Wednesday, 6 June 2012

Timur Kuran on why Indian Muslims lagged economically

This is Muhammad Ali Jinnah, speaking in 1946 to an American Missionary, on why Muslims can't live with Hindus

As a matter of fact, Jinnah's own ancestral community- the Khojas- had the same inheritance rules as Hindu entrepreneurial castes and did just as well as them financially. Jinnah had spoken up for reform of Sunni and 12er Shia Waqf (Inheritance) Law,  as early as 1910, so- clearly- the topic was one Jinnah had thought much about.
The great Turkish economist, Timur Kuran has published a paper suggesting that Indian Muslims  fell behind Hindus because British Courts interpreted Waqf law strictly, thus preventing inherited wealth from being transferred from real estate into commerce. He also explains the lack of economic dynamism amongst the Bengali Hindu bhadralok by ascribing it to the dayabhaga as opposed to mitakshara law that applied there- a rather foolish claim because the former gives the head of the family more rather than less rights to take economically dynamic steps.
Kuran admits that the Joint Stock Company was a legal way to hold wealth for both Hindus and Muslims. He does not give any reason why they should not have preferred to hold ancestral wealth in that form. Perhaps he assumes that there was a religious taboo in operation. However, for people enriched by their association with the British, no such taboo could be considered to hold religious force when it came to a purely financial matter. The fact is the traditional form of property ownership provided more rather than less protection from both Creditors and the State.
Neither Bengali bhadralok nor the Muslim gentry of upper India were lacking in sophisticated legal and financial advice. Both were highly literate and served under the British in various capacities. Indeed, it was the Marwaris, but also the Memons, of Western India who were less literate and legally savvy. Why did neither the highly educated Bengalis nor the Ashraf Muslims use Joint Stock Companies as a means of preserving ancestral wealth and transferring it from less fungible or productive uses into those areas of the economy which were dynamic? Could the spectacular bankruptcies of the 1840's have put them off? Was it not also the case that British rule was increasingly favoring the large land-lord such that their chance of being sold up for rent arrears decreased while their ability to rack rents increased? In the case of Muslims, might not the conquest of Lucknow and the sack of Delhi have shown the relative fragility of Urban prosperity compared to owning agricultural estates?
The fact is, entrepreneurial castes are distinguished by a preference for fungible rather than real assets because of historical reasons. They do own big estates from time to time but their ethos remains mercantile because their shared history has shown them that Land can be less secure than financial capital. The Bengali bhadralok and the Ashraf landowner and many other Landowning Castes all over India were actually taught the opposite lesson in the Nineteenth Century. Furthermore, as elite groups with cultural pretensions, they preferred that their children should seek advancement in Government Service, the learned Professions and Politics, which required a long period of study, rather than that they should acquire commercial acumen and begin earning profits while still in their teens. Thus, though the Freedom Struggle was financed by Industrialists, the rank and file of the Indian National Congress adopted policies which favored rent-seeking because that was the safer inheritance for their descendants.

Timur Kuran and Anantdeep Singh do not mention the Parsis- arguably the most successful indigenous entrepreneurial caste- because their (originally very complex) inheritance law was similar to the Muslims in that division of assets had to take place in the event that a person died intestate. Indeed, in 1835, a Parsi man appealed to a British Court to inherit by primogeniture- thus keeping his father's business together- but this was successfully opposed by the Parsi Council who were afraid that the innovation posed a moral hazard of unjust enrichment which endangered family ties.
Kuran and Singh are quick to point the finger at the British, alleging that their strictness in applying Waqf law hurt the Muslims, but fail to mention that as with the Parsis, or any other group, the Muslims were welcome to make representations and have the Law changed.
Ultimately, it seems to me, the continuity of a business is better guaranteed by a high degree of trust between the heirs. Obviously, if Daddy gets a new bride every year that's not going to happen. The wife and her baby won't trust the older sons. The Judge or Community elders will be obliged to support a division of assets.
On the other hand, in monogamous families, the mother herself might forbid the sons from dividing the estate. If division is inevitable, she may nevertheless see that no party is cheated which means that the inheritors can do business together sometime in the future.
Another point which Kuran neglects to make is that Muslims may actually be God fearing people. If the Quran prohibits usury- perhaps there is a spiritual and an eschatological reason for that prohibition. Islam does not present itself as the ideal religion if you want your descendants to be Billionaires. It does claim to provide Spirtual and Moral security and enrichment for your progeny till the end of days.
I am not advocating Sharia Law- Kuran has another paper showing how even honest and impartial judges under that system are likely to discriminate against non-Muslims- but it would be unfair to say that there is some defect in Islam from the point of view of Economics. This is because rules regarding inheritance can be changed by consensus to fit the times. The British themselves, though conservative as Judges, permitted changes in the Law in line with the informed opinion of those over whom they ruled.

Kuran is an important and very lucid thinker. I acquit him of the charge of 'drive-by regression'. However, Indian history is a subject you do need to know a little about before compiling your data sets.

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