fayyad - AP - August 5, 2010
Palestinian Prime Minister Salam Fayyad speaks at the opening of Cinema Jenin on August 5, 2010. Photo by AP
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Donor nations and the Middle East Quartet met in New York last week to renew commitments to the beleaguered Palestinian economy and budget support to the insolvent Palestinian Authority. Paving the way, PA Prime Minister Salam Fayyad presented a midterm report on his government's program.

He has coined the forthcoming second and final year of the program as the "Homestretch to Freedom." In tune with Fayyad, the Quartet reaffirmed support for the PA's plan and commended its significant progress toward the statehood goal.

Focused on imposing security, predictable public finances and enhanced public service delivery, the Fayyad plan is underwritten by a donor transfer to PA coffers of some $1.5 billion annually. Strong internal security and "creating institutional facts on the ground" are intended to build a wave of public confidence that would trickle up to allow for a Palestinian state by 2011.

Fayyad forges ahead in the belief that a state can be built as a precursor to national liberation. The logic of the program, rooted in the Washington Consensus on economic governance, implies that good institutions are necessary and sufficient for statehood. PA reforms since the death of Yasser Arafat are said to have created institutions that can manage a modern state, generating wide endorsement for what one pundit has called Fayyadism.

But a close reading of the PA's midterm scorecard for itself suggests that few new economic institutions have taken shape. And any state-like institutions that might still emerge are incapable of shepherding the Palestinian economy from its distorted and dependent status under prolonged Israeli occupation.

The IMF, where Fayyad spent much of his career, has highlighted PA financial transparency since 2005 as a model of good governance among developing countries. The economic growth of over 8 percent that the West Bank has witnessed since 2008 is heralded as a green shoot of the PA's reform strategy. An urban construction boom, car shows, prepaid electricity meters, fashionable restaurants, virtual stock trading systems and e-government are seen as evidence of a vibrant market economy.

The CEO of the Palestinian Investment Fund imagines that a peace agreement would deliver 20 percent annual growth, a rate the most successful developing countries in Asia can only dream of. This economic miracle-in-the-making has prompted two Fayyad supporters to suggest in the Wall Street Journal that the sine qua non for economic expansion has been the creation of the new Palestinian security services, which are a model for the state-building program in general. That would be a first in economic development history!

Yet according to a recent UNCTAD report, since 2000, one-third of the economy's capital base has been ravaged by war, while Gaza remains deprived of the reconstruction it desperately needs. The PA budget deficit, at 27% of GDP in 2009, is twice that of the Arafat era. Good governance and strong-arm security cannot replace destroyed factories and homes, bulldozed olive groves and airports or bombed electricity generation stations.

The new conventional wisdom about Palestinian eligibility for statehood was challenged recently by Carnegie scholar Nathan Brown, whose research revealed that in the security, constitutional and judicial domains, PA institution-building has been more authoritarian than democratic and more cosmetic than transformational.

A former PA economy minister wrote in Foreign Policy that the growth spurt is simply a natural response of West Bank aggregate demand to massive donor aid, already seen in past episodes of calm. As for the catastrophe that is Gaza, recent renewed growth is due above all to an illicit tunnel economy.

Some critics conclude that the Fayyad plan amounts to a Palestinian mirror of the economic peace advocated by Israeli Prime Minister Benjamin Netanyahu. Indeed, the dominant narrative of the PA and its backers focuses on improving Palestinian quality of life regardless of political progress. But such Israeli pacification strategies, offering "economic peace" rather than "land for peace," have repeatedly failed since 1967.

Fayyad's "Homestretch" is actually a matrix of projects, many of them pending for years. A few represent concrete plans to assume sovereign economic functions. But overall, PA economic institution building is not geared to ensuring Palestinian sovereignty on the ground, which necessarily implies a retraction of Israeli sovereignty.

On paper, it may look as though the PA is planning for a model state and a modern market economy. But bereft of the necessary condition for their success, they would be unviable and fragile structures.

The project of laying the foundations for a state through institution building devoid of sovereignty amounts to liberalization without structural transformation, a recipe for economic disaster. Unless it goes further and explicitly addresses such weaknesses, Fayyad's statehood-by-2011 plan risks going down in history as simply one more episode of failed economic peace-making.

The author is a senior economist with the United Nations in Geneva who has researched Palestinian development issues extensively. The views expressed are his alone