WE'VE MOVED! IsraPundit has relocated to Click here to go there now.
News and views on Israel, Zionism and the war on terrorism.

January 07, 2003

Why one should oppose a second Palestinian-Arab state in Judea, Samaria and Gaza - Part 16 of 23

This piece continues a series of which the first 15 parts were posted on September 8, 9, 11, 17, 20, 22, 23; October 7, 24, 28, 29; November 6, and 26; and December 5, and 13, 2002. (Alternatively, the previous articles may be found in the IsraPundit archives as follows: September 8, 9, 11, 17, 20, 22, 23; October 7, 24, 28, 29; and November 6 and 26; and December 5, and 13, 2002). The object of the series is to provide a database that is not only reliable and well-documented but also one for which documents are easily accessible, preferably from web resources. The term "second Palestinian-Arab state" is used in order to underscore that one Palestinian-Arab state already exists: it's called Jordan, and it is located in that part of Eastern Palestine that was originally to have been part of the Jewish National Home.

16. The Palestinian Arabs in Judea, Samaria and Gaza (“Yesha”) lack the elements that permit the development of an economically viable sovereign state.

Table of contents:
(16.1) Introduction and definition
(16.2) Review of selected elements of “economic viability” as they apply to the Palestinian Arabs
(16.3) The historical record
(16.4) Implications

(16.1) Introduction and definition

To discuss the question as to whether a sovereign Palestinian-Arab state in Judea, Samaria and Gaza ("Yesha") has the potential of economic viability, one has to bear heavily on economics and related fields such as demography. Not only does such a discussion require a great deal of specialized expertise, but as a literature search on this question indicates, any thorough discussion would extend over many volumes. Complicating the discussion further is the fact that one should consider several scenarios for a hypothetical Palestinian-Arab state, such as free-trade agreement with Israel, customs union with Israel, and various models of foreign investment.

The space available here, even for a long article, can only permit the highlighting of a few basic points, starting with a working definition of what we mean by “economically viable”. Next, we’ll examine such elements as the geographic, demographic and infrastructure bases for the hypothetical state, and their implications vis a vis economic viability. Finally, this article will review the record of the PA on matters economic, the point being that the past may be an indicator of what might transpire if indeed a sovereign Palestinian-Arab state is ever created.

The discussion assumes that the nightmare scenario of the Quartet is realised, and a sovereign Palestinian-Arab state is created in Yesha, possibly with overland links between Gaza and Judea/Samaria through Israel. Under these conditions, given the current economic state of the Palestinian Arabs in Yesha, is an economically-viable sovereign state possible?

As a working definition of “economic viability” we borrow a statement from Leila Farsakh, who wrote as follows in an MIT article on the question we are examining:
It is generally understood that an economy is viable if it is able to use its human, financial and physical resources to grow, sustain itself and increase the welfare of the inhabitants living within its area.
[Cited from MIT Electronic Journal of Middle East Studies, Vol 1, pp. 43-57.]

Some of the factors that should be considered include: Work force/labour pool - quality and availability; industrial base; raw materials and natural resources, including energy resources; agriculture; financial infrastructure; commerce and trade; education and literacy; bureaucratic professionalism (speed of decision making); science and technology; transportation and communications; political stability.

Since it is impossible to cover all these aspects in any depth, we will deal with only the few that seem to us the most pertinent. Note that the vital issue of water was discussed separately in Part 15 of this series (Israpundit or Dawson Speaks).

(16.2) Review of selected elements of “economic viability” as they apply to the Palestinian Arabs

The emphasis in the definition of economic viability, as given above, should be on the words “sustain itself”, for with an endless infusion of financial support and capital, even a basket case may be rendered “economic viable”. But experience shows that the Palestinian Arabs cannot rely on such fairytale support even if their Arab cousins are rolling in petro-dollars. The Arab countries have done precious little to resolve the poverty of their own people, so much so that Egypt now depends on an annual US grant of US$2 bil.

Therefore, one has to judge whether under real-life conditions it is possible for capital to flow into the hypothetical Palestinian so as to create an economy that can “sustain itself”.

To assess the economic viability of a sovereign Palestinian-Arab state in Yesha, let us begin with a very brief review of the area and its population.

Land-locked Judea and Samaria are the size of Delaware, while Gaza is twice the size of Washington DC with a 220 km coastline, but with no port to speak of in the west. The highlands of Judea and Samaria “are main recharge area for Israel's coastal aquifers”. The area has no mineral resources worthy of being mentioned and the industrial basis is virtually non-existent.

The Palestinian-Arab population of Judea and Samaria is 2.2 million, and that of Gaza, 1.2 million, for a total of 3.4 million. The growth rates are, respectively, 3.4 and 4.0 - an international record. These figures imply that just to keep the population from falling behind, the economy of Judea, Samaria and Gaza must grow by at least 3.6% annually. Making this goal virtually impossible is the child dependency ratio (population 0-14 / population 15-64 - a common socio-demographic indicator), which is 0.85 and 1.04, respectively. The latter figure means that Gaza has more children 0-14 than adults 15-64. By comparison, Israel’s child dependency ratio is 0.43. This socio-demographic indicator alone should flash red alert lights in the hallowed offices of the Quartet.

We turn now to other factors that affect economic viability, as listed in Section 16.1 above. Describing some elements of the infrastructure of the Palestinian Arabs in Yesha at the end of the 1990's, Prof. Karen Pfeifer (a professor of economics at Smith College) notes:
For every 13 kilowatts of electricity used by Palestinians, Israelis use 82. Palestinians have 3.1 phones for every 100 people; Israelis have 37. Palestinians have 80 meters of paved roads per 100 people; Israelis have 266. All Israeli households have indoor plumbing, as compared to 25% of Palestinians. Israeli electric power systems fail just 4% of the time, while Palestinian systems fail 30% of the time.
I should emphasize here that Prof Pfeifer wrote one of the usual academic anti-Israeli rants, dripping with vile accusations against Israel, and the data she quoted are designed to highlight how “bad” the Israelis are; we can nonetheless use her statistics to make the point that the Palestinian Arabs have no infrastructure to support economic viability.

Another vital element in the context of economic development concerns banking and the legislation that goes with it. Here is Pfeifer’s admission on this score:

After 1993, banks were again allowed to set up shop in WBG [West Bank and Gaza] and accept deposits. But few of these are locally owned, and, due to lack of deposit insurance and regulatory oversight, they have been unwilling to lend to finance new investment in productive activity in Palestine.
In an article published in 1996, way before Arafat’s Intifada destroyed the economy of the Palestinian Arabs entirely, Aaron Segal assessed the economic viability of a Palestinian-Arab state in an article published in the Middle East Forum. Segal’s assessment does not differ in tenor from that of Prof. Pfeifer but his analysis is much more detailed Here are selected passages:
An independent Palestine is not likely to enjoy economic growth greater than its very high rate of population increase (currently 3.7 percent yearly). Recent years have seen negative growth, negligible savings and investments, and massive deficits in balance of payments, trade, and the budget. Unemployment and underemployment rates are not just extremely high but are worsening as Israel replaces Palestinian day workers with labor from such countries as Romania and Thailand. The few potential growth sectors (tourism, domestic light industry, and agriculture for foodstuffs and exports) all suffer severe external and internal constraints owing to shortages of investment capital, human resources, and markets. Government institutions are a poor bet to operate the electric, postal, telephone, and other services.

As of late 1996, the future Palestine still lacks its own currency, central bank, and effective taxing authority; nor are these likely to emerge soon. The Palestinian Monetary Authority has no reserves and lacks the powers of a central bank. At present, for example, most tax income derives from transfers by the Israeli authorities. There is little likelihood for replacing tax transfers from Israel and declining remittances from Palestinian migrant workers with local tax sources.

Palestine would start out with minimal foreign-exchange reserves, revenue, or ability to borrow or to service debts. Most banks are branches of Israeli and Jordanian corporations, with limited lending capabilities, and are likely to remain that way. The independent state will depend for many years on grants and low-interest loans with extended grace periods. High political and economic risks render foreign direct investment and diaspora capital flows unlikely. Instead, diaspora and migrant-worker remittances will flow directly to households, where they will be used mostly for consumption, not investment. Changing the savings-investment ratio will be critical for the new state.

Inadequate physical infrastructure aggravates the acute lack of capital. Palestine will likely lack a fully operational international airport or commercial port, and have deficiencies in electricity, phones, potable water, and other services. Although some of these services are in the planning stage, implementation is weak. The lack of administrative capabilities to provide these and other services is a most serious problem; state-owned corporations probably cannot productively absorb increased capital flows.

Since September 1993, donors have pledged nearly $1.4 billion but the PA continues to be a major restraint on absorbing donor aid, for too much of it has gone to pay the salaries of a bloated and patronage-based civil service and police. In 1996, the Palestinian police numbers eighteen thousand and the civil service thirty thousand; moreover, with average monthly salaries of $475 and $530, respectively, these employees enjoy an income more than two times the Palestinian average.

Despite the use of aid for recurrent expenditures rather than investment, the PA itself is unable to expand most of the basic social services, such as health and education, for a growing population. The budget deficit combines with the constraints on borrowing to absorb most social-services expenditures in salaries and maintenance. Any expansion of educational and medical services has to compete with external aid for infrastructure. Donors are more and more inclined toward paying for projects rather than salaries. The United Nations Relief and Works Administration (UNRWA) continues to provide health and education services for the nearly 10 percent of Palestinians who remain in refugee camps. The major educational bottleneck is the lack of secondary, technical, and vocational institutions, leaving primary-school graduates with nowhere to go.
A lack of appropriate institutions presents another obstacle to economic growth. Few multinational corporations are present; local businesses consist primarily of small-scale firms with limited capital and technical capacity. Research and development is minimal, even in the seven universities of the West Bank and Gaza. The diaspora too is characterized by small-scale trading firms.

The growing gap in income and opportunity between the richer West Bank and poorer Gaza also creates problems. For 1992, the World Bank reported $1,150 in per capita income for the Gaza Strip and $2,500 for the West Bank. Unemployment and underemployment reaches 40 percent in Gaza versus a mere 20 percent in the West Bank. Gaza is over-urbanized, lacking in arable land and water, and ridden with infrastructure deficiencies. Lacking almost all other exports, Gaza for a decade or more must depend disproportionately on the earnings of migrant workers in Israel -- even as its workers are increasingly denied access to Israel, Saudi Arabia, Kuwait, and much of the Gulf. The International Monetary Fund (IMF) has concluded about Gaza that "the prospects for a marked improvement in employment, the fiscal balance, private sector investment and real per capita consumption are limited." It and the World Bank recommend a strategy that "is outward-looking, led by the private sector, and able to promote sizable nondebt-creating private capital inflows for investment in productive, labor-intensive activities."

In all, Palestine is likely to be a highly dependent, slow-growth state unable to respond to the expectations of its inhabitants. The West Bank is likely to grow modestly while Gaza lags. If donor support falters, economic stagnation or even negative growth may result. It is difficult to develop a scenario in which sustained economic growth stays significantly ahead of population increase.
And all this was said before the Palestinian Arabs destroyed the weak economic basis they had by starting the Intifada of mid-2000. Bearing these facts in mind, one can appreciate the conclusion drawn by Neill Lochery (director of the Centre for Israeli Studies at University College in London) in his June, 2002 article:
Economically speaking, a Palestinian state is not viable either. There would be an over-reliance on international aid from Arab and European Union countries -- dangerous given that much of what was promised in the past never arrived. The business sector has not developed as was hoped back in 1993. The majority of successful Palestinian entrepreneurs live outside the boundaries of the proposed state and have shown little inclination to invest in the Palestinian Authority, preferring markets where there is a stronger chance of financial return. Put simply, they continue to invest in global markets for business and not nationalist reasons, and there is little sign this would change with the creation of a state. Consequently, many Palestinian families would become increasingly reliant on one or more members of the family working in Israel or in Kuwait. In these circumstances, it is difficult to see how a state could raise enough taxes to pay for even the most basic services for its citizens.

What one should emphasize here is that this situation cannot be remedied by some magic wand; if at all possible, it might take decades to reverse the current situation and trends. Until then, there is no point in talking about a sovereign Palestinian-Arab state, unless one is eager to see the immediate demise of Israel. To reinforces this point, the following Section 16.3 reviews of what Arafat and his henchmen have wrought over the last decade.

(16.3) The historical record

This Section reviews what the PA has achieved in economic terms since the 1993 Oslo agreements.

The Paris Economic Protocols, which constituted part of the 1995 Interim agreement between Israel and the Palestinian Arabs, established the economic scope of the PA, allowing as follows (quoted from the foregoing MIT article by Leila Farsakh):

The Economic Protocol binds the WBGS [West Band and Gaza Strip] in a custom union with Israel, which allows for the free movement of capital and goods except for a list of agricultural goods to be phased out by the year 1998. Free movements of labor flows between the two economies are not guaranteed, but the economy of the West Bank and the Gaza Strip is allowed to trade directly with Arab and foreign countries for a limited list of goods. Moreover, the CU [customs union] gives the Palestinians the right to decide on their economic priorities, to determine the nature of their employment, industrial and agricultural policies, as well as to impose tax and to invest in areas under its control. It also gives the Palestinians limited leeway in monetary and trade policy... Israel, though, accepted to remit to the Palestinian economy VAT and custom taxes collected on goods specifically destined to the WBGS, something it never did before 1994...This mechanism consists basically of keeping the WBGS integrated with Israel through a custom union while at the same time giving the Palestinians the right to run their domestic affairs and time to improve their non-territorial economic base. It also gives the Palestinians the right to trade in limited goods and quantities with third countries, thereby allowing them to reduce their dependence on Israel. At the same time, by keeping the link to Israel, the CU enables the WBGS to benefit from trade with a neighboring strong economy.
Leila Frasakh is one of the many virulent anti-Israeli writers and quoting from her (and similar anti-Israeli writers) to corroborate our argument should at least obviate the accusation of quoting writers who are biassed in favour of Israel.

Clearly, the Economic Protocol enabled the PA to use the Oslo agreement to create a strong (if not viable) economy, but the reality shows that the PA preferred to use this framework for corrupted self-enrichment, for shackling the population to the PA and, ultimately, for the total destruction of the economy. Just as significant is the fact that the PA squandered the financial goodwill that the “international community” extended. In addition to what we have already quoted, Leila Farsakh documents:

Between 1994-1999, the international community pledged a total of $3.4billion for a total of 2.8 million Palestinians.
But none of this was utilized to create anything akin to a strong economy.

In 1996, three years into the reign of Arafat and his PA, Gerald Steinberg observed in an aricle entitled, The case against a Palestinian State:

After three years, we cannot find any evidence that the Palestinian leadership can create a viable economic foundation. The per capita GNP in Gaza is approximately $1000 and has declined under Palestinian control, while the very high jobless rate increased. The hundreds of millions of dollars in foreign aid that have already been transferred have disappeared without accountability, and without any significant new investment in infrastructure or job producing industry. As a result, many foreign donors have stopped providing funds, as there is no evidence that the money is being used for the purposes for which it was intended - namely to provide a foundation for economic development and stability in the areas under Palestinian control.
In reviewing the economic mess created by the PA, the standard Palestinian and Arab line of blaming Israel for all the ills in the universe has even less credibility than the Palestinian/Arab average. Here’s what transpired well before the Intifada, according to Leila Farsakh (remeber - this is the virulent anti-Israeli prof writing in an MIT publication):
[D]espite all expectations, the economic situation in the WBGS deteriorated. Just as alarming has been the fact that the two parts of the Palestinian economy, i.e. the West Bank and the Gaza Strip, have further disintegrated rather than integrated. To begin with, per capita income fell by 17% between 1994-1996, while the percentage of people living in poverty increased to 40% in the Gaza Strip and 11% in the West Bank in 1997. Unemployment soured [sic], reaching levels as high as 39% in Gaza in 1996 and 24% in the West Bank . Although it fell to less than 11% in WBGS in 2000, it remains today a major problem, particularly for the inhabitants of the Gaza Strip. While, on average 30,000 new domestic jobs were created per year between 1995-1999, this increase remains insufficient to absorb a rapidly growing population. The Palestinian labor force is presently growing at an annual rate of over 40,000 new persons and has, on average, 70,000-120,000 workers employed annually in Israel since 1995... The Palestinian economy also failed to rely on trade as a vehicle for growth. The actual size of exports fell by 30% between 1994-1996. At the same time, Israel has continued to absorb 96% of all the WBGS exports,
The one area where the Palestinian Arab economy showed growth is the public sector, reflecting Arafat’s attempts to have as many of his people as possible dependent on the PA for employment, thus securing their loyalty. Quoting Leila Farsakh again:

Still in 2000, the Public sector today absorbs more than 24% of all employed in the domestic economy in the Gaza Strip and around 15% of the labor force in West Bank. These jobs are not always productive, though, given that they are mainly concentrated in the police and security services...

[T]he large size of the public sector raises key questions around the economic survival of the public sector and the efficient use of resources. While the public sector eases unemployment in the short run, it also increases bureaucratic hassles and decreases service efficiency.
As to encouraging investment and fostering economic development, Leila Farsakh describes some of the steps taken by the PA - all of which, especially the PA’s “investment law”, amount to zero:
[T]he investment law has been criticized for being directed to foreign investors who will not come given the instability of the economic and political situation. It is also ill suited to encourage domestic investment of small and medium firms. Moreover, the PNA's policy of controlling trade licensing is giving rise to monopolistic practices that are counter-productive. Today, a limited class of PA-affiliated companies and individuals are monopolizing rent and benefits from trade links to Israel. The Palestinian Commercial Service Company (PCSC), fully owned by the PA, holds majority shares in the 34 major Palestinian companies. In 1999, the PCSC held assets totaling $345 million, the equivalent of eight percent of total GDP.
And then there is the corruption angle, to which even Prof Farsakh admits:
On the other hand, corruption scandals within the PNA reveal a loss of resources, whilst the failure of the judiciary to assert itself as a workable and independent system suggests that more needs to be done to improve performance in the Palestinian economy. Without a transparent and legally protected economic environment, investments will not flow nor be effective.
On this very topic, Gerald Steinberg elaborates in the article quoted avove:
Corruption is a major problem. For decades, the PLO has built up foreign currency reserves and created a major corporate empire. In 1993, the British National Criminal Intelligence Service estimated that the PLO had worldwide assets of $10 billion, with an annual income of up to $2 billion. With millions of Palestinians living in poverty, one would expect these assets to be used for national development rather than personal gain.

The Palestinian economy is managed, as one analyst reported, "out of Arafat's hip pocket," without separation of personal funds, party or state accounts. The Washington Post revealed that Arafat maintains a former wife, Yassin, in an opulent villa in Tunis. PLO sources report that "she received from him great wealth. The jewels she has would be enough to build all Gaza anew". Calls from the donor states and the IMF for a proper system of accountability have been ignored. Investment laws have not been enacted, and the bloated bureaucracy is maddening. As a result, foreign investment is close to zero. The surrounding Arab states, including Kuwait and Saudi Arabia are reluctant to contribute, and even under intense American pressure, account for less than 5 percent of total external aid and investment. Even Palestinian investors have stood on the sidelines. Plans for industrial parks and cooperative factories at the intersection of Israel and Gaza, that were expected to provided thousands of jobs to Palestinians, were dropped when Palestinian officials blocked Israeli participation and insisted that the import of materials await the construction of a port in Gaza (an economic mega project which is motivated by personal and political factors). Other mega projects, such as Arafat's reinforced command centre, built in the Saddam Hussein style, vast villas on the Gaza coast, an airport that may never open, and an airline that may never get off the ground, are attempts to buy prestige, not an improved standard of living.
Anyone who believes that the problems outlined above can be rectified one way or another, so as to render a Palestinian-Arab state economically viable, should note how entrenched and endemic the problem is. To corroborate this point we only need to quote from Edward Said, yet another one of the most virulent anti-Israeli writers in the US.
He [Arafat] has an enormous and unproductive bureaucracy. According to the World Bank, he employs in the bureaucracy about 80,000 people, which we don’t need at all. I mean, it’s totally unproductive. But if you add up the security forces and the bureaucracy and multiply them by seven or eight, which is the number of dependents of each person he employs, you’ll find that he, in effect, employs about 700,000 or 800,000 people. And that’s where his support comes from. People who are indebted to him...
(Quoted from p. 433 of:
Said, Edward W. Power Politics and Culture. New York: Pantheon Books, 2001.)

Or, from another opus magnum of Said’s:
A few weeks ago the Guardian's senior correspondent, David Hirst, a lifelong sympathizer with the Palestinian tragedy and a first-rate reporter who has devoted his life to living in and writing about the Arab world, wrote a devastating report entitled "Shameless in Gaza" in the Guardian on "the open corruption of the Palestinian Authority." He described the enormously ostentatious and expensive villas being built on the coast by Abu Mazen and Um Jihad, the company called "al-Bahr" which, true to its name (the sea), swallows up property and businesses for Mr. Arafat's interests, the nightclubs, the luxurious limousines, the commercial abuses of various high officials, all of them going on at a time of huge unemployment in Gaza, the protracted misery of the thousands of camp dwellers, the total paralysis of the Palestinian economy and the complete breakdown in any sort of advance in Palestinian rights.
The really serious theft is the system of monopolies operated by Arafat and his cronies, including his ministers, their children, wives, uncles, and aunts. There are now monopolies on wheat, cement, petroleum, wood, gravel, cigarettes, cars, gasoline, cattle feed, and a few other commodities; all these compel the ordinary citizen to pay inflated prices several times greater than the price under direct Israeli occupation. Thus a ton of cattle feed used to be ~zo dinars; it is now 3oo dinars. No one knows exactly how much money is made in this way, nor who gets it, or how it is spent. There are no laws for companies or investments, and consequently no requirement to register companies nor to hold bidding competitions and offer tenders.

(Quoted from p. 178-180 of: Edward W. Said. The end of the peace process. NY: Pantheon Books, 2000.

Arafat displayed one of the most amazing feats of economic mismanagement when he attended the Davos conference in January 2001. The conference was supposed to have been a demonstration of co-operation between Arafat and Peres, so as to encourage investors to send their capital flows towards Arafat’s Yesha. In an article entitled, Sharon, Arafat and Mao , 8 February 2001, Thomas Friedman describes what transpired:
Mr. Peres did extend the olive branch, as planned, but Mr. Arafat torched it. Reading in Arabic from a prepared text, Mr. Arafat denounced Israel for its "fascist military aggression" and "colonialist armed expansionism," and its policies of "murder, persecution, assassination,
destruction and devastation."
That was the end of Davos-generated investment for the PA. (The entire speech is available on the web at the Palestinian-Arab site, Palestine Affairs Council. It is a masterpiece of self-destruction.)

Summarizing the economic situation created by the PA, Gerald Steinberg opined:
Since the PNA was established in Gaza and Jericho in 1994, its performance has shown all the characteristics of a failed state, including corruption, economic failure, nepotism, intimidation, systematic police violence and torture.

(16.4) Implications

What are the implications of a non-viable sovereign Palestinian-Arab state? I would suggest that such a state is a danger to the region, and particularly to Israel, for at least two reasons. First, at any point such a state might fall prey to an extremist regime such as Iran’s, which will be only to happy to purchase the loyalty of the Palestinian-Arabs for an appropriate amount of petrodollars.

Second, such a state will harbour a substantial underclass of people liable to destabilize the Palestinian regime, which in turn will adopt irridentism for diverting the attention of the masses, and in this case, irridentist claims can only mean the destruction of Israel.

And this is what the Quartet in its infinite wisdom is attempting to achieve.

Neville Chamberlain's heirs are about to bring about Holocaust II, this time with US approval. Let us not sit idle while this happens!

Contributed by Joseph Alexander Norland. This piece is cross-posted on IsraPundit and Dawson Speaks.