Political Settlement Aside, Peace Has Its Price

The recent Israeli-Palestinian meetings in Oslo suggest that the two sides may be nearing the end of a decade of negotiations. Difficult obstacles remain, but the outline of a settlement and the process by which it will be reached are apparent.

Ordinarily, this would be cause for rejoicing. However, the economic consequences of peace threaten to turn a promising political settlement into a disaster unless additional solutions are found.

The economic viability of the West Bank and Gaza--the areas that will become Palestine--depends on the answers to a number of questions. What will be nature of the final territorial settlement? What will be the new state’s relationship to Israel? And will it be able to attract foreign investment and generate attractive exports sufficient to meet the skyrocketing expectations of the Palestinian people?

First, the territorial settlement: The Palestinians will have a territory that resembles a jigsaw puzzle, sliced into isolated islands of quasi-sovereignty by security roads that link Israeli settlements and provide the Israeli armed forces the strategic access they need to safeguard Israel’s vital interests. The best one can say is that such a piecemeal country has never existed. In the most forgiving circumstances, it will be highly awkward to administer and will be constantly vulnerable to upsets caused by angry Jewish settlers or angry Palestinians. The Israeli government and its armed forces will forever be caught in the middle.

Few investors will regard such an environment as a favorable place to send large amounts of capital and technology.

The new state’s relationship to Israel will be problematic. During more than 30 years of occupation, Israel turned the West Bank, in the words of a study conducted at Yale Law School, into “a noncompetitive, subservient, satellite economy, which also serves as a captive market for Israeli goods and a cheap source of labor.”

When the Labor Party lost to Likud in 1977, Israel’s occupation policy shifted from temporary expedients to the view that the West Bank was an integral part of Israel. Likud’s approach to the occupation and the violence of the intifada uprising in the late 1980s increased the Palestinians’ subordination to Israel. By 1996, for example, about 90% of all imports going into the West Bank came from Israel. Arab laborers working in Israel provided a crucial source of income to their families in the West Bank and Gaza, but their salaries were lost whenever Israel closed the borders for security reasons, as repeatedly happened in the 1990s.

More Israeli settlements were established in the West Bank and more land expropriated by the Israeli government. In the mid-1990s, unemployment in the West Bank and Gaza rose as high as 25%. Industry counts for less than 10% of the economy of the two territories. The Palestinians do not have the right to control their foreign trade. They are allowed to freely import only basic foods and simple construction materials; all other imports are subject to Israeli regulation. The Palestinians are effectively prevented from importing agricultural products that would compete with Israeli products, and quantitative restrictions have been imposed on certain agricultural exports to Israel.

These protectionist measures hurt Palestinian farmers, and are, in that sense, anti-Palestinian. The Palestinian Authority is allowed to establish banks and a monetary authority, and to control capital markets, income tax and investment incentives. Under the agreement, the Palestinians would be allowed to receive customs duties and all direct taxes that were being paid to Israel, says Stanley Fischer, head of the economics department at MIT and former chief economist at the World Bank.

Despite these measures, one has to agree with George Abed, a senior official at the International Monetary Fund: “What is the point of a state that is sovereign with all the trappings of independence--a central bank, a currency, borders, armies, a police force . . . but which is totally destitute, dependent on aid, heavily in debt and unable to manage its own affairs?”

The premise of all the agreements reached since the first Oslo accords is that these severe economic problems will not prevent the two sides from reaching a political settlement. Even if this were true in the short term, unless some serious improvements are made, the Palestinians’ heightened expectations will be cruelly disappointed, and their disappointment will weaken the new state and threaten the peace.

One solution would be to make a virtue out of the mutual entanglement of Israel and the new Palestine and find prosperity through economic cooperation. Whether an Eastern Mediterranean free-trade zone or common political and economic union might succeed is unknown. What is certain is that expanding the benefits of peace is the only hope for narrowing the gap between expectation and performance. The time has come to add economic reality to the peace process.