By Robert L. Pollock.
This article is adapted from an essay in the “2003 Index of Economic
Freedom,” published by the Journal and the Heritage Foundation.
November 27, 2002
In 1996, Mahmoud el Farra returned to the Gaza Strip. He had lived 30 years in
Los Angeles, where he raised a family and built a construction business. He
was precisely the sort of entrepreneur the emerging Palestinian Authority sorely
needed, and in those heady days he built its first modern flour mill.
But the business struggled against competition from Israeli imports, and
PA officials began pressuring Mr. Farra to sell them shares. Led by Mohammed
Rashid, Yasser Arafat’s moneyman, they soon gained control of the company.
Two days later they closed the market to Israeli flour.
Meanwhile in Ramallah, Mohamed Masrouji of Jerusalem Pharmaceuticals
struggled with the large cuts Israeli importers took on the drugs he bought for
his distribution company. Then one of Arafat’s ministers formed a
pharmaceutical distribution company of his own. In one day the official
registered dozens of drugs with the Palestinian Ministry of Health, a process
that often took Masrouji a year, and began importing drugs from Egypt.
But those two maneuvers were finesse jobs compared to what happened to
Mahmoud Hamdouni. Also hoping to cash in on the peace dividend, he bought
30 acres near Jericho, built a gas station, and planned a housing development.
He was then charged with the capital crime of treason, and freed only
after signing over his land to the PA. The Oasis Casino now sits on the
property. “We got rid of the Israeli occupation,” Mr. Hamdouni said in June
2000. “Now we are under Palestinian economic occupation.”
At a time like this, with violence a daily reality and the peace process all but
forgotten, it might seem that a lack of economic freedom is the least of the
But with bread riots becoming almost as common in the Palestinian
territories as anti-Israel demonstrations, many Palestinians see the lawlessness
and economic misery inflicted by Arafat & Company as a major factor in a
“We want to be a democracy,” says Khalil Shikaki, a Palestinian scholar
and pollster. “We don’t want to be a corrupt, mismanaged entity – just another
In its crudest form, of course, the poverty-causes-terrorism argument has little
going for it. If it did, sub-Saharan Africa would be its greatest exporter.
That said, it is likely that mixed with an aggressive quasi-religious
ideology and/or an abiding sense of historical grievance and humiliation,
economic hardship plays a role in spurring people to commit or support heinous
acts. The shocking scenes of jubilation in the West Bank as the World Trade
Center collapsed likely had something to do with this desperate combination.
Appreciation of the rule of law as a central element of economic freedom has
increased greatly over the past 10 years as economists have watched the
countries of the former Soviet Union struggle to emerge from communism. A
decade ago Milton Friedman had three words for countries struggling to make
the transition: privatize, privatize, privatize.
“But I was wrong,” he said last year. “It turns out that the rule of law is
probably more basic than privatization. Privatization is meaningless if you don’t
have the rule of law.”
That makes a lot of intuitive sense. After all, a good chance that you’ll be
“taxed” at 100% is probably more of a disincentive to productive activity than
the certainty you’ll be taxed at 50%. And it would explain how heavily-taxed
and regulated Western Europe remains prosperous, while lawless countries that
collect little or no taxes continue to suffer.
It’s also the central problem identified by Palestinian economist Hisham
Awartani of An-Najah National University in Nablus: “Multinationals and big
firms, even local firms, are appalled at the level of lawlessness in Palestine.”
Palestinian problems with the rule of law may be extreme, but in virtually every
Arab state the whim of an unelected ruler reigns supreme and the constitution,
if one exists, mere words. Arabs have too often been content to blame their
consequent economic decline on others, be it a Zionist conspiracy or mere lack
of First World aid. And where concerted efforts at economic progress have
been made, they have too often been influenced by misguided Western notions
of protectionism, self-sufficiency and socialism.
The fact that many fell within the Soviet ambit during the Cold War didn’t help
either. Egypt’s Gamel Abdel Nasser, for example, sought economic salvation in
big government projects like the Aswan Dam. Meanwhile, the effects of
regulation and bureaucracy on the general business climate were neglected. The
result is that Egypt’s standard of living, which was roughly the same as South
Korea’s in 1950, is now five times lower.
Fortunately, Arabs themselves are starting to recognize the “root causes” of
their problems. Rather than blame a lack of aid from the First World, the Arab
authors of the U.N.’s first Arab Human Development Report identify “the lack
of democratic and efficient governance as a major obstacle to economic growth
… the Arab states need a transparent rule of law, a fair and fast legal system
with a professional judiciary.”
Meanwhile, President Bush is charting a new course for American policy in the
Middle East, based on democracy and the rule of law.
If he succeeds in his efforts to bring change to Palestine and Iraq, it
could be precisely the sort of exogenous shock the Arab world needs, spurring
calls for reform throughout the region. The president’s proposed Millennium
Challenge program offering billions in aid to countries that promote economic
freedom could help too.
Arabs do not lack the desire for freedom – about 50% of adolescents polled say
they’d like to emigrate to the West according to the UNDP. They do not lack for
talent, as the countless success stories of those who have already done so
attest. And they do not lack an understanding of markets, as anyone who’s
ever visited an Arab souk would know.
It’s just that bureaucracy, corruption and uncertainty make it difficult to
build a business bigger than a market stall. If accountable government and the
rule of law could be brought to the region, fortunes could change very rapidly.