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Faculty OpinionsRelease Date: May 28, 2004

Ronald T. Wilcox
Associate Professor of Business Administration
Darden Graduate School of Business Administration

Prosperity: A Secret Weapon in the Fight Against Terrorism

The U.S. goal in reshaping the political landscape of the Middle East is to check the growth of fanatical religious movements and crush terrorism. But unless the Bush administration attacks the true enemy in the region – abject poverty -- American diplomatic goals will remain out of reach.

Older people in the region may be tired of the battle to raise their standards of living, but young people clearly are not. And countries that fail to provide the infrastructure needed by those who want to pull themselves up by their bootstraps, are seeing their potentially most productive citizens – young men who are healthy, bright, ambitious and energetic -- become frustrated. And angry. And desperate.

That's when self-serving ideologues step in, leading these young people to trade in a sense of anger, desperation and hopelessness for action. For young people who have chosen to become suicide bombers, their search for the meaning of life has been resolved.

What can the U.S. do to help countries in the Middle East provide their fast-growing, predominantly young populations with other, more life-affirming and economically productive alternatives?

The question is complex and there is no easy answer. But part of the answer relates to commercial law.

Nobel Laureate Douglass North argues that the ability to enter into contracts with the reasonable belief that they will be honored or enforced by a well-established social mechanism -- the courts -- is vital to the emergence of a prosperous society.

Simply put, strong business relationships and the economic growth flowing from them require a stable environment. People must keep their word and the state must move slowly and openly to make any changes. States cannot drastically change commercial law at the whim of incoming political leaders and expect business to hum along as usual.

Property must be secure. The commercial climate is damaged when Egyptian courts fail to protect intellectual property or when the government of Zimbabwe seizes land from one set of owners and gives it to another. And so are the prospects for broadening prosperity.

Widespread access to a dependable banking system is another prerequisite for prosperity. Americans take for granted a well-functioning system into which they can deposit their paychecks and borrow money to buy a new house.

Rural finance, a new and growing field of study, aims to help developing societies build basic banking institutions from the ground up.  If savings and lending markets can be established and expanded, the prospects for general prosperity grow brighter.

Finally, prosperous societies must allow successful entrepreneurs to become rich, very rich. Because the potential to create great wealth leads people to take great risks. But when rewards are meager, few people are willing to shoulder big risks.

Unfortunately, these pillars of prosperity are lacking in many Middle Eastern countries.

Courts are often subjugated to the will of political authorities, creating costly uncertainty in business relationships. Islam's dim view of charging interest on loans hinders the development of a banking system. And central government control of basic resources and capital prevents the emergence of successful entrepreneurs.

Military action alone cannot protect the world against terrorism. U.S. foreign policy must do more to address the basic human needs of people in the Middle East, helping them help themselves and removing the conditions that foster terrorism.

Creating prosperity in the Middle East will be a long road. But the U.S. should take a step by encouraging the reform of commercial law in willing countries. This would encourage domestic economic growth, which in turn would stimulate foreign investment.

Prosperous societies don't make war, they make deals.

Ronald T. Wilcox is associate professor of business administration at the University of Virginia's Darden Graduate School of Business Administration. He worked previously as an economist for the U.S. Securities and Exchange Commission.

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Last Modified: Thursday July 01, 2004