For many months, the streets of downtown Ramallah, seat of the Palestinian Authority (PA), have literally been heaps of earth. Workers have labored intensively to replace water and sewage pipes, repave roads, lay beautiful carved stones at roadsides and install thick chains along the edges of sidewalks in order to better separate pedestrian and automotive traffic. Shopkeepers have been told to reduce the size of their storefront signs; specially designed electricity poles jut skyward. Not every town resident is impressed. As they navigate the mounds of dirt, cynics joke: “The PA is covering the road to self-determination in asphalt.” “We have the sewers; all that’s left is the sovereignty.” “The streets of Ramallah are paved with white stones — who needs Jerusalem?”
Behind the ironic jests of urban intellectuals, and the despair of Palestinians who watch the daily expansion of Israeli settlements in the West Bank, lies a real dilemma for the PA. Some improvement of infrastructure is necessary to facilitate economic growth and ease living conditions for West Bankers, but the undertaking of such projects can also be taken as tacit PA recognition of Israel’s “facts on the ground.”
Take, for example, the road between Ramallah and Bethlehem. The direct route between these two important West Bank cities goes through Jerusalem and is just over 18 miles long. But Jerusalem is a forbidden city for West Bank Palestinians, who must take an alternative path, a narrow road winding for 34 miles over a treacherous mountain pass. Palestinians call it Wadi al-Nar (Hell Valley). Improving the road would make it safer, bringing obvious economic benefits, but could also be taken to imply that the PA accepts Israel’s decree that Jerusalem is a no-go zone for West Bankers. Given that the Palestinian national movement envisions East Jerusalem as the capital of a future Palestinian state, the question is sensitive indeed. Should the PA widen the road or abstain? Should the PA renovate the heart of Ramallah, knowing that it lacks true sovereignty there and cannot prevent Israeli army jeeps (or tanks) from driving downtown and back out at will?
A New Paradigm
Mahmoud ‘Abbas, the PA’s nominal president, and Salam Fayyad, its nominal premier and finance minister, have decided to rebuild the dangerous Ramallah-Bethlehem road and spruce up the city center. (‘Abbas’ term as president expired in 2009, but has since been arbitrarily extended. Fayyad heads the PA’s appointed administrative apparatus in the West Bank; the premier and finance minister of the elected Hamas government sit besieged in Gaza.) They are undeterred by critics who argue that the PA roads are “cementing the Israeli occupation” and are complementary to the Israeli-built network of bypass roads linking the West Bank settlements to each other and to Israel proper.  The choice to upgrade the infrastructure symbolizes the entirety of the new approach adopted by ‘Abbas, and particularly Fayyad. In 2009, the pundit Thomas Friedman called it “Fayyadism,” “the most exciting new idea in Arab governance ever.” 
What is this “Fayyadism”? At one level it is personal. It refers to merits rarely attributed to a Palestinian (or any Arab) politician: integrity, honesty and competence. Salam Fayyad, a former International Monetary Fund economist, is lauded for his understated personal style, a quiet demeanor that Friedman hastens to compare favorably to that of Yasser Arafat. As political theory and practice, however, Fayyadism is a far more controversial. The political scientist Nathan Brown sums up many of the objections in the title of his essay on Palestinian politics: “Fayyad Is Not the Problem, but Fayyadism Is Not the Solution to Palestine’s Political Crisis.” 
Fayyad’s political vision, underwritten by ‘Abbas, is to reverse the time-honored sequence of priorities for the Palestinian national movement. Previously, the Palestinians have demanded that Israel and the international community recognize and protect their rights, whether the right of return for people made refugees in 1948 or the collective right to self-determination, before getting involved in the nitty-gritty of governance. In the eyes of ‘Abbas and Fayyad, this strategy has not only failed to secure the Palestinians’ basic national rights, but has also brought disaster to the Palestinian cause. As the weaker party by far, the Palestinians cannot beat Israel on either the physical or diplomatic battlefields, so they should stop trying. As Fayyad’s sympathizers are fond of saying, “If you want to defeat Mike Tyson, you don’t invite him to the boxing ring but to the chessboard.”
The new strategy has several elements, including the creation of state institutions before the attainment of sovereignty. The idea is that having properly functioning institutions is a precondition for, rather than a consequence of, political independence. National rights can be secured by a proven record of discipline in building and maintaining these institutions and by honoring signed agreements. Rather than waiting for peace to bring the long-awaited economic dividends, relative prosperity and the rule of law will bring peace.
The most controversial element of the new paradigm is that it assumes the abandonment of all forms of armed struggle as a means of pressuring Israel to accept Palestinian rights. President ‘Abbas tirelessly assures all who want to hear it, and even those who do not, that a “third armed intifada” is out of the question. His approach posits that, if the PA builds institutions, revives the economy and adheres to contractual agreements in letter and spirit (even while the other side does not), international and Arab pressure will force Israel to recognize Palestinian rights. These rights, as ‘Abbas understands them, are clearly stated in the Arab Peace Initiative adopted by the Arab League in 2002: The Palestinian side will end the struggle in return for an independent, economically viable and sovereign Palestinian state on the basis of the pre-1967 borders, with East Jerusalem as its capital, and a “just settlement” of the refugee problem. The PA has gone much further, making clear that it is ready to accept land swaps, so that West Bank settlement blocs can be annexed to Israel. Among still other concessions, ‘Abbas and his team have indicated they will also agree to a purely symbolic return of refugees to Israel proper and borders guarded by international forces.
And what about Hamas, the Islamist party that since mid-2007 has been ruling the besieged Gaza Strip? Hamas has not renounced “armed struggle” as a means of securing Palestinian rights and has not recognized Israel in the unambiguous language the US and its allies demand. But the devotees of Fayyadism are not worried: When their new strategy ushers in economic wellbeing and a resolution to the conflict, Gaza will fall by itself, like an apple from the tree, into their hands.
It has been clear from the beginning, however, that deploying the new strategy — and, eventually, checkmating Israel on the chessboard — would require Israel’s consent. Israel would have to step back from forward deployments to allow PA security forces to rein in the lawlessness that prevailed after the second intifada in West Bank cities. It would have to limit, if not totally stop, its army’s frequent incursions into PA-administered areas in order that the PA might enjoy some credibility and popular respect. Finally, Israel would have to ease its restrictions on the movement of people and goods and guarantee the flow of clearance money (the taxes that Israel collects on behalf of the PA and stopped transferring in full to PA coffers at the beginning of 2006). The success of the new strategy also required an understanding with the international community to secure the continuous flow of aid and to train the PA’s security personnel, both to enforce law and order and to put an effective end to militant operations against Israel and Israeli settlers.
Most of these preconditions have been, more or less, achieved. The lawlessness in West Bank cities began to subside in 2005, largely because activists of the intifada were put on the PA’s payroll. To stop Israel’s military interventions, the PA maintained close security cooperation with the occupying power. This level of cooperation has subjected the PA to harsh criticism, particularly because it has not been totally successful in stopping the Israeli army’s incursions, the latest of which was a large-scale sally in the middle of the month of Ramadan.
Fayyad and ‘Abbas have attempted since 2007 to generate momentum in the West Bank for the establishment of the state of Palestine, speaking in terms of anticipation and preparation. Over and over, while cutting ribbons on projects large and small in almost every village in the West Bank, Fayyad has repeated the message: “We ought to be ready, and we will no longer accept open-ended negotiation, with respect to either time or ultimate goal.” He has tried to mobilize Palestinians behind his vision for the country and, at the same time, worked to build up his own constituency after the dismal finish of his Third Way party in the 2006 legislative elections.
The mobilization has taken an official textual form as well. In August 2009, Ramallah’s Interim Thirteenth Government announced its program under the telling title: “Ending the Occupation, Establishing the State.” The program specified the steps that each ministry and PA agency would take to ready itself for the establishment of the state of Palestine by 2011. In mid-April, the same government published the sixth National Development Plan (2011-2013) under the no less revealing title: “Establishing the State, Building Our Future.”
What is the outcome of all this activity? The PA can brag about a number of achievements. The gross domestic product has seen remarkable growth, particularly in the West Bank. Real GDP growth in the Palestinian territories was no less than 9.3 percent in 2010, at a time when the average rate in the Middle East and North Africa was less than 4 percent. In contrast to previous years, the PA was able to pay the salaries of its 146,000 employees in the West Bank almost on time (the good record of meeting payroll obligations came to an end in July). Last, but not least, the UN Development Program, the IMF, the World Bank and the European Union have all issued reports praising the PA for its commitment, financial transparency, delivery of public services and economic policies. The IMF has even labeled the PA’s finances a model for developing countries in terms of transparency.
This rosy picture hides several worrisome trends, however, particularly on the economic front. Worse, the PA has little, if anything, to brag about on the political front. The goal of an independent, sovereign Palestinian state does not appear any closer to fruition or even any more attainable.
The economic concerns can be classified under two headings: sustainability and distribution of gains across society. The aggregate GDP growth, as an April 2011 World Bank report puts it, “does not appear sustainable. It reflects recovery from the very low base reached during the second intifada and is still mainly confined to the non-tradable sector and primarily donor-driven.” Palestinians are better off than they were in 2006, in other words, but worse off than they were before the fall of 2000. Per capita GDP in the West Bank and Gaza was $1,500 in 2010, about 8 percent lower, in real terms, than the level in 1999. And without heavy external subventions, the growth would be substantially less: According to OECD data, total foreign aid to the Palestinian territories amounted to $3.03 billion in 2009, or about 60 percent of the GDP.
The economy of the West Bank and Gaza suffers from huge resource gaps, with regard to investment and commodity imports: domestic savings fall 44 percent short of investment, and imports exceed exports by 50 percent (both ratios are relative to GDP in 2009). These two gaps imply that the Palestinian economy consumes far more than it produces. The trade balance deficit exceeded $3 billion in 2010. In the past, these gaps were filled by the remittances of Palestinians working in Israel and the Gulf countries. But they are filled now mainly by foreign aid.
External aid creates conditions akin to those in oil-producing countries. Like oil revenue, aid is windfall money — what economists call “rent” — that allows countries to consume without producing. Dependency on rent leaves behind negative economic, as well as social and political, effects. Governments become less accountable to citizens because they do not have to collect taxes; services become something granted from on high rather than a public good, based on tough tradeoffs and paid for with collected taxes. On the economic level, the huge inflow of aid, along with the proximity of the West Bank and Gaza to the developed economy of Israel and the resulting distortions in prices and wages, explain why growth in the Palestinian territories has been almost exclusively confined to the service sector and construction of residential buildings. Services and trade account now for over 70 percent of the GDP in the West Bank and Gaza. The share of exports to GDP is only 12 percent, one of the lowest ratios in the lower middle-income countries of the world.
At the same time, foreign aid amounted to 47 percent of the total revenues of the PA’s current budget. Another 37 percent comes from the customs clearance money that Israel collects on the Palestinians’ behalf, by the terms of the 1994 Paris Protocol that is part of the Oslo accords. By right and by treaty, this money belongs to the Palestinians. But since the mid-1990s, and picking up with the outbreak of the 2000 intifada, Israel has impounded the funds every now and then as a punitive measure. (Israel transfers no money to the Hamas government in Gaza.) These two figures are sufficient to demonstrate the vulnerability of the PA’s finances. A delay (politically motivated, some suggest) in the arrival of aid from Arab countries in July forced the PA to pay only 50 percent of the salaries of its 146,000 public employees. The payroll amounts to $1.56 billion annually, accounting for 35 percent of the PA’s recurrent expenditures. When the extra 23,000 people employed by the Hamas government are included, public-sector employment accounts for about one quarter of total employment in the West Bank and Gaza.
The second problem looming on the horizon is the uneven distribution of the benefits of growth. The growth in GDP has not been accompanied by a parallel increase in employment or a reduction of poverty rates. Poverty is a major social problem, with 26 percent of Palestinian large families (and 38 percent of Gazans) spending less than $640 per month on basic needs in 2010. And despite the GDP growth of 2010, the official unemployment rate barely declined — falling by 0.6 percent in the West Bank and by less than 1 percent in Gaza. In 2010, the unemployment rate was as high as 24 percent overall (17 percent in the West Bank and 38 percent in Gaza).
The Palestine Economic Policy Research Institute estimates that the private sector needs to create no fewer than 30,000 new jobs every year just to keep the staggering unemployment rates constant. The estimate assumes that the present labor participation rate of 41 percent also remains constant. The labor participation rate is the proportion of the working-age population who are employed or unemployed and looking for a job. Palestine’s rate is very low compared with most middle-income countries, in which the average proportion is 60 percent.
It goes without saying that the Palestinian economy must generate far more than 30,000 jobs per annum if unemployment is to be reduced. When one considers the needs to limit the public-sector payroll, to absorb the 78,000 Palestinians currently working in Israel and Israeli settlements, and to allow for a rise in the labor participation ratio, the size of the challenge becomes even more obvious. The high overall unemployment rate masks still more causes for concern. The Palestinian Central Bureau of Statistics labor market survey for the first quarter of 2011 reveals three alarming facts: Unemployment is highly concentrated in the 15-24 year-old age group. Unemployment among these young people is as high as 40 percent. Second, unemployment is precipitously high among university graduates — logged at 33 percent for graduates of teachers’ colleges, 24 percent for graduates in computer studies and 31 percent of graduates in mathematics and statistics. Third, unlike what pertains for men, the higher a woman’s education level, the harder it is for her to find a job.
The above economic problems are not all structural, although some definitely are. The call to build up the economy as if the occupation does not exist, a call that was eagerly promoted and generously financed by international actors, has faded away. There is, after all, a limit on how much an economy can grow when 60 percent of its rightful natural resources (located in Area C, the portion of the West Bank still under full Israel control) are beyond its grasp. The severe policymaking constraints on the PA and the extraordinary degree of risk and uncertainty, even regarding as simple a thing as moving from one West Bank village to another, express themselves in the negative economic trends. “We hit the ceiling,” PA officials are apt to say. “Not much more can be done for the economy under the present constraints.” The World Bank took its time but finally came to the same conclusion. “Ultimately, sustainable economic growth in West Bank and Gaza can only be underpinned by a vibrant private sector,” says the Bank in an April 2011 report. “The latter will not rebound significantly while Israeli restrictions on access to natural resources and markets remain in place, and as long as investors are deterred by the increased cost of business associated with the closure regime.” With its myriad of checkpoints, and the ability to erect more at any moment, Israel throws up constant obstacles to commerce and business travel.
It is hard to believe that Fayyad, the skilled ex-IMF economist, was not aware from the start of the “ceiling” that Israel’s occupation imposes on the Palestinian territories’ economic recovery. It seems, therefore, that all the talk of building institutions and economic booms was aimed at buying time. Fayyad hoped that if the PA stabilized the economy, demonstrated good will toward Israel and enforced law and order, then international pressure, particularly from the Obama administration, would persuade Israel to deliver an end to the occupation. The Europeans and the Arabs went along because none of them has a better strategy and all are tired of being “payers but not players” in the Israeli-Palestinian theater.
Fayyad can proclaim his mission accomplished with regard to institutional readiness. The PA has passed the world’s test with honors, and the examining committee was none less than the UN Development Program, the IMF, the World Bank and the EU. An IMF report in April declared that the PA is “now able to conduct the sound economic policies expected of a future well-functioning Palestinian state, given its solid track record in reforms and institution-building in the public finance and financial areas.” The World Bank used a slightly different formulation: “If the Palestinian Authority maintains its performance in institution-building and delivery of public services, it is well positioned for the establishment of a state at any point in the near future.” Some independent observers suggest that the process of building institutions was “more authoritarian than democratic,”  but the more powerful judges were willing to overlook such deficiencies.
Since when, however, has the creation of states been conditioned upon institutional readiness? Who asked South Sudan if it had properly transparent institutions before recognizing it as an independent entity? Were Kosovo’s adequate? And did either of these fledgling states need to demonstrate “economic viability” before being recognized by other countries? History affirms, almost without exception, that state creation is a purely political decision that has owed nothing to these other factors. Shortages of economic or institutional viability may have played a role in dissolving states, but not in creating them or drawing their borders.
The PA’s decision to advance a statehood bid at the UN is a desperate reaction, rather than a strategic move. It comes from despair at the Obama administration’s unwillingness to enforce its own vision of a negotiated settlement of the conflict. After fulfilling its part of the deal and meeting all the conditions laid down by the US, both in President Barack Obama’s public speeches and behind closed doors, the PA has discovered that the US will not come through. The strategy of Fayyadism has arrived at a dead end. The failure on the political front will kill off its economic and institutional vision. Throughout the buildup to the UN bid, the US did little more than threaten the Palestinians with a veto at the Security Council. And Israel decided that the PA’s appeal to the most multilateral organization on earth is a “unilateral” move for which the Palestinians should be punished. Little will change on the ground after September. The Palestinians will seek, and will probably get, the majority vote they seek at the UN General Assembly, and the US and key allies will remain in Israel’s corner. The result, at the diplomatic level, will be deadlock. And the PA will face more of the dilemmas it faced in Wadi al-Nar and downtown Ramallah. But the Middle East is changing and people in many Arab countries are insisting on having more say in their governments’ policies toward Israel. The Arab street will from now on play just as important a role as the Israeli street in deciding the direction of the Israeli-Palestinian conflict. The pressure is mounting on Israel, no matter how invulnerable it looks now. It is far from obvious that Israel will be able to sustain the unprecedented no-state (and no-vote) non-solution it has imposed so far in the West Bank and Gaza.
Author’s Note: I would like to thank David Cobham for helpful comments and insights.
 Nadia Hijab and Jesse Rosenfeld, “Palestinian Roads: Cementing Statehood or Israeli Annexation?” The Nation, April 30, 2010.
 Thomas Friedman, “Green Shoots in Palestine,” New York Times, August 4, 2009.
 Nathan Brown, “Fayyad Is Not the Problem, but Fayyadism Is Not the Solution to Palestine’s Political Crisis,” Carnegie Endowment for International Peace Commentary, September 17, 2010.