Building a lasting peace in the Middle East rests on building a lasting prosperity. While a handshake symbolizes the political mood of the moment, it may well take the invisible hand of the market to provide the economic foundation for political success. The accord between Israelis and Palestinians is a rare opportunity to remake the region's economies and generate growth to change people's lives. For too long, the Middle East has been home to archaic state-dominated command economies that stifled growth.

All across the region, large portions of the economy are controlled by political bureaucracies that protect the interests of their particular constituencies. Competition, market share, and profit are often unimportant. The danger is that, with new billions of aid money flowing into the region, this welfare-statism will be buttressed--to the detriment of the private sector. This is especially true in Gaza and the West Bank. Most of the money flowing in is controlled by local PLO cronies of Yassir Arafat. As political organizations, they operate much like local Democratic wards in Chicago, doling out aid dollars in exchange for political support.

Releasing the entrepreneurial power of local business is the key to growth in the Middle East. Palestinians, Jews, Lebanese, Syrians, and Egyptians are renowned for their entrepreneurial acumen when given the chance, in their own lands or overseas. So what is to be done? The U.S., Europe, and Japan should insist on a major role for the private sector. It would mean that funds flowing to the region should be used in part as seed capital.

In the end, investment by the millions of diaspora Palestinians and Jews--in Gaza, the West Bank, and Israel--is the most realistic way to generate new jobs. Privatization and deregulation are almost certain to repatriate billions in capital, just as they did in Mexico and Argentina. In fact, taking a leaf from the successful State of Israel bonds, the Palestinians should seriously think of floating "Arafat" bonds to their compatriots around the world to finance local growth.

For too long, Middle Eastern societies have been international-aid mendicants. Now, local governments should be encouraged to build up capital markets to prepare for privatizing their economies. Wall Street investment houses could lend their expertise and go one further: There are already funds that invest in Israeli companies. How about creating emerging-market funds for the Middle East as a whole?

To provide economies of scale, there should also be a push for a Middle Eastern common market. The domestic markets of most of the Middle Eastern countries are rather small. A first step could be an Israeli-Palestinian-Egyptian-Jordanian market, expanded later to include Syria and Lebanon. Linkage down the road to other Mediterranean nations makes economic sense. All this, of course, depends on Saudi Arabia's and the other Arab countries' lifting the economic embargo on Israel, which has hurt foreign investment. With the new accords, the U.S. should make sure that the embargo ends immediately. Intel, Motorola, and other companies have already set up operations in Israel. More are sure to follow.

The handshake between Yassir Arafat and Yitzhak Rabin is the chance of a lifetime for millions to leave behind the culture of victimization. A strong private economy, integrated across political boundaries and run by people doing business with each other, is the best way to cement the peace.

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