Evan Soltas
Aug 2, 2012

Peace through Prosperity

Palestine_Map_1948_Shuttle_Arial_View_Of_Palestine_NK20927For some reason, I've been thinking about the Israeli-Palestinian conflict over the last few days. I have no idea why. I follow international news, but I would not qualify a foreign-policy expert by anyone's judgement.

Enduring peace has proven elusive. Both Israelis and Palestinians live under constant threat of violence. Palestine's economic development has been restricted and harmed, and as a result, millions of Palestinians live in poverty, unemployment, or at a standard which is but a shadow of their potential.

The Israeli-Palestinian peace process has advanced and retreated over the years, but decades into it, we find ourselves having tried and failed, tried and failed. (In the meantime, we've seen the resolution of conflicts which once appeared similarly intractable -- most notably, the Troubles of Northern Ireland.) Diplomatic negotiation seems to hit dead ends every way it goes, so much so that 77 percent of voters in an Economist debate assessed them as "not currently a viable way" to peace.

Perhaps this will seem naïve, but I have a few ideas, general outlines of policies. In all of them, I have what I think to be a reasonable hope that they could substantially and permanently reduce the terrible costs of this conflict and put diplomatic efforts in a position for a real chance at true peace.

What you'll notice in all of them is that they are not about more diplomacy, more negotiation, more politics. They're about economics. (Not that this is a surprise for regular readers of the blog, of course.)   They're about achieving permanent increases in Palestinian living standards, in expanding opportunities for remunerative employment, and in unleashing economic development, particularly to the end of building strong cross-border economic relationships between Israeli and Palestinian businesses.

The underlying thought is that an enduring peace becomes possible when there exists a large and politically-empowered constituency who recognizes that peace is strongly in their economic self-interest. The way you get there, in my view, is by encouraging deep economic integration between Israel and Palestine. In particular, Palestine must form an educated middle class whose economic livelihood is rooted in trade.

Peace, in essence, must come through prosperity. It cannot precede. Just like Milton Friedman argued in Capitalism and Freedom, economic opportunity in Palestine "is a necessary...[but] not a sufficient...condition" for a political and diplomatic resolution of conflict.

Here are my six economic policy proposals:

1. Reduce or nullify the value-added tax on imports from Palestine.
The Israeli government currently has a VAT of 17 percent. For consumers, the VAT reduction would probably work through a refund process similar to that of tourists who make purchases in foreign countries. For firms, the VAT exemptions could be done as a standard tax declaration. Since the efficacy of fiscal policy is dramatically enhanced by prior commitment to rules, I would encourage the government to pledge to maintain the VAT reduction rate for 20 years. That would be sufficient for Israeli firms to justify shifting marginal production in Israel or re-sourcing its imports from Palestine rather than elsewhere. All tariffs and customs duties that Israel has on Palestinian imports should also be cancelled.

2. Reduce or nullify capital gains taxation on Palestinian assets of Israeli firms.
Israel currently has a single real (i.e. inflation-adjusted) capital gains tax rate of 25 percent. A combined CGT and VAT exemption would make Palestine a highly attractive site for Israeli business. There should also be a 20-year pre-commitment to the CGT exemption.

3. Expand access for Palestinian applicants to Israeli universities.
Palestinians find it difficult, and in many cases impossible, to attend universities in Israel -- for financial reasons, due to fear of ethnic conflict, due to government security restrictions, due to the school's quotas, etc. Gazans cannot study in the West Bank. These are, in many cases, dedicated students who have fought against adversity their entire lives and want nothing more than to learn; these are the sort of Palestinans whom Israel should welcome and for whom it should facilitate security clearance. The government of Israel should rework the clearance process, expand its Palestinian student visa program, institute high-profile and competitive scholarships for Palestinians, provide financial aid and perhaps also affirmative action programs.

4. Expand access of Palestinian workers to employment opportunities in Israel.
This would complement the student visa access with a large guest worker program.

5. Modify border security procedures to facilitate cross-border economic activity.
The approach of border security will have a determining influence over whether these measures of economic integration succeed. I believe that we are far away from the frontier where there is a trade-off between security and ease of border passage for law-abiding Israelis and Palestinians -- in other words, that there are procedures which can reduce explicit and implicit transport costs for Israeli-Palestinian bilateral trade which do not necessarily compromise security. Giving large businesses the legal responsibility to pre-clear their own trucks before the border, and subjecting them to faster inspection at the border, seems like one way to align incentives properly.

6. Organize an international effort to build Palestinian economic infrastructure.
The field of development economics wrestles today with "capacity-building," particularly as it relates to institutions.  There is, I think, a clear role for international assistance in the development of Palestine's infrastructure and institutions. We're talking very basic things here: create an electricity grid reliable enough for use by businesses and households and a water grid for safe drinking and agriculture. Expand access to computers and to the Internet in major cities. Retrofit and reopen the Port of Gaza and the Atarot Airport, which sits between Jerusalem and Ramallah. Israel should participate financially, but ideally this would be a cooperative effort of many governments, similar to the offers of aid after Hurricane Katrina struck New Orleans or when Chile worked to rescue 33 miners trapped underground, with each contributing to infrastructure development in their areas of specialty.

I do not have confidence in the viability of a two-state solution, given that there are likely no borders to which Israel and Palestine will both freely agree. It may be time to consider working towards a single federal state which provides limited sovereignty to substates of Israel, the Gaza Strip, and the West Bank. The first step will be economic integration. Next can come diplomatic efforts and political reconciliation.

Addendum: Josiah Neeley of the Texas Public Policy Foundation sends me this link via Twitter, which is Bruce Bueno de Mesquita recommending a tourism tax-sharing plan to align Israeli and Palestinian incentives toward peace. It's a good idea.