Trade Jobs for Peace in the Middle East

The nearly $1 billion that President Clinton promised the Palestinian Authority in Washington at the recent conference of donor nations could transcend the vexing issue of land and could leverage the most valuable weapon in waging peace: Israel’s technology-driven, knowledge-based economy to benefit Palestinians. Israel’s emerging biotechnology, electronics and privatization create the capacity to neutralize long-standing resentments through job creation and economic growth for the Palestinians.

Trade, economic reform and technological change are creating a new set of dynamics that will drive the future peace process. Increasingly, the stable engine of growth and peace will be entrepreneurs and managers in the new Middle East who will be responsible to markets, shareholders and customers thousands of miles away. Markets don’t forgive political vanities of any extremist persuasion. Markets can mitigate the sharper edges of regional conflict and discipline the peace process better than governments.

Economic sovereignty and peace will ultimately be determined by economic growth and capital access, not real estate.

More venture capital flowed into Israel than any country except the U.S. last year (up from $264 million to $421 million) contributing to 50 funds with assets close to $2 billion. The market capitalization of Israeli firms on Wall Street exceeds $25 billion; in Tel Aviv, $48 billion. Returns for Israeli firms on those markets are 47% and 45%, respectively, far outstripping the index returns for emerging market countries (19%).

Investors are discovering that the shortest route to the new economy is through Israel. New trade engines in agritechnology, biotechnology, software and electronics are spark plugs for growth that provide investors and strategic partners the lowest cost research and development and shortest time-to-market for any technology process or product innovation.

Economic means can be used to achieve the goals of regional growth and integration where politics stumble. Here’s how:

* Secure the peace. One of the least publicized stumbling blocks in the ongoing peace process is the plan for Palestinian industrial parks. They were agreed to in Oslo but remain unbuilt. Meanwhile, per capita GDP of the Palestinians has dropped by more than 30% in each of the past two years. Because the parks would be located within the Palestinian entity, their construction could provide employment for Palestinians while addressing Israeli security concerns.

Neither Israel nor the Palestinians can finance the parks. The parks’ financing could be structured to offer global investors profit potential. The revenues generated by park leasings could finance bonds for their construction with the equity contributed by the land made available in the Oslo agreements. Because of the risks, credit enhancement could be structured to enable selling the parks’ debt to the global capital markets. The World Bank could issue the credit enhancement (as it did for Jordan’s telecommunications system), while Israel, U.S. and peace-partner states could provide a counterguarantee to indemnify the World Bank. If these bonds were issued by a binational development authority (like the New York-New Jersey Port Authority), economic cooperation between Israel and the Palestinian Authority could begin.

* Privatize the Israeli, Jordanian and Egyptian stock markets. Governments still plays too dominant a role in the capital markets. In Israel, for example, most savings are channeled to government bonds, not business securities. By bonding out more than $3 billion of government debt to the world markets in shekel-denominated issues, the government could unclog the local capital market for entrepreneurs and increase liquidity.

Launching a Middle East regional stock index would reduce investors’ portfolio risk and attract new capital into Israel, Jordan, Egypt and even the new Palestinian Stock Exchange’s markets.

* Create a regional water rights market. Water has already started to gum up the peace process and could cause future wars in the Middle East. Open-market trading of water rights could be modeled after the highly successful sulfur dioxide emission allowance trading market in the U.S. A water rights market would display market prices to guide water usage and provide monetary incentives and rewards for conservation efforts. The water rights market would foster innovation and flexibility and offer an economic rather than a political rationale for a major social and environmental concern.

There is an old Israeli pioneer song that roughly translates, “If it’s good or if it’s bad, there’s no way back from the road ahead.” For a breakthrough in the peace process, negotiators should remember the admonition of the 1992 U.S. presidential campaign: “It’s the economy, stupid!”