by Mohammed Malley
November, 1998
Gov. 390L Comparative Political Economy of Globalization
Both Jordan and Palestine (the West Bank and Gaza Strip) have small
economies that are located in a politically strategic region. While both
have faced increasing economic problems in the 1980s and 1990s, neither have
undertaken the level of economic reform needed to attract enough foreign
investment to secure long term solutions. Both have sought answers to their
problems in politics rather than economics. New political rents, now mainly
in the form of international aid, is being sought as a replacement for
earlier forms of political and economic rents that enabled them to escape or
hide for decades from the structural problems in their economies and
financial sectors. These new rents however have high political costs. The
Jordanian Monarchy and the Palestinian Authority have both been forced into
making costly political concessions that critics assert have infringed on
their rights to political independence as a means of securing what are
relatively small amounts of economic aid when viewed in the larger scheme of
international finance. While Jordan and Palestine are special in the sense
that their strategic location has made it worthwhile for international
donors to maintain the flow of aid into the post-Cold War era, they at the
same time underscore the threat that all developing countries with
inadequate financial sectors face in an increasingly globalized world of
finance.
The signing of the Declaration of Principles between Israel and the
Palestine Liberation Organization (PLO) in Sept. 1993 as well as subsequent
agreements between the two sides have led to more attention being given to
the economy of the West Bank and Gaza Strip (WBG), parts of which
increasingly look like they will emerge into some sort of Palestinian state
in the future. In 1967 the two regions came under Israeli occupation and
for the subsequent 30 years their economy was marked by acute structural
imbalances that were caused by the occupation. Industrial and agricultural
development in the WBG was retarded by Israeli restrictions and regulations
and no real financial sector that could provide credit to Palestinian
entrepreneurs was allowed to develop. Meanwhile, new labor opportunities
opened up in Israel, and later in the Arab Gulf, while Israeli goods were
given unimpeded access to Palestinian markets. As a result, the Palestinian
economy evolved into an importer of goods, mostly Israeli, and an exporter
of labor. Large remittances from Palestinians working in Israel and the
Gulf allowed for substantial growth during the 1970s and early 1980s despite
stagnant or even declining levels of industrial and agricultural production.
The drop in oil prices in the mid-1980s, the Palestinian Intifadha that
began in 1987, the 1991 Gulf War, and the peace process have all however had
serious detrimental effects on the WBG economy which can no longer even come
close to generating enough capital for sustainable growth. Financial
problems constitute a major challenge to the Palestinian authorities who
have been given an increasingly large role in the management of the WBG
economy since the mid-1990s, and if the WBG does transform into some kind of
independent Palestinian entity, the strength of and manner by which its
financial sector develops and thus generates capital will be an important
variable in explaining its future political and economic development.
Since the beginning of the Israeli occupation in 1967, labor remittances
from Palestinians working in Israel or abroad have provided a major source
of capital in the WBG. The number of Palestinians working officially in
Israel, mostly in unskilled manual labor, rose from zero to about 75,000 in
1979 and to 145,000 by 1987, accounting for 35% of the 1987 total employed
population of the West Bank and 45% of that of Gaza. In 1987, Palestinian
laborers in Israel brought home to the WBG about $675 million. There was
also a surge in demand for skilled workers in the oil-exporting countries of
the Gulf after 1973. Of the 800,000 Palestinians in the Gulf in 1987,
165,000 were from the WBG and total remittances from the Arab Gulf countries
to the WBG was $250 million. The $925 million that poured into the WBG
from laborers outside of the area represented 37% of the total 1987 GNP of
$2.5 billion. The Palestinian dependence on outside sources of labor is
thus sharply underscored by the large gap between GDP, which refers to the
level of economic activity within the occupied territories, and GNP, which
refers to total income and thus includes the money from outside labor. In
1987, real GDP in the WBG was $1.57 billion and thus represented only 63% of
total GNP.
In addition to the remittances, the WBG economy was supported by aid from
various UN agencies, Gulf countries and the PLO. The United Nations Relief
and Works Agency, which administers the Palestinian refugee camps in the
WBG, had an annual budget of about $230 million in the 1980s and direct aid
from the Gulf countries to various institutions in the WBG was equivalent to
$70 million in 1989. An even more substantial amount of Gulf aid went
directly to the PLO, which while its leadership was based outside of the
WBG, did funnel a substantial amount of money into the territories to
support an extensive patronage network that guaranteed continued support to
the PLO. From 1980 to 1990, the organization received an average of $1
billion a year from Kuwait, Saudi Arabia and the United Arab Emirates.
While after 1967, opportunities for Palestinians to work in external labor
markets dramatically increased, the economy of the WBG under occupation
stagnated or even declined. The Israeli authorities placed severe
restrictions on industrial and agricultural production in what Sara Roy has
described as "the deliberate, systematic deconstruction of an indigenous
economy by a dominant power ... designed to ensure that there will be no
economic base, even one that is malformed, to support an independent
indigenous existence." The contribution of industry to GDP in the West
Bank declined from 8.3% in 1970 to 7.3% in 1985, while during the same
period agriculture’s contribution declined from 34.8% of GDP to 22.3%.
The substantial amount of capital that was flowing into the region from
workers outside and from aid was either used for basic needs or was being
invested in sectors that were dependent on continued inflows of money from
abroad, such as housing construction and services, while very little was
used for productive enterprises.
The result was an economic anomaly in which the WBG witnessed a rapid growth
in its capital stock during the 1970s and 1980s during which investment
rates of 30-40 percent rivaled East Asia, but at the same time, without any
financial sector to guide those funds and with strict regulations
prohibiting investment in the productive sector, the territories witnessed
an actual decline in levels of employment. As a result, the region’s trade
deficits mushroomed. The money that was flowing into the region from
external sources financed the trade deficits, most of which were with Israel
which used the WBG as a captive market for its goods while prohibiting the
import into Israel of certain goods from the territories. In 1987 the trade
deficit with Israel reached $658 million. Israel also placed severe
restrictions on what the WBG could export to countries besides Israel thus
exacerbating the overall trade deficit of the territories. While the WBG
did maintain a substantial trade surplus that amounted in 1987 to $69
million with Jordan, which maintained a concessionary policy toward
Palestinian imports while Israeli restrictions made exports from Jordan to
the WBG nearly impossible, the WBG’s trade deficit with countries besides
Israel and Jordan was $77 million in 1987. The 1987 total trade deficit of
$666 million constituted more than 42% of GDP.
While external sources of aid and markets for Palestinian labor enabled the
WBG to experience rapid growth during the first decade of the occupation,
that growth was accompanied by major distortions in labor markets, sectoral
production structures, and the balance of trade. Those distortions made the
economy highly vulnerable to the external political and economic
environment, and when that environment began changing in the 1980s, the WBG
suffered.
Economic growth rates first began slowing down with the fall in oil prices
in the early 1980s which weakened demand for Palestinian labor in the
oil-exporting countries. The situation was exacerbated when the Intifadha,
which began in Dec. 1987, caused disruptions in economic relations with
Israel. The Intifadha was marked by Palestinian strikes and Israeli
curfews, both of which had a detrimental effect on the WBG economy. The
Intifadha did result in an improved Palestinian agricultural sector as
Palestinians began boycotting agricultural produce imported from Israel,
and, at the threat of arrest and imprisonment, grew such things as tomatoes
thus violating occupation regulations that restricted Palestinian production
of things that Israel exported. From 1987 to 1991, agriculture’s
contribution to total GDP increased from 22.5% to 38.2% doubling overall
production from $337 million to $683 million. Per capita non-agricultural
GDP however declined by 12% between 1987 and 1991. Employment in Israel
also declined dramatically as strikes, curfews and increased Israeli
restrictions on Palestinian labor led to a decline from the estimated
145,000 legal and illegal Palestinian workers in 1987 to 97,000 in 1991.
Despite double digit inflation from 1987 to 1991, per capita GNP declined
during that period from $1,880 to $1,715. The dramatic loss of income led
to declining levels of consumption, savings, and investment.
The problems were then severely compounded by the 1991 Gulf War, which led
to a temporary border closure with Israel and a permanent loss of tens of
thousands of jobs in the Gulf. On Jan. 16, 1991, Israel imposed a
comprehensive and prolonged curfew that translated into a total work
stoppage on the WBG that lasted for as long as seven weeks in some areas and
substantially increased unemployment levels as Israel began placing more
permanent restrictions on Palestinians working inside Israel. Even more
devastating was the loss of jobs, remittances and aid from the Gulf. As
punishment for the PLO’s stance against American intervention in the Gulf,
the vast majority of Palestinians working in the Gulf were deported, direct
aid from the Gulf to the WBG was terminated as were the substantial
contributions that were given to the PLO. By April of 1991, the loss of
remittances and other direct aid (in addition to the loss of Gulf export
markets) amounted to $350 million, a sum equivalent to more than 15% of the
areas total GDP of $2.1 billion in 1991. As tens of thousands of
Palestinians began returning from the Gulf and Israel simultaneously cut
back on the number of Palestinians it would allow to work inside Israel,
unemployment levels reached 40% in Gaza and were only slightly better in the
West Bank. In Nov. 1992, when the UNRWA, which was already employing
nearly 15% of the working Gazan labor force, posted notices for 8 jobs for
garbage collectors, they received 11,655 applications, close to 10% of
Gaza’s total labor force.
The economic distress suffered by the Palestinians in the WBG after the Gulf
War was paralleled by the economic bankruptcy of the outside Palestinian
leadership represented in the PLO and its leader Yasser Arafat. The
termination of the generous support the PLO had been receiving from the Gulf
states (most of this money was actually raised from taxes imposed on all
Palestinians working in Saudi Arabia) left the organization unable to pay
its own personnel or maintain its significant patronage networks within the
occupied territories, much of it in the form of financial assistance to the
families of martyrs and prisoners but also a significant amount directly
paid to political and student groups that supported the PLO from inside the
occupied territories.
With the end of the Cold War and demise of the Soviet Union in conjunction
with the marginalization of the PLO within the Arab world, the PLO seemed to
have no way to save itself from economic, and thus political, oblivion. In
addition, a peace process that had begun by a conference in Madrid, Spain in
1991 during which Israel insisted that Palestinian representatives be from
within the occupied territories, was gradually leading to the rise of a new
Palestinian leadership that had the potential of separating itself from the
PLO. The PLO was faced with either accepting the passage of power to a new
leadership or doing something dramatic to ensure its own survival. The Oslo
Accords of Sept. 1993, in which the PLO negotiated a separate peace deal
with Israel in total secrecy and behind the backs of the Palestinian
representatives to the Madrid process, moved a fiscally bankrupt and
politically dying PLO back to center stage. The price it paid was accepting
terms that they had previously rejected as wholly inadequate. The Oslo
process has allowed for the establishment of a semi-autonomous Palestinian
National Authority in the WBG led by Arafat, and has made the possibility of
Palestinian statehood much more likely. The hope was that with increased
Palestinian autonomy and independent decision-making powers, the economy of
the WBG could be revived and with improved economic conditions, the
likelihood of violence would be dissipated.
Those hopes have however not been realized and since Oslo the economy of the
WBG had deteriorated dramatically, with outside rents in the form of
international economic assistance saving it from total economic collapse.
The economic policies can largely be explained in the context of the
political policies, actions, and needs of both Israel and the Palestinian
National Authority (PNA).
The Oslo process (which in addition to the 1993 Oslo Accords, includes a
1994 Economic Protocol, a 1995 Interim Agreement, a 1997 Agreement on Hebron
and a 1998 Memorandum) has defined a legal framework for Palestinian
economic activity. While that framework has led to a degree of Palestinian
economic independence that did not exist prior to 1993, Israel still retains
overwhelming influence over the direction of Palestinian economic
development. Israel has retained direct control over all borders (and thus
the movement of labor and goods), all water resources and the vast majority
of the land in the WBG. The Palestinians have not been allowed to print
their own currency, thus allowing Israel to retain control over monetary
policy. Most importantly, the Oslo process has resulted in the segmentation
of the WBG as the territory has been split up into a number of islands of
Palestinian autonomy surrounded by areas under Israeli military control.
This becomes especially important because of Israel’s frequent resort to a
closure policy that since Oslo often means not only that Palestinian
movement in and out of Israel is restricted but also that movement from one
city in the territories to another is blocked. This is best expressed by
the fact that movement between the West Bank and Gaza Strip, which before
Oslo was routine, has now become almost impossible as has all access to
Jerusalem, formerly the center of the West Bank economy, but also movement
within different areas of the West Bank has been hindered dramatically by
Oslo, resulting in the growth of largely separate economic units and the
breaking up of an already small domestic market into even smaller ones.
The Israeli closure policy, which before 1993 was almost never used, has
become the principal reason for Palestinian economic distress since Oslo.
The closure policy has had a devastating impact on the Palestinian economy
and has served Israel well in the peace process as a way of forcing the PLO
to accept short-term economic improvements as opposed to longer-term
political solutions during negotiations. Between 1993 and 1996, the Israeli
government imposed closure for 342 days in the Gaza Strip and 291 days in
the West Bank. The closures deprived workers from going to their jobs, led
to the spoilage of tons of agricultural produce before they could reach
their markets, and delayed the arrival of raw materials for industrial
enterprises thus upsetting production plans. The closure also forced the
PNA to divert funds allocated for investment to meeting emergency needs
while resulting in an economic environment that was not conducive to
attracting either local or foreign investment.
Since the beginning of the Oslo process, Israel has also cut back
dramatically on the number of Palestinians it has allowed to work inside
Israel. The number of Palestinians allowed to work in Israel has varied
greatly as Israel also uses these jobs as a negotiating tactic. There were
nearly 150,000 legal and illegal Palestinian workers in Israel before the
Intifadha and about 97,000 in 1991. In 1992 the number rose to 120,000 but
had been cut back to 80,000 in 1993 while the PLO and Israel were secretly
negotiating the Oslo Accords. Since the signing of the Oslo Accords, the
number has dropped dramatically to 53,000 in 1994, 32,000 in 1995 and 25,000
in 1996. It is worth noting that during closures even this diminished
number of workers can not go to their jobs and thus do not get paid. As a
result, the value of wage incomes earned in Israel (in 1995 dollars) fell an
estimated 90.5%, from $741 million in 1992 to $70 million in 1996.
While Israeli policy has remained the primary cause of the economic problems
in the WBG, the policies of the PNA have also had serious detrimental
effects. When the PLO leadership was relocated to inside the occupied
territories and established the PNA, one of their main responsibilities was
to bring an end to the Intifadha, which had started and was led by a rising
new political elite from within the territories. On the political level, the
security requirements that Israel demanded of the PLO in the Oslo process
have precluded any opportunity for democratic institutions to develop.
Freedom of the press, civil liberties, human rights, and the rule of law
have all suffered as the PLO has tried to fulfill its pledges to protect
Israel, silence all criticism of Oslo, and establish and maintain a
political base within the territories that is loyal to Arafat. The
establishment of that political base has also had serious economic effects.
An important element of Arafat’s political base within the territories is
the dozen different security and police agencies all of which report
directly to him. The heads as well as a few thousand members of the
security forces came with Arafat from outside the WBG. All together there
are 36,000 members of the security forces whose salaries and expenditures
are accounted for in the PNA budget. There are an additional 53,000 people
working in the PNA public sector making for a bloated bureaucracy but also
allowing for a strong political patronage machine. When the families of
the civil servants and security forces are included, more than one-quarter
of all Gazans are directly dependent on the PNA for their livelihood. While
the bureaucracy in the West Bank, where the PNA still has direct control
over less than 3% of the territory, is much smaller, the same political
logic is at play. Jobs in the security forces and civil service require
loyalty to Arafat and the Fatah faction of the PLO that he leads. Even
teachers and doctors, much less state bureaucrats, without ties to Fatah or
Arafat can not find jobs in public schools or state-funded hospitals.
Arafat uses his ability to distribute jobs, in an economy where the private
sector works under restrictions and impediments that often leads to more job
destruction than job creation, to ensure the loyalty of his Fatah cadres,
buy loyalty from others, and negotiate for political space with the nine
other Palestinian factions inside and outside of the PLO that have a
presence in the WBG.
Arafat and the PNA have also allowed for gross levels of corruption as
another way of buying loyalty. An internal PNA investigation, forced upon
them by widespread criticism of corruption, found that $323 million, or 40%
of the total 1996 PNA budget of $800 million, had been misused or wasted.
Most of the money was directly diverted into personal accounts or spent on
luxury items for ministers. Outside critics of the PNA believe that the
figures are even higher. Surprisingly, even those ministers whose corrupt
practices were delineated in the report—most notably Jamil Tarifi, Nabil
Shaath, and Ali Qawasima—not only remained in their positions but were
reappointed after a cabinet "reshuffle" in Aug. 1998, underscoring the
importance of loyalty to Arafat above all other considerations.
A form of more indirect corruption exists in the PNA establishment of at
least 13 monopolies in the names of individuals in Arafat’s inner circle.
These monopolies have the sole right to import more than 100 products
including such things as flour, sugar, cooking oil, frozen meats,
cigarettes, concrete, steel, tobacco, and petroleum. The artificially
inflated prices they are able to charge has resulted in as much as $400
million a year being transferred into the hands of a new economic class that
is both loyal to and dependent on Arafat.
Under the economic problems caused by the political policies of Israel and
the PNA, the WBG economy has become dependent on heavy infusions of foreign
assistance. Soon after the Oslo Accords were signed in 1993, a conference
was held in Washington D.C. during which donors from more than 30 countries
pledged to provide $3 billion to the Palestinians from 1994 through 1998.
A second conference was held in February of 1998 in which most of the donors
pledged to keep the aid flowing into the foreseeable future. By the end of
1996, about $1.35 billion had been disbursed, which while substantial was
only 54% of the $2.5 billion that was scheduled to have been contributed
over that period. About 75% of that aid went for paying the salaries of
the public sector employees and for emergency funds to offset some of the
detrimental effects of the closures, at the expense of any long-term
developmental projects. With the dire state of the WBG economy, the PNA is
highly dependent on foreign assistance, which is expected to pay for 80% of
the 1998-2000 three-year proposed budget of $3.5 billion.
The fact that almost half of the aid pledges were not met is largely the
result of the fact that disbursements have been directly linked to perceived
progress in the peace process. Dependence on such aid to both maintain the
PNA’s patronage networks as well as provide basic needs to the Palestinian
population has thus increased the pressure on Arafat to make concessions in
the peace process that decrease the legitimacy of his administration and
further erode hopes for the development of democratic institutions in the
WBG. Palestinian hopes for both meaningful statehood and democracy will
thus largely be decided upon by the extent to which the Palestinians can
break their ties of dependence on both Israel and the international
community and establish an economy in the WBG whose levels of growth can
sustain their growing population. With unemployment in the WBG currently at
30% and with private investment only accounting for 10-11% of GDP as against
the 15-20% deemed necessary to produce tangible growth, the prognosis for
the establishment of such an economy is not good. Growth will require
increasing domestic savings and attracting private sector investment from
both internal and external sources. In this era of economic globalization,
attracting such investment and even increasing domestic savings will depend
a great deal on the financial system that the PNA develops.
Since the establishment of the PNA in 1994, the Palestinian financial sector
has grown dramatically with a nearly 10-fold increase in bank deposits and
even the establishment of a small Palestinian stock exchange. The total
number of commercial banks in the WBG grew from 2 in March 1994 to 21 by
the end of 1997, while their branches have grown from 13 to 78 during that
same period. Of those banks, the majority are foreign, mostly Jordanian,
owned. There are only seven national banks, with 25 branches, while there
are ten Jordanian banks with 49 branches. There are four other small foreign
banks with four branches in the WBG. Despite the large number of banks, the
sector remains highly concentrated with the Jordanian-based Arab Bank
accounting for about two-thirds of all deposits and more than one-fourth of
all loans. The three largest banks in the West Bank—which in addition to
the Arab Bank, includes the Cairo-Amman Bank, and the Palestine
Bank—accounted for 93% of deposits and 87% of loans at the end of 1995.
Political and economic instability, the lack of clear banking regulations,
and the unavailability of adequate loan guarantees has prevented the banks
in the WBG from playing as large of a role as they could in the development
of the economy. Only about 15% of individuals over 18 years of age in the
WBG have deposit bank accounts and total deposits reached only $1.7 billion
by the end of 1996, which while it represented a 700% increase over the
figures for 1994 still accounted for only 57.5% of GDP, compared to a
deposit-GDP ratio in Jordan of 82.5%. More importantly, even those modest
deposit figures were not well utilized. At the end of 1996, loans totaled
$408 million, accounting for only 23.9% of total deposits, as compared to a
loan deposit ratio of 95% in Jordan. Moreover, about 85% of total lending
by the banking sector in 1994-1995 and about 65% in 1996 was in the form of
overdrafts, which while they are highly profitable for banks make little
contribution to the long-term development of the economy.
The fact that the vast majority of banks are foreign-owned is a major part
of the problem. The upper management of such banks do not have direct and
timely information about the WBG market and thus are less likely to make
loans. Furthermore, they tend to depend on their head office as a source of
liquidity thus inhibiting the development of a domestic interbank market.
Customer deposits account for more than 90% of total liabilities in the
Palestinian banking sector while less than 5% are accounted for by interbank
borrowing, which remains the only source of purchased funds available to
them because of the lack of a Palestinian central bank which could act as a
lender of last resort. Foreign banks also tend to transfer their excess
funds to their head offices, allowing money to be invested in more
politically stable and economically developed areas outside Palestine. By
the end of 1996, the total amount of funds transferred outside Palestine,
mostly to Jordan, was estimated at over one billion dollars. Obviously a
part of the explanation for the restricted range of credit activities is the
dismal state of Palestinian industry which accounts for such a small
percentage of national output that there is little potential for industrial
investment. As a result, the banks credit facilities are used almost
exclusively in the trading sector with almost no credit provided to the more
productive industrial and agricultural sectors of the economy. The foreign
character of the banks however adds to this problem by constraining the
development of substantial linkages between the commercial banking and local
industrial sectors. It should be noted that this is partially offset by the
fact that the banks, especially Arab Bank, have been able to forge strong
ties to major holding companies based in the diaspora Palestinian community
that have made substantial investments in the WBG economy.
The lack of clear banking regulations has further deterred banks from
adopting a more aggressive lending policy. The Israelis have not allowed
the Palestinians to establish a central bank or to print their own currency.
As a result, the Palestinian authorities can not practice a monetary policy
geared toward the needs of development in the WBG, and the monetary policy
of the region, in which the Israeli shekel and the Jordanian dinar are both
legal tender, is largely determined by the policies of Israel and Jordan.
Economic agreements between Israel, Jordan, and the PLO have led to a
situation in which banks in the region are forced to work under a mixture of
procedures laid down by the Central Banks of both Israel and Jordan as well
as the Palestine Monetary Authority (PMA) which was set up in 1994. With
banks having to meet the different requirements of three monetary
authorities, their scope for maneuvering is limited as they are forced to
follow regulations and restrictions whose goals are not always consistent.
Though it has no reserves of its own, the PMA tries to act like a
Palestinian Central Bank. It has exerted mild pressure on banks to adopt
more relaxed credit policies and has tried to convince donors to channel
loans through commercial banks on easier terms. Its governor, Fouad
Beseiso, insists that to be successful the PMA must remain independent of
all PNA institutions but with the political structure that has been
established within the WBG it is doubtful the PMA could act in a manner
contrary to the will of Arafat.
With the commercial banks in the WBG providing almost no long-term financing
and with a need to attract money from outside the region, Palestinian
industrial firms and other companies have begun looking to the emerging
stock market as a means of raising finance. The Palestinian Securities
Exchange (PSE) opened on Feb. 18, 1997 as the most technologically advanced
and open market in the region. The market has no restrictions on foreign
investment and while it does not realistically expect to make meaningful
inroads into the huge pool of international investors until more political
stability is achieved, it does hope to attract some of the $8 to $10 billion
held by the PLO and private sector Palestinians in overseas accounts as well
as the even more substantial sums held by diaspora Palestinians. Most of
the money that came from such sources before the opening of the PSE was
channeled into real estate, causing land prices to spiral upward while
equity investments remained at very low levels.
Considering the conditions under which it operates, the PSE has done well.
In the first six months of 1998 it proved to be the best performing Arab
stock market with its Al-Quds index rising 34 percent. However, the market
remains small and trading remains at a very low level, usually involving
only a handful of the 28 listed firms. Safwan Bataina, the General Manager
of the PSE, hopes that by the year 2000 there will be 80 to 100 companies
traded on the market with a total capitalization of $2 billion. In the
longer run, he believes that with its technologically advanced and open
regulatory structure, the PSE can become the region’s leading stock market.
Like so much else in the WBG, such hopes remain highly contingent on
political developments.
The main force behind the development of the PSE was the Palestine
Development and Investment Company (PADICO) which provided 65% of the
initial capital of $2 million needed to set up the exchange. PADICO,
established in Oct. 1993 by a conglomerate of individual and corporate
diaspora Palestinian investors with capital of $200 million, has established
itself as the leading private sector enterprise in the emerging Palestinian
economy. By Aug. 1997, PADICO’s investment program exceeded $500 million
and in addition to the stock exchange included the major role in the
Palestine Telecommunications Company, which was awarded a mandate to run the
fixed and mobile telephone network in the WBG, half of the shares and the
management responsibilities over the $84 million Al-Mutar industrial zone in
Gaza, a power generation company as well as a number of other major real
estate, tourism, housing, and industrial investments. The 1000
shareholders in PADICO are led by Jordan’s Arab Bank. The company also has
very close ties to the PNA and it is widely believed in the territories that
the only way PADICO was able to grow so fast was because of widespread
corruption that allowed PNA officials to benefit from PADICO investments.
Such cozy relations between PNA officials and top businessmen was echoed by
Nidal Sukhtian, a major Palestinian investor, who noted that for the first
time in Palestinian politics, businessmen are now at the center of
decision-making and leadership circles.
However it is only the biggest businessmen that share such beliefs. Despite
the initial hope that the peace process would open up the possibilities for
increased private investment in the WBG, little actual investment has taken
place with the exception of the projects of PADICO and a few other similar
companies owned by expatriate investors. Private investment in constant
1986 dollars actually declined from $326 million in 1991 to $145 million in
1995. Many local Palestinian industrialists have complained that most
industrial companies have not been making profits in recent years and that
industry has in fact been shrinking since 1993. The main reason for such
problems is Israeli border closures and restrictions on trade and
transportation. Arafat’s propensity to interfere with all aspects of the
Palestinian economy have however also hindered private investment by those
who do not have the political connections of some of the bigger businessmen.
Investors have complained that every major deal requires Arafat’s personal
approval, opening the door for favoritism and corruption. Refusing to
allow for the institutionalization of legal mechanisms that could constrain
his room for maneuver, Arafat has refused to allow for the ratification of
the Palestinian constitution, or basic law, that was drafted in 1994.
Arafat did endorse a vague investment law in 1995 that established the
outlines for the most liberal economy in the region with guaranteed equality
between domestic and foreign investors, the right to fully remit all
profits, and guarantees against nationalization and state confiscation.
However after the PNA ratified the law, Arafat told a group of potential
investors during a conference in Jordan that the existence of the investment
law "does not mean that I won’t interfere."
The lack of a stable and transparent system of commercial laws and
enforcement mechanisms has played a greater role in dissuading foreign
investment than any incentives linked to the 1995 investment law.
Commercial law, including such things as accounting, patents, partnerships
and trademarks, is currently a complex amalgam of British mandate, Israeli
and Jordanian statutes. The enforcement of the laws remains highly
arbitrary. While reforming those laws would be in the interest of the WBG
economy and would help attract the desperately needed foreign investment,
they would also likely lead to a level of transparency and accountability in
economic matters, and as a likely result in political matters as well, that
the PNA, and especially Yasser Arafat, are not ready to comply with. PADICO
and the other businessmen who are benefiting from the current system are
furthermore not likely to push for reform as long as their interests
continue being served by the present regime.
The increasingly dire state of the Palestinian economy, however, may not
give Arafat much choice in the long run. Arafat will ultimately have to
choose between two unpalatable options. On the one hand he can choose to
continue with the policies of political autocracy and economic corruption
and attempt to buy himself out of total economic and political collapse with
increased international aid that can be used to pay for his extensive
security services and patronage networks. If Arafat makes enough
concessions in the peace process, the US and other donors will likely
overlook the faults of his regime and provide such assistance. Past
experience has shown that continued Palestinian participation in the peace
process remains the only real condition for such aid, despite American
assertions that the aid is conditional on more PNA accountability and
transparency. The concessions that Arafat would have to make would however
end all hopes for meaningful Palestinian statehood and would thus be
unacceptable to the vast majority of Palestinians, therefore forcing Arafat
to increase the authoritarian nature of his rule even further.
The other option Arafat has is to undertake the economic and political
reforms that will truly lead to an accountable and transparent economic and
political system with the hope that such a system can attract enough
investment and economic activity to make the Palestinians less dependent on
international sources of aid. The obvious problem with such an option is
that it will likely lead to the breakdown of the peace process as a more
democratic Palestine refuses to make the concessions Israel demands. Israel
could then use its extensive influence over the Palestinian economy to make
the hopes of benefiting economically from such an option less realizable.
As a result political democratization under the current circumstances would
more likely lead to a revival of the Intifadha than to economic growth.
Many Palestinians believe that further democratization, with whatever
results, is however the only way to truly achieve statehood. Palestinian
intellectuals and activists like Azmi Bishara and Husam Khader have noted
that by continuing to make concessions the Palestinians will never achieve
meaningful statehood. Without sovereignty over land, they argue, the only
way to express national sovereignty is through democratic institutions that
can mobilize Palestinian public opinion and express the people’s will to the
outside world in a way that will lead to Palestinian statehood.
Such a strategy, however, would not only go against the interests of Arafat
and those who have benefited from the political and economic system he has
constructed but would also require huge sacrifices from the Palestinian
people while not guaranteeing any results. Even if it were not for Israel’s
ability to directly sabotage any efforts for economic growth, more
transparency and accountability are unlikely to result in the amount of
foreign investment needed to both build the infrastructure of a state almost
from scratch and simultaneously provide enough resources for the sustainable
growth of a population that has long depended on outside sources of economic
rent. The recently concluded Wye Memorandum in which the CIA is being given
an unprecedented role in publicly monitoring and supervising Arafat’s
crackdown on the Palestinian opposition does not seem to point in the
direction of further democracy. However, the poor state of Arafat’s health
may make democratization and economic reform the only viable option in the
longer run since after Arafat’s death it is unlikely that any other
Palestinian leader will have the ability to push through unpopular
concessions to Israel while suppressing Palestinian dissent.
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