Palestine, Israel and the Middle East: The Economics of Peace

By Janet McMahon

For most of the past half-century, particularly in the years since Israel's 1967 capture of the West Bank and Gaza Strip, the Israeli-Palestinian conflict has been considered primarily a political dispute over territory. With the signing of the Oslo accords, however, and the excruciating negotiations over their implementation, the economic aspect of peace is gaining increasing attention, the most recent manifestation being the October regional economic summit in Amman.

In preparation for that summit, the Washington, DC-based Center for Policy Analysis on Palestine held a half-day symposium on "Regional Economic Development in the Middle East: Opportunities and Risks." Some 150 people representing the governmental, private and non-profit sectors heard a range of perspectives and proposals from a similarly diverse panel.

Moderator George Abed, assistant director of the International Monetary Fund's fiscal affairs department, noted that peace has replaced oil as the "engine of growth" in the Middle East. He posed the question of whether peace could succeed where oil wealth had failed, in changing the region's economic culture and inducing economic cooperation.

The first panelist to address this question was Dr. John Page, chief economist of the Middle East and North Africa region for the World Bank and author of the Bank's widely read study The East Asian Miracle: Economic Growth and Public Policy. It was precisely this region to which Dr. Page, using charts and graphs, compared the Arab countries of North Africa and the Middle East.

In the 1960s, Page said, the Middle East had a higher per capita income than the present-day economic "tigers" of East Asia. Yet now the latter's per capita income of $8,000 is more than double that of the Middle East nations, which average $3,400 yearly per capita. Page attributed the Arab world's sharp decline in economic prosperity to its "public sector-oriented pattern of development." The Middle East, he maintained, "has never had a home-grown process of economic growth," relying instead on externally generated wealth through the sale of its oil and gas resources. By contrast, the rapidly growing East Asian economies are characterized by a high rate of savings and domestic investment.

The World Bank official described the Middle East's current economic situation as a "productivity crisis, not a problem of money." He urged the region's governments to increase the rate of private investment, give priority to investment in human capital (e.g., education and training), and to "get into the world economy," since "regional integration follows integration in the world economy, not the other way around." With regard to a Middle East development bank, Dr. Page supported it as a "repository of thinking," ideas and policy—what he termed the "software" of economic development—rather than as a source of financing.

Dr. Samir Abdullah, director of the Department of Economic Policy and Project Selection at PECDAR (Palestinian Economic Council for Development and Reconstruction), discussed the region's economics from the Palestinian perspective. Calling Palestine's economy the region's smallest and most disadvantaged, he enumerated its three positive aspects: a dynamic private sector—"the hope for the Palestinian economy in the future"—that had survived in "a constrained, hostile, oppressive environment"; a strategic location; and a "good base of human resources," both within Palestine and throughout the diaspora.

The question of whether Palestinians are able to make effective use of these comparative advantages cannot be separated from the question of Palestinian identity itself, according to Dr. Abdullah. The Oslo accords gave Palestinians control of some of their resources ("just enough to make a little change") and freedom of access to neighboring markets. Both these gains will have to be expanded upon in order to become meaningful.

Dr. Abdullah observed that, with the signing of the Oslo accords, Israel got everything it wanted with respect to regional and bilateral economic cooperation. But, he cautioned, Israel's creation of additional obstacles between the West Bank and Gaza and between Palestinian businesses and the outside world is leading to a "rethinking of our stance toward regional cooperation."

"How can you urge Palestinian businessmen to support a regional council when they can't meet to form their own organization?" Dr. Abdullah asked. "When they can't import or export to Jordan and Egypt, how can you ask them to support joint ventures?

"Enthusiasm is not as great as before," he told the audience. "People really feel suspicion toward everything being dealt with in multilateral forums." The Palestinian economy has been disadvantaged for so long, he added, that it could be even further marginalized in an environment of regional economic cooperation.

In order to avert these dangers, Dr. Abdullah called upon Israel to take action to remove the obstacles and impediments it was placing on economic activity in the West Bank and Gaza. He cited the need for creating "an enabling environment" for private-sector development and emphasized the importance of upgrading the Palestinian infrastructure. According to Israeli statistics, he noted, Israel's investment in the infrastructure of the occupied territories was "less than anywhere in the world": $15 per capita per year, compared to $1,000 in Israel and $400 in Jordan.

Dr. Abdullah concluded that the Palestinian economy could play a positive, if perhaps not an exceptional, role in the region, especially in the areas of services, tourism and human resource development.

Also emphasizing the human resources of the worldwide Palestinian community was Zahi Khouri, chairman of Intram Investments Inc., a real estate investment corporation, and a director of the Palestine Development and Investment Co. (PADICO) and the Welfare Development Fund.

As a businessman, Mr. Khouri identified one of the priorities of the private sector as involving Palestinians living in the diaspora, especially entrepreneurs, doctors, teachers and the many with administrative and nation-building experience in the industrialized world and the Gulf countries. Other private-sector priorities included investing in existing establishments and adjusting the Palestinian administrative system so that it effectively responds to new conditions, including the opening of the local economy to global markets.

Khouri, a former executive vice president of the American Express Middle East Development Company, pointed out that in addition to the restraints of other developing countries, the emerging Palestinian economy faces continued Israeli control of key aspects of Palestinian life and doubt on the part of donor countries of the PNA's ability to distribute and account for promised international aid. Stressing the importance of public-private sector partnerships, he described the role of the private sector as "crucial" in its ability to "accelerate and sustain growth and solidify the peace process." Such public-private partnerships already exist, Khouri said, in the areas of telecommunications, culture and heritage, and in efforts such as the World Bank's partnership to build and strengthen the PNA bureaucracy and to identify diaspora Palestinians.

Mr. Khouri, too, cited impediments which, from the business perspective, "need to be resolved very, very soon, or the bull will become a bear." The Israelis need to be reminded and to acknowledge that impediments exist, and Palestinians "must be clear about where we want to proceed." The basic challenge for Palestinians, Khouri concluded, was to "learn from other countries' experience, while preserving our own identity."

Necessary Incursions

Former U.S. Ambassador to Syria and to Israel Edward Djerejian addressed the prospects for economic and commercial development in the context of the Middle East peace process. Djerejian, now director of the James A. Baker III Institute for Public Policy at Rice University in Houston, Texas, emphasized that "the success of the peace process must include all of Israel's neighbors—especially Syria and Lebanon." While the Israeli-Palestinian issue represents "the political core" of the Arab-Israeli dispute, he maintained, the Syrian-Israeli issue represents the "geopolitical, strategic core."

Noting that "the path ahead is probably the most difficult one," Djerejian observed that "the peace process has always been a race between rejectionism and violent opposition, and the forward movement of negotiation." The Jordanian-Israeli treaty needs to be consolidated, he said, and the Palestinian-Israeli treaty still is an interim agreement. Legal Palestinian elections will help establish a governmental authority to enhance success in final-status negotiations; other key requirements include "the full political involvement of the United States" and the delivery of promised international aid, the ambassador said.

By the year 2025, Djerejian pointed out, the population of the Middle East (including Turkey and Iran) is expected to reach 576 million—double its current level. Social and environmental pressures will increase accordingly, in a region where issues of social justice and injustice are a major cause of violence and extremism, and where governments spend $166 on the military for every $1 on education. Ambassador Djerejian expressed hope that "progress on peace can redirect these resources."

The symposium's final speaker was Dr. Atif Kubursi, professor of economics at McMaster University in Ontario, Canada and senior development officer for the United Nations Industrial Organization. While citing similar economic ills—low savings rates, investment as a small percentage of GDP, and high illiteracy levels—Dr. Kubursi argued that money is the problem, with dependence on a nonproductive source of revenue creating lasting imbalances in a region where the rulers' income does not derive from the people and where there is little emphasis on producing goods and services.

He also cautioned that foreign investment is not necessarily productive, but can also be exploitative, depending on the terms of the agreement, and cited Lebanon as an example of the dangers as well as greatness of unbridled, unfettered capitalism, which he termed "laissez tout faire." The real issue facing the region, Kubursi emphasized, is what kind of investment is necessary and who should make it.

The question to be asked in regard to the Olso accords, the economist argued, is "peace at what expense?" He said that the agreement did nothing to alter the "prevailing context of dependence between Palestine and Israel," with additional dollars and benefits going to Israel and thus perpetuating "the kind of rentierism that is the problem in the Arab world." Control of resources is the first priority, he agreed: "How can you give me money when I don't have water?"

There can be no meaningful cooperation under duress and between unequals, Kubursi stated, and the DOP "imposes tremendous costs by the Israelis on the Palestinian economy," with forced economic integration and continued subjugation to the Israeli import and tax regimes. Palestinian business and agriculture would have greater access to Israeli markets, he pointed out, but not to other Arab markets.

Kubursi described the benefits of peace to Israel as "extremely large," with the dismantling of the Arab economic boycott worth an estimated $40-70 billion to the Israeli economy. U.S. aid to Israel, he predicted, would be replaced by foreign investment, more economic cooperation, and greater penetration of world markets.

Following their remarks, the panelists responded to questions from the audience ranging from the nature of the U.S. role in the peace process to the chances for an effective democracy in Palestine. As the symposium concluded, the opening remarks of Hisham Shirabi, chairman of the Center for Policy Analysis on Palestine, had indeed been reinforced: "The problem is not only economic, but political, social and moral."

Janet McMahon is the managing editor of the Washington Report.