Upon leaving the World Bank on May 31, 2005, Wolfensohn became special envoy for Gaza disengagement for the Quartet on the Middle East, in which he was to help coordinate Israel's planned withdrawal from the Gaza Strip and to spearhead reconstruction efforts as the Palestinians assumed sovereignty over the area. Citing frustration with the stymied road map process, he announced that he would not continue on past his original one-year commitment, and left the post on April 30, 2006.
The Media Line: When Israel unilaterally pulled out from the Gaza Strip, there was a sense of cautious optimism that you apparently shared. What went wrong?
Wolfensohn: Well, I think that two things went wrong. We established a basis for economic activity in Gaza, which had intended to be based first on agriculture, taking over the greenhouses that had previously been used by Israelis in the area. And secondly, a major potential for tourism, because the coastline is wonderful and really could be a place for both Israelis and Palestinians to have holidays. So we started growing the first crops and we had plans, beautiful plans for hotels and development in the region and then very sadly, violence broke out and that inhibited both things...
And the second thing was, once the violence started, the [Israeli] military then closed the border for all but the most essential items. So the greenhouses, which had started with such hope, became impossible to develop, because they were growing far too many fruits and vegetables for local consumption. And so they were just rotting, and it was tragic to see.
So without economic activity and without travel, you couldn't have hotels, you couldn't fulfill any of the dreams. So it was a wonderful dream for a short while, which had included linkages between Gaza and the West Bank, which had included a port, which had included getting the airport going again. We had so many hopes and very sadly, the violence killed it.
Israelis who opposed additional territorial concessions point to the Gaza withdrawal as their proof positive that Hamas militancy is unrelated to land. How do you respond?
I think that's not correct. There was a moment - and I'm not totally naÃ¯ve because I have visited 130 countries and worked in some of them, post-conflict zones. I believe if you can get economic activity going, you have a basis for not only development, but for peace, and I think most people want peace.
I personally don't think that Hamas at that time was setting out to blow the whole thing up. I think there were mutual mistakes made. Maybe the Gaza withdrawal was premature in terms of preparing the public. My own view was there was a tremendous desire on the part of the Palestinians who were in Gaza to have a peaceful and real economic development.
I do not say for a moment that there were not extremists who would have wanted to blow it up, both emotionally and physically, and that there were not people who didn't want to see peace. I have no doubt that there were some, just as there were on the Israeli side who didn't want to see the development of this location. But several things happened. We had the sickness of the prime minister [Ariel Sharon] here. We had a change in control of the Palestinians, an election [that Hamas won in January 2006] and I'm afraid the dreams we had that November  were not fulfilled.
We see numerous examples of private-sector entrepreneurs investing in Palestinian entities. We even see Israelis participating in some cases. Can private-sector investment become a stronger force in promoting cooperation than governmental obstacles are in preventing it?
I don't know if it can be a stronger force, but it is a growing force here. Even in the last year or two, while I have no official position, I have been engaged in discussions with both Israelis and Palestinians, to inform me of initiatives that are already being taken, a lot of them under the radar screen. But I think it's hugely important that they continue. And basically you should understand that the majority of Israelis and the majority of Palestinians would like to have peace and would like to have business.
It's not always reflected in the leadership and in public policy, but all the polls show, or have shown up until now, that the average Israeli and the average Palestinian would just like to get on with it. And get rid of all the tension and get back to living. And that's not a surprising human reaction.
In this region, you hear over and over about the political process. Do you think the economic process is going to prevail, the one that's going to create a Palestinian state?
I think it's a very important consideration and it has a major chance of helping things. But if you have a million plus people living behind a wall, with nothing going in and out, unless it's in tunnels or unless it's for hospitals or for emergency use. And if you have 60 percent unemployment, that is not a recipe for any sort of future, except anger, frustration and violence.
Politically, if both sides stand on their red lines and don't budge an inch, how can they continue in the process?
Well that's why I feel that I, in the period that I was here, failed, because we had that hope of peace and everyone was thrilled with it and then it collapsed and then, for various reasons, the negotiations did not take a form that I'd hope they might, and both sides went their own way. In my opinion, now not involved in any official capacity, just as a citizen of the world if you like, I think that is tragic because if it goes that way, you will never have peace.
We hear politicians speak endlessly about separation... Do you argue that peace demands separation or cooperation?
Peace, I think, demands both things. I think you want to give a sense of security to the people on both sides. My experience with Arabs and my experience with Jews is that they are not terribly different. They all love their families. They all want to have a quiet life and their instinct is not to go out and shoot somebody. They've lived together for generations, for centuries and they didn't shoot each other. They may have had differences but they didn't shoot each other...
But if you add to that a dimension of politics, which in turn affects the financial outlook for the people, you can have a high education rate, but if you're educating people for unemployment, that is not a great recipe for peace. It never has been in any part of the world and it certainly isn't here.
So, I only see the problem only getting worse unless you want to see a state with a wall around it, and a wall is nothing. A wall keeps out people but it doesn't keep out violence. It may keep out human violence but it doesn't keep out rockets, it doesn't keep out aspects that can destroy.
[Palestinian Authority] Prime Minister Fayad's call for a two-year time table in which to firm up infrastructure and ultimately declaring statehood appears to be gaining support... Is the Fayad plan realistic? Do you support the idea of setting a time table?
Well, I haven't seen Salaam [Fayad] to discuss this. I have an enormous regard for him personally and would count him as a friend. I think what he's done is very intelligent because he said, "Let's not complicate things with the politics at the moment, let's try to build infrastructure for peace and let's make incremental steps." And of course, he succeeded in doing that with four cities in the West Bank, which now have their own police, which now don't have an Israeli presence other than occasionally to deal with some radicals or intruders or something.
Police, but no judicial system.
No, they don't have it yet. But Salaam would like to have that. He would love to have a functioning judicial system. But the truth is, you have an extraordinary group of Palestinian jurists, many of them trained in the United States, and the young people that I met in my short year of working on this, I would have had the Palestinian team for my own team in a moment. There were a dozen of them and they were trained at Harvard and Oxford and you couldn't have a more intelligent, exciting, global group. These were not radicals, these were people like their Israeli counterparts.
Is the time table realistic?
Well it depends what he's trying to do... But I think to carve out a two-year period in which you say, "I am not going to be affected in terms of my economic planning and my structural planning by prior concerns about the politics," would seem to me to be a very smart move.
He may or may not achieve his political objective, but he will do much better at his economic objective, and if he does that, the standard of living and the hopes and aspirations of people in the West Bank will support a more modulated and a more moderate response. So I think it's incredibly smart... I have a high regard for Mr. Salaam Fayad. I think he understands the truth and that's what he's doing and I think it's very smart.
Can Palestinian statehood be sustainable if its financial paradigm remains a donor mentality rather than investment?
I don't think the state of Palestine, if you have peace, will have anything other than an investment mentality. There are many Palestinian entrepreneurs right through the Arab world. I meet them everywhere, in banking, in finance, in industry... So they're not a people that needs to be pitied. These are people that need opportunity.
You've spoken eloquently about the need for a clean and effective government as an indispensable element necessary to sustain a state's economy. How far away is the Palestinian Authority from that description and does the bifurcation between Fatah and Hamas allow room for that?
I think there are, sadly, many countries in the world that are affected by corruption. Probably every country has some in fact, even Israel. The question is, to what extent is there corruption and to what extent can you operate even if there is an aspect of corruption?...
At the World Bank, I launched a major campaign against corruption... In Palestinian territories and in many countries, it is thought that there is a high level of corruption. I believe in some aspects it is. I believe you have even corrupt ministers in Israel. It's a terrible word, but to try and label the Palestinians or Arabs as corrupt without thinking that oneself has the same problem, is a trap that we shouldn't fall into.
Prime Minister Netanyahu speaks frequently of the need for Israel to help sure up the Palestinian economy. Some argue he does so in order to deflect the political endgame. But does it matter - if the result is Israeli cooperation on the economic front?
I think it's important to have economic cooperation as an element of peace. I have no personal knowledge of what would be the reason for Prime Minister Netanyahu saying what he says. I hope that what he says is consistent with a two-state solution, with some pride and with some courage, he announced I think three months ago that he was prepared to do so. For a sitting prime minister here that's a pretty gutsy thing to do. But it set the basis for the discussion...
What I think the Americans and others would like to see is a framework to get on with it quickly. But again I repeat, as a non-Israeli and a non-Palestinian, I am always very reluctant to give advice to the two peoples. But what you can say as a matter of generality is that you're much more likely to have less conflict and a more creative society, if you don't have war. It's not a genius comment. But if you don't have war and you don't have terror, than you don't have bombs going off and people are happier and they can actually do something.
Part of the Middle East mantra has always been that the parties themselves need to make the decisions. But many are now arguing that there needs to be more aggressive brokering, particularly by the United States. Is "tough love" productive or counter-productive?
I know the players and I would hope that to the extent that the United States has an influence, it can wield it to at least confront the players with the reality of what they're doing, by either negotiating or not negotiating... and there is a desire on the part of the American administration to have negotiations without preconditions.
As I understand it, they are discussing at the moment how long they won't build houses, or how long there will be a balance in terms of the building in various areas including Jerusalem. They are the same issues we discussed when I was there and regrettably, they are same issues that have been discussed for decades probably... You have to look forward and say, "What chance is there for having a greater opportunity for peace 10 years from now, 15 years from now, 20 years from now, then you have today?" I think the American position is, looking at it as a friend, is, get on with it today, don't wait.
The fact that you happen to be Jewish, does it help or does it hurt your intervention in the Middle East?
My personal experience is that it had absolutely no impact whatsoever. It had no impact whatsoever in the Arab world. They called me a cousin. I never had 30 seconds of embarrassment about being Jewish. I'm a Conservative Jew. I am very open about being Jewish. I've had many Arabs to my home on Friday nights and I lead an absolutely normal life and never regard being Jewish as a problem. And it was never a problem for me in the Arab world.
Many don't think they can solve the Middle East political process. Looking ahead 10 years, where do you want to see the Israelis and Palestinians?
I would like to see them living in peace side by with secure boundaries, with interdependence, and with the young people playing soccer together and playing games together and attempting to build a society that will probably never be fully integrated, but that is more like the Palestine-Israel situation 10 years ago.
We had Palestinians working in Israel. We had Israelis setting up plants in the Palestinian territories where together they could use their collective skills and experience to compete in the region and around the world. For this tiny group of Israelis and Palestinians, I think the one thing they do have is intellect and entrepreneurial spirit, and if you can get out of the way shooting each other, it seems to me that together they can build a much brighter future for their kids.
James Wolfensohn, thank you so much for your time and inspiration.