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Palestinian Economy Needs a Fair Deal From Israel

April 16 (Bloomberg) -- Poor U.S. Secretary of State John Kerry. Shortly after he announced that the U.S., as part of an effort to jump-start the Israeli-Palestinian peace process, would work to promote the Palestinian economy, their prime minister and well-respected chief economic guru Salam Fayyad resigned.

Fayyad was said to be tired of being blamed for the financial crunch that kept his government from paying salaries on time -- a crisis that wasn’t his doing and that his departure may aggravate.

Kerry is right to focus on economic growth as a route to political stability. This week, he is to unveil detailed plans to remove barriers to Palestinian commerce, many of them Israeli-imposed.

Before promoting new business, however, Kerry should help stabilize the finances of the Palestinian Authority that governs the West Bank and is a crucial counterweight to the radical Hamas, which controls the Gaza Strip. Seventy percent of the Palestinian Authority’s revenue comes from customs, border and income taxes levied on Palestinians who work and do business in Israel. These taxes are collected by Israel. Largely because of Israeli suspensions and delays in those transfers, the Palestinian Authority ended last year owing state employees $71 million and private suppliers $192 million. Local banks have reached their loan-making limits. Unemployment is 23 percent. Protests have broken out.

Kerry should tell the Israelis that pushing the Palestinian Authority any further risks bringing it down. For Israel, the alternatives are worse: Either Hamas, which is dedicated to Israel’s destruction, would rise to power in the West Bank or Israel would have to reoccupy the entire territory.

Most of the rest of the Palestinian Authority’s budget comes from donor governments, many of which have failed to meet their commitments. The U.S., which had been among them, has just begun unlocking about $500 million and should push others to follow suit. With aid promises unfulfilled, Palestinian leaders (like Fayyad) look like suckers for carrying out donor demands to make government finances transparent, introduce prudent fiscal management and cooperate with Israel to reduce terrorism from the West Bank.

In the long term, the Palestinian economy will be healthier if it depends less on revenue transfers and aid. That’s where Kerry’s initiative to remove bottlenecks and barriers comes in. At the same time, any such effort must recognize that Israelis have imposed many, if not most, of these economic constraints -- limits on permits, licensing, land use, and the movement of people and goods -- to protect themselves from Palestinian violence. These measures have brought a reduction in terrorism casualties and aren’t likely to be reversed.

Kerry, then, should home in on Israeli obstacles that have little or nothing to do with security. Some practices seem designed mainly to protect Israeli enterprises. For instance, to obtain a license to import raw materials to manufacture a medication, Palestinian companies need the consent of a competing Israeli company that markets a similar drug to Palestinians.

The Palestinians should be allowed to reduce their dependence on relatively expensive Israeli imports, which make up 73 percent of their total. The two sides agreed in 2000 to add 1,300 items to a list of goods the Palestinians can import from Jordan and Egypt. Executing the deal would reduce living and business expenses.

More than anything, Palestinian enterprises need greater access to Area C, the 60 percent of the West Bank that remains fully under Israeli control. Palestinian developers have permission to work in just 1 percent of the zone. As a result, Palestinian mobile-phone companies can’t build the towers they need to provide service to compete with Israeli providers. Farmers allowed to cultivate the zone’s fertile fields are denied access to the plentiful water there and must truck in their own.

The days of expecting Israelis to take risks for peace are gone. Still, they can afford to relax their control over the Palestinians in ways that won’t compromise their security. When the alternative is to drive out a true ally like Salam Fayyad, the motivation should be strong.

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