The recent and current upheavals in the Middle East mark a good moment for the United States to rethink its economic aid to the region. Over the past twenty years, the Middle East has been the largest recipient of U.S. economic assistance -- but to what result? From the perspective of promoting local business, American aid has been a failure.
For example, Egypt ranks #94 on the World Bank's Doing Business Index, in the bottom half of the total list of 183 countries. Looking at components of the Index, Egypt makes it difficult for its own citizens to start and run businesses. U.S. aid to Egypt has done little to change that. The problem is especially acute for informal businesses expanding into the formal sector: on the two key indicators of "Dealing with construction permits" and "Enforcing contracts," Egypt ranks #154 and #143, respectively. Small businesses especially face a corrupt administrative and legal system full of obstacles that only bribes can bypass. Recall that these recent upheavals in the Arab world began when a small businessperson in Tunisia set himself on fire to protest just such obstacles.
U.S. economic aid to the Middle East has mostly funded government infrastructure projects and food aid -- neither of which helps small and medium sized local business. More recently, it funded NGO projects, too. In general, economic aid to the region has been no different from U.S. aid to other low-income countries, especially in Africa, with similar poor results. But all prosperous countries of the world got that way not through government infrastructure, food aid, or NGO projects, but through the growth of a domestic business sector. India and China are only the most recent examples. Like it or not, a thriving local business sector is the only path to prosperity and stability the world has ever known.
We find a similar story across the region. Oil-rich countries, of course, receive little or no U.S. economic assistance. Elsewhere, American economic aid in the Middle East has failed to help local business. That includes the two newest large aid programs, in Iraq and Afghanistan: despite billions spent in the last decade on economic assistance, they rank #166 and #167 out of 183 countries on the Doing Business list. The Iraqi and Afghani governments essentially prevent local citizens from starting and running businesses, yet American economic aid continues to pour into the country, with the usual poor results. Even in Egypt, where reforms over the past decade have helped a few large Egyptian companies thrive, with a well-functioning stock exchange to facilitate large-firm financing and investment. But there are only 663 listed companies, for a population of 83 million. The missing middle -- small and medium-scale business -- is Egypt's main economic problem. Education over recent decades has developed a deep pool of skilled labor among the young, but without a thriving local business sector, the Egyptian economy can never absorb young workers.
But there is a successful precedent for U.S. aid to help the local business sector of foreign nations -- the Marshall Plan for postwar Europe. The program made loans to local European businesses, which repaid the loans to a national fund, which then used the money for commercial infrastructure to further help those same local businesses. In order to qualify for the program, each country had to make reforms that allowed their business sectors to function, just as the Doing Business Index shows. That program is exactly the kind of aid the Middle East really needs. And the basic Marshall model offers many variations: the kinds of loans can vary widely, and the commercial infrastructure can range from training for accountants to the more traditional ports and roads.
Of course, postwar Europe had a stronger tradition of local business than the Middle East does now. But one of the most successful Marshall Plan countries was Greece, which in 1947 was poor and lacked a local business sector. And all Middle East countries had small but thriving business sectors in the recent past, before the current crop of authoritarian regimes crushed it. Again, Egypt is a striking example: Nasser socialized the economy in the 1950s and 1960s, but starting in the 1990s, Egypt has slowly dismantled parts its state-run economy in favor of a normal business sector. A Marshall Plan for Egypt is the best way for American aid to help that process.
Such aid to the local business sector is also an important tool to limit the spread of Islamic extremism, which several Middle East regimes have used an iron fist to suppress. Only a thriving business middle class offers a stable foundation for a democratic alternative. Turkey is the most striking example, where a pro-business Islamic government has fostered a democratic middle class. Turkey has evolved from the same kind of state-run, authoritarian system as other Middle East nations, and now ranks #65 on the Doing Business Index, between the Czech Republic and Poland.
After all, remember the origin of the Marshall Plan. At the time, Secretary of State George Marshall proposed that the best way to fight the spread of communism in Europe was through local business. That strategy can contribute to the battle against Islamic extremism as well. Egypt's current aid program should become an Egyptian Marshall Plan, and help give Egypt the stable, democratic middle class it has needed all along.
Unfortunately, it will not be easy to convert the current U.S. aid program to the Middle East into a modern Marshall Plan. Despite its past failures, the current aid system features a system of entrenched interests that are resistant to any changes. Some anti-American sentiment by some of the recent protesters came from the support that the current aid system gave to the regime. The popular call for change across the Middle East is a good moment for a change in the aid system to the region as well.
Mr. Hubbard, Chairman of the Council of Economic Advisers under President George W. Bush, is dean of Columbia Business School.
Mr. Duggan is a professor at Columbia Business School.