Give the Palestinians a Stake in Peace

Although peace between Israel and the Palestinians would produce immense benefits for both sides, the situation is hopelessly deadlocked. Meanwhile, terrorism has not only forced Israel to increase its expenditures on security, it has devastated the Israeli economy. The Palestinian economy is in even shakier condition.

What’s needed is an alignment of interests of the Palestinians and Israelis. One way to do this is to give the Palestinians a direct stake in the Israeli economy. President Bush announced in early July that he was looking for new ways of giving money to Palestinians that would prevent the funds from being used to sponsor terrorism.

Here’s how it might be done: First, create an index fund that would buy a value-weighted composite of the entire Israeli stock market, much the way Vanguard or Fidelity index funds track the U.S. stock market’s overall performance. (That is, if a company had 2% of the assets in the market, it would get 2% of the fund’s investment.)

Next, establish a pool of roughly $9 billion -- about 10% of the total capitalized value of the Israeli stock market -- to be invested in the index fund. To raise the money, the U.S., Israel and European states could redirect some of their current assistance to the Palestinian Authority, with the remainder coming from Arab countries, as necessary. Each of the roughly 3 million Palestinian residents of the West Bank and Gaza would then be given a share of the fund, worth on the order of $3,000 per person.

Shareholder registration should initially be anonymous to prevent intimidation of participants by extremist groups. Share prices might be published daily, but the shares would be held in escrow until the two sides agreed to the distribution of the fund in a peace treaty. At that point, the shares would become the property of their owners, with the caveat that they could not sell more than 25% over the course of five years (to prevent panic selling or deliberate sabotage).

If no peace treaty was achieved within 10 years, the fund would be liquidated, with the proceeds donated to Israeli victims of terror and to humanitarian relief in the territories.

We recognize that the root of the conflict is not narrowly economic and that some extremists would reject any material incentives. Yet there may be many other Palestinians who would respond.

This proposal has numerous advantages for all parties. First, as real stakeholders in Israel, Palestinians would have an immediate material interest in peace because this would naturally raise the value of their holdings. They would have a daily, personal and easily measured reminder of the effects of continued violence: Each suicide bomber, each threat to Israel’s long-term security would drop the price of their shares. Might this not have some effect on their willingness to support such behavior, at least at the margins?

A side benefit of this scheme is the important symbolic implications: An investment -- even in one’s current enemy -- can improve one’s own well-being.

A second advantage is that the plan adds a constructive new dimension to peace negotiations. Even though many Israelis are willing to make serious concessions for peace, the country cannot afford to surrender territory or give up on bargaining positions as long as doing so is likely to be interpreted as a sign of weakness. But giving your opponent something of value that he hasn’t actually asked for is a way for Israel to show goodwill toward Palestinians without appearing to negotiate out of weakness.

Third, giving Palestinians a stake in Israeli companies would alleviate some of the political pressure from Europe and Arab countries to impose economic sanctions on Israel. Indeed, financing the plan might even increase the base of foreign customers of Israeli products.

The plan also could have salutary political consequences within the Palestinian community. The shares could be given directly to individuals, circumventing the corrupt and inefficient Palestinian Authority and strengthening the constituency for democracy and peace. Moreover, given the nexus between economic prosperity and stable democratic rule, improving the economic well-being of the Palestinians would make them less dependent on their leaders and thereby foster pro-democratic ideology as well as a commitment to a market economy.

Finally, the plan would be likely to reduce anti-American sentiments. By finding a way to help ordinary Arabs without supporting the anti-democratic regimes under which they live, the U.S. would improve its image and increase its influence in the region.

Would our proposal turn Hamas, Islamic Jihad and the Al Aqsa Martyrs Brigade into free-market, pro-peace liberal organizations? We’re not that naive. But our plan could only help those forces among the Palestinians that recognize the enormous benefits that could flow from peace.

In today’s climate, any such step should be welcome.