Wednesday, October 9, 2013

Fiscal crisis and negotiation chips in the Israeli-Palestinian peace talks

"Only free men can negotiate" -- Nelson Mandela

"The Palestinian leadership under Arafat signed onto the “peace process” at Oslo because it was headed towards oblivion (bankruptcy) after backing the wrong horse in the First Gulf War. In return for being rescued by Washington and Tel Aviv, the Palestinian leadership agreed to act as Israel’s subcontractors in the occupied Palestinian territory. (Former Israeli foreign minister Shlomo Ben-Ami, in Scars of War, Wounds of Peace, is very frank on this point.)" -- Norman Finkelstein

Keeping Palestine at brink of bankruptcy -- part of Israels negotiation strategy?

Financially weak partners are more ready for compromises in negotiations. The Arafat leadership, being at the brink of bankruptcy, was ready for compromises during Oslo, as Finkelstein explains. As leaked cables suggest, Israel had a tactic to keep Gaza at the brink of bankruptcy. The Israeli restrictions to the West Bank have multiple effects, some in the field of security, others in the field of economy, keeping the Palestinian economy small and dependent on the Israeli one, which in turn keeps the potential for tax revenues collected by PA small, so the PA is having a hard time increasing the share of budget under its own control, which in turn make punitive customs tax withholding by Israel more painful for PA.

How deep does the PA's financial crisis run?

To get a rough idea, this is how deep the PA's financial crisis runs -- expenditures are approximately 70%, or 1.4 billion $ above revenues:

If you deduct foreign budget support, and deduct the taxes collected by Israel (mainly custom fees), the Palestinian Authority has control over only about 40% of the money it needs to cover all its expenditures.

Without foreign budget support, the current Palestinian leadership would likely collapse. We witnessed a similar scenario after 2005 elections when the international community withdrew its budget support, the elected government had to stop paying public servant's salaries, the parliament got dissolved, and the leadership was replaced by the current one.

Becoming financially independent

It is the PA's priority to become financially independent by bringing a larger part of the annual governmental revenues under its own control. While that portion was only 40% in 2012, the 2013 budget looks much better, especially the customs losses associated to indirect, smuggled imports through Israel are being reduced. But still the PA is far from standing on its own feet financially.

A strong private sector would be key to increasing independent tax revenues to the PA, but it seems like the framework conditions imposed by Israel will not allow for much growth. Palestinian GDP could grow by 35%, if Israeli restrictions would be lifted for C-Areas of the Palestinian West Bank, according to a recent World Bank report. An earlier report by ARIJ ("the economic cost of the occupation") estimated the Palestinian GDP to grow by 85% if all restrictions of the occupation, including the blockade of Gaza would be lifted.

The other option for the Palestinian leadership to become financially independent would be fiscal consolidation. About half of the governmental expenditures goes to the 160.000 governmental employees. In other economies, especially those without oil, it is deemed unsustainable and not really effective to have one third of the workforce employed by the government.

What are the hard negotiating chips?

Under this link, you find some speculation of how the peace talks may develop.

However, not everybody is so optimistic. Some doubt that the Nethanyahu government would have any benefit from entering into serious negotiations. Others suspect certain Palestinian stakeholders who benefit from the status quo to lobby against a final status agreement.
If the enthusiasm about the Kerry initiative is to crumble at some point, what hard playing cards do the involved parties hold in their hands?

Israel has not much to win from negotiations. For the constituency of the Israeli government, the status quo seems to be the best it could wish for (apart from those that dream of getting rid of Palestinians from the occupied territory altogether). However, if no substantial agreement is reached, Israel will continue its path of being increasingly seen as an apartheid government, or a pariah state. Israel will try to sell the outcome of negotiations, however small, as a great success towards peace.

In case of failed negotiations, the PA will probably sign the Rome treaty to get access to the ICC in The Hague -- and this will initiate a flood of cases filed against current and past Israeli government officials, causing major discomfort and fast decay of the moral standing of Israel in the world.

As revenge, the Israeli government could stop transmitting customs revenues, as it did before many times, and ask befriended governments to withdraw budget support, taking the PA to the brink of bankruptcy.  From past experiences, these financial punishments never lasted very long. It appears that Washington and Knesset don't want to let the PA to collapse. Just imagine how messy and expensive it would get for Israel if they would need to take care for the entire civil administration of Millions of Palestinians.

It is a safe guess to assume that the US government, regardless of its financial cliffhanging exercise at home, will offer a sweet budget support deal to the PA government in exchange for not involving ICC. And maybe the PA will be tempted to accept that deal.

But there might be people who would find it morally acceptable to first accept the budget support, and then seek justice through ICC regardless.

And to be honest, the USA doesn't have much leverage to prevent such steps. Another temporary punitive freeze in budget support maybe, so what? USA will never take it as far as to let the PA administration collapse.