Why Peace Doesn’t Pay

Israel has no economic incentive to conclude a lasting peace with the Palestinians.

The upheavals of Israeli-Palestinian relations are usually explained in strategic, historical, or moral terms. From an Israeli perspective, however, the underlying force behind the troubled peace process — from its inception in 1991 to the violent clashes of today — has always been economics. Bound by a small local market and a hostile Arab neighborhood, the Israeli economy had long been built on exports (such as agricultural produce and diamonds) and foreign connections (such as U.S. financial aid and donations from the Jewish diaspora). But during the late 1980s, Israel reached the limits of its economic outreach: Many countries banned the Star of David flag in their capitals and multinational corporations refused to invest in Israeli firms. This economic isolation only heightened the sense of vulnerability that drove Israel to the negotiating table in the aftermath of Saddam Hussein’s Scud missile attacks and the prolonged Palestinian Intifada.

The invisible hand of the marketplace conditioned Israel to remain engaged in the peace process. Following the Madrid peace conference of 1991, Asian giants India, China, Japan, and South Korea expanded their business ties with the Jewish state. The European Union (EU) and Turkey likewise rewarded Israel in 1993 when Prime Minister Yitzhak Rabin shook Yasir Arafat’s hand. As the process continued, the Arab boycott all but ended, credit ratings surged in the wake of regional stability, a host of new trade agreements was signed with the EU, Canada, Mexico, Turkey, and East European countries, and a flow of foreign investment turned the high-tech sector into an engine of growth. From 1990 to 1999, annual trade with Asia rose from $3 billion to $8.2 billion, while trade with Turkey and India grew more than sixfold. New products filled the market, from Toyota cars in the streets of Jerusalem to McDonald’s restaurants along the sidewalks of Tel Aviv. By reaching out to the Palestinians, Israel went from a pariah state to an integrated member of the global economy.

These rewards contributed to a new national self-confidence and showed Israelis the benefits of reconciliation and openness. But they brought no real incentive to conclude the peace process. On the contrary, a stronger, less isolated Israel felt little pressure to fulfill Palestinian ambitions. As long as there was a peace process and no final settlement, Israel could have the best of both worlds: economic benefits without territorial concessions.

Consequently, Israeli policy toward the Palestinians has consisted of giving away as little as possible while strengthening the West Bank settlements and the Jewish hold over Jerusalem. Successive governments, both right- and left-wing, followed the same course. Keeping true to Rabin’s dictum that, “There are no sacred deadlines,” the Israeli government never met withdrawal dates from Palestinian territories. Each new prime minister “reassessed” his predecessor’s commitments, inevitably resulting in further delays. Even Ehud Barak, who came to office promising a comprehensive peace within 15 months, proved the least generous of Israeli leaders toward the Palestinians. His “all or nothing” approach, initially perceived as courageous, was a tactic to avoid further redeployments from the West Bank that had been mandated by existing interim agreements. Extensive construction in the settlements continued.

The proposed final-status agreement, negotiated with the mediation of former U.S. President Bill Clinton, carried the promise of a better strategic balance, world support, and regional acceptance of the Jewish state. But the painful political concessions embedded within the agreement — withdrawal from most of the West Bank and divided sovereignty over Jerusalem — brought few tangible economic benefits as compensation.

Israeli and Arab markets are incompatible, and even the level of inter-Arab trade is marginal. Regional cooperation programs have never advanced beyond the brochures and early planning stages. The best prospect for Israeli-Arab economic cooperation appears to be transferring old-style industries, such as textiles, from Israel to low-wage industrial parks across the border. (The Israeli underwear manufacturer Delta, owned by a peace-supporting industrialist, built production lines in Jordan and Egypt, but not many others have followed Delta’s example.) In the context of the new high-tech economy, regional peace offers only marginal gains. Small wonder that there has been little incentive to salvage the Oslo accords and reach a final settlement.

Meanwhile, the violent upheavals of the past eight months have had little impact on the Israeli economy forged by the peace process. The ups and downs of NASDAQ and sinking U.S. dot-coms have eroded Israeli well-being more than conflicts in the region; the economic impact of the Al-Aqsa Intifada has been felt most dearly by the Palestinians, who have thus far lost more than $1 billion in revenue due to punitive Israeli sanctions, such as the closure of the territories.

In the long term, however, the situation might prove untenable to the Israelis as well. Maximizing high-tech advantages is the obvious direction for the Israeli economy. In 2000, high-tech businesses accounted for 57 percent of Israeli industrial exports; a recent forecast shows that in 2005, the high-tech share of exports will grow to 70 percent. To make that projection a reality, Israel will need to preserve a stable peace process and avoid military escalation to attract further investment and avoid a credit rating downfall. The government will have to make some effort to appease the Palestinians. Under pressure from the United States and the EU, Israel has already eased some of the blockades.

Ariel Sharon, who ousted Barak in a landslide electoral victory in February, aims to gain strategic stability, not to fulfill some grand peace vision. He is ready to ease the daily hardship of the Palestinians but opposes further land transfer. Instead, he supports a long-term interim agreement, rather than the failed final-status deal negotiated by Barak. In short, Sharon wants a return to the status quo of the last decade: a never ending peace process that is more profitable than war but that sidesteps the bold concessions necessary for peace.

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