Mitt Romney’s comments aside, the Palestinian economy is tottering

Mitt Romney may have caused a storm of criticism by asserting that “culture makes all the difference” between the success of the Israeli economy and the Palestinians’ economic struggles.

But the near future of the Palestinian economy is even far less rosy than he suggested.

During a speech Sunday in Jerusalem at a closed fundraiser, Romney reportedly credited Israel’s GDP being much higher than that of the Palestinians to “the power of at least culture and a few other things,” including a strong pro-business climate, the travails of overcoming Jewish history’s blows and the “hand of providence.”

The bleak forecast goes beyond Romney’s overestimation of Palestinian per capita gross domestic product of $10,000; it’s actually hovering just above $1,500, according to the Palestinian Central Bureau of Statistics. Not only that but the most recent CIA Factbook estimated Palestinian unemployment at 23.5 percent. By comparison, Israel has a per capita GDP of $31,400 with unemployment at 5.6 percent, according to the Factbook.

Moreover, a Palestinian government financial crisis and political instability likely means that the Palestinian economy “is slowing down after four years of solid growth,” said Samir Abdullah, the director general of the Palestinian Economic Policy Research Institute.

Despite being so low today, Palestinian GDP grew by nearly 10 percent in 2011, according to the Palestinian Statistics Bureau. Overall it leapt forward by more than 7 percent between 2007 and 2011, according to the World Bank. But, Abdullah cautions, two fundamental challenges are bringing those numbers down now: the Palestinian Authority’s ongoing financial crisis and political instability resulting from the Israeli-Palestinian conflict.

Last month the Palestinian Authority faced a budget shortfall that would have rendered it unable to pay employees’ salaries. The PA closed the gap with a $100 million loan from Saudi Arabia, but heavy reliance on foreign donations and low tax returns mean that the PA’s problems remain far from solved.

“There is a lot of aid that should be paid that is not paid,” Abdullah said. He also claimed that the PA owes businesses in the private sector $400 million to $600 million for services, which is taking an additional toll on Palestinian development.

Even after the Saudi loan, the PA received harsh criticism from the World Bank, which noted in a July 25 report that “While the Palestinian Authority has had considerable success in building the institutions of a future state, it has made less progress in developing a sustainable economic base.”

John Nasir, the report’s lead author, said in an accompanying statement that the Palestinian economy “is currently not strong enough to support such a state.”

The report represented a stark departure from one issued last year by the bank saying that the Palestinian Authority was “well positioned for the establishment of a state at any point in the near future.”

Blame for the downturn, according to the newer report, lies with Israel’s occupation of the West Bank, which hinders Palestinian growth with “constraints on movement of people and access to resources.” And, the report continued, the public sector takes up too large a share of Palestinian GDP—27 percent in 2010—as opposed to agriculture or industry.

Abdullah says the PA remains hamstrung in part because Israel has periodically withheld large portions of taxes it collects from Gaza, which is controlled by Hamas, a terrorist organization that aims to destroy Israel. He adds that Israeli settlement expansion “makes the whole situation tense and dangerous.”

Both the World Bank and Abdullah say that Palestinian political and economic “stagnation” have the same cure: an Israeli-Palestinian peace treaty.

“The private sector is in bad shape as a result of political instability coming from the end of the peace process,” Abdullah said. “The political atmosphere remains unpredictable. The private sector is hesitant to invest.”

But there may be signs of hope. Israel and the PA signed an agreement on Tuesday that aims to reduce Palestinian tax evasion and allows the Palestinians to collect some taxes directly. Previously, Israel collected Palestinian taxes and transferred them to the PA.

And while on a smaller scale than Israel, Palestinians have a small, burgeoning high-tech sector. In fact, it has enjoyed a 64 percent increase in foreign business since 2009, according to the Guardian. The industry, the newspaper reported, has more than quintupled as a share of Palestinian GDP from 2008 to 2010, from less than 1 percent to 5 percent.

“This is definitely a very positive element,” Abdullah said. “It will use our human capital, and there will be hope for the future Palestinian economy, which will very much depend on human capital.”