The Economic Prospects of the White House’s New Plan for Peace

On January 28, the senior advisor to President Donald Trump, Jared Kushner, released his highly anticipated magnum opusPeace to Prosperity: A Vision to Improve the Lives of the Palestinian and Israeli People. As expected, the vision sketched therein was one largely consonant with the interests of the Israeli center-right that primarily seeks to advance illegal territorial annexation and to rebrand an existing modality of apartheid for 21st century sensibilities. Pointing to utopian—and unreachable—horizons in order to sell Palestinians on a final abandonment of their national project, Kushner’s work represents, in many ways, the apotheosis of the real estate-styled grift investing all Trumpian politics.

Kushner’s plan is filled with many unacceptable claims and proposals. Indeed, it is difficult to parse what is more appalling—his attempt to dissolve the refugees’ right of return or his scheme to denationalize the Triangle communities near the Green Line.1 Even within the context, however, the economic framework articulated in Peace to Prosperity nevertheless stands out for its absurdity. The viability of the White House’s entire gambit, after all, hinges on the possibility that an era of Palestinian economic abundance—achieved without sovereignty but through the combination of boilerplate neoliberalism, technological chimera, and an externally managed $28 billion investment fund financed by unpledged sources—will convince Palestinians to accept an eternal subordination to their Israeli neighbors. The fact is that neither peace nor Palestinian development can be achieved without putting an end to military occupation and the system of land confiscation, resource extraction, and economic dependency it institutionalizes. In all, Kushner’s proposals augur an inevitable extension of the poverty and precariousness that the Palestinian people already know so well.

Neither peace nor Palestinian development can be achieved without putting an end to military occupation and the system of land confiscation, resource extraction, and economic dependency it institutionalizes.

Peace to Prosperity cannot be ignored as irrelevant, however. By virtue of the White House strong-arming the United Nations into taking its proposals seriously and the American ambassador in Jerusalem, David Friedman, coyly greenlighting a new era in Israeli territorial expansion, Kushner’s plan actually threatens to create dangerous new facts on the ground. While entirely implausible, the plan should be subjected to a comprehensive examination all the same, not only for the sake of the historical record but for the opportunity to illuminate the actual causes of Palestine’s stalled development. In this spirit, the ensuing analysis will aim to comprehensively consider the economic contents of Kushner’s proposals by scrutinizing his development plans both according to the terms he lays out and in view of all that he omits, erases, and distorts.

The Economic Ramifications of Peace to Prosperity’s Two-State Solution

Any economic analysis of Peace to Prosperity needs to begin by appraising the likely effects of Kushner’s interpretation of a two-state solution as it pertains to Palestinian development. The basic parameters of this version of the two-state solution are as follows:

  • Israel is to retain control of the prospective Palestinian state’s borders, air space, and territorial waters.
  • Israel is to retain control over Palestinian port facilities, border crossings, and customs operations.
  • Israel is to retain its right to regulate the importation of “dual list” goods into any prospective Palestinian state.
  • The Israeli civil administration—a branch of the Israel Defense Forces—is to remain legally sovereign across the entirety of any prospective (and demilitarized) Palestinian state.
  • Israel’s legal geography is to be expanded to encompass all existing settlements and the infrastructure that serves them as well as the entirety of an undivided Jerusalem.
  • Israel is to acquire the entire Jordan Valley.
  • The Palestinian state is to be obliged to “equitably share” its groundwater with the Israeli state.
  • Palestinian tariffs are to be set at rates equivalent to those of the nations hosting their earmarked port facilities (Israel and Jordan).

As is likely self-evident, the economic costs of Kushner’s version of a two-state solution would be immediate, substantial, and multifaceted for the Palestinian people. To begin, the territorial acquisitions afforded Israel would deprive Palestine—defined according to the armistice border of 1949—of its richest agricultural lands (the Jordan Valley), the most significant tourism asset (Jerusalem), and a large share of its natural resources base (principally, the phosphate and mineral deposits of the Dead Sea). Such reductions in factor endowments imply a structural contraction in national productive capacity, private sector job creation potential, and long-term output potential. Regardless of subsequent policy interventions, then, Peace to Prosperity’s reconstitution of Israel’s legal and physical geography would invariably decrease the steady-state growth rate of the Palestinian economy.

In also rendering the Israeli state legally and functionally sovereign across all Palestinian territories, Kushner’s version of the two-state solution would be certain to worsen economic performance even further. After all, Israel has a 53-year record, since 1967, of using the precise powers invested in it by Peace to Prosperity for the deliberate goals of suffocating Palestinian industry and production, confiscating Palestinian land and resources, capturing Palestinian consumer markets for Israeli firms, and punitively imposing restrictions on the movements of Palestinian goods, capital, and people. If historical precedent is predictive, one can anticipate that a reconsolidation of Israeli legal primacy on Palestinian lands will merely facilitate the same kinds of de-development interventions while also reintroducing high investment risks into the Palestinian business environment. Each variable would depress economic activity significantly.

If historical precedent is predictive, one can anticipate that a reconsolidation of Israeli legal primacy on Palestinian lands will merely facilitate the same kinds of de-development interventions while also reintroducing high investment risks into the Palestinian business environment.

Finally, though more subtle in its effects, one should not neglect the negative ramifications that tariff rate synchronicity would imply for the Palestinian economy. Kushner’s proposal would dictate that the price of Palestinian imports be set at levels commensurate with the needs of the far more developed Israeli economy. As has been the case under the customs union established by the Paris Protocol, such price effects would profoundly distort Palestinian factor markets, especially in the case of intermediate industrial inputs. By both compromising the competitiveness of manufactured exports and disincentivizing investment into the productive sectors of the economy, Peace to Prosperity’s tariff provisions would quietly—though significantly—undermine Palestinian development, too.

Whether accounting for the obvious opportunity costs inherent in an acceptance of Kushner’s proposal or the material consequences certain to be precipitated by an absence of Palestinian sovereignty, the economic effects of this two-state solution would be enormous and unambiguously negative for Palestine.

Peace to Prosperity’s Development Plans

Turning to the economic provisions explicitly laid out in Peace to Prosperity, a few points must be clarified. First, and despite ceaseless messaging to the contrary, this White House initiative does not offer Palestine a full $50 billion in (theoretical) investment in exchange for political complicity. Rather, it nominally allocates Palestine just short of $28 billion, with the remaining balance, $22 billion, earmarked for outlays in Jordan ($7.365 billion), Egypt ($9.167 billion), and Lebanon ($6.325 billion). Second, one must also take note of the composition of the fund being designated for Palestinian development. As initially spelled out in Manama in June 2019, this fund would be comprised predominantly of concessionary loans (underwritten, presumably, by foreign governments and the international financial institutions) and unpledged inflows of private capital; the share of grants in the total would be approximately 27 percent. To the extent that private foreign capital has proven acutely risk averse when it comes to investing in the post-Oslo Palestinian economy—and that this aversion primarily derives from Palestinian markets being beholden to the prerogatives of a foreign military, which would still be the case under Peace to Prosperity—the likelihood of mobilizing FDI at the magnitudes assumed by Kushner is exceedingly low.

Third, it is important to recognize that Kushner’s proposals dictate that this investment fund is to be managed not by Palestinian planners (or, perhaps most appropriately, by the already existing and successful Palestine Investment Fund) but by an unnamed multilateral development bank. The likely impact of this choice—one that would empower non-national actors who have limited knowledge of the local business environment—on prospective investment returns should not be diminished either.

Kushner et al. intend to distribute Palestine’s theoretical $28 billion across a vast array of government reform projects, sectoral development strategies, infrastructure and government services upgrades, and human capital development initiatives. From an impartial view, there is much in this investment plan that is largely unobjectionable. However, there are also many issues with the budgets and proposals being put forth.

The most troublesome components of the government reform project lie in the domains of tax policy reform, intellectual property regulation, and investment/industrial policy reform. On taxes, the system of low tariffs and “low burden” income/corporate tax rates mandated under Peace to Prosperity would further institutionalize Palestine’s existing fiscal dependence on regressive value-added taxes while also further intensifying the economy’s recurring balance of payment issues. In addition to punishing the lower and middle classes, the generalized shortages in tax revenues that would be endemically reproduced due to low income and corporate tax receipts may inhibit the state’s capacity to proactively intervene in the economy as well.

The most troublesome components of the government reform project lie in the domains of tax policy reform, intellectual property regulation, and investment/industrial policy reform.

On intellectual protection regulations, Peace to Prosperity dictates that the Palestinian state needs to adopt austere regulatory measures well in excess of World Trade Organization (WTO) standards (TRIPS-Plus, as they are colloquially referred to). Though such measures are presented as a means of generating technological upgrades via inflows of foreign direct investment (FDI), they are, empirically speaking, unlikely to do so in a place like Palestine. This is because of the following: (1) multinational corporations tend to structure licensing and franchising agreements in the global south in such a manner as to not expose their intellectual property, and (2) foreign investment is sensitive to intellectual property (IP) rights only to the extent that the receiving economy bears the endogenous capacity needed to engage with frontier technologies and production techniques. On the latter point, it is worth emphasizing that a developing economy such as Palestine’s is, ipso facto, lacking in such capacity. By consequence, it can be anticipated that the policing of IP rights as stipulated under Kushner’s plans would be unlikely to facilitate the transfer of technology and knowledge, regardless of the magnitude of FDI inflows. If Jordan’s example is generalizable, such policing—particularly as relates to data exclusivity—may even hurt existing domestic industries while increasing the price of essential medicines.

On investment and industrial policy, Peace to Prosperity requires that Palestinian legislators revise existing investment promotion laws to unconditionally privilege foreign-originating capital and that they establish export processing zones (EPZs) akin to those in Egypt and Jordan. If implemented, these policies, too, would likely prove detrimental to Palestinian development. As concerns investment, this is due to the fact that FDI’s effects on growth, job creation, and technological/knowledge spillovers are ambiguous and highly conditional, as even the World Bank now acknowledges. In view of the opportunity costs, building one’s investment strategy to prioritize foreign inflows indiscriminately is therefore likely to prove developmentally misguided. Given the relative rarity of greenfield FDI in the Middle East, moreover, such policies might even crowd out domestic investment, which would prove disastrous in the medium to long term. Regarding industrial policy, enclave-based approaches of the type recommended by Kushner have, on the east side of the Jordan River, primarily functioned to subsidize the reexporting operations of South Asian garment manufacturers while generating negligible gains in terms of job creation, upstream and downstream linkages, and industrial upgrading. Given the many issues that have also emerged with Palestine’s existing free zones and industrial estates, Peace to Prosperity’s EPZ-related recommendations give little reason for confidence.

As regards the sector development budgets put forth, the meagerness of the investment designated for agricultural and manufacturing activities ($910 million and $875 million, respectively) and the fancifulness of the wider tourism strategy ($1.045 billion) are most deserving of critique. Specific to the former, one must first recognize that agriculture and manufacturing represent those sectors with the highest potential returns in terms of job creation and export income, and that increasing the sophistication of domestic manufactures is one of the keys to driving sustainable economic development. Despite this, and due to the combination of misguided policymaking, donor neglect, and Israeli interference, these sectors have actually come to constitute declining shares of the Palestinian GDP throughout the Oslo period. The outlays proposed in Kushner’s budget would do little to reverse these worrisome trends. Functionally speaking, they would therefore implicitly contribute to the economy’s problematic biases toward wholesale/retail commercial activities and final consumption. Specific to tourism, though Peace to Prosperity provides for substantial investment, the returns on it would rely on Israel to behave in good faith by providing “fast-track accessibility” for Palestinian tourists to the Muslim and Christian holy sites of Jerusalem. To the extent that this good faith is almost certainly misplaced, the economic gains projected in this sector are likely to be grossly inflated.

As for infrastructure, the most obvious issues in Kushner’s proposals concern the political and technical viability of the proposed roads and railway projects. Technically, Peace to Prosperity assumes that the disjointed Bantustans that are to constitute Kushner’s version of Palestine can, in fact, be refashioned into a functionally contiguous national economy. Given the locations of Israel’s settlements, this assumption seems highly dubious, regardless of civil engineering capacities. Politically, Peace to Prosperity also assumes that Israel’s legal supremacy in Palestine—as well as its discretionary authority over the importation of dual use goods—will not impede Palestinian infrastructure development. This, too, strikes as a reckless assumption as it would imply a perfect inversion of historical precedent. Due to the low probability of the imagined ‘sky roads’ connecting Palestinian areas coming to fruition and the high probability of the Israeli civil administration weaponizing its legal authorities to impede the movement of Palestinian goods and people, it would be naive to think that the White House might deliver the infrastructure it promises.

Two quick points are worth making regarding the proposed outlays for human capital development. First, in view of the profundity of Palestine’s labor market crisis, the scale of the investments being proposed for vocational training and work force retraining are qualitatively incommensurate with the scale of the issues they are meant to address. Therefore, their effects are unlikely to be significant. Second, the various educational initiatives proposed in Peace to Prosperity all assume that a labor supply creates its own labor demand—that the training of a generation of coders, for instance, will translate into a generation of coders happily and appropriately employed. Labor demand and private sector job creation do not, however, automatically respond to changes in the labor supply. For evidence of this, one need only review Palestine’s own recent history; as established therein, increases in the skills and education of the workforce do not necessarily translate into better employment prospects. All of this is a long way of saying that one should be wary of those promising human capital upgrades as the singular solution to labor market crises. In many contexts, such initiatives may simply function so to increase the educational profiles (and expectations) of the unemployed.

Developmental Dangers for Palestine

Even if treated purely on its own terms, then, the course plotted in Peace to Prosperity is one clearly littered with developmental dangers. For Palestine, the plan’s most realistic expected outcome is a prolonged entrapment in a lower income sphere characterized by structural unemployment, hazardous dependence on final consumption, and slow growth—in other words, a continuity with both recent and distant pasts.

UNCTAD’s economists have determined that the establishment of a fully sovereign Palestinian state on all the lands illegally occupied in 1967, in conjunction with a few simple policy reforms, would suffice to double the Palestinian GDP.

It is not difficult, of course, to craft a more viable plan for Palestinian development, as the United Nations Conference on Trade and Development (UNCTAD) has shown. Using rigorous macroeconomic modeling where Kushner et al. assert baseless and self-sufficient facts, UNCTAD’s economists have determined that the establishment of a fully sovereign Palestinian state on all the lands illegally occupied in 1967, in conjunction with a few simple policy reforms, would suffice to double the Palestinian GDP and to bring the unemployment rate down to approximately 10 percent. In other words, these economists determined that the very achievements Kushner promises could be realized in actuality without any need for a miracle investment fund. The causes of Palestine’s de-development, after all, do not lie in “failed institutions and endemic corruption,” as Kushner alleges, but in occupation—in land and resource confiscation, siege, punitive restrictions, fiscal leakage, and the many distortions that have been institutionalized by the Paris Protocol. This being the case, the country need only be liberated from Israeli oppression in order to thrive.

Since Israel’s initial occupation of East Jerusalem, Gaza, and the West Bank, the underlying premise orienting its economic policy toward the Palestinian lands and people has been, in the words of then-Defense Minister Yitzhak Rabin, to “strike a balance between actions that could bring on terrible economic distress and a situation in which (the Palestinians) have nothing to lose, and measures which bind them to Israeli administration and prevent civil disobedience.” Kushner’s proposals are fully in keeping with this tradition. Bound to render Palestine but a Transkei Republic wholly dependent on and dominated by Israel, his plans would see to it that Rabin’s balancing act could be maintained ad infinitum. For its economics, then, as much as for its politics and immorality, it is critical that this White House initiative be resisted in full.

1 These comprise Kufr Qara, Arara, al-Tira, Kufr Bara, Baqa al-Gharbiyye, Umm al-Fahm, Qalansuwa, al-Taybeh, Kufr Qasim, and Jaljulia.