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Is Economic Development the Key to Mideast Peace?

Now that the Trump administration has offered a blueprint for economic development and reform in the Palestinian territories, the opportunity costs of maintaining the status quo are clear for all to see. Although the Palestinians remain opposed to the plan, at least now they can start to consider the economic potential of peace.

STANFORD – At a workshop this week in Bahrain, White House Senior Adviser Jared Kushner presented an ambitious economic-development initiative for the Palestinian people. The Trump administration’s hope is that its Peace to Prosperity proposal will untie the Gordian knot of the Israeli-Palestinian conflict, finally establishing peace between the Jewish State and its neighbors.

Though the workshop included several countries with vital interests in the region and a potential role to play in an economic-development program, the Palestinians refused to participate. As a result, the Israelis were not included, either. Palestinian officials consider it an insult to think they would alter their longstanding political demands in exchange for economic assistance. But the White House’s plan throws into sharp relief the opportunity costs of maintaining the status quo. Transforming the economy of the West Bank and Gaza could bring vast improvements to most Palestinians’ quality of life.

The US plan (to which I provided a few suggestions) is nothing if not ambitious. Grants and loans to the Palestinian territories would be accompanied by measures to strengthen property rights and the rule of law, strengthen the judiciary, improve infrastructure, and expand trade with Israel and other parts of the region. The goal is to double the territories’ GDP and create one million jobs, thereby halving poverty.

The program comprises three interrelated initiatives, geared toward “unleashing economic potential,” “empowering the Palestinian people,” and “enhancing Palestinian governance.” Each offers specific reforms to address a wide array of issues. For example, there are proposals to strengthen human capital and support entrepreneurship; to open up the West Bank and Gaza with new roads, rail routes, and border crossings; and to expand energy, water, and digital infrastructure. Equally important, the plan would deepen the Palestinians economic integration not just with Israel, but also with Egypt, Jordan, and Lebanon.

All told, Peace to Prosperity offers a viable roadmap for the Palestinian people to improve their economic future. Though major initiatives such as this rarely unfold exactly as expected (the private sector may pursue opportunities that no one else had considered), progress toward a sizable share of the goals would represent a significant achievement.

A plan that unleashes human potential, trade, and private investment, while establishing sound money and fiscal discipline, represents a tried-and-true route to growth and individual liberty. (To witness the effects of the opposite approach, look no further than Venezuela.) When external assistance is targeted in such a way as to reduce physical and legal impediments to trade and investment, and if it is accompanied by the necessary governance reforms, the ensuing opportunities tend to be numerous and lasting.

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This approach was at the center of the Marshall Plan. After World War II, European governments implemented reforms and removed barriers to trade, and the United States furnished the region with cash, food, and fuel worth 3-5% of its GDP. The clearest successes were in the countries that enacted the strongest reforms. West Germany owes its postwar “miracle” largely to the efforts of Ludwig Erhard, who pushed through currency reform and eliminated price controls before becoming the country’s first minister of economic affairs.

To be sure, even with $27 billion in donor grants and loans, as well as private investment from the rest of the region, securing the necessary reforms in the Palestinian territories will not be easy. Doubling GDP will require 7% average annual growth for at least a decade (or 6% for 12 years).

But that target is well within reach. In the 18 years since China joined the World Trade Organization, its GDP has quadrupled; and India has achieved average growth of around 7% for the past decade. Similarly, after opening up their economies decades ago, South Korea, Taiwan, Hong Kong, and Singapore avoided the so-called middle-income trap – a pattern whereby a developing economy’s growth rate tends to slow to the advanced-economy average when per capita GDP approaches $20,000 – and “graduated” to high-income status. For comparison, the current Palestinian per capita GDP is one-tenth that level.

Additional examples of such success stories abound. The World Bank lists seven countries in Europe, Africa, and Asia (excluding China and India) that have achieved 7% average growth for the last seven years. Another 11 economies have grown at an average rate of 6% during the same period, and an additional 20 economies have maintained average growth above 5%.

If the Palestinians were willing and able to adopt the reforms envisioned in Peace to Prosperity (admittedly a big “if”), there is no reason why they could not emulate these successes with the help of wealthy neighbors, international institutions, the US, and others. The alternative is a continuation of growth at a paltry 1.7% per year – or worse.

There are many deeply contentious territorial and political disputes between the Israelis and the Palestinians, and at some point, these will have to be resolved. But at least now Palestinians can start to consider the economic potential of peace. Deeper economic integration with the region, and particularly with Israel, will translate into reduced geopolitical tensions and substantial gains in living standards, health, and education outcomes. Perhaps most importantly, younger Palestinians who have long suffered through unemployment and underemployment will finally have opportunities for entrepreneurship, personal advancement, and upward social mobility. Ultimately, it is they who will decide the future for their people.

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