At the April 13 meeting in Brussels of the West Bank/Gaza donors group known as the Ad Hoc Liaison Committee, the International Monetary Fund and World Bank presented reports arguing that the Palestinians are ready for statehood. Yet that judgment requires three important caveats.
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First, it depends on Israel-Palestinian cooperation; second, it is contingent on Gaza’s return to Palestinian Authority control; and third, it does not take into account the PA’s broader political readiness for statehood, which continues to lag.
The IMF report correctly emphasizes that Israel will play a central role in the PA’s economic future: “To maintain the growth momentum, rebalance the composition of output, reduce regional disparities [i.e., in Gaza compared to the West Bank], and accelerate the state-building process, it is essential for [Israel] to phase out all restrictions as soon as possible.”
This implies that a unilateral statehood declaration would not be the
culmination of PA state-building efforts, but rather their undoing,
since Israeli cooperation could not be counted on in such a scenario.
Consider the dramatic increase in PA tax revenue, which has reduced the
Palestinians’ overreliance on foreign aid. Digging into the tables
accompanying the IMF report, one finds that two-thirds of current PA
receipts are “clearance revenues,” that is, taxes collected on the
Palestinians’ behalf by Israel and passed on to the PA. These include
taxes on goods shipped from Israel to the West Bank and Gaza, such as
customs duties and heavy tariffs on petroleum products. In 2010, the PA
received $1.26 billion in clearance revenues, compared to the $750
million in domestic revenue it collected on its own.
In other words, the PA is able to pay its bills only because of the
money transferred by Israel. If bilateral cooperation ceased, the PA
would be in no position to pay salaries or meet its other commitments.
The Gaza situation highlights Israel’s centrality to the PA economy. As
the IMF and World Bank reports document, once Israel allowed more goods
to be shipped into Gaza despite Hamas control there, the economy
The IMF report also praises one surprising example of Israeli
cooperation in Gaza, namely, the manner in which Israeli commercial
banks have worked with Palestinian banks to facilitate “timely and
regular” cash transfers into the territory, overcoming Israeli concerns
about the “legal implications” of conducting business with the terrorist
According to the IMF report, “The PA is now able to conduct the sound
economic policies expected of a future well-functioning Palestinian
state, given its solid track record in reforms and institution-building
in the public finance and financial areas.”
The report then goes on to list a series of activities the PA has
undertaken in recent years, the absence of which the IMF severely
criticized during Yasser Arafat’s presidency. In particular, the PA has
been able to “enhance transparency,” “prepare and execute annual
budgets,” “prepare annual financial statements” and “tightly control and
prioritize its expenditures” – all significant accomplishments.
Unfortunately, this progress applies only to the PA, not to the Hamas
authorities that control Gaza. The latter’s methods of taxation and
expenditure are exactly the opposite of what the IMF recommends: They
are not transparent, not conducted in line with a budget, not
accompanied by financial statements, and not tightly controlled or
The IMF report praises the continued strengthening of the PA’s public
financial management system, but it fails to mention how Hamas controls
substantial sums that are completely outside this system and beyond PA
The World Bank report does note serious problems in Gaza, such as judges not applying commercial law.
But it is silent regarding the territory’s lack of transparency, accountability and sound public financial management.
Both the IMF and World Bank should have noted that the progress seen in
the West Bank is not matched in Gaza, making the establishment of a
unified Palestinian state incorporating both territories difficult to
envisage without Gaza’s return to full PA control.
The World Bank report makes the far-reaching claim that if the PA
“maintains its performance in institutionbuilding and delivery of public
services, it is well-positioned for the establishment of a state at any
point in the near future.”
That claim goes beyond the World Bank’s expertise, however, since
statehood involves many other issues beyond the economic sphere.
On the surface, the bank’s report seems to address some of these issues:
“While no recipe for building a state exists, the Organization for
Economic Co-operation and Development has identified certain key
functions as strategically important. Thus, in its 2011 policy guidance
“Supporting Statebuilding in Situations of Conflict and Fragility,” the
OECD describes these key functions as security and justice; revenue and
expenditure management; economic development, especially job creation;
and service delivery.”
The bank then concludes that it “has documented some of the PA’s achievements in the key state functions posited by the OECD.”
Yet the World Bank assessment of the PA is in fact limited in comparison
to the OECD criteria. The report does not – nor should it, given the
bank’s mandate and expertise – consider questions of “security and
justice” beyond narrow discussion of contract enforcement and commercial
law. To be sure, PA Prime Minister Salam Fayyad has made great strides
in building the capabilities of a state, and law and order have been
largely restored in many cities. More progress is needed on other
aspects of “security and justice,” however, including the observance of
human rights standards, freedom from political violence, and the
prevention of terrorism, particularly in Gaza.
More broadly, the bank’s listed criteria comprise just one of the three
dimensions of state-building described in the OECD policy guidance:
“state capability and responsiveness.”
The PA has made relatively little progress on the other two dimensions –
“political settlement and processes” and “social expectations” of the
statesociety relationship, both of which are at the heart of the
uprisings sweeping the Arab world. Efforts on these fronts have been
stymied by stubborn resistance from Fatah and the other political
parties that dominate the PA, which are reluctant to reform themselves
or abandon the corruption and cronyism that propelled Hamas to its 2006
The World Bank and IMF are correct to praise the PA, and particularly
Fayyad, for their hard-won progress in building the economic aspects of a
future state. Fayyad’s accomplishments came against long odds and will
be vital to the success and sustainability of any Israeli-Palestinian
peace agreement. But they have been put at risk by the stagnation of
peace negotiations and the looming prospect of a unilateral Palestinian
declaration of statehood. Moreover, they are insufficient without
greater attention to the political aspects of state building.
The PA and its Quartet partners – the UN, EU, United States, and Russia –
would be wise to put the same sort of steady and determined work into
these areas that Fayyad has put into the Palestinian economy.Patrick Clawson is director of research at The Washington Institute. Michael Singh is the Institute’s managing director.