The Palestinian (economic) problem

Today, international donors to the Palestinian Authority (PA) will meet in New York. This meeting comes at a crucial time — while the Sept. 26 expiration of the Israeli settlement freeze is the most imminent threat to the future of the peace process, Palestinian economic stagnation poses a more fundamental long-term threat to peace and stability, which I discuss at greater length here.

The headlines on the Palestinian economy are quite positive: GDP growth is expected to reach 8 percent in the West Bank in 2010, and 16 percent in Gaza, and PA Prime Minister Salam Fayyad’s institution-building efforts have been successful. Beyond those headlines, however, one finds cause for sobriety. The PA’s impressive economic growth is fueled largely by public spending, which in turn is financed by international donors. What’s more, as significant as foreign assistance to the Palestinians has been, it has not been sufficient: the PA faces an imminent funding shortfall of $300-400 million. Notably, Arab states have been reticent with their aid — Saudi Arabia has given the PA $30.6 million in 2010, and the UAE has provided $42 million. By this point in 2009, they had given $221 million and $174 million, respectively.

Much of the PA’s 2010 economic growth was made possible by Israeli Prime Minister Benjamin Netanyahu’s focus on improving conditions in the West Bank by removing checkpoints, facilitating commerce, and issuing more permits for Palestinians to work in Israel. These Israeli measures were, in turn, made possible by an improved security atmosphere in the West Bank stemming in part from the PA’s security reform efforts. Donors have called for further Israeli steps to ease the business climate in the West Bank, but such steps will likely hinge upon better Israeli-Palestinian security cooperation and progress on the peace process.

Even if the immediate threats to the Palestinian economy are overcome — such as the funding shortfall and the ever-present possibility that the West Bank will once again be engulfed in violence — it will be a long time before longer-term structural problems can be resolved, private sector investment reignited, and growth and development restored to the trajectory they appeared to be on in 1994, at the beginning of the Oslo era. The challenges are not only economic — right now, much of the PA’s success in keeping aid flowing and implementing reform is the result of Salam Fayyad’s talents and reputation. Continued success will require political reform, as well, to build an accountable bureaucracy around Fayyad and offer up a viable alternative to groups like Hamas.

To make it past the short-term problems and even have the opportunity to grapple with the deeper, long-term problems facing the West Bank and Gazan economies, the Palestinians, Israelis, Americans, and their partners must avoid the temptation to focus solely on peace talks and ensure that greater attention is paid to Palestinian economic development and institutional reform. Doing so can spark a virtuous cycle — good economic news can bolster Palestinian public support for peace, and progress toward peace in turn can help create conditions for the return of private investment, which is the key to long-term economic growth and prosperity for Palestinians.