Declaring statehood, spurning Israel’s offer of negotiations would be politically premature, economically self-destructive for the PA.
Palestinian Authority Foreign Minister Riyad al-Malki informed UN Secretary-General Ban Ki-moon on Saturday that the PA would ask the international community on September 20 to recognize “Palestine” as a sovereign state, at the General Assembly’s annual opening gathering at UN headquarters in New York.
The diplomatic ramifications of the looming unilateral Palestinian declaration of independence have been much discussed lately. But in the run-up to September, the question of the condition of the Palestinian economy takes on ever greater urgency.
The viability of an independent Palestinian state will depend less on strictly political factors than on sound and sustainable Palestinian economic capacities, without which any declaration of independence will be rendered empty and imprudent.
Is the Palestinian economy ready for statehood? On the one hand, there have been impressive achievements of late. According to the World Bank, real GDP growth in the West Bank in 2010 exceeded 9 percent.
The PA has reduced its dependence on donor aid for recurrent spending, from $1.8 billion in 2008 to $1.2b. in 2010. Credit to the West Bank’s private sector has increased by 29% since 2009.
Recent months have also seen several major milestones.
The first Palestinian venture capital fund was launched in April, with $29 million in capital. The next month, Padico Holding, an investment company led by Munib al-Masri, announced the first-ever corporate bond issue in the West Bank.
Meanwhile, the Palestinian economy received three key endorsements in April. The World Bank reported that the PA is “well-positioned for the establishment of a state at any point in the near future.”
The IMF concluded that “the PA is now able to conduct the sound economic policies expected of a future well-functioning Palestinian state, given its solid track record in reforms and institution-building in the public finance and financial areas.”
Finally, a UN report concluded that in six areas – governance, rule of law and human rights; livelihoods; education and culture; health; social protection; and infrastructure and water – the PA’s functions were “now sufficient for a functioning government of state.”
Not all economic indicators, however, are quite so favorable. Unemployment is rising. A June UNRWA report showed that unemployment among Palestinians in the West Bank and east Jerusalem rose from 21.7% to 25% during the last year.
More to the point, without annual external assistance of some $1b. from donor countries, the Palestinian economy is far from sustainable. At least one-third of the PA budget comes from external aid, including loans and grants from the US, the EU and Arab states. Just a few weeks ago, the PA coffers confronted a severe shortfall when promised donations – including $330m. that Gulf states have pledged to send every six months – failed to appear. This was just the latest chapter in a long string of Arab states not meeting their pledges to the PA. Some of this is due to donor fatigue, and to the uncertainties of the Fatah-Hamas reconciliation.
This last factor is especially salient in the case of American aid. Hamas has been on the US Treasury Department’s designated terrorist list since 1995 and the State Department’s list of designated Foreign Terrorist Organizations since 1997. It comes as no surprise, then, that Congress has signaled it might suspend aid if the Palestinians declare sovereignty under a Fatah-Hamas unity government.
Most significantly, there is the heavy economic dependence on Israel, a country that according to the PA’s Central Bureau of Statistics accounts for nearly 89% of PA exports and 81% of its imports. The PA also depends on Israel to collect and remit tax revenues of about $1.5b. per year. In May, Israel temporarily suspended those revenues until it received assurances that the funds would not end up in the hands of Hamas. As a result, the PA announced that all government salaries would be cut in half for August.
This served as yet another reminder that if Israel ended economic cooperation, the PA could not pay its own bills. A unilateral declaration of statehood that imperiled cooperation by spurning Israel’s offer of direct negotiations would be not only politically premature, but economically self-destructive, for the PA.