Although peace between Israel and the Palestinians would produce immense benefits for both sides, the situation is hopelessly deadlocked. Meanwhile, terrorism has not only forced Israel to increase its expenditures on security, it has devastated the Israeli economy. The Palestinian economy is in even shakier condition.
What's needed is an alignment of interests of the Palestinians and Israelis. One way to do this is to give the Palestinians a direct stake in the Israeli economy. President Bush announced in early July that he was looking for new ways of giving money to Palestinians that would prevent the funds from being used to sponsor terrorism.
Here's how it might be done: First, create an index fund that would buy a value-weighted composite of the entire Israeli stock market, much the way Vanguard or Fidelity index funds track the U.S. stock market's overall performance. (That is, if a company had 2% of the assets in the market, it would get 2% of the fund's investment.)
Next, establish a pool of roughly $9 billion -- about 10% of the total capitalized value of the Israeli stock market -- to be invested in the index fund. To raise the money, the U.S., Israel and European states could redirect some of their current assistance to the Palestinian Authority, with the remainder coming from Arab countries, as necessary. Each of the roughly 3 million Palestinian residents of the West Bank and Gaza would then be given a share of the fund, worth on the order of $3,000 per person.
Shareholder registration should initially be anonymous to prevent intimidation of participants by extremist groups. Share prices might be published daily, but the shares would be held in escrow until the two sides agreed to the distribution of the fund in a peace treaty. At that point, the shares would become the property of their owners, with the caveat that they could not sell more than 25% over the course of five years (to prevent panic selling or deliberate sabotage).
If no peace treaty was achieved within 10 years, the fund would be liquidated, with the proceeds donated to Israeli victims of terror and to humanitarian relief in the territories.
We recognize that the root of the conflict is not narrowly economic and that some extremists would reject any material incentives. Yet there may be many other Palestinians who would respond.
