The Middle East Channel

Putting the Palestinian carriage behind the horse

There is a common notion in the West, Israel, and even in some Palestinian circles that economically, Palestine is doing rather well; that even though the lack of political progress is causing some difficulties on the ground, the current state of affairs is nonetheless manageable and indeed will continue to improve at the economic level. But a deeper analysis of the situation based on the available indicators suggest a much different reality: namely, the ongoing Israeli occupation, and the international aid regime for Palestine that this has spawned, has created a Palestinian economy that is simply impossible to sustain on its own merits.

Consider the two most recent reports put out by the IMF and World Bank in April of this year assessing the macroeconomic and fiscal picture of the Palestinian economy in the West Bank and Gaza. It is true, as they indicate, that in a superficial sense the Palestinian economy has showed some positive indicators recently. The IMF's report noted that "economic growth in 2009 picked up significantly" and continued "real GDP growth in the West Bank and Gaza (WBG) is estimated at 6.8% for 2009, consisting of 8.5% growth in the West Bank and 1% in Gaza"; whereas real GDP per capita grew by 3.8 percent in 2009 (given the population growth rate of about 3 percent). In real terms, the GDP did grow if computed in Israeli shekels, the currency used in the Occupied Palestinian Territory. Indeed, in spite of Israel maintaining its tight grip on Palestinian lives through their ‘matrix of control', over the past three years the PA has nonetheless (and quite remarkably) "continued to build a solid track record in institution-building and economic and security reforms, supported by generous aid." Total GDP in the West Bank in 2007 was back to where it was in 1999; and real GDP per capita in 2009.

Yet these statistics, happily spread by the Israeli PR machine and its international supporters abroad, consistently belies the more extensive data contained in the same reports. In USD terms, the situation is quite different. The IMF reported that Nominal (pre inflation adjustment) GDP in 2009 was US$6.117 billion, up from US$6.108 billion in 2008, an increase of only 0.1%. Palestine was given aid over the past three years totaling a sum of more than 120% of its GDP, yet in USD terms there was no real per capita growth! As the reports acknowledge, the government stimulus spending growth witnessed was basically consumption driven.

Moreover, the deficit in 2009 grew. The overall deficit was more than US$1.77 billion, or 29% of the GDP, far exceeding budgetary expectations. The original budget, prepared before the Gaza war in 2008/09, had a recurrent budget deficit of US$1.15 billion; however, the initial budget was subsequently amended to take into account the addition of $300 million for Gaza. The actual deficit on a commitment basis was $1.59 billion, an increase of almost 40% on the original budgeted amount. Aid to the recurrent budget of about $1.36 billion was 100 million short of the $1.45 billion budgeted and around 250 million short of the actually needed amount. The development budget was initially US$ 0.503 billion and was increased to US$1.1 billion to respond to Gaza's needs in the wake of the latest war, however only US$390 million or 36% materialized.  Hence, while generous, donors' aid did not cover the deficit. As a result, the PA resorted to bank borrowing and accumulated arrears of US$221 million.

With such a track record, continuing with a ‘business as usual' attitude, as the situation in 2010 gets even worse, is untenable. The current budget envisaged a deficit of US $1.24 billion-however, external financing fell short in the first quarter as $174 million or 56% of the needed amount materialized. To fill the gap, borrowing from local banks increased to around $750 million according to the IMF. This borrowing translates to 12% of the GDP, up from $180 million or less than 3% in December 2009.

The palliative influx of international aid that such a dire situation requires came in May's disbursement of $210 million, which resulted in a cumulative disbursement of $470 million during January to May 2010, only slightly lower than the envisaged $500 million. But this is a reflection of our total dependence on aid and the rigorous ‘from hand to mouth' situation we live in. Unfortunately, this state of affairs that makes independent Palestinian sustainability impossible is not new.

During the "peace" process of the 1990s, for example, exports suffered greatly. We prided ourselves that Palestinian exports in goods and services constituted more than 50% of our GDP before 1994, the highest in the Arab world excluding oil-producing countries. But this figure was dropping drastically even in these ‘high-growth' years. Exports to Israel, estimated at about three fourths of total exports, declined in 2009 by 23% in dollar terms. As a percentage of GDP, exports were 12.7%, a drop from 14.4% in 2008.

Further, the declining production and the plummeting exports explain why there is no significant drop in unemployment or poverty rates in spite of the billions pumped into the economy. The 2009 unemployment rate is 25%. In Gaza it stood at 39% and 18% in the West Bank. More than 80% of Gaza's population and 45% of West Bankers live in poverty and are dependent on aid, causing the gap between the haves and the have nots to widen.

It is apparent that in spite of all the progress made, the essential requirements for jump-starting the private sector, the driver of the real, independent economy, have not been met. The "improved" access and movement witnessed between major urban centers in 2009 is not enough, being that access to area ‘C' and to Jerusalem (some 65% of the West Bank) is still curtailed, exports to Israel are restricted and Gaza is still blockaded. Additionally increased access to high-end technology and markets and reduced costs of doing business, which are essential for a real and sustainable recovery, have not been broadly achieved.  This has had a particularly adverse impact on East Jerusalem, the largest city in Palestine, whose "economy has traditionally relied heavily on its trade links and client base in the West Bank".   

The arguments for ‘economic peace' and an alleged West Bank ‘miracle' are not only insufficient on their own merits, however, but also neglect the catastrophic situation of Gaza-a political reality that is bewilderingly left absent from some prevailing economic-first paradigms. The current situation in Gaza (whose GDP in 2009 was 50 percent of what it was in 2000) is both a shame and a crime. Gaza is deprived and is under-developed, and for decades has been denied access to its natural resources, mainly its off-shore gas deposits. It is the most densely populated territory in the world and for years its inhabitants (1.6 million or 40% of the total Palestinian population) have been kept locked up in a veritable open-air prison. Civilian reconstruction of what was damaged by Israel's war on Gaza, travel, agriculture, industry, decent health care and education are all severely curtailed by the Israeli blockade, which is characterized by restrictions on capital inputs, raw and building materials as well as exports, thus, "impeding the private sector recovery and reconstruction efforts".

To survive, Gaza depends on handouts from the international community and on $1.6 billion, or more than 26% of our GDP, that the PA spends there annually on salaries, water, electricity, medicines and other basic necessities. What is abundantly clear is that no economically ‘sustainable' Palestine can be achieved unless this massive black hole is addressed, and without changing the situation this catch-22 situation will remain.

Reconciliation in Palestine is the prerequisite for progress, an issue Israel, the West, and many in the political echelons of Palestine continue to adamantly oppose. Highlighting the blockade and its disastrous consequences, much like the Gaza-bound ‘freedom flotilla' attempted to underscore, are essential for humanitarian reasons--political as well as economic. And any cosmetic alterations of the face of the Gazan blockade, as publicly announced by Netanyahu, change the underlying reality not one iota.

Much of the improvement in lives of the Palestinian people will of course have to take place on an immediate economic level. And to come out of this mess we must implement immediate austerity measures and redirect expenditures towards enhancing the productive base. Real painful readjustments and reforms are needed-the types of which require national consensus. Thus, at an internal level, achieving national unity is a prerequisite to real economic growth and Palestine must put its national interests first. But this cannot take place in a vacuum absent a change in the external situation.

A 2005 World Bank report clearly established the link between ‘access and movement' restrictions and Israel's maintenance of its colonial enterprise. The occupation, its relentless colonization drive and the separation wall continue to adversely affect Palestinian economic competitiveness. Indeed, it is clear is that there is no viable economic path going forward absent a political breakthrough first. This fact is also recognized by the IMF, which stated that "a breakthrough in the peace process and removal of restrictions on a wider scale are essential for a durable and regionally balanced growth".

It is thus time to put the Palestinian carriage behind the horse. Only an end to the occupation and the establishment of a sovereign independent Palestine on the 1967 borders can lead to a competitive and sustainable economy. A paramount question is whether the international community, particularly the US, will recognize this and exert the pressures needed to achieve it. But whether it is in Israel, Palestine, or the international community, what is abundantly clear is that now is a time for statesmen, not politicians.

Bassim S. Khoury is the former Minister of National Economy for the Palestinian Authority.  He is a private sector industrialist and human rights activist.

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The Middle East Channel

Iraq's political love triangle

In recent weeks there has been tongue in cheek commentary in the Iraqi and regional press as to whether the better metaphor for the alliance between outgoing Prime Minister Nuri al-Maliki's State of Law Coalition and the second major Shi'a bloc in Iraqi politics, the Iraqi National Alliance (INA), is a marriage or a mere engagement announcement. This irreverent speculation about the permanence of the pairing gets to the heart of a delicate three-way political dance underway in Baghdad.  Will a reunified Shi'a alliance be the heart of the new Iraqi government? Or will the competing ambitions of Maliki and his erstwhile Shi'a allies open the door for former Prime Minister Ayad Allawi's al-Iraqiyya bloc to spoil the nuptials?

Baghdad, Erbil, Washington, Tehran and Riyadh appear to agree on the need for Iraq to have an inclusive government with representation from each of its major communities. This can either be taken as a remarkable confluence of interests or a sign that we need to look elsewhere to understand what is going on in the seemingly interminable government formation process. Inclusivity may be the buzzword, but it is the foundational alliance that will likely determine how a big-tent government looks and acts, not the number of parties squeezed under the tent. Even if all major blocs are ultimately brought in, the internal reconciliation optics and regional response to the new government could be substantially different depending on whether it is headed by the reconstituted Shi'a alliance versus a cross-sectarian pairing of either State of Law-Iraqiyya or Iraqiyya-INA.

Four major political blocs contested Iraq's national elections and will determine the shape of the next government: Maliki's State of Law, the rump Shi'a Iraqi National Alliance (INA), the Sunni and secular al-Iraqiyya slate, and the Kurdistan Alliance. However, the leadership dance is only a three-way contest because the Kurdistan Alliance has no designs on heading the government and has said that it will not try to veto any of the possible nominees for Prime Minister. There is also a perception in Baghdad that the Kurdish desire to be inside the government to protect their interests outweighs any preferences they might have for one or another candidate. This leaves three possible blocs from which the Prime Minister could emerge: State of Law, the INA, or al-Iraqiyya.

The most important factor in the vote's outcome was the division of the unified Shi'a list which dominated the 2005 elections. In 2010, Maliki's Da'wa Party undertook a trial separation from the Islamic Supreme Council of Iraq and the Sadrist trend. This splitting of the Shi'a vote opened the door for al-Iraqiyya to win a narrow plurality at the polls. Since no party captured more than 28 percent of the seats in Parliament, some form of a coalition will be required to form a government. Faced with this divided vote, the four major lists have gone further and repeatedly spoken of the need for a government of "national partnership." 

This all sounds nice on the surface, but a national partnership could run the gamut from true inclusion to fig-leaf representation of certain groups. In reality, the international orientation, coherence and possible reconciliation value of any such partnership will likely depend on the sequence in which it is formed rather than its final composition. The first, and perhaps half-way completed scenario, is that the INA and State of Law get fully back together and agree on a Prime Minister. The Kurds have already said that they would support any Prime Minister these two blocs jointly nominate, and together the Kurdistan Alliance and two Shi'a blocs would control almost two-thirds of Parliament. These three entities would then turn to al-Iraqiyya, or parts of al-Iraqiyya, and invite it to fill out the government. Such a partnership government would likely resemble the previous government, have a Shi'a-Kurdish bent and probably only include second-order al-Iraqiyya participation.

There are other scenarios. There is a widespread belief in Baghdad that it will be difficult for Allawi to return to the Prime Minister position due to Iranian objections and perceptions that he is the U.S. and Arab candidate for the top office. But this does not mean that al-Iraqiyya lacks opportunities to take advantage of the internal rivalries in the as-yet unconsummated Shi'a alliance. The INA is the smallest entity in terms of number of seats among the contending blocs for Prime Minister. Its best chance to get the premiership might actually be through an alliance with al-Iraqiyya rather than hoping to come out on top of an extended intra-Shi'a negotiation with the powerful incumbent office holder (Maliki). An Iraqiya-INA joint candidate for PM could likely obtain Kurdish support, leaving the State of Law with the leftovers of national partnership.  Meanwhile, an Iraqiyya-State of Law alliance to head the government is probably the most ideologically coherent pairing, in the sense that both blocs share nationalist and centralist views of the Iraqi state. This pairing would have absolute majority in Parliament and not technically need further partners to form a government, although it would come under U.S. pressure to bring in the Kurds. 

To have a chance at either scenario, the catch for al-Iraqiyya is it probably has to abandon its hope to head the government, approach one of the two Shi'a blocs, and offer to support its candidate for PM in return for key senior positions. This in fact appears to be at least a partial sentiment within Iraqiya, with some of its members expressing concern that the bloc's all-out focus on the PM position could result in it having no post-election role. This incipient frustration with a party leader, and fear of being squeezed out of the political match-making, is not unique to al-Iraqiyya. It is almost two months since the INA and the State of Law first announced their merger, and the two lists do not appear close to settling on a joint nominee for Prime Minister. This past week saw the Saudi newspaper Asharq Al-Awsat claim that some Maliki confidants have advised him to step aside so that the INA-State of Law deal can be finalized.  In parallel to these internal rumblings, the three big parties continue to flirt with each other and the Kurds in order to gain leverage in this political love triangle. (See for example an INA complaint that Tuesday's Allawi-Maliki meeting was intended to pressure them into accepting a second Maliki term.)

The bottom line for outside observers trying to keep track of all this dizzying activity is that while we think we know the final shape of the government (national partnership), the order in which Iraqis get there is important. The proto-Shi'a alliance remains the most likely bet to initiate the process, but its continuing differences allow al-Iraqiyya to live in hope. And a decision by al-Iraqiyya to sacrifice the top job in return for becoming the senior partner in government could really re-shuffle the deck. At stake here is the perception and orientation of the government. Will it be perceived as strongly sectarian, with the risks this implies for internal stability and Iraq's regional re-integration? Will it have the type of legitimacy to make progress on Arab-Kurdish issues in the provinces north of Baghdad where Iraqiyya won a large portion of its votes? The answers to these questions will by no means be determined by the order of government formation, but the sequencing of alliance-making will give us an indication of the prospects for progress on these important counts.

Sean Kane is an Iraq Program Officer with the United States Institute of Peace.  This  article was based, in part, on recent meetings in Baghdad with officials from Iraq's four major electoral blocs.

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