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The Predictioneer’s Game: Using the Logic of Brazen Self-Interest to See and Shape the Future

Page 15

by Bruce Bueno De Mesquita


  One way to change the game is to make costs and benefits change directly and automatically in response to the actions chosen by each player. A self-enforcing strategy solves this problem and can help promote peace and prosperity for each side. Here I would like to use the power of game-theory thinking to propose an important step toward peace between Palestinians and Israelis. It is not a comprehensive peace plan, but it is a way to make peace more likely. What I will say follows logically from game-theory reasoning, but it is not a mere assessment of what is likely to happen. It is a statement of logic in support of a way to end violence. It is a prescription for progress.

  Key to my proposal is the phrase “self-enforcing.” It is an arrangement that requires little or no cooperation or trust between Israelis and Palestinians. The idea I have in mind provides each side with incentives to promote peace and resist terrorism purely in their own interest and utterly without concern for whether it helps the other side. In that sense it follows game theory’s dismal view of human nature.

  My idea is that the Israeli and Palestinian governments will distribute a portion of their tax revenue generated from tourism (and only from tourism) to each other. Before going into the details—where the devil resides—let’s first see why tourist revenue and not any other. Why not, for example, promote peace by setting up joint Israeli-Palestinian ventures, or allowing freer movement between regions, or some other scheme? As we will see, shared tourist revenue provides a nearly unique opportunity.

  The Palestinian Authority (PA) leadership routinely identifies tourism as one of the major pillars of the future Palestine’s economy. This is an eminently reasonable expectation given the vast number of historic and religiously important sites within the current and expected future territory of Palestine. The PA’s gross domestic product in 2007 was $4.8 billion. During peaceful periods, tourism represents more than 10 percent of income, and it could be much, much higher. By comparison, Israel’s GDP in 2007 was over $160 billion. Its tourist revenue was $2.9 billion in 2005 and $2.8 billion in 2006, and it is expected to be around $4.2 billion in 2008. So tourist revenue is a nice but relatively modest source of Israel’s income.

  Tourism has a feature that can be exploited to improve the prospects of peace. You see, tourism and the tax revenue generated from it are highly sensitive to violence. For example, take a look at figure 7.1. The horizontal axis shows the range of violent Palestinian and Israeli deaths resulting from their conflict for the years from 1988 until 2002.2 The scale reflects a range of quarterly deaths from 0 to about 300. The vertical axis shows the number of tourists (in thousands) who visited Israel each quarter between the same period, 1988 to 2002.3 Unfortunately, I have not located comparable tourist data for the PA, but I have found enough to see that the pattern is the same. When violence goes up, tourism goes down, and when violence drops, tourism returns.

  The line in the figure shows the estimated rate of tourist response three months after the reported level of violence, while the dots show the observed amount of tourism in Israel associated with actual violence that occurred three months earlier. Tourism is delayed by three months after observed violence to give prospective visitors enough time to change their plans.

  FIG. 7.1. How Much Does Israeli Tourism Respond to Violence?

  Clearly, more violence means a lot fewer tourists. In fact, on average, every violent death translates into 1,300 fewer tourists and 2,550 fewer hotel bed-nights sold to tourists. There were 53 violent deaths during the typical quarter covered here. That translates into nearly 70,000 fewer tourists in a three-month period suffering average violence compared to the number expected in quarters with no dispute-related violent deaths. Israel averages about 450,000 tourists per quarter, so 70,000 is a serious number. With Israel enjoying about $3 billion in tourist revenue in an average recent year, and an average year having about 280,000 fewer tourists than might conservatively be expected in a peaceful year, that translates into about $500 million tourist dollars lost each year, not counting whatever is also lost by hotels, restaurants, taxis, car rental companies, guides, and so forth on the Palestinian side of the border.

  And what is the Palestinian experience like? As I mentioned, it is harder to get equivalent data for the PA, but still there is plenty of evidence that the picture is grim. For instance, there were about 90 hotels in the PA before the intifada that started in late 2000. By the end of 2001 the number had dropped precipitously to around 75. Naturally, hotel openings and closings result from how much business they do. Figure 7.2 shows the number of hotel guests in the PA for each year from 1999 through 2005, as reported by the Palestinian Authority.4 The intifada produced a quick, intense, and easily anticipated response: hotel stays—and tourism in general—plummeted. Estimates from the PA suggest a loss of 600 million tourist dollars between the second intifada’s inception in September 2000 and July 2002. Annual PA tourism revenue in that same period was only $300 million, so the loss was as large as the total tourist revenue. Keep these numbers in mind. We will return to them.

  With these facts under our belts, we can work through the game-theory logic that points to the attractiveness of tourist tax dollars as a path toward peace. Imagine, for instance, that President Obama’s government or the United Nations presses the Israeli and Palestinian Authority governments to share with each other tax revenues arising exclusively from tourism and then administers the distribution of the funds. Each side’s share of those tax dollars is to be in direct proportion to its current proportion of the total Israeli and Palestinian populations in the PA and Israel.

  FIG. 7.2. Tourism in the Palestinian Authority Since the 2000 Intifada

  The tourist tax revenue arrangement need not last forever. It must include an irrevocable commitment for it to persist for a long time (say twenty years), and it is important that this tax revenue sharing be tied to a fixed formula based on the current populations and not on future changes in those populations. Opening the formula to renegotiation could create perverse incentives. It is also essential that the definition of tax revenue originating from spending by tourists be based on predetermined rules for estimating this source of income. Independent accounting firms might be used to provide a standard way to define and identify tourist revenue and the taxes derived from it. This tax revenue would then be allocated to each side over the agreed duration of the program based on a onetime fixed population-based formula with no questions asked.

  Some tourist-derived tax revenues are obvious. Hotels check the passports of foreign visitors, and so, as we saw, it is straightforward to know how many tourists checked in, what their hotel bills were, and what were the tax portions of those bills. For every foreigner staying in a hotel—whether strictly a tourist or claiming some business purpose—one might stipulate that the taxes on that hotel stay go into the tourist tax revenue pot. It will be necessary to devise a good monitoring system to prevent underreporting, but that is probably something governments already have dealt with.

  Restaurants don’t have as obvious a way of determining who their foreign guests are, but perhaps accountants can find a clever way to approximate the percentage of a restaurant’s taxes that is attributable to tourists. This might depend on the location of the restaurant, the proportion of foreign hotel guests in the area, the location of the bank for payments made by credit card, or many other criteria. The same might be true for shops. Those selling souvenirs, for instance, are likely to have more tourist-based revenue than those selling groceries. At passport control, visitors declare whether the purpose of their visit is business or pleasure. There, too, it is possible to create a revenue formula that approximates how much is spent by those saying they are tourists. Anyway, I am not trying to do the job of accountants, and I certainly am not qualified to do so. Accountants will be good at setting up sensible rules to identify the relevant sources of tax revenue, especially if their fees are also tied to that revenue.

  On the population side, if Palestinians currently make up 40 percent of
the population in the area, then 40 percent of the tourist tax dollars (or shekels, or any other currency) automatically goes to the Palestinian Authority’s recognized government and 60 percent to the recognized Israeli government. Government recognition could be determined by who selects the personnel in the Palestinian and Israeli delegations to the United Nations. This avoids the risk of a dispute over who constitutes the relevant government, since general diplomatic recognition is itself a contentious issue between the Israelis and Palestinians. Just who the Palestinians and Israelis “are” should be defined in terms of people residing in the area and should not include diaspora populations. To include them will result in the meaning of “Palestinian” and “Israeli” being manipulated for political and economic gain. The money distributed is then dictated by how many tourists come and how much they spend, regardless of whether they spend more or less in Israel, Palestine, or disputed territory. Furthermore, there are no restrictions on how the Israelis or Palestinians spend the money received under this program. If leaders invest this money in improving the quality of life for their people, that’s great. If they want to sock it away in a secret bank account, that is between them and their constituents. The key to success is that the money is neither given as a reward for advancing peace nor withheld as a punishment for hindering peace.

  Recall the current situation. Israel expects to bring in about $4 billion in 2008 from tourism and expects, with peace, that this will grow sharply over the next several years. Based on the evidence in figure 7.1, we can estimate that tourist revenue would grow 50 percent relative to what it has been since 2001 if peace prevails. Probably Palestinians in the PA would experience an even greater increase in tourist earnings, as tourism seems to respond more sharply to violence in their region than in Israel. This is not surprising, given that they bear the brunt of the deaths. So, with peace, Israeli revenue would rise from about $4.2 billion in 2008 to (at least) $6.3 billion once a lasting peace was established. Palestinian revenue from tourism would probably increase from $300 million to (at least) $600 million, the amount they earned from tourism in 1999, the year before the second intifada began.

  Current total tourist revenue with ongoing violence is reasonably estimated at $4.5 billion for Israel and the PA combined. With peace, the estimate rises to $6.9 billion. Assuming a 20 percent average tax rate on tourism earnings, this means a tax revenue pot worth $1.4 billion with peace compared to $900 million with ongoing violence.

  Without a tax-sharing agreement and without peace, Israel’s tax revenue (continuing to assume a 20 percent tax take) from tourism is projected to be $840 million in 2008 or 2009, while the PA’s tax revenue from tourism is projected to be $60 million. With a 60-40 revenue sharing arrangement and peace, Israel’s tax take from tourism is projected to be at least $830 million—essentially a wash in terms of tax earnings between war and peace. The PA’s projected tax take under the proposed plan is $550 million, a more than ninefold increase, not to mention an increase in total revenue for the PA of around $1 billion, equivalent to a 20 percent increase in GDP. That’s serious economic growth!

  Okay, so we’ve seen the numbers. Now let’s follow the logical stream. What we have seen is that so long as terrorist attacks or other forms of violence persist at a significant level, far fewer tourists visit Israeli-controlled or Palestinian-controlled sites. When there is significant violence, there will be little tourist income to distribute. Thus, if the Palestinian leadership does not engage in effective counterterrorism, it will get few, if any, funds. It will not be deprived of funds, as it is so often, merely because the Israelis or the international community do not like its policies. Money will not be withheld or payment made contingent on the Palestinians doing what anyone else demands. Money will flow or dry up purely because tourists abhor violence in the places they want to visit. If the Palestinians crack down on the sources of terrorism or other forms of attacks against Israel, then the decreased violence will almost surely be followed by a significant increase in tourism. If tourism increases ever so slightly more than my conservative estimates, decreased violence will mean more tax revenue for both governments.

  Even with my conservative calculations, PA revenue skyrockets and the Israelis lose nothing. Similar gains can be realized if the Israelis control actions by settlers and other groups that may be inclined to foment trouble with Palestinians, leading inevitably to retaliatory strikes back and forth. The governing parties on each side should have the right incentives to prevent that result.

  A failure to engage in effective counterterror or proper policing leaves the status quo in place. Successful counterterrorist policies and effective policing enrich both sides without either side’s having to cooperate directly with the other. Of course, it is likely that collaborative efforts between the intelligence services of each side would emerge to enhance the income of both. There is no mechanism in this proposal by which one side can improve these revenues without also improving the revenues flowing to the other side. That is why the plan is self-enforcing and potentially equally beneficial to both sides.

  Obviously, the Israeli-Palestinian conflict is not only about their respective economies. And equally obviously, many economic incentive approaches have been proposed before, going back at least to the time of Winston Churchill. However, earlier economic schemes assumed investment strategies that required mutual coordination and cooperation, and gave the investing side—the Israelis—the ability to pull the plug if they didn’t get what they wanted. Such approaches fail to assign equal responsibility to the Palestinians and the Israelis for enforcing peace or for punishing violators of the peace. Such approaches also foster a fear of economic dependence in Palestinians employed by Israeli-funded businesses. Sharing tourist tax revenues has none of these limitations. Incentives are symmetric, and the responsibility for enforcement is also symmetric. Violations of the peace by either side mean a loss of revenue for both sides.

  Not only is tourism important for the future PA economy, but the Palestinian Authority’s leaders have also shown that they can and will control threats to the peace that directly impact some forms of income. For example, in the case of the gambling casino in Jericho controlled by the Palestinians, we know that they have successfully secured the road to the casino. That road to casino riches experienced minimal security threats even at the height of the intifada. By securing the road, the Palestinians also ensured the flow of revenues from it. Additionally, we know that the least developed tourist areas in Jerusalem are in the Palestinian quarters, with a similar pattern of underdevelopment of tourist facilities throughout the Palestinian Authority’s territory and in areas in Israel dominated by Palestinian residents. With peace we can expect that international hotel chains, restaurants, boutiques, and other enterprises catering to the tourist trade will grow disproportionately in the underdeveloped areas, thereby making the tie between tourism-generated prosperity and peace all but self-funded in the mid- to long term.

  Finally, sharing tourist tax revenue (recalling that what is shared will by its nature be minimal if there is no peace) will promote a “confidence building” step that requires no trust on either side. It also should promote more counterterrorism efforts from the Palestinian side and probably fewer new settlers on the Israeli side. If this revenue-sharing scheme helps pacify the area and helps promote effective counterterrorism, then the door is opened for more encompassing negotiations over fundamental issues. Terrorist movements, once destroyed, rarely reemerge. The revenue-sharing concept can be a way to move the “peace process” in a positive direction without relying on mutual trust, or even mutual contact, for the time being.

  If religion truly dominates the divide between Israelis and Palestinians, as many believe, then the tourist tax plan will fail to promote peace, but it will reveal who the main impediments to peace truly are. Identifying who exactly is willing to sacrifice their own people’s economic and social well-being for religious or other reasons will make it easier to know with whom
to negotiate and with whom it is a waste of time. That, in turn, can open the way for fragmenting resistance to peace and make subsequent counterterror efforts more focused and more effective. Either way, such a self-enforcing quest for peace is unlikely to make the situation worse, and has a good chance of making it better.

  Some people resist ideas such as my tourist-tax plan because they are sure they can’t work. They think that the cultural divide between Israelis and Palestinians or Jews and Muslims is just too deep to respond to ordinary economic incentives. They think there is a culture of violence that cannot be overcome. They think this even as they see that Northern Ireland is no longer racked by daily explosions and that tens of thousands of former insurgents in Iraq are sticking to their new role as Concerned Local Citizens. Maybe they are right in the case of Palestinians and Israelis, but history does not support their assumption.

  Throughout the long history of Muslim domination of the Middle East until roughly the start of the Second World War, Jews lived better and more freely among Muslims than almost anyplace else in the world. When the so-called Moors controlled Spain, Jews enjoyed the tolerance of the Muslim leadership. That tolerance came crashing down when Ferdinand and Isabella unified Spain under Catholic rule. The basis of Palestinian-Israeli conflict resides, at least for many, in economics, not religion. Religion is a politically useful and easy organizing principle that unscrupulous people use to marshal support, but it is not what the fight was or is primarily about. The fight is about land in a locale where, for most, the economy was historically tied to owning property, just as it is in all traditional societies. The economies in the territories lived in and controlled by Israeli and Palestinians still rely significantly on land, but not nearly as much as they did decades ago. Israel has a modern economy in which agriculture plays a much altered role. The Palestinians aspire to a significant degree to have a modern, service-based economy in tourism. These are the conditions that are ripe for a self-enforcing incentive plan.

 

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