PERSPECTIVE ON THE MIDEAST : Make U.S. Aid a Tool for Peace : Middle East: Some of the $1.2-billion no-strings annual grant to Israel could be targeted for incentive programs to encourage bridge-building.

Despite tens of billions of dollars spent by the United States over the last two decades in the name of peace in the Middle East, U.S. economic assistance has made at best a minor contribution to ending the Israeli-Palestinian conflict.

We are now providing to Israel and the Palestinians $1.275 billion in economic assistance per year, an enormous sum for a combined population of 7 million, roughly $900 per family. If money can contribute to peace, it should have made a mark here. The reason it has not is that the vast bulk of this money, the $1.2 billion a year for Israel, unlike U.S. aid efforts elsewhere in the world, is completely unprogrammed. The funds are not directed at supporting any specific peace-promoting activity, program or policy. Rather, as mandated by Congress, the money is simply an annual cash transfer delivered directly to the Israeli treasury.

In principle, U.S economic assistance could make a major investment in peace by funding certain promising initiatives, such as:

* Provision of financial incentives to settlers in the West Bank and Gaza to encourage them to relocate within Israel proper.

* Programs of interaction between Israelis and Palestinians in the arts, music and literature, as well as in science, medicine and the environment.

* A complete revamping of the educational systems both in Israel and the West Bank and Gaza to build a new generation of peacemakers.

* Major infrastructure projects in Gaza and the West bank that would provide sorely needed employment.

* A Gaza-West Bank rail line to help relieve the isolation of Gaza.

* Major efforts in water conservation and agricultural redirection in Israel that would over time reduce Israeli demand for water, thus easing the competition for this key resource.

* A Palestinian national service corps which would channel the energies of young Palestinians into constructive avenues of service to their society.

* A university under Israeli and Palestinian administration, with students and faculty from the entire region, directed at building a peaceful, democratic Middle East.

* An Israeli-Palestinian peace corps, bringing young people together to work in both societies and around the world.

* An institute for Jewish, Christian and Islamic understanding, based in Jerusalem, to provide training and public education.

* Economic relief to offset loss of income associated with the closure of Israel to Palestinians laborers.

* The fuller integration of the Arab citizens of Israel into Israeli society.

Very little along these lines has been undertaken. The Administration has no legal authority to provide Israel with less than its standard annual check, or to require that the funds be used for any purpose whatsoever. Yet, unprogrammed, it does little good even for the Israelis. Contrary to the views of some of Israel’s neighbors, U.S. aid is not what keeps the Israeli economy afloat. Israel today has a per capita gross domestic product of roughly $14,000 per person; the economy is vibrant and expanding by around $5 billion a year, several times the amount of U.S. assistance.

Essentially, the $1.2 billion U.S. payment to the Israeli treasury does two things. It provides Israel with the funds to repay interest and principal on old loans to the United States (incurred before the program was converted to a grant basis), and it provides Israeli taxpayers with some relief, allowing the government to tax a bit less or spend a bit more.

Of the $75 million a year we are providing to the Palestinians, much of it has been diverted from long-term investment plans to covering the daily operating expanses of the Palestinian Authority.

Congress should consider a more useful allocation of the $1.275 billion. That which is needed to repay old debts to the U.S. government should be rerouted into the U.S. Treasury (roughly $800 million and declining each year) and the remainder, $400 million plus, should be placed in a fund for Israeli-Palestinian peace. As the old Israeli debt is paid down, this component would increase. The State Department should be empowered to allocate these funds to competing peace-promoting proposals.

Israel has no higher national interest than promoting peace and security. This interest is now entwined with the success of Palestinian moderates in delivering politically and economically. Yet Israel is constrained from fully pursuing that interest.

Consider: Responding to terrorist attacks, the Israeli government has severely limited the Gaza Palestinians’ access to jobs in Israel. Unemployment in Gaza is more than 50%, a breeding ground for discontent. If Israel seeks full separation, then, in principle, it could provide major investment resources for long-term job creation within Gaza. But politically, this is unthinkable. A society that has seen its citizens blown to bits in a bus and has seen Palestinians in the street celebrating the deed is not about to provide hundreds of millions for Palestinian job development. But while this is politically unthinkable for Israel, it is just what the United States should be doing with U.S. money, and doing it no less for the Israelis than for the Palestinians.

Because our government has virtually no say over how our aid dollars to Israel are used, and because aid to the Palestinians lurches from crisis to crisis, our aid makes only a minor and diffuse contribution to peacemaking. To do better, our political leaders in Congress and the White House will have to have the political courage to say, “This is America’s money and this is what we want it used for.”