Raja Khalidi: It Can Only Get Worse

By Raja Khalidi

A viable Palestinian economy is a prerequisite for any meaningful two-state solution to the Middle East conflict, but that economy is barely functioning. Israel has withheld transfer of Palestinian import taxes, and most donors discontinued funding after the democratically elected Palestinian Legislative Council, dominated by Hamas, constituted a new government in March. With 160,000 civil servants on strike after six months without pay, there has been a breakdown of central government functions. Meanwhile, the Israel-Palestine economic and trade accords signed in 1993 appear to be increasingly irrelevant, if not moribund.

A new government of national unity could heal internal divisions and present a Palestinian position more acceptable to some donors – a hope echoed by Tony Blair last week. But if Israel is not convinced, donors will remain hesitant, and those vital tax transfers to the Palestinian Authority are unlikely to resume soon. In such a turbulent situation, what can the international community realistically do to help the Palestinian people?

Earlier this month in Stockholm, a donors’ conference pledged new aid for 2006 of around $500m, or approximately half the annual average since 2001. If swiftly deployed, this assistance might stave off starvation and a shutdown of core social services, as well as injecting much-needed consumer purchasing power. But even with US-sponsored plans for crossing points boasting state-of-the-art security to facilitate trade, it is unlikely to turn around the current economic deterioration. That, it seems, can only get worse.

Donors have been forced to watch impotently as their investments in Palestinian infrastructure and institutions have been destroyed or eroded. Israel has seen a lucrative (and captive) market become pauperised by security arrangements. If the path of confrontation is pursued, the price paid by the Palestinian economy – and the wider region – will mount.

Recent UN figures predict a drop in donor aid compared to last year of 30% to 50%, and hence a similar reduction in public expenditure, as well as increased restrictions on trade and flows of Palestinian labourers to Israel. In the most severe scenario, which now seems the more likely, the Palestinian economy will shrink to levels not witnessed for a generation. From 2006 to 2008, losses in GDP could reach $5.4bn, and 84% of the jobs available last year will disappear. Even a full return of donor support and the relaxation of mobility restrictions by 2008 will not protect the economy from long-lasting harm.

Channeling aid through "social allocations" and other back door, non-governmental channels, combined with the tightening of Israeli measures and the withholding of Palestinian tax revenues, can only intensify the process of "de-development". Poverty and humanitarian deterioration could reach unmanageable proportions and would last much longer than the term of any single Palestinian government, irrespective of its political program.

Any resort to temporary international funding mechanisms runs the risk of supplanting Palestinian public-sector capacity. This has been the focus of donor aid since 1994, and is one of the essential elements for the sovereign functioning of the envisaged Palestinian state. Today, that vision appears further from realization than at any point since it was first endorsed by the international community in 2002. Outcomes such as these serve nobody’s interests and will have repercussions far beyond Palestine – at a cost that no amount of subsequent aid will easily reverse.

-Raja Khalidi is coordinator of assistance to the Palestinian people at the United Nations conference on trade and development in Geneva. © The Guardian (www.guardian.co.uk), 22 September 2006

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