Caught up in the euphoria of the Oslo peace accords, the 1993 interim agreement that gave Palestinians a measure of self-rule, oil billionaire Munib Masri joined a dozen other Palestinian expatriates in seeking to build up a national economy in the West Bank and Gaza Strip. The group formed a holding company in 1994 called Palestine Development and Investment, or Padico, which helped establish the aspiring state’s first stock exchange and privately owned phone company and invested in hotels, industrial estates and other projects.
More than a decade later, Padico and its holdings stand as the biggest private employers in the West Bank and Gaza Strip. That status is less a measure of success, however, than an achievement by default. Few other private investors have been willing to risk their money in the territories. Many Palestinian businessmen who arrived after Oslo have long since returned to their homes in the U.S., Europe, the Gulf states and elsewhere, disillusioned by the collapse of the peace process and the eruption of the second intifada, or uprising aimed at ending Israel’s military occupation, in September 2000. Even Padico wasn’t left unscathed. Its $60 million, five-star InterContinental Hotel in the biblical West Bank city of Bethlehem, which opened on the eve of the intifada, stands open but virtually empty after five loss-making years. The company’s Gaza Industrial Estate is equally unprofitable: Half its 40 factories have shut down in the past five years.
Notwithstanding those setbacks, the salt-and-pepper-haired Masri -- a confidant of late Palestinian president Yasser Arafat -- isn’t giving up. In the wake of Israel’s September withdrawal from the Gaza Strip after 38 years of military rule, he is working with renewed determination to convince diaspora Palestinians, Arab businessmen and others to invest in the impoverished territories.
“There should be ten or 15 times more rich Palestinians coming,” he says in an interview with Institutional Investor. His blue eyes glint with urgency as he talks in his neoclassical mansion overlooking the West Bank city of Nablus. “The country needs their expertise, their brains and their money.”
The prospects for peace -- and investment -- look more uncertain than ever, however. The landslide victory by the Islamic militant group Hamas in January’s parliamentary elections dealt a major blow to hopes for a revival of the Israeli-Palestinian peace process. Israel’s acting prime minister, Ehud Olmert, promptly ruled out any negotiations with a Palestinian government that included Hamas because of the group’s support for terrorism and its charter calling for the destruction of Israel.
The election result also could lead to cutbacks in the foreign aid that the Palestinian Authority depends upon because the U.S. and the European Union, among the leading donors, regard Hamas as a terrorist organization. U.S. President George W. Bush, joined by leaders of Germany, Italy and Spain, demanded that Hamas renounce violence and recognize Israel’s right to exist.
Hamas played down its stance toward Israel and campaigned against the corruption that prevailed under the Fatah party of President Mahmoud Abbas, which had dominated Palestinian politics for 40 years. The promise of change helped Hamas win 74 seats in the 132-seat Parliament, compared with 45 for Fatah. Abbas says he remains committed to resuming talks with Israel, but it is unclear how he can do so with a Hamas-led government.
“There are many anxious businesspeople out there not feeling comfortable that there is a large unknown in our government,” says Sam Bahour, an Ohio-born Palestinian-American who owns a technology consulting firm, Applied Information Management, on the West Bank. Although he did not support Hamas, Bahour says his biggest fear is the possibility that the international community could refuse to accept the outcome -- and withhold the aid that sustains the Palestinian Authority.
“We’re a donor-driven community, and without foreign direct investment we won’t have the ability to grow,” he says. “If there is no international acceptance, the PA will collapse.”
The Palestinian results could also have a polarizing effect on Israel’s March 28 election. Prime Minister Ariel Sharon called the election to seek a fresh mandate after the Gaza withdrawal split the then-ruling Likud party and prompted him to form a new centrist party, Kadima. But a stroke in early January left Sharon in a coma and clouded the prospects of Kadima, now led by Olmert. Sharon’s absence, coupled with the Hamas victory, could make security the dominant election issue and boost support for Benjamin Netanyahu, the right-wing Likud leader and former prime minister who opposes the peace process.
The paralysis of that process is likely to prolong economic hardship for the Palestinians. Fully 43 percent of the population lives on less than $2.20 a day; the unemployment rate has nearly doubled over the past five years, to 22 percent; and the public sector is too bloated to absorb the 40,000 annual newcomers to the job market.
Private investment from abroad “is crucial going forward,” says George Abed, governor of the Palestine Monetary Authority, the precursor to a future central bank. “It’s essential for recovering the growth rates of the 1990s, lifting people out of poverty and creating jobs. Diaspora Palestinians could bring management skills, take on large projects like factories or assembly plants and provide links to the rest of the world for export markets, technology and other advantages.”
Foreign investors were a lucrative source of capital before the peace process collapsed. They put some $500 million to $600 million a year into industry, housing, hotels and other business ventures between 1994 and 2000, according to Abed. That’s roughly equivalent to the $500 million a year in budgetary aid that Western governments and international agencies provided to the Palestinian Authority during that period. Since violence erupted, however, private investment from abroad had declined to about $200 million a year, Abed estimates, while foreign aid has nearly doubled to about $900 million.
The potential to revive those investment flows is enormous. There are more than 5 million diaspora Palestinians, with total assets ranging from $120 billion to $160 billion, including as much as $50 billion in financial assets, according to Abed.
Progress is needed on several fronts before investors will return, though. James Wolfensohn, 72, the former World Bank president who serves as a special international envoy for Israel’s withdrawal from Gaza, criticized both Israel and the Palestinian Authority in an October letter to the Quartet -- the U.S., the European Union, Russia and the United Nations -- that is assisting the peace process. Wolfensohn blamed Israel and its “important security concerns” for delaying critical agreements about Gaza’s border crossings. The Palestinian Authority, he added, was “showing disturbing signs of internal fragmentation,” marked by tension between Fatah and Hamas and lawlessness in Gaza following the Israeli pullout. The violence and turmoil, Wolfensohn argued, were undermining the stability needed to bring private investors to the region.
Investors say their main concern centers around Israel’s restrictions on movement, known as closure. Within the West Bank, Israeli forces operate a labyrinth of more than 400 fixed and mobile checkpoints, roadblocks, earthen mounds, trenches and gates. The country is also building a 416-mile-long barrier to separate itself from the West Bank and keep suicide bombers out. The government claims the restrictions are necessary to provide security for Israelis living in Israel and in settlements in the West Bank. Indeed, suicide bombing attacks have declined sharply. In preventing the free flow of goods and people, however, the restrictions have deepened the Palestinian economic crisis. They are responsible for roughly half of the sharp decline of economic output in the territories between 2000 and 2002, the World Bank estimates. The barrier alone may be depressing output by 5 percent a year by making it difficult or impossible for thousands of Palestinians to get to their farms, jobs or essential services, the Bank contends.
“The main difficulty is the Israeli involvement in the environment,” says Bahour, who moved to Al-Bireh, near Ramallah, after the Oslo accords. He has been living on a tourist visa for 11 years and needs to leave every three months to renew it, usually by traveling to Amman, Jordan. “A lot of people say, ‘Why are you still here?’” he says. “Most Palestinian-Americans have already left. When I came back I thought Oslo would create enough opportunities. But it really didn’t.”
To foster private investment, more public aid is needed to rehabilitate Palestinian infrastructure, Wolfensohn says in an interview. He doesn’t expect an influx of investment any time soon but adds, “I would guess that during the course of the next year you will have industrial zones, parks and other things put together that will be a mix of both public and private money.”
The Group of Eight industrial nations pledged in July to provide up to $3 billion annually over the next three years in public and private funds, primarily for infrastructure projects in Gaza. Wolfensohn has been working with the Palestinian Authority to agree on a new three-year development plan to present to donors at a G-8 conference early this year. The authority estimates the total damage to roads, the water supply, electricity networks and other facilities as a result of Israeli military incursions during the intifada at about $910 million. That equals nearly 60 percent of total investment in Palestinian infrastructure in the past decade, according to authority data.
Increased assistance, however badly needed, won’t guarantee an economic revival, though. Palestinians already receive the most donor aid per capita -- $258 in 2003 -- of any country since World War II, according to the World Bank. That compares with a global official development aid average of $13, according to World Bank data. And the G-8 aid pledge isn’t unconditional. “If you have a worsening security situation again, you will not see that money coming,” Nigel Roberts, who served as the World Bank’s director in the West Bank and Gaza until this year, tells II.
The outbreak of violence in 2000 chased away most private investment and sent economic output plummeting and poverty soaring. Gross domestic product amounted to just $4.1 billion in 2004, down 10 percent from 1999. Per capita income stood at $1,100, far below Israel’s $17,781 but closer to Egypt’s $1,111 and Jordan’s $2,043, according to International Monetary Fund data. To put the crisis in context, real per capita GDP plunged by nearly 40 percent between September 2000 and late 2002 in the Palestinian territories, a bigger decline in living standards than those suffered in the U.S. during the Great Depression and in Argentina during its steep recession from 1998 to 2002, according to the World Bank.
With virtually no private sector jobs being created, the Palestinian Authority stepped in to fill the gap, hiring more people even as its revenues collapsed. The authority increased its staff by about 30 percent between 1999 and 2004, to some 131,000, while simultaneously boosting average salaries by 7 percent a year, faster than inflation and private wages. Revenues plunged by more than two thirds between 2000 and 2002 as Israel responded to the intifada by withholding transfers of indirect taxes such as customs duties, which it collects on behalf of the Palestinian Authority. The impact on the Palestinian budget was disastrous: The authority, which had run a surplus of 1 percent of GDP in 1999, posted a deficit of 14 percent of GDP in 2004, or $574 million. Public sector wages alone ate up 90 percent of revenues that year.
The authority is heavily dependent on foreign aid to cover its budget deficit. Direct external budget assistance amounted to $362 million in 2005, or 31 percent of the budget. Unless the authority takes tough measures to cut its wage bill, the deficit will likely exceed $900 million this year, the World Bank said in December. The Bank has warned repeatedly that the authority is approaching “functional bankruptcy” and may find itself unable to meet its payroll and provide basic services.
“Donors have been encouraging us to reduce dependence on foreign aid for budget support,” acknowledges Minister of Planning Ghassan Khatib in an interview with II. “But in fact, we think that as long as there’s no economic growth, as long as the private sector is not able to lead the task of providing new jobs for the unemployed, there will be continuing public pressure on the PA to meet growing demands for employment within the public sector.”
Efforts to trim the authority’s payroll have failed so far. In 2004 the PA agreed with the IMF and the World Bank to reduce salaries to 80 percent of revenues by the end of 2006, a commitment that was a cornerstone of the G-8 aid package. The authority violated the agreement last summer, however, by granting wage hikes worth an estimated $225 million a year after a series of strikes and protests by civil servants. Since then, the PA has worked with the IMF and the World Bank on a fresh package of job cuts designed to reduce its payroll to 67 percent of revenues by 2008, but donors are skeptical. At a meeting in London in December, donor countries refused to release $60 million in assistance because of budget concerns, according to the World Bank’s Roberts.
Abbas had been under pressure to produce economic gains ahead of January’s elections to the Palestinian Legislative Council. Known for delegating responsibilities, Abbas had relied on his top economic policymakers -- National Economy Minister Mazen Sinokrot, Monetary Authority governor Abed and Salam Fayyad, who quit his job as Finance minister in November to run for Parliament after expressing frustration with the PA’s inability to fix its budget and revive the economy.
Fayyad, who won a seat as a member of the Third Way party, had been considered as a potential prime minister or finance minister prior to the election, but it wasn’t clear if he would play a role in a Hamas-led government, which could take weeks to form. A 14-year veteran of the IMF who from 1996 to 2001 served as its first representative to the Palestinian Authority, Fayyad won praise from former U.S. secretary of State Colin Powell and U.K. Foreign Secretary Jack Straw for financial reforms after being tapped by Arafat in June 2002. The 53-year-old University of Texastrained economist issued the first detailed, public Palestinian budget in 2003, established a single Treasury account to consolidate all PA revenues, switched to paying security personnel through direct bank deposits rather than in cash, created a procurement department to control all purchases made by ministries and agencies and consolidated all of the authority’s commercial and investment activities in the Palestine Investment Fund. But Fayyad faced major political roadblocks: The cabinet overrode him to raise civil servants’ salaries last year.
Like Fayyad, the 67-year-old Abed earned international credibility at the IMF before being appointed to the Monetary Authority in April 2005. The economist, who graduated from the University of California, Berkeley, had not lived in the Palestinian territories since the 1950s but returned with optimism. “I saw the promise of a calm period in which we could build institutions,” he says.
Abed’s task is to transform the Monetary Authority from a fledgling institution whose role is limited to licensing and supervising banks into an independent central bank capable of managing a Palestinian currency. That goal -- symbolically important for a people that currently use the Israeli shekel, the Jordanian dinar and the dollar -- remains well in the future, Abed acknowledges. The Palestinian Authority needs to establish a record of laws, institutions and fiscal responsibility before it can be a credible manager of public funds, he says. Until that happens, he adds, “how much trust do you think the public and the markets would put into a currency?”
Sinokrot, who stepped down as Economy minister after the election, spent most of his career running a family-owned sweets maker, Sinokrot Global Group. As minister, he expanded tax incentives to encourage private investment, streamlined procedures for registering new companies and trademarks and established the Capital Market Authority to oversee financial markets.
The Palestine Securities Exchange, established in the West Bank city of Nablus in 1995, had 27 listed companies worth a total of $4.5 billion at the end of 2005. Trading volume hit $2.1 billion last year and the exchange’s Al-Quds index quadrupled as terrorism subsided. By contrast, Tel Aviv’s TA-100 index rose a more modest 21 percent.
A decline in intifada violence, the death of Yasser Arafat and Israel’s withdrawal from Gaza raised some hopes of a revival of the peace process and boosted the economy. Output was expected to grow by as much as 9 percent in 2005, the World Bank says, reducing unemployment and poverty. The number of Palestinians working in Israel or at Israeli settlements hit 64,000 in the first nine months of 2005, up 28 percent from a year earlier but barely half the pre-intifada figure. Bank lending to the private sector jumped by 30 percent.
Hopeful signs notwithstanding, Israeli restrictions on movement remain a huge impediment to recovery. Suzanna Uri, an owner of the Ramallah franchise of Florida-based Checkers Drive-In Restaurants, reopened the fast-food burger place in 2004 for the first time since it was demolished during the Israeli Army’s incursion into the city in 2002. But Israel’s closure policy has deprived the once-thriving restaurant of customers from nearby Jerusalem, limiting it to clientele from the smaller Ramallah area. Uri and her partners opened franchises in the West Bank towns of Nablus and Bethlehem in 2001, but those quickly failed as tighter movement restrictions during the intifada kept customers away.
Zahi Khouri, a prominent investor who helped found Padico and established Coca-Cola’s franchise in the Palestinian territories, says the bottler’s transportation costs have doubled since 2000 because of Israeli restrictions. Containers shipped from abroad are detained for three or four days at the southern Israeli port of Ashdod. Depending on their destinations, truck drivers must make long detours to avoid Israeli closures; they face delays at multiple Israeli security checkpoints; and they are often forced to use a “back-to-back” system to cross the Israeli border into or out of Gaza and the West Bank, whereby freight must be off-loaded from one truck, carried across the border and then loaded onto another truck. The cost of those restrictions cut profits by at least one third during the intifada, Khouri says. “Unless these borders are totally open, Gaza will not see any investments,” he asserts.
Israel’s border restrictions have taken a direct toll on Palestinian employment and have frustrated efforts to develop exports. Before the second intifada, about 146,000 Palestinians -- one in five of those employed -- worked in Israel, and they earned twice as much on average as workers in the West Bank and Gaza, according to World Bank data. The Israeli government wants to phase out Palestinian work permits by 2008 but may reconsider that decision, says former prime minister Shimon Peres, who is involved in talks with the Palestinians on economic issues. “If by 2008 the security situation will improve, it’ll be a whole new ball game,” he tells II. “We could then negotiate new numbers.”
Palestinian exports of stone and agricultural products fell 27 percent between 1999 and 2002. Considering that the territories send 90 percent of their exports to Israel, which has a quasicustoms union with the PA, the impact of security restrictions has been devastating. “There’s supposed to be a free flow of goods between the two areas, but that’s not the case,” says Nabila Assaf, acting chief executive officer of the Palestine Trade Center. “Israel freely flows goods into our area, but we can’t send our goods freely into Israel under the pretext of security. We’re a subeconomy of the Israeli economy.”
Some Israeli peace activists say their government should do more to ease impediments to private investment in the Palestinian territories. “Israel needs to understand that it can’t work with 100 percent security anywhere, because no one will guarantee that security,” says Ron Pundak, who played a key role in starting the Oslo peace process and now heads the Tel Avivbased Peres Center for Peace. “There’s no logic that Israel will work only one or two shifts and not three at cargo crossings to increase the goods going in and out. There’s no logic in not making the crossings civilian-run. There’s no logic in hindering trade as a collective punishment.”
The Gaza Strip, a 28-mile-long coastal patch that’s roughly twice the size of Washington, D.C., is home to the greatest Palestinian deprivation. With some 1.4 million inhabitants on just 360 square kilometers and a jobless rate of more than 50 percent, Gaza has a per capita GDP of just $600, the fourth lowest in the world after Sierra Leone, Malawi and East Timor, according to the Central Intelligence Agency’s World Factbook.
In the wake of Israel’s September withdrawal from Gaza, international donors led by the European Union, Japan, the United Arab Emirates and the U.S. have pledged at least $750 million in aid to help rebuild the strip’s infrastructure and economy. The funds will be used to rehabilitate the main trunk road; build new housing, schools and health clinics; reconstruct the territory’s sewage treatment plant and electricity grid; and strengthen key PA institutions such as the customs service. Envoy Wolfensohn has also urged donors to finance industrial parks, tourism projects and the expansion of agricultural and technology exports.
Despite optimism generated by Israel’s withdrawal from Gaza, continued tension between Israelis and the Palestinians has dampened hopes for a revival of the Palestinian economy. Armed Palestinian groups have launched rockets into Israel from Gaza, prompting Israel to respond with air strikes. Citing the security situation, Israel has postponed the start of passenger bus convoys between Gaza and the West Bank, which had been scheduled for mid-December under a deal brokered by U.S. Secretary of State Condoleezza Rice. Israel has agreed to permit agricultural exports from Gaza, a boost for Palestinians who have inherited greenhouses in the now-abandoned Jewish settlements. Wolfensohn has estimated that such exports could generate 3,000 jobs and more than $50 million in revenue a year.
Israelis and Palestinians continue to disagree about building a permanent link between Gaza and the West Bank, which are separated by as little as 40 miles. The Israeli government supports a railway as the cheapest and fastest solution, whereas Palestinian officials want to build a sunken road. Such a road could also carry gas, water and electricity lines and be used for a future railway, Planning Minister Khatib tells II.
Wolfensohn has criticized both sides for failing to reach quick agreements on measures to boost the Gaza economy. “They are finding that old habits die hard,” he told the Quartet in his October letter.
Wolfensohn also is urging the speedy reconstruction of Gaza’s airport and the building of a new seaport. Gaza’s one-runway airport, built with international financing in 1998, was destroyed by the Israeli army in 2001. According to Peres, Israel has agreed to the seaport but wants to see improved security before agreeing to the airport’s reconstruction. Still, Peres says Israel needs to help the Palestinian economy recover.
“We cannot keep Gaza poor and hungry,” he tells II. “Gaza has very little commerce with Egypt or other Arab countries. It’s very much dependent upon relations with the West Bank and Israel, and we have to keep it open to enable them to have a viable economy.”
Several months after the Israeli withdrawal, however, the disappointment in Gaza is palpable. Paltel, the Padico-owned phone company that controls more than half of the Palestinian market, had hoped to wrest 100,000 Gaza subscribers from Israeli cell phone operators following the pullout. But the company can’t install the Ericsson equipment it needs to expand its network: That has been held up awaiting customs checks at Israel’s Ben Gurion Airport for 16 months, and Paltel has had to pay 1 million shekels ($217,000) a month in storage fees.
Sami Abdel Shafi, a former Silicon Valley venture capitalist who moved back to his native Gaza in 2000 to open a management consulting firm, Emerge Consulting Group, says the recent cancellation of three meetings with potential American clients because of movement restrictions will have caused his revenues to fall 40 percent short of expectations in 2005.
“Many Palestinians from the diaspora have invested and lost money,” says Talat Othman, a Chicago-based investment banker and Palestinian-born Muslim. “They had a stop-and-go situation where you had hope and then no hope after Oslo. They’ll now be somewhat cautious to see that investments will be viable and that there will be open borders.” Othman helped form the Chicago Ten, a group of U.S.-based Muslim, Jewish and Christian businessmen that aims to create a company in Gaza to facilitate trade with the U.S. and Europe.
Notwithstanding the obstacles, Padico chairman Masri vows to continue what he calls “my crusade” to build up the future Palestine. His patriotic pride is embodied in his massive villa, which he calls House of Palestine, perched on top of Mount Gerizim outside Nablus. The villa, overlooking a 4,000-year-old city where many of the inhabitants live below the poverty line, was built in three years during the intifada by 500 men who used donkey carts to carry stones up the mountainside. In the center of the dome-shaped front hall is a statue of Hercules, which Masri tells guests symbolizes Palestinians’ endurance.
Masri, who is ranked by Arabian Business magazine as the world’s 25th-richest Arab, with an estimated net worth of $1.62 billion, says patriotism -- not profit -- should lure diaspora Palestinians to the national cause. The trained geologist, who says he has invested more than $20 million of his own money in the Palestinian economy, is a former executive of Phillips Petroleum Co. -- now part of Houston-based ConocoPhillips -- and the founder of Edgo, a billion-dollar family-owned oil and gas contracting company based in Amman, Jordan.
Masri plans to launch a major fundraising offensive at an investment conference in Bethlehem and Gaza this spring. The first question he’s asked by potential participants, he says, is whether they will be able to get safe passage to travel to the conference. Masri understands their fears. Seeking to get to an event in Jordan on a recent sunny afternoon, he waited for several long minutes in the backseat of his van at a checkpoint near his villa, and called out a slightly impatient “Shalom” to the Israeli soldier outside. The soldier seemed to ignore the greeting as he looked over documents from Masri’s driver.
Used to the ordeal, Masri shrugs. “Sometimes I have a problem passing. Today, maybe,” he says, then adds of the soldiers, “It’s a hard job. They probably don’t even like being here. I’m sure they wonder sometimes what the hell I’m doing here.”
