Publication
Omar Shaban Ismail · Halat al-Iqlim (Cairo) · 2014
Omar Shaban examines the economic challenges facing the Palestinian National Consensus Government formed after the al-Shati Agreement in June 2014, arguing that reconciliation is not an equal merger but the reintegration of Gaza into a West Bank-centered political and economic system. He contends that seven years of division and blockade created a distinct reality in Gaza: a rent- and relief-dependent economy, severed trade with the West Bank, rising demographic and service pressures, and two separate budgets and bureaucracies. He outlines the technocratic government’s three core tasks—preparing elections within six months, lifting the blockade including normalizing Rafah, and reconstructing destruction from the 2008–2009 and 2012 wars—while citing figures such as Gaza’s former 33% share of GDP and 15% of exports, Hamas’s 2014 Gaza budget of about $894 million, the PA’s $3.9 billion budget, and 51,000 Hamas government employees. He concludes that success depends on moving Gaza from relief to early recovery and then to development, while harmonizing institutions and reconnecting Gaza’s economy with the West Bank.
Omar Shaban, June 2014: Reconciliation can succeed only by reintegrating Gaza and shifting from relief to development.
The signing of the Palestinian reconciliation agreement between the Fatah and Hamas movements comes after seven years of developments that have made the Palestinian situation more complex than it was before the legislative elections held in January 2006. Despite the importance of reaching this agreement, this complex situation poses specific challenges that may hinder the effectiveness of the agreement in ending the division between the Gaza Strip and the West Bank.
In this context, this paper attempts to explore the expected economic challenges facing the Palestinian National Consensus Government, which was formed on 2 June 2014, based on the text of the al-Shati Agreement.
## Seven Hours Ended Seven Years of Division
The division between the Gaza Strip and the West Bank began after the legislative elections held in January 2006, in which Hamas won and subsequently formed a unilateral government. This was followed by internal fighting in which the Palestinian Authority was defeated and its influence became confined to the West Bank, while Hamas and its government took control of the Gaza Strip. At the same time, a severe Israeli blockade was imposed on the Gaza Strip, and the international community boycotted the Hamas government for not adopting the Quartet conditions, namely: recognition of Israel, renunciation of violence, and recognition of the agreements concluded between the Palestine Liberation Organization and the Israeli government.
This was followed by continued reconciliation efforts between Hamas and Fatah under Egyptian leadership and with Arab support, and numerous reconciliation agreements were signed in Sana'a, Mecca, Cairo, and Doha without any implementation. Concurrently with these efforts, Israel launched two harsh wars on the Gaza Strip in 2008–2009 and in 2012.
The regional position toward Hamas’s control of the Strip changed with the end of Muslim Brotherhood rule in Egypt on 3 July 2013, as relations between Hamas, governing Gaza, and the new Egyptian regime became strained. As a result, the Egyptian government closed the tunnels between Gaza and Sinai, causing a financial and psychological crisis for the Hamas government and the residents of the Gaza Strip. This coincided with the end of nine months of negotiations between the Palestinian Authority and Israel under American mediation without result.
These developments formed the backdrop to the 23 April 2014 meeting in Gaza between the PLO delegation led by Fatah’s representative in the reconciliation file, Mr. Azzam al-Ahmad, and the Hamas leadership, which concluded with the signing of a new reconciliation agreement that appears, this time, to be the closest to implementation. Seven lean years of Palestinian division ended in just two sessions lasting seven hours in Mr. Ismail Haniyeh’s home.
The al-Shati Agreement—al-Shati being the refugee camp in which Mr. Ismail Haniyeh lives, and which resulted from a seven-hour meeting at Haniyeh’s house—was an element of surprise for everyone because of the speed of its completion despite the major problems accumulated by the division over the previous seven years. This prompted Palestinians, who had grown weary of the pledges and statements by the two parties to the division to end it without any real action toward achieving that, to joke by saying: “If the Mecca Agreement, in the holy place, did not succeed in reconciling them, will the al-Shati Camp Agreement— a place with no religious sanctity—succeed in achieving what modest Sana'a, holy Mecca, influential Cairo, and wealthy Doha failed to achieve?”
## Summary of the al-Shati Agreement
The al-Shati Agreement provides for the formation of a National Consensus Government composed of independent technocratic figures with no political affiliation, enabling it to gain international recognition and enabling President Mahmoud Abbas to market it to Israel, the United States, and Europe. Information indicates that both parties were compelled to accelerate reconciliation because of the pressures experienced by the two sides of the division. On the one hand, the Palestinian Authority, led by President Mahmoud Abbas, gained nothing from the negotiations that resumed in August 2013 and were set for nine months ending in April 2014, while Israel continued its very intensive settlement campaign in the Palestinian territories, and President Mahmoud Abbas wished to close the division file that had occurred during his tenure before leaving the political scene.
On the other hand, Hamas and its government have been experiencing a deep financial and political crisis since the fall of Muslim Brotherhood rule in Egypt in early July 2013, and the severe Egyptian campaign to close the tunnels between Gaza and Sinai, which had constituted the material and financial lifeline for Hamas in Gaza, in addition to the restrictions on the movement of Hamas members out of and into Gaza through the Rafah Crossing, which is considered their only gateway to the world through Egypt, as well as the changes in the region that finally convinced Hamas that these changes were not in its favor. Hamas therefore decided, with considerable maturity, to go to reconciliation with all its strength. The two sides of the division had previously identified (and later the reconciliation) the mission of the technocratic government in three main tasks as follows:
- Preparing for legislative and presidential elections, the date of which is expected to be announced six months after the formation of the government, and if reconciliation efforts succeed, the elections are expected to be held in January 2015.
- Lifting the Israeli blockade on the Gaza Strip in a manner that allows the return of the movement of goods and individuals into and out of it. This includes restoring the relationship with the Arab Republic of Egypt, meaning the resumption of normal operations at the Rafah Crossing so that the Palestinians of the Gaza Strip can enjoy freedom of movement.
- Reconstructing what was destroyed by the two Israeli wars on the Gaza Strip in 2008–2009 and the war of December 2012.
## A Process of Reintegration or Merger?
There is no doubt that the expected challenges and obstacles are great, thorny, and complex. Some are known and have already been diagnosed, while others remain unknown, whether partially or entirely, as seven years have created a different economic, legal, administrative, political, and social reality between the Gaza Strip, ruled by Hamas since June 2007, and the northern governorates, governed by the Palestinian National Authority from Ramallah.
Given the small area of the Gaza Strip compared with the West Bank—365 km2 compared with 5,000 km2—and given the concentration of the political and economic system in the northern governorates over the past seven years, reconciliation means reintegrating the Gaza Strip into the political and economic system centered in the northern governorates. Therefore, it is not a process of equal merger between two regions or two systems; rather, it is a process of reintegrating the Gaza Strip region, which had broken away, into the Palestinian political system of the Palestinian National Authority.
Since Hamas and its government took control of governance in the Gaza Strip in June 2007, Israel has imposed a comprehensive and harsh blockade on the Gaza Strip as a whole. Israeli policy in the blockade of the Gaza Strip was governed by three criteria: no development, no prosperity, but no humanitarian crisis.
This policy changed over time. After Israel had previously allowed only relief materials to enter, it permitted the entry of construction materials, trucks, and equipment for the construction sector. These improvements in the blockade policy occurred after the Freedom Flotilla incident on 31 May 2010, which created international pressure on the Israeli government to lift the blockade, or at least ease it. The blockade policy pushed the Hamas government, its movement, and the citizens of the Gaza Strip to rely almost entirely on tunnel trade between Gaza and Sinai, which became the main source of hundreds of goods necessary for life, as well as an important source of income for the Hamas government in Gaza.
This unusual situation produced an abnormal condition and created a reality that was sharply contrary to what the Gaza Strip had been, and certainly to the economic, social, and political reality in the northern governorates. Many observers believe that the hidden objective of the Israeli government in imposing the blockade on the Gaza Strip is to prevent communication between the two regions, thereby preventing the establishment of a single Palestinian state. This was acknowledged by the Israeli army in its testimony regarding the Freedom Flotilla incident in May 2010, as included in the report of the Turkel Commission of Inquiry, which stated that: “One of the objectives of the Israeli army is to separate Judea and Samaria from Gaza as a security and political objective.”
The West Bank, the Gaza Strip, and East Jerusalem remain the territory of the future Palestinian state, as stipulated in the peace agreement between the Palestine Liberation Organization and the Israeli government. The West Bank and the Gaza Strip are two physically separate regions, and to some extent economically as well, and there are many differences in the institutional, intellectual, and social structure between them. This difference deepened during the years of the blockade, as communication between them was forcibly cut off because of the Israeli blockade, trade between them was prevented, and the movement of individuals between the two regions was reduced. Palestinian politicians and the Palestinian people also affirm that a Palestinian state cannot be established without either of them. There is no Palestinian state in Gaza or the West Bank separately, and no Palestinian state without Gaza. The World Bank indicated in its report issued in August 2009 that “the strategic objective of establishing an economically viable Palestinian state can only be achieved if the West Bank and the Gaza Strip remain together in a single economic unit.”
The economic and social situation in the Strip after seven years of blockade can be identified as follows:
- The transformation of the Gaza Strip from a productive society that contributed to total Palestinian national income and produced many exportable goods and services into a rentier, relief-dependent society and economy that relies almost entirely on cash and material assistance from abroad. All international institutions ceased, especially in the first years of the blockade, implementing any projects requiring the entry of raw materials or heavy machinery and equipment. International institutions also stopped dealing with the Hamas government in Gaza, under what was termed the no contact policy. This was accompanied by a sharp deterioration in indicators of education, public health, social cohesion, infrastructure, and economic activity, and a massive rise in unemployment and poverty rates.
- The severing of trade between the Gaza Strip and the West Bank, bearing in mind that trade between the two regions represented the largest share for both of them. Up until 2004, the Gaza Strip contributed 33% of total GDP and 15% of total exports of the Palestinian territories.
- The overturning of the social pyramid due to the tunnel trade, which came at the expense of the traditional and legitimate business sector. The tunnel economy produced a class of wealthy people who had not previously been part of the fabric of the business sector. This group is characterized by great wealth, but lacks the skills and experience necessary for the legitimate and formal business sector. Work in the tunnels also led to the exit of most legitimate capital from the business sector, a situation that can be summarized as “leadership without capital, and capital without leadership.”
- The increase in the population’s basic needs—housing, infrastructure, water, and health services—due to the halt or slowdown in development in these sectors during the years of blockade. The United Nations report “Gaza 2020” indicates that the population of the Gaza Strip in 2020 will reach 2.1 million, which will create unprecedented pressure on the level of social services, as population density will reach 5,500 people per km2, and the Gaza Strip will need around 260 million m3 of potable water, an increase of 60% over what is available today. The Strip will also need around 400 new schools and 800 new beds to meet health needs, in addition to the need to employ 1,000 new doctors and 2,000 nurses.
- The cessation of external investment, as the Gaza Strip has not witnessed any meaningful development investments in the past seven years. All external aid was concentrated in relief fields, including hospitals, schools, ambulances, and food assistance. Quite the opposite occurred: dozens of productive projects closed, and many business owners took their capital out to invest outside the Gaza Strip. It was also observed that a number of businessmen moved to work in the West Bank governorates and neighboring countries, whether in Egypt or Jordan, and even in distant countries such as Canada, Australia, and African countries.
- The difference in the status and legal environment of the Gaza Strip from that of the West Bank, as the Israeli government declared in September 2007 that the Gaza Strip was a “hostile entity,” and Israeli institutions were forced to stop direct dealings with the Gaza Strip. Israeli banks stopped dealing with their counterparts in the Gaza Strip, and the quantities of Israeli currency transferred to the Gaza Strip were reduced, causing a continuing crisis in the availability of the shekel in the Gaza Strip. The Israeli Ministry of Economy also stopped using the customs code specific to the Gaza Strip in the Israeli government computer system, depriving the Gaza Strip of direct contact with the world and forcing the business sector in Gaza to deal with intermediaries from the West Bank or Israel to complete import and export transactions.
- A division in the financial and administrative bureaucratic system between the Gaza Strip and the West Bank. After the June 2007 split, the Gaza Strip came to have a public budget submitted by the Hamas government separate from the Palestinian Authority budget. The Hamas government budget in Gaza for 2014 amounted to around $894 million, and around 51,000 employees work for the Hamas government, about one-third of them within the Ministry of Interior. The Hamas budget relies on external aid and on taxes collected from the tunnel trade, in addition to the taxes usually applied, such as income tax and value-added tax. Meanwhile, the Palestinian Authority budget amounted to around $3.9 billion, relying on $1 billion in taxes, clearance revenues transferred by Israel monthly amounting to $1.2 billion annually, and around $1 billion in external aid and loans from local banks.
In addition, following the split, the Palestinian National Authority asked its employees in Gaza not to work with the Hamas government and to stay in their homes while continuing to receive their salaries. The Hamas government therefore moved to fill the administrative vacuum resulting from this decision with tens of thousands of employees, many of whom were found not to possess the necessary educational qualifications and experience, which negatively affected the level of services provided to the public, especially in the health and education sectors. It should be noted that tens of thousands of Palestinian Authority employees have returned to work under the supervision of the Hamas government in Gaza, while continuing to receive their salaries from the Palestinian Authority government in Ramallah. In short, the split produced two different public budgets and two different government apparatuses.
## The challenge of transitioning to a developmental economy
It can be said that the reconciliation agreement lays the foundation for the Gaza Strip to enter a stage referred to in development literature as the early recovery phase, which is the stage that follows the emergency intervention phase in disaster areas, and precedes the third stage, namely the development phase, in which it becomes possible to focus on development projects with long-term impact. The early recovery phase requires combining relief intervention to assist the sectors most affected and in need of rapid intervention with interventions that have a development dimension. In general, it represents a bridge or transitional stage toward creating a productive developmental economy. Therefore, the challenge in this phase lies in seeking intervention mechanisms that combine the relief and development dimensions, and allow the gradual transition from a relief economy and dependence on aid to a developmental economy that relies to a high degree on its own resources, while strengthening the concepts of investment, partnership, and trade.
Under such circumstances, the question is always raised: should the focus be on reconstruction “rehabilitation,” or should we seek to focus on building and development? In Japan, for example, after the Second World War, the question was: should efforts be directed toward repairing what the war had destroyed, or toward construction and foundation-building? The optimal choice lies in how to combine the two. Time and the economy do not wait; rather, work must proceed within a vision based on: which activities can be carried out in parallel, and which activities can only be carried out sequentially.
Related to this is how to strike a balance and set priorities for pressure groups: should employment opportunities be created for young graduates or for those who had been unemployed in previous years? Does the priority lie in rapidly addressing poverty and unemployment, or in focusing on strategic projects that bear fruit only after many years?
One of the important challenges during the coming period lies in how to create harmony within the bureaucratic apparatus between Palestinian Authority employees—who were asked to stay in their homes and have been receiving their salaries for the past seven years and will now be asked to return to their work—and the employees of the Hamas government, some of whom assumed positions previously held by Palestinian Authority employees; likewise, creating harmony between the bureaucratic apparatus in the Gaza Strip and its counterpart in the West Bank, so that together they form a coherent bureaucratic apparatus working in a regular rhythm.
Re-linking and harmonizing the economy of the Gaza Strip and the West Bank after the rupture caused by the blockade and the division is also an important challenge. The Gaza Strip is in urgent need of much of what the northern governorates produce, and likewise the West Bank economy is in urgent need of the products of the Gaza Strip. Likewise, the rapid activation of private sector institutions and companies, civil society organizations, and universities so that they contribute to the success of this phase constitutes another important challenge.
In short, the post-reconciliation phase for the Palestinian people is a “strategic” phase: either the people succeed in crossing it toward a better future, or they fall into the abyss of poverty, dependency, and division from which there will be no return if they fail to overcome it.
Topic: National Reconciliation — reconciliation · economic policy · Palestinian governance · aid — Text © Halat al-Iqlim (Cairo) — archived here with attribution to the source. — PDF