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Executive Summary

Building a Failed State: Palestine’s Governance and Economy Delinked


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Key Points

  • Mainstream economic prescriptions cannot work in the Palestinian context; policies should directly address the conditions created by Israel’s occupation
  • Governance reforms, seen as a success, partly led donor countries to accord formal statehood recognition; but the reality of Israeli control indicates otherwise
  • The market looms large in Palestine, effectively replacing economic resistance to the occupation with cooperation
  • The PA and donors should address the political as well as the economic impact of their policies


International support to the Palestinian Authority (PA) has depoliticized economic development policy, leading to an infatuation with prescriptive efficiency and technical solutions that have transformed the PA into an NGO-like body.

Israeli control over the Occupied Palestinian Territory (OPT), and Israel’s influence in determining donor aid policies has forced the PA to resort to “occupation- circumventing” economic activities that try to bypass Israeli obstacles with very little downward accountability towards the Palestinian people.

Reforming Governance but Ceding Control

Among donor countries providing budget support to the PA, governance reforms over the past 10 years have been considered a resounding success. However, the PA’s developmental approach has focused on technocratic, administrative, and process-oriented considerations. Israel controls even these mundane processes, although its influence in planning “development” projects is understated and under-reported.

When a Second-Best Policy Option Is Better

One of the major initiatives of Salam Fayyad as Prime Minister was to develop three-year plans setting development objectives for the OPT. The reform involved in preparing the 2014-2016 development plan forced the PA’s hand in the direction of fiscal contraction in order to align with diminishing aid flows and Israel's repeated withholding of clearance revenues.

The conditions of ongoing occupation have turned what is a “best practice” in development planning into an acknowledgement of defeat by the PA. Instead, a second-best policy strategy may be to continue producing comprehensive development plans that function as a policy statement about the Palestinians’ thwarted development potential.

Misguided Focus on the Market

The current PA discourse represents the role of the government and municipal bodies as merely service-related, or apolitical. Instead of economic resistance to occupation, shared business endeavors have bloomed, creating mutual interests between Palestinian capital and power on one side, and Israeli business on the other.

The economic relations between the PA and Israel, together with the PA’s neoliberal approach have had a gradual yet profound impact on people’s choices and consumption trends. In line with the distorted pattern of credit allocation, wealth has been more and more concentrated while real wages declined by 11% between 2006 and 2010.

An Occupation-Circumventing Economy

Lack of support for Palestinian agriculture has been attributed by decision-makers to the low productivity of the sector. However, the low productivity is in part a result of the lack of PA support or international aid, which hinders farmers from using new technologies to replace outdated techniques.

Despite the obstacles to agricultural activity placed by the Israeli occupation, investment in this sector could have an immediate poverty-reduction impact by generating employment in rural areas. Finally, underinvestment in agriculture has resulted in migration out of Area C that has indirectly facilitated settler expansion.

Untying the Hands of Palestinian Policy Makers

Neoliberal policy frameworks, an intransigent Israeli occupation and upward accountability to donors have diluted the PA’s downward accountability to respond more effectively to citizen priorities. Steps that should be urgently taken include the following:

  • The PA should adopt a path towards cutting off links of dependency with Israel, starting with boycott of Israeli products that can be replaced by local industries.
  • The PA should consider transitioning to a mandate of basic service provider rather than attempting to run the OPT in the absence of elections and political or economic sovereignty.
  • Donors to the PA must develop a policy to balance strengthening the PA by supporting independent political organization and civil society mobilization.
  • Donors should ensure that governance reforms involve crafting and putting in place institutionalized systems of accountability between the PA and Palestinian citizens.

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