Palestinians have built the institutions but sustainable growth is frustrated

April 5, 2011

Mariam Sherman, Country Director

Recent events in the Middle East remind us that change in seemingly established, even entrenched, systems and situations can occur -- often with little warning -- and can be more far reaching than most imagined possible.  Without delving into the political causes or ramifications, or indeed pros and cons of such events, they do serve as a useful reminder of the power of individuals and ideas, even in the face of enormous odds -- or perhaps because of them -- to create momentum and make lasting and significant change a reality.

We in the World Bank, along with many others in the international community, have been working with Palestinians to support their quest to develop the bases – both institutional and economic - for a future state.  To be viable this state must be able to respond to and provide for its citizens – through services, jobs, and systems that harness the capacity of citizens.  The strength of its institutions – both governmental and non-governmental are clearly enormously important -- but this is not enough – such institutions must be underpinned by, and supportive of, a sustainable and growing economy.  A government, no matter how efficient, that has to contend with a donor-driven economy and the vagaries of managing an aid-dependent budget will be held back in serving its citizens.
Robust institutions of civil society have long been in place. The resilience of Palestinian society has repeatedly been tested under extreme conditions over the past decade, performing above and beyond any reasonable expectations. Palestinian institutions of state have developed rapidly and now have the capacity to provide satisfactory levels of service delivery to the Palestinian public. For sure, the task is not yet complete – for example regulatory capacity in some areas is lacking and some fundamental legislation is incomplete – yet progress on the reform agenda indicates that the Palestinian Authority (PA) is well positioned to address these gaps.
However the story on sustainable economic growth must remain a focus of our attention.  Indeed the major strides in institutional performance could be undermined if prospects for a viable economy are not on the horizon. The impressive growth of the West Bank economy over the past two years is commendable – yet we know that it was largely a result of donor-driven public spending. The private sector did not grow sufficiently and investment levels remain inadequate.  Fundamental change is needed.  Palestinian production and trade, the bread and butter of a vibrant economy, are still hampered by Israeli restrictions on access to natural resources and markets. Investors are driven away by the increased cost of business associated with the closure regime.
The past two years have been characterized by levels of stability unimaginable throughout most of the previous decade. Israeli officials consistently and explicitly praise Palestinian security performance. Since its inception, the current Israeli government has made determined efforts to eliminate restrictions not mandated by its security concerns. All this, yet the net economic impact of closure regime remains worrisome.
Much of the real economic potential under the current political scenario has been exhausted. This is doubly true for a major segment of the Palestinian economy, the Gaza Strip. Much of the remaining productive capacity has been driven into the informal economy. The formal economy is moribund, driven almost exclusively by increasing levels of external aid.
Another serious issue is predictability. One of the few assumptions shared by all parties is that the current political situation is temporary. The resultant lack of confidence handicaps planning and raises the cost of investment. The repeated physical destruction of investments in conflict over the years has compounded the difficult situation.
Over the past months many have cited the World Bank’s positive assessment of PA institutions.  Concerns about the prospects for sustainable growth have received less attention. Yet these two facets of building a viable state must be considered together. We must therefore collectively support the PA in addressing its growth agenda.  This will include continued attention to addressing constraints and ensuring a supportive business environment and – looking forward – to the development of an appropriate trade policy along with the regulations, capacity and infrastructure that it will need.  We must also continue to exploit genuine opportunities and support the ambitious reform agenda being pursued.  The World Bank remains committed to contributing to the efforts of Palestinian women and men as they put in place the fundamentals of a future state.  Leaf through the pages of this update and you will see examples of how the World Bank is doing this.