PALESTINE: Palestinian economic revival
Nigel Roberts and Stefano Mocci

The World Bank has spent much of the last year analyzing and discussing with the Palestinian Authority (PA), the Government of Israel (GOI) and the international community what is needed to revive the devastated Palestinian economy, and what it will take to develop a new and healthier economic relationship between Israel and the PA.

We have done so knowing that economic growth and prosperity by themselves might not guarantee peace, but that stagnation, unemployment and widespread poverty make any search for reconciliation infinitely more difficult.

When Israel announced in June 2004 its plan to withdraw from Gaza and parts of the northern West Bank, the World Bank was asked by the PA, the GOI and the donors to review the initiative`s potential impact on the Palestinian economy.

In the report `Stagnation or Revival? Israeli Disengagement and Palestinian Economic Prospects`, issued in December 2004, the Bank concluded that disengagement in and of itself would not make an appreciable difference to the prostrate Palestinian economy. A lot more than the act of disengagement is needed if Palestinian economic fortunes are to be revived.

The report, endorsed and adopted by the international community at recent conferences in Oslo and London, emphasized the need for a sustained flow of foreign assistance. It also argued, however, that foreign aid is not the key factor in bringing about economic revival. A cursory appraisal of the history of donor assistance in recent years illustrates this.

During the intifada donors doubled their annual disbursements to almost $1 billion per year - over $300 per person per year, itself a record in the annals of foreign assistance. And yet, at the same time, Palestinian personal incomes contracted by almost 40 percent in real terms. This is a graphic illustration of how a malign policy environment can overwhelm the benefits of additional donor assistance. Only if this environment changes can donor assistance achieve very much at all.

What exactly do we mean by the policy environment in this case? We are talking above all of the restrictions on the movement of Palestinian goods and people imposed during the intifada. These have so severely distorted and compressed the functioning of the economy that returns on investment are now for the most part negligible.

If disengagement is to have much positive impact on the Palestinian economy, it will therefore need to be accompanied by a swift dismantling of closures. This in turn places a premium on the PA and on Palestinians to restore law and order and to abide by Palestinian security obligations as defined under the road map.

In addition, in order to attract back the private investors whose efforts are essential to the achievement of sustained growth, the PA will need to accelerate its program of internal governance reforms in areas like legal and judicial reconstruction and combating corruption.

These complementary activities can be defined collectively as `preconditions` for Palestinian economic revival. Only once these policy changes begin to take root will donor assistance have any positive transformational impact (as opposed to merely slowing the speed of economic decline, as it does now).

Put another way, donor developmental assistance can only bring sustainable growth if the policy environment changes first. In this sense the Bank has argued that meaningful progress on closure, security and reform is a necessity if one wishes to achieve a `quantum leap` in levels of donor developmental assistance.

In adopting this logic, the donor community, at the meeting of the Ad Hoc Liaison Committee (AHLC) in Oslo in December 2004, requested the Bank to translate its recommendations into a set of concrete steps that should be taken by the PA and the GOI - and to assess progress toward implementation.

The Bank has since then been working with officials of the PA and the GOI to identify possible practical ways of dismantling today`s closure regime without compromising Israel`s security, as well as seeking new ways to support Palestinian reform.

One aspect of this work has involved a dialogue on options to improve the border passages and terminals. Israel wishes to upgrade these terminals into modern, efficient and secure facilities. The Bank has proposed an approach to border management in which cargo flows would be regularized and determined principally by market demand, involving the adoption of internationally-accepted terminal service standards, modern risk management techniques and commercial dispute resolution mechanisms.

Efficient border terminals alone will not be enough to revive the economy, however. Israel will need to adopt a more comprehensive approach to dismantling closure, including the removal of the checkpoints and roadblocks introduced into the West Bank during the intifada, and establishing a flow of people and goods between Gaza and the West Bank adequate to maintain the economic coherence of the two parts of the Palestinian territory.

It will also be important to maintain a reasonable and predictable flow of Palestinian labor into Israel while Palestinians seek to reduce their excessive economic dependency on Israel and to develop export competitiveness - something likely to take many years, and to require transitional support of various kinds from Israel and the donors.

There is some cause for optimism these days, but the road to Palestinian economic recovery will not be an easy one, even if the parties can agree on how it should be constructed. The Bank`s December report speaks of a recession `of historic proportions`, of a `loss of all economic dynamism` and of the PA`s fading political control and popular support. Even under the most optimistic assumptions the PA will face daunting challenges as it attempts to cater to its rapidly expanding population.

Unless a solid start is made very soon the goal of recovery and eventual prosperity may slip from our collective grasp, condemning Palestinians to long-term penury and Israel to the possibility of an impoverished, bitter and angry neighbor. And in this context it has to be said that very little has changed on the ground since the Bank delivered its December warning.

Nigel Roberts is the director of the World Bank - West Bank and Gaza Country Department since April 2001. Stefano Mocci is the World Bank`s senior external affairs officer in the West Bank and Gaza. Acknowledgement to bitterlemons-international.org