Economic Interests

If you owe the bank £100, that's your problem. If you owe the bank £100 million, that's the banks problem.

Palestine: a matter of time?

Relations between Israel and Palestine are deteriorating as both sides land destructive blows upon each other. Israel managed to kill Hamas’s military commander Ahmad Jabari and destroyed multiple long range missiles that had been stockpiled by a more extremist group in Gaza. Hamas meanwhile (the governing party of Gaza) managed to successfully strike at the heart of Tel Aviv (Israel’s capital city in all but name). Israel now threatens to put troops on the ground as matters seem to be getting out of hand.

Meanwhile, in the background of all this fighting, Mahmoud Abbas (the Palestinian leader of the West Bank) is set to apply for an upgraded “observer” status within the UN on November 29th. This would allow Palestine to participate somewhat in the UN’s activities and despite objections by Israel, is predicted to win such a vote on the international stage. This could be the road to Palestine establishing itself as a truly separate state.

Mahmoud Abbas is all set to upgrade Palestine’s UN status. 

But could they really survive as a new state?

Well in Gaza, they had been experiencing an economic boom of sorts. Growth in the constructions sector had been kick started by the smuggling of materials in underground tunnels from Egypt (a major backer of Palestine) and less strict economic sanctions from Israel in 2010. GDP grew by 20% in 2011 alone, while unemployment dropped from 45% to 28% in Gaza. Recently economic activity had started to slow in the west bank (controlled by the PA) to just 5% last year, down from the double digits of the previous years, though growth in the Gaza strip remains at around 10%. International investment has also helped improve the private sector, with Qatar a keen investor in the Gaza strip, investing around $400 million dollars and creating nearly 10,000 new jobs.

Palestinian GDP

This graph from the Financial Time shows the Palestinian GDP over the last few years. An economic boom now seems to be slowing down.

But there are still many problems economically for the Palestinians. They are reliant upon foreign aid, with it accounting for around 30% of their GDP. This has become a problem as aid money from the Arab world has dried up drastically, leaving a large gap in the PA’s (Palestinian Authority’s) budget of a suggested $400 million this year. Stemming from the problem, the PA has had to increasingly borrow money from its local banks, rising from half a billion dollars to $1.2 billion, roughly equivalent to just under 100% of the bank’s equity. The other large problem is Israel’s continued economic sanctions, which still restricts a large majority of trade in and out of Palestine. Israel collects custom duties and value added tax for Palestine and then transfers over the funds, but refuses to release all the information and is suggested to have held money back over the years ranging from $200 million to $450 million a year (depending on who you believe). They also hold the power to freeze these funds, which leads onto the current problem. Last time the PA tried to apply for observer status with the UN, Israel froze the tax funds to the country and has threatened to do so again this time around. Even worse, the finance minister has warned that Israel might just stop collecting such taxes, meaning a complete loss of the much needed funds for the Palestinians. This seems an empty threat in truth, as Israel has transferred over hundreds of millions of dollars already to help keep the PA ticking over, but such talk will not help already frayed relations between the two sides.Alongside this Israel continues to build upon Palestinian land and divides up the population with border controls, which has had a large effect on East Jerusalem, where nearly 80% of the people are suggested to live in poverty.

This table found at shows how occupied Palestinian territories have declined in GDP per person. 

So could the country survive independently? It is very difficult to suggest while the Israeli government has such a tight hold upon the Palestinian people and economy. Such restrictions have made it near impossible for the Palestinian private sector to grow, a necessary action for any economy to become sustainable. Palestine will need to be released to really see if it can grow into the sort of economy Israel currently boasts.

Even more important could be the USA and Egypt’s role in this divide. Israeli Prime Minister, Mr Netanyahu, was close friends with Mitt Romney and would have favoured his election, as his comments on the Palestinians economic problems being down to cultural differences showed a dislike of the country. Mr Obama’s re-election could see renewed peace talks between Israel and Palestine and more equality between the two sides. While America will need to put quiet pressure on their close allies, Israel, to not allow this current fighting to escalate. Egypt’s President, Mr Morsi, is a member of the Muslim Brotherhood and backs Palestine more than his predecessor. He is already brokering peace talks between the two sides and his countries ties with the Palestinian held territories (via underground tunnels) are an essential economic link to any future prosperity.

Mr Morsi and Mr Obama could hold the key to helping Palestine grow. 

If Palestine does achieve an observer status with the UN, it could be the start of a great journey towards independence. But fewer restrictions by Israel and closer links to Egypt will be needed; otherwise it could unravel before it has even begun.


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