Middle East Peace Bonds: give greed a chance
Or to put it more diplomatically: ‘give financial self-interest a chance’. Why? Because the idealists and ideologues, the politicians, the generals, and the men of religion have failed tragically to end the violence. Perhaps it’s time now to contract out the achievement of peace in the Middle East to the private sector.
It’s largely a matter of focus: we don’t have to be as ruthless as the terrorists, but we do have to be as focussed on what is presumably our ultimate goal: peace in the Middle East. We need to be very clear that this is what we want to achieve, and we need to reward the successful achievement of this goal, rather than activities that are supposedly aimed at achieving it—activities that are often counterproductive, unethical or disturbingly violent themselves.
There are too many people who think their interests lie in keeping the conflict going. Many in governments and non-governmental organisations (NGOs), and most individuals in the Middle East, would like nothing more than to see an end to the violence in the region. But there are many in positions of power or influence who are half-hearted about peace; others who feel threatened by it, and others who, for whatever reason, actively promote violence.
Ideally, then, we need a way of promoting peace that can modify or circumvent these people’s uncooperative or obstructive behaviour. We need to mobilise the interests of the far greater number of people who want peace. We need to find a way that can co-opt or subsidise those people in positions of authority and power who want to help, and at the same time bypass, distract, or otherwise undermine, those opposed to our goal.
Ideally too, we would use market forces. Markets are the most efficient means yet discovered of allocating society’s scarce resources, but many believe that market forces inevitably conflict with social goals: accentuating extremes of wealth and poverty, for example, or accelerating the degradation of the environment. So it is important to remind ourselves that market forces can serve public, as well as private, goals. This article describes a new way of channelling the market’s incentives and efficiencies into ending the Arab-Israeli conflict.
Peace Bonds
Assume that as a long-term policy, governments, institutions and anyone else with a genuine interest in peace put their money where their hearts are and contribute to a fund that would be used to redeem ‘Peace Bonds’. These bonds would be an entirely new sort of financial instrument. Their purpose would be to create a powerful coalition of interests that has a strong incentive to bring about peace in the Middle East. Peace Bonds would be issued on the open market and would become redeemable for a fixed sum only when the number of people killed or injured by inter-communal violence in the Middle East reached a very low level. Importantly, the bonds would make no assumptions as to how to bring about greater peace—that would be left to bondholders.
Normal bonds are redeemable at a fixed date, for a fixed sum, and so yield a fixed rate of interest. Peace Bonds would not bear interest and their redemption date would be uncertain. Bondholders would gain most by ensuring that the targeted definition of peace is achieved quickly.
Under the Peace Bond mechanism governments, with the help of NGOs and charities, would collectively decide on the exact specification of the peace objective, and contribute toward the funds needed to redeem the bonds. The bonds would be issued by open tender, as at an auction; those who bid the highest price for the limited number of bonds would be successful in buying them. Each bond would become redeemable for, say, $1 million once the targeted level of peace, as certified by objective measurements made by independent bodies, had been achieved and sustained. Once issued, the bonds would be freely tradeable.
Assume that Peace Bonds, redeemable for $1 million each, have been issued, and that they each sell for $100 000. People, or institutions, now hold an asset that gave them a return of 900 percent once the targeted peace level had been achieved. It is this prospect of capital gain that would give bondholders a strong interest in ending the conflict, and in doing so as cost-effectively as possible.
Peace Bonds could target different definitions of peace, over a range of geographical areas. But let us look at bonds that target ‘the number of people who are killed by violent intercommunal events within Israel and the occupied territories’, as measured by an independent body. Once issued what would happen? The bonds could be bought by anyone. The Governments of Israel and other countries in the region and elsewhere, including those currently financing violence, might decide to buy Peace Bonds. So too might the militant organisations. Or they might be given them as a form of aid. These bodies are currently the ones that can probably do most to stop the violence, and ownership of Peace Bonds would enable them to reap financial rewards by doing so. They could do this in ways they have not fully explored, because they have had no incentive for to do so. Indeed there are many within government and beyond who have a vested interest in continuing the conflict.
But Peace Bonds could also be bought by other institutions or individuals. If at any time others thought they could do a better job than the governments or military organisations who might own them at first, they would be in a position to bid more for the bonds than their current market value, and buy them from those bodies. They could use their own capital, or borrow on the strength of the redemption value of their bondholdings, or on the strength of any increase in the value of their bonds, to support projects that would help lower the level of violence in the region. Similarly if existing bodies did not want to be actively involved: people in the private sector would buy the bonds instead and work to achieve peace as they saw fit.
Note that the bond mechanism would be helped by the support and participation of the relevant governments and militant organisations, but it would not rely on such support.
What would determine the price of the bonds? Most obviously, the market’s assessment of how close the peace target were to being achieved. Interest rates on alternative investments will also be a factor. The bonds would sell for small fractions of their issue price if people thought there were virtually no chance of the conflict ending within their lifetime. People would differ in their valuation of the bonds, and their views would change as events occurred that made achievement of higher peace a more or less remote prospect. But the bonds, once issued, would be transferable at any time. Bondholders, having contributed to a lessening of the conflict, would see the value of their bonds rise. They could then sell their bonds and realise a capital gain.
The market prices of Peace Bonds would be publicly quoted, just like those of ordinary bonds or shares, and these prices, and their changes over time, would supply helpful information as to how fast the objective were being achieved.
Who would buy the bonds?
Some people might buy Peace Bonds as they would a lottery ticket, or a publicly quoted company share. They would think that the bonds’ value might rise even if they did nothing to help achieve peace. Such passive investors would want to become ‘free-riders’ hoping to benefit from any increase in the bond price without actually participating in any peace building activities. But the way markets work would limit the opportunities for this sort of investor. The more bonds they collectively own, the more remote the targeted peace level would become, and so the more they would stand to lose as the aggregate value of their bond holdings fell. At some point, then, it would become worthwhile for these passive investors either to become, or to sell their bonds to, active investors.
Active investors would finance initiatives aimed at ending the conflict. They could use their own capital, or borrow on the strength of the redemption value of their Peace Bonds, or on the strength of any increase in the value of their bonds, to support projects that help reduce the intercommunal violence. They would have every incentive to co-operate with each other to help achieve the targeted peace objective, and to do so as cost-effectively as possible. Their motivation would arise from the expected capital gain they would experience as the value of their Peace Bonds rose in line with the enhanced probability of the conflict ending.
What could bondholders do?
The lower the targeted level of violence, the more likely bondholders would be to undertake projects that would pay off only in the long term, but note that it would be unsatisfactory to achieve a low level of violence just for a short period. The ultimate objective is a sustained low level of violence, and that is the targeted objective that would have to be achieved before Peace Bonds should be redeemed.
Many bondholders would be in a better position than governments to undertake a range of peace-building initiatives. They might, for example, finance sports matches between opposing sides, promote anti-war programmes on TV, set up exchange schemes for students of the opposing sides. They might even subsidise intermarriage between members of the opposing communities, or try to influence the financial supporters of conflict outside the region to redirect their funding into more edifying activities. They could offer the Palestinians and the citizens of neighbouring Arab countries different forms of aid, including education and scientific aid, and measures aimed at enlightening Arab citizens.
Bondholders could lobby, or work with, the Israeli and Arab governments to, say, give a higher priority to peace studies in schools, but they could also develop peace-teaching projects of their own. While immediate peace might not result, much more could be done to enhance the prospect of peace in the future. Bondholders could, for instance, make strenuous efforts in Israel and the neighbouring countries to have some mixed classes of Jewish and Palestinian children at kindergarten and school. Both groups must have the chance of spending time with each other. At the very least there should be opportunities for the younger people from both sides of the conflict to meet, discuss, argue and form friendships.
Other examples of activities that bondholders could undertake would be:
Lobbying for the elimination of all state-sponsored anti-Israeli and anti-Jewish propaganda, in textbooks, radio, TV, newspapers and the internet; especially in Syria, Lebanon, Egypt and Jordan.
Promoting exchanges between Israel and its neighbours at all levels, to discuss matters of regional importance including: water resources, the environment, economic integration etc. Any agreed outcomes from such talks could be seen as a bonus: bureaucrats talking to each other may or may not achieve very much, but their talking in itself implies a recognition of the humanity of the other side, which would make armed conflict less likely.
Lobbying western countries, including Israel, to give Arab countries preferential trade access to the Israeli market. Doing so would give everyone in the region the chance of economic growth and a better life for their children. It would give them a chance to build trust and take a stake in a peaceful future – a chance that the current Arab governments are largely denying their own people.
Promoting opportunities for the populations of these countries to learn English (and even, eventually, Hebrew).
Promoting genuine democracy in, and foreign direct investment into, the Arab countries.
The rationale for these last measures is again to give the populations of these countries something to hope for other than the destruction of Israel. More positively, it is to open the eyes of the younger people in the Arab countries to the virtues and rewards of democracy and economic growth. If it works for older people too, so much the better; if not, these measures may at least distract them from the current conflict.
These are only examples, of course, though they do illustrate the potential for peace-building initiatives that are largely ignored by those with influence today. In reality, bondholders would be likely to undertake a range of initiatives, the precise nature of which need not be known in advance. It would be up to bondholders to decide on those programmes that would give them the best return for each dollar they spend, and this means they would look for and put into action ways of achieving peace that they believe will be most effective.
Trading the bonds
Peace Bonds, once floated, must be readily tradable at any time until redemption. The operation of such a ‘secondary market’ would be critical to the working of the bond mechanism. Many bond purchasers would want, or need, to sell their bonds before redemption, which might be a long time in the future. With a secondary market, these holders would be able to realise any capital appreciation experienced by their holdings of Peace Bonds whenever they choose to do so. Tradability would make the bonds a more attractive investment in the first place.
As the bonds were traded, they would tend to flow towards those who would be most able to help reduce the violence. In fact, though, an actual flow of bonds would not be necessary. Large bondholders might simply decide to subcontract out the required work to many different agents, while they themselves held the bonds from issue to redemption. The important point is that the bond mechanism would ensure that the people who allocate the finance had an incentive to do so efficiently and to reward successful outcomes, rather than merely to pay people for undertaking activities. At the limit we can conceive of just one single buyer of all the bonds. If this buyer were determined to hold on to the bonds until redemption, then the bonds would function as a sort of performance-related contract, with the backers paying only when the objective had been achieved. The buyer could contract out most, or all, of the work required to achieve the objective, with the incentives given by the Peace Bonds for speedy accomplishment cascading down from the bondholder to those subcontracted to do the work of reducing the violence.
Too large a number of small bondholders could probably do little to help achieve peace by themselves. If there were many small holders, it is likely that the value of their bonds would fall until there were aggregation of holdings by people or institutions large enough to initiate effective peace-building projects. As with shares in newly privatised companies the world over, Peace Bonds would mainly end up in the hands of large holders—be they individuals or institutions. Between them, these large holders would probably account for the majority of the bonds. Even these bodies might not be big enough, on their own, to achieve much without the co-operation of other bondholders. They might also resist initiating projects until they were assured that other holders would not be free riders. So there would be a powerful incentive for all bondholders to co-operate with each other to help bring about peace in the Middle East. They would share the same interest in seeing targeted objectives achieved quickly. So they would share information, trade bonds with each other and collaborate on conflict-quelling projects. They would also set up payment systems to ensure that people, bondholders or not, were mobilised to help build peace. Bondholders would either trade bonds, or make incentive payments to ensure that any proceeds from higher bond prices, or from redemption, would be channelled in ways most likely to end the violence. Large bondholders, in co-operation with each other, would be able to set up such systems cost-effectively.
Regardless of who actually owned the bonds, aggregation of holdings, and the co-operation of large bondholders, would ensure that those who helped build peace were rewarded in ways that maximise the reduction in violence per unit outlay.
Efficient costing
How many bonds would be issued? That would depend on how much the issuers were prepared to spend on the objective. The maximum cost to the issuers would equal the total number of bonds multiplied by their redemption value, minus any revenues gained on floating the bonds. But while the issuers would have to decide on the maximum cost of achieving the objective, they wouldn’t have to calculate the actual cost with any accuracy - that would be done by bidders for the bonds in the open market. For example: if one hundred bonds, each redeemable for $1 million, were issued, this would mean the maximum cost to the issuers of achieving the objective would be $100 million. If, when they were first marketed, they fetched just $100 000 each, the actual cost to the issuers would be $90 million. But suppose the issuers were in the dark about how much it would cost to achieve the targeted objective and instead of issuing one hundred Peace Bonds, they issued one thousand, each redeemable, again, for $1 million. They would then be liable for a maximum cost of $1 billion rather than $100 million. But would-be purchasers market would still reckon that they could achieve the objective for $90 million. So instead of valuing the bonds at $100 000 each, they would bid up the issue price of the bonds to the amount that would involve the issuers’ incurring the same estimated total cost of $90 million, which would be $910 000 per Peace Bond. (Peace Bonds would be an unusual financial instrument, in that the more that were issued, the higher would be their value!) The crucial point is that potential investors in the Peace Bonds would have estimated how much the targeted objective would cost to achieve, and would have every incentive to minimise this cost. They would do this when they bid for the bonds at issue and at all times subsequently until the bonds were redeemed. At the same time, the issuers could put a cap on their total liability by limiting the number of bonds issued.
These facts, and bondholders’ incentive to minimise their costs, contrast with the current system, in which the costs of containing the conflict, if they are estimated at all, are not widely known, nor subject to competitive bidding. A further point is that the issuers could add to the number of bonds in circulation after floating, at any time, if they wanted to boost the efforts going into peace-building initiatives.
Advantages of Peace Bonds
The main advantage that Peace Bonds would have over conventional means of bringing about peace is that they would build a coalition of interests with a strong incentive to reduce violence in the Middle East as effectively and efficiently as possible. Such a coalition would have more freedom to initiate projects that governments and others in positions of power cannot support, or do not wish to support, or do not wish to be seen to support. Holders of Peace Bonds would have incentives to support whichever peace-building initiatives would be most effective. Their objective and that of the governments and individuals who would back the bonds would therefore be exactly the same. The more efficient were bondholders in reducing the level of violence, the more they would gain from appreciation in the value of their bonds. This efficiency would maximise the reduction in violence that could be achieved per dollar outlay.
Of course, many enlightened individuals and organisations are already carrying out valuable peace-enhancing activities. But under a Peace Bond regime many more might be enticed to do so; while very large numbers of people could be encouraged to moderate their opposition to measures that build peace. It would be in the interests of bondholders and those whom they influence to seek out those ways of achieving the targeted level of peace that would give them the best return on their outlay. It would also be in the interests of those, whether taxpayers or private individuals, who would be the ultimate source of funds used to redeem the bonds. Crucially, it would be only when the violence had fallen to the targeted lower level that that the bond issuers would end up paying for these efforts. Until then it would be up to bondholders to finance those initiatives that they believed would bring about reductions in the violence. The issuing body would, in effect, be contracting out the achievement of peace to the private sector. It would still, though, stipulate the definition of peace that it wanted to see achieved and, by undertaking to redeem the bonds, would be the ultimate source of finance for that achievement.
Another significant advantage of Peace Bonds would be their transparency. They would make clear to everybody exactly what would be the real objectives of those governments, NGOs, and individuals that back the bonds. The objective of a Peace Bond issue would be clear and explicit: to reduce the level of inter-communal violence to a very low level.
Further advantages of a Bond regime are:
that funds for increasing peace could bypass corrupt or inefficient governments or, by appealing to their financial self-interest (if they were bondholders, or bribed by bondholders) could effectively modify their behaviour in favour of achieving the peace objective; and
that the backers of the bonds, be they governments (taxpayers), NGOs or private individuals, would pay up only when the targeted lower level of violence had been achieved—any risk of failure would be borne by bondholders, rather than taxpayers.
Some powerful people in governments, religious institutions or militant organisations would resent the targeting of such objectives by external agencies in this way. But, while under the current system they can oppose peace in ways that attract support, under a Peace Bond regime, they would have to openly declare their opposition to peace itself. It is precisely this focus on the outcome of peace—rather than activities or institutions—that would help strengthen the coalition working to achieve it.
By appealing to people’s self-interest, Peace Bonds are likely to be more effective than conventional efforts aimed at reducing violence. In channelling market forces into the achievement of this objective the bonds would ensure a maximum reduction in violence for taxpayers’ outlay.
In today’s emotional climate decision-making is too often reactive. It is too easily swayed by those with a propensity for violence or those who benefit from the conflict, whether financially or emotionally. At the same time, governments can evade or deflect censure on grounds of communal affiliation or patriotism, because the adverse effects of their policies are difficult to relate to their cause. Peace Bonds with their focus on an identifiable outcome and the channelling of market efficiencies into the achievement of an urgent social goal, could be the most effective way of bringing the peace that the people of the Middle East yearn for and deserve.
© Ronnie Horesh, September 2002
Books and articles
Market Solutions for Social and Environmental Problems: Social Policy Bonds, Ronnie Horesh, 2008
Better than Kyoto: Climate Stability Bonds, Economic Affairs, 22 (3), September 2002, Institute of Economic Affairs, London.
Injecting incentives into the solution of social problems: Social Policy Bonds, Economic Affairs, 20 (3), September 2000, Institute of Economic Affairs, London.
‘Investing for the Future’, Ronnie Horesh, UK CEED Bulletin No 35 (September-October 1991).