Core values by John Blundell in The Business

IT is easy to think of the Middle East as mere blood-soaked rubble. The truth is more optimistic. The most dynamic places on the planet are also in the Arab World. They include the UAE, Dubai and Sharjah, and Bahrain. It is worth being emphatic: it is not oil or any other mineral resource that signals where people are pacific and prosperous. The magic ingredient for people to thrive is free trade. Dubai is close to joining the illustrious club of city states that flourish – like Singapore and Hong Kong.

This is no new insight. It is an ancient recipe. The Greek word katalattein means not only to “trade or exchange” but also “to receive into the community” and also “to turn from enemy into friend”. My personal hero Friedrich Hayek urges an evolution from economics to catallactics – the study of spontaneous orders. The options offered by Western politicians are variations on the single theme of men with guns – even if they have blue helmets – standing in between other men with guns; it is my view that the great balm that delivers peace and prosperity is open markets and trade.

The Israelis blame Iran and Syria as the hidden hands behind the Shi’ite Hezbollah assaults. I am not concerned to argue about this. What I do assert is that those two nations are locked in institutional failure. They do not have free markets. They do not have free trade. They do not have the rule of law.

The magisterial Heritage Foundation’s Index of Economic Freedom sums up Iran’s economy: “It was crippled by the 1979 Islamic revolution, the Iran-Iraq war, and widespread economic mismanagement. The country’s state-dominated economy remains troubled by high unemployment, inflation, corruption, expensive subsidies and a bloated and inefficient public sector.” Incredibly Iran’s tariff barriers, at 15%, are 3% higher now than in 2000. Iran, sustained only by oil revenues, is relapsing not growing.

Syria is a near basket case too. The Wall Street Journal computes its average tariff rates at 35% and climbing. It is a socialist economy run, if that is the word, by the Ba’ath Party. What Syria needs is full-bodied economic liberalisation. It is scarcely likely to move in that direction

Israel is a series of anomalies. As a semi-permanent war-economy it is full of paradoxes. Without any natural resources it has some thriving niches. But Israel pays obsequies to the idea of socialism and the state is an active and confusing presence in Israeli commerce. What Israel and her neighbours fail to do is to trade. Compare the National Income figures – Israel tots up to $20,000 per head (£11,200, $16,000). Iran achieves $3,000 and Syria $1,200. They are not equals.

I do not want to seem naïve. It would be foolish to ignore the ancestral rivalries and jealousies of the Middle East. In addition to the tensions between Israel and its neighbours, the Kurds are even denied their nationhood. The hatreds between Shi’ite and Sunni based on an early Islamic schism are still alive today. The blessing of economics is that we can see free trade can be a force for peace and harmony that bypasses old religious and social differences.

David Ricardo’s potent insight – Comparative Advantage – remains far more important than relative armour. “Money is colour-blind,” said Nelson Mandela, wisely. Money is equally blind to religious or national or tribal affiliations. In that bustling enclave of capitalism, Dubai, people swap and bargain without fretting about illusory supernatural divisions. Is it fanciful and impractical to urge the Middle East to relax both holy messages from the mullah-cracies or the deformed notions of Arab socialism? What the “arc of terrorism” needs is what we need in Britain – the rule of law and open markets, a society based on contracts not on rank. This needs no jargon. What is lacking is the elusive quality – trust.

President Bush agrees with this, if you look beneath the military headlines. He wants to establish a US-Middle East Free Trade Area by 2013. He promises a “step by step pathway” to “deeper trade and economic partnership”. He intends to integrate a series of bilateral free trade agreements. Bob Zoellick, the US Trade Representative, told the World Economic Forum in 2003 that there is no tension between Islam and liberal or capitalist economies. There seems no blasphemy in confirming Mohammed was a property-rights-respecting trader who praised commercial freedom. I am not sufficiently knowledgeable on Islamic history but I gather it is agreed Islam’s early dynamic included free trade and lower taxes than its neighbours.

What modern item of devilish Western technology do Middle Eastern households most covet? They barter or buy satellite dishes. Television is a strange force for shared experiences. Is it too optimistic to think digital signalling may be a force for mutual understanding? If this seems all a little Utopian, I invite you to reflect how rapidly the obliterated economies of Germany and Japan revived after 1946. The malignant Nazi system or the Imperial Japanese delusions evaporated. Two militaristic regimes were transformed into peaceful capitalistic lighthouses. The floundering and decaying economies of Arabia could boom.

If the international consensus is that a UN “peacekeeping force” must get between Lebanon and Israel, let them not be an impediment to freedom of trade. Mutual dependence makes for prosperity. Beirut and Jerusalem should swap goods and services – not missiles. When goods do not cross borders armies will.

John Blundell is director general of the Institute of Economic Affairs