'There Is No Purely Economic Solution to the Palestinian Economy’s Problems'

Kushner's plan includes a few surprises that could change the face of the region. But does it have everything the Palestinian economy needs?

Palestinians stamp on protest signs showing the crossed-out faces of Netanyahu, Trump, King Hamad al-Khalifa of Bahrain, and the Saudi Crown Prince, Bethlehem, June 16, 2019.
AFP

Jared Kushner’s economic conference is being eulogized even before it officially opens in Bahrain on Monday, mainly because the Palestinians for whom it is being called are refusing to attend. But the fact is that economic plan released by the White House over the weekend includes a few surprises that could change the face of the region, if it ever gets off the ground.

The $50 billion program includes, for instance, a transportation link between the Gaza Strip and the West Bank as well as upgrades for border terminals between the Palestinian areas and Jordan and Egypt. Other sections in the plan call for massive investment in infrastructure, higher education, development of industrial zones and incentives for the Palestinian private sector.

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The Palestinian economy has been in the doldrums for some time and it’s gotten worse in the last several months as U.S. aid and tax revenues collected through Israel have been cut off. On the face of it, the Palestinians need whatever aid they can get and certainly an improvement in their economic relations with Israel.

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A change in the political environment doesn’t seem to be in the offing anytime in the foreseeable future, but in the meantime there are elements of the Kushner program that everyone should be paying attention to:

Last February, Israel suspended the transfer of 500 million shekels ($138 million) of taxes it collects in the name of the Palestinian Authority. Under the Paris protocol governing economic relations between Israel and the Palestinian Authority, Israel collects customs and other taxes on goods imported via Israel and destined for the West Bank and Gaza, and passes them on to the PA.

The move was in line with a Knesset law approved the previous July that called for reducing the transfers based on the money the PA spends supporting Palestinians held in Israeli jails and their families. Israel regards the money as financial support for terrorism.

In response, the PA said it would accept absolutely no tax money from Israel, a dramatic move since the transfers account for about two thirds of its budget. Nevertheless, the Palestinians said they would stick to their guns even if it causes the economy of the West Bank to collapse. In April, the PA said ministry budgets were being slashed by 50% and civil servants’ salaries by 40%.

The budget crisis has far-reaching implications because the Palestinian economy is so heavily reliant on the public sector. Last week Israeli media reported that Nadav Argaman, the head of the Shin Bet security service, met with Palestinian President Mahmoud Abbas in an effort to convince him to take the tax money. There have been no reports about the results.

“The public sector has become the biggest employer and most important element of the Palestinian economy, with close to 3000,000 employees,” said Dr. Sami Miaari, of Tel Aviv University’s labor studies department and a fellow at Oxford University’s Blavatnik School of Government.

Palestinians hold a sign during a protest against the U.S.-led economic workshop for Mideast plan in Ramallah, June 15, 2019.
\ MOHAMAD TOROKMAN/ REUTERS

Private sector development is impeded by the restrictions Israel imposes on the movement of goods and people in the West Bank and to and from Israel.

“What the sharp drop in salaries for the Palestinian public sector means is that the economy is shrinking a lot. People aren’t buying and there’s been a drop in consumer spending. For the private sector, it means that productions if dropping and the business cycle is turning negative,” said Miaari.

The World Bank estimates that the Palestinian areas’ economy showed zero growth in 2018 due to the drop in activity in Gaza and the slowdown in the West Bank. One out of every three Palestinians of working age is unemployed and nearly a quarter of Palestinians live in less than $5.50 a day. Per capita GDP is just $3,050 versus $38,000 in Israel.

The World Bank puts joblessness at around 18-19% in the West Bank and more than 50% in the Strip. The rate is 67% among young people in Gaza, after economic activity in the enclave declined 8% last year, following modest 2% growth in 2017.

Gaza has kept its head above water in recent years thanks to international aid and money from the Palestinian Authority, which together account for between 70% and 80% of Gaza’s GDP, according to the World Bank. However, both these sources have shrunk in the past year. Miaari estimates that about 70% of Gazans live in poverty, making it one of the poorest places in the world.

Robert Tchaidze, the International Monetary Fund’s representative for the West Bank and Gaza, said the three immediate challenges facing the Palestinians are the humanitarian crisis in Gaza, the fiscal crisis in the Palestinian Authority and the negative impact they have on the economy.

He stressed that an economic solution alone will not be enough. 

"In general, it should be emphasized that there is no purely economic solution to the Palestinian economy’s problems: a political solution between the Israelis and the Palestinians is needed."

To begin with, that means solving the problem of tax transfers, because a loss of 15% of the GDP will lead to an economic crisis, even bankruptcy for the PA.

“The Palestinian economy’s reliance on the public sector can’t continue,” said Miaari. “In order to strengthen the economy we need to focus on strengthening the private sector and to encourage export and labor intensive industries – traditional sectors like agriculture and textiles that can be brought back from Jordan or the industry there is in Gaza.”

The Paris accord is no longer useful and it should be amended to give Palestinian control over their borders with other countries, like Jordan, he said. “It means giving the Palestinians an open economy instead of a closed one, to remove barriers to movement between Palestinians and Israelis and inside the West Bank,” Miaari said.

“As long as Israel is the sole basis of the Palestinian economy, it will always be at risk to a deteriorating political situation,” he said, adding that the Palestinian economy should have access to overseas markets, mainly in the Arab world.

In Gaza, there are natural resources that could help improve the economy in a relatively short time span: “It has a port, you can build an airport and develop the natural gas reserves that exist in Gaza’s territorial waters. The thing you need to do to realize Gaza’s potential is to end the blockade,” said Miaari.

Another problem left over from the Paris protocol is a water shortage, which in turn harms Palestinian agriculture. The protocol fixes the Palestinians’ water quota at 1990s levels, when the population was smaller and the standard of living lower.

The West Bank and Gaza have no desalination plants nor do they recycle waste water, both of which involve undertaking negotiations with Israel. In addition, there is a long list of products banned for import to the West Bank and a much longer list for Gaza, including chemicals and various kinds of machinery. Others require a special permit each time they’re imported.