Wednesday, April 13, 2011

"Palestine": The pyramid-scheme state

The recent report from the World Bank on how the PA is supposedly ready to become a state is an object lesson in wishful thinking replacing sober analysis. In fact, from all the data I can find, all of the wonderful economic indicators that are being tossed around are simply paper gains.

The PA has very little underlying economy outside of the money that is coming in by the billions from donors.

The World Bank report says this explicitly:
The economic growth observed in WB&G is arguably donor-driven, and sustainable growth remains hampered by Israeli restrictions on access to land, water, a range of raw materials, and export markets, to name a few. WB&G has experienced growth for the third year in a row, including a recent reduction in unemployment. It must be kept in mind, however, that the economy is rebounding from a low base, particularly in Gaza. In addition, the growth is mostly confined to the non-tradable sector and reflects the importance of donor aid in driving the Palestinian economy – though recent easing of restrictions by the Government of Israel has probably had a positive impact as well. Sustainable growth will require the unleashing of the private sector’s potential, including its ability to trade. And while unemployment has declined recently, it remains very high, especially for the youth – a fact inexorably tied with the stifled private sector.

The Palestinian Arabs aren't actually producing anything. And what little they produce is mostly going to Israel.

Thus, growth is mostly confined to the non-tradable sector and probably reflects the importance of donor aid in driving the Palestinian economy. Israel remains WB&G’s largest trading partner, yet in the first three quarters of 2010, exports of goods and services to Israel were only about US$480 million in nominal terms. This is only 6 percent higher than in the same period in 2009 and nearly 22 percent lower than in 2008. Since Gaza has been closed since mid-2007, these figures are not affected by the situation there. Consequently, the fact that growth has taken place recently despite the slowdown in exports to Israel probably reflects the importance of aid in driving growth.

The budget deficit is over a billion dollars a year, which has been made up by - donors.


Because of the need to fund development projects for which designated aid was not received, the PA was forced to increase bank borrowing and accumulate arrears at an unsustainable rate. Net domestic bank financing increased by about US$84 million, with gross borrowing of US$200 million, so that at the end of 2010, total domestic debt stood at about US$840 million, which may be close to the PA’s borrowing limits. In 2010, the PA paid close to US$23 million in arrears in net lending, but it accumulated another US$144 million in new arrears. While most of this was to the pension system, about US$50 million was in non-wage and development spending. This suggests that some private providers of goods and services to the PA may be facing delayed payments.
The only good news has been an increase in tax revenues - not because there is a particularly larger tax base, but because the PA is now doing a better job at collecting taxes.

In the end, all of the promising indicators - the decrease in unemployment, decrease in poverty and similar - are directly because of donor aid, and to a smaller extent to Israeli policies.

But what about the future? What sort of a private-sector economy will the nascent state of "Palestine" have?

As a small open economy, the future Palestinian state will depend upon increasing trade, especially the export of high value added goods and services that exploit its comparative advantage arising from a relatively low wage but well educated workforce. Increasing trade and integration into the international markets will provide consumers access to a wider range of products at lower prices, while producers will benefit from higher prices found on the world market. The Palestinian market’s small size means that, without access to the world market, Palestinian producers will not be able to achieve minimum efficient scale. In addition, becoming competitive on the export market will force Palestinian producers to improve their productivity, thereby increasing employment, raising wages, and lowering poverty. Since 1967, trade in WB&G has been overwhelmingly oriented towards Israel. As of 2008, Israel accounted for nearly 89 percent of WB&G’s exports and 81 percent of imports. The majority of exports were for low value added goods that required a minimal level of processing. In order to achieve sustainable growth, the WB&G economy must increase overall trade, expand trade beyond the Israeli market, and increase the value added in exports. To do this, an appropriate trade policy regime must be in place, including the necessary institutional, regulatory, and physical infrastructure that will facilitate trade.
In other words, the Palestinian Arab economy has not adapted to survival in the real world. The World Bank says what must happen - but shows no indication that any of this is even on the drawing board.

What countries will buy the mythical Palestinian Arab goods? The obvious candidates would be the rest of the Arab world - but their own unskilled labor is cheaper than that of the PA. So what would the PA export to Europe or the Americas? What value added will the "well educated workforce" give to goods and services needed worldwide? Is there a serious initiative to build software companies, or R&D facilities? Because if the PA economy is dependent on selling tomatoes and olive oil, it will never be viable.

The World Bank glosses over these problems, instead insisting that a transparent monetary policy and an improving judicial system are somehow the only pre-requisites for a functioning state.

PA prime minister Salam Fayyad, who last year said that the PA could be financially independent by the end of 2013, just asked for another $5 billion over the next three years "to launch a Palestinian state."

The entire PA economy is a shell game, where donor money pays for basic needs but nothing is being done to actually build a functioning, independent state. It is wonderful that all the government is apparently not as corrupt as it was a few years ago, but that doesn't mean that the donor money is doing anything forward-looking. Fayyad's latest demand makes the PA economy a pyramid scheme as well, as the money coming tomorrow will keep propping up the untenable situation today. Meanwhile, there is no real economy, where people are actually building and growing and discovering and creating products that the world needs.

And these are just the economic problems with "Palestine." This doesn't even touch the much worse problems that it has.