Try Trade for Peace, Instead of Land for Peace

The United States has officially demanded an immediate Israeli withdrawal from the West Bank. Israel has vowed to continue its “war for survival.” Meanwhile, the peacemakers shuttle sadly round the Middle East, oblivious to the fact that no one is listening to them.

All peace efforts are still based on the resumption of the “Oslo process,” according to which Israel was supposed to turn over the occupied territories to a Palestinian state, the Palestinians were supposed to renounce their right of return to Israel and everyone was to live happily ever afterward.

However, there were two major flaws in this “land for peace” design. The first was that there was never enough land available to make the proposal acceptable – not nearly enough to satisfy the passionate possessiveness of all those with claims to it: the Israeli settlers and the Palestinians at home, as well as the diapora beyond.

Secondly, “land for peace” never made economic sense. If compensation for wrongs to the Palestinians is to be a guiding principle, there are far better ways of achieving it than to set up a rickety, poverty-stricken state that excludes more than a million Palestinians still in camps and is dependent on subsidies from oil-rich Arab neighbors.

The continued pursuit of the land-for-peace formula actually puts peace beyond reach. It foists on the occupied territories a shadowy Palestinian Authority that cannot satisfy the aspirations of its people and, therefore, has no incentive to control violence in its own territories -even if it had the means. For its part, Israel cannot offer the Palestinians enough land to satisfy them, and cannot crush the uprising without repudiating the “peace process.” The result is the worst of all worlds: escalating violence, with no political resolution in sight and no economic prospects.

The time has come, therefore, to restart the search for peace on more imaginative lines. The two requirements for a new approach are sufficient force to bring violence to an end and an economic program that creates opportunities for Palestinians to gain a sustainable livelihood.

Any hope that Israel would be able to establish peace by using force – the program on which Prime Minister Ariel Sharon came to power – looks forlorn now nearly a year after his election. If anything, the conflict has got worse since the “war on terror” was launched.

Only an international peacemaking and peacekeeping force can do the job. What is required is a neutral authority that can be trusted by all sides. Such a force will have to be credible and effective. Though it would need to be mandated by the United Nations, it would need to be bigger and more effective than the small third-party forces normally used in UN peacekeeping missions and more like the forces currently on the ground in the Balkans.

A strong U.S. presence would be needed to satisfy Israel and a matching Russian presence to reassure the Palestinians. Recent cooperation between the United States and Russia on security matters makes it possible to propose this as a feasible and helpful suggestion, rather than a utopian one or a wrecking device.

There needs to be reform in the Palestinian Authority as well. The French suggestion of fresh elections is a constructive one. But it may take a UN presence before conditions for free and fair elections are established. The creation of a new Palestinian Authority with a fresh popular mandate – even if it is led by the same leadership as now – is desirable, not least for the good of the Palestinian people themselves.

But peace cannot be maintained permanently by force. Occupied peoples must be given economic incentives to choose the path of peace. After World War II, “reverse reparations” from the United States helped restore the shattered economies of Germany and Japan, most notably through the Marshall Plan and its lesser known Japanese equivalent. This successful precedent might inspire a new approach to the Palestinian problem. The enforced peace should be followed by a massive (i.e. billions, not millions of dollars) aid package for the occupied territories and the Palestinian diaspora supplied jointly by the United States and European Union.

Its purpose would be to reconstruct the West Bank, build up a regional business infrastructure and get the million or so Palestinians out of the camps and into jobs. The Palestinians would benefit quickly from such assistance. Apart from the Israelis, they are the most productive people in the Middle East, unlike many Arabs in the oil-rich states who are enjoying a rentier existence.

A further aim of such a package would be to help reopen the clogged channels of trade and migration. A national customs union between Israel and the occupied territories was formally established by the Paris Protocol of April 1994, with a joint Economic Council to adjudicate trade disputes. Hitherto, its operation has been aborted by Israel’s security concerns and the Palestinian Authority’s goal of political independence. The former has led to frequent and arbitrary restrictions of the right of Palestinians to work in Israel.

With peace, trade liberalization can be accelerated and its benefits will be large. Palestinian workers bring more money ($828 million) back home than Palestinian exports ($697 million, both figures for 1998). The security situation imposes an uncertain and arbitrary transaction cost on this labor movement estimated at anything between 30 percent and 40 percent on the price of goods. A mere halving of these transaction costs, made possible by peace, will add 3 to 3.5 percent to Palestine GDP and real wages of Palestinian workers.

But we can go farther. At present, all goods other than those from Israel are subject to tariffs, purchase taxes and VAT, while Israeli goods are subject only to VAT. These charges add between 20 and 40 percent to prices. A World Bank study has estimated that if all goods were treated on the same basis as Israeli goods and paid only VAT, this would add between 5 percent and 6 percent to Palestine GDP.

There is scope here for stepwise liberalization. First, establish peace and the enhanced sense of security will cut the transaction costs and improve the flow of labor. As a second step, allow Palestine to have the same foreign-trade regime as Israel. Trade will expand with Israel and with the rest of the world. It will make the Palestinian economy a full member of the world economy, open to trade and investment.

And yet these benefits of trade liberalization are not just for Palestine. As in all trade stories, both sides gain. But for Israel, there is a further possibility if peace is sustained. At present, Israel is isolated within the Middle East and the North Africa region. This isolation can be ended by integrating Israel and Palestine into a larger free-trade area – a veritable Common Market of the Middle East. This will benefit Israel as an exporter of manufactures and skills and an importer of oil and labor. But it will also benefit other countries by making a middle-income prosperous trader available as a market and supplier in their midst.

The last element in the package is to postpone determination of the final status of the West Bank for 10 years, and then settle it by referendum. Who knows? A time may come when moderate leadership on both sides might come to accept the advantages of political federation, resulting in a new entity – Israel-Palestine – that would be self-governing in its component parts. If this could be embedded in a Middle Eastern community/confederation, it would bring the durable peace that has been so elusive. If France and Germany could do it after a century of war, why not Israel and Palestine?