In the new year, hope springs eternal: while Iraq seems a looming disaster, there is at least the potential that US efforts there could help stabilize the Middle East. The key is to apply lessons learned in the reconstruction of Japan.

All eyes are on Iraq’s upcoming elections as the test case for America’s plan to bring to democracy to the Middle East. But elections alone do not build stable democracies. The US is failing to learn from history – and missing an opportunity to put the stability of the Middle East on a firmer foundation.

In politics, it always matters who has the money, and in the Middle East, the wrong people have it. For decades the region’s political agenda has been set by oil-rich princes, tithe-rich ayatollahs, and aid-rich generals – to the detriment of both political openness and economic development.

It is not easy for outsiders to change this kind of politics, but it is possible. Consider the lessons learned in Japan. Recent books by Aaron Forsberg and Sayuri Shimizu have shown that it was not just Japanese industriousness and ingenuity that made post-war Japan such a success. It was the unusual form of US aid.

In Japan, as in Iraq, the early days were dark and difficult. Japan was economically devastated, politically authoritarian, and hopelessly exotic to its American occupiers. Two years into the occupation, Japan’s economy was stagnant and inflation was rising.

But then the Americans made an abrupt change of strategy. In 1948, National Security Council policy statement NSC 13/2 abandoned attempts to reform Japan’s politics and economy along US lines and made reviving Japan as a stable and prosperous anti-Communist ally the “primary goal” of US policy.

US funds poured into Japan, but not in the form of aid. During the decade surrounding the Korean War, the US military showered Japanese firms with supply and service contracts – in excess of $500 million each year; in some years close to $1 billion. In aggregate, this vastly exceeded the $2 billion in aid the US gave Japan’s government during the occupation. In 1952, a whopping 70 percent of Japan’s commercial exports were US military procurement orders.

The result was that in Japan, private businesses – not soldiers, politicians or priests – had all the money. And these businesses started to set the political agenda. In the 1950s, Japan’s firms lobbied their government for good infrastructure, a well-educated workforce – the things Japanese businesses needed to export to America’s newly opened, unimaginably wealthy, but highly competitive markets.

It is a political dynamic that is all too rare in the developing world. Japan’s elites lobbied for policies that would make not just them, but also their country, rich. In 1958, Japan’s three largest Japanese business associations colluded to pressure their government. But this was good pressure: their chief demand was an ongoing trade dialogue with America. In 1959 alone, Japan’s exports to the US grew by 52 percent. The country’s meteoric rise was under way.

To be sure, applying these lessons to the Middle East will be far from easy. But in the long term, it is this kind of politics – the politics of institutions and interest groups – that makes a country a success or a failure. Great leaders are both rare and temporary. Constitutions are mere pieces of paper until imbued with the weight of history.

A central goal of US policy in the Middle East should be to put money in the hands of the region’s private businesses. Efforts thus far have amounted to political window dressing. Halliburton, Bechtel, and other US contractors were instructed to farm out work to Iraqi and Middle Eastern subcontractors. But US firms, understandably, specialize in rebuilding power grids, not nurturing foreign industry. A watchdog group funded by George Soros found that, for 39 reconstruction contracts awarded in the past year, each with a value in excess of $5 million, only two percent of the revenues actually went to Iraqi companies.

No matter what, billions of US dollars have been spent in Iraq, and billions more will likely be required. The way to achieve the maximum policy impact with these funds is to distribute the benefits in the region. Reconstruction funds, including, as much as possible, military procurement, should go, first and foremost, to Middle Eastern firms. That will mean providing generous capital and technical assistance and relaxing standards and requirements. But that is the way to change who has the money in the Middle East, and create an interest group – outward-looking private businesses – that could at long last change the dynamics of the region for the better.

This article was originally published on, before I sold the site to Roubini Global Economics.