Hoover Daily Report

Creating Incentives for Israeli-Palestinian Peace

Monday, July 16, 2001

Shared interests in stability are a prerequisite for peace between Palestinians and Israelis. Depressed economic opportunity reduces Palestinian interests in stability, increasing the risk of violence, as witnessed in the current Intefada in which unemployed teenagers foster lawlessness, prompting harsh responses that create violence. Terrorism is another manifestation of such risk taking. I propose a revenue-sharing plan based on income from tourism that will create mutual interests in peace and stability even in the absence of mutual trust.

Since the 1980s many have held the view that Israeli-Palestinian joint ventures and other business investments would encourage Israelis and Palestinians to live in peace. These proposals suffer from a reliance on mutual trust. Substantial investments are unlikely in an atmosphere of civil unrest. Furthermore, joint ventures are sometimes perceived as economic imperialism.

Jerusalem, in addition to being a place of religious value, is a cash cow. Tourism produces vast amounts of income. Palestinian experts anticipate that tourism will be the major industry of an independent Palestinian state. Nevertheless, the Palestinians are at a disadvantage in competing for tourism moneys because of their lack of infrastructure and investment capital. This disadvantage, however, can become a major step toward peace.

Suppose all government tourist-generated revenues from all of Jerusalem were divided according to a fixed formula between the two sides. For instance, Israel's current population is about 6.3 million. The populations of Gaza and the West Bank are 2.9 million. Proportionality argues that about 31 percent of tourist revenue go to Palestine and 69 percent to Israel. This division is only one possible allocation. The key is that this pooled revenue be shared according to a prearranged fixed formula.

A revenue-sharing arrangement ties the wealth flowing to the Palestinians to their ability to enforce a tourist-friendly atmosphere. Tourist income ebbs and flows with violence. As the record low tourism in Bethlehem over the recent Christmas holiday makes clear, when peace is lacking, tourism declines. In an arrangement that ties revenue to tourism, both Palestinians and Israelis have incentives to minimize violence. Because tourism is currently so much weaker in Palestinian areas, the incentive is asymmetric. A fixed revenue-sharing arrangement, regardless of where the tourist income is generated, gives both sides an interest in seeing the pie expand and gives the Palestinian leadership reasons to control the Intefada and terrorism.

A shared-revenue arrangement encourages both sides to improve access to important religious, historic, and cultural sites, assuring access for everyone to the contested sites of Jerusalem and other parts of Israel and Palestine. Furthermore, investors will have incentives to build tourist trade in Palestinian-controlled areas because both sides will benefit (the Israelis to the degree that the proportion of total tourist revenue generated within Palestine increases).

This proposal does not resolve questions such as the right of return or the contiguity of territory, but it does offer a self-enforcing solution to one central problem. Pooling tourist revenue provides a firm foundation for reducing violence and paving the way for mutual administration of Jerusalem, thereby taking a significant step toward peace.