When Israel and the PLO concluded the Oslo accords in 1993, more than a few people expressed great enthusiasm over the economic dividends that would assuredly flow from the dawning of a new era of cooperation in the Middle East. Leading the chorus of optimism was Israel’s Foreign Minister, Shimon Peres, who foresaw the establishment of something akin to a European-style common market. Giving peace a chance, Peres argued, would allow the countries of the region to cut defense expenditures, allocate additional funds to civilian purposes, and join together to carry out projects in infrastructure, manufacturing, agriculture, tourism, and other fields. Israelis would hardly be the only beneficiaries of this expanding trade and rapid economic growth; many millions of Arabs would have access to better-paying jobs, improved health care and education, and rising living standards. Thanks to this economic resurgence, in turn, the constituencies for peace within the Arab world would vastly increase, thus signaling an end to the long cycles of violence and despair.

Almost four years have now passed since Oslo. With so many issues still unresolved between Israel and its Arab neighbors, some might contend that it is too soon to say whether this vision of a “new Middle East”—which was hardly Peres’s alone—is realistic or not. Certainly, though, there has been no diminution of official enthusiasm for the twinned ideas that the way to cement peace in the Middle East is by encouraging prosperity, and the way to encourage prosperity is by cementing the peace. “Trade and investment are the essential foundations to undergird the peace process,” declared Stuart Eizenstat, Undersecretary for International Trade in the U.S. State Department, not long ago.

Is there anything to this?

Any serious analysis of the prospects for Arab-Israeli economic cooperation and integration must begin with one fundamental fact: a tremendous gulf separates Israel from the Arab states on its borders. In its immediate neighborhood, Israel is an economic superpower, in comparison with which Egypt, Jordan, Syria, Lebanon, and the emerging Palestinian state range from supplicants to mendicants to indigents to paupers.

The Egyptian economy, to start with, is mired in stasis and poverty. Egypt’s gross domestic product (GDP) per capita of $1,020 is approximately fifteen times lower than Israel’s $15,650 (1995 figures). Unemployment, according to the World Bank, exceeds 17 percent, and nearly three quarters of the unemployed are under the age of twenty, a statistic particularly troubling because of the lure of Islamic fundamentalism among the young.

Egypt’s dismal economic performance is a legacy of the “Arab socialism” embraced under Nasser’s tutelage in the 1960’s and from which the country has never been able to wrestle free. The state remains in control of key sectors, including industry and banking. Though a policy of privatization—strongly urged by outside aid donors like the International Monetary Fund and the United States—has been officially adopted, it has been resisted by powerful interest groups. The government, fearing the social consequences of laying off tens of thousands of workers in bloated state-run enterprises, has dragged its heels.

What is worse, the Egyptian authorities have for many years chosen to use the already massive civil-service bureaucracy to soak up surplus labor. While this may reduce one obvious source of danger to the regime, its economic effects are lethal. A massive, utterly incompetent and corrupt regulatory apparatus straddles the economy, raising consumption while inhibiting production and draining the treasury. Without a radical change of direction, the Egyptian economy will remain consigned to failure. But radical change, the authorities clearly calculate, is too dangerous a path on which to embark. On the horns of this dilemma the Egyptian economy—as well as Egypt itself—is impaled.

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The picture is only moderately better in Jordan. From half to two-thirds of the country’s labor force is employed directly by the government. Official reports place the unemployment rate at 15 to 20 percent; unofficial estimates are considerably higher. Jordan was particularly hard hit by the economic effects of the Gulf war, losing revenues from the transit of Iraqi goods through its port of Aqaba and remittances from Palestinians laboring in Saudi Arabia and Kuwait. Despite respectable economic growth in the early 1990’s, living standards have been in a steady decline, falling a staggering 50 percent (according to one Jordanian economist) over the past ten years.

In Syria, which, like Egypt, is a “beneficiary” of Arab socialism, things are considerably worse. According to one estimate, about 65 percent of the population lives below the official poverty line. As elsewhere, the public sector is predominant, and though the government has spoken of encouraging private enterprise, it continues its old-style policies of multiple exchange rates and preferential treatment for the swollen and corrupt state-run economy. Even if Syria’s strongman, Hafez al-Assad, became serious about economic reform, shifting course would be a politically explosive task, bound to precipitate formidable internal strife.

Lebanon, now under Syrian control, is the only one of Israel’s neighbors that can boast of economic success—but unfortunately, that success was in the past. Before it was ravaged by civil war, Lebanon had a thriving market economy and enjoyed, among other things, status as the banking center of the Middle East, with oil-rich Arabs using it as a safe haven for their funds. All that, of course, came to an end with the decade and a half of conflict that began in 1975 and ended in 1990 when Assad enforced a cease-fire among the warring factions. Though reconstruction is now under way, per-capita GDP remains a fraction of Israel’s. With Syria managing Lebanon’s affairs through the barrel of a gun, and Iranian-funded guerrilla groups still marauding in its south, the country’s prospects—economic no less than political—remain clouded at best.

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Of Israel’s close neighbors, however, the one in the worst economic shape of all is the emerging Palestinian state in the “autonomous areas.” In the wake of the Oslo agreements, the major industrial countries pledged $2.4 billion in foreign aid over five years to Yasir Arafat’s Palestinian Authority (PA). Though overall aid funds have already exceeded this original commitment, the economy has nevertheless spiraled downward. In the four years since Oslo, GDP per capita has plunged, according to a UN estimate, from $1,800 to $800 per annum in the West Bank and from $1,200 to $700 in the Gaza Strip. Palestinian officials themselves put unemployment at 38 percent in the West Bank and a stunning 51 percent in Gaza, figures which they of course attribute to Israel’s periodic border closures and its effort to bring in temporary substitutes for Palestinian labor from Eastern Europe and Asia. But while these policies undoubtedly have had a deleterious effect, the economic debacle is mostly the consequence of other factors.

As is the case in Jordan, a cut in the flow of remittances from the Persian Gulf, along with the return of unemployed Palestinian expatriates, has taken a toll on both income and employment levels in areas under the control of the PA. But of even greater significance is the widespread mismanagement and corruption within the PA itself. Little more than token portions of the billions in foreign-assistance funds provided by the industrialized West have been used to develop infrastructure or to stimulate private investment. Instead, vast sums have been diverted into private hands. What the PA does manage to keep for public purposes goes to current expenditures, in particular the salaries of 26,500 civil servants as well as the 45,000 soldiers who staff ten different police and security services—“the highest police-per-citizen ratio in the world,” as one lawyer in Gaza was quoted in the Economist. If recent trends continue, Gaza will also soon have one of the lowest per-capita-income ratios in the world.¹

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What does the huge and growing disparity between Israel and its neighbors mean? For one thing, there is little room for any significant near-term growth in trade. The backbone of the Israeli economy is manufacturing, with high technology its most rapidly growing component. The primary market for Israel’s output is the industrialized West and to a lesser extent the thriving economies of Asia and Latin America. While some speak yearningly of millions of Arab consumers eagerly awaiting Israeli products, the relevant factor in assessing the prospects for trade is not the raw quantity of potential buyers but purchasing power. And it is in purchasing power that the Arab world is critically deficient. Over the past three years, tiny Holland (population fifteen million) imported far more goods than all twenty Arab states combined (population 250 million).

Unlike the oil states of the Persian Gulf—which even with their great wealth have run into serious financial difficulties of their own—Israel’s immediate neighbors are particularly unattractive as potential customers. Not only do they lack the wherewithal to buy goods from abroad, they also have little to sell. Egypt’s commodity exports in 1995 were $4 billion; Syria’s, $3.8 billion; and Jordan’s, $1.2 billion. By contrast, minuscule Israel’s were $19 billion, of which the lion’s share was made up of manufactured goods destined for Europe and the United States.

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This is not to say that richer and poorer countries cannot find mutually advantageous ways to trade. They can, and in the years since the Camp David accords of 1979, Israel and some of its neighbors have found opportunities from which to profit. But this brings us back to what is perhaps the major fallacy in the “new Middle East” version of things—namely, the notion that commercial ties will serve to lubricate the wheels of political relations. In fact the opposite has been occurring, and for obvious reasons.

A good many Arab leaders, intellectuals, and economists fear and resent Israel’s economic power, and point to it as yet another thorn being thrust by the Jewish state into the Arab side. Some of these Arab fears stem from garden-variety protectionism. Thus, the Crown Prince of Jordan has argued for sustaining the Arab boycott of Israel, because ending it would be “economic suicide.” Ghassan Ayache, former deputy governor of Lebanon’s central bank, complains that after the 1982 war in that country, “Our markets were flooded with Israeli goods, and our local products could not stand up.”

But some Arab resentments are more explicitly political in coloration. Among Palestinians, for instance, there is widespread suspicion of Israeli economic “imperialism”; in the words of one former high-ranking official in Israel’s last Labor government, Palestinians “see their former occupiers plotting to perpetuate economic control after withdrawal.” Similar sentiments are common in Egypt. One prominent Egyptian economist recently expressed the view that the establishment of a free-trade zone in the region would reinforce Israel’s “hegemonic dominance.” Other Egyptian public figures go much farther. According to the Economist, “scarcely a month goes by without some parliamentarian accusing Israel of exporting poisoned food products to Egypt.”

With such feelings in the air, an expansion of Arab-Israeli trade and the initiation of joint ventures might easily backfire. As one student of Middle Eastern affairs, Patrick Clawson, has pointed out, “Financial disputes have been an irritant in joint international projects around the world, even when the countries involved are on good terms; they are likely to be all the worse when the partners start out being suspicious of each other.” Moreover, whatever steps Arab countries might take in order to become serious trading partners will entail severe social costs at home, including unemployment and rising prices for subsidized commodities. The resulting unrest leads shaky regimes to seek scapegoats—usually Zionists and Israel—for their internal woes. The process is occurring not only in Egypt (where, among other things, an Israeli businessman is now to be put on trial as a spy) but in such famously moderate countries as Morocco. Indeed, it is happening everywhere in the Arab world where economic-liberalization policies, however limited and tentative, are being pursued.

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If not much trade is likely to materialize, and if the little that does materialize is unlikely to serve as a solid foundation for improved political relations, is there a chance that peace will at least permit a sizable reduction in military expenditures? Hardly. As the economic analyst Peter Kemp has written, “rather than delivering a dividend, peace seems destined to come at a price, with at least as much if not more being spent on defense for many years to come.”

It is not difficult to understand why this should be so. With its narrowing geographical profile and always vulnerable population centers, Israel, for one, could not afford to be militarily unprepared if a revolution or a coup d’état or a change of heart somewhere in the Arab world were to cause peace to break down. And as for the Arabs, though the Arab-Israeli conflict makes headlines across the world, it is by no means the only conflict in the Middle East.

With Iraq, Iran, Syria, and Libya all led by brutal dictators, with enormous stockpiles of modern weaponry in place, with nuclear, chemical, and biological warfare a growing possibility, and with all of the states of the Arab world afflicted by varying degrees of instability, no country in the region is about to let down its guard. King Hussein of Jordan has put it well: “Our problem is not one particular frontier but all of them.”

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In sum, the economic problems that bedevil the Arab world, and that have led country after country into financial ruin, have little or nothing to do with the Arab-Israeli conflict, and they will persist with or without the formal conclusion of peace agreements. The governments that have repeatedly plunged their countries into terrible wars are the same governments that have mismanaged their own economies, and that have squandered natural resources and human capital with abandon. What is required for prosperity—and, for that matter, peace—is a decisive change in the nature of those regimes: in a word, democratization. Until that miracle occurs, there will be no “new Middle East.”

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¹ For a more extended discussion of the economic and political situation in the West Bank and Gaza, see “In Arafat’s Kingdom” by Nadav Haetzni in the October 1996 COMMENTARY.

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