Foundation of a state or common burden?

Israel’s strangulation of Palestinian commerce grows ever-more severe

by Sami Halabi

Palestinian farmers destroy their vegetables in protest of Isreal's closure of the produce market in Beita village, near the West Bank city of Nablus, June 2007. (Rami Swidan/MaanImages)

The consequences of Israel’s recent war on Gaza are evident to anyone with a television or Internet access. Recurrent images of civilians dying or injured in Gaza’s hospitals, smoke bellowing from distant buildings on the horizon and diplomats the world over shuttling from one photo-op to another will, in all likelihood, be duly recorded as merely another chapter of Palestinian suffering at the hands of the Israeli occupation. Those of us who live outside of Palestine can only imagine the horrors that have befallen the Palestinians in Gaza over the last few weeks. However, when the dust settles, the Palestinian people will have to deal with getting back to whatever sense of normalcy they can muster in the face of the whimsical dictates of their occupiers.

Perhaps the most nuanced aspect of Palestinian suffering that goes more or less unnoticed is the abominable state of the Palestinian economy. The systemic and perpetual economic hindrances imposed upon the Palestinian economy by the Israeli occupation are viewed by most experts to be the primary impediment to allowing the Palestinian economy to reach its full potential. The World Bank has identified three principal “paralytic effects” of Israeli policies on the Palestinian economy: access to economies of scale, access to natural resources and access to an investment horizon. It also cited physical impediments — road blocks, closures, earth mounds and the ongoing construction of the wall on West Bank land, the route of which was deemed illegal in an advisory opinion made by the International Court of Justice in 2004 — as a “paralysis confronting the Palestinian economy.” [1]

Further exacerbating this paralysis is the political and economic division of the West Bank and the Gaza Strip. The lack of a contiguous Palestinian land mass and the Israeli siege of Gaza have resulted in the divergence of the two territories in terms of the effects on total GDP which stood at an estimated $4.14 billion in 2007. [2] Palestine’s total GDP for 2008 is expected to comprise 70 percent of that of 1999, prior to the second Palestinian intifada. [3] In addition, per capita GDP fell nearly 30 percent from its height of $1,610 in 1999 to an estimated $1,099 in 2007 and is expected to decrease by 7.4 percent in 2008. [4] Furthermore, the effects on real GDP of the Occupied Palestinian Territories (OPT) cannot be accurately gauged due to Israel’s continuing economic blockade and its subsequent military offensive. However, the International Monetary Fund (IMF) and the World Bank estimate that results from the first quarter of 2008 are slightly negative and project modest growth of 0.8 percent in 2008 “due to a continued yet marginal drop in economic activity in Gaza, given its already-low base, matched with a modest rise in economic activity in the West Bank.” [5]

Prior to Israel’s invasion of Gaza, its blockade of the tiny coastal territory led to the emergence of a “tunnel economy” that was estimated to provide nearly 90 percent of all products entering the Strip worth roughly $40 million per month. Facilitated by a series of tunnels between Egypt and Gaza, smuggled goods ranged from vegetables and livestock to radios and generators and served as the main lifeline of the civilian population of Gaza. The associated costs of this improvised means of transporting goods is evident in shops and markets across the Strip where the price of everything from basic staples like rice and flour to commercial goods and products have increased dramatically while incomes have dropped precipitously during the same period. [6] The Israeli military offensive that began on the 27 December has further intensified the upward pressure on essential items such as food which has seen a 20 percent and 23 percent rise in prices in the West Bank and Gaza respectively. The price of tomatoes in Gaza during the Israeli bombardment is said to have risen from about 1.5 NIS (about $0.40) before the Israeli onslaught to 7 NIS, an increase of over 400 percent. [7]

The Palestinian economy suffers from numerous institutional restrictions resulting from more than 40 years of Israeli occupation, including no independent Palestinian currency, airport, or seaport. As a result, it is dependent on the ability to trade within its territories and with its neighbors. Trade flows constitute nearly 85 percent of the GDP, 85 to 90 percent of which is with Israel. This economic dependence on Israel can be seen as a direct result of Israel’s economic policies. Prior to 1993, Israel engaged in a policy of “integration” that, in theory, sought to eliminate the barriers that stood between the two economies. However, in practice, it codified and solidified the dependences of the OPT’s economy on that of Israel. Although there was a rise in Palestinian income as workers took up jobs inside of Israel and on Jewish-only settlements in the OPT, there were prohibitions on developing Palestinian commerce and industry. Accordingly, the dependence on the Israeli economy at the time of the Oslo Accords in the mid-1990s was immense: more then 90 percent of goods traveled to and from Israel and the trade deficit stood at 45 percent of the GDP. According to the World Bank, after the second Palestinian intifada broke out in late 2000, Israel announced that it intended to end all Palestinian employment in Israel effectively pulling the rug out from under the Palestinian economy. [8]

Since Israel imposed its siege on Gaza 19 months ago — effectively stopping all intra-Palestinian and international trade — conventional trade within the OPT has relied solely on the internal and external trade of the West Bank. The numerous restrictions and administrative blockades imposed upon the Palestinian residents of the West Bank by the Israeli occupation have crippled the means of transporting Palestinian products in a competitive manner. As a result, Palestinian exporters face enormous amounts of uncertainty thus crippling their ability to compete in regional and global markets. Therefore, the OPT has witnessed a perpetual decrease in the amount of Palestinian trade over many years even before Israel’s construction of its wall in the West Bank. Between 2000 and 2006 the amount of West Bank enterprises that made a significant amount of sales outside of their home cities decreased from 60 percent to less than 40 percent. [9]

The increased levels of uncertainty add to the anguish of Palestinian enterprises that are becoming subject to increasingly high fixed costs per kilometer within the West Bank and by default the rest of the world. A recent survey conducted by the Palestinian Trade Center (PalTrade) identified several parameters that increase costs for transporters inside the West Bank. PalTrade identified as much as a 40 percent increase in distance covered to reach key areas such as Jerusalem and the Allenby Bridge, which connects the West Bank and Jordan, due to Israeli policies that do not allow Palestinian trucks to take a direct route. The survey also noted increases of up to 70 percent in labor costs due to delays caused by road closures without announcement, flying checkpoints, unexpected variations on restrictions on cargo and movement of vehicles and people, losses due to inability to deliver on time and the waste of resources waiting, and trying to predict certain outcomes. [10]

Ultimately, trade dependency on Israel has proved to be detrimental to the Palestinian economy. In order for trade to thrive, Palestinians must have access to global markets and alternative trading routes. As of the publication of this article, the Rafah border crossing between Egypt and Gaza remains closed as it has been since the Hamas takeover of Gaza in June 2007. Although the crossing could potentially provide an enormous amount of respite to the ailing Palestinian economy, this has yet to materialize as a result of a seemingly tacit agreement between Israel and Egypt. Even when the crossing was “operational” it proved not to be a viable alternative to accessing the global market as the crossing operated only 16 percent of its scheduled working hours between June 2006 and March 2007, totaling a daily loss of $500,000 worth of exports. [11]

Trading through Jordan is also uneconomical due the fact that all goods moving to and from Jordan must first cross the Allenby Bridge controlled by Israel. According to the World Bank it is “a cumbersome and inefficient process that adds to the cost of shipping and discourages West Bank shippers from using the Jordan routes.” Jordan not only complies with Israel’s occupation policies but also imposes its own specific customs requirements on Palestinian products making it even more difficult for Palestinians to trade with Jordan and the rest of the world. Goods traded through Jordan are subject to redundant searches, parcel volume restrictions and lack of adequate storage facilities for sensitive products like vegetables and medical supplies. Due to the recent increases in Israeli restrictions, coupled with some improvements by Jordan, Amman’s Queen Alia Airport has become slightly more competitive for handling large volumes than its Israeli counterpart Ben Gurion, which charges $1,150 per metric ton for “security surcharges” on Palestinian products. Nevertheless, the World Bank states that Palestinian traders still prefer Ben Gurion because of “better service, easier access and more frequent flights.” [12]

Positioned at the heart of the Middle East, on the coast of the Mediterranean and constituting a sizable portion of “the land of milk and honey” are just some of the factors that lend to Palestine’s inherent economic potential. The promise of a thriving and prosperous Palestinian economy is as logical as it is fleeting in the face the ongoing Israeli occupation and persecution of the Palestinian people. A viable Palestinian state will require a sustainable economy without the current hindrances on trade and businesses imposed by the Israeli occupation. The people of Palestine, expelled, bombarded and starving understand that unless realities on the ground change, the economy of Palestine looks set to remain a burden shouldered by Palestinians rather than the foundation of their future state.

First published in Electronic Intifada on January 27, 2009

Palestine – Economy under occupation
Israel’s strangulation of Palestinian commerce grows ever-more severe

The new world economy

In wake of crisis, GCC may reshape balance of power with West

by Sami Halabi

It is easy to be pessimistic. Especially when the president of the United States, the supposed beacon of prosperity in the world, concedes that “this sucker could go down.” The question becomes, how far down can we go? Around the world, analysts, thinkers and social commentators have predicted the end of the financial and economic environments as we know them… and they are probably right. The resulting financial landscape that will prevail will be inherently different than what we knew before this all started. The financial earthquake that began in the US real estate sector has inevitably resulted in tremors being felt throughout the world’s markets. These tremors come as a stark reminder that, unchecked, the greed that caused this crisis to occur has severe ramifications for the global economy.
In the minds of most analysts the current global financial crisis has erased any doubt that the world is on its way to several years of recessionary growth rates. What remains to be seen is the magnitude of how long and hard the fall will be. “The financial crisis is a major event that has had repercussions that have brought about a [global] recession,” said Fadi Osseiran, head of BLOMINVEST Bank. “The depth and length of this financial crisis will affect the shape of this recession and it is really premature to try to understand the full impact this will have.” Marwan Barakat, head of research at Bank Audi, stated that the IMF has recently adjusted that global growth estimates for 2008 down to 3.9% from a previous estimate of 5% and predicts a 3% growth rate for 2009, indicating the commencement of a global recessionary period.
Looking out the window in the Middle East. however, one can see that the sun is still shining. And like the annual spat of rain that tarnishes the windows of the Gulf’s high- rises, this storm will soon blow over — albeit leaving a few clouds in its wake. The wider Middle East in general has managed to weather the global economic downturn of the past year relatively well. Barakat explained that this is mostly due to vast amounts of liquidity available linked to petrodollar revenues, the diversification of investments, and the conservative nature of regional banking.
On the other hand, the culmination of the subprime mortgage saga seems to have had a humbling effect on initial statements by many who previously attested to the region’s relative immunity to the crisis. What has transpired in regional markets lately shows that the troubles battering major financial institutions in the US and EU have indeed affected the status of a number of financial institutions in the region. “The Gulf markets have been hit hard,” said Mounir Rached, vice-president of the Lebanese Economic Association and former senior economist at the IMF. At the time of publication, the markets of Dubai and Saudi Arabia had thus far taken the worst beating, down by about 40% each, and the MSCI of Arabian Markets Index is down by a third year-to- date. “Regional investors and funds in general were negatively affected by the global financial crisis,” added Ziad Shehadeh, instructor of Monetary Economics at LAU and head of the Credit Department at Arab Investment Bank.
All in all, however, in these times of global recession the economies of the region look to be better off than most as the effects of the global financial crisis continue to emerge.

Liqidity flowing from the desert
The region’s massive sovereign wealth funds (SWF) and wealthy investors stand high above the dry valleys of the US and Euro-zone markets like massive reservoirs ready to burst open and inundate western markets with a flood of much needed capital. The UAE alone is estimated to hold a massive $875 billion in its SWF, followed by Saudi Arabia (at some $330 billion) and Kuwait (approximately $213 billion). SWF investment strategy has also recently been focused on diverse investment aimed at increasing capacity and a substantial amount of this investment has already gone into buying up equity in western financial institutions. Last November, the Abu Dhabi Investment Authority (ADIA), the world’s largest SWF, bought 4.9% of Citigroup for $7.5 billion. Earlier this year Citi sold off a further 7.8% ($14.5 billion) to a group of investors that included Saudi Arabia’s Prince Al Waleed bin Talal and the Kuwait Investment Authority (KIA – Kuwait’s SWF). Merril Lynch also sold a special class of stock to KIA for a price tag of around $2 billon. Both Citi and Merril stocks have been heavily damaged in recent months with KIA losing $270 million on its Citi group investment. As Executive went to press, Citi’s market price had declined by more than 50% since the SWF investments.
Despite these losses, the region’s SWFs do not seem to be pulling out of western markets anytime soon. The nature of their investment strategy is regarded as long-term, and there is an expressed notion that regional governments and their SWFs are not in the business of bailing out the ailing western financial institutions that spawned the global financial crisis. “We are not responsible for saving a bank, an economy or anyone,’’ said Bader Al-Saad, managing director of the KIA in an interview with Al- Arabiya. “We are long-term investors and we have long term social and economic obligations to our country.’’

Shoring up the markets
The obligations that al-Saad was referring to have already been fulfilled to some extent, and not just in terms of monetary policy. The moves by regional governments to shore up confidence have also come at a sizeable cost. Although minuscule in relation to the infusions of developed nations, the UAE central bank has recently promised to inject a further $19 billion into its markets, bringing the total to $32.7 billion, with other regional SWFs such as ADIA, KIA, and the Qatar Investment Authority (QIA) following suit. More importantly, we are seeing assurances being made by regional governments and their respective SWFs to maintain the infrastructure and operations of financial institutions throughout the region. Mirroring the actions of many developed countries, the UAE has issued a federal guarantee of all savings and deposits in their markets, as well as guaranteeing inter- bank lending. QIA has also announced that it would contribute between 10% and 20% to the capital of local banks in order to boost their capacity to finance developmental projects. Saudi Arabia, the region’s largest economy, also made $40 billion available to its banks and cut interest rates. While these actions are indicative of a major issue in regional markets, it has been widely accepted that there is enough liquidity, and the will to inject it, to keep the Middle Eastern markets healthy and wealthy for some time to come. “I don’t think there is a [liquidity] problem. They have enough liquidity to step in when needed,” said Osseiran, “they have accumulated reserves for a while now as a result of oil revenues.”
With everything more or less taken care of on the home front, the issue of SWFs influence and standing in a global economy is now increasingly becoming the question, as opposed to a question on the minds of politicians and economists the world over. The idea of large chunks of the American and European economic and financial landscape being bought up by regional governments is in itself an idea that is politically problematic. Even al-Saad conceded that “disasters in the United States, Europe, and Asian nations do create interesting investment opportunities, especially in the real estate and financial industries.” It is not rocket science to assume that these regional governments could use their influence over western and specifically US financial institutions to leverage their own economic, political, and strategic interests on a global stage. “The West, broadly speaking, will have to come to the realization that the global economic power equation is shifting,” said Sven Behrendt, visiting scholar at the Carnegie Middle East Center.
In order to pacify those critical of the nature of SWF investment and ownership being used for political purposes, ADIA and the IMF established the International Working Group of Sovereign Wealth Funds (IWG) in May of this year. The group, composed of a wide range of SWFs, recently published their “Generally Accepted Principles and Practices” outlining their “Objectives and Purposes”. In short, this document touts the financial impetus for the actions of SWFs but stops short of saying that SWFs will not use their influence for political ends. “The IWG report focuses heavily on SWF internal governance issues and often prescribes measures that appear to be self- evident,” Behrendt said. “They do not address the fears that western economies have with regards to foreign government intervention in their economies.” Instead, the report focuses on increased transparency and corporate governance and states that “if investment decisions are subject to other than economic and financial considerations, these should be clearly set out in the investment policy and be publicly disclosed.” This is hardly the language of reassurance that developed countries were looking for.
As this new economic power paradigm begins to take shape, the question is: what will the global financial landscape look like once the dust has settled? With western economies in, or on the brink of recession, and larger growth patterns in emerging markets such as the Middle East and the BRIC (Brazil, Russia, India, China) economies, it is becoming increasingly evident that things will never be the same again. “One of the things happening now is a realignment of the world economy, making the US relatively less important,” said Riad al-Khouri, co- founder and principal of KryosAdvisors.
Nonetheless, the retrenchment of the traditional players, in terms of economic power, should be taken with a grain of salt. According to Behrendt, the estimated value of the world’s SWFs is around $1-1.5 trillion, including assets managed by central banks. Moreover, Morgan Stanley estimates that the total size of SWFs could reach $12 trillion by 2015, about $2 trillion dollars less than the GDP of the US in 2007. The sheer size of western financial institutions and the amount of real output they produce will ensure that the US and the Euro-zone will remain at the forefront of the world economy in the foreseeable future. “For the time being, the US will maintain its spot at the top [of the financial world] in general as there is no real viable alternative to the US market that can sustain the global economy,” Shehadeh said.

Back to oil
Being an oil-based regional economy has certainly helped the Middle East cope with the effects of the global economic downturn and the recent financial crisis. Now that the price of oil is on the decline many observers are drawing parallels between this decrease and a worsening economic situation in the region. Indeed, the effect of a decrease in the price of oil will have a direct impact on the revenues of the regional players. “The Gulf countries will be affected by oil prices, in terms of price and volume,” Rached said. “They are going to sell less at a lower price and will behave differently with less money from oil.” However, these decreases need to be put into perspective. “All the government budgets of the GCC countries were made according to the oil price of $60 last year,” Barakat pointed out.
With oil having reached levels of close to $150/barrel it is simple mathematics to deduce that surpluses are ever present in the coffers of the oil rich states in the Middle East. Even with these surpluses, oil is still seen as the premier conduit in which the global financial crisis seeps into the real economy of the region despite the fact that governments have been diversifying their wealth in order to reduce dependency on oil revenues. “It is still the case that the overwhelming importance of oil and gas in the region mean that higher revenues from hydrocarbon exports will cause a boom and lower prices and lower exports will create a problem,” al-Khouri said. “Gulf countries have diversified their economies but they are still dependent on oil,” added Osseiran.
In any case, this substantial decrease in prices is not expected to last forever and does have good effects for the global economy as a whole. OPEC nations have called for an emergency meeting that is to be held shortly, in which supply is expected to be cut. According to Deutsche Bank estimates, different countries in OPEC require different price levels in order to balance their budgets in a time of a global financial crisis. Iran and Venezuela both require oil prices of $95/barrel, whereas Saudi Arabia needs $55/barrel. “The price of oil will go down and probably oil exports will go down,” al-Khouri said, “but not by too much because there are still parts of the world that are growing and will pay higher prices for oil and/or import larger amounts.”

The conservative nature of the Lebanese banking sector, guided by the central bank’s Riad Salameh, has allowed it and Lebanon’s economy to sidestep many of the direct effects of the global financial crisis. Barakat explained that tight regulations and conservative investments have allowed Lebanon to avert the worst of the global financial crisis and maintain the financial infrastructure to deal with the situation. Regulations in Lebanon pertaining to the restrictions on structured products, leverage requirements, and a high rate of deposits are seen to have pre-empted widespread exposure to the global financial crisis. Moreover, the ownership model of banks in Lebanon has contributed to more conservative investment models. “Banks [in Lebanon] are owned partially or totally by their managers which means that usually they are not looking for short term profits,” Osseiran pointed out. “These owners have an intrinsic stake in the bank.”
Despite a global recession in the works, Lebanon is expected to see growth of around 6% in real GDP for 2008 and around 5% in 2009, according to IMF figures. Such growth rates in times of global recession are indicative of the unique situation in which Lebanon finds itself. Much of this growth can be attributed to the recent political settlement in Lebanon that has increased confidence across the board. “According to the signals we are getting, regional investors are looking at Lebanon more and more in this period because of the political settlement that we had this year,” Barakat exclaimed. “Now Lebanon is back on the radar screen.”
Despite the advantages that come with Lebanon’s unique situation, not all of the news is good. Lebanon is expected to see a decrease in exports across all sectors due to a decrease in demand from trading partners. “There is no doubt that our exports will be affected,” Rached stated. “Exports to Europe, whose share is about 30%, will decline.” However, since the relative scale of exports is not considerable, and accordingly the Lebanese economy can manipulate it with relative ease, this potential problem will be looked upon as rather secondary in nature. “Our share in the world export markets is so tiny, it won’t make any difference really,” Osseiran said. “The Lebanese are able to adjust their products according to markets and prices.”

Who is paying and with who’s money?
Since this crisis began to take shape, there have been unprecedented calls for global coordination by presidents and prime ministers alike. “No country — not even the biggest — can make it just on their own at a time like this,” stated British Prime Minister Gordon Brown on the back of an emergency EU meeting. “We are all in it together and we have to work to solve it together,” the PM concluded. Yet, despite these words of encouragement and the rallying of global markets subsequent to actions of governments, including regional ones, by and large it is the people of the world who have to pay the bill for the greed of investment bankers.
The majority of the bail-outs have come from taxpayers’ pockets and there have been reports of money being printed and freed up by central banks and the Federal Reserve. As Suheil Kawar, senior lecturer at the American University of Beirut, pointed out, “The Bank of England has made facilities worth £50 billion pounds [$79 billion] to individual banks and the Federal Reserve is just printing money now.” According to Rached, “We have a contraction. Money is not growing in the US and this is a situation that is more important than inflation.” Add lower interest rates to this equation and the global economy is left with a situation that applies a great deal of inflationary pressure on the already prevalent problem of increasing global inflation. The UK, for instance, has recently reported a 5.2% increase in its consumer price index for the month of September, the highest level recorded since March 1992. The US has also registered a similar increase of 5.4% for the month of August, even before the major bailouts began to occur. Moreover, with all the mergers, takeovers and acquisitions taking place, issues relating to monopolies have been tossed aside as an unimportant consideration in times of crisis. “Issues related to government monopolies are not a priority now. The major concern is to provide stability,” Shehadeh explained. “The mergers we are likely to see are going to be cross-border and global in nature.”
All of these factors are contributing to the creation of a global financial environment with fewer players and less purchasing power to go around. How the world’s population ended up paying for the mistakes of investment bankers on Wall Street is a matter that will be discussed for decades to come; especially the next time a financial instrument like a toxic mortgage back security comes along and breaks the back of the world’s financial institutions. For the Middle East the next few years will be essential in proving to itself and the world that it can weather a global financial crisis, the resulting recession, and play a more relevant role in the global economy. “The challenge will be to continue to handle things better because we are just at the beginning of the economic crisis,” Osseiran said. “[Regional] governments will have to adjust themselves to the new era of lower oil prices, how much they are going to spend and how they can sustain budget deficits.”
That challenge, if overcome, will have a galvanizing effect on the region’s economy and set the stage for a Middle East that may start to set the rules of the financial world rather than follow them.

First published on the cover of Executive Magazine’s November 2008 issue