Palestine’s private sector growth plan depends on politics

Palestine’s private sector growth plan depends on politics

Private sector-led growth and decreased Israeli restrictions on trade are needed to boost Palestine’s stagnant economy. The Palestinian Economic Initiative represents a potential solution, but its success depends upon political considerations.

Last month, the World Bank released a report on Area C of the West Bank in the Palestinian Territories, stating that the West Bank’s gross domestic product shrunk for the first time in a decade. With the ongoing Israeli-Palestinian peace talks, it is worth examining what effects the ongoing negotiations between Israel and Palestine will have on Palestine’s economy and prospects for its improvement. The current negotiations focus on political, security and economic issues. While the economic plan proposed by the Middle East Quartet (made up by the United States, the European Union, Russia and the United Nations) is a positive step forward in stimulating economic growth across various Palestinian sectors, its success is contingent upon reducing security risks and political obstacles that impede robust, organic private sector-led growth.

State of the Palestinian Economy

The World Bank report attributes the economic contraction to a steep decline in foreign aid to the heavily aid-dependent Palestinian government and to Israeli restrictions imposed on Area C. Sixty-one percent of the Area C territory is under full Israeli control. “The manner in which Area C is currently administered virtually precludes Palestinian businesses from investing there,” the World Bank reports. Since Area C is where the majority of the West Bank’s natural resources are located, the restrictions on this area have severely hurt the Palestinian economy. The report importantly states that restrictions on trade, movement and access in Area C have significantly reduced private sector activity. It concludes that reducing restrictions in Area C would provide a $3.4bn surplus to the Palestinian economy, which is about 35 percent of the gross domestic product. Opening economic activity in the area would particularly help businesses in agriculture, Dead Sea minerals exploitation, mining, tourism and telecommunications.

Palestine Graph

Source: World Bank

Importance of Private Sector-Led Growth

In an April 2012 report, the World Bank stressed the importance of a dynamic, private sector-led economy in sustaining economic growth in the Palestinian Territories. Encouraging private sector led growth, it reported, would develop a sustainable economic base that could generate jobs and the resources needed by the government to provide essential public services. The Palestinian Authority (PA) has, over the years, become increasingly dependent on donor assistance. This dependence explains part of the contraction it underwent in 2013 due to a sharp decline in foreign aid to the area. The foreign aid that the PA does receive currently goes into paying Palestinian state sector wages and financing the federal deficit, and is not invested in key industries. In addition to reducing Israeli restrictions to trade and growth in Area C, bolstering private sector development (and consequently slowly weaning the state off dependence on foreign aid) is an important goal, as it will reduce the vulnerability faced by the aid-dependent economy and develop fiscal sustainability.

Prospects from Peace Talks: The Palestinian Economic Initiative

As part of the ongoing Israel-Palestine peace talks, the Middle East Quartet is drafting a three-year economic plan, requiring some US$4bn in investment, to strengthen various Palestinian sectors and stimulate job growth. The plan, known as the Palestinian Economic Initiative, spanning the entirety of the West Bank including Area C and the Gaza Strip, proposes new large-scale projects in eight industrial sectors: agriculture, construction, tourism, information and communication technology, energy, building materials, water and light manufacturing. By combining both donor development assistance and private sector investments, the plan hopes to “unlock the economic potential of the Palestinian private sector.” Donor assistance will potentially be directed towards “grant financing, concessional loans, political risk insurance and bank guarantees.” Acknowledging that Area C and the Gaza Strip are important parts of the overall Palestinian economy, the initiative plans to develop critical infrastructure in Area C and Gaza through projects in the water and energy sectors.

Reducing Restrictions in Area C

While the Palestinian Economic Initiative is a good, transformative start to spur economic growth in the Palestinian Territories through private sector and infrastructure development, its success ultimately relies on other aspects of the peace negotiations, namely, resolving the political obstacles between the negotiating parties. While the Palestinian Economic Initiative includes crucial measures to develop infrastructure in Area C, it does not focus on reducing Israeli restrictions in the region, which impedes the growth of the export sector. Reducing these restrictions on Area C (which include roadblocks and intense security and border controls) would allow for more predictable international trade, and it would allow companies to reduce potential capital losses from shipment issues. As the recent World Bank report concludes, reducing restrictions ultimately will encourage private sector activity.

The Palestinian Political Risk Insurance (PPRI) program serves as a temporary measure to help reduce losses incurred from restrictions in Area C. PPRI is a commercial insurance product that “helps exporters by providing compensation for losses resulting from certain movement and access, trade disruption, and political violence risks.” PPRI allows exporters to file claims for damages and lost income. While this program serves to reduce risk faced by private-sector industries, more steps must be taken to address the root causes of economic stagnation.

Private sector development in and of itself is a necessary condition for Palestine’s overall economic growth. It is not, however, a sufficient condition. Political differences must be resolved, particularly over Area C, for the Palestinian Economic Initiative to gain traction and truly spur economic growth. Mohammad Shtayyeh, a former negotiator in the peace talks and minister of the Palestinian Economic Council for Development and Reconstruction, succinctly states the problem: “In the absence of any political solution and vision, these sorts of economic plans become not only ambitious, but have very little interpretation on the ground.”

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