Penniless Palestine

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What to Read on the Middle East Peace Process

Steven A. Cook

An annotated Foreign Affairs syllabus on the Middle East peace process.

The financial crisis currently facing the Palestinian Authority is not just economic; it is also a symptom of the deep political problems facing the leadership in Ramallah. The PA has based its appeal to the Palestinian public on a strategy that combines working with Gulf Arab states, Israel, and the West to produce improvements in the quality of life for Palestinians under occupation, while at the same time pursuing independence through international diplomacy. Now a lack of funding has limited the PA’s ability to meet its payroll, undermining the credibility and authority of its approach and its leaders.

The situation became especially perilous in late July, when promised donations failed to materialize, including $330 million that Gulf Arab states had pledged to provide every six months. This shortfall was caused by a combination of donor fatigue, impatience with the lack of progress on Fatah-Hamas unity, and a long-standing tradition of Arab states not meeting their pledges to the PA. Previously, in May, Israel also temporarily failed to deliver the Palestinian tax revenues it controls. As a result of the shortfall, the PA was forced to announce that government salaries -- on which more than a million Palestinians in the West Bank and Gaza are dependent -- would be cut in half for August.

The PA’s financial woes undermine the achievements made by the state- and institution-building program initiated by Prime Minister Salam Fayyad in August 2009. Public anger at the proposed wage cuts was palpable: civil servants, doctors, and teachers threatened a mass strike. The government, meanwhile, mandated a reduction in the price of bread, the staple food for most Palestinians -- a further reflection of the financial hardships that the crisis is causing to ordinary people.

Undelivered pledges from Arab states are at the core of the immediate crisis. (Fayyad has refused to publicly identify which states reneged, but the group certainly includes Saudi Arabia.) This has been a perennial problem for many years, since Arab states have often tied the delivery of their donations to political demands and have at times raised legitimate questions about the corruption that used to be endemic in Palestinian financial management.

The uncertain status of the Fatah-Hamas reconciliation agreement has further undermined donor confidence, because governments prefer to know who precisely will be in charge of the money they are providing. By signing a vague “national reconciliation agreement“ in Cairo in April, the PLO and Hamas agreed, in effect, to agree. But since then, they have not achieved a specific agreement on any issue. The tense and frequently hostile relationship between the parties remains unchanged, meaning that Palestinian society, polity, and leadership remain not only divided but in a de facto cold war.

Both Fayyad’s reputation and that of the entire PA leadership have suffered as a result of the financial crisis. Some leaders in Fatah and Hamas have tried to make Fayyad the issue by claiming that disagreement over whether he should remain in office was the primary obstacle to reunification. But Fayyad is a convenient red herring. In reality, there is near-total disagreement between the two sides. Focusing attention on a manufactured dispute about Fayyad, who is a member of neither party, has been a means to distract from Fatah and Hamas’ inability to agree on any substantive issue.

Hamas is the primary beneficiary of the PA’s financial woes and their political consequences. Indeed, although Hamas is suffering something of a financial crisis of its own due to tensions with Egypt -- and, especially, Syria -- it remains the recipient of significant cash transfers from other patrons, primarily Iran. Still, the consequences of Hamas’s financial crisis are greatly mitigated by the fact that its rival, the PA, continues to pay most public employees in Gaza -- even though Hamas still rules there.

The real core of the PA’s long-term challenge is the ongoing Israeli occupation, which prevents the Palestinians from having control over key sectors of their economy and restricts almost every form of economic development. In April, Mariam Sherman, the World Bank’s country director for the West Bank and Gaza, said, “While we commend the solid performance of Palestinian institutions, we are concerned about the prospect for continued economic growth.” Israel’s ”closure regime,“ she continued, represents ”the most substantial obstacle to Palestinian economic viability.” A World Bank report issued at the same time noted that strong private sector growth is unlikely “while Israeli restrictions on access to natural resources and markets remain in place, and as long as investors are deterred by the increased cost of business associated with the closure regime.”

Such findings echo those of every major multilateral institution, which emphasize that Israeli restrictions on access and mobility are the gravest threat to long-term development and financial stability. Genuine financial viability will ultimately require the creation of an independent Palestinian state alongside Israel.

However, even under occupation, the PA has achieved a great deal in recent years. According to the World Bank, real economic growth in the West Bank in 2010 exceeded 9 percent of GDP, which surpassed the PA’s budget projection estimate of 8 percent. Moreover, under Fayyad, the PA has overcome a legacy of corruption and patronage to establish a transparent public finance system that has greatly reassured foreign donors.