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Donors Damaging Palestinian Economy

Analysis by Pierre Klochendler

JERUSALEM, Mar 25 2012 (IPS) - The latest Work Bank report on the Palestinian economy fuels the row on institutional viability precisely as Palestinian Authority President Mahmoud Abbas considers renewing his statehood bid.

A year ago, in more than tacit acquiescence in President Abbas’s unilateral campaign for UN recognition, the World Bank assessed that the Palestinian Authority (PA) is “well-positioned for the establishment of a state at any point in the near future.”

Supported by similar appraisals of the International Monetary Fund and the EU, the birth certificate of a healthy ‘in-vitro Palestine’ was intended to be issued in September 2011.

Yet, blissful blessings notwithstanding, six months after Abbas held the membership application at the world podium, the Palestinian project, still in gestation, risks suffering a miscarriage – not only because of joint U.S.-Israeli pressure.

The bi-annual World Bank report published Mar. 15 portrays a grim outlook for Palestinian economic viability prospects. It notes that “while the Palestinian economy continues to grow, indications of sustainable growth remain absent.”

The data in the report entitled ‘Stagnation or Revival? Palestinian Economic Prospects’ is cause for concern. In the West Bank, it shows a growth rate of the Gross National Product (GNP) of 5.8 percent during the first three quarters of 2011– a drop of 1.7 percent compared to the same period in 2010 – and unemployment remaining at 16.6percent.

The report blames the stagnation on both Israel and the donors. “The slowdown in West Bank growth in 2011 demonstrates its dependence on donor aid, which is on a negative trend, and the lack of new Israeli easing of restrictions,” the report concludes.

The report forecasts a further GDP growth drop to 5 percent in 2012, and a recurrent budget deficit of 1.1 billion dollars.

In Gaza, it indicates a GNP growth rate of 25.8 percent (compared to 16.8 percent in 2010) with an unemployment rate of 30.3 percent. “The recent upswing in growth demonstrates the importance of easing of Israeli restrictions on the entry of raw materials in combination with the availability of donor financing for investments.”

Unsurprisingly, regardless of the downturns afflicting the U.S. and European economies and the bloody Arab upheavals distracting the Gulf States, the Ad-Hoc Liaison Committee (AHLC), a forum of donor countries for assistance to the Palestinian people, gathered on Wednesday in Brussels and pledged to honour an aid package.

The crisis was expected. During its 2008-9 war on Hamas in Gaza, Israel inflicted a coup de grâce to the local economy which was slowly recovering from the 2000-6 Palestinian Intifadah uprising. The blockade worsened the situation. “The Gazan economy is still rebounding from a very low base, with the average Gazan remaining worse off than s/he was in the late nineties,” the report says.

West Bank growth has been steadily declining since 2008. Donors were then at the pinnacle of their peace and state-building efforts. But the Gaza war compelled the PA to suspend negotiations with Israel. Three years on, peace initiatives are proving insignificant.

Exacerbating the PA’s financial and fiscal woes, the U.S. cut off funding when Abbas attempted his statehood drive in defiance of President Barack Obama’s commitment to jumpstart direct negotiations. For its part, Israel punitively deferred transfers of import taxes earmarked to the PA on goods from other countries.

Though Israelis and Palestinians have recently reported progress on renewed talks aimed at revising the tax collection chapter of the Paris Protocol on their economic relations, pressuring Israel to further relieve its pressure on their neighbour’s economy is wishful thinking given a political conjuncture dominated by U.S. elections and talk of war against Iran’s controversial nuclear programme.

Last year, requiring 1.5 billion dollars in budget support and receiving 814 million dollars, the PA borrowed from the local banking sector to finance the gap, and accumulated some 260 million dollars in arrears to the private sector, the report notes.

“Stabilisation of the PA’s fiscal position compels immediate action by the donor community,” urges Mariam Sherman, World Bank country director for the West Bank and Gaza.

Deploring the gap between donors’ pledges and deeds, the report portends that “the current trend of reduction in donor aid would likely aggravate the Palestinian fiscal crisis, potentially jeopardising gains made in recent years in institution-building.”

This mix of urgency and warnings is likely to instil scepticism over the PA’s aptitude to become a state. This is most inappropriate in view of Abbas mulling a return to the UN; this, in spite of Obama’s repeated pleas that he returns to the negotiations table.

Into the fray enters Israel with a 44-page report which relies heavily, albeit selectively, on the World Bank report, and argues at the AHLC meeting that the Palestinian economy isn’t stable enough for full statehood.

“This demonstrates the need for further reform in order for the PA to meet the standards of a well- functioning state,” is the Israeli report bottom-line. The State Department chimes in, vowing to “improve the long-term sustainability of Palestinian institution-building projects.” The road to independence is paved with good intentions – and can be quite hellish.

Dimitris Bouris, researcher at the Council for European-Palestinian Relations (CEPR) criticises the international community for jeopardising its own advocacy to Palestinian statehood. “Not because they have reduced the donor aid but because they did not link their state-building initiatives with clear political objectives,” he explains in the EU affairs portal

The donors, the soul-search goes, are trapped by their commitment to a negotiated solution to the conflict, in effect abiding to the conditions created by the Israeli occupation as their state-building endeavour addresses only some 40 percent of the West Bank (‘Areas ‘A’ and ‘B’, under full and partial PA control) and totally excludes Hamas-ruled Gaza.

In his ‘Economic Sophisms’ essays, 19th-century French political theorist Frédéric Bastiat refuted the common analogy between economic war and war: “In war, the stronger overwhelms the weaker. In economics, the stronger strengthens the weaker.”

Where the PA and Israel stand is indeed a sophism, but the donors’ assumed role isn’t quite clear. Their diplomatic powerlessness seems to support the sustainability, not of the Palestinian economy, but of the conflict.

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