The overall identity of the Palestinian economic system was defined
years before the establishment of the Palestinian Authority (PA).
Both the Palestinian National Charter and the Declaration of
Independence stipulate that the future Palestinian state would
adhere to a market economy system predicated on the free movement
of goods, capital and labor, where prices are determined by supply
and demand in a competitive environment, governed by all-binding
legal and judicial frameworks.
Adherence to a market economy is one of the principal underpinnings
of a democratic society in an age of globalization, as no country
can hide for long behind the wall of protectionism. For Palestine,
the option of a free economy finds further validation when one
takes into account that it is among the least endowed countries in
natural resources, and has a very small domestic market. Therefore,
it is impossible to contemplate a closed economy based on
self-sufficiency, unless one is ready to accept very low living
standards and high unemployment. In addition, adherence to a market
economy should be perceived as a basic requisite for encouraging
the flow of foreign investment from the Palestinian diaspora, as
well as from other Arab, Muslim and international sources.
The Palestinian Economic System after the Establishment of the
PA
The discourse of the Palestinian economic system following the
establishment of the Palestinian Authority in 1994 reveals mixed
results. After 28 years of occupation and six years of intifada,
the PA has succeeded in implementing a unique level of democratic
practices, such as conducting free legislative and presidential
elections, allowing freedom of opinion and political pluralism -
all of which are alien to most other Arab countries. The PA also
took a positive stance on the establishment of civil society
organizations, which indeed played a prominent role in Palestine's
social and economic life.
In spite of these achievements, however, the PA's record in
managing the Palestinian economy has been marred by many mistakes
and deficiencies which precipitated a negative investment climate.
It is of course true that the sharp economic decline affecting the
Palestinian territories is attributed primarily to the punitive
measures and restrictions, imposed by the occupation authorities in
their declared war against the Palestinian resistance. It would be
too simplistic, however, to assume that this has been the sole
cause for the economic predicament of Palestine. The following
"mistakes" have certainly also left deep wounds in the Palestinian
economy:
1) The process of PA institution-building caused the most serious
damage to the Palestinian economy and social structure in general.
This has been a multifaceted problem whose most important aspects
include:
* Proliferation of governmental and semi-governmental institutions.
This was coupled with a large degree of overlapping in powers and
functions, which led to duplication, rivalries and even
inconsistencies in work mechanisms. Bureaucracy in governmental
institutions has in fact become a major impediment to the promotion
of work efficiency in the country's economic institutions.
* An accompanying sharp increase in the number of public sector
employees - from 25,000 in 1994 to over 160,000 at present. This,
too, is a two-fold problem: a) The wage bill has become a heavy
burden for the PA, accounting for 70% of the general budget; and 2)
unprofessional standards are used for staff appointments,
especially in leading positions.
2) The PA showed an intractable tendency towards direct
intervention in commercial activities, especially those of a public
utility nature. Some senior officials began establishing contacts
with international companies even before they relocated to the
Palestinian territories. A case in point was the contract with the
Israeli fuel company Dor, which was concluded without an open
tender.
3) Shortly after relocating to Palestine, the PA resorted to giving
monopoly "concessions" to certain governmental organizations -
e.g., the Palestinian Petroleum Commission, and cement importation
and distribution. In addition, the PA sought partial or full
partnership in firms operating in various sectors, some of which
were accorded important privileges without much competition. The PA
leadership has also turned a blind eye to the long standing murky
interconnections between the security apparatuses and certain
financial institutions.
4) The PA gave concession rights to certain private companies,
e.g., the Palestinian Telecommunications Company - which
constitutes a serious breach of the PA's adherence to a free market
economy.
5) In addition, the Palestinian economy and the investment climate
suffered gravely due to serious deficiencies in the regulatory and
legal frameworks, which were promulgated by the PA since its
inception in 1994.
Distortions in Economic Policies
It should be noted that failures in the institutional framework and
in economic policies have had their own deep-rooted dynamics. Since
the first days after relocating to Palestine, the PA officials were
faced with those problems which are typically experienced by
national liberation movements when transitioning from armed
resistance to building a civil-society state. The first problem is
the absorption of the leaders and field operatives, especially
since the majority does not have the required academic
qualifications or professional experience for civilian jobs. A
second problem is the imperative to secure self-financing to
minimize as much as possible the nascent authority's reliance on
external sources of funding. This is especially important in view
of the fact that the PA has certain financial obligations which
most donor countries and organizations refuse to assume.
Such abuses, however, have paved the way for major plunders, and
they have precipitated a psychologically depressed atmosphere, and
generated exaggerated rumors about corruption, which all have led
to a significant deterioration in the investment climate, and
nearly a total halt in foreign investments. All of this has also
triggered a flight of capital from Palestine to other countries,
either directly or through transfer of deposits in banks from
branches in Palestine to external destinations. Also of note are
the negative repercussions of the current regulatory framework on
work efficiency in private sector enterprises, and on the cost of
services they receive from government institutions, such as company
registration procedures, health certificates and external trade
permits.
Reform Efforts in Economic Policies
Breaches and abuses like those mentioned earlier have elicited
strong reactions from the private sector and civil society
organizations in Palestine. They have also generated much criticism
on the side of donors and international institutions, which began
to exert increasing pressure on the PA since the 1990s, especially
with respect to the monopolies and direct intervention in trade
transactions. But in spite of the repeated promises, no concrete
steps were taken until 2000, when the PA was compelled to reshuffle
the cabinet, the most notable change being the appointment of Salam
Fayyad as finance minister.
Fayyad succeeded in implementing a number of reforms which for
years had been high on the list of Palestinian priorities, such as
the following:
* The imposition of stringent control on government spending
according to the budget law;
* The consolidation of revenues in a single account under the
control of the Ministry of Finance;
* Curtailing indiscriminate appointments; and
* The imposition of total transparency on trade activities owned
directly or indirectly by the government.
Notwithstanding the importance of all such measures, it is clear
that the Palestinian leadership did not show a comprehensive and
thorough commitment to a genuine reform process. This is tangibly
evidenced by the continuation of financial and administrative
abuses throughout the past five years, in spite of the continued
talk about reform.
The Position of the Palestinian Legislative Council
Members of the Palestinian Legislative Council (PLC) are well aware
of irregularities in the PA institutions, especially those with
strong ties to economic and financial matters. The overwhelming
majority of members, including those affiliated with Fateh and
Hamas, feel bitter because of slow improvement in the performance
of most government institutions. Yet they have done nothing real
except scoring points in workshops and in front of the media. The
current PLC, elected in January 2006, has clearly fallen victim to
the bitter struggle between Fateh and Hamas, which has led to a
complete paralysis, especially in relation to the reforms
file.
Nonetheless, it is the previous PLC which witnessed the majority of
corruption cases in the PA institutions, and practically did
nothing to stop it. Yet the former PLC members continue to reap
hefty financial benefits which constitute a burden on the PA's
meager resources. More fittingly, they should be held legally and
historically accountable on gross oversight failures.
The Performance of the Judiciary System
The cornerstone of an attractive investment climate is establishing
an independent and efficient judiciary which is capable of
enforcing compliance with its rulings on all parties, including the
higher echelons of the political leadership and the security
apparatuses. This has always posed a big problem in Palestine;
hence it is no surprise to see widespread reluctance on the part of
foreign and even local investors. This was in fact one main reason
why the majority of banks operating in Palestine, especially those
of foreign origin, tightened their credit policies.
Of the several factors leading to the judiciary's poor performance
in settling trade disputes and current paralysis, the most
important is the lack of genuine backing from the political
leadership. The leadership has been unable to free itself from
recourse to political and factional allegiances and interests when
looking into trade disputes and problems, instead of abiding by the
law and court rulings. The performance of the judicial system
should be perceived as the litmus test for the seriousness of the
reform policies adopted by the current government. There is no
doubt that the prime minister and his cabinet are well aware of the
importance of this issue, and that they are committed in principle
to taking the necessary corrective measures to restore the respect
of the judiciary. It would be naïve, however, to expect this
to be a sufficient prerequisite to overcome the deeply ingrained
factional mentality, which the Palestinian leadership has pursued
for more than a decade.
Non-Governmental Organizations
Several non-governmental organizations (NGOs) have played an
important role in providing valuable services, not only in the
political, social, health care and human rights areas but also in
the governance domain. These NGOs have also been instrumental in
pressuring the PA on several vital issues pertaining to governance,
democracy and civil society in general.
Nonetheless, NGOs themselves have also suffered important setbacks
in past years, as most of them suffer from the very same ailments
prevalent in the political and public sectors, which diminishes
their efficiency and results in the squandering of available
financial resources. There are also clear signs that most NGOs do
not observe democratic values, e.g., holding timely and real
elections. This is why most of them have not seen a change in
leadership for many years. Most of them tend also to have an
inflated number of employees, which has entailed significant
distortions on their programs and fundraising practices.
International Donor Organizations
Donor countries and certain specialized international
organizations, such as the World Bank and the International
Monetary Fund (IMF), have played a major role in supporting the
Palestinian people since the beginning of the peace process, most
importantly in providing vital health, social and educational
services. The significant level of financial aid pumped into the
Palestinian economic infrastructure has helped, directly or
indirectly, to promote growth, or at least to avert a sharp
regression in living standards.
Undoubtedly, donors and international organizations have also
played a key role in prodding the PA on the reform prerogatives.
Many expatriate and local experts, however, complain that many
donors have also suffered from deficiencies in their own governance
structures, especially in the following areas:
* The level of coordination among the donors remains low, despite
the formation of several coordination mechanisms. This is
exemplified most strikingly in the duplication of activities
pertaining to issues of democracy, women and human rights, which
have become a steady denominator in projects supported by donor
countries.
* The levels of transparency and accountability in the management
of aid by certain countries and funding organizations leave much to
be desired. This was one important reason why public institutions
and NGOs have not taken reform recipes presented by those
organizations as seriously as they should.
The Banking System
The performance of the banking system is one of the key
determinants of development in Palestine. Despite considerable
expansion in the banking sector, both in the number of branches and
size of deposits, the level of banking services remains well below
optimal, as exemplified by the following features:
* The quality of services is not satisfactory, especially with
regard to the slowness of loan operations, and the complications
related to required collaterals.
* The cost structure of banking services is much higher than that
in international financial markets.
* The volume of credit provided by banks is small compared with
actual needs, and in view of available liquid assets. The ratio of
loans to the volume of deposits is very low, rarely exceeding 35%
.
It is understandable that weaknesses in the judicial system
constitute an important cause of the modest performance of the
banks operating in the Palestinian territories. Yet the main factor
behind the emasculated performance of the banking system is the
absence of a truly competitive environment. This, in turn, is
precipitated by the monopolistic leverage associated with the large
size of certain banks, which are in effect capable of setting price
rates in the domestic market.
Higher Education
The human factor plays a central role in economic development in
light of the accelerated technological evolution, which lies at the
core of competitiveness. During the past three decades, great
strides have been made in the number of higher learning
institutions and in their absorption capacity, as well as in the
number of specializations and graduates flooding the job market.
But despite these achievements, it is clearly noted that the
quality of education offered in local universities suffers from
profound weaknesses, which is largely due to the dramatic increase
in the number of students. Inevitably, this has reflected
negatively on the capacity of Palestinian graduates, undermining
the demand for them in local and external labor markets.
It should be further noted that the Palestinian education sector
consumes an enormous amount of investments, which begs the
question: How cost-effective is the system? Most likely the answer
is not encouraging. Consequently, reform in the higher education
system has also become one of the urgent priorities.
Deformations in Economic Relations with Israel
Although politicians and the media have tended to focus attention
on the political and security aspects of Palestinian-Israeli
relations, one should note that economic relations between the two
sides have evolved considerably during the past four decades.
Obviously, these relations have entailed important economic and
social repercussions on both sides, but clearly more so on the
Palestinians.
Notwithstanding the great importance of those relations, however,
there have been basic deficiencies in the way they were managed by
the relevant Palestinian institutions. Among the most important
areas of mismanagement are the following:
1) Trade Relations
Trade in commodities has evolved very rapidly during the occupation
period, whereby Israel became the primary trade partner for the
occupied territories. Israel was the chief source of goods imported
into the territories (about 90%), and the main market for
Palestinian exports (about 75%). Following the Paris Economic
Protocol, important amendments were introduced on the conditions of
trade, mainly by opening the way for Palestinian enterprises to
establish direct relations with other countries. Not surprisingly,
Palestinian imports from Israel fell to 65-70%, and Israel's share
of Palestinian exports rose to over 90%.
It is of course understandable that the Palestinians should do all
they can to identify new markets for their products, in order to
reduce dependence on Israel. What is strange, though, is to witness
the very low level of interest on the Palestinian side in
correcting and improving trade relations with Israel. This
undoubtedly is a major cause for the continued hardships that the
Palestinian firms face in their trade with or via Israel.
2) Labor Relations
The flow of workers from the Palestinian territories into the
Israeli labor market was one of the major transformations in
Palestinian society since the beginning of the Israeli occupation
in 1967. Their number rose rapidly so that it exceeded 150,000
workers by the end of the 1990s, and their earnings contributed
approximately 30% of the Palestinian gross national product
(GNP).
The entry of workers into Israel was almost completely halted
following the outbreak of the second intifada, once again for
alleged security reasons. This was the principal and direct cause
for widespread poverty among wide segments of the society, whose
main source of income depended largely on remittances from
Israel.
The political and economic changes during the past two years have
allowed an increasing number of workers to return to the Israeli
labor market. The Israeli economic recovery is likely to allow the
absorption of more Palestinian workers. But again, one major
impediment is the confused and shy attitude of the Palestinian
partner in dealing with this issue.
3) Joint Projects
In contrast to relations in the areas of trade and labor flows,
very little progress has been made with regard to capital-sharing
joint ventures with Israeli enterprises. Obviously, such forms of
cooperation are still on the list of taboos on the side of the
Palestinian business community, seemingly for complex political and
psychological reasons.
The PA's position on joint ventures, however, has been much less
reserved, as the PA itself has concluded a number of joint projects
with Israel, as in the case of the border industrial zones. As
expected, this has caused great confusion, both at the public level
and within the private sector institutions.
The issue of joint Palestinian-Israeli ventures entails political
and economic implications of the utmost importance for Palestinian
society, especially in the eventuality of achieving tangible
progress in the peace process. It is important, therefore, that the
Palestinian leadership crystallizes a unified and rational position
on this issue, which is to bind all Palestinian stakeholders. This
is one more important reform priority in Palestine.
To conclude, one should note that there have been limited and
isolated successes in the reform efforts in the Palestinian
territories, yet the commitment for this process remains weak at
the top political echelons. This means that the Palestinian
leadership should assume a much more determined stand on this
process, and should take serious steps to implement relevant
measures and policies. The success of this endeavor requires
exerting more proactive efforts on the side of all stakeholders,
including donors and international organizations.
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