Privatizing the Peace Process
Aug 10, 2005
Glenn Yago and James Prince
Publisher: The Wall Street Journal

The Wall Street Journal

Next week's Israeli disengagement from Gaza has sparked a national crisis in both Israel and the Palestinian Authority. In Israel, Finance Minister Benjamin Netanyahu's resignation on Sunday and his direct challenge to Israeli Prime Minister Ariel Sharon mirror the daily internal challenges faced by Palestinian President Mahmoud Abbas. Unfortunately, both leaders are more pre-occupied with internal rivalries than with ironing out details between each other for a successful economic transition in Gaza -- one that might support the next steps to bypass future conflict.

The economic conditions and consequences of disengagement can either enhance or damage the political road map towards a two-state solution to the Israeli-Palestinian conflict for a long time to come.

In a sign of how low expectations have fallen, the U.S. State Department's most touted achievement to date is a tenuous agreement to destroy settler housing and have Palestinians haul it away. If the road map is to survive, we'll have to move beyond the irony of Israelis destroying their own homes as they leave as a principal form of Palestinian job creation -- and fast.

This much is clear: The economic preconditions for a successful transition in Gaza will not be met prior to the pullout. Consider: More than 5,000 Palestinian jobs at the Erez Industrial Park and border crossing are at risk without agreements or procedures on the handling of goods. Another 4,000 agricultural jobs in Gaza greenhouses that generate $150 million in export revenue are also in jeopardy. Air and sea transportation projects, and water and housing plans, all remain largely unaddressed in this contentious divorce. (We won't even go into the still-unresolved complexities of the 450 dairy cows and 350 calves that comprise a successful dairy that may soon disappear in Gaza.)

Since 1948, every American president has cobbled together a plan to resolve the Israeli-Palestinian conflict, and each of these plans has ended up in the ashcan of history. George W. Bush, the latest to play the optimist on Israeli-Palestinian relations, conceived of the current "road map" as leading toward a two-state solution and peaceful coexistence. It differed from its predecessors, in part because for the first time since the conflict's beginning, what's happening on the ground in the local economy -- below the diplomats' radar -- may influence outcomes more than the vagaries of Palestinian and Israeli politics.

And while the idea goes against the grain of a long history of liberal thought, disengagement and separation are the best hope for the sort of economic development that will give Palestinians a powerful stake in an enduring peace. By its very nature, the impending withdrawal of Israeli troops and settlements from Gaza changes the status quo, creating opportunities to lessen political friction by helping the devastated Palestinian economy move toward sustained viability. An economic road map defined by common Palestinian-Israeli interests could, as a practical matter, make a bigger difference than another roll of the political dice.

An effort by the Bush administration to engage the private sector in shaping regional economic development could help avoid many of the limits and failures of past negotiations. The private sector can provide the timeliest impact in creating economic growth and durable jobs -- two vital components of a permanent peace. With outside support, the Palestinian Authority and local Palestinian community could already begin necessary public and private partnership investments to start building their state.

During previous political negotiations, the political ground may have been fertile for the seeds of peace. Nevertheless, the economic ground at the time remained desolate and offered little incentive to support political risk-taking. To avoid similar mistakes in the future, economic preconditions for coexistence must be created. Development of an economic infrastructure for a Palestinian state must precede any final political status agreements. This is both possible and necessary for an ultimate peace between Palestinians and Israelis. By creating such an infrastructure and delivering private investment and job creation now, we have the opportunity to transform a constituency for violence into a constituency for growth and economic viability.

Although the past four years have been dismal for the Israeli economy, they have rendered the Palestinians destitute. Consider:

  • Average personal income for Palestinians declined by more than one-third; more than half were reduced to poverty, and unemployment levels are nearly 30%.
  • Employment among males aged 15 to 24 years stands at 43%, and up to 70% of new entrants into the job market since 2000 are unemployed.
  • Even with the population growing at 5.2 %, GDP per capita plummeted.
  • The age group that will be entering the labor force over the next 10 years (ages 10 to 19) is seven times larger than the age group exiting.
  • Palestinian exports declined in value by 45% and imports contracted by one-third.
  • About 22% of the work force is government-employed. The Palestinian Authority has become the employer of last resort.

During this same time, political polarization among Israelis and the desperation of the extremist elements among the Palestinians have returned violence to the region and rendered meaningful economic activity nearly impossible. As Israeli novelist A.B. Yehoshua put it: "We have hooked our circulatory system to that of the Palestinians and the two nations are poisoning each other."

Without immediate economic investment, those same dynamics threaten to abort a Palestinian state before its inception. Time for creating viable economic arrangements for Palestinians is running out, as is the opportunity for a two-state solution to which all parties are committed. Any economic vacuum in the coming months will be promptly filled by terror and violence.

If Oslo represented reconciliation and integration, the success of President Bush's road map and the Sharm El Sheikh summit in creating a Palestinian state reads more like a successful separation -- the minimum conditions for which are a normalization of trade and economic relations between two independent states to the benefit of both. Goods transport, free capital flows and access to markets for Palestinian goods and services will be necessary, but not an integration of labor markets or free movement across borders that create dependency with Israel or threaten its security. The idea must be to transform Israeli-Palestinian relations based upon mutual economic self-interests.

A future Palestine could revolutionize its weaknesses, as did Israel. Like Israel, Palestine lacks plentiful supplies of land or natural resources, but is potentially rich in human capital, has a wealthy diaspora, and has strong entrepreneurial and trading traditions that could energize a local economy. Palestinians could capitalize on and leverage their goodwill in the Arab world.

The Palestinian work force is highly educated, which could prove a strategic advantage for outsourcing for the Arab world, and as a trade and finance bridge. With an enhanced effort to reform and construct effective financial institutions and a financial services sector with deep capital markets, Palestine could become a financial and commercial services center for the Arab East.

The targets for investment for a Palestinian economy are clear. Among them are:

  • Long-delayed energy and water projects that could create jobs and provide necessary services immediately.
  • Energy projects that have separable, easily forecastable, and stable revenue streams, and the ability to attract public-private investment.
  • Housing construction and the creation of a home-mortgage banking system that would have immediate economic and political benefits to the new country.
  • Transportation and tourism at historical, religious and recreational sites that would create jobs and provide a basis for market development; and
  • Agro-technological advances in the diverse climatic zones and, yes, keeping those greenhouses open and operating.

Recognizing the need for market-oriented economic growth, the Palestinian Authority recently announced the establishment of a new investment fund to place risk capital into the region and into many of these projects. This should be politically applauded and economically leveraged by both the international donors and private-sector investors. Disengagement will soon be a reality. With it, perhaps the final opportunity to identify and support specific economic development projects for a Palestinian economy will appear in its wake. The successful execution of these and similar development projects can help realize a separate and sustainable peace.

Dr. Yago, director of capital studies at the Milken Institute, is currently supervising the Koret Knesset Fellows program. Mr. Prince is president of the Democracy Council and consultant to the Palestinian Investment Fund.