Economic carrots keep the peace process alive

Israel's decision to hold early elections in May has effectively frozen the political track of the Middle East peace process.

But the fact that business leaders and donor countries continue to meet regularly and move ahead on the economic track - despite the political situation - demonstrates a resilience and irreversibility in the peace process as a whole.

Donor countries will meet in Frankfurt next week to plan a new $3 billion, five-year development program for the Palestinians.

That same week, the annual World Economic Forum in Davos, Switzerland - a gathering of world political, economic, and cultural elites - will bring top Middle East business executives together to chart a course for expanding private investment and increasing regional economic growth.

In the Middle East, economics traditionally serves as handmaiden to politics, but this dynamic is beginning to change. Political inertia may stall the peace process, but it is economics that is keeping it alive.

While economic development is not a cure-all for what ails the peace process, economic initiatives are helping to consolidate a peace constituency among Palestinians, assuage periods of Israeli-Palestinian stalemate, influence Palestinian governing bodies to observe international norms of accountability and transparency, and promote regional normalization.

Without economic incentives, there would be no Palestinian self-rule. Economic aid has allowed Palestinians to control their own education, social welfare, and day-to-day government services.

For decades, Palestinian Authority Chairman Yasser Arafat controlled Palestinian finances by fiat. Today, the PA produces Western-style accounting statements for donor countries, and oversight officials publish reports on waste and fraud.

Yes, there is some corruption and influence-peddling, but day by day, the notions of transparency and accountability are becoming institutionalized. Donor conditionality and oversight have been crucial, but could certainly be strengthened.

The donor process and the regional business summits also serve as an instrument for regional normalization. They not only provide forums where Israelis interact with Saudis and Tunisians, but they are an opportunity for much-needed inter-Arab and intraregional economic coordination and cooperation.

As the donor community meets to develop its second five-year program, greater effort should be made to follow through on commitments. Of the $3.6 billion pledged during the first five-year period (1994-98), only slightly more than half was distributed. Japan and Norway top the list of donors who have "paid their pledges," while the US, EU, and other donors trail behind.

One way to resolve the gap between commitments and disbursements is for donors to create a more realistic aid architecture.

For example, in a kind of cart-before-the-horse logic, a quarter of US and European assistance has been earmarked for investment guarantees. But due to the poor investment climate in the Palestinian areas, these funds have gone untouched.

Another important step would be for Mr. Arafat to grant more authority to the PA's public monitoring department, and redouble his efforts to root out corruption. Donor commitment, as well as private-sector investment, is largely a function of Palestinian accountability, transparency, and oversight. The US has substantially raised its aid commitment to $900 million over five years. But if Arafat doesn't keep his books open, congressional authorization won't happen.

As for the regional economy, all governments need to do much more to ease trade barriers. Telecommunications, transportation, tourism, and finance are just four of the many sectors that face serious government-imposed barriers.

The Middle East and North Africa, as a region, has the world's lowest level of intra-regional trade. Precisely when other regions are moving aggressively to remove trade barriers and harmonize business practices, the Middle East lags far behind.

While some statist policies are still necessary in an ever-turbulent global economy, improving the region's business climate remains the best long-term guarantee for economic growth, and the surest way to expand constituencies for peace.

Indeed, signs remain of the old disregard for economic development. The recently collapsed US-led effort to create a regional development bank was a perfect opportunity for the Middle East to get an economic boost. Instead, because policymakers in Israel, Jordan, Egypt, and the PA could not get together to sign the charter, donor countries had difficulty raising the capital base.

Nevertheless, there are clear indications that economic policy is beginning to break from the clutches of the political fray.

In the days ahead, the international community will reiterate its commitment to economic development in the Middle East - because political and business leaders worldwide understand that stability in the region is a critical global interest.

S.B. Lasensky is a Jerusalem-based international affairs writer. He served in New York as a public affairs officer for the Israeli Ministry of Foreign Affairs from 1993 to 1995.