Throughout the Mideast peace conference in Madrid, pundits were kicking around a proposed exchange of concessions: Israel would stop all "settlement activity" in the West Bank, Gaza Strip, and Golan Heights in exchange for an end to the intifada and the Arab boycott. Just about everyone but the Israelis seemed to think that a settlement freeze would be a reasonable first step.

Divided on other issues, the Egyptians, Jordanians, Syrians, Lebanese, and Palestinians all agree that Jewish settlement in the territories is an "obstacle to peace." The Bush administration concurs.

It's easy to understand why. As presented by Haidar Abdel-Shafi, head of the Palestinian delegation in Madrid, the case for a settlement freeze seems compelling: "The settlements must stop now. Peace cannot be waged while Palestinian land is confiscated in myriad ways and the status of the occupied territories is being decided each day by bulldozers and barbed wire."

But in accepting the idea that settlement in the territories stands in the way of a settlement at the peace table, the Bush administration implicitly buys into the segregationist logic that lies at the heart of the Israeli-Palestinian conflict. A settlement freeze might lead to short-term progress in negotiations, but only by establishing a precedent that will make coexistence harder over the long term.

The problem is that the Palestinians do not object merely to the Israeli government's confiscation of land or its subsidies for settlements. They object to Jewish settlement itself. In this view, it does not matter whether settlers acquire their land legitimately or not. If they are Jews, they must go.

On This Week with David Brinkley the weekend of the Madrid conference, Jordanian Foreign Minister Kamal Abu Jaber indicated that the West Bank and Gaza should be Judenrein: When Israel gives up the territories, including East Jerusalem and its suburbs, all Jewish residents should leave. Palestine is for the Palestinians; Israel is for the Jews. He seemed puzzled when George Will noted that Arabs and Jews live together as citizens of Israel.

Abu Jaber may not speak for all Palestinians, but his assumption is troubling. If, as the Arab delegates in Madrid kept insisting, the conflict between the Israelis and the Palestinians is a conflict over control of territory, its resolution will hinge on the meaning that the two sides attach to sovereignty.

According to the absolutist model, which prevails in the Arab world, sovereignty means complete control over land and people. This would include the authority to expel and exclude residents on the basis of religion (or any other basis). According to the liberal model—approximated in Israel, though not in the territories—there are limits to sovereignty; to say that a government is in charge of a given territory does not mean that it may do as it chooses there. In international law, the conflict between these two models of sovereignty is apparent in the tension between concern for human rights and squeamishness about meddling in a nation's "internal affairs."

If Israelis and Palestinians conceive of sovereignty in absolutist terms, they will never reach a settlement. No Israeli government will yield that kind of sovereignty over Jerusalem, Hebron, and Jericho. By the same token, the Palestinians will not accept absolute Israeli sovereignty. If Israelis and Palestinians think of sovereignty in liberal terms, however, compromise is possible. The less power conferred by sovereignty, the less sovereignty is worth fighting over. If the West Bank is open to Jews and Arabs on equal terms, for example, it matters less whose flag flies over it.

Which is not to say that it does not matter at all. There are emotional aspects to Jewish and Palestinian nationalism that go beyond the quest for freedom and security. As Israeli Defense Minister Moshe Arens likes to note, the Mideast is not the Midwest.

Still, the Palestinian grievance has much to do with the lack of personal freedom under Israel's administration of the territories. During an exchange with an Israeli at the Madrid conference, Palestinian delegate Albert Aghazarian tried to explain why his side did not want to hold negotiations in Israel: "Just to get to work I have to cross the roadblocks, and I don't always make it."

Palestinians in the territories are not free to live, work, and travel where they choose. They are subject to the infringements of military rule, including search and seizure without warrant, arrest without charge, and collective punishment without trial.

In addition to the special burdens of military rule, Palestinians in the territories, along with Arabs and Jews in Israel, must deal with a panoply of regulations that limit economic growth and prospects for individual improvement. Daniel Doron, director of the Israel Center for Social and Economic Progress, argues that economic reform, by increasing prosperity, would go a long way toward easing Arab-Jewish tensions in Israel and the territories.

Both economic reform and the easing of restrictions in the West Bank and Gaza could accompany the interim arrangement that Israeli and Palestinian negotiators will try to define during the coming months. The process should encourage both Arabs and Jews to reach a new understanding of those buzzwords of Middle Eastern politics, autonomy and self-determination. The more they focus on the rights of the individual rather than the rights of the group, the greater the chance for peace.