Towards a Middle East Economic Roadmap – My lecture given at the Royal Society of Arts, London – 19 June 2007
- It is a great honour to be here today in the Royal Society of Arts. I would like to thank Rosemary and her colleagues at Chatham House for their help in organising this lecture.
- There could be no better forum than Chatham House at which to speak for the first time in detail, and in front of this highly distinguished audience, about the work that I have been doing over the past eighteen months, together with my colleague Jon Cunliffe, the Second Permanent Secretary at the Treasury. As you know, we have been leading a project to: analyse how the international community can encourage and support the reconstruction of the Palestinian economy; and support the political roadmap to a viable two-state solution to the Israel-Palestine conflict.
- And yet, we all know that the events of the past week – the violence, suffering and deepening instability – cast a long shadow over today’s proceedings. We and international partners are working to minimise the damage to the political process, to the humanitarian situation in Gaza and to the Palestinian economy. We welcome the Emergency Government under Salaam Fayyad that President Abbas has appointed, and welcome Israeli willingness to support President Abbas. The shocking violence we saw in Gaza highlights the need to address its root causes.
- Our task, when Gordon Brown, with the support of Jim Wolfensohn, asked us in the autumn of 2005 to look at these issues for the G8 Finance Ministers, was to identify the necessary conditions for economic progress in the Palestinian Territories and how the international community should offer support. Today, I don’t think anyone would argue with the assertion that we are some way away from delivering those conditions. But the appointment of Salaam Fayyad as Prime Minister is a reminder that things can change – suddenly and positively. Indeed we may have an opportunity to apply the conclusions of our work more quickly than I feared when I began writing this lecture.
- From the outset, the basis of our work has been to support and reinforce the UK Government’s objective for the Middle East: a negotiated settlement resulting in the emergence of an independent, democratic, and viable Palestinian state living side by side, in peace and security, with Israel and its other neighbours.
- The rationale for our work is straightforward. We can only achieve a viable Palestinian state with a sustainable Palestinian economy, and we can only achieve success in the Peace Process if political negotiations are accompanied by economic development and the prospect of prosperity in the West Bank and Gaza.
- And if we have learned one thing over the past eighteen months, it is that political events can move very fast in this part if the world.
- When we started our work in September 2005, Israel had just withdrawn from the Gaza Strip and Jim Wolfensohn’s work on behalf of the Quartet to coordinate the international support and encourage cooperation in the Gaza disengagement process was moving forward positively. Within a few weeks, the Rice Agreement on Movement and Access was concluded. The then Israeli and Palestinian finance ministers, Ehud Olmert and Salaam Fayyad, met together for the first time in Tel Aviv in the presence of Gordon Brown. And by mid-December 2005, when the UK Treasury co-hosted a conference on possibilities for private sector investment in the West Bank and Gaza, there did appear to be a historic opportunity to move forward with an economic roadmap.
- That belief was shared by both Finance Ministers when they historically met here in London in early December with G8 finance ministers to discuss ways in which they could work together in pursuit of the shared aims of prosperity and security.
- Of course, there remained tensions and difficulties which gave cause for concern. The Rice Agreement was never properly implemented: the Palestinian election campaign in January 2006 saw continuing security problems and persistent closures, particularly of the Karni crossing into Gaza, with the waste of much of the produce from the Gaza greenhouses which Jim Wolfensohn and others had worked so hard to make viable.
- And even before the flow of customs revenues from Israel was suspended in early 2006, the budget of the Palestinian Authority was already in crisis as the government failed to control public spending or hold back the growth of the Palestinian security services.
- Then, as we all know, the prospects for early progress ground to a halt following the – to some surprise – election of the Hamas-led government and its refusal to meet the Quartet’s three conditions for recognition by the international community: non-violence; recognition of Israel; and acceptance of previous agreements.
- Israel ceased co-operation with the PA and largely suspended the transfer of Palestinian tax revenues – which would normally make up the majority of the Palestinian budget. And unable to work with the Hamas government, but determined to prevent a humanitarian crisis, the international community was obliged to redirect its external financial support to the Palestinian people away from the Government and through a Temporary International Mechanism.
- Over the past year there have been moments of cautious optimism: the beginning of regular meetings between Prime Minister Olmert and President Abbas, discussions of the political horizon, supported by Condoleeza Rice, and February’s Mecca Agreement between Fatah and Hamas, brokered by Saudi Arabia, which led to the appointment of a National Unity Government.
- But these moments of optimism have been accompanied by progressive economic collapse, the declining authority of the PA, increasing lawlessness, acute political tensions and internal Palestinian violence, culminating in the events of the last week.
- Some commentators have asked us whether, in such inauspicious political circumstances, it was worth carrying on our work. Of course, we knew from the outset that economic development can only ever play a supporting role to the politics of the roadmap, and that significant economic steps forwards are unrealistic without political progress and progress on security.
- And having already postponed our planned final report last year, because the moment when a viable medium-term economic plan could be launched by the PA, backed by the international community, seemed so far away, we recognise that now is clearly not the time to set out detailed and comprehensive medium-term economic proposals.
- But many people – not least the Israeli government, including newly elected President Shimon Peres; President Abbas; Arab leaders, such as King Abdullah of Jordan; and the business and wider Israeli and Palestinian communities – have urged us to continue. Because, as I think almost everyone who knows about the region will agree, there is no chance of a lasting political settlement with either security or justice for the Israeli or Palestinian people while political instability combines with high unemployment, rapidly rising poverty and economic collapse in Gaza and the West Bank.
- So we have continued to consult widely – including with many of you here today – and our visits to the region have helped us understand the current economic situation and what would need to be done when the politics allows.
- In recent days the situation on the ground has been changing by the hour. Prime Minister Olmert is today meeting the US President. The UN Security Council and the European Council will be meeting later in the week. The Arab League Foreign Ministers have already met, and the Quartet will be meeting early next week. President Abbas has appointed an Emergency Government, headed by Salaam Fayyad, who I greatly respect, to see the Palestinian people through these difficult times. Israel has indicated it will work with Abbas to pursue stability, and permit the supply of essential services and supplies for Gaza. The full engagement of the international community, regional actors and above all the parties offers a chance to stabilise the situation, and prevent further political and economic damage. Though, it must be said, the short-term political, security and economic implications of these developments are, for Palestinians, very unclear.
- But if we can get the politics on to a more positive footing, then it is our strongly held view not only that security and prosperity must go hand in hand but, more than that, that an economic roadmap can help drive forward peace and prosperity in the region.
- And so it is in this spirit, that I want to set out some of the conclusions that Jon and I have drawn on the areas in which action will be needed for economic progress – and outline some of the more specific actions that we think would be required if – we hope when – the politics allows.
The Palestinian economy
- Before I do so, let me start by putting the current state of the Palestinian economy in context.
- In the last 40 years, the global economy has changed dramatically and the Israeli economy has kept pace. In 1967, the Israeli economy was characterised by agriculture and low-value manufacturing. Now, the modern Israeli economy is built on innovative, dynamic and competitive companies specialising in high-tech products. Israel has shown it can adapt to the new economic environment: one that requires flexibility, continual investment in education and the business climate and unconstrained access to global markets.
- The Palestinian economy, in stark contrast, has changed very little over these forty years. Indeed, its composition is barely different from 1967, when agriculture was the dominant sector and industry contributed less than 10 per cent of GDP. Then, as now the average industrial unit was a micro-enterprise of fewer than 5 employees, catering almost exclusively for the domestic market.
- While other countries in the region have industrialised and are beginning to become more integrated into the global economy, the Palestinian private sector remains under-developed. Engagement with international investors, particularly those from the Palestinian diaspora, is constrained by the security, movement and access regime, meaning that their talents and resources cannot be used as they have been in the past. What industry there is continues to concentrate mainly on producing low-value goods for domestic consumption and Israeli manufacturing companies, a dwindling source of demand as Israel moves away from manufacturing.
- The evolution of the Palestinian economy has been driven by its political and economic relationship with its neighbours. After 1967, labour flows to both Israel, and to a lesser extent the wider Arab world, propelled the economy. These accelerated rapidly following the Oslo Accords in 1993 and, on the eve of the second intifada, nearly a quarter of all employed Palestinians were working in low-skilled jobs in Israel.
- This brought benefits – the money workers sent home supported thousands of Palestinian families. Indeed, between 1996 and 1999, the year before the second intifada began, GDP in the West Bank grew by over 10 per cent, and by 5.5 per cent in Gaza, whilst overall unemployment fell to 12 per cent – the regional average.
- But this relative growth in prosperity came at a cost. The links with the rapidly growing Israeli economy pushed up domestic Palestinian wages and reduced Palestinian competitiveness compared to its regional neighbours.
- The result was that the Palestinian economy was increasingly dependent on Israel. And so when the second intifada and the appalling terrorist attacks in Israel began, the impact of the ensuing economic separation was severe. Almost overnight the number of employed Palestinians fell by 100,000 and access of Palestinian goods to the Israeli market became heavily restricted.
- The result has been a massive recession in the Palestinian economy: since 2000 a 40 per cent fall in per capita GDP- and this during a period in which much of the developing world has experienced unprecedented economic growth and in which Israel has seen its economy expand by over 10%. To put this in context, consider two facts:
– first, this represents a fall in incomes twice as severe as both the worst two years of the US Great Depression in the 1930s and the Argentinian economic crisis at the turn of the Millennium;
– second, this economic collapse has been occurring in Palestinian Territories which have one of the fastest population growth rates in the world. Today around 50 per cent of the population of Gaza is below 15 and UNRWA estimate that just to maintain the same unemployment rate as today, 140,000 jobs would need to be created in the Palestinian economy over the next 5 years.
- The result is that when employment contracted sharply, the employment gap opened wide – a gap which the private sector was ill-equipped to fill. Not surprisingly, unemployment levels quickly doubled to 23% by mid-2005 and poverty rates soared. And with private employment unable to soak up the excess, public sector employment expanded instead, growing from 80,000 to 140,000 in the decade before 2005. By the end of 2005, public sector wages took up 95% of the PA’s domestic revenues, with public sector employees earning substantially more than the private sector. It is important for us to remember that this was already happening before the Hamas election. It was the intifada, and consequent end to Palestinian labour migration, the restriction of goods exports and frequent decisions to close borders and roads in response to security threats that drove this economic collapse.
- Until the opening of the Rafah crossing into Egypt, all goods leaving and entering the Gaza Strip, with its population of over one and a half million people, had to pass via the Karni crossing, which has been open insufficiently and unpredictably. And the failure to implement the call of the Agreement on Movement and Access to make passages to the West Bank fully operational has continued to severely limit opportunities for exports from Gaza.
- But just as depressing to economic activity has been the number and unpredictability of closures which, combined with the Separation Barrier, have made sales of goods and services from the West Bank to East Jerusalem increasingly difficult. Today, as documented by the UNOCHA, over 500 permanent and temporary internal impediments to movement have been installed throughout the West Bank. These have undoubtedly reduced the short-term security threat to Israeli citizens, but at a considerable price.
- But what was already a very severe recession became a crisis following the Hamas victory, its refusal to espouse the Quartet’s principles and Israel’s decision to suspend payment of the revenues it collects on the Palestinians’ behalf, in response to the renewed security threat. This has dramatically reduced Palestinian revenues.
- Since the formation of the Hamas-led government in March 2006, the PA has faced an acute financial crisis, worsening an already precarious situation. Even before the January 2006 elections, many donors had suspended direct budget support. By the end of 2005, the PA was financing current expenditure through sales of Palestinian Investment Fund assets and bank lending secured against those assets.
- The result is an unsustainable fiscal position, with an estimated deficit of $800m for 2006 alone and a total PA debt of around $1.3bn and growing, 50 per cent of which is owed to commercial banks and the private sector. In the short-term, this places the economy under great strain. And in the longer term, fiscal instability will undermine improvements in developing accountable and transparent public financial management mechanisms, such as the Central Treasury Account.
- The Palestinian economy has been left extremely weak, and growing poverty and unemployment have fuelled the spiral of instability. Despite the expanding public sector, unemployment today is high, nearly 50 per cent in Gaza.
- And as the economy has continued to deteriorate, pressure for the PA to act as the employer of last resort has continued – both for those who previously worked in the private sector, and those who could otherwise join paramilitary organisations – although of course, many of the nominally ’employed’ have not received their full salaries in over a year.
- So the current economic outlook for the Palestinians is bleak. Despite $10bn in international aid since Oslo, the Palestinian people are getting poorer. 65 per cent now live below the poverty line, compared with around 20 per cent in 1998.
- If it had not been for the TIM, things would already have got much worse. Aggregate EU assistance to the Palestinian people in fact rose by 27 per cent last year to over 650m euros with UK bilateral aid higher this year than in 2005 or 2006. As of this month, the TIM has disbursed a total of 276m euros in targeted financial assistance to 150,000 beneficiaries, directly supporting nearly 1 million Palestinians, enabling people in Gaza to access essential supplies, power and water, sanitation and health care. This has helped contain the economic decline from a predicted -26 per cent at the beginning of the year to around -5 to -10 per cent by the end of the year.
- But alongside political instability the economic situation if left unchecked will get worse, particularly as the population continues to expand rapidly. For the Palestinians, economic collapse will only increase the humanitarian suffering we have seen. For the Israelis, economic crisis can only increase the risks to their security. For both sides, the current vicious cycle of poverty and unemployment contributing to instability and conflict, and in turn further poverty and unemployment, must be broken.
Building Blocks of the Economic Roadmap
- So this is the bleak economic context to the current political instability unfolding daily in the region. In our work, we have tried to identify the key economic building blocks which have to be put in place to arrest further deterioration and set an economic roadmap to what must be our goal – a vibrant Palestinian economy, trading with its neighbours, with the region and with the world, and providing employment and prosperity for all its citizens.
- As I have already made clear, the current political situation does not make it possible or practical to outline significant proposals, or detailed economic plans.
- But at the core of our analysis are five insights into the actions that will be needed once the time is right, and which we believe will remain constant through time. I will take each in turn.
Stabilising the economy
- The first is a statement of the obvious – that you cannot even begin to build a strong economy without a platform of stability. Unless the Palestinian economy can stop contracting, it can never grow. And so stabilising the economy – by addressing the fiscal crisis, controlling the growth in public sector employment and starting to create productive jobs – must be the first step on any economic roadmap.
- Of course, as we have stressed, this initial economic stability requires political stability and a government able to control its security forces to deliver law and order. Even before the crisis of the past week, the PA’s large but poorly organised security services had proved incapable of ensuring security and controlling local gangs and militia. The absence of internal law and order was brought home to us on 12 March, with the kidnapping of the BBC’s Alan Johnston. The inability, nearly one hundred days later, to secure his release indicates the severity of the problem.
Acknowledging the asymmetry between the Palestinian and Israeli economies
- Second, we have to understand and work within the fundamental asymmetry in the current relationship between the Palestinian and Israeli economies.
- The disparity between the two is staggering – in 2005, Palestinian GDP was only 7 per cent of Israel’s, and the average Palestinian income was only 6 per cent that of an Israeli.
- And the reality is that the flexibility and global reach of today’s Israeli economy means that it does not need the Palestinian economy. The growth in migrant labour from Asia and elsewhere in the region to replace lost unskilled Palestinian labour in recent years is a testament to that fact.
- And yet, to be viable, the Palestinian economy needs some effective economic and trading relations with Israel. The Palestinian economy is highly dependent upon the Israeli market – the destination of over 90 per cent of Palestinian exports, many for re-export, and the source of over 70 per cent of Palestinian imports.
- However, a return in the foreseeable future to the high level of economic integration, characterised by the labour flows witnessed in the 1990s, is not realistic, nor necessarily in the longer-term interests of the Palestinian economy.
- But without a much greater degree of economic cooperation, certainly in the form of mobility of goods between the West Bank and Gaza, with Israel, and through Israel to wider markets, the Palestinian economy is set for a prolonged period of stagnation.
Improving security to allow movement
- Third, therefore, a viable economic roadmap will not be possible unless a better balance can be struck between short-term security on one hand and allowing movement and access on the other, necessary to promote both security and prosperity for the medium term.
- For Israelis, their immediate security has understandably been the priority.
- And sensible people have to acknowledge the effectiveness of the restrictions that have been put in place: the threat that Israel faces from Palestinian terrorist attacks is very real and the restrictions have successfully prevented a number of intended terrorist attacks.
- But the security restrictions seriously constrain Palestinian economic development and are a big obstacle to prosperity. And although targeted at extremists who seek to undermine peace, the restrictions impact equally on the majority of moderate Palestinians who seek a negotiated settlement.
- Most importantly, we must also acknowledge the long-term security impact the restrictions will have, through dramatically reducing economic activity. As the Government of Israel itself has recognised, economic development of the Palestinian territories is an essential component of achieving security in the long-term. The Agreement of Movement and Access, shows that progress here, under the right circumstances, is possible.
- But, at present, the restrictions are tight – and I have seen first-hand in the course of my visits to Gaza, Bethlehem, Ramallah and the Jordan Valley that vibrant economic growth simply cannot exist in such circumstances, with the Palestinian economy hopelessly fragmented.
- Without movement and access, the Palestinian private sector will always struggle to function; and without a functioning private sector, there is little hope of a viable Palestinian state, and a lasting peace. So Israel is faced with an acute challenge between the short-term security measures which restrict access, and the medium- and long-term security threat of a failing Palestinian private sector. This is a hugely difficult balance to strike.
- The reality is that the medium-term security of Israel’s economy can only be assured through prosperity in the Palestinian territories. And by allowing movement, Israel will also unlock the ability of the Palestinian economy to respond to the asymmetries I talked about earlier by diversifying both its industrial structure and its export partners – so reducing the reliance on Israel.
Encouraging Palestinian economic diversification
- Because our fourth insight is that the Palestinian economy badly needs to diversify. Already, the Territories are increasingly an enclave economy and have fallen behind their competitors. For example export levels are static while Jordan has seen the value of trade increase by 18% every year since 2000. That will remain the case while companies have no choice about where to send their products.
- This lack of trade corridors limits access to foreign markets, and this is particularly serious given the size and fragmentation of the internal Palestinian market. Yet the West Bank shares a border with Jordan; the Gaza Strip with Egypt. Trade corridors through these countries could allow Palestinian producers to build links with the burgeoning economic powerhouses in the Gulf; or access lucrative markets in the EU.
- Finding direct ways to encourage diversification, including through new trade agreements and Palestinian infrastructure is critical. This was also a key finding of Jim Wolfensohn’s work.
- So these are the first four building blocks of any economic roadmap – stability; a predictable functioning economic relationship with the Israeli economy; striking an effective balance between security and movement and access; and Palestinian diversification.
- And they are all preconditions for the fifth and critical building block – developing and supporting a vibrant Palestinian private sector through encouraging investment and increasing productivity.
Supporting the Palestinian private sector
- Globally, foreign direct investment is at record highs – but, even before the recent deterioration of the security situation, it wasn’t reaching the Palestinians.
- Encouraging investment requires continual support and improvement to the internal business climate.
- In the West Bank and Gaza, recent surveys have highlighted that, though levels of corruption and bureaucratic inefficiency compare favourably in the region, absent or inadequate commercial legislation, incomplete land registration and weak institutions present a further barrier to investment.
- There is also very little domestic investment. In 2005, less than 50 per cent of firms invested at all, and the average piece of machinery in the West Bank and Gaza was over 10 years old.
- The traditional focus of Palestinian industry on producing low-value goods for Israeli manufacturing companies is not sustainable, especially as Israel replaces Palestinian workers with imported labour from countries like India and the Philippines; and because of the impact on competitiveness of the high cost of Palestinian labour.
- So as well as attracting investment, Palestinian enterprises need to increase their productivity. They need to move up the value chain by taking on new equipment and learning new practises.
- But catalyzing private sector development will take time, and will require a number of essential changes to the business environment, enhancing the wider investment climate through the strengthening of Palestinian institutions, developing the capacity of enterprises and, crucially, delivering law and order.
Lessons from Northern Ireland
- The importance of mobilizing the business community behind economic and political reform as a catalyst for prosperity and peace is also one of the key lessons one can draw from the Northern Ireland peace process.
- Of course, any simple comparison between the two situations is fraught with risks. No two conflicts are the same. And there are clear differences between the conflicts in Northern Ireland and the Middle East. Most obviously, the goal in Northern Ireland was always to share power peaceably, never to create separate Catholic and Protestant sovereign entities. Even at the worst points in the Troubles, there was a flow of goods and labour – there weren’t the same problems of movement and access that we see in Gaza and the West Bank. And the use of suicide bombers in the Middle East presents Israel with a particularly difficult security challenge.
- But where insights from one conflict can be drawn they should, where appropriate, be applied to others. And I would like to commend the Portland Trust for their work highlighting the lessons from Northern Ireland which may be applicable elsewhere.
- Economic inequality was a key factor in sparking and sustaining violence in Northern Ireland. But improved economic conditions, together with a series of legislative changes, helped reduce the disparity between Catholic and Protestant unemployment rates from as high as 14% in 1985 to about 4% in 2004.
- And whilst public sector financial support by the British government was essential in underpinning the economy through the most difficult periods, it was private sector growth, supported by substantial foreign investment, which drove increased employment and improved living standards in the longer-term.
- In fact, international mediation began around economic issues, with business becoming a key lobby for peace. Senator George Mitchell, who eventually chaired the talks that led to the 1998 Good Friday Agreement, first went to Northern Ireland as a special economic adviser, and economic discussions became a platform for political settlement.
- I agree with much in the Portland Trust’s report – and we will reflect on this as we continue to work on our report. Without economic progress, even small acts of sabotage by those who benefit from the conflict can derail a peace process. But if a plausible economic vision for the future, underpinned by visible progress in the present, can be widely communicated, a peace process can better resist such violence.
Towards an Action Plan
- Let me now turn to some of the specific actions we think will be necessary for a viable economic roadmap.
- Of course some actions, like the provision of humanitarian relief, or targeted support to struggling Palestinian businesses, are being carried out today, often in very difficult circumstances. This work is necessary to prevent suffering and also to create an environment more conducive to stability and peace. And today Hilary Benn has announced that the UK will be giving £1 million, channelled through the International Committee of the Red Cross (ICRC), to meet immediate humanitarian needs.
- But most actions require enhanced political relations between the Israeli and Palestinian authorities, and the international community, and are not possible under the conditions we are faced with today.
- This list is not exhaustive, and it is grouped into four sections: stability, security, mobilising the business community, and supporting the Palestinian private sector. I’d like to outline our preliminary thoughts on each of these.
- As I said, the first step towards recovery of the Palestinian economy must be stabilisation – stopping its descent so we can begin its ascent. In the first instance, this requires continual monitoring and enhancing of the Temporary International Mechanism. But critically it requires the PA to take responsibility where it can.
- The TIM is now being coordinated with the Ministry of Finance to allow for better integration with budgetary systems, making it more responsive to the needs of moderate Palestinians and their institutions. We will work with US and EU partners to do this.87. And we welcome the news yesterday that the US will resume full assistance and normal contacts with PA. Along with the US, the EC also affirmed its full support for Abbas and the Emergency Government yesterday, with the UK pushing hard for resumption of direct financial support, and for intensive efforts to build the institutions of a future Palestinian state.
- But in the longer term, a macroeconomic crisis can only be averted through a credible PA-led budget plan based on the uninterrupted transfer of the clearance revenues and the reduction of public expenditure, specifically the wage bill. The IMF and the World Bank have a crucial role to play in advising the PA on reforms and supporting their execution. And in light of recent events, EU Foreign Ministers yesterday called on Israel to release the withheld tax revenue in full.
- Actions can also be taken on some of the security issues that I described earlier to enable the PA to provide sufficient security to allow Israel to relax its stringent security measures and free up movement for goods and people, particularly at the economically critical border and crossing points, the scene of past terrorist attacks. The ongoing work of the EU Missions, particularly the EU monitors at Rafah, and of US Security Coordinator General Dayton, play a key role. The UK government is contributing to this through the provision of non-lethal equipment and technical expertise, and we welcome the Norwegian government’s role in funding and supporting the development of a comprehensive plan for reforming the Karni Crossing, and Canada’s role in providing assistance with infrastructure.
- We will also need, as soon as the opportunity presents itself, to persevere with implementing the 2005 Agreement on Movement and Access, which established the intellectual justification, and practical framework, for a consistent security relationship between Israel and the West Bank and Gaza.
- Of course, Israel has legitimate security concerns, as demonstrated by the tragic death of two civilians in Sderot last month. And the PA must fulfil its international obligations to prevent terrorist attacks on Israel.
- So the international community must work together with Israel and with moderate Palestinians, to advance a range of measures to incrementally lift security measures, allowing trust on both sides to increase. The security benchmarks presented to the parties by Secretary Rice offer a framework for doing this.
- First among such measures should be supporting the diversification of Palestinian export routes out of Jordan and Egypt, for example the Prince Mohammad Bridge or through the Rafah Crossing. I stressed earlier the importance of diversification for the Palestinian economy – opening these crossings would allow Palestinian producers direct access to the global market for the first time in years. And while we cannot eliminate risk entirely, the World Bank has produced detailed analysis on how the crossings can be operated at minimal risk.
Mobilising the business community
- The third area in which we believe action can be taken is mobilising the business community – Palestinian, Israeli and international – to help ensure that the economic case for peace is heard amidst the louder debates on politics and security. There are a large number of extremely talented, successful and well-connected businessmen, in the region and from the Palestinian and Israeli diaspora, who are eager to support the peace process. We have met many of them in the course of this work.
- Establishing joint fora, where businesspeople can come together to discuss practical measures to enhance the region’s business environment – not only concerning access and movement but all elements of the investment climate – is one practical way of contributing. The experience in Northern Ireland, where business leaders persistently and persuasively articulated the economic dividend that would accompany peace, suggests that this could be effective way of maintaining momentum behind the peace process.
- And along this theme, I strongly welcome the recent formation, announced at the World Economic Forum in Amman, of the Israeli-Palestinian Business Council, and we should consider whether there are other ways in which external economic leadership could play a greater role.
Supporting the private sector with public action
- The fourth area of action must be supporting the Palestinian private sector. This will require a sequenced approach, towards a long-term objective of improving the ability of Palestinian companies to trade with themselves, with Israel and with the rest of the global market.
- Until security has been restored, and improvements made to movement and access, we are limited in how we can support Palestinian businesses. However, right now we should implement targeted programmes that enhance export opportunities, where we can.
- There is also a role for external investors. We saw in Northern Ireland that once a political settlement was reached, first at the 1994 cease-fire and subsequently at the 1998 Good Friday Agreement, the perceived political and security risks fell rapidly and the high levels of education and entrepreneurship attracted significant overseas investment, further driving the private sector growth that underpinned sustained economic improvements.
- Like Northern Ireland, the Palestinian population is highly educated and entrepreneurial. The challenge, therefore, is to assemble the right investors and devise adequate mechanisms to mitigate the risk they face, so that they are ready for the moment when investment in the Palestinian territories becomes a realistic proposition.
- The UK government has already set aside £3 million over 3 years to establish a new fund to help lower the risk for Palestinian companies to enter new markets. This will help Palestinian producers diversify their operations and reintegrate them into the global economy. The money will be used to issue grants to match the money businesses raise for investment.
- As an independent fund, all donors can contribute to this important project – and I hope that those of you from donor governments will seriously consider doing so.
- But given all that is needed, it would be unrealistic to expect the private sector to flourish in the short and even medium term. Preventing further reductions in Palestinian GDP will require action by the Palestinian Authority, Israel and the international community, and we will need to work to bring the key actors together. In the short term we must look carefully at the infrastructure required to boost the productive potential of the Palestinian economy, and the need to provide jobs to Palestinian workers, if we are to demonstrate to the Palestinian people that an achievable path that leads away from the current malaise exists.
- Such investment would achieve two objectives. It would upgrade Palestinian infrastructure, housing, and communications and expand the industrial base, enhancing business productivity and providing a modern foundation for economic growth. And it would provide an immediate source of employment, training and hope for Palestinian workers; bridging the gap until the private sector expands to fill it.
- So there is an important role for large-scale public and private sector funds to deliver investment into the West Bank and Gaza. Under the supervision of a mutually trusted intermediary like the World Bank, such funds could provide a flexible and robust vehicle for allocating investment according to the economic priorities of the Palestinian Authority and the private sector.
- To supplement these funds, we are exploring how the international finance community could provide political risk insurance. And we are exploring the merits of establishing economic planning and coordination structures, to ensure that we are ready to act decisively when sufficient political progress is achieved.
- So this is where we have got to with our work. I know that I speak for Jon as well as I myself when I say we have found this project very compelling but also frustrating. I hesitate to use the word conclusions at a time of such great uncertainty, although as I said, I believe that the building blocks to the economic road-map will remain constant through time.
- Our objectives will also remain the same. I know that achieving lasting stability and security in the Middle East will be a high priority for the next Prime Minister, and I believe the work that we have done since 2005 on the building blocks for an economic roadmap has helped him prepare both in terms of understanding the issues, and in developing proposals to take us towards that goal. It is clear that bringing prosperity to the Palestinians and security to the Israelis is critical to the stability of the region and the world. We need to build a dividend of peace that will itself entrench that peace, create a new prosperity that would make a return to past conflicts all the more costly, and deliver a future of prosperity and opportunity for all.
- And yet over the last eighteen months we have seen the security situation in the territories progressively deteriorate and the economic prospects of the Palestinian people get worse and worse as the divides within the Palestinian territories have grown more stark and become more violent. Recent events in Gaza have reinforced the dangers of the current economic, political and security situation. But it is important that we look beyond the current troubles and continue to make the case for peace.
- Let me end with three points, which were as true in September 2005 as they are today.
- First, there is no medium-term solution to security and stability in this region without addressing the hardship of the Palestinian people and getting on track with an economic road map to deliver rising prosperity.
- Second, the Palestinian economy must diversify and reduce its dependence on Israel. But given the historic links between Israel and the Palestinian Territories, there is no medium-term solution to Israeli security without a Palestinian economic relationship with Israel, including trade in goods, reliable access to raw materials and some labour mobility too.
- And third, the access and mobility this requires to work will require a degree of trust and cooperation between the Israeli and Palestinian governments which today looks remote and which will require great leadership to secure.
- The international community can, if adequately prepared, play an essential part in supporting the peace process through economic measures, as we saw from the work led by Jim Wolfonsohn on behalf of the Quartet.
- But this will only work if local leadership is in place and working together. Without it, the grounds for optimism look thin. But we must be ready for the moment when it comes.
Thank-you.Posted November 26th, 2015 by admin