An Economic Analysis of Kushner’s Failed Plan

On June 25 and 26, the Trump Administration presented its plan for the Palestinian economy, Peace to Prosperity: A New Vision for the Palestinian People and the Broader Middle East, in Manama, Bahrain. The plan represents the economic component of the administration’s approach to Palestinian-Israeli peace in two parts. The first is a 40-page narrative document that outlines the major elements of the economic plan, namely 1) unleashing the economic potential; 2) empowering the Palestinian people; and 3) enhancing Palestinian governance. The second part is a more detailed 96-page document listing all the projects to be implemented in the 10-year period of the plan as well as their costs and financing sources such as grants, loans, and private investment.

The majority (167) of the 199 projects are earmarked for the Occupied Palestinian Territories (OPT) for a total of $27.8 billion while the remaining 32 projects are aimed at Jordan, Egypt, and Lebanon, amounting to $22.2 billion. Almost two-thirds of the OPT projects, or 105, are focused on the first element, “unleashing the economic potential,” and vary from targeting infrastructure and human capital to promoting private sector growth in a series of economic sectors including agriculture, manufacturing, housing, and tourism. The following analysis sheds light on the plan by tackling four key principles.

The Backdrop

Two main features of the plan stand out: first, it sounds much like previous plans; and second, it ignores the political reality by precluding any official Palestinian involvement. Indeed, over the last 15 years at least four different plans from various parties have covered similar ground. In 2014, then-Secretary of State John Kerry presented an economic plan with an almost identical set of projects. In 2011, the Office of the Quartet, headed by former British Prime Minister Tony Blair, announced a series of economic projects addressing infrastructure and natural resources. In 2007, former Palestinian Prime Minister Salam Fayyad presented the “Palestinian Reform and Development Plan 2008-2010” to a meeting of donors in Paris; it contained projects for infrastructure, economic sector development, governance, and the rule of law as well as social projects. This plan secured the largest amount of international aid since the establishment of the Palestinian Authority (PA) with pledges totaling $7.4 billion, exceeding the original $5.6 billion requested. Finally, in 2005, the RAND Corporation conducted a lengthy research project that culminated in a report titled “The Arc: A Formal Structure for a Palestinian State” which presented a new framework for infrastructure, transportation, and urban planning, including connecting the West Bank and Gaza Strip by rail.

Two main features of the plan stand out: first, it sounds much like previous plans; and second, it ignores the political reality by precluding any official Palestinian involvement.

Some of these, such as the Kerry plan and Quartet understandings, share many of the shortcomings of “Peace to Prosperity.” They recycle an old attitude that, at best, ignores the structural distortions of the Palestinian economy and gives credence to what Israeli Prime Minister Benjamin Netanyahu called “economic peace” back in 2008. While many were equally unrealistic, some of the aforementioned endeavors differ from the new proposed plan in that they acknowledge the political dimension. For example, the Kerry plan defined political “enablers”––mostly from Israel––who were required to ensure its success, and RAND’s Arc project was designed for when a Palestinian state—with the return of at least some refugees—would be established. Moreover, despite the shortcomings of many of these failed plans, as research documents they are all superior to the current one, which fails to provide sources of data or any methodology for calculations. It is not surprising, then, that Palestinian Prime Minster Mohammad Shtayyeh described the plan as “not serious” and likened it to superficial desk research.

The second distinct feature of the plan, and perhaps most significant, is the absence of any official Palestinian participation or consultation. In contrast, for example, the Kerry plan claimed to have interviewed more than 100 Palestinian and Israeli private and public sector leaders. In fact, Palestinians did not participate in the Bahrain workshop nor were they expected to do so. Moreover, and in its pursuit to force Palestinians to negotiations, the current White House moved the US embassy from Tel Aviv to Jerusalem and announced the latter as the capital of Israel. It closed the PLO office in Washington, and cut off funding to USAID projects and to the UN Relief and Works Agency (UNRWA) in the OPT. Further, the US ambassador to Israel recently made statements regarding Israel’s “right” to annex parts of the West Bank.

The absence of political representation goes beyond simply not participating in the workshop; it extends to the terminology utilized in the narrative document. The word “Palestinian” is mentioned 301 times, yet none of those instances mention Palestinian land, territory, state, or authority. This should not come as a total surprise in light of Middle East advisor Jared Kushner’s statements, in which he doubted the Palestinian ability to self-govern and claimed that he speaks not to the bureaucrats, but “to Palestinian people, what they want is they want the opportunity to live a better life.” Kushner is gravely mistaken if he believes that on this topic, the Palestinian people disagree with the official position: an opinion poll conducted last March showed that 80 percent of Palestinians in the OPT rejected any White House plan that ignores their political aspirations, and 83 percent stated that they believe the United States is not serious about the peace process.

The Detailed Figures in the Plan

Four important specific details in the plan highlight major shortcomings. First, even though 84 percent of the projects are intended for the Palestinian economy in the West Bank and Gaza Strip, they receive only 56 percent of the total funding, or $27.8 billion. More than half of that figure, or $14.6 billion, consists of loans, while only 40 percent, or $11.4 billion, is planned as grants, with the remaining set as private investment. Furthermore, if divided by the 10-year period of the plan, that leaves the sum of the average annual grant at $1.14 billion; this is quite modest if one recalls that in 2007, the international community pledged $7.4 billion for a three-year plan. Finally, the fact that the majority of funding is set as loans (even if they are proposed as concessionary loans) raises many concerns about debt sustainability and about the effect on internal Palestinian decision-making, threatening to keep it hostage to external parties.

The fact that the majority of funding is set as loans (even if they are proposed as concessionary loans) raises many concerns about debt sustainability and about the effect on internal Palestinian decision-making, threatening to keep it hostage to external parties.

Second, whether one considers the average annual grants of $1.14 billion or total funding of $2.78 billion, both figures are not far off from the amount of international aid the PA already uses to finance its budget. In fact, from 2007 to 2017, international aid to the PA never fell below the $2 billion mark annually. For example, prior to the recent fallout with the Palestinians, the United States funded the PA with $600-$800 million every year through USAID projects, funds directed to security forces, and money for UNRWA. The European Union and Arab countries covered the remaining amounts and the United States is now pushing Gulf countries to relieve it of the financial burdens of aid to the Middle East region; recent examples include these countries replacing US funding for UNRWA and aid for Syria.

Third, many of the macroeconomic figures included in one table of the plan seem to be inflated, particularly the ones on employment. The plan argues that investments will increase GDP by more than 100 percent, from $14.6 billion to $33.3 billion. The Kerry plan had somewhat similar estimations; it projected half of the funding set by the current plan, $13 billion––with $5 billion in the first three years––and estimated half the increase in GDP (50 percent rather than 100 percent). Many of these estimates appear to rely on CGE models of the World Bank that have been long-criticized as “cookie-cutter” exercises. To be sure, the assumptions and causational structure are particularly unrealistic in the Palestinian case. The employment figures of the new plan are overly “optimistic” in the 10-year period—more than 1.3 million jobs are projected to be created, compared to 300,000 in the Kerry plan. To put this in perspective, today the current number of jobs (total number of employed persons) in the OPT is 956,000. These employment projections are extremely unrealistic, especially if the plan does not include employment in the Israeli economy.

Fourth, and finally, the projects targeting economic sectors revolve around the same areas as those articulated in the Kerry plan. Natural resources and energy projects are unoriginal and seem to be copied from other sources, and the projects on education and health appear to be generic descriptions that can be found in the annual plans of Palestinian ministries (aside from a 20-word sentence describing the establishment of a new university). Like the Kerry plan, many of the economic projects tackle the symptoms but fail to address the disease. For example, rather than allowing freedom of commercial movement, the new plan proposes to develop “cold-storage facilities and trucks” at checkpoints to reduce spoilage. Similarly, instead of empowering Palestinian industries to compete with Israeli ones, it proposes “joint industrial parks along the border” which have historically utilized Israeli capital and cheap Palestinian labor, ensuring the majority of value added is accrued to the Israeli side. What does appear elevated and distinct from previous plans, however, is a much stronger emphasis on the economic ideology of the plan.

Instead of empowering Palestinian industries to compete with Israeli ones, it proposes “joint industrial parks along the border” which have historically utilized Israeli capital and cheap Palestinian labor, ensuring the majority of value added is accrued to the Israeli side.

The Plan’s Economic Ideology

There is a side of the plan that has not been discussed in the media’s commentary on the Bahrain conference and the Kushner plan: the strong focus on market fundamentalism. The plan demotes the role of the state to a mere facilitator for the private sector; in the same spirit, the workshop in Bahrain invited Palestinian businessmen rather than PA officials. To be clear, all international financial institutions follow a neoclassical market-oriented framework in their recommendations for developing countries; in the case of the OPT, for example, a proposed framework would suggest that the proximity to the Israeli economy would reap substantial economic spillovers, rather than lock it in a cycle of dependency. However, this plan reeks of conservative concepts of supply side economics, blind faith in markets, and “law and economics.”

“Law and economics” is a tradition with origins in the Chicago school of economics and it gained traction with the neoliberal turn. Special interest groups around the world, particularly in the United States, utilize microeconomic theories of “rationality” and welfare economics to marginalize labor and environmental protections and justify legal rulings against them. A recent study captures the dangerous influence of this field on the US judiciary through the courses offered by conservative institutes, including the Manne Economics Institute for Federal Judges. The study uses econometric analysis to show the impact of these courses on decisions to side against labor and environmental agencies in the United States—thus siding with business and large corporations. The tradition extends to the development field through the “law and economics of development” doctrine, which argues that the most appropriate approach to ensure development in “backward” countries is to guarantee the rule of law, with very little significance paid to the societal, class, or political contexts. Needless to say, Palestinians are forgiven for being skeptical about the impact of “laws,” whether they are military laws implemented in the last 52 years or international laws that have never been implemented. The “Peace to Prosperity” plan follows this tradition and includes dedicated sections on property rights and legal and tax frameworks as well as legislation for capital markets and projects for alternative dispute resolution and arbitration. At one point in the narrative document, an excerpt is highlighted in all-caps, reading “CONFIDENCE IN LEGAL MATTERS IS CRITICAL.”

Palestinians are forgiven for being skeptical about the impact of “laws,” whether they are military laws implemented in the last 52 years or international laws that have never been implemented.

Another sign of the fundamentalist market tendencies in the plan is the call for a “pro-growth tax structure.” The reader should not be fooled by the upbeat sounding term. Similar to “trickle-down economics” or “right to work” laws, the term hides the devil in the details. Pro-growth taxation is sponsored and lobbied for by conservative institutions like the Heritage Foundation, the American Legislative Exchange Council, and the American Petroleum Institute, which is the largest US trade association for the oil and natural gas industry. It calls for lower taxation on corporations and the rich, arguing that the “biggest bang for the buck comes from reducing the top marginal tax rates” in an effort to free up “the big money to spark innovation, entrepreneurship, and investment that creates jobs and opportunities.” This is yet another ill-advised approach that removes focus from the poor and the marginalized groups who need urgent support. Moreover, the doctrine “hinges on the notion that people will spend their money more carefully and more productively than the government”—a statement that somehow attributes corruption only to the public sector while it glorifies the profit-motive that has directly and indirectly, intentionally and unintentionally, brought on the world the largest economic crises in history.

The Attendant Sustainability Problem

Beside the central problems of lack of Palestinian buy-in, murky allocation of funds, and questionable economic justifications and ideology, “Peace to Prosperity” has the attendant dilemma of securing sustainability for the Palestinian economy and addressing its dependency.

Indeed, a recent analysis argued that the Palestinian economy has suffered distortions since 1948. The pattern of economic activity witnessed in the OPT today is a direct result of Israeli policies that created dependency on Israel’s labor and goods markets. During the first 25 years of Israel’s occupation of the West bank and Gaza Strip, around half of the Palestinian labor force either worked in Israel and illegal settlements, or for the Israeli economy through Palestinian subcontractors and border estates. Following the creation of the Palestinian Authority in 1993, little changed in terms of this dependency on Israel (except that Israel became much less reliant on the Palestinians’ markets). Rather, the abrupt transfer of responsibilities to the PA led to a new type of dependency on international aid that brought on a wave of neoliberal policies and a credit bubble. The productive sectors dwindled ever since, yet income from work in Israel was accessible, leading to an ever-increasing trade deficit mostly focused on Israeli goods. On average during the 52 years of occupation, 80 percent of imports and 90 percent of exports moved from and to the Israeli economy, respectively.

It seems that everyone in the international community—except the current White House—has figured out that the Israeli occupation is the major constraint on the Palestinian economy. They just refer to it by using euphemisms.

This movement of resources from the periphery to the core, and the opposite movement of goods from the core to the periphery, is a textbook example of colonial and dependency relations. It is extremely relevant when discussing the employment opportunities offered by the new plan and the unemployment rates in the OPT. The graph below shows how after the first intifada, Israel started replacing Palestinian workers with labor from Thailand, the Philippines, and Romania, while the Palestinian economy has not been able to surmount its dependency on the Israeli labor market.

It seems that everyone in the international community—except the current White House—has figured out that the Israeli occupation is the major constraint on the Palestinian economy. They just refer to it by using euphemisms. The World Bank’s nomenclature is “Israeli measures”; the IMF refers to the occupation as “Israeli restrictions”; and the Kerry plan discussed the required political “enablers” to succeed. The “Peace to Prosperity” plan goes one extra step in the hocus-pocus of terminology, stating at one point that “the Palestinian people routinely encounter logistical challenges in the West Bank” without mentioning that those actually are ubiquitous Israeli checkpoints on roads. Referring to the 52-year occupation—one that has been to the detriment of millions of Palestinians and has structurally distorted and destroyed the Palestinian economy—as a “logistical challenge” is, simply put, ridiculous.

Two Final Points

Finally, the reader should take two points away as food for thought. First, the strategy of Jared Kushner to bypass or marginalize Palestinian officials and “speak directly to the Palestinian people” in an effort to gain support for his economic plan, or to put pressure on the Palestinian leadership, has failed miserably. To be clear, Palestinians have major disagreements with their leadership; in the same poll mentioned above, 82 percent of Palestinians in the OPT believed there was corruption in the PA, 60 percent believed one cannot criticize the PA in the West Bank without fear, and 60 percent wanted President Mahmoud Abbas to resign. In fact, words like “leadership” or “representatives” should be taken with a grain of salt, as the last presidential and parliamentary elections were held 14 and 13 years ago, respectively. Rather than Palestinians focusing on the above and trying to explore paths for reinvigorating political participation, the current approach of the White House has actually created sympathy and agreement in the face of an external threat.

The political aspirations of Palestinians should be first and foremost at the epicenter of both internal debate and external negotiations.

Second, and to end on a brighter—yet extremely optimistic—note, it is true that today the economic component is second in importance after the political. The political aspirations of Palestinians should be first and foremost at the epicenter of both internal debate and external negotiations. However, we must keep in mind that the Palestinian Arab population in the area between the Jordan River and the Mediterranean Sea now exceeds that of Israeli Jews. A day will come in the next 10, 20, or 50 years when a form of a one-state solution could be the only option on the table. If and when that day comes, Palestinians should be aware that political justice in the form of “one-person, one-vote” might actually not be sufficient. Sidelining the economic component then actually risks a repeat of the case in South Africa, where political apartheid transformed into economic apartheid because capital was, and still is, in the hands of white South Africans. When that day comes for Palestinians, the economic aspects of class, resource distribution, and the overall economic system should all be at the center of the debate.

Ibrahim Shikaki is Assistant Professor of Economics at Trinity College in Hartford, Connecticut.