The Palestinian economy’s hard road out of isolation

Taybeh, a Palestinian brewer owned by the Khourys, a Christian family, makes a crisp and flavoursome tipple much loved by residents and expats in Jerusalem and the West Bank. With light and dark beers, the company describes its product as “the finest in the Middle East”, hosts a popular Oktoberfest and exports small quantities as far as Japan.

But the brewery’s path to markets – even down the road to Jerusalem – is a tortuous one. Delays at Israeli checkpoints can add hours to delivery times and expose the beer to long waits in the sun. The West Bank has no port, so Taybeh’s imported Czech and Bavarian hops, Belgian malt and English yeast arrive in the Israeli port of Ashdod, where the bags are subject to security checks at a cost of about 2,000 shekels ($566) a delivery, and are sometimes sliced open.

Exporting beer involves hauling the barrels by Palestinian truck through land under Palestinian Authority control, then shifting it on to an Israeli one. David Khoury, who co-founded Taybeh Brewery with his brother Nadim after returning to the West Bank in 1994, after the Oslo Accords were signed, says it costs about $1,200 to move a container about 75km from Taybeh village to Ashdod – the same as it costs to ship it from Ashdod to Japan. “We are looking forward to stability and peace, and hopefully we will have a better opportunity to grow,” he says.

Private companies such as Taybeh are the subject of intense international attention ahead of the unveiling of the Economic Initiative for Palestine, a $4bn plan launched by John Kerry, US secretary of state, in parallel with Israeli-Palestinian peace talks that began in late July.

The plan, due to be launched in coming days or weeks, gets to the heart of whether the Palestinians can build the economic underpinnings of a viable state and – perhaps more crucially – whether Israel will ever allow them to.

It came to life from a realisation among the foreign governments that bankroll the Palestinian Authority that the economic status quo of chronic budget deficits, widespread poverty and unemployment of about 25 per cent – and more than 40 per cent among young people – is unsustainable. The past two decades’ rounds of failed peace talks – interrupted by the violence of the second intifada a decade ago – have done little to build an independent Palestinian economy that can break free of Israel and pay its way when and if independence comes. Among a section of the Palestinian political and business elite too, there is a desire to pursue economic statebuilding alongside the political track.

“We need to support the political process with an economic process that would reduce hardship and build the basis of a Palestinian state,” says Mohammad Mustafa, the Palestinian deputy prime minister and senior official responsible for implementing the plan. “We want a sovereign state, but we want it to be economically strong.”

An executive summary released at a donors’ meeting in September said that the aim was to support the Palestinian Authority in “engendering transformative change in the West Bank and the Gaza Strip”. Tony Blair, the former British prime minister who represents the Middle East Quartet, comprising the US, EU, Russia and the UN, is overseeing its implementation, in consultation with Palestinian officials and with advice from McKinsey, the consultancy.

The plan proposes big new projects across eight industrial sectors, to be supported by foreign investors and lenders. They range from the pumping of natural gas off the Gaza Strip and the mining of potash on the Dead Sea to developing new “Holy Land” tourism in places such as Bethlehem.

Behind the plan’s upbeat rhetoric and sweeping ambitions lie some grim calculations about the Palestinian economy, which has been a ward of the international community since Oslo, the agreement that was meant to produce an independent state by 1999.

Foreign governments and international organisations contribute about $1.5bn a year to the Palestinians in budget and project support, and have put more than $20bn into the territories in the two decades since Oslo. Most of this has gone into paying the Palestinian state sector’s wage bill and helping to finance its deficit, rather than investment, as private sector activity has been stunted by political conflict and the controls that Israel exercises over movement, resources and planning permissions on occupied lands.

The West Bank’s economy, after rebounding strongly from the chaos of the second intifada, contracted in the first half of this year for the first time in a decade, according to the World Bank. The international lender blamed a drop in foreign aid and the draconian limits Israel puts on Palestinian economic activity in “Area C”, the 61 per cent of the West Bank that it directly controls.

Now donors, led by the US and some European countries, want to wean the Palestinians off their dependence on aid as they face competing demands for help from other Arab countries, from Morocco to Egypt and Syria. “There is a sense among donors that it is getting more and more difficult to maintain the status quo, both politically and from an economic perspective,” says Udo Kock, the International Monetary Fund’s representative in the West Bank and Gaza.

At the same time, the plan’s anodyne prose and at times implausible assertions (the executive summary speaks of the Gaza Strip as a potential tourism hub), also conceal a significant challenge delivered by the international community to Israel. Unlocking economic potential and giving foreign investors the confidence they need to risk their money on its various projects will require that the Israelis lift roadblocks, ease security and border controls and allow Palestinian companies greater access to Area C.

“This plan will show people what is possible – it will demonstrate the potential of the Palestinian economy,” Mr Blair told the Financial Times in an interview in October, choosing his words carefully on one of his flying visits to the Quartet’s Jerusalem office. “This is what the future could be; however, it doesn’t happen unless the right enabling environment is in place.”

The World Bank last month estimated that alleviating restrictions in Area C would deliver a $3.4bn windfall to the Palestinian economy, equivalent to 35 per cent of gross domestic product. Benjamin Netanyahu’s government has in recent weeks made first steps towards easing some of these economic controls, but the Palestinians describe them as tentative.

However, the call for Israel to relax controls comes at a time of sporadic but rising violence in the West Bank that has emboldened rightwing Israeli critics of the peace process. Naftali Bennett, head of the far-right Jewish Home party that sits in coalition with Mr Netanyahu’s Likud, opposes the two-state solution entirely, and has called for annexing Area C outright.

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Area C is best known as the home of Israel’s big “settlement blocs”, built-up residential areas on land it occupied in 1967, which it wants to hold on to as part of any peace agreement, despite objections by the Palestinians. However, much of it is given over to land Israel keeps off-limits, citing environmental or military reasons, such as firing zones.

The potential for obstacles and conflict that could doom the economic plan to failure before its birth are evident in just one sector, agriculture, which the Palestinians describe as a microcosm of the occupation.

The sunny lowlands of the Jordan Valley, north of the Dead Sea, are conducive to growing fruit and succulent medjool dates. The Palestinians regard the area as the breadbasket of their future state. However, the area lies almost entirely inside Area C, and Israeli settlers control most of the arable land and water. Palestinian officials say their people have access to just 6 per cent of the land.

Farmers need Israeli permission to drill wells, build pipelines and dams to irrigate their crops and build roads. But this is rarely forthcoming. They are barred from importing some fertilisers that Israel worries could be used for explosives. To export, they need to send their goods via Israeli ports or airports, or one of the Israeli-controlled border crossings into Jordan.

Palestinian officials estimate that the Israeli settlements in the Jordan Valley, which the international community deems illegal, account for €230m of exports to the EU every year, while Palestinian farmers export just €15m. In per capita terms, they say, an Israeli settler receives 100 times more than a Palestinian for their exports. “Will they [Israel] commit to successful implementation and a paradigm shift?” asks Mr Mustafa. “Or will they continue to control development of our economy by continuing to exercise control in every department?”

Israel, in the context of the peace talks and under pressure from foreign officials, has begun to make some fitful economic concessions to the Palestinians. Some in Israel’s elite are voicing support for the Palestinian economic track, recognising that their country’s relentless focus on strict military security neglects the poverty and social issues that could feed new unrest in the occupied territories.

“We have an interest in having a financially sound Palestinian Authority,” a senior Israel Defence Forces official told the Jerusalem Post. “This keeps violence down.”

At an annual donors’ conference for the Palestinians in New York in September Yuval Steinitz, strategic planning minister, announced initiatives in several areas. These included new water pipelines and desalination projects, an upgrade of the Palestinians’ mobile phone infrastructure and improved co-operation in the supply of fuel to the West Bank. Mr Netanyahu’s cabinet in October approved a new X-ray inspection system for cargo at the overstretched Allenby Bridge border terminal between the West Bank and Jordan, described as a measure to improve service “and assist the Palestinian economy”.

In a boost for construction, one of the biggest industries and employers in the Gaza Strip, Israel also eased its restrictions on the import by private companies of construction materials. The curbs had been in place for the six years since the takeover by the militant group Hamas. However, barely two weeks after the relaxation, Israel last month reimposed its restrictions after its military uncovered a 1.7km tunnel built by Hamas under the heavily fortified border, constructed – Israel said – with concrete intended for humanitarian purposes. Asked about this, Mr Blair described the measures as “two steps forward, one step back”.

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Palestinian officials are more pessimistic. “The economic problem here is an outcome of the political reality that the Palestinian people are living under, and therefore any economic plan has to have a political vision,” says Mohammad Shtayyeh, a negotiator in the peace talks and minister of the Palestinian Economic Council for Development and Reconstruction. “And in the absence of any political solution and vision, these sorts of economic plans become not only ambitious, but have very little interpretation on the ground.”

He also doubts whether foreign investors will back the plan before a final political settlement with Israel. “I’m not sure if Che Guevara had $1m whether he would invest in Palestine today, given the political uncertainty,” he says.

Other Palestinian officials and commentators have dismissed the plan for promoting “normalisation” or “economic peace” with Israel – pejorative phrases in Ramallah, where they are considered tantamount to collaboration before a two-state solution is agreed. Some have questioned Mr Blair’s leadership of the initiative, given his globetrotting schedule that takes him to Jerusalem just once or twice a month. They also cite his modest achievements since taking the job of Quartet representative in 2007.

Mr Khoury says Mr Blair visited the brewery recently. In his telling, the former prime minister told the company: “You have a bright future.” Mr Khoury says they discussed issues such as checkpoints, an area where the brewer’s lot has eased recently after Israel allowed it to use a checkpoint near Jerusalem. Despite the curbs Taybeh faces, the brewery continues to expand its operations and product lines. It has even begun to make wine and non-alcoholic beer.

“I summarised by saying, ‘The economy will not get better if we are still in conflict with the Israelis’,” he says. “Once we have the two-state solution, God willing, the economy will thrive.”