One often-cited key to peace between Israel and the Palestinians is economic development. To that end, there seems to be broad agreement about the importance of extending development aid to help the Palestinians build the physical and social infrastructure that will enable the emergence of a sustainable, prosperous society. But few have seriously questioned how much money is sent and how it is used.

Such assistance will only promote peace if it is spent to foster tolerance and coexistence. If it is used to strengthen intransigence...