By Rex Brynen
Later this month, the Palestine Liberation Organization is expected to call upon the United Nations to recognize Palestinian statehood based on the 1967 borders. The initiative is not based on any hope that the move will itself bring about a concrete change in conditions in the occupied Palestinian territories. Rather, it is intended to more firmly anchor the principle of a Palestinian state, at a time when Palestinian leaders fundamentally doubt Israel's commitment to a two-state solution.
The move is vehemently opposed by Israel, with Prime Minister Benjamin Netanyahu arguing that the effort seeks to circumvent the peace process. U.N. recognition is also opposed by the Obama administration, which has threatened to veto the move in the U.N. Security Council. While Europe is divided on the issue, the Palestinian request is expected to enjoy widespread support within the U.N. General Assembly, where the Palestinians will likely attempt to partially circumvent an American veto in the Security Council.
Not surprisingly, international attention to the issue has also raised the question, not for the first time, of whether Palestine is ready for statehood. Critics argue that it is not: They portray the current Palestinian Authority (PA), and hence any future Palestinian state, as dysfunctional, aid-dependant and not yet viable as sovereign state. Conversely, Palestinian officials argue that the economy of an independent Palestine would function much better than it does under the current conditions of Israeli occupation. Indeed, the plan put forward in 2009 by PA Prime Minister Salam Fayyad, a former International Monetary Fund official, was intended to prove to the international community that Palestine was fully prepared.
What does the current evidence suggest about those claims? Part of the challenge of assessing the economic prospects of a future Palestine is that it fundamentally depends on what kind of Palestine one imagines and how one imagines getting there. In Palestine, economics are always very political indeed.
Imagining the Economy of Palestine
At present, political leadership in the Palestinian territories is divided between the Palestinian Authority, which administers much of the West Bank and is dominated by PA President Mahmoud Abbas and his Fatah movement, and the Islamist movement Hamas, which controls all of Gaza. Fatah has long championed a negotiated two-state solution to the conflict with Israel. Hamas has not been prepared to abandon violence and takes a much harder line, although it has declared its willingness to accept a Palestinian state within the 1967 borders -- albeit it on terms Israel finds unacceptable. A reconciliation agreement was signed between the two Palestinian sides in May, but there has been little movement toward implementing it.
The economic viability of a future Palestinian state depends heavily on how this political schism is healed, if at all. The optimal outcome would be a final status agreement with Israel that both parties feel they can support, or else a Fatah-led deal that Hamas accepts after it wins ratification in a national referendum. In such a case, political instability and violence is likely to be minimized. Conversely, a final status agreement that faces strong domestic opposition from Hamas and others would likely involve much greater degrees of political -- and hence economic -- instability, and under present circumstances could not be implemented in Gaza at all. Another variant would be a "West Bank first" approach. The Palestinians have shown little enthusiasm for this, seeing in it a recipe for further national fragmentation.
With regard to the territorial extent of Palestine, the minimalist version -- preferred by those within the Netanyahu government who might be prepared to accept near-term Palestinian statehood -- would involve continued Israeli control of Palestine's international borders, retention of large swathes of Palestinian territory where Jewish settlements are to be found and continued occupation of the Jordan Valley and East Jerusalem. Few would contest that such a Palestinian state would be the least viable option possible, with its economy shackled by territorial fragmentation and its survival dependent on Israeli control of access to the outside world.
The fuller version would see a Palestinian state established based on the 1967 borders, with minor territorial exchanges. Such a state would have a much more coherent territorial continuity, greater land and natural resources, and control over its international borders. Its economic potential would be correspondingly enhanced.
This latter vision of substantive Palestinian independence is the one favored by the United States and by the diplomatic Quartet comprised of the U.S., the European Union, Russia and the U.N. It was also the focus of the last truly substantive rounds of Israeli-Palestinian peace negotiations in 2000-2001 and 2007-2008. If it were to somehow be achieved in the near future -- and, at present, that seems extraordinarily unlikely -- how might such a Palestinian state fare?
From Aid Dependence to Sustainable Development?
In summarizing economic conditions for the international donor community last April, the World Bank noted that the current high economic growth in the Palestinian territories -- estimated at 9.3 percent in 2010 -- is not sustainable. Rather, growth has generally been associated with recovery from the conditions associated with the second intifada in the early 2000s, or driven by the inflow of donor assistance. The productive and export sectors of the Palestinian economy have shown little real expansion. Unemployment remains very high: 16.9 percent in the West Bank and a whopping 37.4 percent in Gaza, which has faced years of Israeli-imposed trade restrictions as well as the extensive damage caused by Israeli military operations during Operation Cast Lead in late 2008.
Heavy dependence on external support has been a hallmark of the Palestinian economy for some time: For more than 15 years, the occupied Palestinian territories have been one of the highest per capita recipients of development assistance in the world. In 2009, the West Bank and Gaza received more than $3 billion in aid for a population of only 4 million people. The Palestinian Authority has also run large budget deficits for a decade now, relying on donor financing to close the gap. In 2011, the PA budget shortfall is projected to be $1.5 billion, representing 17 percent of gross domestic product, down from $1.7 billion and 28 percent of GDP in 2008. Moreover, even these figures may understate aid dependence, since a portion of the health and education system is provided by the United Nations Relief and Works Agency (UNRWA), which offers services to Palestinian refugees. Given such high levels of reliance on outside resources, how could an independent Palestine possibly be expected to stand on its own economic feet?
Part of the answer to this lies in looking more deeply at why the Palestinian territories are characterized by such economic dysfunction. Certainly, there have been significant weaknesses in the Palestinian Authority's efforts to build the infrastructure, institutions and other enabling elements of vibrant private sector growth. However, the biggest drag on Palestinian economic development has been the occupation itself. According to the World Bank, the West Bank and Gaza "will not rebound significantly while Israeli restrictions on access to natural resources and markets remain in place, and as long as investors are deterred by the increased cost of business associated with the closure regime." A variety of restrictions inhibit exports from the West Bank as well as internal commerce, while Gaza remains under severe import and export restrictions. More than 60 percent of the West Bank land is under full Israeli security and administrative control, and a growing proportion is taken up by either illegal Jewish settlements or the separation barrier built largely within the Palestinian territories to protect Israel from terrorist attack. Hundreds of checkpoints and road barriers limit internal traffic. According to an August 2011 report by the U.N. Office for the Coordination of Humanitarian Affairs, "This system has continued to hinder the access of the Palestinian population to livelihoods and basic services, including health, education and water supply." The Palestinian Authority itself has only limited legal powers under the existing interim agreements, hampering its ability to generate resources or undertake many policy initiatives.
In short, the current economics of the Palestinian territories should not be seen as a reliable omen of a Palestinian state's economic prospects after independence, but rather as a particularly anomalous and dysfunctional set of conditions that exist in large part because of the absence of Palestinian sovereignty. Earlier this year, the IMF estimated that, were it not for the effects of conflict and Israeli restrictions since 1994, the current GDP of the West Bank and Gaza would be 88 percent higher than its current level.
In fact, the West Bank and Gaza have a number of potential developmental advantages should an independent state be achieved. While the PA has arrears to local banks and suppliers, it has no external debt. Education rates are relatively high, with Palestinian students often outperforming most others in the Arab world. Most physical infrastructure is comparable to other countries at similar levels of development. There are gaps, of course: Gaza has no commercial port, and the airport built in southern Gaza in the 1990s has been largely destroyed. Such development and reconstruction projects, however, are likely to attract donor investment quite easily.
Some have suggested even more grandiose investment projects. A study by RAND, for example, proposed a massive $8.5 billion infrastructure investment program to construct the "Arc" -- a transportation and communications system running from the northern West Bank to southern Gaza, together with associated housing. Leaving aside the practicality and likely cost overruns of such an endeavor, the primary Palestinian development needs are rather more prosaic: investing in human capital, upgrading existing infrastructure, building institutional capacities, enhancing productivity, and promoting appropriate fiscal, legal and regulatory reforms to encourage private-sector growth.
One key challenge for a future Palestine will be water, especially in light of a rapidly growing population. Aquifer resources are limited and, in Gaza, already subject to severe overuse and consequent degradation. While conservation and loss-reduction measures, the removal of Israeli restrictions and revised pricing mechanisms might result in more equitable and rational allocations of water, the issue will present an ongoing challenge, particularly in an era of adverse climate change. In the medium term, Palestine will not have the sort of income levels that would make desalination cost-effective in most cases, unless the price of desalination technology drops further. In the long term, however, desalination is likely to be an important part of the answer, especially in Gaza.
Palestine's trade complementarities with Israel and Europe are substantial. There are, of course, disadvantages in Palestine's current overwhelming commercial dependence on Israel, including higher local price structures and loss of tax revenues under the current customs regime. Nevertheless, an era of peace would allow Palestinians to take better advantage of their lower-wage proximity to a high-income economy through joint ventures and Israeli investment in Palestinian manufacturing. Palestinians, both in the territories and the diaspora, have also shown themselves to have a strong entrepreneurial streak when local economic conditions are right. A Palestinian state would also likely benefit from very considerable international good will, expressed in trade agreements and various other trade-promotion facilities.
The Challenge of Governance
Promoting sustainable development in a post-independence Palestine would also require that it meet the challenges of governance. At present, however, the Palestinian Authority suffers from significant shortcomings. The constitutional and democratic process in the Palestinian territories has been short-circuited since the 2006 elections, which saw a Hamas government elected to power, and the subsequent 2007 Fatah-Hamas armed conflict, which saw the two sides consolidate their control over the West Bank and Gaza respectively. Fatah's poor electoral showing in 2006, in turn, had much to do with public perceptions of corruption and poor governance. In a June 2011 public opinion survey, 68 percent of West Bankers and 72 percent of Gazans reported corruption in their local political institutions.
Although the question of re-establishing the democratic and constitutional process in Palestine does not appear likely to be resolved soon, it would almost inevitably be addressed in any future peace agreement. It is difficult to imagine a peace deal that did not provide for an electoral process, and equally hard to imagine Palestinian leaders successfully selling one that did not to their public.
The question of corruption is more complex. Undoubtedly there has been and is some corruption within the PA. However, surveys also report that while many Palestinians complain about corruption, strikingly few -- less than 2-5 percent -- have ever actually experienced it. Indeed, actual rates of bribe-paying in the West Bank and Gaza are much lower than in most of the Middle East, with less than 4 percent of firms reporting corruption as one of the top 10 constraints on their business. Public financial management is relatively strong and transparent by the standards of the developing world. High levels of expressed concern at corruption would thus appear to have much to do with public expectations as well as discontent over political patronage and personal favoritism, rather than widespread illegality per se.
At present, the PA payroll is certainly larger than it can afford. Public sector wages account for more than half of all PA expenditures and fully 20 percent of GDP (excluding UNRWA employees). Much of this is accounted for by the security sector, which accounts for almost one-third of the PA budget -- an amount equivalent to health and education expenditures combined. Given the importance of security in any stable Israeli-Palestinian peace, it is difficult to see this burden declining even after statehood is achieved.
According to the World Bank's world-wide governance indicators, in 2009, the West Bank and Gaza ranked in the 4th percentile -- from the bottom -- for political stability, in the 20th percentile for voice and accountability, in the 21st percentile for government effectiveness, in the 39th percentile for corruption control, in the 45th percentile for rule of law and in the 50th percentile for regulatory quality. The first two of these are largely a function of the ongoing Israeli-Palestinian conflict and the suspension of the democratic process caused by the Fatah-Hamas tensions, resolution of both of which would be a prerequisite to any agreement on independence. With regard to the other indicators, however, the West Bank and Gaza actually rank ahead of many or most developing countries, even prior to any achievement of Palestinian statehood.
The Refugee Challenge
Assessment of the economic prospects of a Palestinian state thus far has examined its viability from the point of view of its existing assets and resources. However, a future Palestine would face another challenge: the possible absorption of large numbers of refugees from the diaspora. Could it cope with this influx, or might it overwhelm the capabilities of the nascent state.
Currently the number of refugees registered with UNRWA stands at 5 million, of whom 60 percent are to be found outside of the West Bank and Gaza; the total Palestinian diaspora is even larger than this. While the formal Palestinian position remains that of seeking the refugees' "right of return" to their original family homes within Israel, Palestinian officials have long recognized that any such return would likely be little more than symbolic. Consequently, any returnees would be more likely to repatriate to the West Bank and Gaza. Indeed, considerable quiet planning has been done around this issue, notably by the World Bank and PA. While the relevant studies have never been formally released, summaries of them have been. These have stressed that Palestine ought not to be thought of as having a fixed "absorptive capacity," but rather a variable ability to absorb returnees that depends on underlying economic growth. If repatriation were largely self-directed, such that individual families made repatriation decisions based on both their current conditions and good information on those in Palestine, it seems likely that repatriation flows would be largely linked to employment, investment opportunities and housing prices. Conversely, if refugees faced significant "push" factors that forced them to leave their current host countries, the impact could be destabilizing.
In any case, it is generally expected that only a minority of refugees would ever choose to repatriate. At present, by far the largest number of refugees lives in Jordan, where most have secure citizenships. The situation of those in Lebanon is much more precarious, however. And, while Syria has historically treated its Palestinians very well, the ongoing political violence there would undoubtedly make refugees more likely to leave for Palestine if they could.
A final aspect of refugee absorption in the future Palestine relates to the issue of refugee compensation. In past negotiations, Israelis and Palestinians have agreed in principle that Israel would compensate refugees for their displacement in 1948 and the subsequent seizure of their lands and properties. The parties remain far apart on amounts, however: Israeli negotiators have typically considered a contribution of $2 billion to $3 billion, while the Palestinian have put their claims as high as $263 billion. The provision of compensation to refugees would considerably facilitate repatriation by providing refugee households with significant financial resources for housing and investment.
The Bottom Line
As the previous analysis has shown, the economic prospects of a future Palestinian state will be greatly shaped by the nature of the peace agreement, the extent of the state and the politics that surround it. It is clear, however, that many of the supposed economic impediments to statehood are dysfunctions rooted more in the current extended abnormality of the occupation than they are inevitable elements of future development. In its April report to donors, the World Bank was clear that "if the Palestinian Authority (PA) maintains its performance in institution-building and delivery of public services, it is well-positioned for the establishment of a state at any point in the near future" -- a positive assessment it has repeatedly made since 2009. IMF assessments generally concur, and there is no reason to believe that the donor community feels any differently.
In terms of administration, economic policy, sustainability and growth potential, an independent Palestine would match or exceed many existing developing countries. The West Bank and Gaza are no worse off in these regards than were Bosnia-Herzogovina or Kosovo when they were assisted to independence by the international community, and in a rather better position than East Timor or, most recently, South Sudan. This is not to suggest that the Palestinian economic future will not face severe challenges and require appropriately thoughtful policy responses. That, however, is the normal course of affairs for developing countries. Indeed, most Palestinians are eager to experience such a normality of economic risk and competition, free from the distortions of occupation.
There are, of course, many obstacles to Palestinian statehood. They are fundamentally political: the current absence of meaningful negotiations, weak U.S. leadership, a divided Palestinian polity, difficult issues on which the parties disagree, violence and terrorism, continued Jewish settlement activity and a right-wing Israeli government unenthusiastic about genuine Palestinian self-determination. Sadly, no matter what economic and institutional progress the Palestinians make, and regardless of what happens at the United Nations this month, there seems little prospect for overcoming those issues soon.
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