02/11/2011 11:28 am ET Updated May 25, 2011

Why the Middle East Needs Economic Opportunity

Uprisings across the Middle East have exposed the futility of America's Faustian bargain with "moderate" Arab despots. Whatever happens in Egypt, it's time for the United States to switch course and throw its weight unequivocally behind popular aspirations throughout the region for political freedom and economic opportunity.

No doubt this will be risky: If friendly autocrats go down, who knows what will take their place? Already there's chortling in Tehran, because the fall of pro-western rulers could tilt the regional balance of power toward Iran and its satraps, weakening U.S. influence and further isolating Israel. For American strategists, however, such risks must be measured against the enormous costs of perpetuating a rotten status quo in the Middle East.

U.S.-backed regimes are far from the region's worst, but they have contributed to the dismal conditions - stunted political and economic development, systematic abuse of human rights, endemic nepotism and corruption - that breed popular discontent and, at the extreme, the violent ideology of radical Islam. Washington's support for authoritarian rulers has yielded neither lasting stability nor moderation, though it has compromised our own liberal values and engendered anti-American sentiment on the street.

Now, amid rising popular demands for change, America should aim not at stability, but at transformation in the Middle East. We should side with the young, civic activists and political reformers who want to throw off strongman rule; knock corrupt elites from their privileged perch; bypass central bureaucracies that stifle enterprise and dole out economic favors as a means of social control; empower civil society and women; and, in general, open Arab and Muslim societies to the modern, interconnected world.

Given our embrace of realpolitik in the Middle East, America doesn't have a lot of credibility in the eyes of people now protesting in the streets of Cairo and other Arab capitals. But while our influence on political developments may be limited, there's nothing to prevent the United States from addressing the economic frustrations that feed today's revolts.

As PPI has documented in a series of policy reports, the Middle East is the great outlier in today's system of economic globalization. If you take out oil, the region's share of world trade has remained strikingly small (about two percent of farm and manufacturing products), even as its population has nearly doubled over the past three decades. Exports are up in some countries, including Egypt and Pakistan, but the region as a whole attracts very little foreign investment. Poverty rates remain high - in Egypt, just under half the population is poor - and, according to the International Labor Organization, the Middle East has world's highest unemployment rate: 10.3 percent compared to a global average of 6.2 percent.

This picture of economic stagnation is particularly grim for the young. Fully a quarter of them can't find work. Little wonder that, as young men pour out of schools and universities into barren job markets each year, some are susceptible to Islamist extremists who offer them not only pay and adventure, but also a compellingly simple account of who is to blame for their misery - corrupt rulers in cahoots with the infidel West.

One practical way the United States can counter the radical narrative is to champion economic freedom and prosperity in the Middle East. The principle instrument here is trade and investment, rather than development aid. What these countries need is economic reforms that facilitate their integration into global markets, not wealth transfers from rich countries that end up lining the pockets of corrupt elites. To spur reform and growth, President Obama should ask Congress to pass a massive tariff-reduction bill based on the successful precedent of the Africa and Caribbean free trade agreement. A Greater Middle East Trade Initiative would provide the levers for lowering barriers to trade and investment in the region, promoting financial transparency, encouraging all countries to join the World Trade Organization, and removing obstacles to individual enterprise.

The nexus between trade and investment and economic reform is critical. As Peruvian economist Hernando De Soto has shown, massive state bureaucracies and bad laws smother entrepreneurship and drive a lot of economic activity underground. In Egypt, more people work in the underground economy than in either the private or public sectors. His studies also show that a low-income entrepreneur has to negotiate with scores of government agencies to start a business, and it years to get clear title to land.

Of course, Washington should press harder for political reforms and fair elections in the Middle East as well. But many in the region simply don't trust Washington to embrace democracy if it produces outcomes we don't like. By focusing on poverty, unemployment and jobs, the United States can work around such suspicions. Making life better for ordinary people is the best way to advance U.S. interests in the Middle East.

This item is cross-posted at Progressive Fix.