In Israel, money can't buy you peace

It's not just peace that seems to be breaking out in Israel. Its economy is showing new life after four years of Palestinian intifada and a long recession. Growth is up. So are tourism and stock prices.

Neither recession nor prosperity can forward peace, if the history of this troubled region is any guide. While Israel has successfully reinvented its economy and negotiated recession, it has not yet been able to integrate itself into the Middle East economy. "It is remarkable how politics consistently trumps economics," says Scott Lasensky of the United States Institute of Peace, a conflict-resolution group.

In 2000, for example, Israel's economy foundered from the twin hits of a new Palestinian intifada and the bursting of the Internet bubble, which hit the nation's high-tech sector hard. As suicide bombings became more frequent, the flow of tourists dwindled to almost nothing. Foreign investment dried up. Security costs soared as new guards were placed at schools, shopping centers, and other public places, and more soldiers became engaged in the occupation.

But that two-year recession did little to change the internal politics of Israel. Its occupation continued in a tougher mode. Despite the possible impediment to a future peace deal, the number of Jewish settlers on the West Bank grew hugely. Then in 2003, with prospects for peace no closer, Israel posted a small 1.3 percent growth in real gross domestic product (GDP).

"Israel has shown that its economy can grow even with a security problem, though at a slow pace," says Menachem Feder, a partner of Caspi & Co., a Tel Aviv law firm. "If peace breaks out, it will grow faster."

Peace does look a tad closer. Israel's cabinet on Sunday ratified the withdrawal of Jewish settlers in Gaza. Conciliatory moves by both sides have steered them back toward their road map to peace.

But the economic gap has widened. If Israelis suffered during the intifada, Palestinians fared worse. Their economy shrank by more than a quarter in two years, according to an October World Bank report. Revived growth in 2003 fizzled last year. Four years of conflict have cut average incomes by a third and pushed Palestinians back to third world status. Nearly half live below the poverty line.

Israel's GDP, by contrast, grew a brisk 4.2 percent last year. Something similar in growth is forecast for this year. Meanwhile, tourism shot up 40 percent last year over the low level of 2003, says Zohar Peri, a New York-based economic representative for Israel. Investment in information technology (IT) and other high-tech industries rose 5 percent. The Tel Aviv stock exchange gained 61 percent in 2003 and 19 percent last year.

Last month, a Merrill Lynch analyst noted he was bullish on the Israeli market. "What was once a traditional economy based mainly on agriculture, light industry, and labor-intensive production, has in 15 years transferred into a knowledge-based economy, with internationally competitive telecommunications, IT, electronics, and life-sciences industries."

Now, the prospect of greater quiet has risen. "The mood is a bit upbeat," says Uzi Arad, director of the Institute for Policy and Strategy in Herzilya, Israel. "It's a very cautious degree of optimism."

After the 1993 Oslo Accord, Israel had hoped that peace would open the Arab world to its commerce. Today, it sees little potential there. Its economy is not that compatible with those of Egypt, Lebanon, or Syria. So it is looking to industrial markets and elsewhere.

But peace remains crucial to future prosperity. Mr. Lasensky argues that major financial "carrots" from the US and other rich nations can help persuade Israelis and Palestinians to reach a deal.

Last week the Israeli parliament voted $870 million to pay 8,500 settlers in Gaza and a few hundred in the West Bank to leave their homes. But there are at least 250,000 Jewish settlers on the West Bank.

Will Israel pay for any resettlement? Or will the US and others pony up cash to finance the transition?