Away with the sticks and bring in the carrots – that is supposed to be Israel’s and America’s new policy towards the Palestinians under their respective new leaders.
Not all the sticks have been removed, and the biggest carrot of them all, the possibility of a Palestinian state, isn’t even being hinted at. Still, the more modest ones in the economic realm being doled out to the Palestinian Authority are important. Joe Biden resumed American aid to the PA in the first days of his administration, and Israel has allowed more Palestinians to work in Israel.
This week, Israel offered to help bail out the PA by lending it 500 million shekels ($156 million) and increasing the quota of Palestinians allowed to work in Israel.
The PA is in dire financial straits, which is mostly its own fault. Its payroll is bloated and politicized. The PA has gotten too accustomed to relying on foreign aid to pay its bills, and that foreign aid has largely evaporated. President Mahmoud Abbas chose to play politics by refusing to take money due it from Israel while annexation was on the table rather than face the economic reality that he had no choice.
True, its economic situation isn't entirely the PA’s fault. COVID caused the Palestinian economy to shrink 11.5 percent last year. As a result, tax revenues declined while spending to counter the effects of the pandemic soared.
Israel and the U.S. can’t let the PA collapse. It also covers the cost of civil servants in Gaza even though it collects no tax revenues from the Hamas-controlled enclave. The Palestinian public sector accounts for a hefty one-third of total employment in the West Bank and Gaza. Its workers, particularly in the higher echelons, are paid well. Their money percolates through the West Bank and Gaza to keep the rest of their stunted economies afloat, insofar as they are afloat.
Given the dangers that a collapse poses, keeping the PA one step removed from financial collapse is a short-term solution and a necessary one. But long-term, the PA is a big part of the problem.
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That problem is that Palestine has certain unfortunate similarities to Afghanistan. In both places, billions of dollars have been poured into it by the international community (about $145 billion over 20 years in the case of Afghanistan and more than $40 billion over 27 years in the case of Palestine) and there’s little to show for the investment.
Decades of financial assistance turned the financial assistance itself into the engine of the economy. In the West Bank – and even more so in Gaza, which on top of Hamas mismanagement, has suffered from the Israeli blockade, and frequent destructive wars – the productive part of the economy, that of industry, agriculture and private sector services, has shrunk from the early 1990s onward.
The fact is the public sector pays better, and the jobs there are more secure and aren’t particularly demanding. Meanwhile, the private sector not only struggles with the roadblocks and the weight of the occupation, it has to cope with poor regulations, corruption and government neglect. Last year, the World Bank’s Doing Business index, a barometer of local business climate, ranked the West Bank and Gaza at 171st among 190 countries.
For all that, however, Palestine isn’t Afghanistan. Gaza comes pretty close, but the West Bank has much more promise. In terms of human capital, it scores much higher on the UN’s Human Development Index (ranking 115th, including Gaza) than Afghanistan (169th). Palestinians, in the West Bank and Gaza, are better educated and (relatively speaking) there are more opportunities for women. Palestine has duty-free access to European Union markets. And, as much as the occupation deters economic development, the presence of Israel right next door creates business and employment opportunities.
When he took the trouble to articulate a policy toward the Palestinians, Benjamin Netanyahu used to say economic development should come first, then we can talk about a political settlement. Whether he ever really meant it or just figured it was a good way of putting off the day of statehood reckoning is anyone’s guess. But in practice he did nothing about it. In that respect, he had a partner in the PA, which looked at real economic development as a threat that might undermine the struggle against the occupation or an unnecessary distraction.
The Trump administration, whose abortive Deal of the Century would have invested $25 billion in the Palestinian areas over 10 years, also sought to put economics ahead of politics. The plan was cynical in the Trumpian sense of assuming that no one in their right mind would turn down such largesse, but it was sincere in the sense that he and Jared Kushner really believed that money could buy peace. It was the carrot-of-the-future side of a policy whose stick-of-the present was taking away the aid that there was.
In any case, Trump came from the same perspective as all the other billions spent in the wake of the Oslo Accords: It assumed that economic development must be top down and that the PA would spend the money wisely to foster a private sector and sustainable economic growth.
What should have happened during the Oslo years, and could still happen today, is encouraging economic development from the bottom up. The U.S. and Israel should be jawboning the PA into improving the business environment. Israel should be encouraging tie-ups between its business sector and the West Bank’s, especially in high-tech. Barriers to Palestinian goods coming into Israel should be lowered. Business parks in the West Bank’s Area C, which is under Israeli administration, should be open to Palestinian entrepreneurs.
Naftali Bennett is the key decision-maker in all this. His business background and free-market instincts should favor such an approach, but his settler-friendly politics is just as likely to deter him. What could tip the balance is a push from the Biden administration. Let’s hope, against the odds, that it will happen.