Israel/Palestine One or Two States V. The One State Solution – Economics and Politics

On the surface, Donald Trump’s Deal of the Century is a two-state solution with a very slimmed down Palestinian state.[1] It reminds an onlooker of the very slimmed down Zionist state recommended in the 1938 Woodhead Report. The Trump solution is more akin to an inverted image of the Jewish state proposed in 1938. Instead of a Jewish sliver along the Mediterranean coast, there would be a Palestinian sliver in the Judean hills with much more convoluted borders and a multiplicity of enclaves (15). Further, instead of restrictions on Jewish immigration, the right of return would be abrogated. Instead of the restrictions on land purchases, Israel would have the right to annex the Jordan valley. Other impositions restrict sovereignty and self-determination in both cases.

Just as the Zionists grew more and more frustrated and more and more upset by successive British proposals that reduced their share of the Mandate, it should be no surprise that the Palestinians responded in the same way in 2020 to the shrinking successive offers. One conclusion that Palestinians draw is that, “The time has come to rethink the goals of Palestinian liberation in a way that focuses on ending the colonial regime rather than partitioning the land.” (Munir Nuseibah) In other words, a one-state binational solution serving all its citizens.

Randa Wahbe argues that, “Palestinians deserve more than the scraps at the bottom of the barrel of human rights discourses or international treaties that maintain a world order that refuses to decolonize. This is a golden opportunity for the Palestinian community in the United States to rise up together, become a collective community, and capitalize on its strength to revitalize the demands for the right of return and freedom.” Wahbe supports a two-state solution and a revolution to achieve it. The goal includes the whole of the West Bank, Gaza and East Jerusalem in Palestinian hands as well as the right of all Palestinian refugees to return to their land and homes in Israel.

These are the two extremes. One is a Beinart utopian one state solution. The other is a radical revisionist two-state solution that totally ignores facts on the ground. Neither the utopian unitary state proposal nor the hardline Palestinian two-state proposal attend to the long history of One and Two State proposals over the long history of this One Hundred Years War.  I want to start with the situation as it exists now and then go back to the War of Independence and the al-Nakba (the disaster of 1948) to see how we got from there to here. At each key moment I will survey a different theme. Following the contemporary analysis of this blog, I revert to: 1) 1949 and the proposed solutions for the  Palestinian refugees in 1967 following the War of Independence; 2) the Allon Plan following the Six Day War of 1967 and the issue of settlements and borders; 3) the Oslo Accords of 1993 and 1995 and the problem of sovereignty.

We now have a de facto One-State system that by no stretch of the imagination can be called a solution – for either side. Yet, in some sense, it is the fulfillment of the Balfour Declaration which envisioned a Jewish Homeland in the Mandate, but one which respected the civil and religious rights of the Arabs living in Palestine. There was no provision for political rights. In the current situation, the issue of civil rights leaves a great deal to be desired. However, there are at least some political rights, both in Gaza and particularly in Area A (18%) of the West Bank where the Palestinian Authority (PA) exercises administrative control as well as domestic security. But there is no real democracy as the fullest expression of rights and self-determination.

This is particularly true in the arena of finance. Palestine is a welfare dependency of the world. 70% of the PA budget comes from aid. Though much exaggerated and simplified, nevertheless the familiar formula sums up the situation as Palestinians perceive it: the U.S. decides, the World Bank leads, the EU pays, the UN feeds and Israel destroys. (Alaa Tartir) Is there any wonder there is so much waste? Is there any wonder there is so much bureaucracy? Is there any wonder there is now so much donor fatigue?

All this has been enormously complicated by the actions of Trump. Between 1994 and 2017, America provided $5.2 billion in aid. In addition to cancelling the American contribution to UNRWA (more on this in the next blog), the current regime signed the 2018 Taylor Force Act in March that cut off one-third of American assistance to the PA as long as parts of the budget were being used to “reward” terrorists by paying their families when the “terrorists” were killed or imprisoned by Israel. Approximately $200 million in aid was cut.

In the first seven months of 2020, Ramallah’s total revenues plummeted 70% and aid fell from $500 million to $255 million on top of these previous cuts. In 2020, funding from Arab countries dropped by an enormous 85%, from $267 million to $38 million, signaling an ensuing shift in foreign policy by the Gulf states that openly took place this past summer.

Although the EU pays half the bills of the PA, the Arab burden is much less and very unevenly distributed among the Arab states. While the UAE gave $130 million, it was almost all in 2012 and 2013. In 2020, the UAE resumed a bit of aid for the Palestinians to help the PA wrestle with the COVID-19 crisis. But the aid was in goods not in cash. Interesting enough, months before the Abraham Accords were announced, that aid was delivered on the first direct cargo flight from Abu Dhabi to Tel Aviv. On the other hand, Algeria has given over $280 million. Saudi Arabia’s contribution totaled $1.5 billion.

Aside from welfare dependency, there is a huge chasm between Palestinian and Israeli GDP. On top of a GNP that reached $36,150, capital formation that was a whopping $70,400, the Israeli GDP per capita totaled almost $35,300 at its peak, almost as much as that of Japan ($37,900) and South Korea (just below $38,500) and within striking distance of that of Saudi Arabia ($40,500). Jordan’s, by contrast, is just over $10,000. Palestine’s is $2,560.  

Why is this the case when the Oslo Accords were supposed to open the gates of investment in Palestine? Why is this the case when the Oslo Accords did just that. From 1993 to today, 40 billion dollars from donors went into the Palestinian economy. Palestine is the top recipient of non-military aid in the world. Why has it not been much more successful economically?

There are many possible explanations:

  1. Donors have hamstrung the creative use of that capital.
  2. The PA has not used the funds for constructive purposes but mainly for bureaucratic government salaries and for construction of buildings. Neither is a significant source of economic productivity. The PA has the wrong priorities.
  3. The PA is corrupt.
  4. Israel has sabotaged and undermined the ability of Palestine to develop a more productive and self-sufficient economy.
  5. The second intifada and ongoing low-level conflict have seriously damaged the economy and the prospects for investment.

With the donors’ agreement, three-quarters of incoming donor funds have come in to pay for a puffed-up bureaucracy rich with nepotism, a system where jobs go to family members or someone from one’s own tribe. Three-quarters of incoming funds have gone to the PA, much of it for public sector jobs and the creation and continuation of clientelism.

Last week (8 October 2020), the EU informed the PA that it will not advance any more funds until Ramallah accepts the tax revenues collected by Israel, tax revenues which Abbas refused to accept since May when it formally renounced cooperation with the State of Israel in response to Netanyahu’s announcement that Israeli law will be extended to Area C. Egypt and Jordan also insisted that the PA resume accepting the excise taxes that Israel collects on behalf of the PA.

Thus, the problem is not only economic. There are enormous pressures on the independence of a Palestinian political program, especially in relation to Israel. What would Palestine have to do if it wanted to free itself from this dependency and Israel’s veto power, especially since Israel has a voice along with the EU and the PA on the use of such funds?

In every single report over the last hundred years dealing with the Palestine problem, the premise has been stated and repeated: growth and development depends on the good will of both parties (the Jews and Arabs). But occupation by its very nature undercuts good will in favour of suspicion and distrust. Further, the situation is exacerbated because the two conflicting parties are each yoked to one or the other leg of the donor.

There is another important dimension to the whole system. Israel is a major beneficiary of Palestinian donor funds. Though those monies flow through the PA, in addition to paying salaries, the monies are used to purchase goods, much of those purchases from Israel. If the PA wanted to develop its economy by means of import substitution – growing its own tomatoes and cucumbers for example – that clearly would hurt the Israeli economy. Israel is in a position to veto the use of donor money to build the infrastructure necessary to foster import substitution through home-grown production.

Israel controls the Palestine economy in another way. For a number of years, the use of Palestine labour in Israel was cut off as a terrorist prevention measure and Israel began to bring in guest workers from Asia. That system has been reversed. Israel now brings in 120,000 to 150,000 Palestinian workers per day. If Palestinians contemplate returning to the use of force to advance their cause, the loss of these jobs and the remittances transferred back to Palestine are a huge disincentive, particularly so since the unemployment rate in Gaza is 50% greater than the unemployment rate in the West Bank, 60% versus 40%. Further, this high unemployment rate is itself a huge pacification incentive.

And look at the type of employment encouraged and created by such development aid. The aid development paradox is a result. Palestine gains upward economic mobility of development professionals while perpetuating a state of poverty among the recipients of development aid. This is on top of the micro-macro paradox of development aid. As economists have discovered, there is no significant correlation between aid and growth, between the growth in aid and the growth in GDP. In fact, there is the suggestion that an inverse correlation may exist. The more aid, the greater the downward pressure on the measures for economic growth. Yet development agencies and donor countries always boast of the enormous success of their aid.  

Then there are the payments for utilities – for electricity and water. If Palestine wanted to use donor money to build an electricity plant to escape the dependency on Israel and become more self-reliant, Israel is in a position to place obstacles in the way because of the tripartite control over the use of such funds. At the same time, a two-year-old agreement between Israel and Palestine to settle old Palestinian debts for electricity and set up a mechanism for future payments unraveled. The Israel Electric Corporation was carrying a debt of almost a million shekels or a quarter million dollars. Further, according to some estimates, Israel controls and uses 80% of the water from aquifers, another source of leverage.

What about Palestine moving away from its dependency on foreign governments by enhancing the prospects for public-private sector partnerships? There have been joint industrial parks (over 50) on the borders between Palestine and Israel so workers from Palestine no longer have to cross a security barrier. There are even joint enterprises by a few settlements and surrounding Arab villages. This started in the agricultural sector. Funded by the EU, an experimental program began in 2018 that Kibbutz Mizra in the Galilee to nurture joint Israeli-Palestinian agro-businesses. There was already a joint olive oil marketing project.[2]

Does not the above, taken altogether, suggest that Palestine has a similar status to a colony in relationship to Israel, and this without even considering Israel’s security control over Area B in the West Bank (22%) and both security and administrative control over Area C (60%), the largest part of the West Bank? Thus, the problems between Israel and Palestine go much deeper than settlements and disputes over the status of Jerusalem. They are problems of economic independence as well as political self-determination.

ADDENDUM – The Political Implications of Dependency

The Palestinian Authority (PA) as well as the Palestinian Liberation Organization (PLO) face a legitimacy crisis, not only because of the absence of transparency, accountability and popular participation in democratic practices and institutions, but also because of mismanagement of the economy and a continuing colonial dependency. However, it also has a very problematic relationship with its largest donor.

Palestine is enormously dependent on Europe for advancing its political program. One-third of the EU members recognize Palestine as an independent political entity and most members of the EU have diplomatic exchanges with Palestine, all in accordance with the 1999 Berlin Declaration. The large amount of money and the tripartite decision-making structure gives Europe control over capital infusion into the economy, a significant leverage over Palestine. The latter is very susceptible to political pressure.

The recognition of Palestinians as a people, the promotion of Palestine as a homeland for that people, the refusal of the EU to recognize any changes in the Green Line as the border for Palestine without Palestinian consent, the dubbing of Israeli settlements under international as illegal, the condemnation of Israel whenever that country resorts to force to punish Palestine for acts of terrorism committed by its “citizens” – dubbed a form of collective punishment – all these political issues have significant political costs in terms of the strength of donor leverage.

Those costs are born both by Palestine and the EU. For Palestine, in some perverse way, the economic power reinforces the image and status of Palestine as a colony and even as a colony of Israel. At the same time, the trade-off has reduced rather than increased the power of the Palestinian people. For it helps to freeze the options available. When the largest donor, the EU in 2009, endorsed a policy of pursuing a two-state solution and a refusal to recognize any border changes, including the annexation of East Jerusalem by Israel, at once the Palestinian political and diplomatic position and resistance to compromise was reinforced at the same time as its substantive independence, particularly its economic independence, was reduced. Thus, an irony, increasingly Palestinians were dressed in a strait jacket reinforcing reification of its political position just when maximum flexibility was needed.

The EU then held out the attraction of fuller recognition on condition of Palestine resuming negotiations with Israel, which already had so much leverage. Thus, added to its frozen negotiation position was a need to assert its independence in the face of such pressure.

This position had another repercussion – on the EU itself. It weakened the EU as its own leverage over Palestine increased. For splits over Palestinian policy reverberated into splits in Europe over that policy, thereby undercutting the EU’s role as a mediator. By the time we got to 2020, Luxembourg Foreign Minister Jean Asselborn described the hopes for a two-state solution as “being dismantled piece by piece, day after day,” and called for the EU to recognize Palestine as a state without recognizing how this freezing of positions reinforced that very propensity.


[1] en.wikipedia.org/wiki/Trump_peace_plan#:~:text=The%20Trump%20Peace%20Plan%20i

[2] Of course, by far the largest and most ambitious area of economic cooperation is the Red-Dead Project of Jordan and Israel to build a canal from the Red to the Dead Sea. It still creeps along.

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