The Palestinian Economy

The Way Forward

by Brad Nielson

December 20, 2004

Corruption hits hardest at the poorest in society.

Mary Robinson, former UN High Commissioner for Human Rights, Transparency International Global Corruption Report 2004

Recent publications from the World Bank reveal that within the territories administered by the Palestinian Authority "47 percent of Palestinians live below the poverty line" and that "as many as 600,000 Palestinians cannot afford to meet their basic needs in food, clothing and shelter to survive"

The World Bank was a major sponsor at a conference of international donors to Palestinians held in Oslo on 8 December 2004. After a long period of reticence and concern, the wealthy are reviewing guidelines for their sponsorship of Palestinian projects. Press reports reveal that up to $4 billion in immediate, direct aid has been requested by the Palestinian Authority from the global community, including from the EU, America, the World Bank, Norway and Japan.

It is suggested that this money is required to pay for non-salary current expenses, particularly in the fields of education, health and social security. In the past, substantial aid was used to prop up the statutory part of the PA budget, including salaries. The evidence indicates that this went towards paying the wages of militias involved in the struggle against Israeli citizens.

Donor countries must answer a key question. What is the best way to help the Palestinians escape from financial sorrow? An investment of an estimated $10 billion since 1993 has bought neither peace nor an economic revival. Recent World Bank reports have stressed this very point:

While money, and in particular donor money, has an important role to play in reviving the economy, it is not the determining factor. The last four years exemplify how little donor assistance can achieve in the absence of a positive policy environment - while donor disbursements doubled to almost US$1 billion per annum, real personal incomes fell by almost 40 percent in the same period.

To combat effectively the cycle of poverty, donors might best begin by examining the roots of the problem.

According to some commentators, blame for the poverty lies with logistical restrictions imposed on the Palestinians. Nigel Roberts, World Bank Country Director for the West Bank and Gaza echoes these thoughts: "Closures are a key factor behind today's economic crisis in the West Bank. They have fragmented Palestinian economic space, raised the cost of doing business and eliminated the predictability needed to conduct business."

"Closures" include travel restrictions, roadblocks, restrictions on Palestinians entering Israel for employment and more. As evident in its October 2004 report "Intifada and Closures" and the follow up overview of "Palestinian Economic Prospects", the World Bank is utilising its international reputation and expertise to call on the Government of Israel to change its policies. The hope is that freedom of movement will push the Palestinians towards economic progress.

However, within the reports of the World Bank, there are other crucial recommendations. Though determinedly ignored by journalist and vested interests, a solid block of international economists agree that these other measures may well have the greatest and lasting impact on economic progress for the Palestinians. In turn, this will ultimately foster the atmosphere needed for reform and true peace.

Item 1: The security closures, introduced following the continuous deterioration in the security situation, have certainly had great adverse economic effect. However, as the World Bank confirmed most bluntly:

For its part, the PA faces two sets of challenges, if it is to play its part in bringing about a revival. First is the need to demonstrate strong commitment to security reform…Without a visible and effective effort, the case for persisting with certain closure measures is hard to refute.

A radical easing of internal closures would bring growth to the Palestinian economy, but unemployment rates would still increase…which could lead to a real GDP growth of 3.6% in 2005. Despite these economic gains, easing internal closure alone would not be enough to spur economic activity to reduce unemployment and poverty.

In layman's terms, the closures cannot be viewed in isolation. A cessation of Palestinian violence is a prerequisite for removing obstacles of freedom to movement. Before the commencement of the Intifada in September 2000 and the subsequent inception of suicide bombers, few closure measures were in place. The World Bank estimates that up to September 2000, 146,000 (22%) of Palestinians worked in Israel and received relatively high wages. With the continuing Intifada, these figures have dwindled drastically to the detriment of all sides.

Item 2: The World Bank demands that the PA takes pro-active measures to control unambiguously and openly its own finances and procurement procedures.

The PA also needs to reinvigorate its program of governance reforms in order to create an internal environment more attractive to private investors. Doing this will require that the PA … address concerns about transparency and corruption.

This analysis is very much in line with the 2004 annual report of OLAF, the anti-fraud Office of the European Commission: "Despite improvements to the financial control systems within the Palestinian Authority, these systems are not yet sufficiently consolidated to exclude all risk of misuse."

In the past year, foreign donors have greatly reduced direct aid to the Palestinian Authority. This is not just in response to the work of the pressure groups such as the Funding For Peace Coalition. There are now multiple Arab and Palestinian sources, which have cried out for change. Evidence has been presented by Al-Jazeera, the Palestinian banker Issam Abu Issa, leading Palestinian politicians like Muhammed Dahlan and Rafikl aI-Natsheh, and others- all documenting how the Palestinian elite has stolen billions in international aid.

The instances of corruption, extortion and nepotism are many. UNRWA, which commands an annual budget exceeding $400 million, provides a simple case study. Donor countries are concerned by admissions that many UNRWA employees are members of Hamas, internationally recognised as a terrorist organisation. Extensive proof portrays how UNRWA schools have become centres for terrorism and how its textbooks support an environment that celebrates hatred. Its logistical resources have been exploited, and many supplies have ended up in the hands of the local wealthy or racketeers.

An initial positive sign, indicating greater transparency, are the reports of the possible release to the PA of $600 million from Chairman Arafat's secret fortune. Naturally, it is left to speculation why this money was never entrusted to the Palestinian treasury in the first place and how much more is still hidden from the ordinary citizen.

Item 3: The World Bank makes very clear that large segments of the Palestinian population live in poverty, even if the figures have started to improve. In 2003, 47% lived below the official poverty line, including 16% below the subsistence line. However, its report qualifies such statistics on three counts:

  • Palestinian National Accounts for the years 2001 onwards are being revised upwards following consultation with the IMF and the World Bank. Previous poverty figures were considered exaggerated).
  • Poverty statistics are estimates only. No reliable information is available.
  • 55% of those who receive emergency assistance are not needy…32% of the needy do not receive emergency assistance.

What emerges is that there are desperately poor areas in the Palestinian territories. Yet, many of those who receive support, do not need it. At the same time, a third of the needy are not being supported by outside contributions.

The truth of this complex and hidden scenario was brought home by a rare anecdote from overseas correspondents, who were sent to cover Chairman Arafat's funeral. As many waited around for the Palestinian leader's body to return from France, they found time to explore the thriving shopping mall in Ramallah. This features international brands like Benetton and McDonald's. For some, their unexpected purchasing mission destroyed preconceptions of poverty engulfing the region.

Surprisingly, the World Bank did not investigate and report on the reserves of the PLO and the PA, which are estimated at billions of dollars, covering assets in many countries. These have yet to be tapped, even though donors are currently prepared to release more money.

Is there any hope for the Palestinian economy?

The EU claims that it no longer gives direct budgetary assistance to the PA. Several individual countries are also prohibited from giving direct support. A notable example is the policy of the DfID, an arm of the British government.

As way around these restrictions, the World Bank established an alternative fund, "The Public Financial Management Reform Trust Fund of the World Bank", in April 2004. It has already passed on $137 million in 2004 directly to the PA, mostly from the EU and member countries. Most of this was paid through The Arab Bank, which has a history of money laundering activities, and has long disappeared from the view of inspection.

The result is that the fund may be nothing more than a technique to cover up further corruption by the Palestinian elite. Again, both taxpayers around the world and the average Palestinians appear to have been swindled.

So, where does the path towards Palestinian economic paradise commence?

Evidently, the PA needs to take the steps to implement security and financial reforms, proving that new handouts will not disappear as before. With those measures in place, the world can begin to operate in confidence, ensuring that aid is directed to securing peace and prosperity.

The above article draws extensively from World Bank reports, press releases and analyses. The reader is encouraged to read them in full.

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