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The Palestinian economic bubble

By Tareq Sadeq, september 1st, 2011

 I did not imagine I would one day see the Palestinian occupied territories within the 1967 borders reach an economic growth rate equivalent to that of China, with an announced progression of 8% for 2010. According to the economic forecasts of the World Bank it will reach 13% in 2013; to such an extent that I began to think that the territories under the control of the Palestinian Authority could be the Singapore of the Middle East, as the artisans of the Oslo agreement claimed in the 90s. It was soon proved that this has just been an illusion that could not withstand the fragile reality of the Palestinian Authority: the reality of a bubble that can burst at any moment. Only a few months were needed for the Palestinians to understand that their leadership is confronted with a an economic crisis such, that the government is practically insolvent.

How can an economy showing a growth rate among the highest in the world, be confronted with an unprecedented financial crisis ? Such a contradiction can only be explained from two hypotheses: either the figures are faked which is difficult to verify: or this is due to the very structure of the economy, where the increase in State expenditure leads to GDP progress but also to a budget deficit.

How can the policies Salam Fayyad has followed for four years (2007-2011) in the name of economic independence and sovereignty have resulted in such a fiasco ? Fayyad has announced that his government has reduced by 35% over the last two years its dependence on foreign payments and has claimed that it was capable of paying six months of wages to its employees in the event of total cessation of these payments. Fayyad’s optimism is such that he has claimed he will be able to do without foreign aid as from the year 2013. All his declarations collapsed from the moment the Israeli authorities announced they were ceasing to transfer to the Palestinian Authority its share of customs duty taxes. It has to be noted anyway that in spite of the economic growth rate announced, the rates of unemployment and of poverty have not fallen at all.

Without any doubt the first cause of the fragility of the Palestinian economy is the Israeli occupation and therefore in reality the Palestinian Authority: void of any authority, it is simply an organ for executing foreign policies.

The town of Ramallah — that the Palestinian Authority has proclaimed the capital — represents alone 40% of Palestinian GDP. However the dominant economic activity there is that of restaurants and bars. Note that the consumer growth rate in this field has increased in a significant manner between 2007 and 2010 going up to + 2.4% in 2008. This is an indicator of the dominant type of consuming among the Palestinian population. The Palestinian Authority is the number one employer on the Palestinian labour market where 20% of Palestinian workers are employed in the public sector. However since the main part of the Palestinian Authority's resources come from donating countries its capacity for employing a fifth of the population depends on how docile the governments' politics and economics are in relation to Western countries. A clear illustration of this, is what the Hamas government then the government of national unity had to go through in 2006. Or there again, the fact that the World Bank and donating countries intervene in the choice of the type and financing of all development projects.

What is astonishing is that the Finance Minister is also Salam Fayyad, the Prime Minister. The only known precedents for such a situation are to be found in countries rotten with corruption where the head of the executive holds the power of decision and that of financing these same decisions. The absence of a legislative organ – because of the existing conflict between Hamas and Fatah – is good ground for favouring all forms of corruption. In any case, the deepening of the State budget deficit leading to a situation where the Palestinian Authority can no longer pay its employees or honour its debts to the private sector, a situation of cessation of payments, prove

that foreign aid even if not discontinued - cannot be the basis of a durable solution for the Palestinian Authority. To-day's financial crisis is not due to a delay in payments from donating countries — fundamentally Arab countries —, as the Finance Minister claims. Foreign financing has constantly supported Fayyad's budget since 2008 and aid from the Arab countries represents only 20%. The main reason is that the Palestinian Authority has no authority anywhere, no more on the West Bank, in the towns of the A Zone than in Gaza. The structure of the Palestinian Authority itself is another of the causes: wages represent 58% of government expenditure – one of the highest rates in the world – as opposed to only 8% spent on development projects. It should be noted that 47% of these wages are spent on some 70 000 security employees, in the different branches of the sector and it is a question for them of ensuring security under a regime of occupation. Such a high percentage accorded to the security budget is aimed at conforming to the requirements of the US and the Israeli security services: it must be ensured that all mobilisation of the Palestinian masses is under control and fully mastered. At the same time expenditure for health or education does not exceed 5% of the budget.

This structure of the Palestinian Authority has led to making the Palestinian citizen, who lives in the occupied territories within the 1967 borders, a simple consumer of Israeli products, a hostage of the interests of the Israeli market, of foreign financing, of the appreciation of donating countries, a hostage of Israeli policies. It is not surprising that in these conditions the Palestinian Authority is confronted with a true financial crisis: it only serves to finance Palestinian consumers who produce nothing of their own.

What's more, corruption continues to be rife in Palestinian organs of power and Ministries, as much under the Fayyad government as that of Hamas, but in both cases in a different way to that of Arafat's time (then, widely criticised by Westerners). It is a question to-day of structured corruption entailing different forms of money laundering, as the recent accusations aimed at Mohamed Dahlan ( former Minister and member of the Fatah Central Committee) showed, but which do not account for more than the infinitely small emerged tip of the iceberg.

It can moreover, appear paradoxical that the World Bank supports the capacity of the Palestinian Authority to set up a State, while one of its own indicators (the Indicator of the control of corruption) underlines the deterioration of the Palestinian Authority's struggle against corruption since 2008 i.e. from the first days of the Salam Fayyad government.

GDP growth cannot be considered as an indicator of economic development , since it is consumption that structures the economy. The growth rate can fall through the simple fact – for political reasons – of a delay in the payment of a donation. This economic structure imposed by Israel and donating countries is deliberately aimed at submitting the whole of Palestinian life and therefore the Palestinian economy to permanent political blackmail. To want the well being of the Palestinian people would mean allowing it to develop and consume its own production: on the other hand if the objective is to maintain it under foreign control, there is no need for a real economy with its own capacity of financing itself.

Israel has succeeded in creating the political framework for this situation via the different agreements that have been signed with the PLO or the PA. The Oslo Agreements and the Paris Economic Convention have greatly limited any possibility of changing the political course for the Palestinian Authority or of developing the means of counting on its own resources: the Palestinians , for example, do not have the right to fix different customs duty to that of the Israelis, they cannot either collect directly duty taxes but only wait on Israel's pleasure: Israel collects the taxes and then transfers - as it wishes – the part that is due to the PA , taxing it at 3% in doing so. The Palestinian Authority can mount no development project outside the zones placed under its control on the West Bank. It has no possibility of changing the percentage in its budget attributed to security - which is directly decided by Israel and donating countries.

The Palestinian Authority's policies, particularly over the last four years under Fayyad's leadership have resulted in no progress in the Palestinian economy towards its independence. On the contrary they have made the situation worse, because the economy has become more and more centred round consumption alone and has been rendered more and more vulnerable to foreign pressure. This dependence on donations continuing, was visible in Mahmoud Abbas's insistence on Salam Fayyad being maintained at the head of the national union government with Hamas, so that foreign aid be not suspended. In short, the function of the Palestinian Authority is more than ever that of managing a situation which is conform to American and Israeli requirements.

No solution to to-day's economic crisis can be expected from government policy. If the Palestinian Authority wants to truly launch real economic growth, it must allow Palestinians to produce what, contrary to the economic and political needs of Palestinians, no step in this direction will be possible.

In a situation under occupation, it is natural to resist and combat occupation till it is ended, so that the people gain all political rights and civil equality for all citizens. As a result, the existence of an autonomous Authority in the shadow of occupation cannot be considered as normal, even less so with the two States solution, which cannot guarantee at all, as most Palestinians are aware of, social justice and equality for the Palestinian people.

If Palestinian leaders are aware of the situation, they have to liberate the Palestinian people from the farce of the Oslo Agreements and from the Authority encharged with implementing them.

Tareq Sadeq teaches Economics at the Birzeit University in Palestine.

From DIALOGUE REVIEW ( www.dialogue-review.com )