Can 'economic peace' be the solution?

The idea that "economic peace" can eliminate the need for a peace agreement and alleviating the travel restrictions imposed on the Palestinians comes from the naive assumption that economic improvement would mitigate hostility and decrease violence.

From this point of view, MK Benjamin Netanyahu's current platform and Shimon Peres' past statements about a "new Middle East" have a lot in common. The advocates of this approach cite West European states as an example for this process. But these former enemies were pushed closer by the constant threat of the Soviet Union during the cold war. Perhaps their economic cooperation became possible the moment they abandoned the idea of using arms against each other, and not the other way around.

As far as the Palestinians are concerned, past experience completely refutes this assumption. The first intifada, undoubtedly a popular uprising, erupted after about two decades of prosperity, the likes of which the Palestinian economy had never experienced.

Between 1968 and 1986, the Palestinian GDP grew by 9.3 percent a year in real terms, almost as much as Netanyahu is now promising. The Palestinian economy grew at a similar rate even in the three to four years prior to the second intifada. While an economic deterioration may increase violence, improving the economy does not necessarily make things safer.

Netanyahu proposes improving the Palestinians' economic situation by setting up industrial parks near Palestinian cities. This would free them, and us, from having them come work in Israel. The industrial park that existed until recently near the Erez border crossing employed 5,200 people. When the industrial park being set up in Jenin, at the initiative of the Peres Center for Peace, is completed in 2011, it will create a similar number of positions.

But the Palestinians need another 40,000 workplaces a year to accommodate the youngsters joining the work force. The proposed industrial parks will only solve their economic distress if eight to 10 are established annually.

The alternative to employing Palestinians in Israel - having them export their labor - must be exporting products manufactured in the territories, even if not at these industrial parks. Public works like paving roads and constructing houses can raise short-term production and income, but such investments will only bring a one-time, temporary economic improvement. They cannot ensure viable economic growth because what they produce - apartments, for example - cannot be exported.

A small farm that cannot effectively produce what it needs must import. The Palestinians do that today with the generous international aid they receive. But the main source of financing their imports in the longer term - and the economy's growth engine - will have to be exports.

The smaller the economy, the more it needs international commerce to attain a certain standard of living. Exports comprise three quarters of the Netherlands' GDP, but only a ninth of the GDP of the U.S. Trade within the U.S. renders foreign trade largely redundant.

But to export, one needs access to markets. No entrepreneur will build a plant unless he knows for certain that his merchandise will reach clients, and that his raw materials and workers will reach the plant, on time.

The restrictions of movement in the territories, and with Israel and the rest of the world, mean that this is not the case. No wonder, then, that Palestinian exports are barely what they were 20 years ago.

As long as Israel upholds the restrictions, no employment centers will offer alternatives to work in Israel. Nor will they offer the 10-percent annual economic growth that Netanyahu sees in his vision, nor the economic peace he promises.

The author is a professor emeritus of economics at the Hebrew University of Jerusalem.