At the height of the Palestinian uprising six years ago, the only traffic in this holy city, believed to be Jesus' birthplace, were Israeli military jeeps enforcing curfew.
Now, with record bus loads of Christian pilgrims filing through the Church of the Nativity and sleeping at local hotels, Bethlehem is abuzz.
The revival of tourism in the West Bank is one of the few bright spots in the Palestinian economy, which was supposed to get a big boost from the Bush administration at its Middle East peace conference in the fall of 2007 in Annapolis, Md.
"After the Annapolis conference ... there was a relative relief in the political situation," says Palestinian tourism minister Khouloud Daibes-Abu Dayyeh. "The pictures coming through the media showed at least part of Palestine as more safe and ... ready to receive tourists," he says.
While tourists must pass through the Israeli security barrier at the main entrance to Bethlehem, West Bank visitors have doubled over the past year. The 1.3 million tourists expected for 2008 surpasses the pre-uprising peak nine years ago. The surge is filling hotels to capacity – an encouraging sign as chains Mövenpick and Days Inn pursue plans to open in Ramallah.
Tourism contributed to a modest 2 percent growth rate in the overall Palestinian economy this year – a figure that would have been twice as high if it weren't for the flagging economy in the Gaza Strip, which has been under a yearlong Israeli blockade.
In the Beit Sahour suburb of Bethlehem, hammers can be heard from hotel construction just up the road from Shepherds' Field, the hillside believed to be the site from where the biblical Star of Bethlehem was sighted. Builders are adding to the Sahara Hotel to nearly triple its capacity to 52 rooms.
Owner Majed Banoura said he would open the hotel, closed for renovations, for Christmas to accommodate overflow from Bethlehem. "There is security and a sense of calm," says Mr. Banoura, who says his family's souvenir business took in a record $1 million this year. "We feel the rule of law. This is what we need."
The construction sector is also getting a kick-start with housing projects in and around Ramallah. And the rollout of a new Palestinian cellphone company this year marked the largest single foreign investment ever.
Yet the economy has a deep hole to climb out of. Hemmed in by hundreds of Israeli military checkpoints, Palestinians have been struggling, with international donors contributing $1.75 billion to keep the government running. The private sector has been in retreat. A recent World Bank report said that the economy won't fully recover unless Israel removes more restrictions on movement and allows West Bank residents access to agricultural land.
"These are wonderful sparks of potential," says one Western diplomat who requested anonymity. "But now the Israelis have to enable it to explode."
When the Bush administration convened Israelis, Palestinians, and Middle East allies in Annapolis a year ago, boosting prosperity in the West Bank was part of a plan to encourage support for peace negotiations and the government of Palestinian President Mahmoud Abbas – at the expense of Hamas, which controls Gaza.
Since then, negotiators failed to meet a deadline for a political accord set for the end of the year. The political vacuum opened up by change in Israeli and US governments has left progress on the economy in the West Bank as one of the sole bulwarks of the peace process.
For Christmas Eve and morning, Israel's Tourism Ministry arranged a free shuttle to ferry pilgrims hourly between Jerusalem and Bethlehem. At the Bethlehem crossing point this week, a soldier hung a Tourism Ministry banner with holiday greetings for tourists. Israeli officials say they see Bethlehem and Jerusalem as part of the same package for tourists.
In Manger Square, Montreal native Ryan Roe says he is vacationing in the region for the first time since moving to Abu Dhabi to work as an investment banker. The passage from Jerusalem to Bethlehem was unexpectedly hassle-free. "We showed up at the wall and there was no one in line," he says. "They didn't even check our passports. It was like zero security."
Palestinians complain that they're getting only a fraction of tourism revenues because most of the visitors' time and cash is spent in Israel. And Israel has approved only about 40 of about 200 requests for entry permits for Palestinian tour guides.
Moreover the tourism revival is concentrated in Bethlehem and Jericho. If in 1999 the industry was 10 percent of Palestinian gross domestic product, in 2008 it accounted for only 4 percent, according to the World Bank.
At a souvenir shop near Shepherds' Field, owner Linda Elias says that anywhere from 10 to 30 buses show up daily, but few tourists linger. "We want this wall to go and we want our rights. But we don't want another war. We want peace," she said. "I pray some people will come."