THROUGHOUT the Middle East there is a crisis of governance. Unlike its Arab neighbors though, Israel suffers not from dictatorship, theocracy, or colonial-created monarchy but rather from hyper-democracy. Indeed, in a country where the national sport is politics and every citizen has an opinion on the important issues of the day, it seems as if all of those opinions are represented in the government. Odd though it may seem to lay criticism upon the Middle East's only democracy, the Israeli system is in need of major reform. There was only one interpretation of Israeli Prime Minister Yitzhak Shamir's decision to lead his country's delegation to the Middle East peace conference in Madrid: a payoff to the right wing of his government to keep the tenuous coalition from self-destructing. It is widely believed among Israel's right-wing cabinet members that Foreign Minister David Levy, one of the few in the government who unabashedly support the peace process, is too dovish and more inclined to make concessions to the Arabs. Over the last decade, the Israeli domestic political environment has prevented either of Israel's large political parties from gaining an outright majority of the 120 seats in the Knesset (parliament). As a result, the country has suffered the political paralysis of a government of national unity (1984) and narrow coalitions that border on the extreme (1988, 1990). A political party need only win 1 percent of the vote to retain a seat in the parliament. In the last national elections, held in November 1988, 27 parties contended for the 120 mandates, with 15 parties actually retaining the seats. Likud won the most, gaining 40 seats, followed narrowly by Labor, which gained 39 seats. The ensuing coalition government formed by Mr. Shamir's Likud consisted of seven parties, six of which won less than 6 percent of the vote. This process generates a system where small, f ringe parties wield disproportionate power because the more moderate large parties are beholden to them to stay in power. No issue has done more to demonstrate the excessive power of the small right wing and religious parties than the status of the occupied territories and its inevitable linkage to the peace process. The current settlement policy pursued by the Shamir government is really a perversion of the original "Allon Plan," which in the early 1970s sought only to place Jewish settlements in strategic locations along the Jordan Valley to serve as trip wires against Arab attack. A careful review of the Likud party's pl atform reveals no intention to relinquish any territory in exchange for peace, expressing biblical claims to Judea and Samaria. THIS seemingly unrelenting position is a political concession to the religious parties and the right wing. In June 1990, after Shamir's government fell in opposition to Egyptian President Hosni Mubarak's six-point peace plan, Labor leader Shimon Peres was on the verge of forming his own coalition. Peres failed because the religious parties he had been courting objected to his position that Israel was capable of trading land for peace. Shamir, in turn, promised them no compromise on the disputed territory - and was thus returned to power. The recent predawn raid on the Arab neighborhood of Silwan in East Jerusalem, in which several Arab properties were seized and several right-wing members of the Israeli Cabinet participated, is further disturbing evidence of the radical sway in Israel's government. While Shamir condemned the operation, he was careful in his criticism for fear it could precipitate a right-wing backlash and more turmoil. It would not be entirely accurate to suggest that the status of the West Bank and its Arab population is the only obstacle to peace, but continued settlement activity will push the fragile peace process to the breaking point. The right wing is well aware of this, and since it believes the peace conference is the first step in national suicide, continued radicalism like that in Silwan is possible. In Israel, perhaps more than in any other country, domestic politics drives foreign policy. The large segment of Israeli society which is ready for peace is being held at bay by a few who wield power beyond their numbers. There seems to be only two ways out: either one of the large parties must gain an outright majority, which in the current political environment is extremely unlikely, or reform. No matter how desirable the latter, it too is unlikely. Reform will mean forcing the religious parties and ri ght wing to relinquish their control over a political system that has put them in power.