Squeezing The Palestinians Could Set Off Another Intifada

On June 7, representatives from some 30 donor countries met with Yassir Arafat at the U.N. compound in Gaza City. The Palestinian Authority chief painted a grim picture of the situation in the West Bank and Gaza. He told of near-starvation conditions in parts of Gaza and warned that this was playing into the hands of Islamic radicals. He appealed to the international community to speed up its promised assistance and demanded that the Israelis fork over $30 million in tax revenues that they have been slow in transferring.

The Palestinian areas could well turn out to be incoming Prime Minister Benjamin Netanyahu's biggest headache. He just eked out an election victory with promises to take a tougher line toward Palestinians and other Arabs. Yet if he is not careful, he could find himself dealing with a renewed intifada in the territories or even Jerusalem. "If the economic situation remains stagnant and the uncertainty over the peace process continues, then the situation could rapidly deteriorate," says Edward G. Abington, the U.S. Consul General in Jerusalem.

PERES' LEGACY. To be fair, the status quo "Bibi" Netanyahu is inheriting from Labor Prime Minister Shimon Peres is bad. Peres preached economic cooperation in the Middle East, yet he inflicted economic hardship on the Palestinians by closing off the territories in response to last February's wave of terror bombings. "Closure," as the blockade is known, has brought business to a halt in the Palestinian areas by making importing and exporting from them virtually impossible. The World Bank is projecting a 20% decline in economic output in these areas this year. Among other things, closure costs Arafat's government an estimated $6 million a day in tax revenue, threatening it with bankruptcy. The situation is also scaring off international donors, who have only spent $97 million of the $875 million pledged this year.

The collapse of the Palestinian economy, along with Netanyahu's election, has American officials wondering if all that has been achieved in the Middle East in the past five years is about to unravel. When Netanyahu visits the U.S. later this summer, he will be asked to ease up on closure and give the Palestinians a boost by increasing the number of Palestinian workers permitted into Israel. This has declined to just 22,000 a day, compared with 150,000 two years ago.

POSITIVE SIGN. But it is uncertain how Netanyahu will respond. The drive-by killing of an Israeli couple on June 9 may force Netanyahu to harden his position--although the incident, which occurred in Israel and not the territories, highlights closure's shortcomings as a security measure.

One positive sign is that Central Bank Governor Jacob A. Frenkel is at the top of Netanyahu's list for the key post of Finance Minister. Frenkel, who is highly respected abroad, would likely push for measures to encourage Israeli-Palestinian economic cooperation. "The more you have the business sector involved, the larger is the base of individuals who have a stake in the continuation of the [peace] process," he said in a June 10 speech to the Institute of International Bankers in New York. Frenkel's presence would also aid Netanyahu's hopes of attracting foreign investment to aid his ambitious privatization plans.

But until the post-election picture clears, no private business is going to spend any more money in the Palestinian areas than it has to. Both Palestinian and Israeli executives are postponing deals there. Shimon Peres' dreams for the Middle East are, if not dead, very much on hold.

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