The MacNeil/Lehrer NewsHour

MR. MacNeil: Good evening. A war of words at the Mideast peace conference leads the news this Thursday. Syrian and Palestinian delegates demanded the return of all occupied territory and an end to new settlements. Israel said such demands would put a quick end to the talks. We'll have details in our News Summary in a moment. Judy Woodruff's in Washington tonight. Judy.

MS. WOODRUFF: On the NewsHour tonight, the Middle East peace conference is our first stop. After all the parties have their say, Charlayne Hunter-Gault talks to Egypt's foreign minister and we bring in analysts from the West Bank, Israel, Lebanon, and the United States. Then it's on to domestic issues and the money troubles hitting state and local governments. We have documentary reports from Massachusetts and Texas. NEWS SUMMARY

MR. MacNeil: Bitter words and sharp differences dominated the second day of the Mideast peace conference in Madrid. Most of the disagreements were familiar ones over the issue of land. In strongly worded speeches, Arabs and Israelis each asserted rights to the disputed occupied territories. At the opening of today's session, Israeli Prime Minister Shamir said the issue is not territory but our existence. Later, Syria's foreign minister said there would be no acknowledgement of Israel's legitimacy without territorial concessions.

FAROUK AL-SHARAA, Foreign Minister, Syria: [Speaking through Interpreter] Peace and the hesitation of the land of others cannot co-exist. Every inch of Arab land occupied by the Israelis by war and force, the Golan, the West Bank, Jerusalem, and the Gaza strip must be returned in their entirety to the legitimate owners.

YITZHAK SHAMIR, Prime Minister, Israel: You know our partners to the negotiations will make the territorial demands on Israel, but as an examination of the conflict's long history makes clear, its nature is not territorial. It will be regrettable if the talks focus primarily and exclusively on territory. It is the quickest way to an impasse.

MR. MacNeil: Shamir made no mention of the controversial Jewish settlements in the territories. That brought an angry reaction from the head of the Palestinian delegation.

HAIDAR ABDEL-SHAFI, Palestinian Delegate: The settlements must stop now. These cannot be waged while Palestinian land is confiscated in myriad ways and disturbance of the occupied territories is being decided each day by Israeli bull dozers and barbed wire. This is not simply a position. It is an irrefutable reality. Territory for peace is a travesty and territory for illegal settlements is official Israeli policy and practice. The settlement must stop now.

MR. MacNeil: Another Palestinian delegate said Shamir's hard line had set back hopes for peace. The Palestinians also repeated their demands for an independent state, something Israel has rejected, but they formally accepted some interim period of limited self-rule in the occupied West Bank and Gaza Strip. A senior Israeli official at the talks said what Arabs proposed today would amount to the dismantling of Israel. But despite the hard words, Israeli officials said the first round of face to face negotiations would begin in Madrid on Sunday or Monday. We'll have more on the talks later in the program. Judy.

MS. WOODRUFF: The White House today praised the Federal Reserve for allowing its key interest rate to fall. Yesterday the Federal Fund's rate dropped 1/4 of a percent to 5 percent. That's the rate banks charge each other for overnight loans. White House Spokesman Marlin Fitzwater predicted that even lower rates would follow. Two weeks after he vetoed a bill to extend unemployment benefits to people whose payments have run out, President Bush today said Congress should act quickly to help the needy. The President said the plan he vetoed to extend benefits an additional 20 weeks cost too much and increased the budget deficit. He spoke to reporters this morning during a picture taking session with Republican leaders.

PRES. BUSH: I have been saying all along that I want to sign an unemployment benefits package and I want it to be one that does not bust the budget agreement. I want a temporary program that takes care of the people that are hurting out there, and there are people that are hurting, and I've said this all along, that I'm very much concerned about it. I want a temporary program. I want to live within the budget agreement so we do not increase interest rates on everybody and thirdly, I want one that does not raise taxes only to make the economic problems worse.

MS. WOODRUFF: Senate Majority Leader George Mitchell said Democrats "will not accept any level of insurance coverage less than that provided in the bill the President vetoed." He offered this reaction to Mr. Bush's remark.

SEN. GEORGE MITCHELL, Majority Leader: The President has had two opportunities to sign unemployment insurance benefits legislation and he has rejected both. So his words today contradict his actions in the past. But for the President, those millions of American families who now have exhausted their benefits and are unable to receive additional benefits, they would have been receiving them but for the President. So the statement by the President today, of course, is contradicted by his past actions.

MS. WOODRUFF: Communities along the Atlantic Coast were hit with hurricane force winds and surging tides last night. Thirty-five foot waves smashed sea walls and flooded streets from Maine to North Carolina. Four people are reported missing. The storm damaged homes on New York's Long Island and Cape Cod in Massachusetts. There was also severe damage to more than 100 seaside homes in Maine, including President Bush's vacation house in Kennebunkport. The President and Mrs. Bush will go there on Saturday to look at the damage.

MR. MacNeil: Rescuers have spotted wreckage and survivors from the Canadian military transport plane which crashed yesterday near the North Pole. A spokesman for the Canadian Armed Forces said there were 18 people on board. It's not known how many survived or what their condition is. Rescue efforts have been difficult because of poor visibility from blowing snow and the fact that the area is in darkness nearly 24 hours a day.

MS. WOODRUFF: Theater producer Joseph Papp died today at the age of 70 after a long battle with prostate cancer. He founded the New York Shakespeare Festival which was the birthplace of many Broadway hits and Pulitzer Prize winning plays, like "A Chorus Line," the longest running show in Broadway history, as well as "That Championship Season." His outdoor productions in Central Park included revivals of all of Shakespeare's plays. That's it for the News Summary. Just ahead, is there any give and take behind the hardline positions at the Middle East peace conference, and Massachusetts and Texas struggle with the recession. FOCUS - ELUSIVE PEACE

MR. MacNeil: We begin tonight with the Middle East peace conference, focusing both on what's been said publicly and the prospects for progress in quiet, diplomatic negotiation. Much of what's been said publicly so far has had a familiar ring to it. Today each delegation went out of its way to make that point to reporters covering the event. Delegation members were detailed to brief the media and to react to the speeches delivered at the conference. Here's a sampling of those briefings.

KAMAL ABU JABER, Foreign Minister, Jordan: I was really sad as I listened because I had hoped that after 40 years of suffering on both sides, after seven wars, that there would be some, a new tone, new regimen, new ideas presented, but to repeat old cliches over and over again, I know, are we prophets here talking in absolute terms, or are we mere human beings exchanging ideas, trying to reach a compromise, a peaceful settlement, something that we and our children can live with.

BENJAMIN NETANYAHU, Deputy Foreign Minister, Israel: This is not the spirit, this not the hope that we have come here for, and it is not the hope that we can continue with. We want to see a change. We're prepared to see a change and we hope to see a change, and yet, this afternoon, the speeches have ended. Not one of the Arab leaders, not one of the heads of the Arab delegation has responded to the simple clear invitation of the prime minister of Israel. And we hope there is still hope because we all live with hope, and peace must live with hope, we hope that there will be a response and a change of tone and a change of spirit. There is a day tomorrow, and if we do not hear it, we will not relent, we will not give up on our efforts to peace.

HANAN ASHRAMI, Delegation Adviser, Palestinian: Our response to President Shamir's statement is one of tremendous dismay. We had hoped that Mr. Shamir will come to this country with a new attitude recognizing the needs of the moment, trying to assert the humanity of the others rather than negate the legitimacy of the others, using a type of language, a discourse that is new, that would reach out in order to establish peace. We felt that the contents was hardline. He brought nothing new. It was a reiteration of the same old entrenched positions. He did not try in any way to modify or recognize the needs of a peace conference. He tried to negate our history and we are extremely resentful of the fact that there is a clear distortion of our history. Actually, in essence, what he did was he brought to this conference the attitude and the tone of the occupiers and we have been victims of domination and racism and distortion as people under occupation. The tone of that speech reflected exactly what was happening in the occupied territories, domination, racism, and a patronizing attitude.

BENJAMIN NETANYAHU, Deputy Foreign Minister, Israel: The Palestinian delegate ended his speech by invoking Yasser Arafat. Yasser Arafat is the chairman of an organization that has a constitution which is annually reaffirmed. It's called the Palestinian National Covenant, the charter, the PLO Charter. It calls, as you know, for the annulment of the state of Israel. It says in Article 19, the partition of Palestine in 1947 and the establishment of the state of Israel are entirely illegal, regardless of the passage of time. It doesn't make any difference if 50 years have passed. Israel is illegal. It has to be dismantled and the other segments explained and dismantled through force. Now, here's an opportunity and a challenge which I now turn to the Palestinian-Arab delegates, to all the Arab delegates, but especially the Palestinians. This is an opportunity. You can invoke Arafat, you can invoke the PLO, you invoke the PLO charter, or you can use this opportunity to tear up these papers of hate and to sign the papers of peace. This is what we've come here for.

MR. MacNeil: Among the Arab delegations in Madrid, the Egyptians have one distinction. Theirs is the only Arab nation to have made a full and formal peace with Israel. In Madrid, Egypt's foreign minister, Amre Moussa was the sole Arab representative to shake hands with the Israelis. Mr. Moussa is a career diplomat who participated in the Camp David negotiations 13 years ago. He spoke with Charlayne Hunter-Gault outside Madrid's royal palace, where the conference is taking place.

MS. HUNTER-GAULT: Mr. Minister, thank you for joining us. What was your reaction to today's three speeches? The Palestinian observer delegation, Hanan Ashwari and others, were very upset. What do you think will be the impact of such speeches? I mean, everybody has talked about this as a confidence building process. If she and the Palestinians and other Arabs are reacting that way to Prime Minister Shamir, I mean, where is the confidence?

AMRE MOUSSA, Foreign Minister, Egypt: The confidence building measures meant by all of us are not words but certain deeds in the occupied territories, in particular West Bank and Gaza, in order to ease the burden on the people living under occupation, to deal with the question of settlements, to deal with issues of importance for the lives of people, not words or statements. So I look at the confidence building measures from a different angle.

MS. HUNTER-GAULT: Your own message yesterday is being interpreted in some quarters as being a little tougher than you sometimes are, especially in your assertion of Arab rights to Arab territories, saying that they cannot be compromised. What was the essence of your message?

MINISTER MOUSSA: That was the position of Egypt all the way. When we negotiated with Israel, we negotiated on the basis of land for peace, on the basis of total withdrawal from our territory and in exchange of peaceful relations or relations of peace. This is exactly our position, and we wish it to be applied also in the negotiations between Israelis and Syrians, Israelis and Palestinians. We have not changed our position at all.

MS. HUNTER-GAULT: But there's a fundamental difference because there is total Israeli rejection of UN Resolution 242, which follows on land for peace, and a total embrace of that by Arabs? Is that going to be the main obstacle in these talks?

MINISTER MOUSSA: I do hope that the position of Israel you are referring to is just an open position in the negotiations, and that it will not continue to be the same for long, because Resolution 242 --

MS. HUNTER-GAULT: You think this is possible?

MINISTER MOUSSA: Yes, I hope so. There will be a possibility to negotiate under Resolution 242 in accordance with the principle of land for peace.

MS. HUNTER-GAULT: There's a lot of talk now going on about venue, and I don't want to get into, too much into the nitty gritty. Israel wants the venue to be in its own region.

MINISTER MOUSSA: Right.

MS. HUNTER-GAULT: I suppose because it would mean recognition of Israel.

MINISTER MOUSSA: The time will come for that. I urged everybody to be patient, not to read many things, especially bad things in certain position or proposal taken or proposed by the other party. Now we are in Madrid, so the negotiations should start in Madrid, and later on, perhaps they will move from Madrid to any other place that all parties in each committee would agree on.

MS. HUNTER-GAULT: You were very much, as you just referred to Camp David, a part of that whole process, obviously. Does Camp David have an application here? I mean, is there a framework for self-government in the territories that's already in place that you think can be applicable?

MINISTER MOUSSA: Yes, indeed. Yes, indeed. We have done a lot of work during the talks between us and the Israelis on the establishment for the self-government authority in the occupied territories and the whole work is at the disposal of the Palestinians and as well as the Israelis, the Israelis were other partner in those negotiations, so they know exactly what we proposed and the documents that we have executed at that time. We put all this experience and the documents related thereto at the disposal of the negotiators.

MS. HUNTER-GAULT: Is U.S. involvement in these negotiations essential?

MINISTER MOUSSA: Absolutely essential. This initiative is an American initiative, and it is due to the, the efforts of the United States that we are all meeting here, including Palestinians and Israelis. Their presence, the administration's presence is a must.

MS. HUNTER-GAULT: You are here not as an observer but an official part of this delegation.

MINISTER MOUSSA: I'm a participant.

MS. HUNTER-GAULT: Participant. Why is that, and what role is Egypt playing and does it plan to play?

MINISTER MOUSSA: I explained that yesterday, and in my contacts with all the delegations here, we are a full partner in the establishment of peace. We are the largest Arab country in the region and we do not think that any arrangement for the future in the region could be achieved without the contribution of Egypt and the opinion of Egypt. Thirdly, we have this experience with Israel and we can help the Palestinians in particular just going through this difficult process, at least at the beginning. And, again, we enjoy the ability to talk to all the parties concerned, all of them. We talked to the Israelis. We are an Arab country, so we have natural relations with the Arab countries, so we can do a lot.

MS. HUNTER-GAULT: How united do you think the Arabs are?

MINISTER MOUSSA: On the question of territory for peace, I believe we are quite united.

MS. HUNTER-GAULT: But on some other issues.

MINISTER MOUSSA: There are differences of view on this or that, like human rights, for example, where also the rights are diminished. On the territories, we are all for the withdrawal of Israel. On the relations with Israel, we are all for normalization of those relations if Israel approves and admits the right of the Palestinian people. This is a must. It is a joint endeavor. Israel should get the rights, her rights, and the Palestinians also should get their rights.

MS. HUNTER-GAULT: Can separate deals be cut? Do you expect that separate deals will be cut?

MINISTER MOUSSA: I can't answer that question at this stage.

MS. HUNTER-GAULT: Finally, Mr. Minister, what happens if these talks collapse?

MINISTER MOUSSA: Oh, it will be a very bad thing. That's why we have one option, to make it succeed and not to collapse.

MS. HUNTER-GAULT: Well, Mr. Minister, thank you for joining us.

MINISTER MOUSSA: Thank you for inviting me.

MS. WOODRUFF: We now get four views on the prospects for peace after day two of the Madrid talks. Sam Lewis was the United States Ambassador to Israel from 1977 to 1985. Helped negotiate the Camp David accords in 1978 and '79. In 1983, he mediated the Israeli- Lebanon peace settlement. Ziad Abu Amr is a Palestinian and professor at Bir Zeit University in the West Bank. He currently teaches at Georgetown University. Shlomo Avineri is a professor of political science at Hebrew University in Jerusalem and presently a guest scholar at the Brookings Institution in Washington. From 1975 to 1977, he served as director general of Israel's Ministry of Foreign Affairs. And Hisham Melhem is a Lebanese journalist with As Safir Newspaper of Beirut. He joins us tonight from Raleigh, North Carolina. Prof. Avineri, I want to begin with you. We are seeing very, very hardline statements coming out of the conference, particularly today. Do you see hopeful signs, as we just heard from the Egyptian foreign minister, underneath all of this tough rhetoric?

PROF. AVINERI: I am mildly optimistic, because none of the statements today or yesterday surprised me. This is what you expect at the beginning of what is basically a very ceremonial and confrontational meeting. So nothing could have been really otherwise. What really matters is that a conference took place and the conditions give you hope for basically one reason. The Palestinians after 12 years of not being ready to negotiate something that is in the framework of the Israeli proposal for autonomy, which they rejected at Camp David, for the first time are ready to come to Madrid under conditions of humiliation, not exactly under their official banner and under the official flag. The fact that they are ready to do it means that they have changed their views and are ready now to negotiate something that they rejected 12 years ago. And this is a great hope.

MS. WOODRUFF: Prof. Amr, is that the difference? Is that what gives you hope that something is going to come out of all this?

PROF. AMR: Well, of course, we have a stake in a successful peace conference and we came to this conference with the hope that peace would be achieved and a just settlement for the Palestine question and the Arab-Israeli conflict. But I'm afraid what we heard today from Mr. Shamir is very disappointing. Everybody knows that this conference convened on the basis of land for peace and achieving the legitimate rights of the Palestinian people and security for Israel. In his speech today, Mr. Shamir negated the entire basis of the conference when he refused to talk about trading land for peace.

MS. WOODRUFF: Well, Prof. Avineri, that doesn't sound like the good signal that I hear you reading out of what's going on.

PROF. AVINERI: Well, let me be very frank. I think the key is what President Bush said yesterday. President Bush chose his words very carefully yesterday and he used a term which is really indicative of what we're talking about. He talked about a territorial compromise. And a territorial compromise means that Israel is not able to hold on, will not be able to hold on to all the territory occupied since 1967, but the other side, the Palestinian, and the Syrians considerably will not get back all the territory which they demand. This is what the compromise is about. This is what a conference is about. So we have here now to discuss the boundaries of the conference. None of the sides will get, at best, all of what it wants, no doubt about it.

MS. WOODRUFF: So when Prof. Amr says Shamir's statement today that there will be no land for peace, you just don't take that, you're saying he didn't mean what he said, or --

PROF. AVINERI: No, what I'm saying is that this is exactly the position of the Lekud government in Israel. It doesn't come as a surprise. Under those conditions, Israel came to the negotiating table. And what is clear is that the Palestinians are ready to come to the negotiating table now because they are ready to take something which would be the beginning of the process, autonomy, which they rejected. I hope that this time they are not going to reject it, because it was a catastrophe that they rejected it when it was offered in 1977.

MS. WOODRUFF: Is that true, Prof. Amr, the Palestinians are now prepared to accept what they did not accept before

PROF. AMR: Well, I think we are now going through a new phase, not only the Palestinians or the Arabs or any single power in the region, but it is the entire world. And we hope that Israel would cope with this new world reality. Today in his speech the head of the Palestinian delegation talked about an interim arrangement which amounts to autonomy, in fact, it is autonomy, but he has stipulated that this should not become a permanent, should not become a permanent status for the Palestinian people.

MS. WOODRUFF: As limited self-rule.

PROF. AMR: Yeah.

MS. WOODRUFF: In other words, that it would lead to a state or some other entity or something?

PROF. AVINERI: Which was offered in 1977 as a limited, a three to five year stage of transition, where both sides agree that at this stage they do not agree what the condition will be at the next stage.

MS. WOODRUFF: Hisham Melhem, as you listen to this, do you see the seeds of agreement? Is it just in the eyes of the beholder? What do you see coming out of this conference?

MR. MELHEM: Obviously, both sides have gone to Madrid with different interpretations of the terms of reference for the conference. The Arabs and the United States, the whole world community, for that matter, agree that 242 means land for peace. The Israelis obviously reject that, certainly the current government in Israel, I think when it comes to fundamentals.

MS. WOODRUFF: But just as, I mean, as you just heard Prof. Avineri say that President Bush put the new spin on that, so to speak, when he talked yesterday of territorial compromise.

MR. MELHEM: Sure, I will address that. I think on the question of fundamentals from the Arab perspective, there is the return of their territories and Palestinian national rights. There will be no compromise if compromise means accepting less than national rights for the Palestinians and regaining all the territories. If there is going to be compromise on the Arab side, it will be in the area concerning the modalities. For instance, that's why I made that distinction between modalities and fundamentals, in terms of modalities, the Arabs accepted already the notions of phased withdrawals, interim arrangements, demilitarized zones, and in the case of Syria, they will insist that it should be reciprocal. So in the Arab modalities there will be compromise and flexibility on the Arab side. When it comes to fundamentals, for instance, Asad, President Asad of Syria cannot accept for Syria anything less than what Sadat accepted for Egypt when he regained Sinai. This, there is no Arab leader who is willing today, given the reality in their own societies, to go beyond certain red lines. The compromise is in terms of living with Israel, but not in terms of living in perpetuity in the shadow of Israeli power.

MS. WOODRUFF: Well, given that, Amb. Lewis, if there are some areas where the Palestinians and the other Arabs are willing to make some concessions, and we haven't talked about the Syrians yet here, but they're not willing to give in on the fundamentals, which, of course, is where an agreement is going to come, where is the give going to come?

AMB. LEWIS: Eventually, the give is going to come in changes in what's just been said, but it's not going to come very quickly. Look, nobody has really suggested here why this conference is taking place. These positions that were stated today are the positions everybody has asserted in the past for a long time, both Shamir's position, Syria's position no surprise, though stated about as toughly as it could be stated in the speech this afternoon, the Palestinian position perhaps showing more change than other Palestinian spokesmen have, but the basic point is the world has changed, the world has changed. The cold war is over. The U.S. role is different in the Middle East, and the Israelis and the Palestinians, in particular, are really weary and ready for a compromise. Whether the Shamir government is ready to say it at this point is one thing. Israeli public is ready for change and the Palestinian public is ready for change.

MS. WOODRUFF: Well, let me just ask --

AMB. LEWIS: And now, the question in my mind is whether the Syrian leadership is ready. I am not sure about the Syrians, but they're there and the fact that they're there is what really counts at this moment.

MS. WOODRUFF: All right. Let's go down -- we'll take this to the Syrians last, but first, Prof. Avineri, go to the Israelis. Is Prime Minister Shamir prepared not today or tomorrow but in the near future to make the kinds of changes that Amb. Lewis is talking about?

PROF. AVINERI: Well, I am not a spokesman for Mr. Shamir. I did not vote for him. I don't expect I'll ever vote for him or his party, so let's be clear that I'm not his spokesman. I'm trying to analyze his position.

MS. WOODRUFF: Exactly.

PROF. AVINERI: The position which he and his party have espoused for the last 20 years is that as a first stage they are ready to offer the Palestinians on the West Bank and Gaza autonomy, limited autonomy, to my mind not enough. This is a position which had until now been rejected by the Palestinians. If it would have been accepted by the Palestinians 12 years ago, we would be today 12 years into a completely different kind of era. This is what Shamir is ready to offer now, and I agree with Amb. Lewis that this government is not ready to offer more, but I can see a dynamism of the situation. If we start negotiating seriously about autonomy, if the Palestinians would be ready to have a tough value on autonomy, then I can see also changes in the Israeli electorate as I can see changes amongst the Palestinians, hopefully perhaps one day amongst the Syrians, the same position has until been really not very helpful but will continue to be not helpful until they basically change the whole attitude what this conference is about, because you cannot discuss as the Syrians are suggesting only the territorial issue of Golan, you have to discuss disarmament, arms control, or of this issue. The Syrians until now appeared not to be ready to do it. And that's not very helpful.

MS. WOODRUFF: Well, my question is: What has to happen first? Is there agreement that one piece of this puzzle has to fall into place before the rest of it?

AMB. LEWIS: What has to happen is you've got to get started negotiating. This conference is just, the bulk of it --

MS. WOODRUFF: Which hasn't begun yet.

AMB. LEWIS: -- is just the curtain raiser. You've got to get into concrete discussions about the pieces of the issues, and then you begin to see if there's some little changes that are reflected in the positions. And it's silly, I think, tonight to take these hardline speeches as indicative of much of anything, except this is the way nations that haven't dealt with each other officially for generations are going to behave when we get in the same room for the first time.

MS. WOODRUFF: All right. Then let's get beyond the hardline speeches. And Prof. Amr, what about what you heard Prof. Avineri say a moment ago? I think I understood you to say that this is an area that's fruitful for some sort of resolution, the whole autonomy.

PROF. AVINERI: The beginning resolution.

MS. WOODRUFF: Do you think the Palestinian point of view would accept that?

PROF. AMR: First of all, I would like to take issue with invoking the Camp David accords. We are talking about different circumstances. There were different objective conditions and different reasons which account for the Palestinian non- participation in the Camp David Accords, and I don't think that it helps any purpose to reiterate this element. Now we are ready to talk peace. We would like to see readiness on the other side. So what is the point of talking about are we supposed to pay a price, for instance, for our non-participation in the Camp David --

PROF. AVINERI: May I try to respond to that?

PROF. AMR: But let me please finish and say this. I think I agree with Amb. Lewis. This is only the, the conference has not started yet, it's true, but we need some gestures. The Palestinians came to this conference addressing all the conditions and the terms which the Israelis laid down. We in the past insisted on representation from Jerusalem, an independent Palestinian delegation, Palestinian participation from the West, from the PLO. We have gone to the conference conceding all of these objectives. Yet, we haven't seen any reciprocity from the other side. We would like also to see some good will, some good gesture, and not reiterating old language and old positions and propaganda by Mr. Shamir.

MS. WOODRUFF: Prof. Avineri, and then I want to go back to Hisham Melhem.

PROF. AVINERI: Fair enough, fair enough. The point is that usually everybody sees his own compromise or his own readiness to make compromise. The Palestinians have made compromises. Let me remind you that Mr. Shamir in the last 10 years was against an international conference, was against any sort of negotiations with Palestinians. He's now accepted an international conference. He accepted negotiating with Palestinians, albeit under limited circumstances, and so every side makes some move in order to make that conference possible. And --

MS. WOODRUFF: But Prof. Amr is saying that more has to happen from the Israeli side.

PROF. AVINERI: That's obviously the Palestinian position. I can imagine the Israeli position will be different. The point is let's have negotiations on the issue which I think is the most hopeful one, the Israeli-Palestinian issue, where both sides have made concessions, not enough, even in my estimation, on both sides. I would be very happy, you know, to see the Palestinian covenant revoked because it would have an impact on public opinion in Israel.

PROF. AMR: The covenant has been invoked practically. The Palestinian people and even the PLO has adopted a new political program which, which renders the charter irrelevant.

PROF. AVINERI: Okay, we're getting into the argument. That's not really the point. But I think there is a hope here precisely because both sides are now in a position which a year ago I cannot imagine Shamir thinking that he would be sitting in an international conference. I cannot imagine the Palestinians a year ago thinking that they would be sitting in a conference without official representation of the PLO.

MS. WOODRUFF: Hisham Melhem, do you agree with what's been said, that the next potentially fruitful area for exploration and negotiation is this whole autonomy question for the Palestinians, or does something have to happen on the Syria-Israel set of issues before this can be resolved?

MR. MELHEM: I think the Arab side in general takes very seriously this phrase, "a comprehensive and just peace." By comprehensive, we want a peace, they want a peace that is not a separate peace, like the Camp David treaty or like the Lebanese-Israeli agreement in 1983. I think it seems to me now that given the diametrically opposed views of both sides when and if the bilateral negotiations take place, they will reach a dead end in no time.

MS. WOODRUFF: A dead end?

MR. MELHEM: Absolutely, because the first item that the Arabs are going to put on the agenda, all of them and all of the various committees would be a cessation of the activities of settlements in the occupied territories. If Shamir is going to reject them, and I would expect him to do so, this will put to the test the American role and the American definition of their role as an active player in this whole process. It seems to me that if there is no end of the activities in the settlements, if the Israelis do not stop the incorporation, the colonization of our territories, it will be inconceivable for me to see the Arabs continue in the bilateral talks. As far as the question of modalities, it is extremely important, you don't have to be an expert in conflict resolution to know that before you embark on negotiations, before you take the peace train, so to speak, you will have to know at least, if not exactly the final station, at least you would like to know where you're going, are we going due North, due East, is it going to involve the return of Arab territories, in return for Arab recognition of Israel as part and parcel of the region, that's the issue.

MS. WOODRUFF: Amb. Lewis, the point that once we get to that difficult nut to crack, namely the settlements, which Israel says it's not willing to change its policy on, will the U.S. get more involved on that?

AMB. LEWIS: Well, I think it's clear the U.S. has already gotten pretty involved on this. Bush has put a fair amount of pressure on the Israelis on this issue. They have not yet changed. I suspect there will be other additional pressures applied, but my expectation is that while the Arabs are all going to talk about this and all oppose it, that none of them are going to walk away as the gentleman just suggested. I think all the parties have invested too much in getting this far to walk away over any issue in the first few weeks. I mean they may eventually and in that period while they're still feeling one another out, I would think the U.S. action behind the scenes to poke and prod is going to be very important and I would think ultimately successful on this particular point.

MS. WOODRUFF: All right. Well, on that hopeful note we'll have to stop there. We want to thank all four of you gentlemen for being with us. Thanks very much. Robin.

MR. MacNeil: Still ahead on the NewsHour, the budget crunch at the state and city levels. FOCUS - HARD TIMES

MR. MacNeil: We turn now to the domestic economy. While the recession lingers, state and local governments all over the country are going through some tough economic times. Tax revenues keep falling, while demands for services are going up. Tonight we look at two different attempts to make ends meet. First, Business Correspondent Paul Solman of public station WGBH in Boston reports on the city of Chelsea, Massachusetts, and how it's coping.

MR. SOLMAN: The firefighters of Chelsea, Massachusetts are fighting mad.

BILL SULLIVAN, Firefighter: Well, no one knows that Chelsea's between a rock and a hard place better than the firefighters who stay here 24 hours a day. You know, there are always firefighters here.

DAVID APONTE, Firefighter: We've given up so much and now they're after our jobs, our livelihood!

MICHAEL THOMPSON, Firefighter: We save lives, Paul! Imagine, we have to sit here with you and defend our saving lives. I mean, that's totally insane.

MR. SOLMAN: The firefighters of Chelsea aren't the only ones on the defensive. Police, teachers, all the municipal workers here are under siege. Long-term economic decline, coupled with recession, has cast a shadow over this city of 28,000, huddled on less than two square miles of land, much of it tax exempt, much of it under a bridge. A stone's throw from Boston, Chelsea is reeling, a 25 percent budget deficit in a town that won't or just plain can't raise taxes. And so Massachusetts Governor William Weld, on the left, has actually appointed and sworn in a receiver to replace Chelsea's democratically-elected officials, an American city is in receivership, the first time that's happened since 1934. In a sense, the story of Chelsea is a story of failing federalism. The U.S. was founded on federalism. That is a balance between a strong central government and the independence of its political units. When times are good and towns are solvent, it's been a classic American model, but it can fall apart, as it has here in Chelsea and other hard-pressed communities around the country, from East St. Louis, Missouri, to Bridgeport, Connecticut. These places are destitute, yet, the federal government won't bail them out and neither will their states. Meanwhile, their own voters won't raise taxes and their unions won't work for less.

FIREFIGHTER: We're fighting for our livelihood here. We're fighting to maintain safety for our brothers, so let's put the blame where it belongs.

MR. SOLMAN: In Chelsea, blame may be the wrong word. The city's fiscal problems seem more a question of fate. Like lots of small, old cities, Chelsea has lost the industries of the past have been shipping, manufacturing, yet has little chance of attracting new business, since much of its land is polluted by toxic waste. Meanwhile, the city is saddled with expensive union contracts. So Chelsea's receiver, Jim Carlin, wants to save money by opening municipal services to the free market.

JIM CARLIN: I think it's amazing how competitive people can get if their jobs are on the line.

MR. SOLMAN: Carlin calls it economic reality. Municipal workers say it's union busting.

WORKER: We bargained in good faith. The American way, isn't the American way good faith?

MR. SOLMAN: Yes, but isn't it economic reality?

WORKER: I don't think it's fair. I haven't been here that long, but I don't think it's fair to guys who've put 30 years in this job for someone to come in and say, hey, you're out of a job just because the city don't have any money.

MR. SOLMAN: So what's a Chelsea to do? Raising taxes may seem like an obvious answer, but that's been tried here repeatedly. Just this spring, Chelsea voters rejected a tax increase by a margin of 3 to 1. More people here live below the poverty line than anywhere else in this state. They're unwilling or unable to pay higher taxes.

MAN: I can't afford it, on the income I get for crying out loud! I have just enough to survive now, for crying out loud! That's what I mean.

MR. SOLMAN: What do you think about raising taxes to pay for police and fire protection here in town?

MAN ON STREET: No!

MR. SOLMAN: Further compounding the problem, in the last decade, Chelsea's immigrant population has more than doubled.

IMMIGRANT: I come in every morning; they say, I'm sorry, nothing open. For one year I look.

MR. SOLMAN: Are you looking for work?

IMMIGRANT: Oh, sure.

MR. SOLMAN: But no --

IMMIGRANT: No, no.

MR. SOLMAN: And so they're caught in a classic contradiction. They won't raise taxes, they won't cut services.

OLDER WOMAN: I want whatever is best for Chelsea, that's all I can say.

MR. SOLMAN: But you might not be able to afford it.

OLDER WOMAN: That's right.

MR. SOLMAN: She's not the only one. Even the firefighters who live in Chelsea turned down new taxes.

RICH MORABITO, Firefighter: I voted against Proposition 2 1/2, even though I know I could have lost my job, but why is it always the working people have to shoulder all of the responsibility? Let government take more of a part in the responsibility to what happens.

MR. SOLMAN: But government is you. You're the guy who won't spend, you won't spend money for extra taxes.

MR. MORABITO: Let me answer that. I want to clear the situation up. I would let my taxes double, if not triple, if I knew I was going to be guaranteed my job and I wasn't going to be unemployed and that I knew where the money was going. If you don't know where the money is going, you're not going to give anybody 10 cents!

MR. SOLMAN: This aversion to taxes has spurred a new approach to providing government services, privatization, turning over sanitation, jails, police and even firefighting to corporations. Here in Scottsdale, Arizona, fire protection is supplied by a private firm and the savings are substantial. Nationally, half a dozen such companies manage to cut costs by using part-time workers who cover more territory. Not surprisingly, Chelsea's firefighters aren't impressed.

ROBERT BETTER, Firefighter: This fire service doesn't show productivity as it does as if you're selling a product or something like that. It's difficult to measure what we do. I'm not saying you can't privatize it.

MR. SOLMAN: Some people do privatize it.

MR. BETTER: Some do, but I think if you check across the country, it does not work well because people in the private sector are also looking to make money.

MR. SOLMAN: Now there's nothing wrong with looking to make money and if you and I say were to start our own private Chelsea fire company we'd have more financial incentive to be efficient than the union because presumably, we'd get to keep some of the savings as profits. But suppose we start cutting corners to save money, skimping on service to the poorest parts of town because it's more expensive to do business here and the neighborhood has no political clout, or we take out our profits short-term, and don't invest long-term in better equipment, or fire prevention. Do any of that in Chelsea and it could easily result in the loss of life. Chelsea's essentially made of wood. The city has more fires per capita than any in the country. But Chelsea's new receiver is thinking about privatizing the fire department and just about everything else. How much money can he save?

JIM CARLIN, City Receiver: That's going to be a good question. We're going to probably find out.

MR. SOLMAN: Are you going to do it?

MR. CARLIN: We'll take a look at privatization in perhaps every department.

HOWARD HUSOCK, Kennedy School of Government: That's what unites Chelsea with government across the country. We're in a period of time in which governments face declining budgets and high expectations, and so there's a tremendous amount of, in effect, market pressure on government to increase its efficiency, and Chelsea in some ways is just the outlying example, the most extreme example of that dynamic.

MR. SOLMAN: Howard Husock runs the research program on cities and towns at Harvard's Kennedy School of Government. He says privatization is a trend of the times.

HOWARD HUSOCK: The same dynamics that operate on private businesses clearly operate on the public sector and if fixed costs are high because of unionized work rules and work forces, some adjustment is probably inevitable, isn't it?

MR. SOLMAN: That's what the union calls union busting.

HOWARD HUSOCK: The union may call it that and the public may call it efficiency. Change is a very difficult thing for people to accommodate, whether that's change in the Gdansk Shipyard in Poland, or it's change in the fire union in Chelsea. And it's difficult to ask people to change and difficult to ask people to say, to adjust their standard of living because the world is changing, and yet, people must ask them to do that and that's a very difficult position to be in.

MR. SOLMAN: But is privatization the only answer? The firefighters have other proposals, like taxing commuters on the well traveled Tobin Bridge. The receiver says maybe the whole city can be an enterprise zone, a low wage tax haven for new business. But barring such salvation, this is a poor city that's getting poorer and that means fewer resources for its children, less protection for everyone. There is one last ditch hope, annexing the city to Boston. And in November, Chelsea will actually vote on annexation, though why Boston with its own problems would want Chelsea is not immediately apparent. But if the voters of Chelsea choose to annex themselves to Boston, and Boston for some reason agrees, it will represent a tilt away from one of the great American political ideas, federalism. And that's where we began this story. The dream of federalism is that America's political units will remain united, yet independent, masters of their own fate. the federalist nightmare is that fate can turn ugly, as it has here in Chelsea, that when it's every town for itself, the rich get richer, the poor get snubbed, and that darkens another great American dream, equal opportunity for all. Because if Chelsea can't provide for its young, for its immigrants, for its underprivileged, who will? And if state and federal government won't provide for these people either, then equal opportunity for the people of Chelsea could recede further and further out of reach.

MS. WOODRUFF: Chelsea's budget problems are not unique. As Correspondent Betty Ann Bowser of public station KUHT in Houston reports, cities and towns all over Texas are trying to decide how much government they can afford.

MS. BOWSER: The Lufkin High School cheerleaders rank among the best in the nation, not bad for a small high school in rural East Texas. The school's soccer team this year is going after a regional championship, and KLHS, the Lufkin High School television station, is so good that a local cable company broadcasts its programming every day, pep rallies, school announcements, basically whatever the student broadcasters produce. Eugene Jones is the cameraman at KLHS. He's also captain of the Lufkin High School football team and because Eugene makes good grades along with his extracurricular activities, colleges all over the Southwest are after him with football scholarships.

MS. BOWSER: Suppose your education had consisted only of classes and grades, would it have been the same kind of education?

EUGENE JONES, Lufkin High School Student: I don't really think so, you know. I think, umm, you know, you'd get a boring education, it would be very dull during school. You know, I think students, you know, they would drop out.

MS. BOWSER: Eugene's vision of a boring education could some day become reality because the Lufkin Independent School District is running out of money at a time when the state government is cutting back its funding to education. Five years ago, the district operated on a budget surplus, but by the end of this year, the money will have run out. And unless Asst. Superintendent Jack Darnell can find a money tree somewhere in the school's backyard, those extracurricular programs that have meant so much to Eugene and his friends are going to be in trouble.

JACK DARNELL, Lufkin High School Official: We would probably have to cut such things as music programs, physical education programs, cut back on the maintenance of our facilities, which is certainly not a good idea, really cut back on teachers' salaries, or employees' salaries, and then probably get into cutting back on personnel.

MS. BOWSER: The city of Lufkin is also facing the possibility of cutbacks in programs and services. Already parks and recreation projects are on hold and like the Lufkin schools, the cutbacks are a result of the decrease in state spending on localities. Officials in small towns all over Texas say they're running out of money because during the Reagan years the federal government cut back or cut out entire programs. States like Texas, with already dwindling resources, were left to make up the difference and increasingly, they're finding out they can't.

SPOKESMAN: The chair at this time recognizes the Senator from Lubbock.

MS. BOWSER: Faced with a multibillion dollar budget deficit, shrinking federal dollars and taxpayers unwilling to pay more, the Texas state government recently made an audit of itself to see if there were places to save money. When newly-elected Texas Comptroller John Sharp got through, here's what his so-called performance review concluded.

JOHN SHARP, Texas State Comptroller: It was suggested to us that we find $200 million in savings and we did the first day, and then the second day they found another $200 million.

MS. BOWSER: Sharp recommended the elimination of hundreds of state jobs, consolidation of agencies that previously held overlapping responsibilities. He said implementing that and other portions of the performance audit would save the state $2.3 billion.

MR. SHARP: We hate bad government. We've got some stuff in every government, state government included, where people believe that their agency and their Fifedoms are more important than the taxpayers that they serve and we decimate those folks. I mean, there ain't no question about it. This program is about getting those people out of state government and getting those kinds of systems out of state government and that's why they scream and holler.

MS. BOWSER: But when the Texas legislature convened this year to write a new two year budget, it passed only about half of Sharp's recommendations. The lawmakers were unwilling to strip all those fifedoms Sharp talked about down to bear bones and lose all their political influence within the state agencies. The legislators knew they were facing an unprecedented $10 billion deficit going in the front door of the state capitol, but there was no clear cut plan to balance the budget. For three weeks in special session, the lawmakers talked.

SPOKESMAN: We may have an idea for you to solve your personal crisis.

MS. BOWSER: And talked. When they did legislate, they sometimes took from one program to fund another. The legislature finally begin to pass budget business in mountainous waves that kept members up until the wee ours. There was so much confusion at one point that lawmakers were literally writing bills up on pieces of scrap paper.

SUE SCHECHTER, Texas State Representative: I would go home and I would think, you know, what have we done to Texas today. I'm sure it was awful.

MS. BOWSER: Sue Schechter is a freshman Houston representative who couldn't believe legislative leaders had no plan to solve the budget problem.

MS. SCHECHTER: I don't know, at my house, and I figure probably at your house, usually, if you're going to remodel your home, you figure out how much money you have first and then you decide how extreme you'll get in your remodeling, whether you do a plain job or a real fancy job, and it seemed sort of foreign to me that you would write your budget and then say, well, you know, we're $4 million short of that, we've got to come up with more money.

MS. BOWSER: As Schechter says, the lawmakers decided how much they were going to spend, then they had to figure out where all that money was going to come from.

SPOKESMAN: The governor of the state of Texas, the Honorable Ann Richards.

MS. BOWSER: Toward the end of the special session, Gov. Ann Richards came riding into the sate capitol on a white horse named lottery. In a state where religious fundamentalism and politics go hand in hand, it would be a hard sell.

GOV. ANN RICHARDS, [D] Texas: We have been very careful in every public statement that we have made to make it clear that a lottery does not solve our problem but the amount of money that it does produce reduces the amount of money we have to raise in taxation.

SPOKESMAN: It sounds like what you're saying, Governor, is that the lottery is the carbuncle on the elbow of life and it's time to lance it, I guess.

GOV. RICHARDS: Well, I'm sure, Senator, in your poetic way [laughter by all] -- you can describe it in that fashion.

MS. BOWSER: When the homespun humor subsided, Richards prevailed and in November, voters will decide whether the state will have a lottery, a lottery that will put off something almost considered high treason in Texas, and that is a state income tax. In the interim, the legislature raised other old taxes, passed some new ones, and increased fees. College tuition is higher. It costs more to get a driver's license and more money to buy gas to drive a car. The sales tax is now the 12th highest in the nation and before those increases, Texas already ranked in the top 10 in property taxes. If there were also a state income tax on top of all of that, Texans would be among the most heavily taxed in the country.

CARL PARKER, Texas State Senator: Well, I think it's a symptom of what's happened to us nationally.

MS. BOWSER: Carl Parker has been an influential state senator for 15 years.

CARL PARKER: And I think Ronald Reagan was the greatest ceremonial President we've ever had and was long on image and short on substance. He said what the people wanted to hear, that we can cut back and cut back from federal expenditures, and what we ended up doing is simply pushing things that had formerly been paid for at the national level onto the states and local government.

MS. BOWSER: And little towns like Lufkin are just beginning to realize that the choices it may have to make won't necessarily improve education or city services. Those choices may mean just what the Reagan years promised, less government for everybody. RECAP

MR. MacNeil: Again, the main story of this Thursday was the war of words at the Mideast peace conference in Madrid. Syrian, Jordanian, and Palestinian delegates demanded the return of all Israeli-occupied territories and an end to Jewish settlements. Israeli delegates said the Arab proposals would amount to the dismantling of Israel and bring a quick end to the talks. Good night, Judy.

MS. WOODRUFF: Good night, Robin. That's our NewsHour for tonight. We'll be back tomorrow night with a look at the final day of the Madrid conference and the week's political round-up with Gergen & Shields. I'm Judy Woodruff. Thank you and good night.