The Taming of the Palestinian Authority
Israeli influence over Palestinian finances has driven a wedge between PA leaders and their supporters.
When U.S. President Donald Trump announced that he would unilaterally recognize Jerusalem as Israel’s capital last December, Palestinian officials promised swift retaliation. Refusing to meet with U.S. officials, they threatened to withdraw recognition of Israel by the Palestine Liberation Organization (PLO)—for years the bedrock of an uneasy accommodation between the Palestinian government and Israel—and promised to halt security coordination with the Israeli government. But months after Trump’s decision, and even after the actual relocation of the U.S. Embassy in May from Tel Aviv to Jerusalem, the Palestinian Authority (PA) has failed to make good on the majority of its threats.
In fact, the PA has been backing off a lot of its promises lately. In the years since it was established in 1994 to bring a measure of statehood to the Gaza Strip and the West Bank, the authority has been able to build some limited capacity for governance under the tight control of the Israeli military in most Palestinian population centers. Recently, though, it has failed to halt security and economic cooperation with Israel or prevent the relocation of the U.S. Embassy to Jerusalem—both very popular demands among Palestinian people and their political parties.
The aspirations of Palestinians and the preferences of their political leaders seem to be growing further and further apart. Something, it appears, is changing the way PA officials operate. And that something may turn out to be Israeli’s control over Palestinian taxes.
To be sure, this isn’t the first time the PA has been accused of failing to uphold Palestinian interests. Observers such as Jeremy Wildeman and Alaa Tartir have posited that the issue could be aid dependency. Indeed, Palestinians in the West Bank and Gaza have received more than $35 billion in aid since 1993 and are consistently ranked among the world’s the top recipients of aid per capita. In 2008, over 50 percent of the PA’s annual expenditures were covered by international aid. And donors used that money, the argument goes, to effectively pay for policies they liked, such as integrating the Palestinian economy into the Israeli one, even when the public might have preferred to progressively lessen economic ties with Israel.
Since 2008, however, aid has become a far smaller share of expenditure financing—down to 17 percent in 2017—and is projected to continue its decline. This is largely the result of economic reforms pushed by the donor community. The reforms—which were first implemented in 2008 by Salam Fayyad, a former PA prime minister and economist with the International Monetary Fund (IMF)—restructured PA finances and restricted spending in line with IMF and World Bank suggestions. They also pushed the PA to start depending less on aid and more on local taxes.
But there was a catch. Without real sovereignty or control over border crossings, most taxes—amounting to about 70 percent of tax revenue—fell outside the PA’s sphere of control. For example, the PA could collect corporate and property taxes but not customs and import duties. This problem was already well-understood when the PA was created, which is why, as part of the Oslo Accords, something called the clearance revenue mechanism was created. As part of this system, the Israeli government collects various taxes from Palestinian traders or those employed in the Israeli economy and then credits the PA on a monthly basis (after deducting a 3 percent administrative fee).
The amount of clearance revenue is substantial for the small Palestinian economy, amounting to $2.5 billion in 2017 and representing 60 percent of the PA’s total expenditures. In 2008, clearance revenue was $1.1 billion and represented just 31 percent of the PA’s total expenditures. In part, the jump has to do with the post-2008 reforms, which made it easier for the PA to secure the clearance revenue by introducing new measures to help the authority collect receipts from Palestinian traders, among other things. Today, the money is mostly used to cover the salaries of public employees, which amounted to $2.1 billion in 2017.
It is true that clearance revenue comes from Palestinians and belongs to the Palestinian Authority. But Israel has used its control over the money for political purposes. When Palestine acceded to the Rome Statute of the International Criminal Court in 2015, for example, the Israeli government halted the transfer of clearance revenue for four months. To cope, the PA had to cut public employees’ salaries by 40 percent. Israel later reinstituted the revenue’s transfer after substantial pressure from donor countries, which feared that the PA would soon collapse.
In fact, Israel has withheld the transfer of funds to the PA for a cumulative period of more than four years since 1997. The most notable incidents were in response to the Second Intifada in 2000, following Hamas’s win in the 2006 legislative elections, and in retaliation for the PA’s bid for full membership in the United Nations and other international organizations in 2011-2012. The disruptions resulted in severe economic damage to the Palestinian economy and in most cases ended up strengthening the PA’s cooperation with Israel when the money started flowing again.
For example, when Israel withheld clearance revenue in 2014 after Palestinians signed an agreement to unify the West Bank and Gaza, Abbas described security coordination with Israel as sacred. Additionally, PA rhetoric aside, the IMF continues to praise the PA for its ongoing economic and security cooperation with Israel.
Meanwhile, the PA has learned to worry more about Israel than about domestic public opinion. For example, despite having little popular support for it, Palestinian President Mahmoud Abbas’s response to the Trump administration’s move of the U.S. Embassy to Jerusalem was ultimately to call for new multilateral peace talks with Israel. Abbas’s pleas came in spite of urging by the PLO, which he chairs, to suspend its recognition of Israel, terminate the Oslo Accords, and halt security cooperation with Israel.
In turn, PA credibility has taken a hit among Palestinians. According to exclusive data from the Arab Center for Research and Policy Studies, only 9 percent of Palestinians surveyed in 2017-2018 trusted their government, 94 percent viewed the PA as financially and administratively corrupt at various levels, and 64 percent disagreed with its economic policy. When asked about the PA’s response to Trump’s embassy decision, 72 percent considered it below expectations. The Arab Opinion Index likewise shows strong support for suspending security coordination between the PA and the Israeli military as a countermeasure to Trump’s decision—something the PA will probably never agree to.
The PA is caught in a trap. Caving to public opinion by suspending security coordination with Israel or adopting an aggressive foreign policy would most certainly lead to Israel halting the transfer of clearance revenue, which would financially doom the PA. But failure to respond to any provocations, including the Trump administration’s plans to strip millions of Palestinian refugees of their status, will continue to erode the PA’s legitimacy and distance its leadership from the rest of Palestinians.