Is a Palestinian State Today Economically Viable?
The Report of the World Bank is a bitter commentary on the Palestinian economy, currently in a self-inflicted decline induced by the violence it brought on itself by launching the Second Intifada in 2000. Above all, the fundamental requisite for economic and political progress is to end the violence.
Over the last year Palestinian authorities have spent a great deal of time calling for a unilateral declaration of a Palestinian state while refusing to resume peace negotiations with Israel. Although they garnered political support for this in the UN General Assembly in September 2011, a new report from the World Bank, from April 2012, and made public in July 2012, indicates that the efforts of the Palestinians and their supporters would have been more usefully employed in thinking about the economic viability of such a future state.
The conclusion of this sobering report, which contradicts the more optimistic picture of the Palestinian economy presented by the IMF in 2011, is that although the Palestinian Authority [PA], the official representative group established in 1994, has made steady progress in many areas towards establishing the institutions required by a future state, the economy is currently not strong enough to support such a country. The report is a bitter commentary on the the Palestinian economy -- especially compared to the economies of Israel and even Jordan -- currently in a self-inflicted decline induced by the violence it brought on itself by launching the Second Intifada in September 2000.
The crucial problem according to the report is that the Palestinian economy has become increasingly dependent on foreign aid to drive its growth, a means of generating income that is insufficient for economic sustainability. Foreign aid has given the Palestinians billions of dollars -- by 2008 about 56% of GDP. This led to a GDP growth of 7.7% between 2007 and 2011; in some years its growth even reached 9% a year.
But that growth is artificial and is not sustainable for three reasons. Foreign donations have funded government expenditures and been largely in the area of government services, real estate, and other non-tradable sectors. The productive sectors have declined in importance: there has been a decrease in manufacturing, down from 13% to 10%, and in agriculture from 9% to 6%.
The inflow of foreign aid in 2007 led to some improvement in GDP in the West Bank. Gaza experienced growth because of the foreign aid and the expansion of trade through tunnels from Egypt. However, the Palestinians now face a crisis because important donor countries have so far not sent aid or have sent less aid in 2012. The PA now has a deficit of $1.5 billion in its budget of about $4 billion, and a cash shortfall of $500 million. It has been promised $100 million from Saudi Arabia which is insufficient to end the crisis.
Those who admired the second Intifada, heralded by Yasser Arafat but which generated violence for over two years and halted progress to peace negotiations, will now realize that it was a disaster, a severe blow to the Palestinian economy. The violence only resulted in the West Bank and Gaza suffering a severe economic contraction. Between 1999 and 2002, real GDP fell by 27%. In 2007 real per capita GDP was 23% below the 1999 level. Industry, agriculture, tourism, and some other services declined. Public administration, defense, and public services such as health and education grew from 20% of GDP to more than 27%.
The report argues that the PA must increase private sector growth, must improve its trade infrastructure to lower costs and increase efficiency, must improve the investment climate and must improve the quality of the workforce. Sustained economic growth entails a strong dynamic private sector that can generate jobs both to employ a rapidly growing population and to provide resources for government to provide services.
This necessary dynamism is lacking. The Palestinian private sector is overwhelmingly dominated by small family-owned businesses. The high cost of doing business lowers competitiveness. The Palestinian businesses mostly focus on the local market. In addition, relatively high wages, compared to other countries such as Turkey and India, high transportation costs, and low level of innovation also reduce competitiveness.
Yet, even with significant growth, it is unlikely that the PA can support an administration of its current size. It must reduce costs, raise revenues, and move to fiscal sustainability. Politically, the report recognizes that investment would be increased if a peace agreement were reached between the Palestinians and Israel.
The Palestinian economy over the last decade has been characterized by high levels of unemployment and underemployment, some of the highest rates in the world. These have varied between 20% and 30%. Those rates are accompanied by low levels of labor force participation, about 41%. Even more troubling has been the decline in youth employment and economic participation, and the extremely low level of female labor participation. In 2010 youth unemployment in general was about 34%, and 53% in Gaza. During the last decade, the rate for women participating in the labor force was below 16%. The result of this high unemployment and the decline in private sector wages relative to government wages, has led to high levels of poverty: in 2009 it was 22% in the West Bank and 33% in Gaza.
The report makes the obligatory criticisms that Israeli restrictions significantly impact Palestinian's ability to trade and remain the biggest impediment to investing because they create high uncertainty and risk, and that Palestinian goods have difficulty entering the Israeli market. But it ignores that this damage is also self-inflicted as these restrictions are due to Israel's security needs as a defense against further Palestinian violence. The Report also says nothing about the climate of innovation in the Israeli culture, and how it has continually overcome adversity -- factors that help explain the large disparity between the GDP per capita of Israelis and Palestinians.
How can the viability of the Palestinians be increased? Clearly, there are problems to be resolved besides the acute one of differences between the Fatah control of the West Bank and the Hamas rule of Gaza since 2007.
If the Palestinian narrative has gained some resonance in the political realm, the PA has lacked competence in economic matters and not been devoid of corruption. It could try to build a better business and investment environment by reforming the legal system, especially relating to land, now composed of a disparate group of layers of Ottoman, British Mandate, Jordanian, Egyptian, Palestinian laws which differ between Gaza and the West Bank, and Israeli military concerns. Although the report speaks of the well educated, entrepreneurial population in the West Bank, it is apparent that the skill level of Palestinian workers needs to be improved by more emphasis on cognitive and behavioral skills, such as discipline and work effort.
Most importantly, and not sufficiently stressed by the World Bank report, are the benefits that would accrue to the Palestinians were there a peace settlement. Economically, these would include a well-balanced customs union between a future Palestinian state and Israel, and a non-discriminatory policy of free trade agreements. Above all, the fundamental requisite for economic and political progress is to end the violence.
Michael Curtis is author of Should Israel Exist? A Sovereign Nation under attack by the International Community.
Reader comments on this item
|If It Collapses, Then It Will Pull Israel Down Along With It [122 words]||Tim Upham||Aug 13, 2012 22:42|
|Peace as a last resort? [205 words]||Batya Casper||Aug 8, 2012 23:48|
|Is Israel viable? [12 words]||Juliano Oliveira||Aug 8, 2012 10:19|
|↔ Yes [46 words]||Gary||Aug 9, 2012 07:25|
Comment on this item
by Richard Kemp
Would General Allen -- or any other general today -- recommend contracting out his country's defenses if it were his country at stake? Of course not.
The Iranian regime remains dedicated to undermining and ultimately destroying the State of Israel. The Islamic State also has Israel in its sights and would certainly use the West Bank as a point from which to attack, if it were open to them.
There can be no two-state solution and no sovereign Palestinian Arab state west of the Jordan, however desirable those things might be. The stark military reality is that Israel cannot withdraw its forces from the West Bank.
Fatah leaders ally themselves with the terrorists of Hamas, and, like Hamas, they continue to reject the every existence of the State of Israel.
If Western leaders actually want to help, they should use all diplomatic and economic means to make it clear to the Palestinians that they will never achieve an independent and sovereign state while they remain set on the destruction of the State of Israel.
by Louis René Beres
The Palestine Liberation Organization [PLO], forerunner of today's Palestinian Authority, was founded in 1964, three years before Israel came into the unintended control of the West Bank and Gaza. What therefore was the PLO planning to "liberate"?
Why does no one expect the Palestinians to cease all deliberate and random violence against Israeli civilians before being considered for admission to statehood?
On June 30, 1922, a joint resolution of both Houses of Congress of the United States endorsed a "Mandate for Palestine," confirming the right of Jews to settle anywhere they chose between the Jordan River and the Mediterranean Sea. This is the core American legacy of support for a Jewish State that President Obama now somehow fails to recall.
A sovereign state of Palestine, as identified by the Arabs -- a Muslim land occupied by "Palestinian" Arabs -- has never existed; not before 1948, and not before 1967. From the start, it was, and continues to be, the Arab states -- not Israel -- that became the core impediment to Palestinian sovereignty.
by Timon Dias
It looks as if this new law is meant to serve as a severe roadblock to parties that would like to dismantle the EU in a democratic and peaceful way from within.
A rather dull semantic trick pro-EU figures usually apply, is calling their opponents "anti-Europe."
by Alan M. Dershowitz
by Soeren Kern
Austria has emerged as a major base for radical Islam and as a central hub for European jihadists to fight in Syria.
The proposed revisions would, among other changes, regulate the training and hiring of Muslim clerics, prohibit the foreign funding of mosques, and establish an official German-language version of the Koran to prevent its "misinterpretation" by Islamic extremists.
Muslims would be prohibited from citing Islamic sharia law as legal justification for ignoring or disobeying Austrian civil laws.
Leaders of Austria's Muslim community counter that the contemplated new law amounts to "institutionalized Islamophobia."
Official statistics show that nearly 60% of the inhabitants of Vienna are immigrants or foreigners. The massive demographic and religious shift underway in Austria, traditionally a Roman Catholic country, appears irreversible.