The Heritage Foundation

Backgrounder #920 on Middle East

November 5, 1992

November 5, 1992 | Backgrounder on Middle East

Why Economic Growth Is Critical to Arab-Israeli Peace

(Archived document, may contain errors)

November 5,1992 INTRODI WHY ECONOMIC GROWTH IS. CRITICAL XION Lastin g peace and stability in the ~iddle East nquin that ~rabs and ~sraelis have's stake in a prosperous, ccondcally interdependent region. For this mson the atten tion focused on camomics by the multilatffal Economic Development W-g Group EDWG) meeting in Par is, France, on October 29 and 30 is long overdue. Despite an entire yair of peace negotiations and high expectations, there has been lisle conmete progness. No doubt the road to peace will be long anddifficult. But cumomic nEoam should not wait.

Israel's e conomy is struggling to absorb immigrants from the fmcr Soviet Union andEthiopia,rcquihng it to bonow billions of doh with an American guarantee of repayment.lhe economies in the Israeli.sccupied West Bank and Gaza Strip, as well as in neighboring Jardan, a in shambles.To lay the groundw& bra stable, long tennpeace, as well as maddnssimmediatepmbhs, theUnitedSeates shouldgive high pxiority to encouraging gmwth&tcd, fne marketnhs throughout the n gion.

Economk factars fuel the Arab-Israeli wnfh Poverty in the West Bank and Gaza especially in comparison to Israeli living standards, was a major mason fa the out bnak of the Palestinian revolt against Israeli control, or "intifada in 19

87. This molt has ma de matters much worse, however, and the economies in the West Bank and Gaza a now near collapse. Widespmd unemployment also is contributing to the rise of militant, anti-Western Islamic fundamentalism in the West Bank, Gaza, and Jalan 1 Ibe EDWG is- toall thc panicipants in the bilateral peace talks, such as Isratl, tbe IU&nhs, J~~dan,Syria. andLeban0n.a~ well as otha Arab and majaindusrriel states, ranging from Egyptandsaudi Arabiato the US Rsna, Gamany.and Japan.'Lhe last round met in Brussels in May 19

92. Israel did notatmd,howcver,because it dud to meet with palcstinians fnnn Jausalem,thogeliVingaupideoftheWesrBanlrmd~.ormOareaffiliated withmepalestineLibwa!ionorganitation.

The Israeli government for decades has overregulated and overtaxed its people, lead ing to a weak, slow-growing economy. Israeli leaders have been nluctant to cut waste ful government spending, sell off government enterprises, and remove government red tape and restrictions from entrepreneurs. As a result, Israel is heavily depende nt on for eign aid to remain afloat. The sluggish Israeli economy further exacerbates Palestinian unemployment, since 40 percent of the Palestinian labor farce typically seeks work in Israel but increasingly finds fewer jobs and lower wages.

Jordans econom y is in desperate shape. The Iraqi invasion of Kuwait, the 1990 United Nations embargo against Iraq, and the 1991 Gulf Wtir farced hundreds of thou sands of workers in the Gulf countries to flee to Jordan, straining an already im poverished economy. Saudi Arabia and the U.S. then cut off foreign aid to Jordan in re sponse to King Husseins sympathy for Iraq, adding to the countrys economic woes Compounding all this is the 46-year-long Arab boycott against Israel that denies Is raeli, Palestinian, and Jordan ian businessmen access to neighboring markets and drives away fmign investors.

Economic growth cannot solve the Arab-Israeli conflict. It is a necessary but not a sufficient requirement for peace. But stronger economies can strengthen pmwestern political m oderates and increase the confidence of regional leaders to take the risks necessary to achieve peace.

The United States, thexefore, should promote a policy of Economic Growth fm Peace, making economic refm a top priority in both the multilateral and bila teral Middle East peace talks. Specifically it should 2 t# Urge the Arab countries to end their economic boycott against Israel. Israelis Palestinians, and other Arabs all suffer because of this boycott It should be ended immediately d Revitalize the U.S. - Israel Joint Econ.omic DevelopnreM. Group (JEDG) to emur age Israel to press forward with comprehenslve free market reforms. Established in 1984, this group helped Israel control hyperinflation. Since 1990, however it has been dormant. It should be revive d to help Israel make the refarms needed to cxeate a growing economy t# Urge the Israelis and Palestinians to deal Immediately with the problem of Pales tinlan violence against other Palestinians. Violent gangs of nationalists and IS lamic fundamentalists h ave killed hundreds in the West Bank and Gaza. Until order and calm am established, Israel cannot be expected to withdraw hm these tenitones, and strong economic growth will be impossible 2 Egypt is atso in desperate need of economic reform to create jobs for a rapidly gmwing population, strengthen moderate pWesm forces within the country, and counter the growing Islamic fundamentalist movement which opposes peace with Israel and strong ties u) the West. See James A. Phillips, Options for the U.S. As Egyps Time of Reckoning Nears, Heritage Foundation Backgrounder No. 5

46. November 10,1986 2 d Urge the Israeli, Palestinian, and Jordanian delegations to establish a trilateral Economic Development Working Group Progress is much more likely in direct talks betw een the parties who have the most to gain than in the multilateral talks where many political and economic interests compete for attention. This trilateral working group should assemble economic data on the territories, dis cuss Palestinian economic polic y and trade relations for the interim period of autonomy, and explore ways to boost tourism d Establish a U.S.4ordan Joint Economic Development Group (JEW Jordan must take quick action to revive its crippled economy. U.S. officials and pri vate free market economic development experts should help Jordan liberalize its economy and develop export industries, just as they help Israel d Review all U.S. non-military assistance to Middle East countries with a long=term view to phasing It out. Foreign aid is in pa r t responsible for the regions eco nomic problems. To make certain that such aid does not block economic re form, and to give Middle East countries an incentive to move quickly with ece nomic reforms, the U.S. should begin planning a phase-out of aid TWE W E ST BANK AND GAZA: REVOLT AGAINST POVERTY Peace talks between Israel, the Palestinians, Jordan, Lebanon, and Syria commenced on October 30,1991, under the sponsorship of the U.S. So far there has been little con crete progxess and continuing negotiations n o doubt will be long and difficult. These talks have many aims. Among them: satisfying the desires of the Palestinian people for self-government, of Israel for secure and recognized national borders, and of Jordan for regional stability and a settlement of the Palestinian problem terdependence will be key elements to a lasting regional peace. The opening of Eco nomic Development Working Group talks in Paris on October 29 and 30, which in cluded the parties to the peace negotiations, a number of Middle East countries, and various industrialized countries, focused attention on the need for an economic trans formation in the Middle East.

The current round of peace and economic talks occurs amidst a four-year-long Pales tinian revolt, or intifada, in the West Bank and Gaza that began in December 19

87. De spite Palestinian calls for statehood, however, the intifada was not entirely politically motivated. The Arab-Israeli conflict is exacerbated by urban poverty. Just weeks after the outbreak of the intifk, Rasha d al-Shawa, the Palestinian mayor of Gaza City, told an Israeli newspaper People in the Gaza Strip have a sense of injustice and deprivation, they feel they have nothing to lose. They work for you as garbage men and dishwashers, and they feel like slaves T he latest wave of riots is only one more expression of the peoples despair and frustration. The present wave is a spontaneous expression of popular rage, which begins with a small pupil in elementary school and concludes with the worker who returns every d ay from Israel, sees the good life there, but is forced to live here in subhuman conditions But no matter what the outcome of these negotiations, economic opportunity and in 3 Israeli economic analyst Daniel Dmn, Director of the Israel Center for Social a n d Economic Progress, agrees that a lack of economic opportunity is a cause of the in tifada. Arabs of all walks of life are sending a message that everyone is ignoring writes Doron. A major reason for their growing frustration-surely not the most im porta nt, but important enough that they keep repeating it-is the repressive economic regime Israel has imposed upon them.

The Palestinians in the West Bank and Gaza are no strangers to poverty. Egypt did little to improve Gazas economy when it ruled the area between 1948 and 19

67. An nual er ca ita income during that period was less than $500, measured in 1990 dol lars. Similarly, when Jordan controlled the West Bank, businessmen and skilled work ers emigrated in droves in search of jobs since the annual per c apita income was only 809, measured in 1990 dollars. In fact, the term Green Line, which is used to de scribe the border between pre-1967 Israel and the territories, refers to the fact that from an airplane, Israel, which placed a high priority on agricul tural development, c uld be distinguished easily from the West Bank and Gaza, which were virtual deserts.

Growing, Interdependent Economies. Under Israeli occupation beginning in June 1967, the Palestinian economy improved steadily. By 1987 Gam per capita income had risen to $1,648, measured in constant 1990 dollars. In the West Bank, per capita in come reached $2,3

79. The number of telephone subscribers in the temtories multiplied six-fold and the number of tractors inmased nine-fold!

Further, since the beginning of the occupation, the economies of Israel, the West Bank, and Gaza have become interdependent. By 1987, for example, nearly 40 percent of the Palestinian labor force was employed within Israel. More than 90 percent of Gams im ports and 88 percent of the West Banks imports came from Israel. Likewise 85 percent of Gazas exports and 65 percent of the West Banks exports went to Israel.

However, Palestinian children born since 1967-more than 60 percent of the popula tion of the terr itories-do not compare their lives with those of their parents under Arab rule. Young Palestinians compare themselves with Israelis. By that standard, the economic reality in the West Bank and Gaza remains dismal. Arab wages are seldom more than one-third of those in Israel for similar work. Furthemore, 36 percent of the Gazan population live three or more to a room compared to less than one percent of Jews in Israel.7 BP s See Daniel Doron, The Profits of Peace. The New Republic, May 30,1988. pp. 22-

24. Latex analyses picked up the economic trail. See Brigadier General Aryeh Shalev, The Infzfh: Causes and Effects pel Aviv: Jaffee Center for Strategic Studies, 1991 and The Enraged Proletariat in Zeev Schiff and Ehud Yaari, In

h: kaef s Third Front (New York Simon Schuster, 1987 pp. 79-100.

Pafrick Clawson and Howard Rosen, The Economic Consequences of Peace for Israel, The Palesrinhs and Jordan Washington, D.C.: Washington Institute for Near East Policy, 1991),Table 2.

SeeTom Bethells inteaview with Daniel Domn, director of the Israel Center for Social and Economic Progress, On the Road To Jerusalem, The American Specfafor, May 1990, p. 11.

Schiff and Yaari, op. cit p. 84.

Israeli Stafisrid Absfrucr, No. 42 (1991 Israel Central Bureau of Statistics (Jer usalem pp. 302 and 722 4 Denying Economic Opportunity. The frustration and poverty suffered by the Pales tinians in the West Bank and Gaza are caused in part by Israeli economic policies. For both agriculture and industry, Israel has built a tax and regul a tory regime in the territo ries to discourage Palestinian self-sufficiency and competition with Israeli goods and services. Since 1967, the Israeli military has issued more than 1,500 regulations cover ing the entire spectrum of Palestinian economic activ i ty. Many have nothing to do with security concerns. Order 1015, for example, required Palestinians to obtain the militarys permission to possess fruit trees or seedlings other than those needed for per sonal consumption. An appen dix later limited the ord er to grapes and plums, but Order 1039 extended the list to in clude eggplants and tomatoes in the Jericho region.

The Israeli government also ovmgulates its own citizens and denies them full eco nomic freedom. Agricultural regulations, for example, fill a n 833-page book of two col umns per page. Many Israelis however, are able to secure from their government special privileges or exemptions. Pal estinians, by contrast, have no political mechanism to work for economic change. This adds to their frustration .

Mostly unorganized laborers and small entrepneurs, Pal estinians lack the defenses Is raelis have evolved to protect 8 1991 Per Capita GNP Comparison Israel Dominates its Neighbors 1991) bdhn 12,000 10,000 6,000 6,000 4,000 2,000 V Gaza West Bank Jordan Israel Note: Data for West Bank and Gaza are estlmater Sourcrn: Embassy of Israel. Jordan Information Accurate data are unavallable.

Bureau. World Bank. Horltagr DatoChart themselves from the system: an old boys network, membership in organizations that s olicit tax exemptions, and privileges of all sorts, notes Daniel hn. Thus, Israels onerous economic system further inflames the Arabs radical nationalism and xenopho bia just as political manipulation of the economy radicalizes less advantaged Jewish grou ps and incites violent labor strife among even patriotic citizens such as El A1 workers.

Going From Bad to Worse. Since the outbreak of the 1987 Palestinian intifada, the economic situation has gone from bad to worse. Unemployment in the West Bank is at le ast 25 percent. In Gaza it is nearly 50 percent. Palestinian per capita income in Gaza 8 9 For a detailed description of Isaeli control of Palestinian agriculture, see Richard Drury and Roka Winn, Plowshares and Swords: The Economics of Occupation (Boston : Beacon Press, 1992 Doron, op. cit pp. 22-24 5 has fallen from $1,648 to about $8

50. Per capita income in the West Bank dropped from $2,379 to about $1,4

00. By contrast, Israel's per capita income was 11,276 in 19

91. The frustration among Palestinians due to the fail- of the in tifada to evict Israel from the West Bank and Gaza, themfore, is intensified by their despmte economic conditions ECONOMIC CONDITIONS IN ISRAEL While Israel's economy is very strong in comp a rison to its neighbars histori cally it has been dominated by state direction and control. Over the past two de cades it has experienced serious problems. Between 1950 and 1973, Israel's aver age per capita income grew by 5.6 percent per year. Since then i t has averaged less than one percent annual growth, and in 1990 actually declined harmed by excessive government control.1o For example, Israel's top marginal tax rate on monthly income of over $3,000 is 50 percent. This makes it very difficult for Israel i entrepreneurs to accumulate capital and launch new businesses Red tape further constrains entrepreneurs. Between 1985 and 1989, for example, only 50 percent of the applications for new investment projects processed by the Israeli Investment Center were a p proved, according to Meir Eldar, a policy analyst at Israel's Institute for Advanced Strategic and Political Studies Furthermm, Eldar estimates that an entrepreneur may pay consultants, accountants, and lawyers for as much as 500 working days of advice to navigate through the labyrinth of Israeli bureaucracy to obtain final appval for an investment project. This can cost be tween $250 and $1 ,OOO a day Few Jobs for Immigrants. The results of the Israeli government's mismanage ment of the economy has been a woeful inability to successfully employ masses of Soviet and Ethiopian Jews. Unemployment is nearly 11 percent nationally and 40 percent among Soviet Jews. In the highly regulated, highly taxed Israeli economy Soviet immigrants have fewer employment oppor tunities and thus must take the lowest paying jobs. Soviet Jewish engineers and doctors, therefm, sweep stmts and musicians work as janitors.

Israel's stagnant economy exacerbates the economic problems of the West Bank and Gam, with which it is closely tie d. This is primarily because the 40 percent of Palestinians from the occupied territories that typically work in Israel see their jobs threatened or eliminated by Israel's poor economic condition. Further, competition for low paying jobs from Jewish immig r ants makes work in Israel even more Mi cult for Palestinians to find The reason for this poor performance is that Israel's economy is severely l 10 See Joel C. Rosenberg "Land of Promise: Restoring Israel's Economic Miracle Policy Rev&, Fall 1991, pp. 60- 6 5 11 See Meir Eldar Toward Growth and Independence: Establishment of Free Export procesSing Zones in Israel Institute for Advanced Strategic and Political Studies (Jerusalem February 1992, p. 11 6 ECONOMIC CONDITIONS IN JORDAN Jordans economy is centraliz e d and extremely inefficient. The government em ploys over one-third of the labor force and accounts for over 65 percent of the countrys 2.8 billion GNP. Transfer payments axe almost 30 pent of the national budget and, of course, military expenditures are e nonnous-over 20 percent of the budget. The Jordanian government completely owns or controls the majority shares in key sectors of the economy such as Royal Jordanian Airlines, and the phosphate, pot ash, cement, and fertilizer in dustries. Water food, ele c tric ity, and gas are subsidized though a restructuring pro gram by the International Monetary Fund IMF) is working with Jordan to elimi nate subsidies as well as re duce the government budget and deficit and privatize the airlines Per Cepite GNP in Jorda n : 1872-1991 Living Standards Have Been Halved in Last Decade 1990 Dollars 2500 1500 1000 500 Jordans economy is also extremely vulnerable because it is so closely tied to the econ omy of the Persian Gulf states. Falling oil prices in the 1980s caused a st eady decline in Jordans income because workers in the Gulf states sent less money back home and oil exporting countries reduced their aid to Jordan. Per capita income, for example, declined from $2,329 in it82 to 1,657 in 19

88. The war against Iraq then c ost Jordan an estimated $1.8 billion in lost trade with Iraq, Kuwait and other Gulf states The war also flooded Jordan with more than 300,000 Palestin ians fleeing the Gulf. Furthermore, Saudi Arabia cut off $360 million in aid and the U.S. cut off $35 mi l lion in aid to Jordan in retaliation for King Husseins tilt toward Saddam Hussein. These factors drove unemployment to 25 percent, inflation to 14 per cent, and Jordans foreign debt to more than $8.5 billion. Per capita income in 1991 was only $1,172 Sour c e: The World Bank Herllaae DataChar 12 The World Bank, World Tables: 1989-1990 Edition, p. 333, ConveRed to constant 1990 Amencan dollars using the US. consumer price index 7 This year, Jordans economy has improved The reason: Palestinians from the Gulf n o w convinced they have nowhere else to go, have transferred 1.4 billion in savings to Jordanian banks. This has financed a housing boom and the creation of many small businesses. Unemployment has dropped to around 18 percent today, inflation is down to jus t 5 percent, and Jordans GNP is expected to grow 7.5 percent by years end. This boom, however is not expected to last. Further, prospects for long-term Jardanian growth are hampered by a huge foreign debt-despite several major mchedulings by international b anks and foreign governments BOYCOTTING PROSPERITY All of the countries of the Middle East have been harmed by the economic boycott maintained for the past four decades by Arab countries against Israel. In 1946, Arab states began a primary boycott against direct trade with Jews in what was then Brit ish-ruled Palestine. This was expanded in 1951 to include a secondary boycott against any company worldwide conducting business with Israel, and a tertiary boy cott against companies doing business with other c o mpanies doing business with Is rael ation of Israeli Chambers of Commerce, it has cost Israel an estimated $45 billion in lost trade and investment over the last four decades. It also prevents Jardan from tap ping the Palestinian and Israeli markets of mo r e than 6.8 million people over two times Jardans population. The boycott also harms Palestinians. Neighboring Arab countries are logical markets for the products of the West Bank and Gaza, accarding to Fuad Sahouri, chairman of the Arab American Business a nd Professional Associa tion. Unfortunately, the political ramifications of the Arab economic boycott against Israel has, for the most part, prevented Palestinian manufacturers from expating to the Arab world The Arab boycott has been harmful to both Jews and Arabs. According to the Feder RADICALISM: CONSEQUENCE AND CAUSE OF ARAB POVERTY The poor economic conditions, lack of opportunities for individuals to prosper through their own work, and the high costs of the Arab boycott have contributed to an other problem that threatens Middle East peace and American national security: Is lamic fundamentalism.

Increasingly, Islamic fundamentalist groups in Jordan, the West Bank, and Gaza such as the Muslim Brotherhood, Hamas (Islamic Resistance Movement) and Islamic Jihad-groups funded by Iran and Saudi Arabia-exploit sevem poverty and despair to build their membership and radicalize the uncommitted. According to Robert Satloff, Deputy Director of the Washington Institute for Near East Policy: Islamic groups have be e n the prime beneficiaries of the anger and frustration of even highly ed 13 Interview with author, September 1992 8 ucated Jordanians, whose expectations of rising social and economic status left un fulfilled in todays climate of austerity, recession and mass unemployment.

Islamic fundamentalists have gained power in Jardan. Their opportunity for political victory was set up in the winter of 1989 when the IMF insisted that as part of an emer gency restructuring program, Jordan cut military expenditures and raise the price of items ranging from gasoline to cigmttes by removing subsidies. By April 1989 Jurdans southern cities erupted in riots against the resulting high prices and economic hardship caused by the WIF austerity program, and the Jordanian govemm e nts overall mismanagement of the economy. By November 1989, in ;lardans first open parliamen tary elections in 22 years, the Muslim Brotherhood-Islamic fundamentalists who staunchly oppose any negotiation with Israel-won a stunning twenty of the eighty se ats in the Jordanian Parliament. Today it holds 22 seats while six other seats are held by independent, non-Brotherhood Islamic fundamentalist legislators. Their slo gan: Islam is the solution.

Islamic fundamentalists are a threat to Middle East peace firs t because of their utter rejection of Israels right to exist. Further, their particular hatred of the United States causes them to oppose the U.S. playing a leading political role in the xegion. Whether in Jordan, the West Bank and Gaza, or elsewhere in t h e Middle East, Islamic fundamentalist objectives-including a penal code based on the Koran, second-class citizenship for all non-Muslims, warfare against non-Muslims only, and an ultimate union of all Muslims living in peace under one ruler-are not conduc i ve to pluralism RZ markets, and regional peace.I6 Feeding on Poverty. Islamic fundamentalism is feeding on the poverty and despair in the West Bank and Gaza. Gazans, far poorer than West Bank Palestinians, me also more attracted to radical religious doctr i nes. Residents of refugee camps, where the worst economic conditions prevail, are attracted in still greater numbers to these doc trines than are more prosperous business owners and merchants. Furthermm, Palestin ian youth and the college-educated are at t he center of the Islamic revival, in part be cause they see for themselves a bleak economic future, a trend found in other Arab countries that are also seeing a surge in Islamic fundamentalism. Only one in eight Pal estinian college graduates, for example , finds work in his profession in the West Bank and Gaza The radical Hamas and Islamic Jihad factions are now bitterly fighting the Pu) for political and economic control of the territories and are winning power. Hamas mem bers, for example, w n decisively the elections for the Hebron and Ramallah Cham bers of Commerce.In 1989, Hamas was said to control more than 40 percent of all 14 See Robert Satloff, They Cannot Stop Our Tongues: Islamic Activism in Jordan. Policy Papers Number Five Washhgmn Institute fa r Near East Policy, 1986, p. v 15 See Robert Satloff, Jodan Looks Inward, Current History, February 1990 16 See Daniel Pipes, Fundamentalist MUlims and U.S. Policy. Heritage Foundation InternufionuIBriejjng, August 10,1984, p. 6 17 Schiff and Yaari, op. ci t p. 9 1 18 See Pinhas Inbari, Hamas Seen Supplanting PLO in Temtories, AI Hamishmar, March 11,1992, tnrnslated in Foreign Broadcast Ir&ormatwn Service-Near East and South Asia, March 12,1992, and Wed AbuToamah 9 Gazan mosques. This number has surely fifow n and the total number of mosques in Gaza has grown 140 percent since 1967.

Islamic fundamentalism and radical Palestinian nationalism not only feed on eco nomic hardship, however, they help create it. Followers of these two movements call for the eliminat ion of Israel. They also call for the deaths of those who stand in their way In the West Bank and Gaza at least 723 Palestinians were killed by other Palestin ians between December 1987 and August 1992-an average of mm than a dozen per month. Thus, when A r ab-on-Arab violence is added to denials of economic freedom by the Israeli government, the conditions for economic growth in the West Bank and Gaza m even weaker PREREQUISITE FOR ECONOMIC GROWTH: THE RULE OF LAW The Palestinian-Israeli peace process faces a dilemma. On the one hand, economic growth and prosperity in the West Bank and Gaza would help mitigate the violence foster economic interdependence, and facilitate a peaceful resolution On the other hand, economic growth requires order and calm.

Whether in the inner cities of America or the West Bank and Gaza, order and daily calm, the "rule of law is a prerequisite to economic freedom. But factional or gang vi olence has plagued the occupied territories. Furthermore, arbitrary and unjustified acts of v i olence by Israeli authorities against Palestinians contribute to a vicious circle of re taliation. The lack of law and order makes peaceful coexistence impossible. The "rule of law" in this context does not necessarily mean that Israeli law and Israeli la w enfm ers-the military-must be in control of the Palestinians. It does mean that protection of life, liberty, and property must be fundamental elements of how the territories are administered.

Whatever arrangement is finally aped upon as a result of the p eace talks, whether some form of autonomy or an independent Palestinian state, control of domestic vio lence in the West Bank and Gaza will be a prerequisite. Best would be for Palestinians themselves to control the Arab-on-Arab violence. Bethlehem's mayo r Elias Freij, for example, told Israeli radio in August that We cannot allow the creation of a vacuum [between a withdrawal of Israeli forces and the creation of a Palestinian police force]. So, I think the first item on the agenda-my advice to our delega t ion-is now to talk with Israel and reach an agreement about the formation of a strong, well-trained well-disciplined Palestinian police force, so when t moment comes for the Israelis to withdraw, our police force will be ready. L he Uncharted Terrain of P a lestinian Politics The Jerusalem Repon, June 4,1992, pp. 30-32 19 For an excellent analysis, including detailed examinations of Islamic Jihad-"the most radical, violent, and innovative of the Islamic organizations" in the territories-and Hamas-a "wing of the Muslim Bmherhd"--see Robert Safloff s "Islam in the Uprising Orbis. Summer 19

89. See also Schiff s and Ya'ari's chapter on "The Islamic Resistance Movement op. cir pp. 220-239 20 Jerusalem's Kol Israel radio, August 29,1992, mslated in Foreign Broadca st Idormarion Service-Near East and South Asia, Sepwrnbez 1.1992 10 SMALL BUSINESS: THE KEY TO JOB CREATION AND ECONOMIC GROWTH As Israeli, Palestinian, and Jordanian policy makers seek ways of improving their own economies, and as the U.S. considers ways to promote economic development in that region, they should recognize that small businesses usually account for most of the job creation in any country and thus a~ the engines of economic gmwth. Small busi nesses a~ run by entrepreneurs willing to take ri sks. These businesses can adapt more quickly than large firms to changes in the market and so find profitable niches. Small businesses usually have lower startup and overhead costs than do larger enterprises.

They can often be started in a home or garage. Thus small businesses are especially im portant to countries that have problems attracting fmign investment.

The proportion of small business in Israel, however, is much smaller than in the U.S.

Only 42 percent of the Isr aeli labor farce is employ by fms with less than 100 peo ple, compared to 57 percent of the U.S. labor force! This is in large part because Israels government favors big business with huge subsidies and tax incentives. In addi tion, high taxes and intrusi ve government regulations fall especially hard on small en terprises. Yet despite these and many other advantages given to large manufacturing fms and military industries, many are inefficient money-losers and cmntly are downsizing and laying off workers.

The regions economic future probably does not lie in luring Honda to Haifa or Wes tinghouse to the West Bank. Risk-averse carporations are unlikely to invest large sums of money in the area until peace has been established and proved to be dmble. Rather t h e regions economic future lies in neating conditions that allow entrepreneurs and small businesses to flourish. This means creating a cleir and orderly legal system that protects private property rights and enforces contracts. It means moving entry bar ri ers such as high taxes and excessive regulations. It also means ma g institutions that extend credit and allow people to accumulate and invest capital.

Enormous Informal Sector. Given such conditions, the prospects far a dramatic in crease in small busines s creation in the region are very good. Israelis have a strong en trepreneurial tradition. They have, for example, circumvented tax and regulatory obsta cles and created an enonnous informal sector. The underground economy is variously estimated at somewh ere between 15 percent and 30 percent of Israels GNP.

Palestinians are also very entrepreneurial. The number of Arab businesses in the Is raeli-occupied territories has doubled since 1983 virtually without Israeli government assistance. Israeli government baniers, however, prevent their growth. In the West Bank and Gaza, 93 percent of all industrial fms employ fewer than ten warkers. The average enterprise has four workers. The Center for Jewish-Arab Economic Develop ment estimates there is $50 million in private Palestinian capital hidden away or depos B 21 See Israels Statistical Abstract, 1991. p. 422, and the U.S. Statisticul Abstract, 1991, p. 5

32. See als~ Ziv Hellman Small Businessmen Losing Ground in Isml, Jerusalem Post International Edition, Sept ember 15,1990, p. 21 22 For more, see David L. Birch, Job Creation in America: How Our Smallest Coqpanies Put the Most People to Work Nm Yarlc Ihe Free Press, 1987 11 ited overseas that could be invested in Arab usinesses were the conditions for risk-tak i ng and investment improved dramatically. 28 Outside the West Bank and Gaza, many Palestinian entrepreneurs am also quite suc cessful. Scattered from Amman to Atlanta, they form a global community of wealth and power united by a single cause. They are Pale s tinian entrepreneurs and...they favor prosperity over military power, began a 1989 Fomne magazine pfde of some of the worlds wealthiest Palestinians. These entrepreneurs include the president of the largest private bank in the Arab world, owners of the Mi d dle Easts leading private in ternational construction company, and an American real estate *loper who owns the Rib-Carlton hotels in New York City and Washington, D.C intangible quality of entrepreneurship and root itself in people ppad to incur the risks required to achieve an economic objective, writes Harold Dick, a specialist on the Palestinian economy. He warns, however, that foreign aid can be harmful to the Palestinians. Money is a particularly blunt instrument and can be detrimental to the entrepre n eurial process. Authentic economic development djynction through credit and joint venture schemes, accompanied by technical support An economic development strategy for the occupied tenitories must be built on the THE FOREIGN AID DILEMMA Calls for economi c reform in other countries inevitably lead to calls far fareign aid as a means to such reforms. Israel and Egypt already ate the two largest recipients of U.S. aid. Relief organizations in the West Bank and Gaza also receive U.S. aid, though in much small e r amounts. U.S. aid to Jordan was cut off in 1991 as a result of King Husseins tilt toward Saddam Hussein during the Persian Gulf War. As economic re farm talks proceed, and as a Middle East peace agreement is fmulated, no doubt the participants will call for massive new aid and the U.S. might be tempted to purchase economic reform and peace. The consequences of agreeing to such handouts, however must be seriously considered.

U.S. aid has done little to help any country in the world abandon destructive eco nomic policies for free markets. In fact, foreign aid, by covering the costs of unsound economic policies, often slows economic reform. In the 198Os, far example, the U.S with its allies, funneled billions of dollars through the International Monetary Fu n d and World Bank to debtor countries, especially Argentina, Brazil, and Mexico.These countries promised economic reforms in exchange for funds but substantial reforms did not materialize. It was only in the late 198Os, when the U.S. made clear to the gov e rnments of these countries that massive new aid would not be forthcoming, that re 23 See Sue Fishkoff, The Delicate Business of Coexistence, Jerusalem Post International Edition, July 18,1992 24 ShawnTully, The Big Moneymen of Palestine, Inc Fortune, July 31,1989, pp. 176-186 25 Harold Dick, Toward a SIrategy for Development: Empowerment and Entrepreneurship, in GeorgeT. Abed, ed.

The Palestinian Economy: Studies in Development Under Prolonged Occupation New Yok Routledge Press, 1988 26 Edward L. Hudgins, Director of the Center for Intemational Economic Growth, helped prepare this section p. 10 pp. 311-327 12 formers in these countries were able successfully to pro mote radical, free market re forms 1.8 billion annually has helped Israel survive in the fac e of forty years of hos tilities from her neighbors. Is rael has also proved a faith ful friend in a troubled and turbulent region. Israel pro vided a check on Soviet backed aggression in the re gion and continues to pro vide the U.S. valuable intelli genc e , docking rights, and prepositioning sites for U.S military equipment and sup plies Certainly U.S. military aid 1992 US Foreign Economic Assistance Egypt 58 million $315 mllllon Gam Strip 645,000 $16.7 mllllon Israel 5.1 million $1.2 billion Jordan 3.3 ml lllon $0 combined with Gam West Bank 1.1 mllllon The $16.7 million is distributed among relief organitrdbns that operate in both Jordan received $35 million m 19

90. Congress cul off aid in 1981 due to Sources: Population figures: Embassies of EM, Israel, and Jordan.

Ad figures: U.S. Agency tor International Devebpmerd the Gaza St

and the West Bank Jordan's tilt toward Saddam Hussein during the Gull War U.S. economic aid to Israel-$1.2 billion annually-however, also has been a clas sic case of how foreig n assistance can slow economic refm. As long as U.S. aid cov ers the costs of Israel's economic mistakes, Israel has little incentive to change its poli cies. Despite billions of dollars in U.S. economic aid to Israel over the past two de cades, Israel's economy has fluctuated between weak growth and nxession. Israel's governments over those years were slow even to consider selling off government enter prises or reducing regulations on businesses. Public sector payrolls remain bloated and taxes high.

The U .S. government recently agreed to provide guarantees for $10 billion in loans to be sought by the Israeli government. These further ce incentives for Israel to eliminiite wasteful spending from the country's budget. The government now is able to continue i ts wasteful ways and bumw to cover its cost. This will mean even greater Israeli government debt in the future. In case of default, the U.S. taxpayer will have to foot the bill 97 Some of its advocates maintain that foreign economic assistance to Israel a n d Egypt aims both at helping local economies and promoting regional political stability, They maintain that the Egyptian government would not have been able to accept the Camp David peace accords without U.S. funds. American aid allowed the Egyptian gover n ment to spend more on public works projects, subsidies, and other handouts to "buy domestic peace and to blunt domestic critics of the accords. But while aid might have bought short-term peace, it has done long-term economic harm to Egypt. Rather than 27 See Edward L. Hudgins and Joel C. Rosenberg, "Economic Reform, Not Loan Guarantees: Israel's Only Path to prosperitY Heritage Foundation Bockgrounder No. 881, February 13,1992 13 use foreign assistance to cover the costs of a transition to the he &et, Egy p t used aid as a narcotic to avoid dealing with the economys real illness!This meant that in the long term the economy grew worse. This has opened the way for Islamic fundamentalists to capitalize on the governments economic failms. By seriously harming Eg ypts or any other countrys economy, thmfore, aid can actually under mine long-term political stability.

Jordan may well be the next obvious candidate for massive new U.S. foreign aid handouts. King Hussein liiely will want to be able to pump money into the economy to head off criticism of a peace accord with Israel. But this approach is fraught with danger. Jordans perilous economic situation is due in part to its dependence on aid from Saudi Arabia, other Gulf countries, and the U.S which was cut off duri n g the showdown with Saddam Hussein. Jordan no longer can afford to be dependant on for eign aid. It thus has a strong incentive to begin now to develop a free market economy and begin trading with Israel, Europe, and the West CHANGING ATTITUDES TOWARDS EC O NOMIC GROWTH A growing number of Palestinian leaders appear to favor economic cooperation with Israel. Palestinian activist Sari Nusseibeh calls for a new integrated economic order in the region based on open borders and cooperation. Bethlehems Palestinia n mayor Elias Freij says he would like to see Israel, Jardan, and the Palestinians form a Benelux trade area modelled after Belgium, the Netherlands, and Luxembourg. I think we need each other economically and politically, says Freij.

Jordan Aims for Peace and Prosperity. Jordanian leaden say improving their countrys depressed economy is a major reason they are participating in the peace pro cess. At the opening of the October 1991 Middle East peace talks in Madrid, Jordanian Foreign M i nister Kamil Abu Jaber declared that his country seeks a peace that will focus on region-wide issues such as the economic balance among the peoples of the ma through joint development programs There is also an emerging realization among Jordans leadership that peace with Israel, economic liberalization, and grow ing export opportunities are the keys to Jordans future. In an October 1991 speech to the national parliament, Jordans King Hussein stressed that in the post-Cold War era competition will essential l y be economic and scientific not military. Says a senior Jordanian official: I would like to see Jordan become the Japan of the Middle East concentrating on developing a viable export industry aimed at the West. That, by neces sity, means making peace wit h Israel. Remarks one Jordanian diplomat, Israel is Jordans window to the world.2g Talking to Capitalists, Not Stone Throwers. Israeli leaden amss that countrys political spectrum increasingly place importance on economic development in the terri tories. W e understand very well that to be an island of prosperity in an ocean of pov erty will be a mistake, said Israeli Foreign Minister Shimon Peres of the Labor Party 28 phillips.0 cit 29 Personal inteniews with the author. Officials asked not to be identified 14 in a September 1992 speech. Peres also told the Wall Street Journal that if we can creaw an economic dynamism that constantly improves the standi# of living in the region, it will give the impetus to the political process as well. Many Likud Party lead ers agree. I think weve seen in the last four decades that the bet ter off people are economically, the easier they are to deal with politically, says Moshe Arens, Likuds Defense Minister in the previous Israeli government.

Wed like to have capitalists tal king to us from Gaza. Its much easier than talk ing to stone throwers, he adds. In 1991, following recommendations of Ezra Sadan, Israels former Director General of the Ministry of Agriculture who di rected a government study of economic conditions in the temtories, Arens began to take small steps to reduce taxes and bureaucratic obstacles to Palestinian small business creation NEEDED: A U.S. POLICY OF ECONOMIC GROWTH FOR PEACE At the multilateral EDWG talks and the bilateral talks in Washington, the U.S s hould encourage the Israelis, P estinians, and Jordanians to pursue a policy of Economic Growth for Peace. Economic reform, development, and coopera tion offer Arabs and Israelis tangible and immediate benefits from the peace pro 3 cess.

Specifically, the U.S. should d Uge the Arab countries to end their economic boycott against Israel For more than four decades, the Arab states have banned all direct and indirect trade with Israel and products made with Israeli raw material. This has harmed Is rael, the P a lestinians and Jordan. The boycott should be ended immediately The U.S. should insist that Saudi Arabia take the lead in declaring the boycott null and void. Saudi Arabia owes its very existence to the U.S. as a result of Oper ation Desert Shield and Oper ation Desert Storm in 1990 and 19

91. Saudi Arabia today can afford to be bold in its policy toward Israel. The PLO was discredited in the eyes of Saudi leaders after Yasser Arafat openly embraced Saddarn Hussein the Iraqi military is largely destroyed, an d American-Saudi relations axe at an all time high following Presidents Bushs commitment to sell the Saudis advanced fighter jets. The Saudis should thus follow Egypts lead and begin the process of normalizing relations with Israel by ending its adherence to the Arab boycott d Revitallze the U.S.=lsrael Joint Economic Development Group (JEDG) to encour age Israel to press forward with bold, comprehenslve free market economic re form 30 Amy Dockser Marcus. Israels Peres Sees Key to Peace in Cooperative Effo r ts With Arabs, The Wall Sweet 31 Joel C. Rosenberg, For Middle East Peace, Let Palestinians Get Rich, The Wall Sfreef Jour&. July 8,1992 Journal, September 21,1992 15 The U.S.-Israel JEDG, made up of State Department economic oficers and private consultan t s, was created in 1984 by then-U.S. Secretary of State George Shultz and then-Israeli Prime Minister Shimon Peres to stabilize Israel's hyperinflation. The JEDG's advice helped reduce the annual inflation rate from over 400 percent to around 20 percent. F r om 1985 through 1990, the group met twice annually to discuss further opportunities for Israeli economic reform. But the Israeli government adopted only a few of the JEDG's recommendations. Since the debate over U.S. loan guarantees for Israel, however, t h e group has not met Less government intervention in the economy, not fWign handouts, will allow Is rael to amact foreign investment, make Israeli capital more productive, and spark sus tainable economic growth. Economic prosperity will enable Israel to su c cessfully ab sorb Jews eager to flee an imploding former Soviet Union. A growing, psperous Is rael also will be boon to Palestinians in the West Bank and Gaza Strip, 40 percent of whom typically work in Israel and are hardest hit by massive immigration an d Israel's sluggish economy.

It is time, therefore, for the JEDG to meet again to monitor Prime Minister Yitzhak Rabin's economic program and discuss strategies to Reduce Israeli government spending. Israel's 1992 budget is equivalent to 72 percent of the country's GNP Reform the tax code and reduce corporate and personal rates. corparate taxes are as high as 40 percent and the top marginal rate on personal an nual income over $36,000 is 50 percent Speed privatization of state-owned enterprises, banks, and land. The gov ernment owns 160 companies, controls the four major banks and 93 per cent of Israel's pre- 1967 land Eliminate barriers to the creation of small businesses. Israel's thriving un derground economy is caused by time- and capital-consuming regu l a tions, government-sancti ned monopolies and cartels, onerous labor laws and a punitive tax code. 3Y d Urge the Israelis and Palestinians to deal directly and immediately with the pols lem of Palestinian violence against other Palestinians Law and order i s critical to a successful autonomy agreement and to economic devel opment and cooperation. If Palestinians rather than Israelis establish this order' they make a stronger case for self-rule and autonomy and pave the way to real economic growth 32 See Ros e nberg Land of Promise Daniel Doron lsrael's Economic Challenge: How the U.S. Can Help Heritage Lecture No. 350,1991; and Alvin Rabushka, Scorecard on the Israeli Economy: A Review of1991 (Jerusalem Institute for Advanced Strategic and Political Studies. M a rch 1992 16 a/ Urge the Israeli and Palestinlan-Jordanian delegations to establish a trllateral Economic Development Working Group Trilateral discussions are far more likely to produce actual agxeements on economic development and cooperation than multila teral discussions that include Syrians, Leba nese, Gulf countries, Europeans, and Japanese. This is because the Israelis, palestin ians, and Jardanians have the most to gain from increased interdependence.

One issue that might be tackled immediately is tra vel and tourism The West Bank is probably the richest [land] in the world in respect to religious shrines dear to llow ers of the three great religions notes Palestinian economist Hisham Awartani!'Thus the most viable form of job creation and economic coo peration exists in the area of tourism. Officials should discuss ways to make it easier for tourists to obtain visas cross borders, and exchange currency.

In addition, the trilateral group should Assemble detailed, up-to-date data on the economies of the W est Bank and Gaur. Israeli's statistics on the economies of the West Bank and Gaza are questionable because so much activity occurs in the underground econ omy Discuss what kind of economic policy Palestinians will pursue under autm Ow. What kind of tax c o de will exist, how will the taxes be collected and what will they be used to pay for? With initial tax revenues expected to be low, how can the Palestinian private sector provide services typi cally thought of as public responsibilities, such as garbage c ollection?

How can the Palestinians avoid establishing the sort of massive bureau cracy that has hindexed economic growth in Israel and throughout the Arab world Negotiate interim trade arrangements between Israel, the West Bank, Gam and Jordan under auton omy. Do the Israelis, Palestinians, and Jardanians intend free movement of goods, services, labor, and capital d Establish a U.S.Jordan Joint Economic Development Group (JEDG With Saudi and U.S. foreign aid to Jordan cut off and a crushing foreign debt, J o r dan must refm its economy and strengthen its private sector. With Iraq and Kuwait closed to Jordanian goods and services, Jordan must look for new markets. With highly educated and skilled Palestinian refugees from the Gulf states now living in Jordan. a nd bringing their savings with them, Jordan has a unique opportunity to develop hunkds 33 See Hisham Awd Palestinian-Israeli Economic Relations: Is Cooperation Possible delivered to a confemce on "The Economics of Middle East Peace" at kard University's I n stitute far Economic and Social Policy in the Middle East. November 14-16.1991 17 of small export businesses. These factors provide a window of opportunity for the U.S. to help Jordan make the transition from dependency on aid and debt to a strong commitm e nt to the free market and export promotion. A growing fiee market economy would strengthen moderate, pro-Westem politicians in Jardan and work to erode the support for Islamic fundamentalists who exploit Jordanian poverty for their own political gain In a d dition to providing technical advice on how to reduce Jordans budget downsize its bloated bureaucracy, and privatize major industries, a U.S.-Jardan ian JEDG, modelled after the one with Israel, could also help Jardan establish free export processing zone s (FEpzs Highly successful in East Asia, FEpzs are extremely low-tax, minimum regulation industrial parks. Their purpose is to attract foreign and domestic investment, develop x industries and create jobs There m currently no such zones in Jo~dan!~Evate fr e e market em nomic development experts should be invited to work with U.S. trade officials as part of the delegation to the U.S.-Jordan JEDG d Review all U.S. non-military assistance to the Middle East with a long=term What Israel, Jordan, the Palestinians , and Egypt need are free markets that allow entrepreneurs to open businesses and offer goods and services to paying customers wherever they might live. Foreign aid by covering the costs of failed economic policies, actually removes an incentive to economi c refarm Some American policy makers might think it necessary to xewad the partici pants in the peace negotiations with more foreign assistance on the conclusion of a peace treaty. But such aid inight buy short-term peace at the cost of long-term economic p rogress An economy weakened through addiction to aid could well become politically unstable. The U.S. thus should seriously consider its adverse effects before offering massive new aid to Jordan, the Palestinians, or other par ticipants in the peace proce ss.

The U.S. government should conduct a thorough review of the harmful effects of such aid. It should begin planning a long-term phase down of such assistance.

Washington should be especially wary of backing any peace proposal that re quires huge U.S. go vernment handouts that could undermine both local econe mies in the short term and local political stability in the long term. If Washing ton wishes to purchase peace with such handouts, the adverse economic ef fects that can result must be kept clearly i n mind and the burden of proof far such funds must rest on the advocates of such aid view to phasing it out 34 Far a detailed examination of FEpZs in Asia and their potential utility in the Near East, see Meir Bldars Toward Econanic Growth and Independence : Establishment of Free Export procesSing Zones in Israel, Institute for Advand Snategic and Political Studies (Jerusalem February 19

92. See also Andrew B. Brick, The Asian Development Miracle: Taiwan as Model, Heriruge Lecture No. 399,1992 18 CONCLUSION Despite an entire year of Middle East peace negotiations, little has really changed for Arabs and Jews in the region. Multiple rounds of peace talks have produced high expectations but little concrete progress. Meanwhile, Israels economy struggles to ab s o rb Soviet and Ethiopian Jewish immigrants, economic conditions in the West Bank and Gaza Strip are going from bad to worse, and Jordan continues to face severe pov erty and massive foreign debts. No doubt the road to peace will be long and difficult But e c onomic reform cannot wait and indeed can help pave the way to peace Economic factors fuel the Arab-Israeli conflict. Poverty in the West Bank and Gaza especially in comparison to Israeli living standads, was a key xeamn for the outbreak of the 1987 Palest inian intifada revolt against Israeli control. Widespread unemploy ment today is contributing to the rise of militant, anti-Western Islamic fundamentalism in the West Bank, Gaza, and Jordan.

Excessive Israeli and Jordanian government interfemce in theh eco nomies hinders the prospects for growth. Palestinian violence against other Palestinians in the West Bank and Gaza makes economic development there virtually impossible. Compound ing all this is the 46-year-long Arab boycott against Israel that denies Isr a eli, palestin ian, and Jardanian businessmen access to neighboring markets and drives away foreign investors Top Priority. The U.S therefm, should promote a policy of Economic Growth for Peace. Such a policy should press Arabs to end their boycott, assist ffee market economic reform in Israel and Jordan, urge Israelis and Palestinians to deal with the problem of Arab-on-Arab violence in the territories, and review cmnt U.S. aid policy in the Middle East with a view toward a long-term phasedown.

Economic gr owth cannot solve the Arab-Israeli conflict. But stronger economies can strengthen pro-Western political moderates and increase the confidence of regional leaders to take the risks necessary to achieve peace. For this reason, Jkonomic Growth for Peace sho uld be a top U.S. priority Joel C. Rosenberg Assistant to the Director Center for International Economic Growth 19

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