing nations of western Europe. The military failings of the Turks, like those of other Muslim forces, reflected the Islamic world’s economic backwardness in regard to the West. At the beginning of the nineteenth century, Muslims remained overwhelmingly illiterate, whereas in large areas of Europe mass education was already more than an ideal. Few Muslims appreciated, and even fewer sought to capitalize on, the scientific discoveries and organizational innovations that were transfiguring production processes, ushering in new commodities, and boosting living standards in the West. Muslim trade with the outside world, even trade within it, was largely under the control of Europeans, whose local representatives came principally from minority groups. The Islamic world featured no major banks, and its public treasuries were too depleted to finance large-scale development projects.
Two centuries later, some Muslim countries are on the World Bank’s roster of high-income countries, with many others in the middle-income category. The better off countries feature well-capitalized local banks that finance both trade and a wide range of investments. Some have rapidly growing and increasingly diverse industries that export heavily to the West. Their private and public sectors operate dams, power facilities, modern transportation and communication networks, agricultural and industrial enterprises, hospitals, and vast education programs. Against these achievements, the Islamic world also contains some impoverished countries. Yet even the poorest countries have undergone profound transformations: in the most populous ones, the share of agriculture within gross domestic product is now below, and in some cases much below, 40 percent. The economic transformations of the past two centuries have been neither continuous nor free of conflict. Along with periods of feverish reform, there have been times of resistance to institutional change, to integration into the world economy, and to the reallocation of resources.
In the early nineteenth century the Islamic world was rocked by an invasion of mass-produced goods from Europe. The inflow of industrial commodities dealt a severe blow to the profitability of various craft guilds. Some succumbed quickly to the competition. The majority survived, although they lost both market share and political clout. By and large, they reacted to the competition by seeking to strengthen their customary rules through legal codification. They were generally slow to change their production methods and to reorganize. Under the circumstances, the new European technologies were introduced into local economies primarily by entrepreneurs operating outside the traditional craft guilds.
In the second half of the nineteenth century new industries and trading companies were established, first in the major urban centers and then in the hinterland. Although still centers of fine handicrafts, the guilds progressively declined in economic importance. In the process, they started losing their ablest workers. Even some masters joined the exodus, leaving their time-honored marketing districts to open shops in new economic centers or to become workers in nascent factories.
Meanwhile, agriculture became increasingly commercialized, with certain crops cultivated primarily for export to Europe. Largely through the initiative of European trading companies, silk became a major export commodity in Syria, Lebanon, Turkey, and Iran; cotton in Egypt, Syria, and Turkey; wine in Algeria and Tunisia; tobacco in Turkey, Iran, and the Dutch East Indies; rubber in Malaya and the Dutch East Indies; palm oil and groundnuts in Central and West Africa; tea and jute in India; and coffee in Yemen and the Dutch East Indies. An indigenous development of the period was the emergence of the Jaffa orange as a lucrative export commodity in Palestine.
These transformations in the private economy were accompanied by revolutionary changes in the scope and character of government. Until the nineteenth century, the economic functions of Muslim governments went scarcely beyond the enlargement, exploitation, and protection of their revenues and modest efforts at redistribution to preserve social stability. Governments undertook few infrastructural investments, did not engage in economic planning, and left many matters that we now consider essential government functions to the guilds, to local communities, or simply to the discretion of individuals. Their revenue came mainly from direct taxes on land, although at various times and places substantial additional sums were raised from the sale of commercial and artisan licenses. By the mid-nineteenth century, large regions of the Islamic world, including India, Indonesia, Malaysia, Algeria, and much of sub-Saharan Africa had fallen under European rule. The economies of these regions had thus come to be administered by Europeans. Around this time, in the non colonized parts of the Islamic world, government activism in the economic sphere was beginning. With Muhammad `All’s reforms in Egypt (1805-1849) and the Tanzimat in Turkey (1839-1876), independent and semi-independent Muslim governments started promoting new industries; codifying financial, commercial, and administrative procedures; relying increasingly on indirect taxes, including excise taxes, for revenue; and establishing secular schools to train specialists and civil servants. In instituting such reforms, these governments became increasingly centralized.
The nineteenth-century reformers understood that sustained development would require much new infrastructure. They had neither the funds nor the know-how, however, to undertake major investments on their own, so they borrowed heavily from Western financiers and relied on foreign enterprise. Some of the great infrastructural projects of the period, including the Suez Canal, the Berlin-Baghdad Railway, the ports at Port Said, Beirut, and Haydar Pasa, the gas, water, and power systems of Istanbul, Cairo, Baghdad, Damascus, and other cities, and some of the early irrigation systems in Egypt, were undertaken through borrowed funds and with technical and administrative guidance from foreigners. The first half of the nineteenth century saw the establishment of private banking firms, mostly British, in major cities of the Islamic world. With government debt rising, several foreign-owned incorporated banks came on the scene in the middle of the century, including the Ottoman Bank, the Bank of Egypt, and the London and Baghdad Association. Shortly thereafter the leading European banks opened their own branches in many places. These banks allowed local government debt to grow enormously, and before long one government after another found itself unable to meet its interest obligations. The standard European response was to put an international commission in charge of the defaulting government’s finances. Some countries, such as Turkey and Iran, continued to retain their political independence even as they lost financial autonomy. Others, notably Morocco, Tunisia, and Egypt, endured foreign occupation.
Scant industrial investment took place in the Islamic world until the aftermath of World War I, partly because international treaties precluded local governments from developing industries to compete with foreign enterprises. During World War I, certain local governments found their supplies of industrial commodities cut off, so they began producing domestic substitutes, generally at high cost. After the war, many independent governments as well as some colonial administrations continued promoting nascent local industries, through both subsidies and preferential buying schemes. A highlight of this era of economic nationalism is the opening of the first banks owned and managed by locals: Bank Misr in Egypt and Is Bank in Turkey.
With the onset of the Great Depression, the drive toward self-sufficiency accelerated. Declining world prices for the Islamic world’s traditional export products prompted governments facing trade deficits to give their industries high tariff protection. Many Muslim governments were free by this time of treaty restrictions on their tariff policies. In addition to regulating trade, they started to manage consumption patterns and the sectoral allocation of investments. Their efforts coincided with expanding government interventionism in the Soviet Union and in Germany.
As world trade entered a new expansionary phase after World War II, operating the infant industries established to substitute for imports became increasingly costly. Yet most governments went on protecting them through high import barriers.
The most significant economic development of the post-World War II era has been the emergence of oil as an overwhelmingly important source of government revenue and foreign exchange in Saudi Arabia, Kuwait, Qatar, Oman, the United Arab Emirates, Iraq, Iran, Algeria, Libya, Nigeria, Brunei, and Indonesia. All these countries have become major exporters of oil.
The oil industry of the Islamic world had its beginnings in the late nineteenth century in exclusive concessions granted to foreign oil companies in Iran and the Dutch East Indies. Its rise to global prominence came much later, in the mid-twentieth century. In 1940 Muslim countries accounted for 8 percent of the world’s oil production. By 1970 their share had surpassed 40 percent.
Prior to the early 1970s, the foreign companies that ran much of the Islamic world’s oil industry adhered to common rules with regard to production, marketing, and host country rights. In effect, they acted as a cartel limiting returns to the producing countries. The 1950s and 1960s featured some attempts at nationalization on the part of local governments, but they were generally unsuccessful. Against this background, the Organization of Petroleum Exporting Countries (OPEC) was formed in 1960 to facilitate cooperation among major producers in their dealings with oil companies. In the first decade of its existence, OPEC provided only modest benefits to its members. By 1970, however, its clout was growing as cracks appeared within the cartel of foreign companies. The subsequent decade saw two OPEC-supported jumps in the world price of oil: a quadrupling in 1973-1974 and a further tripling in 1979-1980. Each price hike was triggered by political events in the Middle East. The first occurred when OPEC’s sister organization, the Organization of Arab Petroleum Exporting Countries (OAPEC) imposed an oil embargo on certain countries deemed to have supported Israel in the Arab-Israeli War of 1973, including the United States. The second was precipitated by the Iranian Revolution of 1979 and the decision of Iran’s new government to slash its oil production.
The price shocks of the 1970s stimulated exploration and production outside of OPEC. Partly as a consequence, OPEC’s share of world production fell to 30 percent by 1991, even though it holds about two-thirds of the world’s proven reserves. Meanwhile, the price of oil receded to its mid-1970s level. Most analysts attribute the decline not to OPEC as a whole but rather to the efforts of Saudi Arabia, OPEC’s leading producer, to preserve the value of its vast reserves by discouraging substitution away from oil in the industrialized West.
The flow of oil revenue to OPEC’s Islamic members has served to finance enormous economic development programs. It has allowed these countries to raise their saving and investment rates to unprecedented heights; gain access to advanced technologies; make major improvements in their infrastructures; and offer their populations greatly upgraded and expanded public services. The low-population countries, which have few complementary resources, have gained, in addition, the ability to invest substantial sums in world markets. Most of their investments are in Europe and North America. The oil-poor countries of the Islamic world have benefited in several ways from the boom in the oil-rich countries: higher export earnings, foreign aid, and remittances of guest workers.
Along with many positive economic effects, the oil boom has also had some negative consequences for the oil exporters. The production of other internationally traded commodities, including agricultural goods, has tended to decline. Wage increases have outstripped productivity gains, thus rendering local industrialization unprofitable. Female labor participation rates have fallen, causing fertility rates to rise. With the local investments of all oil exporters concentrated in industries whose demand has suffered from high energy prices-petrochemicals, aluminum refining, dry docks-much established capacity has remained underutilized. Extensive state subsidies to individuals have undermined work effort as well as the incentive to acquire marketable skills.
By the mid-1980s, these adverse effects, together with falling oil revenues, had prompted many oil exporters to seek to diversify their economies and privatize their public enterprises. Such policies were already in place in many of the oil-poor countries, including Malaysia, Turkey, and Egypt. In these countries market-oriented reforms, encompassing also the liberalization of foreign trade, had generally followed balance-of-payments crises. The pro-market drive also drew strength from the emergence of East Asia as an economic powerhouse through export-driven growth policies and from the deepening economic crisis of the Soviet bloc. On the whole, however, liberalization and privatization have proceeded slowly, partly because, in both oil-rich and oil-poor countries, reforms have encountered stiff resistance from civil servants, labor groups, and industrialists long-accustomed to protection. The largest increases in industrial exports have been achieved by Turkey, Tunisia, Malaysia, Indonesia, and Kuwait.
The ownership structure of industry exhibits some variation, although family-owned, small firms are common everywhere. In Turkey, Pakistan, India, and Lebanon, many large enterprises belong to highly diversified private conglomerates; others are state owned. In much of the rest of the Islamic world, including most oil-exporting countries, almost all large enterprises are under state ownership. A few countries allow foreign ownership, but most permit only joint ventures. Inter-Arab joint ventures, both public and private, have become increasingly common since the 1970s.
As the twentieth century draws to a close, the economic achievements of the Islamic world present a decidedly mixed picture. The oil-rich states of Saudi Arabia, Kuwait, the United Arab Emirates, Qatar, Libya, and Brunei have attained per capita incomes that place them among the world’s high-income countries. Most of the remaining Arab states fall in the middle-income category, as do four other predominantly Muslim countries, Turkey, Iran, Albania, and Malaysia. Yet six of the eight countries with the largest Muslim populations-India, Indonesia, Pakistan, Bangladesh, Nigeria, and Egypt are among the world’s poorest, as are certain smaller Muslim or semi-Muslim states of Africa and Asia. Life expectancy at birth exceeds sixty-five in Jordan, Lebanon, Turkey, Tunisia, Algeria, Malaysia, the United Arab Emirates, Kuwait, Qatar, and Brunei, whereas it remains below fifty in Afghanistan, Yemen, and several largely Islamic countries of sub-Saharan Africa. Adult literacy stands above 8o percent in Turkey, Lebanon, and Jordan, and above So percent in all the other high- and middle-income countries. In the poor countries, by contrast, literacy lies between 2o and So percent.
Within individual countries, certain inequalities are very pronounced by global standards. The distributions of wealth and income are highly unequal in most countries because of disparities in land ownership, inequalities in access to education, and in some cases, ineffective redistribution systems. Most of the large countries show huge inequalities between regions and between cities and the countryside. Finally, there are remarkably high inequalities based on age and gender. Where in most parts of the world life expectancy at birth and child survival rates tend to be considerably higher for females than for males, in some parts of the Islamic world, including Bangladesh, India, and Pakistan, they are lower for females. In some countries, males outstrip females in educational attainment, measured in years, by as much as So percent, although the gap has been shrinking rapidly.
The ideas, expectations, priorities, and apprehensions that have under girded the Islamic world’s development drive since the nineteenth century have been shaped largely by interactions with the West, although local sensibilities, intellectual traditions, and political conditions have colored every concrete reform. In the second half of the twentieth century, attempts have been made to base the economic transformation of the Islamic world on self-consciously Islamic principles. Some countries, most notably Iran and Pakistan, have tried to eliminate the use of interest and to institute Islamic redistribution schemes. Such efforts have had no major impact on any key indicator of development.
[See also Modernization and Development.]
BIBLIOGRAPHY
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TIMUR KURAN and JEFFREY B. NUGENT