Will Palestine's Peace Dividend Buy Peace?

Although the ceremony was interrupted by unseemly last-minute haggling, Palestine Liberation Organization Chairman Yassir Arafat and Israeli Prime Minister Yitzhak Rabin finally signed an agreement in Cairo on May 4 for Palestinian self-rule. The Israelis will now withdraw their troops from the West Bank town of Jericho and from much of Gaza. Police duties and civil administration of these areas will soon be handed over to Arafat's followers.

So begins a planned five-year experiment with Palestinian autonomy that will be crucial in determining whether the region can find a lasting peace. Arafat, a career revolutionary with no experience in government, is going to have his hands full just keeping things under control, particularly in Gaza. Some 40% of Gazans are unemployed, half live in squalid refugee camps, and many of them prefer Hamas, the militant Islamic group, to Arafat.

To try to sweeten the poisonous mood, the outside world, led by the U.S., is raising funds to create a peace dividend. The idea is to lay the groundwork for a private investment boom that will win over the many Palestinians who believe Arafat has conceded too much to Israel. "The economic seeds of peace need to be sown along with the political seeds," says a senior Clinton Administration official.

The effort is being coordinated by the World Bank, though most project deals will be concluded between the PLO and individual donors. So far, 40 donors have pledged $2.4 billion in aid. The bank has drawn up an initial blueprint to spend $1.2 billion over three years on infrastructure, technical assistance, and startup costs for the new Palestinian Authority.

BIG RISKS. The money could easily go to waste. Caio Koch-Weber, World Bank vice-president for the Middle East and North Africa, acknowledges that there are big risks. He fears that continued instability in the Palestinian entity could discourage the private investment that must be "the primary engine of economic growth." He also worries that donors will rush to fund big-ticket projects that could turn into white elephants.

Another key question is whether the PLO, long an exile group dominated by one man, can transform itself into a real administration. Donors warn that they will stop the flow of funds if they aren't being well spent. The Palestinians have created an agency called the Palestinian Economic Council for Development & Reconstruction (PECDAR) to supervise the development projects. But Arafat has yet to give PECDAR much authority, and its chairman, Ahmed Qurie, is rumored to be contemplating resignation. A May 9 PECDAR board meeting in Tunis may determine its viability.

Also controversial is an Israeli-Palestinian economic accord signed in Paris on Apr. 29. There are some clear pluses in the deal for the Palestinians. They can collect income taxes and are to receive tax revenue from Arabs working in Israel and from duties on goods bound for the self-rule areas. And they are promised much greater access to the Israeli market for their products. But some Palestinians worry that the deal doesn't go far enough in guaranteeing them access to badly needed jobs in Israel. They also suspect the accord will serve to bind the territories closer to Israel and continue their isolation from Jordan, Egypt, and other nearby Arab countries. If so, this could chill investment from wealthy Palestinians and other Arabs.

Still, some potential investors say they are pleased that the ground rules have at last been established. One major player, Kamal Shaer, a Jordanian who heads a $200 million investment fund called Palestinian Development & Investment Inc., says his group plans to "link up with affiliates in the West Bank in key sectors such as housing, industry, and tourism that will focus on job creation and exports."

In the U.S., Builders for Peace, a Washington-based Arab-American and Jewish-American group, is busy identifying investment projects in the territories. It has helped Culligan International, a subsidiary of Florida-based Astrum International, set up a demonstration water-purification project in Bethlehem. James Zogby, Builders' co-chair, wants the U.S. to extend most-favored-nation status and its free-trade agreement with Israel to the territories. "This would be a major spur to Palestinian industries," he says.

But most investors are taking a wait-and-see stance. Benny Gaon, CEO of Koor Industries, Israel's largest company, says his plans for investing in the territories are on hold until the Palestinians show they want Israeli partners. "No thinking businessman is going to pour capital into a market that is starting from scratch," adds Mohammed Asfour, head of Amman's Chamber of Commerce. The PLO, the Israelis, and their Western backers have a lot of work to do to change that attitude.

      Major donors         Amount
                  millions of dollars
      EUROPEAN UNION         $600
      U.S.                    500
      JAPAN                   200
      NORWAY                  150
      SAUDI ARABIA            100
      ITALY                    80
      ISRAEL                   75
      TOTAL                $1,705
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