Palestinian Economy Is Booming, Thanks to Foreign Aid

The Media Line (Link) - David Rosenberg (November 16, 2010)

In a sign of the new prosperity, the West Bank gets it first five-star hotel � and Gaza�s in line to get one, too

In the lobby, a pair of workers is hanging large portrait photographs of Yasser Arafat and Mahmoud Abbas, while outside a construction scaffolding sits close by the front entrance, but otherwise the West Bank�s first five-star hotel is open for business.

Banners advertising the Palestinian stock exchange�s annual conference in the grand ballroom adorn centerpieces, while smartly dressed women and men in dark business suits mingle over drinks. Indeed, the demand for conference space is so strong that the Ramallah-based Movenpick Hotel began hosting them before weeks before its first guests checked in.

The peace talks with Israel have stalled, and Hamas and Fatah remain at loggerheads over who is the legitimate ruler of the Palestinian areas. But, the economies of the West Bank and Gaza Strip are shrugging off their uncertain political future and booming. Yet, economists warn, the boom is a precarious one.

�When the political situation allows it, the economy recovers and people rush out and say that is economic development. That�s not what�s happening,� Nathan Brown, professor of political science and international affairs at the George Washington University, told The Media Line.

The International Monetary Fund estimates that their combined gross domestic product will grow 8% this year. In Gaza, whose economy is coming back to life as Israel has eased its three-year-old blockade, GDP is likely to grow 16% in the first half of 2010.

Indeed, Gaza is due to gets its first five-star hotel soon as well, the Palestinian Ma�an news agency reported this month. The hotel was ready to open in 2007 when Hamas seized control of the enclave and forced the developers to mothball it.

Ramallah, the West Bank�s commercial center and unofficial capital, is replete with construction sites, but the prosperity is relative. The West Bank and Gaza are still engaging in catch-up from the days before the Intifada exploded in 2000. The subsequent fours years of violence left 3,400 Palestinian dead ( as well as over 1,000 Israelis) and left the West Bank divided by Israeli army checkpoints� that continue to choke commerce to this day.

In Gaza, GDP per capita is only 60% of its level in 1994, the year the Oslo peace process with Israel got underway, according to the IMF. More than a third of the working age population is unemployed. The West Bank has fared better, but its per capita GDP only clawed back to its pre-Oslo level last year. Its jobless rate was 16% in the fist half of the year.

Law and order in the cities, and Prime Minister Salam Fayyad�s campaign to clean up the Palestinian Authority�s finances and a crack down on corruption have all helped boost economic growth in the West Bank. Israel has eased the checkpoint regime. But the main driver for prosperity is huge levels of foreign aid that is used principally to fund the Palestinian Authority�s budget deficit.

The Palestinian Authority is slated to get $1.2 billion in outside assistance this year, a sum equal to about 15% of its GDP. Investment in infrastructure, whether it�s by foreigners or the private sector, is minimal. U.S. Secretary of State Hilary Clinton pledged $150 million more last week. The latest infusion of money brings America�s total direct budget assistance to $225 million for this year alone and overall U.S. support and investment to almost $600 million for the year.

At the Swiss-owned Movenpick, the clientele is mainly business people, not tourists, said Communications Manager Katreena Khalil. The hotel boasts seven conference rooms and is hosting a business woman�s club, but business in Ramallah means mainly government, the United Nations and the non-government that distributes the aid largesse and run health and educational programs.

�What you see is that anything related government expenditure is doing very, very well. But no external investors are rushing to get in,� said Brown.

Moreover, economic growth is focused on residential building, Paul Rivlin, a senior research fellow at the Moshe Dayan Center for Middle East and African Studies at Tel Aviv University, told The Media Line.

�The problem is that in an economy that is filled political uncertainty and numerous restrictions,� said Rivlin, author of the book Arab Economies in the 21st Century. �One of the things you can make quick and easy money and meet needs is construction. Building factories has a payoff only when you start production.�

Rivlin said he doubted that the West Bank is threatened with the kind of property bust the U.S. and Dubai have suffered because it isn�t based on speculative investments or poor lending practices. But, he said, poor unless the fundamental situation changes, the long-term prognosis for the Palestinian economy remains poor. �