Palestine's State Building: Towards Economic Independence

Three experts discussed the current economic framework between Israel and the Palestinian Authority and how it can be changed as it restricts Palestinian economic growth and opportunities for the Palestinian people. They also addressed ways in which economic prosperity can help promote Palestinian autonomy.

On May 15, the Middle East Program hosted a meeting on “Palestine’s State Building: Towards Economic Independence” with Mohammad Mustafa, Chairman and Chief Executive Officer of the Palestine Investment Fund; Inger Andersen, Vice President, Middle East and North Africa at The World Bank; and Toni Verstandig, Executive Director of Middle East Programs at the Aspen Institute and Senior Vice President of the S. Daniel Abraham Center for Middle East Peace. Aaron David Miller, Distinguished Scholar at the Woodrow Wilson Center, moderated the event. Michael Van Dusen, Executive Vice President, gave welcoming remarks and introduced the panel.

Mustafa explained that the rise in economic strength of the West Bank in the last five years was due to the restoration of law and order, Israel easing restrictions on movement, strong support by donors, and the resilience and creativity of Palestinians. However, he argued, a vibrant private sector, necessary for permanent growth, “is impossible under the current occupation.” Although the Palestine Investment Fund works to promote private sector growth, the problem lies in the current framework for economic relations between Israel and the Palestinian Authority. The 1994 Paris Protocol, a five-year interim agreement still in place today, imposes restrictions on Palestinian trade, labor mobility, taxation, and access to resources, making it impossible to issue a currency or set monetary policy. This led to substantial imbalances between both sides, including a trade deficit, budget deficit, and high unemployment among Palestinians. Mustafa stressed that a new framework providing for an independent economy is necessary, although economic independence is only a complement to, and not a substitute for, political independence.

Andersen outlined that the Palestinian economy is skewed to the public sector, with the private sector shrinking as the industrial and agricultural sectors declined. Andersen claimed that promoting the private sector is the path to sustainable growth, and suggested three areas where the Palestinian Authority can take action, notwithstanding Israeli restrictions. Land policies, such as registration and titles, will tie land into the economic system. Legal reform is necessary, especially in economic law, which is disorganized after years of legal heritage from different eras of rule. Finally, a promotion of education and skills, ensuring the graduates’ skills are suitable for the modern workplace, is crucial.

Verstandig recognized the political underpinnings of the economic situation, explaining that politics have to be dealt with in order to effectively address economic problems. She emphasized that international aid is useful for providing opportunities for economic growth, and a public-private partnership is important for investing in and expanding the private sector.

Miller argued that while peace can exist without prosperity, prosperity cannot exist without peace. While the political process was vibrant in the 1990s, now it is the inverse, with increasing promotion of institution-building being used as a tool to bring Palestinians out from their current situation.

The panelists then addressed how political implications affect the economic situation. Verstandig said Palestinians are looking to create economic opportunities for themselves that will allow them to participate in normal daily life. Andersen claimed improvement in the economy can drive growth and opportunities in the political environment, and it is necessary to create as many opportunities as possible within the present framework. Mustafa stressed that efforts should be made to deal with short-term issues and strengthen institutions since these transformations will take time. He concluded that Palestinians should not wait until political change happens to try and improve their situation.

By Joanna Abdallah, Middle East Program