10 THE (DE)CONSTRUCTION OF “ECONOMIC PEACE”: “ECONOMIC PEACE” STRATEGIES IN THE ISRAELI–PALESTINIAN CONFLICT Between theory and reality Mor Mitrani and Galia Press-Barnathan Introduction Miller’s (2010) framework regarding transition to peace presents four broad strate­ gies, distinguishing between realist strategies to achieve cold peace, and liberal strategies that may lead to warm peace. Among the main strategies Miller discusses under the rubric of “defensive liberalism” is the strategy of commercial liberalism. This strategy, often seen as the hallmark of the pacification of Western Europe after WWII, has been put forth by both local and international actors as a promis­ ing avenue to promote transition to peace between Israel and the Palestinians. This chapter focuses on the attempts to apply economic means to promote peace in the context of the Israeli–Palestinian conflict. It distinguishes between two related, yet distinct economic strategies – “Commercial Peace” and “Capitalist Peace”. It then examines the unique implications of the asymmetric nature of the Israeli–Palestinian conflict (both power asymmetry and actor asymmetry) for the abi­ lity to use these strategies. In this respect, we also question to what extent these so-called liberal strategies are indeed liberal, by surveying the obstacles of employing liberal strategies in an illiberal environment. Economic liberal strategies were used successfully in postwar Western Europe, but the pre-conditions for their success, namely relatively moderate economic power disparities, existence of sovereign states with sufficient economic infrastructure, and a relatively stable security envi­ ronment, are missing in the Israeli–Palestinian case. In the chapter, we focus on these pre-conditions and their importance. Finally, Miller’s typology entangles conditions that are favorable to transitions (e.g. hegemony, existence of democratic regimes etc.) and strategies that can be used to push forward transitions to peace (e.g. military decisive victory, forceful democratization). Our focus is on the challenges of devising foreign policy strate­ gies based upon assumptions about liberal conditions that are conducive for peace. Here we emphasize that in practice the neat theoretical distinction between liberal and realist strategies becomes blurred, and the gap between the rhetoric and 6241-1111.indb 194 8/21/2015 12:00:04 PM  The (de)construction of “economic peace”  195 practice is wide. Despite the strong bias that tends to associate the use of economic tools with Liberal peace-promotion schemes, we conclude that in this case eco­ nomic tools end up being used to better manage an ongoing conflict rather than to resolve it. After presenting the conceptual distinctions between the Commercial Peace and Capitalist Peace arguments, we examine their limitations in the context of Israeli–Palestinian relations. The Commercial Peace ideas dominated the thinking in the early 1990s, as reflected in the Paris Protocol (1994) that accompanied the Oslo Agreement. We demonstrate that the failure of these ideas stems from the negative consequences of the wide economic disparities between Israel and the Palestinian Authority (PA), of the actor-asymmetry (namely the privileging of the PA of the goal of sovereign independent statehood over the possible merits of economic interdependence with Israel), and of the volatile security condition on the ground. We then move on to examine how in recent years there has been growing realization that domestic economic development of the PA should be addressed before attempting at building viable commercial relations, hence dem­ onstrating a shift in focus to the ideas of the Capitalist Peace. This shift is evident in the strategy of the “the Economic Peace”, advocated by Prime Minister Ben­ jamin Netanyahu in 2009. In this context, we then demonstrate how attempts to advance a Capitalist Peace strategy turned out in the context of volatile security, wide power asymmetries and ongoing military occupation to be the guise for realist conflict-management strategies. The findings of this case have broader implications for our understanding of the relevance of economic liberal strategies of peace promotion. The Israeli– Palestinian case helps to flesh out the scope conditions under which these theories work. It illustrates that these theories heavily rely on a security assumption, which in practice is a precondition needed for economics to kick in. Furthermore, it illustrates the challenges of implementing economic peace theories within asym­ metric conflicts – both in terms of power asymmetries and in terms of actor asymmetry. This is important since most contemporary conflicts are of an asym­ metric nature. It is also important because despite the many obvious challenges, decision makers in Israel, the United States and the European Union, formally refer to (liberal) economic tools based on the theoretical premises of the Economic Peace – both rhetorically and practically, as valid and desired policy tools aiming to advance the resolution of the Israeli–Palestinian conflict. It is therefore important to carefully analyze both the potential and the limits of these tools for policy pur­ poses, especially in terms of their scope conditions and the challenge of using them as prescriptions for conflict resolution in many of the conflicts of the twenty- first century. The commercial peace – economic interdependence and peace Since the mid-1990s, the theoretical economics/peace literature in the field of International Relations (IR) has focused on the linkage between economic inter­ dependence and peace, namely explaining why economic interdependence reduces 6241-1111.indb 195 8/21/2015 12:00:04 PM  196  Mor Mitrani and Galia Press-Barnathan the likelihood of armed conflict between trading partners (e.g. Polachek et al., 1999; Bearce, 2003; McDonald, 2004). Commercial Peace theories are often linked with the democratic peace literature and its development, in the framework of Emanuel Kant’s political theory (1795), as scholars often measure and assess the interplay among the three corners of the Kantian triangle: democracy, international organizations and interdependence (e.g. Russett and Oneal, 2001; Oneal et al., 2003; Oneal and Russet 1997). Based on the liberal assertion that a rational actor will aim to maximize his or her benefits with minimum cost, interdependence deters trading partners from initiating a conflict, due to their fear of losing the actual and potential gains from commerce (Polachek, 1980, 1997; Arad, Hirsch and Tovias, 1983; Gelpi and Grieco, 2003: 45). Other perspectives have focused on the ability to use trade and interdependence for costly signaling during crises, so as to avoid deterioration to violence (e.g. Morrow, 2003; Stein, 2003; Levi, 2003). Finally, another version focused on the role of domestic liberalizing coalitions in pro­ moting peace because such coalitions are eager to free more resources for eco­ nomic goals and to create a stable external environment, conducive for more AuQ9 trade and FDI (Solingen, 1998, 2007). The capitalist peace – domestic economic development and peace Whereas the Commercial Peace thesis focuses on the pacifying nature and logic of dyadic economic international interactions among functioning economies, a second, monadic, argument focuses on the benign and pacifying impact of economic development and economic liberalization at the domestic level. While both perspec­ tives were often treated interchangeably, in recent years, a growing body of literature and studies has demonstrated statistically that previous findings about the pacifying impact of interdependence and democracy are in fact conditioned by a third variable of economic development (Hegre, 2000; Mousseau et al., 2003; Gartzke, 2007; McDonald, 2007; 2009) in explaining the effects of economic factors on patterns of conflict and peace. This approach focuses on a distinct liberal logic that links domestic economic capacity in the form of a market economy, the subsequent enhancement of individuals’ economic welfare and peace. This argument, historically voiced by scholars like Angell, Schumpeter, Hume and others, focuses on the rationalizing effect of private property and individual wealth as weakening chauvinistic senti­ ments and creating a greater stake in the status quo. Schumpeter (1951: 88–89) suggests in the Sociology of Imperialisms that with the rise of a capitalist economy, people “were all inevitably democratized, individualized and rationalized” (Schum­ peter, 1951: 89). This argument has been advanced and refined in recent years by several scholars, each pointing at somewhat different domestic mechanisms. Hegre (2000) has shown how rising trade reduces the risk of military conflict only if accompanied by economic development. He builds on the arguments of Rosecrance that a 6241-1111.indb 196 8/21/2015 12:00:04 PM  The (de)construction of “economic peace”  197 minimal level of development may be critical for the liberal peace to work (Rose­ crance, 1986: 9) and that development strengthens the effect of interdependence by creating the possibility to gain from trade. A different explanation offered by Mousseau (2009), suggests that developed market economies are contract-intensive societies where people become used to trusting strangers for interactions and trust the rule of law to manage these interactions. Transferring this domestic norm to foreign policy leads to greater trust toward other nations, thus facilitating coopera­ tion and peace. McDonald, in turn, emphasizes the impact of the size of public property owned by the government on its likelihood to go to war. The bigger the size, the less constrained is the government, and the less sensitive it is about the potential costs of going to war (McDonald, 2007). Consequently, this also generates additional commitment problems for such a state vis-á-vis other states (McDonald, 2009). Finally Gartzke (2007) suggests that economic development – combined with capital market integration and compatibility of foreign policy preferences – supplant the pacifying effect of democracy and help in reducing risks of militarized con­ flicts, but he also notes that development actually increases the ability of states to project power when incompatible policy objectives exist. When trying to draw policy recommendations from the trade-centered and the development-centered arguments, each proscribes different policy trajectories to reach the ultimate goal of peace. Although these trajectories are not essentially competing, they are not identical and in practice, decision makers will have to decide on prioritizing their efforts, especially if considering development as a prerequisite for the Commercial Peace theory. A shared problem of both approaches is that they focus on the restraining impact of economic interdependence or domestic liberal markets once they are established and consolidated. Unfortunately, many of the current violent conflicts of the twenty-first century occur where pre-existing levels of interdependence are not very high to begin with, and where economic development remains a chal­ lenge, being characterized with both asymmetric power relations and asymmetric actors’ involvement. These characteristics of contemporary asymmetric conflict situations do not necessarily render both liberal peace perspectives irrelevant. They do, however, invite shifting the spotlight from understanding the causal linkage between economics and peace to exploring the preconditions and prerequisites that enable and facilitate the operation of these causal mechanisms (e.g. Barbieri, 2002; Press-Barnathan 2009: ch.1). The challenges facing commercial peace arguments in the context of asymmetric conflicts The literature on the Commercial Peace has been extensively criticized, mainly by realist scholars, who doubt whether there is a meaningful connection between trade and peace that can establish a pacifying impact of interdependence on conflict (see Barbieri, 2002; Keshk et al., 2004). Some have argued that the theory gets the causal mechanism backwards and that it is in fact peace (lack of violence) 6241-1111.indb 197 8/21/2015 12:00:04 PM  198  Mor Mitrani and Galia Press-Barnathan that allows trade to develop and interdependence to build (e.g. Blainey, 1988: 18–32). Trade and interdependence, it is argued, can flourish when the basic security concerns are satisfied, that is, when conditions ameliorate the primary concerns about survival, self-help, relative gains etc. (e.g. Buzan, 1984; Gowa, 1993; Grieco, 1988). A stronger realist argument suggests that trade, in fact, can become an additional source of conflict, especially when the logic of power politics spills over to the economic realm as well. According to realists, interdependence is never symmetrical and is therefore always problematic in terms of relative gains and is dangerous in a world of self-help (e.g. Barbieri, 2002: 17–42; Waltz, 1970). When focusing on the specific subset of cases of asymmetric conflicts (the Israeli–Palestinian case being one of them) and on situations of transition from active violent conflict to peace, this initial realist critique of the Commercial Peace in general is more pronounced. Furthermore, asymmetric interdependence gives the more powerful actor political leverage (“coercive power”) vis-à-vis the weaker actor. In the long run, it is also likely to create an “influence effect”, whereby trade relations are likely to lead to the creation of new interests within the weaker actor that will push it to accommodate with the powerful actor’s policies (Hirschman 1980). Both these concerns should lead to greater hesitation and suspicion in asymmetric situations on part of the weaker actor to engage in such economic interaction, especially in a case of recent enemies, in which asymmetric interdependence is more likely to be translated into relative gains considerations. It is not surprising that Håvard Hegre (2004) finds that trade reduces the incentives for conflict most clearly in cases of relatively symmetric dyads A second, political, challenge stems from the fact that in many of the recent asymmetric violent conflicts, the weaker parties aspire for greater independence. The desire to minimize dependence of others in order to reassert/achieve inde­ pendence, conflicts with the interdependence–peace logic. While economists may suggest that interacting with a more advanced economy should be beneficial for a smaller, less advanced one, from a political perspective, for the weaker party – and between former enemies – there is a conflict between the possible economic benefits and the political aspirations for independence. Consequently, actors striving for political independence are more likely to forgo the expected economic benefits of interdependence if those directly undermine the political goal of independence. This problem is relevant for traditional asymmetric relations between any two states, but much more so for relations between a state and a non-state actor fighting for recognition. It is the actor-asymmetry here that poses a unique problem. From an economic perspective, wide power asymmetries pose additional chal­ lenges regarding the economic prerequisites for the interdependence and peace logic to kick in. The interdependence/peace logic assumes the existence of parties with the ability and desire to interact economically in a significant manner. Namely, it assumes the potential for external trade that is significant enough to allow both sides (and actors within them) to believe they stand to gain significantly from such interaction, as well as to perceive specific costs or fear of losses. While this does not necessarily imply the need for full-fledged liberal capitalist market 6241-1111.indb 198 8/21/2015 12:00:04 PM  The (de)construction of “economic peace”  199 economies (e.g. economically liberalizing authoritarian states, see Solingen, 1998; 2007), it implies the prerequisite of an operating independent economy, with domestic production and domestic business groups able and interested in exporting it. Wide economic asymmetries also limit the overall scope of possible trade rela­ tions, as the less developed partner can only afford to buy certain goods, thus offering limited gains for the more advanced partner. At the same time, such trade relations are likely to follow traditional North–South patterns, with the less devel­ oped partner providing mainly primary goods. Such a situation can be easily viewed as exploitation and can generate greater friction and ill-will, rather than promote peaceful relations. All these challenges suggest that wide economic asymmetries are likely to undermine the impact of trade on pacification of relations. The Commercial Peace logic cannot begin to operate before a certain level of domestic economic devel­ opment is reached. While the actual causal mechanisms linking either trade or development and peace are well explored (as described above), these pre-conditions are simply assumed. The next section illustrates these challenges through an examination of the attempts in the 1990s to advance Commercial Peace strategies in the Middle East. The New Middle East and the Paris Protocol The aftermath of the Six Day War (1967) compelled Israel to frame its economic policy vis-à-vis the newly occupied territories in general, and the non-annexed ones in Judea, Samaria and Gaza in particular. Since 1967, Israel fully integrated the Palestinian economy into the Israeli one, including a full control over its fiscal and monetary systems. Subsequently, Israel became the primary (and actually the sole) market for both Palestinian exports (up to 90 percent of Palestinian exports were to Israel) and Palestinian labor (reaching in its peak to one-third of the overall Palestinian labor force). Following the 1987 first Intifada, security concerns in Israel facilitated policies aimed at lowering the levels of Palestinian labor in Israel. The attempt to build economic capacity within the territories at the time had less to do with a peace process, and more to do with the need to reduce the emerging liabilities of the occupation since the late 1980s, as well as to promote separation in economic aspects (Murphy, 1995: 7; Arnon and Weinblat, 2001: 294–295). The first “Economic Peace” initiatives, embodied in Shimon Peres’ “New Middle East” vision, and the MENA economic conferences (Casablanca 1994, Amman in 1995, Cairo in 1996 and Doha in 1997), focused (at least in principle) on the logic of building economic ties across the region, echoing the interdepen­ dence and peace argument. In his book, Peres uses the European Community and the history of Franco-German relations as the appropriate models for the New Middle East vision and focuses accordingly on economic cooperation between states (Peres, 1993). The concept of the New Middle East and the MENA confer­ ences illuminated the attempt to create trade relations and economic partnerships among Israel and the Arab states, and consequently embed Israeli–Palestinian 6241-1111.indb 199 8/21/2015 12:00:04 PM  200  Mor Mitrani and Galia Press-Barnathan relations within a broader multilateral setting both by providing real economic benefits to all sides, and not less important, by building a habit of cooperation among the countries in the region. Developing regional cooperation was set as crucial conduit to give substance to the official peace treaties and to help solidify them by constantly enhancing the mutual benefits from peace and raising the cost of armed conflict (Dassa-Kaye, 2001: 110–157). This logic was evident in American thinking as well. Secretary Christopher, for example, stated that: “governments can make the peace .  .  . Only the private sector can produce a peace that will endure” (Christopher, 1994).1 These efforts, however, were aimed at promoting relations with the Palestinians only indirectly, and focused more on relations with other Arab states. The direct economic strategy accompanying the formal peace process between Israel and the Palestinians, in the framework of the Oslo Accords, came in the form of the Paris Protocol, signed on 29 April, 1994. The Protocol covered the complex dimensions of economic relations between Israel and the emerging PA. It eventually reflected a mixture of instruments – largely a customs union, but with elements of a com­ AuQ10 mon market (some free movement of labor) and of an FTA, with a long list of goods on which the Palestinians could import with independent tariffs and rules. The negotiations leading to the Paris Protocol and the protocol itself mirrored the basic challenges (some might say the inability) of detaching economics from politics- central to the actor asymmetry problem. Borders, or more accurately the lack of them, both in economic and political terms, shaped to a great extent the negotiations and formalization of the Paris Protocol. Aiming “to walk between the lines”, the protocol drew some kind of economic border designated to both separate the (practically unified) economies and to reintegrate them as interde­ pendent partners, while at the same time avoided creating a new reality that could influence or restrain future political negotiations regarding a final settlement. For example, Israel opposed signing a free-trade agreement with the Palestinians because an FTA assumed the existence of borders – a concept that Israel opposed given that no Palestinian state existed yet. The Palestinians, on the other hand, refrained from calling the eventual agreement a “customs union”, because they wanted to stress that they are a separate entity from Israel. The final agreement was a form of a customs union, which, to a great extent, legalized and formalized the arrangements that were set prior to the Oslo process, but now were mutually agreed upon and not unilaterally enforced. It declared free trade with Israel in industrial and agricultural goods, with temporary excep­ tions on some farm produce to be eliminated by 1998 and subject to veterinary and phytosanitary requirements. Due to political-security considerations, and a desire to promote separation rather than integration, Israel also sought an arrange­ ment that would not force it to accept thousands of Palestinian workers every day. As an alternative, both sides discussed during 1993–1994 the possibility of establishing border industrial estates, to serve as employment centers for Palestin­ ians. Nevertheless, there was no existing legal framework that could have been used to advance this project – especially given the difficulty to agree on which territory and under which jurisdictions the estates will operate. Moreover, the PA 6241-1111.indb 200 8/21/2015 12:00:04 PM  The (de)construction of “economic peace”  201 did not have enough money to implement it and Israel did not have sufficient incentive to finance it (Baskin and al Qaq, 1998).2 The Paris Protocol also led to the establishment of a joint economic commis­ sion (JEC), the goal of which was: “to follow up the implementation of this Protocol and to decide on problems related to it” (Article II, 1). Nevertheless, the protocol neither gave formal responsibilities to the JEC, nor specified what should be its practices and courses of action (Kleiman, 1994: 347–373; for a Palestinian assessment see Elmusa and El-Jaafari, 1995). When interdependence meets asymmetric conflict – the failure of the Paris Protocol The political and economic challenges that the interdependence and peace argu­ ment faces when applied to cases of transitions to peace in asymmetric conflicts are evident in the Paris Protocol and explain how and why the attempt to encourage interdependence as a stimulant for peace failed in the case of the Israeli– Palestinian conflict. The agreement came against the backdrop of a pre-existing economic relation­ ship of imposed economic integration since 1967, characterized by a dependence of the Palestinian economy upon the Israeli one (Arnon and Weinblat, 2001: 295–296). The Palestinians faced an obvious paradox: politically, they sought sepa­ ration from Israel, while economically, facilitating interdependence would have improved their economic prospects. Abu-Mazen’s (1994) book, Through Secret AuQ11 Channels: the Road to Oslo, argues that four stages were needed to diminish the total economic dependence on Israel. First a gradual detachment from the Israeli economy, then unequal cooperation with the Israeli economy, followed by more egalitarian cooperation and finally economic integration with the Arab markets (Abbas, 1994: 330–331). In other words, because the Palestinians were seeking to first establish economic sovereignty and economic independence, only after such independence is realized, and a greater symmetry in the relations is created, it may be possible to talk about further economic integration (e.g. Arnon and Weinblat, 2001: 25). Feldman (2009: 20–21) makes this argument with regards to Netanyahu’s Economic Peace plan, which is discussed below, suggesting that an actor fighting for independence will be willing to pay higher economic costs and will have a greater stake in changing the status quo. Due to the wide economic power disparities, economic interdependence was not perceived as the structural condition within which Israel was operating vis- à-vis the PA, and was therefore not a constraining factor. While Israel did hold the assumption that economic well-being in the PA was in Israel’s own interest because if Palestinian economic welfare would increase – peace will be more established, in terms of the impact of interdependence the territories’ economy was seen as having little if any importance to the Israeli market. While certain sectors in Israel were indeed more vulnerable to a shortage of Palestinian labor (namely construction, agriculture), the expectation was that they would adjust once such labor become unavailable (The economic consultancy team to the 6241-1111.indb 201 8/21/2015 12:00:04 PM  202  Mor Mitrani and Galia Press-Barnathan political negotiation, 1993). It follows then, that the fortunes of the Palestinian economy were seen as important much more for political, rather than economic, reasons. Indeed, the protocol did not focus on creating islands of cooperation or on searching for fields of mutual gain, as the interdependence-peace logic would suggest. It was much more focused on establishing viable economic arrangements to deal with pre-existing (inter)dependence and to help enhance Palestinian eco­ nomic independence. Indeed most observers of the Paris protocol have stressed the fact that it further institutionalized the pre-existing economic asymmetry between the two parties. This was the result both of pre-existing huge economic asymmetries on the ground, as well as the asymmetric nature of the Paris Agree­ ment itself, which left more power in the hands of the Israelis (Jawahry, 1995; Huleileh, 1998; Naqib, 2003). The wide economic asymmetries between the Israeli and Palestinian economies illustrate the tension between a purely liberal economic logic and a political logic. Since its occupation in 1967 and until 1994 and the Oslo process, the Palestinian economy grew dramatically thanks to the virtually free movement of labor and goods between the two parties. This, argues Kleiman (2001: 4–6), is exactly what economic theory would lead us to expect when a small, poor, labor-endowed economy is brought into contact with a relatively big, rich, labor scarce one. However, the political logic is quite different, as described earlier, as the political goal of independence precedes that of economic growth. The dilemmas surrounding the Paris Agreement illustrate that independence should be seen as a pre-condition to interdependence. Only once the trading parties are both politically and economically independent and sovereign, they will have the capacity to build economic relations in which economic cost and benefit calculations may prevail over political considerations, or at least will not threaten fundamental notions of independence and sovereignty. In the Israeli–Palestinian case, the greatest fear on the Palestinian side was that the economic agreement would be too liberal and would cast integration in a manner that will replace, or continue, the political occupation with an economic integration. Even though, economically speaking, this would have probably enhanced growth, employment and other economic figures, politically speaking the Palestinians had more incen­ tive to be separated rather than integrated. Basic security as a precondition for building economic interdependence The Paris Agreement failed to promote greater Palestinian prosperity also due to the security environment within which the economic relations were embedded. Lack of basic security and a high likelihood of violence undermine any economic cooperation logic in several ways. Even if we ignore the negative impact of economic power asymmetries, inter­ dependence can reach a level that would significantly raise the cost of future violent conflict, only if and when the level of security between the parties is high 6241-1111.indb 202 8/21/2015 12:00:05 PM  The (de)construction of “economic peace”  203 and stable enough over time. Unless high levels of economic interdependence already exist between the parties, a situation less likely after protracted conflicts, basic security and trust between the parties are key prerequisites to allow the gradual building of such interdependence. Otherwise, interdependence will not have time to evolve to the point in which it can actually constrain actors, and actors would also hesitate to promote it because of their short time horizon. When looking at trade figures, the total of Israel exports to the PA in 1994 was $920 million and grew significantly in 1995 to a level of 1521$ million. This trend continued during the following years (1996–2000), as Israel’s export of goods to the PA varied around figures of $1,600–1,700 millions, the highest level in history. At the same time, the PA exports to Israel stood in 1994 at a level of $205 million and increased by almost 60 percent to a level of $345 million. This trend, however, was reversed and in the following years (1996–2000) and especially with the outbreak of the Second Intifada in 2000. Such dramatic decline in Palestinian exports is also detected in face of the first intifada in 1987 (for data see The Untapped Potential, 2006: 33–42). The level of trade, from both parties, is significantly influenced by the level and intensity of the violent conflict. Security challenges and violent episodes also led Israel to create new regula­ tions and mechanisms that made Palestinians’ work in Israel much more com­ plicated and thus raised levels of unemployment in the PA. Israel also adopted the policy of closures following terrorist attacks, which effectively inhibited attempts to build a thriving local economy in the territories (see Le More, 2005; Mishal, Kuperman and Boas, 2001: 81–84).3 Moreover, security threats on Israel were addressed by closing crossings and transport routes in and from the Pales­ tinian territories, resulting consequently in limitations on both its export/import capacities and the movement of labor from the PA to Israel. The closures policy and its effects on the Palestinian economy in general, along with its economic relations with Israel in particular, illuminate the role of security as a precondition to the interdependence-peace logic. Similarly the erection of the separation bar­ rier since 2003 was driven by a strong sense of vulnerability to terrorist attacks. In turn, it further intensified the territorial fragmentation of the West Bank itself (Le More, 2005). Beyond direct impact on trade levels and labor movement, violent episodes also negatively influence any potential for a Commercial Peace logic to work because if the parties foresee a significant likelihood of renewed violence between them, economic considerations will be linked to and translated into political and security considerations. The paradox here is quite straightforward. While raising economic interdependence can help raise the costs for the other party to back track to violent conflict, it can also create economic capacity that may be utilized in a future round of violent conflict should the process fail (see, Garzke 2007). Rips­ man and Blanchard (1996) argue that in times of crisis, strategic and military considerations trump economic considerations. A period of volatile transition to peace is likely to be wrought with crises, thus further raising the risk of greater violence due to greater economic capacity. 6241-1111.indb 203 8/21/2015 12:00:05 PM  204  Mor Mitrani and Galia Press-Barnathan Netanyahu’s “economic peace” strategy – the logic of the capitalist peace and its problems The negative impact of wide asymmetries, and the very limited economic capa­ city of the PA suggests that building domestic economic capacity and infrastructure of a modern market-oriented economy is a precondition for developing a mean­ ingful interdependence. This logic is the one expressed in the Capitalist Peace literature, and it is the one accentuated in the recent Netanyahu Economic Peace initiative. Toward the 2009 general elections in Israel, Benjamin Netanyahu introduced his peace plan, framed in an economic-liberal logic. Netanyahu’s plan, later dubbed “the Economic Peace”, was based on the tripartite linkage among security, eco­ nomics and peace. Netanyahu first presented his ideational seeds in 2003, when he served as Israel’s minister of finance. Economic development and well-being in the PA, he suggested, should precede the political track, thus, serving as a pre­ condition to a “real” peace process. (Netanyahu, December 17, 2003). The causal link presented in 2003 seemingly reflected a liberal, Schumpeter-like, logic. Raising individuals’ living standards will create – for the first time – the “cost”, that later will justify preferring the benefits of peace. In terms of the two liberal strands, Netanyahu’s vision focuses on the second, domestic, strand, rather than the inter­ dependence–peace argument. Four years later, now as the leader of the opposition in the Israeli Parliament (hereinafter: the Knesset), Netanyahu kept reiterating the idea that economic stability and development will advance pragmatism among Palestinian leadership, which will consequently facilitate the peace process. Netanyahu posited that the Economic Peace policy should be seen not only as a pre-condition to a possibility of peace, but rather as a “third way” that will serve as “a corridor to a possibility of political peace in the future . . . This does not make political negotiations on the permanent agreement redundant, but rather creates the conditions to its ripe­ ness” (Netanyahu, January 21, 2008). Netanyahu suggested that Israel would promote this economic peace plan while keeping security issues in its hand (Netanyahu, April 2, 2008). Indeed he stressed that it relies on two forces—Israeli security and market forces (Netanyahu, November 20, 2008). Netanyahu’s speeches demonstrate a liberal conception regarding the potential merits of transforming the Palestinian economy to a market-oriented one. Accordingly, peace between Israel and the Palestinians will become feasible, when and if the PA will establish and maintain a free-market economy. It is interesting that Netanyahu chose to stress the potential beneficial impact of capitalist devel­ opment on individual attitudes, rather than on other factors suggested by the Capitalist Peace literature (generate greater potential for trade, based on Rose­ crance and Hegre). This suggests that his approach is linked more directly to Schumpeter, and perhaps to the interesting economic norms argument presented by Mousseau. While it is very tempting to dismiss the recent Netanyahu “Economic Peace” statements as rhetoric (Ish-Shalom, 2013: 155–169), several actual policies were 6241-1111.indb 204 8/21/2015 12:00:05 PM  The (de)construction of “economic peace”  205 implemented since 2009, suggesting that this was not merely elections rhetoric. In the aftermath of Netanyahu’s elections, the first concrete step toward opera­ tionalizing his pre-election speeches was the re-creation of the Ministry for Regional Cooperation, to be headed by the vice Prime Minister, Silvan Shalom. Interestingly, this new ministry was built on the foundations of the old Regional Cooperation ministry that was created in the late 1990s, headed by Shimon Peres and dismantled in 2003.The creation of the new ministry was accompanied, for the first time, with an actual institutional reform that created a potentially effective framework for real economic cooperation. The ministry received significant project funds, a ministers committee to improve the conditions of the Palestinians was created by Netanyahu, and the Regional Cooperation Ministry received control from the Israeli side on the JEC, as well as on direct contacts with Tony Blair’s team in Quartet. This structure was potentially important to facilitate what was a complex multi-actor cooperation and coordination process (Interview with Yishai Sorek, 2013).4 The most evident step was the attempt to ease freedom of transportation and the closures policy. This attempt was explicitly framed in Netanyahu’s rhetoric as a measure to induce growth and allow freer trade and movement of goods. In August 2009, the military’s Central Command made a decision to dismantle a significant number of check-points. That decision, however, was directly linked to the perceived reduction in terrorist activities in the area (Saar, 2009). In terms of trade movement at crossings, apparently there has been an increase in the number of trucks, estimated at approximately 40 percent in land checkpoints and approximately 45 percent through the Allenby Bridge. This, however, was mainly due to the institutionalization of the checkpoints and blocking the illegal move­ ments, which were not included in previous surveys (Ashkenazi and Greenapple, 2009).5 Despite much discussion about the creation of industrial zones within the PA, increasing local capacity and reducing unemployment, these various projects, such as the proposed zones in Jenin, Beth Lehem, Hebron (Tarkumiya), encoun­ tered endless obstacles and to this date none is fully constructed and operating. The changing nature of the discussion regarding such joint projects is indicative of the disillusionment on the Israeli side from Commercial Peace ideas. As a senior official in the Regional Cooperation Ministry notes, talks about “joint industrial zones” reflect “the thinking of the 90s” (Sorek, 2013). It very quickly became clear that the projects under discussion were Palestinian projects to which Israel could contribute either by removing various barriers that made their realization difficult, or by offering a relevant functional interface to increase their viability. Any limited cooperation that was achieved was cooperation for the sake of advanc­ ing the viability of the Palestinian economy, rather than for the sake of promoting Israeli–Palestinian cooperation per se. This reflects an understanding of the negative implications of wide power disparities and the reality of occupation on any attempt to generate balanced cooperation. The ambitious and dubious slogan of “Economic Peace” disappeared quite rapidly, in the face of major criticism regarding its insinuation that this could somehow replace a political diplomatic process. However, the more nuanced and 6241-1111.indb 205 8/21/2015 12:00:05 PM  206  Mor Mitrani and Galia Press-Barnathan less ambitious agenda of actually promoting Palestinian economic well-being as an Israeli interest did not disappear. For example, the Regional Cooperation min­ istry invested heavily in upgrading the crossings, seen as the main bottle-necks of any economic interaction. It invested in various initiatives aimed at facilitating actual interaction on the ground between Israeli and Palestinian businessmen, such as the forthcoming opening of a business lounge near the Taybe crossing. The cur­ rent emphasis is on facilitating and backing international donor support for the creation of Palestinian industrial zones, by guaranteeing movement and access to and from these zones (Interview with Adi Ashkenazi, 2013). One very recent project illustrating such cooperation is a cooperative venture with the European Investment Bank to build four electricity substations on the Israeli side, close to existing and planned Palestinian industrial zones, in order to increase electricity supply to these zones and enable their efficient operation.6 The rhetoric of “Economic Peace” has disappeared for two main reasons. One, as noted before, was the negative connotation that came to be associated with it as an alternative for a Palestinian state. The second reason had to do with practical considerations regarding the facilitation of actual cooperation. As was the case in earlier attempts to cooperate economically with Egyptians or Jordanians, coopera­ tion ventures between Israelis and Palestinians stood the best chance to succeed if they were dealt with discretely, with minimal public exposure. This explains in part the low profile of the Israeli ministry and its operations. Early attempts in 2009 to give wide public exposure to such economic ventures seriously backfired, leading to both harsh internal criticisms on the Palestinian participants and to the eventual premature death of these ventures. The conclusion was that if any eco­ nomic projects were to succeed, it had to be done discretely, without the press (Ashkenazi, March 4, 2013). In what can be seen as an ironic twist, actual economic cooperation is taking place where there is economic logic, but only as long as it is discrete and as long as it is not framed as a strategy for promoting “peace”.7 Conclusions: The limits of liberal economic peace theories in asymmetric conflicts The reader may argue that the whole discussion of the impact of economic interdependence in the case of Israel–Palestine is misleading given that we are not discussing two sovereign states and that the PA is under Israeli occupation for over 40 years. Still, especially since the late 1980s–early 1990s, there has been much discussion and focus at the decision makers’ level on the economic dimension of these relations and on the ability to use it to promote peace between Israelis and Palestinians. Both domestically, in both sides to the conflict, and internationally, among third parties, there has been an ongoing interest in the idea of an Economic Peace, despite all the problems. The limited success of these various schemes reflects the different problems and challenges outlined above, stemming from the economic and political asymmetry between the two parties. We can choose to simply brush away decision makers’ rhetoric on the linkage between economics and peace as foolish or cheap talk, or we can further explore it, and strive to 6241-1111.indb 206 8/21/2015 12:00:05 PM  The (de)construction of “economic peace”  207 understand the basis for the attempts to use these policies and what undermines their implementation. Here, we chose the latter option. Our analysis of the attempts to use strategies based on both a commercial peace and a capitalist peace logic, has led to the following conclusions. Economic development is crucial politically. The goal of creating a Palestinian state necessitates the creation of an independent and functioning Palestinian economy. Economic development is not only an important element in advancing peace or reducing the danger of violence, but it is also a significant part of creat­ ing a new state actor. One cannot think of a more politicized economic issue. This logic is very well reflected in the recent dramatic developments in building domestic state capacity – to a large extent on the economic front – guided by former Palestinian Prime Minister Salam Fayad, which set the ground for the decision on the unilateral declaration of a Palestinian state in the UN in September 2011.8 However, Economic independence needs to precede economic interdependence if the latter is to become a force for peace. Israel under Netanyahu seems to have acknowledged this, but at the same time chose to chose to de-couple economic independence, at least temporarily, from political independence. There is, however, a built-in contradiction in advocating the enhancement of economic growth on the one hand, and controlling individuals’ freedom of movement and labor on the other. The self-proclaimed liberal nature of Israel’s strategy of promoting Economic Peace was clearly compromised by the complex implications of wide power asym­ metries and the political leverage they offer to the more powerful side. As we show, wide power asymmetries created greater concern and resentment on the Palestinian side. At the same time on the Israeli side, they implied that no signifi­ cant inherently economic costs or benefits were tied to relations with the Palestin­ ians. Such economic costs/potential benefits are the engine behind commercial peace logic. With a very wide asymmetry the stronger party will always be tempted to use its economic leverage politically. This peace-promotion strategy is further compromised by the fact that beyond the power disparities, it is still conducted within the context of an ongoing military occupation, where “facilitating eco­ nomic development” mainly implies easing various restrictions on the movement of people and goods within the Palestinian territory. Furthermore, because for Netanyahu “the sequence is not peace-economy- security, but the other way around, first security then economy and then peace” (Netanyahu, December 17, 2003), the liberal economic strategy turned out to be a Realist conflict management strategy. The equation of security-economy-peace has two parts. The liberal part regarding the role of economics and economic development in peace promotion and conflict resolution, is preceded and therefore conditioned upon the first, Realist, part, which envisages security as a precondition of economic development and cooperation. There are two problems with this triangular equation. First, as noted before, actual Israeli attempts to achieve security undermine the ability to achieve economic prosperity, hence creating a vicious circle. While some in Israel acknowledge the link between restrictions on access 6241-1111.indb 207 8/21/2015 12:00:05 PM  208  Mor Mitrani and Galia Press-Barnathan and movement and radicalization, and want to loosen Israeli controls as much as security will allow, in times of crisis a second perspective that perceives the potential of using the economy punitively as an instrument of coercion, usually wins out (Lasensky and Grace 2006: 4–5). The latter point highlights the fact that liberal beliefs about causal relations between economic well-being and peace or inclination to violence can also be used within a realist-oriented framework of “economic statecraft”, aimed at shap­ ing the parties’ incentives for engaging in violence (Baldwin, 1985; Blanchard and Ripsman, 1999–2000; Ripsman and Blanchard, 2008). When such economic statecraft is carried out in an illiberal environment (e.g. in the context of military occupation), such Liberal beliefs and strategies become either irrelevant, inadequate or perceived as cynical rhetorical moves. Consequently, as long as Israel has the power to use economic tools for the purpose of exerting political leverage, mainly via the use of positive and negative sanctions, in order to achieve short-term “security”, the liberal aspect of its policies is largely compromised. If steps to improve the viability of the Palestinian economy are always contingent upon Palestinian behavior, then this can easily be seen as a “carrot” for good behavior, just as the closing of passages or withholding the transfer of tax revenues is a “stick” for misbehaving. This is not a peace promotion strategy, but rather a conflict management strategy. And if this is indeed the strategy, then the pro­ nounced goal of helping to build a viable Palestinian economy is unlikely to be truly advanced.9 Once we add to this picture the fact that physical security is still volatile, this conclusion gains even more strength (Frishman and Lavi, 2010). In conclusion, our review of the several economic policies that Israel considered and partially pursued regarding the Israeli–Palestinian conflict over the years, as well as their overall failure, demonstrated not only the Gordian knot between the Commercial and Capitalist Peace, but also the need to think about the scope conditions that enable the Economic Peace arguments to play out. This case sug­ gests that such arguments are less likely to be relevant for the resolution of asym­ metric conflicts. In terms of power asymmetry, as we explain before, economic interaction generates either concern and fear in the weaker party, or a temptation to be used as leverage by the powerful party. Such broad disparities also mean lack of significant mutual economic gains that may push both parties toward an agreement. In terms of actor asymmetry, the Palestinian case demonstrates that for a non-state actor fighting for recognition, economic considerations will always be trumped if and when they imply cooperation with the other side at the expense of the broader political-national goal of achieving political independence. Returning to the initial Miller framework of peace-promoting strategies, our chapter offers the following final conclusions. First, there are difficulties applying standard realist/liberal arguments to asymmetric conflicts between state and non- state actors. Second, while Miller (2010: 141–143) distinguishes realist from liberal strategies based on their goal of influencing the rival’s capabilities (realist) or its intentions (liberal), in the Israeli–Palestinian case, given the background military presence of Israel, it is almost impossible to disentangle the two in the application of economic strategies. Finally, this case suggests that liberal strategies cannot 6241-1111.indb 208 8/21/2015 12:00:05 PM  The (de)construction of “economic peace”  209 effectively promote peace without prior realist conditions that can enable their inherent logic to kick in. Notes 1 http://dosfan.lib.uic.edu/ERC/briefing/dossec/1994/9410/941030dossec.html 2 A Reevaluation of the Border Industrial Estates Concept, IPCRI December 1998. Two indus­ trial parks functioned on the borders of the Gaza strip, and seven others were in different stages of planning to be built along the border near the cities of Jenin, Tulkarem, Rafah, Ramallah and Hebron. The outbreak of the second intifada halted most of these opera­ tions. For a review of the types of border enterprises see: Tamar Arieli, “Israeli–Palestinian Border Enterprises Revisited” (paper presented at the annual meeting of the Israeli International relations Association, 2010.) 3 For a review of the violent cycles in the relations and their economic impact, see Reuveni (1999). 4 The interviews with the policymakers were semi-structured and were conducted through an open conversation with the policymakers. 5 Trade data is taken from http://www.peres-center.org/Media/Economic%20Peace%20 Political%20Peace%20with%20Economic%20Prosperity.pdf 6 European Investment Bank, http://femip10.eib.org/projects/construction-of-four- substations-in-west-bank.htm 7 Only in August 2012, almost four years after Netanyahu conveyed the “Economic Peace” as a path to conflict resolution with the Palestinian, a formal economic agreement between Israel and the PA was reached. 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