War and Diplomacy Failed: Let Economics Create a Palestinian State

The people want it; the snag is powers invested in the status quo, from the settlers to companies to the Palestinians themselves

David Rosenberg
David Rosenberg
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Palestinian vehicles wait on the Ramallah side of the Kalandia checkpoint into Israel.
Palestinian vehicles wait on the Ramallah side of the Kalandia checkpoint into Israel.Credit: AP
David Rosenberg
David Rosenberg

It took U.S. Secretary of State John Kerry more than eight months, a dozen or so trips to the Middle East and countless crises to finally conclude last Friday that it was time for a "reality check" on the Middle East peace process. But from the start, his effort looked like a quixotic mission, driven more by personal ambition rather than by strategic necessity.

Throughout the long months that followed, it was evident that he didn't have the enthusiastic support of the Israelis, the Palestinians or even his boss in the White House. With large swathes of the Middle East in disarray and difficult, controversial talks with Iran – not to mention more distant crises that should have been commanding the secretary of state's attention – Kerry looked increasingly like the drunk looking for his lost key under a street lamp because the light was better. His reality check is months overdue.

Now everyone is piling in not only to diagnose what went wrong but how it could be done better next time or shouldn't be done at all. Partisans of one stripe or another are blaming Israel or the Palestinians, but what is quite obvious from this last stab at a peace process is that neither of the two sides see a solution as a priority.

Nothing to lose

Israel has nothing to lose from the status quo. The United States will have its back, the boycott threat is a fiction and the Palestinians are quiescent. Why trouble with painful concessions? The only domestic constituency interested in the Palestinian issue is the settlers, and we know what they think.

The Palestinians exhibit no sense of urgency either. However, much they are suffering under the occupation, it is apparently not bad enough to pursue either the diplomatic or the Intifada route. Not enough Palestinians – and we're not talking just about Hamas – can shake off the romantic notion that their state can only be won by violence and that have if they wait long enough they can have it all.

Meanwhile, diplomacy involves too many compromises and too little glory. Like the ones before it, this generation isn't ready for peace.

How do we prepare the next generation? How can we assuage Israeli security concerns and give the Palestinians a sense that the present is worth preserving and the future something that can be built rather than fought for?

Business as usual

In the Israeli-Palestinian complex, economics traditionally has taken the back seat. At its best, it used to smooth out a difficult diplomatic process by promising the Palestinians (and occasionally even Israel) aid money in exchange for cooperation. At its worst, it's used as an excuse to delay real progress towards a diplomatic solution (a-la Benjamin Netanyahu) or as a grand but distant vision of a glorious future to inspire diplomatic process (a-la Shimon Peres).

But economics can and should be used in a very fundamental way to build a real Palestinian state in the making.

See the example of the Czech Republic and Slovakia, which went their separate ways in 1993 without a bullet being fired.

Palestine has become a foster child placed in the hands of dysfunctional family. It has one parent (the U.S. and Europe) that tries to buy cooperation if not obedience with money and another parent (Israel) that ignores it when it's behaving and is quick to punish it when it acts up. The child itself has come to expect their money and attention as a substitute for taking its fate into its own hands.

What 's resulted is economic disaster.

The Palestinian economy in the West Bank has posted impressive growth after the Second Intifada, but it was all based on huge inflows of foreign aid. The result is a bloated public sector that employs close to a quarter of the workforce while the overall unemployment rate is more than 25%.

Aid money does little or nothing for the economy itself: It gets spent on consumption and residential construction. Private investment amounts to just 15% of gross domestic product, 10 percentage points less than strong middle income countries typically generate, according to the World Bank.

Manufacturing, which is usually the key to growth for underdeveloped economies, accounts for less of Palestinian GDP than it did at the start of the Oslo process. The Palestinian Authority relies on Israel to collect most of the taxes it relies on, so it has little incentive to foster a thriving economy.

What the Palestinians, Israel and the U.S. should be doing is worrying less about funding the PA and more about opening up opportunities for the business sector.

Silly stereotypes

From an economic perspective, the Israeli stereotype of Palestinians is a mass of pitiful laborers and a few crony capitalists, but the fact is that the West Bank has a class of talented people whose abilities have been repressed by the restrictions Israel has put on business and by the PA's crowding out the labor market with government jobs. If Palestine lacks a lot of the drivers for Asian-style economic growth, it has the advantage of being astride the Israeli economy and potential access to the Arab market.

Realizing this potential must start with removing the checkpoints that dot the West Bank. Then open up access to Israel both for labor and trade, and third - end Palestinian restrictions on Area C, the 60% of the West Bank under Israeli control, and stop settlement expansion.

The World Bank estimates that opening up Area C alone could add 35% to the West Bank's economic output. That's probably overly optimistic, but even 10% or 15% would be a major gain for the Palestinians.

The idea is to let loose the kind of enterprise the West Bank has never enjoyed – broad-based, bottom-up growth founded on business and creating jobs rather than the narrow, top-down growth generated by aid money. If Asia is any model, it wouldn't take many years for this kind of activity to create an economic revolution and change attitudes enough to make accommodation with Israel a virtue rather than a sacrifice.

That's when the time will come for some future secretary of state to step in It could happen, but it will probably remain nothing more than an idea because it faces a long and powerful list of enemies. The list includes the settlers, who came to inherit the land, not share it on equal terms with prosperous neighbors. It includes the army, which won't want to ease up enough on security to allow goods and people to flow freely enough. Many Israeli businesses will oppose Palestinian competition. And, there is no shortage of Palestinians who won’t look askance at the whole thing.
Hamas and others are too invested in liberation and conflict. The PA political leadership would certainly look at booming business as a threat to their power.

But the fact is the so-called military solution has failed the Palestinians and after more than two decades of Oslo the diplomatic solution has failed, too, even if few are prepared to admit it. Economics is the last best hope for the two-state solution.



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