Bubble in aid-dependent West Bank bound to burst, say economists

6 August 2012

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The economic gap is growing in the West Bank.

(Eyad Jadallah / APA images)

RAMALLAH (IPS) - A bubble in the economy of those West Bank cities, towns and villages managed by the Palestinian Authority cannot be sustained, according to analysts. “It [the bubble] will collapse, and the collapse will be harder when it happens later,” said Tareq Sadeq, a Palestinian economist and professor at Birzeit University.

“It will mean that people will lose their homes. They will lose their cars. They will lose their land sometimes because of the collapse of the bubble. This will affect the whole economy and will also reflect on the Palestinian Authority. So this may be a collapse of the PA itself,” Sadeq said.

The Palestinian Authority has announced it is facing a funding crisis; it is now relying on donor aid to cover a budget deficit of $1.1 billion and cash shortfall of $500 million.

“The Palestinian economy has become more and more dependent on wages, on salaries, for the whole economy, not just for the public sector; around 70 percent of all employees are wage employees. As a result, there is no production in the Palestinian economy. People consume and consume and consume and there is nothing to produce,” Sadeq said.

The International Monetary Fund turned down an appeal from the Israeli government in early July for a $1 billion loan to fund the PA. The West Bank economy is almost entirely upheld by international aid; in 2011, donors promised the PA $1 billion in support, of which $800 million was transferred.

“The whole economy is constrained to financial aid from international donors, which created more vulnerability in the Palestinian economy,” Sadeq said.

“Not strong enough”

Salam Fayyad, the PA’s prime minister, has nevertheless pushed economic development and investments in the private sector as a means to secure a Palestinian state. To date, most international economic bodies and foreign governments have praised Fayyad’s approach, pointing to Palestinian gross domestic product (GDP) growth rates as a measure of its success.

Palestinian GDP grew 7.7 percent between 2008 and 2011. In its 2011-2013 development plan, titled “Establishing the State, Building our Future,” the PA estimated the GDP would grow by 12 percent in 2013.

But a World Bank report released in July found that the Palestinian economy is unsustainable (“Towards Economic Sustainability of a future Palestinian State,” [PDF].)

“The Palestinian Authority has made steady progress in many areas towards establishing the institutions required by a future state but the economy is currently not strong enough to support such a state,” said economist John Nasir, lead author of the study.

The report said that removing Israeli restrictions on market access and to natural resources is the necessary first step in expanding the Palestinian private sector, and that the PA must stem its reliance on foreign aid.

Israel controls trade

“This has been in our face ever since Oslo started; you can see that the economy is not sustainable,” said Sam Bahour, a Palestinian-American businessman. In his experience, the biggest obstacle to economic development is Israeli control over Palestinian human capital.

“If you go into the private sector today and ask them what’s your biggest issue, it’s that we can’t find the people we need. Israel controlling all the points of entry and exit not only for goods but for people, basically regulates the pace of our development through the blockage of human resources,” Bahour said.

Israel and the Palestinian leadership signed the Paris Protocol in April 1994, as part of the Oslo accords, a 1993 political agreement that outlined relations and responsibilities between the two parties and created the Palestinian Authority. The Paris Protocol set up a framework for economic relations between Israel and the PA. Under the agreement, Israel began collecting import taxes on goods and transferring taxes to the PA on goods destined for the occupied West Bank and Gaza.

In turn, the PA was given authority to impose direct and indirect taxes, build an industrial policy, provide public sector jobs and establish a monetary authority. Palestinian trade with other countries was still handled through Israeli ports or Israeli-controlled border crossings, however, and continues to cause significant economic losses.

Need for resistance

According to Bahour, Israeli control over the Palestinian market and the resulting economic and social challenges Palestinians now face has led to what he called the “Americanizing of the Palestinian population.”

“When the economy is hurting and the donor involvement is basically dominating and driving the economy and people are being indebted even further, people become very individualistic and are out to make the best for themselves,” Bahour said.

The unemployment rate in the West Bank during the first quarter of 2012 was approximately 20 percent, data from the Palestinian Central Bureau of Statistics found. The bureau also found that a quarter of Palestinians in the West Bank lived below the poverty line in 2011, while almost 13 percent of Palestinians lived in deep poverty, in a West Bank Palestinian population of approximately 2.6 million.

According to economist Tareq Sadeq, the PA leadership needs to acknowledge the realities of building an economy under Israeli occupation and change its policies in order to alleviate the financial burden many Palestinian families now face.

“The gap is growing. There is frustration in the street but what matters for people now is that they don’t want to lose; they want to get their salaries and they want to keep their homes and the things that they bought,” he said.

“The Palestinian economy is under occupation. We have to think about our own policies of development under occupation and to think how to help people sustain and stay in their lands and resist occupation.”

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