b i t t e r l e m o n s. o r g
    March 24, 2008 Edition 12                      Palestinian-Israeli crossfire
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  The global financial crisis and the conflict
  . The main issues are political, not economic        by Yossi Alpher
There is not even a demonstrable connection between prosperity and a reduction in terrorism.
. Bad for the economy, bad for peace        by Ghassan Khatib
Further economic deterioration will reflect badly on the prospects for the peace process.
  . The peace process will be weakened        by David Brodet
In view of the riches accumulating in the region, it is possible with relatively small sums to influence Palestinian political decisions.
. Currency pressures add to economic and political despair        by Sam Bahour
The PA is being looked at to provide direction but is at a loss as to how to address the problem in the short term.

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The main issues are political, not economic
by Yossi Alpher

The growing global financial crisis will not be a significant factor in the resolution, or for that matter the ongoing deterioration, of the Israeli-Palestinian conflict. The past 40 years of Israeli occupation, full and partial, have witnessed a variety of attempts to alleviate or solve the conflict along with two prolonged intifadas and several additional Israel-Arab wars, all of which have demonstrated that the conflict is affected primarily by politics, not economics.

The ups and downs of the Israeli economy or the global economy have never been a significant factor in determining the direction of the conflict. Nor have the economic pressures of conflict radically affected the cycle of prosperity and recession in Israel. Moreover, since 1967 virtually all Israeli governments, and particularly ministers of defense, have implemented a broad spectrum of economic carrots and sticks with the objective of manipulating the Palestinian political will--with little or no effect on the overall attitude of Palestinians toward Israelis and the conflict.

Carrots? Since 1994, the international community has invested huge sums in developing a Palestinian infrastructure and security services and propping up the governing bureaucracy of the Palestinian Authority. Currently, Quartet emissary Tony Blair is in charge of such a program, toward which seven billion dollars have been pledged by the international community. Israel has agreed to take measures to enable a smoother functioning of the Palestinian economy.

But the benefits for the political process are at best debatable. Indeed, arguably the huge sums of international aid showered upon the Palestinian leadership over the past decade and a half have been an important factor in generating the corruption that caused Palestinians to install a Hamas leadership two years ago. Moreover, as PA Prime Minister Salam Fayyad can attest from past experience, even wealthy donors who are not affected by a global economic crisis, like the oil-rich Saudis and Emiraties, frequently avoid making good on their aid pledges.

Sticks? In recent months and years, Israel and the Quartet have imposed severe political sanctions on the Gaza Strip due to Hamas rule there and ongoing aggression against Israeli civilians. But the Hamas regime in Gaza has merely been strengthened and is more popular than ever.

Thus if, as anticipated, the growing international financial crisis generates the imposition of new limits and constraints on the amount of aid flowing to the West Bank, this will almost certainly not be a primary factor in determining the outcome of peace efforts.

To be sure, economic prosperity is as good for Palestinians as it is for everyone else. But there is not even a positive and demonstrable cause-and-effect connection between prosperity and a reduction in the inclination to engage in terrorism: witness the solid economic background of the 9/11 perpetrators and, closer to home, the outbreak of the second intifada at a time of relative Palestinian economic prosperity.

Of course, Israelis and Palestinians will feel the negative effects of a sharp global economic downturn. The red-hot Israeli economy will cool down. Less aid will flow to the Palestinians. In projects involving the building of Palestinian civil society--a key foundation for a successful democracy--and laying the long-term foundations for civilized coexistence, the denial of aid by donor governments and foundations, due to their own financial setbacks, could be truly unfortunate.

Then, too, the United States government is liable, for the foreseeable future, to concentrate far more on domestic American economic dilemmas than on the Israeli-Palestinian conflict. When it does look at the Middle East, it will focus more on oil and Iraq, due to the huge economic implications of these issue areas, than on Israel-Palestine.

But that is precisely the point: our conflict is not primarily an economic issue. The causes are political and the solution is political.- Published 24/3/2008 © bitterlemons.org

Yossi Alpher is coeditor of the bitterlemons family of internet publications. He is former director of the Jaffee Center for Strategic Studies at Tel Aviv University and a former special adviser to PM Ehud Barak.

Bad for the economy, bad for peace
by Ghassan Khatib

While economists are puzzling over the global financial crisis that started in the US and is most dramatically illustrated by the fall in the value of the US dollar, the effect in this region is massively and disproportionately felt. Most countries in the region either have their currencies directly tied to the dollar or are heavily invested in economic relations with the US.

The Palestinians are quite possibly most negatively affected from the turbulence. Although neighboring countries such as Israel, Jordan and Egypt are also suffering, they all have their own state and currency and thus the economic and monetary tools to deal with the crisis. The Palestinian government has no such tools to respond with and the Palestinian economy, moreover, is heavily dependant on foreign aid, most of which comes in dollars.

The Palestinian Authority, furthermore, is in such a poor state that it cannot even consider any subsidy measures to mitigate the effect on the lowest income sector of society, which has already been suffering dramatically as a result of the practices of the occupation, including the restriction on movement and confiscation of land.

The global crisis affects the whole spectrum of Palestinian society. The Palestinian government, the private sector and non-governmental organizations are all feeling the pinch though to different extents. The government, which is the biggest employer in the country and is responsible for channeling money not only for wages but also to ensure that basic services and development projects reach those in need, is less and less able to fulfill these obligations.

The effect of that goes beyond the immediate economic and humanitarian consequences. The crisis will also affect the PA and its constituent parties politically. One of the political platforms of the current leadership of the PA is that its political positions, as opposed to those of the radical Islamic opposition, will leave it better equipped to fulfill its economic and humanitarian obligations. This platform, already suffering from Israeli intransigence in the peace process, is being undermined further by the global economic crisis.

The NGO sector, which in the Palestinian case carries a heavy burden in terms of services, including health and education as well as development, is the sector most harmed by the economic turbulence. NGOs--including almost all big universities and more than half of all major hospitals in addition to hundreds of development and service organizations--earn their income in dollars and Jordanian dinars, both linked and thus equally devalued, while their expenses are in Israeli shekels. This has been creating huge deficits that are threatening some of these institutions with possible collapse.

The private sector is facing similar problems, this time for a combination of factors. One is the devaluation of the currencies used here, but there is also the sharp increase in the price of the means of production. The most obvious example is in the construction sector where the Contractors Association recently declared that the prices of basic materials for construction in the last year increased by an average of 20 percent. Add to this the sharp increase in the price of oil that is affecting both producers and consumers, and the private sector faces a gloomy outlook.

The link between the economic and political situations in any given context has been oft noted. In our case, further economic deterioration will reflect badly on the prospects for the peace process. Studies from across the world show a clear link between economic deterioration and radicalization, and here, where economic deterioration is mostly caused by Israel's policies vis-a-vis its occupation of Palestinian land, the link is even stronger.

These conclusions are also borne out in Israel, in spite of that country being better equipped to deal with economic crises. Recent polls there have shown that support for right wing extremists is growing in the poorer sectors of society. It is among these strata of society that most of the racism and hatred toward Palestinians is concentrated. The bigger the poor sector in Israel, the greater the backing for those who oppose the peace process and support the use of force against Palestinians.- Published 24/3/2008 © bitterlemons.org

Ghassan Khatib is coeditor of the bitterlemons.org family of internet publications. He is vice-president of Birzeit University and a former Palestinian Authority minister of planning. He holds a PhD in Middle East politics from the University of Durham.

The peace process will be weakened

by David Brodet

The economic crisis we are currently experiencing appears to be extreme, largely because it really comprises three major simultaneous and interlocking crises. The first is a complex financial crisis in the American capital market. The second is a prolonged macro-economic crisis in the United States that began several years ago and affects global currency exchange rates. And the third is the extreme rise in oil prices.

Each of these crises is big; together, they create a critical situation. Here we are not going to discuss economic solutions or broad ramifications for the entire world. Rather, we shall sketch several ways in which these economic developments directly and indirectly affect Israeli-Palestinian relations.

The new economic reality will, in the near future, divert the world's attention away from the conflict in our region, as the world focuses on economic problems and their domestic significance for each individual country. The scope of this crisis is so broad that virtually no country will escape its effects with the exception of the oil producing states that benefit from a huge income windfall thanks to the rise in oil prices.

In the US, President George W. Bush will be busy with economic issues. Even the American elections will focus on the economy. Caught in the eye of the economic storm, Washington will redouble its efforts to find a solution in Iraq (though probably not before 2010) that enables it to withdraw, thereby reducing its defense burden and its budget deficit. This American weakness, however temporary, is of course immediately projected onto the Annapolis process and Washington's allies in the region--first and foremost Palestinian President Mahmoud Abbas (Abu Mazen).

The Middle East is changing in view of this new reality: Saudi Arabia and other oil-producing states are accumulating economic clout that the US cannot ignore. They are buying up assets in America, including troubled financial institutions, and enhancing their influence. Egypt and Jordan with their peace treaties with Israel are witnessing their inter-Arab standing slip in favor of the wealthy oil states.

Under these circumstances, the big winner will be Iran. Tehran recognizes that it will soon be relieved of the American presence on its borders. As an energy producer bursting with new oil income, it can easily deliver financial aid to nearby state allies like Syria and to allied extremist movements like Hizballah and Hamas.

The most significant damage will be done to the Palestinian Authority. The readiness and capacity of the western economies to make good on their commitments to donate funds as promised at the December 2007 Paris donors conference will be reduced. And while the oil-rich Arab economies could easily transfer funds to the Palestinians and make up the difference, it is not clear how eager they will be to do so.

Economic aid to the Palestinians is a factor in the emerging struggle between the Sunni and Shi'ite axes in the Middle East. In view of the riches accumulating in the region, it is possible with relatively small sums to influence Palestinian political decisions. At this point in time it is the Iranian axis that appears to be the more activist, as it buys influence even beyond Gaza and Hamas--in the West Bank and among additional Palestinian movements--while the Sunni axis is less resolute in its support for Abu Mazen.

Israel with its export-oriented economy and international economic profile will also be hurt by the global drop in growth that follows the American crisis. The extent of the slowdown will depend in part on the economic policies adopted by the government of Israel. The Palestinian economy, with its links to Israel, will also be affected--but to a relatively limited extent, insofar as the Palestinian economy has over the past seven years reduced its ties to the Israeli economy in the wake of the violence of the second intifada and Israel's economic and security response. The Palestinian economy is weak (not only in Gaza but in many parts of the West Bank as well) and cut off from many of the economic links and developments related to Israel and the West. Thus the emerging economic situation is more likely to influence extremist elements.

There are still many unanswered questions with regard to longer-term developments in the global economy and their effect on the Middle East. Conceivably, the world will recover relatively quickly from the economic crisis. But in the short term, the moderate Israeli-Palestinian track will be weakened vis-a-vis the extremists. In the near future, irreversible developments are liable to confront Israel with extremist forces and a deteriorating political reality.

As always in these situations, time works in favor of those actors who know how best to exploit it.- Published 24/3/2008 © bitterlemons.org

David Brodet is former director general of the Ministry of Finance. He headed the Israeli delegation that negotiated the Paris protocols in 1993-94.

Currency pressures add to economic and political despair

by Sam Bahour

As if the Palestinian economic reality was not complicated enough, the rapid drop in the value of the dollar has put many Palestinians between a rock and a hard place, not knowing how to make ends meet and not seeing an end to this perplexing situation.

The Palestinian market uses four main currencies. The Israeli shekel is traded in daily purchases; the Jordanian dinar, euro and US dollar are used for business and real estate transactions. The JD is pegged to the dollar at 0.709 so any devaluation of the dollar directly devalues the JD.

The vast majority of private sector employee contracts are in either JDs or dollars. Very few employee contracts use the Israeli shekel, mainly due to its historic fluctuation and because using it is a sign of Israeli dominance over the Palestinian market, which many prefer not to contribute to. And while all civil servant contracts are in shekels and thus the devaluation of the dollar benefits public employees, this is not so for the other major employment sector, the NGO sector, which is very reliant on the dollar and where the devaluation is deeply felt.

It is here important to note that the Palestinian economy is not only an Israeli-occupied one, but a donor-driven one. International assistance, which at the best of times barely props up the economy, comes to Palestinians mainly in dollars. Thus, every dollar donated to Palestinians in the past two years, when the dollar has lost almost a quarter of its value, has brought much less in terms of real value, in turn causing serious strain on the general Palestinian Authority budget.

Many large employers, such as universities, have already faced labor actions calling on them to supplement salaries to make up for the loss in currency value. While many organizations complied early on, with no end in sight to the dollar's decline the question is no longer whether the employer wants to compensate employees, but rather that many simply no longer can afford to do so. More labor actions can therefore be expected and are bound to disrupt the market.

A barely stuttering Palestinian economy cannot afford any more body blows. The pressure from Israeli-imposed closures and violence has already caused huge damage. Now a sharp increase in prices and inflation could just become the straw that breaks the camel's back. Households are sinking deeper into debt just to keep up with payment of bills.

The PA is being looked at to provide direction, but is, like most small countries around the world (except Israel which has announced it will purchase $25 million daily for the next two years to support the dollar), at a loss as to how to address the problem in the short term. The PA, furthermore, is at an even greater disadvantage given that it has no national currency and thus no monetary policy to affect currency issues. Nevertheless, it could promote the euro or even the shekel, given that consumer goods are all shekel-based.

But the knock-on effects are not only direct. The dollar crisis offers yet another reason to fear the danger of a new wave of brain drain from the occupied Palestinian territory. A significant currency devaluation, in addition to an already depressed market and political and security volatility, can easily cause more Palestinians to consider looking for more prosperous markets in the Gulf or Europe. With a recent poll showing that 44 percent of Palestinians living under occupation desire to emigrate, it will not take much to convince those with the resources to emigrate to do so.

The Salam Fayyad government is placing high hopes on the upcoming Palestine Investment Conference in May. However, the value of the dollar may prove an unexpected complication to recruiting already low foreign direct investment. Many voices are calling on Fayyad to postpone the conference until the security, political and global economic states of affairs are more conducive to real investment. The fear is that the conference will be merely a demonstration of economic solidarity and empty of any real investment.

Some hope was registered last week when the governor of the Bank of Israel, in an interview with Globes Magazine, warned currency speculators that the dollar would eventually rebound, and when it does, could do so rapidly. This is one case where most Palestinians would be pleased to see an Israeli official's prognosis be absolutely correct.

Meanwhile, the faltering economy will only complicate the political situation.- Published 24/3/2008 © bitterlemons.org

Sam Bahour is a business consultant based in Ramallah/al-Bireh.

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Editors Ghassan Khatib and Yossi Alpher can be reached at ghassan@bitterlemons.org and yossi@bitterlemons.org, respectively.

Bitterlemons.org is an internet newsletter that presents Palestinian and Israeli viewpoints on prominent issues of concern. Each edition addresses a specific issue of controversy. Bitterlemons.org maintains complete organizational and institutional symmetry between its Palestinian and Israeli sides.