Part V: The Palestine Economy

By the Palestine economy, I refer primarily to the West Bank and only to the parts of the West Bank under the control of the Palestinian Authority. Gaza will receive only a cursory attention. As suggested in yesterday’s blog, that economy is under severe strain. Each and every individual in the West Bank is affected. The impact can be illustrated by a story that appeared in the Times of Israel yesterday.

Ahmad, a 31-year-old resident of Nablus, is a member of the Palestinian Authority security forces. He is a father of two. In June, his salary totaled US$700. This was after Israel decided in February to withhold tax rebates equivalent to the amounts the PA paid the families of security prisoners and terrorists killed by the IDF and border police. Abbas decided to shoot itself in the foot by refusing all tax revenues collected by Israel on behalf of the PA until the cuts were restored. Those revenues totalled half of the income of the PA. The effect on Ahmad – a decline in his salary by 20% or US$140 per month. For others in less critical roles, salary cuts may have been as much as 50%. Jafar Sadaka, a reporter for the PA’s official news outlet Wafa, said Ramallah cut his salary from NIS 4,000 to around NIS 2,000 or US$560 per month. There are insufficient funds even to pay rent and put food on the table.

Add to these indicators the rise in unemployment, especially among the young, the decline in manufacturing and retail sales that have put many businesses on the brink of bankruptcy, and it is an understatement to say that there is an economic crisis in Palestine.

Another factor in the decline in revenue to the Palestinian Authority has been the cut in monies allocated to the PA and Palestinian refugees by the Trump administration. When the U.S. recognized Jerusalem as Israel’s capital in December 2017, PA chairman Mahmoud Abbas boycotted President Donald Trump, Jared Kushner and special envoy Jason Greenblatt. However, diplomatic efforts are currently underway to bridge the rift between the U.S. and the PA. Majid Faraj, head of PA security services, is leading the rapprochement following backroom exchanges. Economic pressure has forced the PA to come on bended knees to restore communications with the U.S.

Whatever the failures of the Bahrain workshop for American diplomacy, this might be counted as a success. For the results in Bahrain were far worse for the PA as it was clearly deserted and left to stew in its own juices by its major Arab allies and supporters. The gloom that resulted added to the previous despair that was a product of the abandonment of militancy since efforts to protest the Israeli occupation were met with harsh responses; the protests set the Palestinians back even further. Meagre achievements did not justify the loss in human lives.

Greenblatt’s message to the Palestinians: “The Palestinian leadership must internalize that the success of the conference in Bahrain shows that there are those who believe in peace and in the ability of the Palestinian people to create a good and prosperous economy with the help of many investors. This is an opportunity that the Palestinian leadership must not miss.” Will they or won’t they?

Given that the Europeans have been political pygmies in advancing economic peace in the Middle East, the EU has tried to offset its political weakness with large investments in infrastructure. One project to use wind farms to both generate electricity as well as solve the serious shortage of water has entailed investing 100 million euros ($112.8 million) over the last three years in this project. As the EU has stated its goal: “this project aims at ‘supporting the Palestinians’ right to water. Water is a right just like dignity and freedom. We choose to stand by this right, and we choose to be with the Palestinians in their long journey until we reach an independent Palestinian state.”

France and the EU may try to stand tall on a pile of euros, but the reality is that there has been a decline of 50% in economic aid to the Palestinians over the last six years. |In any case, a political resolution must go in tandem with economic initiatives and cannot be viewed as a separate goal. Otherwise, the EU is making the same mistake as the Trump administration.

In spite of Bahrain, temporary relief might be coming from the Gulf States. In May, Qatar promised to send $50 million in grants and $250 million in loans to the PA over the next 12 months. However, a finger in a dike will not prevent a flood, contrary to myth.

What a contrast to the early optimism and economic improvement following the Oslo Accords! What happened? For the following, I have relied on some Israeli economists, but mostly on the report of Dr. Mohammed Samhouri, a former senior economist of the Palestinian Authority and fellow at Brandeis University in the Crown Center for Middle East Studies. (“Explaining Failure: How Palestinian economic potential was denied during Oslo”, July 2019)

The PA is just 25 years old. Samhouri traces the stages of the increasing economic anemia of the West Bank. Last year, Palestine had a very meagre economic growth (0.9%). This year, there will be a severe decline. Oslo was premised as much on economic development as on the political negotiations. In fact, the stability of PA political institutions was seen as a magnet for attracting economic investment when combined with the negotiated economic arrangement between Israel and the PA known as the Paris Protocol.

Samhouri argued that it was not the economic plan that was faulty. Instead, he located the failure in the “wider political, security and territorial context.” There were three: “(1) the restrictive nature of the political and territorial arrangements t. Instead, he at were negotiated between Israel and the PLO; (2) the deterioration in political and security conditions during the 1994-2019 period; and (3) the Israeli system of constraints, complex and multilayered, that was imposed on the access and movement of Palestinian people and merchandise trade in and out of WBG.”

Israeli security was premised on restrictions and control. Palestinian economic development was premised on the free flow of capital, labour and goods. The two premises were incompatible. The most obvious example was not only the tripartite division of the West Bank under Oslo with Areas A, B and C under different or combined authorities, but the division of the areas under PA control into a fragmented economic terrain of disconnected towns and villages.

Further, according to Oslo II (Chapter 2, Article XI.3.c), Israel’s temporary control over Area C did not end in July 1997 as intended. Instead of a gradual transfer of responsibilities and authority to the PA, the creeping extension of Israeli sovereignty began, initially to control the movement of people and goods in part in response to the series of suicide bombings in Israel in 1996, but also through the confiscation of private Palestinian land, ostensibly for security purposes, the expansion of Israeli settlements and the building of Israeli-only road connections.

By 2000, the tipping point had been reached with the failure of the Camp David Summit. The Palestinian economy began its downward spiral, propelled by the outbreak of the Second Intifada in September 2000. By 2002, Israel occupied all of Area C and began the construction of the separation barrier largely on West Bank land. Israeli unilateral withdrawal from Gaza completed in September 2005 led to the election and coup by a radical Palestinian political party, Hamas. Israeli and Western reprisals followed and reinforced a deep schism in the Palestinian polity. The faith of Israelis in the peace process, never very hardy at any time, began a downward slide to match that of the Palestinian economy.

Three wars with Gaza, 2008-2009, 2012 and 2014, followed as Gaza became a base for rocket attacks on Israel and the latter responded with a tighter and tighter economic squeeze involving the closure of commercial crossings and the shrinking of the sea areas in which Palestinians could fish. The economic blockade was eased when Hamas prevented its militias and that of other groups from engaging in terrorist acts and tightened when missiles and, more lately, fire balloons were sent across the border against Israel. For twelve years, the economic blockade of Gaza was either enforced or eased in response to the behaviour of the radical leadership in Gaza. Gaza, thus, also served as an object lesson for the West Bank Palestinians and the international community as well as Israel.

The election of Hamas in Gaza was followed by the effort to reignite the peace process in a summit in Annapolis Maryland in November 2007, an EU-led pledging conference that committed $7.7 billion for investment in the West Bank, the strengthening of security coordination between the PA and Israel and the easing of Palestinian movements between West Bank urban centres. However, the economic improvements were feeble and short-lived. A West-Bank first policy became just another in a long series of failed efforts to solve political problems with economic band aids.

The West Bank economy remained structurally weak with an overloaded and inefficient public sector, endemic corruption and a dependency on outside aid that soon began to decline. A one-third unemployment rate would sometimes be offset with joint Israeli-Palestinian entrepreneurial partnerships, but never in sufficient amounts to offset the economic disruptions of a dysfunctional Palestinian governing apparatus and Israeli settler expansion and additional fragmentation of the intra-Palestinian transportation and communication systems.

As Samhouri documented, the economic indicators are terrible:

  • decline in manufacturing by about one-half
  • severe drop in agricultural productivity by more than two-thirds
  • decline in private investment
  • private investment largely goes into residential construction, retail trade and services
  • decline in internal capital formation by two-thirds
  • decline in merchandise exports by 20% while remaining concentrated in low value-added products
  • increased dependency on the Israeli economy; 83% of exports go to Israel
  • use of foreign aid to offset budget deficits versus capital and infrastructure projects.

Samhouri traced the decline to:

  • Military occupation
  • A faulty foundation in the Paris Protocol that resulted in a lopsided pattern of dependency and restrictions
  • General insecurity for economic investment resulting from an unresolved military conflict
  • Singular dependency on Israel

“After researching the Palestinian economy for several years, we are convinced that its links with the Israeli economy were the most important factor in determining the course of its economic development. The formation of these links and the nature of the labor, goods, and capital flows between the Palestinian and Israel economies, were determined almost exclusively by Israel.” Israeli economists Arie Arnon, Israel Luski, Avia Spivak, and Jimmy Weinblatt

  • Restrictions on mobility resulting largely from Israeli constraints that reduced supply capacity and increased transportation costs while preventing economies of scale
  • Limitations on access and utilization of Palestinian land and water resources and on the ability to, import raw materials and machinery
  • Inability to freely reach regional and international markets 
  • Lack of access to resource-rich Area C (60% of the West Bank) at an estimated cost of $3.4 billion and $800 million in tax revenues
  • Lack of access to the Jordan Valley where the development of agriculture could create 100,000-200,000 new jobs
  • Lack of access to the resource rich Dead Sea
  • The construction and expansion of Israeli settlements where employment opportunities were offset by further restrictions
  • The construction of the Separation Barrier that created a seam zone (9.4% of the West Bank) of agricultural land inaccessible to Palestinian farmers
  • Restrictions on the use of modern telecommunication equipment
  • An absence of Palestinian fiscal, monetary, exchange rate, and trade policy tools
  • The severe restrictions on decision responsibility that will cramp any enterprise, whether private or public sector

This past record provides an object lesson in why one cannot separate transactional initiatives from solid progress on the political and military fronts and, further, why political agreements must be properly thought through to assess the impact of agreements on the economic sector. The lesson posed by Greenblatt’s challenge is that even if the PA submits to the behemoth of the U.S.-Israeli partnership, no significant breakthroughs will be forthcoming on the ground unless political and economic approaches are viewed synergistically. Further, it is crucial that the right formula for their marriage be found and that the mistakes of Oslo not be repeated.

With the help of Alex Zisman


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