You Call The Palestinian Economy A Free Market?

Arafat shares the blame for the territory's tattered condition

All over Gaza, partially built apartment and office buildings rise out of the sandy landscape. In the past couple of years, Palestinians have poured $600 million into construction and real estate, figuring that peace with Israel would lead to an economic boom. Instead of a buzz of construction around the buildings, there is silence. Peace talks with Israel remain at a standstill, and tensions in the border territories are mounting. The projects' owners, out of money, have abandoned them.

The unfinished buildings represent a Palestinian economy in tatters. Palestinians hold Israel responsible for many of their economic woes. But although much blame falls on Israel's shoulders, it does not rest there alone. While Palestinian leader Yassir Arafat boasts of creating a free market, critics--Palestinian and foreign alike--claim he is running a command economy, dominated by state-run monopolies and choked by corruption and favoritism.

DEAF EARS. It is true that in closing its borders with Gaza and the West Bank, Israel contributed to a 22.7% drop in the territories' gross national product between 1992 and 1996. Yet Arafat himself may be holding the economy hostage. Virtually every major deal requires his personal approval, say investors. And despite pleas from both local and foreign interests, no credible business or investment law has been passed.

Another obstacle to healthy economic development in the territories is monopolies. Since the Palestinian National Authority (PNA) was formed four years ago as the vehicle of self-government, it has allowed the creation of more than 100 exclusive importing agencies. Theoretically independent, these agencies have become sole licensees for importing products from cement to cigarettes to petroleum--and thus have a lock on prices. Now, the agencies' tentacles are spreading into areas from advertising to computers. Not only are they monopolizing certain industries but they are de facto PNA companies.

Most of the big investors who have not shied away from doing business in the territories have political connections. Created in 1993, Palestine Development & Investment Co. (PADICO) is the largest investor in the territories, with 1,000 wealthy local and expatriate Palestinian shareholders. The company is building $500 million worth of projects, including a housing complex and industrial park in Gaza and a hotel in Bethlehem. It's also managing the new stock exchange in Nablus and is the largest shareholder in the new Palestinian telephone company. According to Western diplomats and Palestinian sources, the company also has close ties with the PNA. Wusta, or bribery, is said to flourish.

The economic mismanagement worries the international community. "The U.S. has made clear that we are concerned about trends that we believe are contrary to developing a healthy private sector," says one U.S. official. At a donor aid meeting in Brussels in December, the PNA pledged to stop granting monopoly licenses and to better organize how it raises money. "We'll see if it actually happens," says the official.

Some foreign investors have broken through the bureaucratic mess. In Nablus, for example, the Al-Aqqad textile factory has a contract with Marks & Spencer PLC to manufacture and export jeans bearing the label "Made in the West Bank and Gaza Strip." Kentucky Fried Chicken is getting ready to open in Gaza City, and a Marriott Hotel has finally broken ground after months of delay. And now that Israel has allowed Palestinians to use the new Gaza airport, Palestinians are hoping commercial flights will begin soon, allowing them to export agricultural goods such as strawberries.

But most Palestinians are bracing for more economic hard times. On Omar Muktah Street, there are few Palestinian shoppers on the formerly busy sidewalks. Only two shopkeepers seem optimistic--jeweler Khalid Sadie and his brother, who have opened their second shop. Sadie says he still has customers: a handful of businessmen and, the biggest spenders these days, members of Arafat's PNA.

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