Settlements Or Economic Peace: An Interim Report

Readers of this blog know the importance of Israel cultivating, or at least getting out of the way of, the Palestinian private sector. Without an evolved civil society, subtended by sustainable businesses, the prospect of a Palestinian state at peace with Israel and itself is purely hypothetical.

Two reports have been released today, one by the World Bank, the other by PalTrade (sponsored by the Norwegian government), which ought to give us pause. Both point to genuine progress, but progress that is neither fast enough to outrace social discontent, nor fast as it would be if Israel got out of the face of Palestinian entrepreneurs--that is, without policies designed to protect the settlement project.

Keep these reports is mind as you read press coverage about the snags in the final status talks as we approach September 26, when Israel's settlement "freeze" is set to expire or be extended. Settlements are not just little communities that may, or may not, be allowed to stay in place owing to land swaps. They are destroyers of Palestine's business ecosystem.

First, the World Bank report summary, focusing on macroeconomic conditions:

Washington: September 16, 2010 -- Economic growth in the West Bank and Gaza is likely to reach 8% this year but largely thanks to external financial aid while the critical private sector investment needed to drive sustainable growth remains hampered by restrictions on movement of people and goods.

The report, released ahead of the AHLC meeting scheduled for September 21 in New York, emphasizes the need for strong institutions and private sector-led growth to underpin any future Palestinian state. The report also applauds the efforts of the Palestinian Authority in institution-building and delivery of public services. Starkly missing, however, says the report, is the sustainable economic growth required for the PA to reduce its donor dependence.

“We commend the Palestinian Authority for recent results under its reform agenda,” said Shamshad Akhtar, Vice President of the Middle East and North Africa Region. “These include increased efficiency of the social safety net system that is now one of the most advanced in the region, improved fiscal standing through greater revenue collections and a decrease in recurrent expenditures and an improved security situation in the West Bank.”

The West Bank and Gaza economy continued to grow in the first half of 2010 and is likely to reach 8% this year. But external financial aid is its primary driver. Private investment, particularly in the productive sectors, has yet to increase significantly. This is attributed to important Israeli restrictions still in place: (a) exports from Gaza remain prohibited; (b) access to the majority of the West Bank’s land and water is severely curtailed; (c) East Jerusalem – a lucrative market – is beyond reach; (d) the ability of investors to enter into Israel and the West Bank and Gaza is unpredictable; and, (e) many critical raw materials to the productive sectors are classified as “dual-use” (civilian and military) and their import entails the navigation of complex procedures, generating delays and significantly increasing costs.

“Action can, and should be taken to remove the remaining obstacles to Palestinian private sector development,” said Mariam Sherman, World Bank Country Director for the West Bank and Gaza. “Our analysis highlights important areas holding back private investment and we hope our work in this report can provide some momentum to address these challenging – but surmountable – issues. Without this, economic growth will not be sustainable growth, the PA will remain donor dependent and its institutions, no matter how robust, will be unable to underpin a viable state.”

The PA is making steady progress in implementing its reform including controlling the growth of the public payroll, reducing electricity subsidies and improving public financial management, said Nasir. The World Bank is committed to supporting the PA’s reform agenda but its ultimate success depended upon the PA carrying out promised reforms, the Government of Israel relaxing closures to allow private sector growth, and the international donor community providing full support for the PA’s recurrent budget.

Second, the PalTrade report summary, focusing on the information and telecom sector:

Ramallah: September 16, 2010 -- The Israeli restrictions retarding development of the Palestinian private sector remain a central obstacle to the establishment of an economically viable Palestinian state. Public spending, largely financed by donor aid, is the primary driver of the recent rebound in the West Bank economy. Remaining Israeli limitations on access to markets, on exploitation of natural resources, and on imports of critical raw materials continue to discourage the private investment required for sustainable growth.

Pending a political solution to the conflict, the outlook for the permanent easing of many of these restrictions remains uncertain. Throughout the interim period following the signing of the Oslo Accords in 1994, and especially after the tightening of the closure regime over the past decade, development agencies have sought to encourage industry that is relatively less dependent on Israeli policies.

At first glance, Information and Communication Technology (ICT) appears to meet this criterion because it requires relatively less physical infrastructure and is particularly suited to telecommuting. But the role of ICT in the Palestinian economy remains marginal, making up just 4.9% of total Palestinian GDP. This share grew by only 1.9% since 1999, despite a sharp increase in public sector computerization, relatively high rates of household internet penetration and the launch of a second cellular operator. A comparison with Jordan underscores the untapped potential of this sector: ICT share of the Kingdom’s GDP is 14%, compared with 10% in 2005.

A new report by PalTrade -- the Palestine Trade Center -- asserts that Palestinian ICT is underdeveloped because the basic network infrastructures it requires remain absent. Expansion and development of these is vulnerable to some of the Israeli restrictions retarding the development of other industries: Impediments on access to natural resources and on imports of critical materials. Israel has not met its commitments to release sufficient frequencies and continues to limit construction in Area C (60% of the West Bank) of the physical infrastructure required for efficient exploitation of the limited bandwidth currently available to Palestinians. In addition, import of telecommunications equipment is severely restricted.

These conditions position Palestinian ICT firms at an extreme disadvantage compared to their Israeli competitors. The latter have unfettered access to advanced wireless broadband networks and their coverage extends to most of the West Bank’s population centers.

According to the report, improvement of the current policy environment requires intensive and regular Israeli-Palestinian cooperation. The only institution with the authority and capacity to facilitate cooperation -- the Joint Technical Committee – has not met since 2000, however.