Penniless Palestine

The financial crisis currently facing the Palestinian Authority is not
just economic; it is also a symptom of the deep political problems
facing the leadership in Ramallah. The PA has based its appeal to the
Palestinian public on a strategy that combines working with Gulf Arab
states, Israel, and the West to produce improvements in the quality of
life for Palestinians under occupation, while at the same time
pursuing independence through international diplomacy. Now a lack of
funding has limited the PA’s ability to meet its payroll, undermining
the credibility and authority of its approach and its leaders.

The situation became especially perilous in late July, when promised
donations failed to materialize, including $330 million that Gulf Arab
states had pledged to provide every six months. This shortfall was
caused by a combination of donor fatigue, impatience with the lack of
progress on Fatah-Hamas unity, and a long-standing tradition of Arab
states not meeting their pledges to the PA. Previously, in May, Israel
also temporarily failed to deliver the Palestinian tax revenues it
controls. As a result of the shortfall, the PA was forced to announce
that government salaries — on which more than a million Palestinians
in the West Bank and Gaza are dependent — would be cut in half for

The PA’s financial woes undermine the achievements made by the state-
and institution-building program initiated by Prime Minister Salam
Fayyad in August 2009. Public anger at the proposed wage cuts was
palpable: civil servants, doctors, and teachers threatened a mass
strike. The government, meanwhile, mandated a reduction in the price
of bread, the staple food for most Palestinians — a further
reflection of the financial hardships that the crisis is causing to
ordinary people.

Undelivered pledges from Arab states are at the core of the immediate
crisis. (Fayyad has refused to publicly identify which states reneged,
but the group certainly includes Saudi Arabia.) This has been a
perennial problem for many years, since Arab states have often tied
the delivery of their donations to political demands and have at times
raised legitimate questions about the corruption that used to be
endemic in Palestinian financial management.

The uncertain status of the Fatah-Hamas reconciliation agreement has
further undermined donor confidence, because governments prefer to
know who precisely will be in charge of the money they are providing.
By signing a vague “national reconciliation agreement“ in Cairo in
April, the PLO and Hamas agreed, in effect, to agree. But since then,
they have not achieved a specific agreement on any issue. The tense
and frequently hostile relationship between the parties remains
unchanged, meaning that Palestinian society, polity, and leadership
remain not only divided but in a de facto cold war.

Both Fayyad’s reputation and that of the entire PA leadership have
suffered as a result of the financial crisis. Some leaders in Fatah
and Hamas have tried to make Fayyad the issue by claiming that
disagreement over whether he should remain in office was the primary
obstacle to reunification. But Fayyad is a convenient red herring. In
reality, there is near-total disagreement between the two sides.
Focusing attention on a manufactured dispute about Fayyad, who is a
member of neither party, has been a means to distract from Fatah and
Hamas’ inability to agree on any substantive issue.

Hamas is the primary beneficiary of the PA’s financial woes and their
political consequences. Indeed, although Hamas is suffering something
of a financial crisis of its own due to tensions with Egypt — and,
especially, Syria — it remains the recipient of significant cash
transfers from other patrons, primarily Iran. Still, the consequences
of Hamas’s financial crisis are greatly mitigated by the fact that its
rival, the PA, continues to pay most public employees in Gaza — even
though Hamas still rules there.

The real core of the PA’s long-term challenge is the ongoing Israeli
occupation, which prevents the Palestinians from having control over
key sectors of their economy and restricts almost every form of
economic development. In April, Mariam Sherman, the World Bank’s
country director for the West Bank and Gaza, said, “While we commend
the solid performance of Palestinian institutions, we are concerned
about the prospect for continued economic growth.” Israel’s ”closure
regime,“ she continued, represents ”the most substantial obstacle to
Palestinian economic viability.” A World Bank report issued at the
same time noted that strong private sector growth is unlikely “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.”

Such findings echo those of every major multilateral institution,
which emphasize that Israeli restrictions on access and mobility are
the gravest threat to long-term development and financial stability.
Genuine financial viability will ultimately require the creation of an
independent Palestinian state alongside Israel.

However, even under occupation, the PA has achieved a great deal in
recent years. According to the World Bank, real economic growth in the
West Bank in 2010 exceeded 9 percent of GDP, which surpassed the PA’s
budget projection estimate of 8 percent. Moreover, under Fayyad, the
PA has overcome a legacy of corruption and patronage to establish a
transparent public finance system that has greatly reassured foreign

Nevertheless, corruption in other sectors remains an issue. The PA’s
improved image is threatened by an ongoing investigation into alleged
malfeasance by some officials, including four ministers, among them
Minister of the Economy Hassan Abu-Libdah. There are also charges and
countercharges of corruption between Fatah and an ousted former PLO
official, Mohammed Dahlan.

Other obstacles to economic well-being also remain. A June UN report
showed rising unemployment among Palestinians in the West Bank and
East Jerusalem — from 21.7 percent to 25 percent during the last
year. Moreover, what economic growth has occurred has been based on an
increase in construction and retail businesses, not manufacturing or
long-term, self-sustaining enterprises.

The PA’s state- and institution-building program has shown great
promise, but it requires sustained international financial and
political support to continue and expand. Crucially, if it is to
remain politically viable, it must also be seen by the Palestinian
public as part of a broader program to establish an independent state.
There is no Palestinian constituency for a program to create better
living conditions in small autonomous zones within a permanent or
semi-permanent Israeli occupation.

Although the PA’s potential plan to push for UN recognition of
Palestinian statehood is not directly related to the present crisis,
it does contribute to the overall uncertainty about the direction in
which Palestinian politics and national strategy are headed. A UN move
could create additional significant financial problems, including a
withdrawal or reduction in U.S. aid and possible withholding of
Palestinian tax revenues by Israel. At the same time, reported plans
for mass civil disobedience among Palestinians in coordination with a
UN initiative in September further contribute to uncertainty among
donors and investors, and raise additional tensions with the United
States and Israel.

The bottom line is that the PA’s financial crisis threatens the
achievements and potential of the state-building program, which has
been the basis of significant but limited economic growth in the West
Bank in recent years, as well as the credibility of the moderate
leaders who have created and led it. The success of the program in
terms of economic development must be linked to a viable political
path to national independence — not symbolic gestures at the UN that
have no effect on realities on the ground — or even its creators and
leaders will abandon it. Fayyad and other PA officials conceptualized
their project as a bottom-up supplement to top-down diplomacy, not as
an alternative to it.

The mainstream Palestinian leadership in Ramallah has staked its
entire political future on this policy of independence through a
combination of state-building efforts at home and diplomacy abroad. If
the Palestinian public sees this strategy as having permanently and
irrevocably failed, particularly if there are ongoing or regular
financial and economic crises, they will look to an alternative
leadership and program. The alternatives are either chaos or Hamas,
with inevitably dire consequences for the Palestinian national
movement and for U.S. and Israeli interests as well.

Those parties who do not want the Palestinians to go ahead with a UN
initiative — such as the United States, some European countries, and
Israel — should make every effort to ease the financial crisis. The
Palestinian leadership needs a clear and reasonable incentive to avoid
a confrontation at the UN in September, which would probably be very
damaging to Israeli, Palestinian, and U.S. interests in the broader
Middle East. Otherwise, the Palestinians might feel they have no other
diplomatic options and an overwhelming domestic political necessity to
go forward with plans that carry significant risks.

Meanwhile, those parties, including some Arab states, who are
encouraging Palestinians to go forward with a UN initiative in spite
of the risks have an obligation to protect them from the political,
diplomatic, and financial consequences. But so far, the opposite has
occurred: the pattern of unmet pledges undermines the ability of
Palestinian leaders to make constructive decisions, places them at the
mercy of domestic political calculations and public anger, and weakens
their ability to lead. It is pushing them toward a confrontation with
the United States (and for that matter, much of the West) and with
Israel that they can ill afford, leaving them alone and exposed.

There is, however, the potential for compromise. Fears of a
Palestinian failure at the UN producing a backlash in the West Bank
are justifiably widespread. Yet a perceived success at the UN, met
with an initial wave of euphoria but followed by disenchantment as
living conditions remain unchanged or worsen because of Israeli or
U.S. retaliation, could produce an equal backlash. Instead, a
compromise strategy could produce a limited but real Palestinian
achievement in New York. Such a strategy would involve an upgrade of
the PLO observer mission at the UN, a reiteration of the Obama
principles (negotiations based on 1967 lines with agreed-upon land
swaps) , and a UN declaration clarifying that the international
community will not accept any outcome other than a two-state solution.

Massive international investment in state- and institution-building
could ensure a major upgrade in the quality of life for Palestinians
in the West Bank and could defuse the impact of any disappointment.
Whatever happens in New York in September, the day after needs to look
better, not worse, for Palestinians on the ground. Ultimately, the
Palestinian national aspiration for independence must be met. But
institution-building, investment, and financial support for a
leadership that is opposed to violence and committed to peace with
Israel can buy time and patience — probably for years, but certainly
not for decades.