The Israeli-Palestinian “peace process” seems to be in trouble. The due date for the redeployment of Israeli forces in the West Bank to allow for election of the Palestinian governing authority has long come and gone. Expanded construction in “Greater Jerusalem,” land grabbing by settlers throughout the West Bank, bombings and killings on both sides, all presided over by two leaders whose authority is weakening, Rabin and Arafat, do not augur well. An analysis of the underlying forces that brought about the peace process can support some cautious optimism about its outcome, but it would be useful to replace the term “peace process” with “decolonization,” a term that describes more accurately what is actually taking place on the ground.
Decolonization is preferable for two reasons. First, the notion of a peace process suggests a mutually agreed-upon process undertaken by two sovereign entities. This has already given rise to unrealistic expectations on both sides. The inevitable frustration is a major element in the difficulties encountered by the process at the moment. Decolonization, by contrast, a process whereby a new political entity is created out of the territorial contraction of a presently existing one, has historically been a difficult, brutal and bloody process.  Second, decolonization is one stage in a longer process of colonization, and can be understood only in that context. The outcome of decolonization has usually been neocolonialism — that is, continued domination by the former rulers through mostly economic rather than mostly political means.
If we think of the current process as decolonization, it becomes clear how this is but one element of a larger process of liberalization currently underway in Israeli society. Liberalization entails changing the locus of domination from the state to the market, and in that sense domestic liberalization makes decolonization of the Occupied Territories a structural imperative. To put both of these developments in context, we need to look at Israel society as it evolved prior to the present stage.
As a democratic frontier society, the Israeli polity has operated, since its inception, under two partially contradictory imperatives: the exclusionary imperative of settlement and nation-building and the universalist imperative of democratic state formation. As a result, a fragmented, hierarchical citizenship structure has emerged through which the various ascriptive groups within the Israeli control system were differentially incorporated into the society. This citizenship structure enabled the society to sustain the tension between exclusion and universalism so long as the mobilizational capacity of the state was high and resistance on the part of the lowest-placed ascriptive group — non-citizen Palestinians — was low.
The political institutions and political culture of the yishuv (pre-1948 Jewish community in Palestine), which served as the foundation for the Israeli state, evolved in response to and in the context of the Jewish-Palestinian conflict. The yishuv was an ethno-republican community organized to achieve a common moral purpose — the fulfillment of Zionism. Its civic virtue, halutziyot (pioneering), was a composite of two qualities which corresponded to the two bases of legitimation invoked by the Zionist settlers: Jewish historical rights in Palestine and the “redemptive” activity of the pioneers — physical labor, agricultural settlement and military defense. Being a halutz meant, first and foremost, being a Jew, and then engaging in those activities. This process laid the foundation for distinguishing between the civic virtue not only of Jews and Palestinians, but also of different groupings within the Jewish community, based on their presumed contributions to the project of Zionist redemption. 
The yishuv was also a democratic republican community, in that individual rights and the procedural rules of democracy were widely respected. This was mandated by the yishuv’s semi-voluntary nature and the need to keep all Jewish social sectors within its bounds, for demographic and legitimational purposes. When the state of Israel was founded in 1948, a new ethos, mamlachtiyot, was invoked to legitimate the transition to statehood, This ethos emphasized the shift from sectoral interests to the general interest, from semi-voluntarism to binding obligation, from foreign rule to political sovereignty. Equal application of the law was of paramount importance if the state was to assert its authority over the various Jewish social sectors, which had enjoyed a large degree of autonomy in the yishuv.
Uniform rule of law did not entail, however, a neutral “nightwatchman” liberal state. The state would continue to be committed to the values of halutziyot and to demand such commitment from its citizens. Mamlachtiyot was not meant to displace the legitimating ethos of pioneering or to abandon the settlement project. Quite the contrary: It was meant to endow citizens with the organizational and political resources of a sovereign state. And individuals and social groups were to continue to be treated by the state in accordance with their contributions to the common good as defined by the Zionist project.
The democratic tradition of the yishuv, the vital integrative function of the rule of law, and the keen interest shown by the international community in the new country’s affairs, all combined to ensure the grant of citizenship to all residents of Israel, Jews and Palestinians alike. But the meaning, or more accurately the various meanings, of this citizenship are not immediately revealed by its formal characteristics. These meanings have to be “unpacked” by deciphering, first, the prevailing discourse, or discourses, of citizenship, and then the actual social practices which endow the notion of citizenship with its workaday content.
Israeli citizenship discourse has consisted of three different layers, superimposed on one another: the liberal discourse of civil, political and social rights; the republican discourse of community goals and civic virtue; and the ethno-nationalist discourse of inclusion and exclusion. The most universalistic of the three is, of course, the liberal one, but even it describes only a partial aspect of the meaning of civil, political and social rights. For in reality these rights establish not only entitlements but mechanisms of surveillance and control, and arenas of political contestation as well. Thus the precise meaning of citizenship and non-citizenship in each social context — that is, the extent to which either of them empowers or disempowers individuals and collectivities in society — is subject to political negotiation and struggle.
In Israel, the differential allocation of entitlements, obligations and domination proceeds in a number of stages. First, the liberal idea of citizenship functions to separate the citizen Jews and Palestinians from the non-citizen Palestinians living under Israeli rule. Then the ethno-nationalist discourse of inclusion and exclusion is invoked to discriminate between Jewish and Palestinian citizens within the sovereign state of Israel. Lastly, the republican discourse is used to legitimate the different positions occupied by the major Jewish groupings: Ashkenazi (European) vs. Mizrahi (Eastern), males vs. females, secular vs. religiously orthodox.
Liberalization of Israeli Society
This fragmented citizenship structure derived from, facilitated and depended upon a highly intrusive but formally democratic state, engaged in intensive mobilization and control of societal resources both directly and through the Histadrut. Aside from being an umbrella labor organization, the Histadrut, together with the Jewish National Fund (JNF), was a pillar of pre-state Labor Zionist colonization policy designed to establish an exclusively Jewish economic sector in Palestine. The aims of the JNF and the Histadrut were the removal of land and labor, respectively, from the market, closing them off to Palestinian Arabs.  The resultant Jewish economic sector gradually developed into an economic empire encompassing, at its height, agricultural, industrial, construction, marketing, transportation and financial concerns, as well as a whole network of social service organizations. Until recently this conglomerate has operated under the aegis of the Histadrut, and as long as the Labor Party was in power (1933-1977) it enjoyed the support, first, of Zionist institutions and then of the state as well. At the same time, this economic infrastructure played a crucial role in maintaining the political and cultural hegemony of the Labor Zionist movement, thus ensuring the privileged position of a large segment of the veteran Ashkenazi community.
Over the years, however, Israel’s economic development, funded to a very large extent by externally generated resources, has weakened the state’s and the Histadrut’s economic con- trol in favor of private business interests.  This sectoral shift has affected the fortunes of the younger members of the veteran Ashkenazi Labor Zionist elite. If the second generation of leaders of the Labor Zionist movement (such as Rabin and Peres) made their careers in the various public bureaucracies, the third generation, those who have come of age since 1967, were drawn to the private sector. They have been the principal champions of political and economic liberalization, and of the integration of Israel’s economy with the world market through the reduction of tariff and administrative barriers. Since Labor’s return to power in 1992, this group, which operates politically primarily through Labor’s neoliberal wing, headed by Haim Ramon, Yossi Beilin and Avraham Burg, as well as through Meretz, has been working assiduously to dismantle the Histadrut and the public-sector economy in general, and to undermine the welfare state.
In the last few years, drastic liberal reforms have been instituted in key areas of the economy and society. Among the most significant are:
• Privatization of the economy. The Histadrut is no longer a major owner of productive resources, and has recently lost control over its Sick Fund. The state is divesting itself as rapidly as possible of its economic assets, even in security-related industries such as arms manufacturing and military research and development.
• Health care reform. On January 1, 1995, the state took over financial control of the ailing health care system, which will now be financed through a health tax rather than through voluntary membership fees in the various sick funds. In a different social context, such as in the US, this may sound like a major expansion of the welfare state. In reality, in spite of the universalization of health care coverage entailed by it, this act signifies a retreat of the welfare state and a major step towards the privatization of the health care system. Until now, the different sick funds, and primarily the one owned by the Histadrut, provided health care services on a deficit financing basis, with the state covering their deficits each year. From now on, while the existing sick funds will continue to provide health care services, they will be required by law to operate within an authorized budget limit. This means an inevitable deterioration of services, to be picked up by private health providers for those who can afford to pay. In addition, the new law forbids the sick funds to make their own membership contingent on membership in any other organization. This severs ties between the Histadrut and its Sick Fund (which currently provides health care services to 70 percent of the population, down from 90 percent two decades ago), depriving the Histadrut of its most important means of attracting members.
• Education. The education system has shed all pretense of providing quality education on an egalitarian and (intra-Jewish) non-discriminatory basis. Under the ideological banners of “excellence” and “parents’ choice,” the system is becoming openly multi-tiered, with decent education for children whose parents can afford to pay and sub-standard education for all others.
• Constitutional changes. These can be grouped under two headings: electoral reform and human rights legislation. The electoral system has long been under strong pressure to “Americanize” — that is, to institute progressive-type reforms. So far, two important changes have been instituted: intra-party primary elections, and personal election of the prime minister by the entire electorate (making the prime minister a semi-president, US style). The effect of these changes is to reduce the power of political parties and increase the influence of large donors who can help finance electoral campaigns. Rabin’s current troubles with his party, including his cabinet ministers, stem from the fact that these politicians have become free agents, each required to be elected on her or his own in the primaries.
In the human rights field, two important Basic Laws (which enjoy constitutional status) have recently been enacted: one is entitled “Human Dignity and Freedom,” and the other “Freedom of Occupation.” By some interpretations, these two laws together constitute no less than a “constitutional revolution,” and will allow, for the first time, judicial review of primary legislation. The rights guaranteed by these laws have to be interpreted, according to Israel’s Supreme Court, in light of the country’s values as a Jewish and a democratic state. This will, of course, limit their applicability in the areas of religious freedom and the rights of Israel’s Palestinian citizens, not to mention those of non-citizen Palestinians. More importantly, however, the rights guaranteed by these two laws are civil and political rights only, including the right to property, but not social rights. Thus these laws threaten to undermine the entire edifice of Israel’s relatively progressive labor relations and social welfare legislation.
The liberal economic, social and political values reflected in these changes are rooted in the liberal discourse of citizenship rather than in the ethno-republican discourse of pioneering civic virtue. The social group responsible for these changes — upper middle-class, third-generation veteran Ashkenazim — has also provided, through Peace Now, the main opposition to Likud’s efforts to legitimate the de facto annexation of the Occupied Territories and its 1982 adventure in Lebanon.
Peace Now was established in 1978. Its founding charter was the “Officers’ Letter,” a petition addressed to Prime Minister Menachem Begin calling on him not to miss the opportunity for peace provided by Egyptian President Anwar al-Sadat’s 1977 visit to Jerusalem. The letter was signed by 348 veterans of elite military units — all Israeli citizens, all Jews, all male, the vast majority of them secular Ashkenazim holding officer rank in the military reserves. Most of the signers were students or members of kibbutzim at the time; most of them have since graduated into the business, academic or political sections of the elite. It is perhaps significant, at least on the symbolic level, that Omri Padan, a founder and early leader of Peace Now, today owns the McDonald’s franchise in Israel.
From Liberalization to Peace
The chronological proximity in the appearance of Peace Now and the Israeli-Egyptian peace treaty signed in 1979 provides a fair indication of the social basis of the current peace effort as well. With the structural changes in the economy and in their own personal fortunes, the institutional edifice created by the labor movement around the Histadrut and the state has come to be seen by third-generation Ashkenazim as a hindrance, rather than a boon, to their own economic wellbeing. As a business and educated elite, they feel confident enough to compete in the open market, both domestically and internationally. Their concern is no longer to be protected within this market but to expand it as much as possible.
But the international opportunities open to Israeli businesses, both in terms of their own operations abroad and in terms of foreign investments in Israel, have been limited because of the Arab-Israeli conflict. The Arab boycott and general considerations of economic and political expediency made cooperation with Israeli firms risky for many foreign companies. For 20 years the occupied territories provided a partial substitute for the international market and a clandestine outlet to the Arab world. But the economic benefits of the occupation — a cheap and reliable labor supply and a captive market — were sharply reduced by the intifada. The costs of the occupation to the Israeli economy have come to overshadow its benefits.
For these reasons, settling the conflict — meaning, in effect, decolonization of the Occupied Territories through accommodation with the PLO — became an economic necessity for the Israeli business community. Indeed, since the Oslo agreement, many foreign markets that had been closed to Israeli firms, in the Middle East and beyond, have opened up. This process is only beginning, and its continuation depends, ultimately, on the continuing progress of the peace process. Thus two leading Israeli economists, generally bemoaning the slow pace of privatization, recently concluded that “there cannot be a better companion to aliya [Jewish immigration] in boosting long-lasting growth and economic prosperity than genuine peace in the Middle East.” 
The Israeli business community’s unquestionable support of the peace process is motivated, then, by two principal considerations: their interest in reducing the size of the state, including the state-like Histadrut, and their desire to integrate into the international economy. The terms of Israel’s decolonization of the Occupied Territories is a separate issue altogether, which currently presents itself as a question of economic relations between Israel and the Palestinian Authority. On this issue, individual businesspeople may differ among themselves and may be at odds with the government. Here their positions depend on their types of business, the size of their firms, the extent of their dependence on Palestinian labor (now rapidly being replaced by workers from outside the region) and their fear of Palestinian competition. By and large, the owners of smaller firms in the more traditional industries favor political decolonization without economic decolonization, while the larger, technologically advanced producers and financial capitalists are not particularly concerned with this question at all.
As amply demonstrated by historical experience, economic liberalization, so long as it occurs under conditions of relative prosperity, is best served by parallel political liberalization. In the Israeli context, this would require not only peace with the Palestinians but universalization of the citizenship structure as well, in order to reduce ethnic discontinuities which interfere with the smooth operation of the market. Israel’s citizenship structure could not be universalized, however, without first removing the most glaring inconsistency within it — the existence of about 2 million non-citizen Palestinians who are deprived of their rights in the Israeli control system. This provides an additional reason for ending the occupation.
Needless to say, opposing forces are operating in the society as well, and the outcome of their conflict with the peace forces cannot be predicted with absolute certainty, at least not in the short run. What can be confidently stated, however, is that the combination of “pull” factors — the trajectory of Israel’s development over the last two decades — and “push” factors such as the intifada make the chances for a decolonization of the Occupied Territories much better than even.
 Ian Lustick, Unsettled States, Disputed Lands: Britian and Ireland, France and Algeria, Israel and the West Bank-Gaza (Ithaca: Cornell University Press, 1993).
 Yoav Peled, “Ethnic Democracy and the Legal Construction of Citizenship: Arab Citizens of the Jewish State,” American Political Science Review 86/2 (June 1992).
 Gershon Shaflr, Land, Labor and the Origins of the Israeli-Palestinian Conflict, 1882-1914 (Cambridge: Cambridge University Press, 1989).
 Michael Shalev, Labor and the Political Economy in Israel (Oxford: Oxford University Press, 1992).
 Assaf Razin and Efraim Sadka, The Economy of Modern Israel: Malaise and Promise (Chicago: University of Chicago Press, 1993).