Palestine’s Economic Catch-22

It is doubtful that Fayyad can create a sustainable Palestinian economy without Israel's consent and aid

In August 2009, Palestinian Prime Minister Salam Fayyad submitted the Palestinian national plan entitled “Palestine: Ending the Occupation; Establishing a State.”  In this well-known and controversial document, Fayyad called for a process of state building by concentrating on the strengthening of Palestinian institutions in order to prepare Palestinian to unilaterally declare statehood in the summer of 2011.  Paramount in the goals outlined in Fayyad’s document was the creation of a sustainable, vibrant Palestinian economy that was not dependent on the charity of the international community.  Put another way, Fayyad realized that Palestine could not be donor-dependent if it were to survive as an independent and sovereign nation.

[tweetmeme] An internationally recognized economist, Fayyad made two important conclusions concerning the needs of the Palestinian economy.  First, Fayyad realized that the key to a sustainable economy is attracting and promoting domestic and international investment in the private sector.  Secondly, it was clear to the Palestinian PM that Palestine, as any small economy, would need to vastly increase exports in order to expand the available markets.  To that end, Fayyad implemented many programs – highlighted in both the original plan and the one-year progress report – targeted at stimulating private domestic and international investment in Palestinian society, including the regulation of markets, the creation of industrial zones and the adoption of a national strategy on exports.

While the Fayyad government did make advances in the last year towards the general goal of a sustainable state, there are still major obstacles to the development of a sustainable Palestinian economy.  Annual economic growth of around 8% masks the deficiencies of a Palestinian economy that is limiting the ability of the Palestinian territories to complete the transition to a viable state with a sustainable and fully functional economy.

According to a World Bank report, entitled “The Underpinnings of the Future Palestinian State: Sustainable Growth and Institutions,” Fayyad’s institution building program has created a Palestinian society that “well-positioned for the establishment of a state at any point in the near future.”  Despite the World Bank’s confidence in the ability of the Palestinians to create a viable state, there were many reservations about the Palestinian economy.  Despite receiving nearly US$1.2 billion in 2010 in international aid, Fayyad was recently forced to ask donor nations for more aid to cover an estimated US$300 million shortfall in the Palestinian budget.

Despite Fayyad’s optimism as well as the recent implemented policies designed to catalyze the private sector, the Palestinian economy remains boxed in by the constraints of the Israeli occupation.  Although Fayyad has been able to display an impressive growth rate in the West Bank, this growth has been predominantly donor-driven and government-initiated; the private sector remains sluggish due to the divisive effects of the Israeli occupation, namely the diminished markets available to Palestinian businesspeople and the disincentive for private investment.  For the Palestinian economy to cease relying on international aid – as Fayyad hopes to accomplish by 2013 – Fayyad must find a way to stimulate the private Palestinian sector.

Yet, while the Palestinian private sector has shown more recent growth than in the last several years, it is still well below the levels of investment and production displayed in the pre-Second Intifada era.  Israeli occupation policies that have been implemented since the end of the Second Intifada have assured the Palestinian economy of modest growth in the private sector.  The policies that have divided Gaza, the West Bank and East Jerusalem have dramatically limited the markets available to Palestinians, thus cutting possible profit for Palestinian businesses; a farmer in the West Bank is unable to sell his product to Gaza or East Jerusalem.  Additionally, the division of the West Bank into areas A, B and C has cut Palestinians off from 60% of the West Bank, severely curtailing the economic potential of Palestine by drastically reducing tourism and the agricultural area.  Furthermore, by maintaining control of Palestine’s borders, Israel is diminishing international investment as well as exports and imports by following unpredictable procedures and unclear import/export regulations.  Through its lack of transparency, Israel is creating a strong disincentive for foreign private firms from investing in Palestine.

Thus, PM Salam Fayyad has discovered himself to have fallen in a catch-22 of epic proportions.  The policies of Israel’s occupation are severely curtailing Palestine’s ability to create a sustainable functioning economy.  Indeed, such policies have left the occupied territories with an economy that is almost completely driven by the government and funded by international donors.  In order to prove to Israel and the world that Palestine has created the institutions necessary to declare statehood, Fayyad must enhance the capacities of his economy; he must inject sustainability and consumer confidence into the Palestinian economy.  Unfortunately, in order to do this, Israel must lift many of the limiting occupation policies.

Photo from Electronic Intifada

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