Palestinian businesses held back by lack of a political solution

The US House of Representatives last month approved $140 million in funding to support joint ventures between Israelis and Palestinians. The bill was well-intended and indeed might promote person-to-person relations between Israelis and Palestinians (there is additional funding for dialogue programs); however, like many other efforts, it overlooks the practical challenges to developing the Palestinian private sector.

The Palestinian territories offer several advantages for developing business. Palestinians have a heritage as merchants and farmers, as well as a culture that encourages civic activism. These and other factors encourage entrepreneurship. Given their history, Palestinians also tend to be resilient and are accustomed to finding creative ways around obstacles. They tend to be well educated. They are well connected to the world, particularly to Europe, the US and the rest of the Middle East. The diaspora offers a valuable resource for investment and business connections.

Despite these advantages, the Palestinians in the West Bank and Gaza face enormous obstacles to conducting business. There are some reforms that the Palestinian Authority (PA) can make to improve conditions for business in the West Bank, such as improving the regulatory system, providing reliable statistics, and combating corruption. However, the PA fundamentally lacks sovereignty, which constrains its ability to provide the necessary infrastructure for businesses, to enforce regulations, to control borders, and more.

Israel’s control over the borders of the West Bank and Gaza, as well as its control over much of the West Bank’s land and key resources like water, pose the most pressing obstacles for Palestinian businesses. Flourishing private sectors need key ingredients, such as infrastructure, basic resources such as land and water, reliable transportation for people and goods, access to financing, a transparent regulatory framework, and availability of labor and customers. The PA plays an important role in the regulatory framework but has little control over most of the other factors.

While the PA makes some investments in infrastructure, for example, Israel is largely in control of water, roads, building permits, and information and communications technology (ICT) infrastructure. The high-profile building of the new city of Rawabi in the West Bank, for example, was significantly delayed and constrained by a lack of permits for sufficient roads and by Israel’s refusal to connect the city to the water supply — a situation that was eventually rectified thanks to political pressure from outside actors. And, when Palestinian-Israeli or Hamas-Fatah tensions are particularly high, Israel often cuts off electricity and fuel to Gaza, which further reduces the already-rationed electricity — a severe constraint on business.

Attracting investment when there is so much uncertainty is difficult, and access to finance is another challenge.

Kerry Boyd Anderson

E-commerce is one area that is ripe for private sector development. However, Israel did not allow local Palestinian 3G networks until 2018 and has delayed the rollout of 4G networks in the West Bank, while Gaza still has only 2G. Israel cites security concerns, but Palestinians note that the delays benefit Israel’s ICT sector, as many Palestinians buy unauthorized Israeli SIM cards in order to access Israel’s faster service. The World Bank and others have noted that the delays in upgrading ICT infrastructure have had significant costs for the Palestinian economy.

Transportation is another major problem for Palestinian economic development. Palestinians have no control over their own land or sea borders and are thus dependent on Israel allowing exports and imports through crossings and ports. This has led to many problems for Palestinian businesses over the years. Last year, the PA stopped importing beef from Israel, saying it wanted to import beef directly rather than depending on Israel. The move led to a trade war, with Israel blocking Palestinian agricultural exports. Since Israel controls all Palestinian outlets to the world, it has the upper hand in such disputes. Furthermore, Palestinians who want to travel abroad for business often struggle to gain the necessary travel permissions.

Internal transportation is another problem. Israel’s blockade of Gaza has severely undermined Gaza’s economy, with many limitations on imports, exports and the movement of people. Within the West Bank, the patchwork of PA-controlled and Israeli-controlled areas includes multiple checkpoints, which can create hours-long delays in moving people and goods even within the small territory.

The political situation creates multiple other challenges. For example, attracting investment when there is so much uncertainty is difficult, and access to finance is another challenge for Palestinian businesses. A lack of sovereignty makes it difficult for the Palestinians to join organizations such as the World Trade Organization. Today, the pandemic presents an additional challenge. 

Aid projects offer potentially valuable funds but often focus on the interests of foreign parties rather than on the practical needs of Palestinian business people. The recent House bill is one example of a plan that focuses on creating joint Israeli-Palestinian ventures rather than helping to remove the obstacles to private sector development. However, there are examples of successful partnerships between Israeli and Palestinian businesses. The two economies are deeply interconnected and improved business and trade relationships would be a positive development.

Many organizations, such as the OECD, the World Bank and some aid groups, focus on making the types of regulatory tweaks and small investments that might help Palestinian businesses, despite the political situation. Such efforts are important and can be useful. However, as long as there is no political solution and Palestinians continue to face enormous political obstacles to doing business, such efforts will only help Palestinians merely tread water. The Palestinian private sector will not be able to fulfill its potential until there is a political solution to the conflict with Israel.

By:

  • Kerry Boyd Anderson 
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