Notes from Newcastle Day Limmud 2007
The Economic Roadmap for Peace in the Middle-East
There are two aspects to the interaction between the economy and the peace process. Can the economy help the peace process, and how can the economy benefit from the peace process?
Some NGOs, particularly the Portland Trust, have been paying attention to the peace process in Northern Ireland, and what can be learned from it:
Economic progress is crucial to the political forces that favour peace. Without it, even small acts of sabotage can derail a peace process. But supported by economic momentum, a peace process can resist violent shocks meant to derail it.
There are four lessons which can be learned from the Northern Ireland peace process: Economic disparity was a principle factor in the fact the Catholic minority turned to violence. Public section financial support from the British Government underpinned the peace process. Private sector business, in particular from the US, was a key factor in the revival of the Northern Ireland economy. Finally, mediation began with economic issues.
Irbid in Jordan is one of the most important towns for the Hashemite Kingdom. Following the peace treaty with Israel in '95, Israel, the US and Jordan signed the QUIZ agreement—Qualified Industrial Zones. Israel has a two favourable trade agreements with the US and the EU, allowing Israeli products to enter these markets duty free. To utilise these agreements, each product has to have at least 35% added value in Israel (to avoid Israel becoming a transit port for goods from China, etc). Israel and Jordan approached these powers and proposed to share this 35% between Israel and Jordan, for example if a product is started in Israel and completed in Jordan. The US agreed, as later did the EU.
In 1997, total exports from Jordan to the US was $15m—nothing, in international trade terms. Today they are $1.5bn, a factor of a hundred higher. There are now 60 factories in Irbid acting under the QUIZ arrangement; and 50,000 employees in Jordan benefitting from this. The Egyptian manufacturers, particularly textile (Egyptian cotton)—began to become nervous about this, and lobbied President Mubarak to get some benefit out of their own peace treatment with Israel. The same arrangements now exist in Egypt: 650 factories, each employing about 1000 people.
Combining the lessons from Northern Ireland and Egypt and Jordan a vision begins to emerge.
In London, on 25 October 2007 Morgan Stanley published a report about the peace process in Israel:
The Israeli economy would benefit from a viable Palestinian state as much as the Palestinian. ... The constant state of war and terror has forced the authorities to channel capital away from the economy into defence spending, which has kept the economy below its potential. Even the strong growth in the last five years does not mean Israel is realising its full potential.
What is happening on the ground, and who is behind it? The British government is very active to push the economic agenda in the peace process. September 2005, when British was chair of both the EU and the G8. Gordon Brown commissioned a report by Jon Cunliffe (the Managing Director of HM Treasury Macro Economics and International Finance Directorate) and Ed Balls (today the Secretary of State for Children, Schools and Families), into how to go about using economic incentives to further the peace process. The two started working on the ground, and brought together the Finance Ministers of the UK, Israel and Palestinian Authority—all of whom nowadays are Prime Ministers!
They were invited to a G8 special meeting on the Middle East, in London, in early December 2005. The governors of the central banks and of the finance ministers heard Olmert and Fayyad present their cases. A private sector meeting took place in London—200 businessmen from Israel and Palestine—on how to do business together: what are the obstacles, and how can they overcome them?
Three weeks later, though, Hamas won the Palestinian elections and everything not only came to a halt but went backwards. The Palestinian economy between the Oslo accords in the mid-90s had 10% growth in the West Bank, 5% in Gaza, and unemployment dropped fromm thirty-something to 11%. Fully a quarter of the workforce was employed in Israel. During the second Intifada, though, the Israeli borders were closed to Palestinian labourers, and some of the tax money was stopped; it became an economic catastrophe. During the period 2000–2005 the income per capita in the territories fell by 40%—the worst downturn in recent economic history, even worse than 1929 in America.
The Palestinian government, to alleviate the situation, started hiring all the people who had become unemployed. In 2005 about 95% of the government budget of the Palestinian Authority was devoted just to paying salaries—no salaries, no nothing. But, unfortunately, there was huge corruption, which ultimately lost Fatah the election. During the previous decade $10bn of financial aid was channelled to the territories, much of which found its way into private Swiss bank accounts, including, notoriously, Yasser Arafat's wife.
After the election, for a year and a half nothing happened. But in June 2007, Hamas took over the Gaza Strip, and a separate political entity was created in the West Bank. For many, including the British government, this was a ray of hope. Maybe now they could implement some of the things they have been working on. To their credit, they haven't stopped for a day. There's not much they can implement, but field work
Since then, people have seen a new way of trying to implement the economic agenda. Firstly, Salam Fayyad was installed as prime minister—a little shaky poltiical-wise, but a good executive, well admired by Israelis and USAns. Secondly, Israel released all its withheld tax revenues which it had not wanted Hamas to have. Some of this was used by the PA to pay government employees in the Gaza Strip. Thirdly, the international aid restarted, bypassing the Hamas government in the Gaza Strip. Today, we are in a position where there is some hope that the economic roadmap may be implemented. But what is this roadmap? And what is Tony Blair's role?
The Economic Aspects of Peace in the Middle East Report was officially released in September of this year. (They waited because they didn't see much point releasing it beforehand.) Executive Summary: The underlying rationale was thata viable Palestinian state requires the creation of a sustainable Palestinian economy. The vicious cycle of conflict and unemployment must be broken. This is a key economy: the Palestinians cannot develop their economy without free movement within the terriroties and between them; Israel says that would lead to the renewal of suicide bombers. It is true that the roadblocks within the West Bank and the security fence have almost eliminate suicide bombers. But it is necessary to look at the medium and long-term views: They worsen the economic situation, which provides incentives to the extremists and the vicious cycle merely continues.
The economic roadmap requires adopting various measures, some of which can help bring peace but some can only come later. Firstly, law and order must be restored; foreign investors will not be interested in a country with kidnappings and bombings. This is of course very problematic with the political split between the West Bank and Gaza. But if we can show that the West Bank benefits, this might influence the people in the Gaza Strip. Secondly, encouraging economic development between the Israelis and the Palestinians. While ten years ago the two were bound together economically, today this is no longer true. In spite of everything, the Israeli economy has moved rapidly from labour-intensive industries to more high-tech industries. The Israeli economy has a surplus in their balance of payments this year for the first time; it's doing well under any international standard... but it's almost free now of Palestinian employees. Any jobs which could not be replaced with Palestinian employees have been replaced by foreign workers.
But the Palestinian economy is still dependent on the Israeli market. But, as Irbid shows, Israel can support neighbouring economies without bringing about the movement of workers into Israel. What about doing the same thing with Palestinian cities? These are good for both economies, and do not create any security hazards.
Improving security to allow movement: This is a hugely difficult balance to strike, balancing the needs of the military establishment versus the civilian establishment.
Encouraging Palestinian economic diversification. During the last forty, fifty, years the Palestinian economy has not seen enough entrepreneurial effort. Many of the more successful people have left the territories and chosen to work elsewhere. The report recommends starting negotiations with the Arab world to allow
Support the Palestinian private sector: by providing microfinancing; by removing hurdles to developing small businesses. The Portland Trust, a London-based fund with an office in Ramallah, Tel Aviv and London, has put together a $200bn fund for small and medium enterprises in the territories; backed also by Opic bank in Washington; with guarantees for 70% of the loan. They are also trying to copy the model of Mohammed Yunis's microfinancing in Bangladesh.
The Aix en Provence process (named after the university in Marseilles)—a small working group of Israeli and Palestinian academics and business leaders—not very well reported in the international news. (There were international leaders, but after five minutes they left, as they were so impressed by how well the Israelis and Palestinians worked together, when they were finally given the chance.) They have touched on all major issues, including Jerusalem. This was a good demonstration that the two sides are not as far apart as they may seem to be. On the ground level, most people from both sides are in favour of a two-state solution, regardless of the difficulties at the political level. The Aix en Provence group says to start things moving now, before any political solution. They have become an important lobby group with both governments; showing that the economic process has an upside.
Questions from the audience
How do Syria and Iran tie in?
Syria is under the threat that Israel will reach peace with the Palestinians, and Syria will be left last. In that case, they will not have any leverage. They are therefore doing their utmost to sabotage the peace process with the Palestinians, so they can make peace with Israel first; but they are not doing much about it, due to pressure from Iran.
Iran is a totally different story. With the present leadership, there is no possibility of any peace process; it's a balance of threats atm.
What about the Gulf states?
Most of these have trade relationships with Israel, even though there are no formal diplomatic relationships.
The Saudis are more cautious, and their role will depends on what comes out of the upcoming peace conference in Israel. They would like to see what Israel can be pressured into giving in order to bring Israel to the table. Although they have strong relationships with the EU and UK, politically they are much closer to the US. Once political peace is made, however, they may be interested in economic cooperation too.
How to deal with the extremist minorities on both sides?
At the end of the day it's a matter of the leadership reaching an accord. If they can do that, then none of the them has the political power to implement it. They will have to go to the people and get their approval. This will probably involve elections. If Hamas goes with the democratic approach, they will have to go along with the desire of the majority. If the majority vote again, then all of this roadmap is derailled, but all of the opinion polls suggest the majority of both sides is in favour of an honourable, just, two-state solution.
How to stop money lining people's pockets?
Atm, both sides are confident with the arrangements that have been made. And in Gaza, the one thing you can't say about Hamas is that they are corrupt!