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This paper examines the politics and finance of development among Middle Eastern countries with particular emphasis on the incentives of autocrats to advance pro-growth policies in general and to foster small enterprise in particular. It is premised on the observation that there is no fundamental reason why Middle Eastern economies cannot enjoy steady, stable economic growth. At several points in the past, particularly in the late 1970s, various Middle Eastern economies, including Iraq, enjoyed middle-income status. From the 1960s until the end of the 1970s, Middle Eastern countries made massive public investments in economic infrastructure, as well as in health, education and, less successfully, in state-owned enterprises. Economic growth, at six percent per worker per year, was the highest in the world in the 1960s. Going back much further, during the tenth century the Middle East was extremely advanced as measured by its standard of living, technology, agricultural output, and literacy rates.

The discussion begins with a description of the institutional features that are important to economic development. Three institutional arrangements in particular are critical for economic growth and human flourishing. These are: (1) the ability to create investment vehicles that facilitate risk-taking, such as the corporation and the limited partnership; (2) the capacity of institutions to adapt to economic and technological advances and changing human preferences and tastes; and (3) an economic, social, and legal environment that encourages long-term investment, tolerates failure, and facilitates trade.

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