Huleileh was interviewed by PIJ Co-Editor Hillel Schenker and Gershon Baskin, the Israeli director of the Israeli-Palestinian Centre for Research and Information (IPCRI) and a PIJ Editorial Board member.

PIJ: Let's start with the state of the Palestinian economy today.

Samir Huleileh: To describe it simply at the macro level, it's an economy with an extremely high poverty rate - reaching the 70s in Gaza and the 60s in the West Bank. Unemployment - according to its restrictive, not general, definition - has reached an average of 26% in the West Bank and Gaza. What's new now is that there is a large variance between the districts. We are no longer talking about a simple, single economy functioning together in poverty or in unemployment.
This is particularly true in the West Bank. Gaza is more uniform and consistent. In Jenin, one of the vast agricultural areas, the poverty rate is now 77%, as bad as it is in the refugee community in north Gaza. In Nablus, the industrial capital of the West Bank, the poverty rate has reached 69% - an unprecedented level for that area - and it's because of the closure imposed on Nablus. Only Ramallah has been spared this economic constriction; there the poverty rate is 44%.

Why is Ramallah different?

It's important to realize that it's not the same consistent economy anymore, so a description at the macro level does not necessarily apply at the micro or regional level. Some sectors are prospering and many others are deprived and problematic. In the last two years the economy has been affected differently in each region. Employment in the public sector is a major instrument in the economy: In Gaza 47% of the work force are public employees, as opposed to 17% in the West Bank, so the government affects the economy substantially in Gaza but not in the West Bank. Therefore, covering the budget deficit is extremely important for the survival of Gaza. After the election of Hamas, the public sector - half of the labor force - was not paid, but the Gazan economy could rely on the private sector. Now after two years, it's exactly the opposite: The private sector is bankrupt, and the public sector is paid. So one half of the population is always subsidizing the other half.
These are new factors: the role of government, the public expenditure and the differences between provinces. This characterization is the effect of the structured long-term closure regime imposed in the West Bank after the intifada - the structure undermining normal relationships and the smooth movement of people and goods between West Bank cities, leading to extreme variations in the West Bank. In the last five years many people looking for jobs in Jenin have come to Ramallah. In Nablus most of the businesses have moved to Ramallah. You see it in Ramallah, where hundreds of businesses have moved in the last two or three years.

Ramallah is absolutely booming. Everywhere you see construction, people out in the streets, new restaurants, new businesses …

It's not just that the central government is there, although it's important. Most of the highly paid civil servants are located in Ramallah: at least 1,000 directors general and several hundred above that - secretaries, undersecretaries and ministers. Ramallah has 15% of the public servants; 30% of what is paid to the public servants is paid there. But even more importantly, 100,000 people live between Jerusalem and Ramallah - mostly Jerusalemites, who are paid more and are paying more in rents and services than in the rest of the West Bank. And with the separation wall being built, the center of the province is no longer Jerusalem but Ramallah. Ramallah is prospering because these 100,000 people have been cut off from Jerusalem.

What is happening on the East Jerusalem side of the wall?

It's simple. On Salah Eddin Street, you see far fewer people, far fewer businesses. A recent survey reveals that poverty in Jerusalem is higher than in Ramallah: 51% of the population is below the poverty level according to Palestinian standards, and by Israeli standards, close to 80%. In 1992 the per capita income in Jerusalem was much higher than in the West Bank. That's not the case anymore.

There is a perception that Gaza is on the verge of a very serious economic crisis.

You may be surprised by how many shocks and how much pressure the Palestinian economy can absorb - because the community is used to being in crises for long, long periods. People know they are going from one crisis to another, and they act accordingly. Half of the population can always take on the burden, and this could be enough to sustain the community for a long time.
Today in Gaza there is no industrial output, or very little, and only half the investment in agriculture - because most of the farmers did not plant, but those who invested in agriculture for export need to start pressuring the Israelis and the international community before the export season begins in November. Some basic services and retail are still operating, because there are some final goods, so people are still selling and buying. But they are not producing.

They're mostly coming in through the smuggling routes. There are no raw materials coming in, and very few final goods.

But at the end of the day, if this produces even 30% of the economy's output, in addition to 47% of the labor force being paid by the government, this will sustain the economy for a certain period. Still, this is a major, unprecedented blow to the economy, especially to the productive sectors. We have to buy everything from Israel; we're paying Israel in shekels, but where will we get those shekels? We're not working in Israel. The only way is to physically bring shekels from Ramallah to Gaza, and to distribute them as if you were printing money. That comes from the public expenditure.

To what degree are the West Bank and the Gazan economies functioning as a unit together, and to what degree are they developing separately?

For the last three months, there's been an almost complete separation - except for basic services like telecommunications. But it's not possible, not permitted, to physically bring any material in or out, including human resources. Not that we had a single functioning economy in the past. Over the last seven years, a lot of our trade has been to Israel or through Israel to Arab countries and vice versa. But this could be temporary, because it's not natural; it's not by request, but only because people are forced to separate. That's why I feel that there is still a chance for us to re-engage with Gaza economically, at all levels, not just services or financially.

With the [Salam] Fayyad government in the West Bank, do you see any changes?

There are two clear changes: First, tourism in the Jerusalem, Jericho and Bethlehem areas is returning to the levels of 5-6 years ago. We are talking about 70% and higher occupancy rates through the end of the year. This is essential, but this is a geographically small area and a small sector. The second component is the payment of salaries and the repayment in the private sector of arrears. We see it in the markets; the effect is clear: The economy is accelerating and recovering its capacities. Also, security and public order are becoming a major goal for the government. You see the effects in most of the cities of the West Bank.

Is there talk about new investments, about using the loan guarantees that the Americans are making available to the private sector?

People are still hesitant. You need a longer stable period, not just a few months. Many people have paid a high price for investing at the wrong time, without enough assurances from the politicians that things are moving ahead.

What is necessary in the short term? What should be done now?

There are two sectors that we can invest a lot in, in addition to the full repayment of arrears and salaries, the main income for Gaza. If, at any time, we don't have enough to pay full salaries, we should pay Gaza first for the time being, because Gazans depend solely on this public expenditure. From a purely private-sector point of view, investment in agriculture and in housing, in particular low-income and affordable housing, should be the focus of any program, if you want to create employment immediately. Affordable housing is more resilient and less affected by the restrictions on movement, because enough cement has been available so far. Generally it's low-risk, so people don't mind investing in housing.

What about the idea of building a new city between Ramallah and Nablus?

That requires a more stable situation, and 5,000 units is a lot to concentrate in one area. Investing 1,000 units in each region is more socially coherent and meaningful. I'd prefer going into Areas A and B, around the cities, with smaller projects that don't need Israeli approval. The demand is spread across all the provinces, not just in one province like Ramallah, where unemployment is just 13%. You need to create jobs in Jenin, Nablus and other areas.
Having said that, investing in infrastructure is a must for the PA and donors. Infrastructure projects have been stalled for almost two years - water, in particular, but also electricity and roads. Investment in these areas should come soon, because it is also an employment mechanism, and housing and infrastructure could make a real difference in the short term. By "short term," I mean no less than six months. If you don't start now, you won't see it in six months. I think we're already late. By mid-September Salam's government will have been there for 90 days; they should mobilize their resources immediately to work out specific projects to ensure that something happens.
Of course, removing checkpoints and lifting the siege on cities like Nablus and Jenin is the number-one priority for any government, and this is what Israel should do, because without it, things cannot move substantially. But we can invest in projects where we can start generating some economic activity without being jeopardized by an Israeli or political decision. We should work in the margins around politics, to enable people to survive the process.

What is Israel's responsibility? What would you ask Israel to do?

Israel has been asked too many times in the last seven years to do a few things, and to undo certain things, concerning the movement issue in particular. They've been raising their security concerns as the main reason not to make it possible, but they are not justified. First, Jenin is considered to be a potential source of "terrorism," but the movement to and from Jenin is smooth; yet this is not the case for Nablus. Tulkarm and Qalqiliya are almost never accused of being sources of potential terrorists; still, strict closure is being imposed on Qalqiliya. There is no rationale that we can see behind the strict closure regime in the West Bank, where there are more than 500 checkpoints and roadblocks to prevent the movement of people. We see only a political decision to punish, to pressure, to put some political, not economic, price on it. The second issue is the restriction on movement in the Jordan Valley, which is not justified on a security basis, either.

It was claimed that some of these restrictions were removed last month.

People are still required to have permits, or they cannot travel, and it's the same for people to go to the Dead Sea. They said they would consider removing the restriction, but the question is still: Why did they impose it? This can tell you about the rationale behind certain decisions. The third issue concerns the commercial crossing points. This is being handled by the Americans, Israelis, Europeans and Canadians, and still nothing substantial has been done. What has been done is very technical, and if you deal technically with the crossings, you will be caught up in the Israeli details from security and political concerns. If you deal with them as commercial entry and exit points, with some security concerns, then things could be solved. The crossing points need an Israeli political decision, not only army decisions, because they leave us with a lot of technical details that lead us almost nowhere.

Are you saying that no serious economic progress will be made without political progress?

Everything we have been doing with the Americans and the international community over the last few years is based on the assumption that there is no decision on the Israeli side for making movement easy. Israel's security decision, unchanged from 2000 through 2007, is: "Make it as strict as possible. Check everything." So within that framework, everybody is making some adjustments and corrections. They want to pressure us - Abu Mazen, Salam Fayyad and ordinary Palestinians - to surrender, to give up on the two-state solution and to accept whatever it is - unilateral, not unilateral, even the continuation of the status quo.
Since 2000, the Israeli army has said that it's a battle of wills. The one who destroys the will of the other wins. That's why politics, economics and closure were all used intensively, and the battle is still going on. There has been no decision by the Israeli government to stop this, and with a weak government, nobody in Israel can stop this "low-intensity" war.

Do you see any hope for progress with the conference to be held this fall, with what Olmert and the Americans are saying about their desire for a political horizon to move forward? Abu Mazen has been reporting to the cabinet members that the atmosphere is good and progress is being made in the negotiations on the principles.

The conclusion, as we see it, is that Israel is looking for some "quiet time" for the next two years - either to prepare the environment in Israel, or to continue the settlement activity - you can interpret it as you wish. They are buying time, because if they agree on principles and decide that they will go into the details, they will want to sell us the hope that things are moving, but without implementing anything on the ground. From a completely moderate point of view, we can accept that, if we see direct signals concerning the movement issue and the settlements. If you are serious about the two-state solution, then you should stop the settlement policy and undermine any attempt to expand settlements over the next two years. Whatever Olmert concludes with Abu Mazen does not commit Barak or Netanyahu, and they are the ones who will implement whatever Olmert agrees to. And the new American administration may not accept it.

The only chance that Olmert has of surviving beyond two years, or even the next few months, is to make significant progress.

We need serious signals that Israel is changing its position and is no longer in the "low-intensity" war of undermining the enemy. The culture of unilateralism still runs deep in the army, the Ministry of Defense and others. You need something big to change this. But a prosperous economic development plan cannot substitute for serious signals vis-à-vis the settlements and the closure regime, reflecting a change in Israeli culture in how they deal with West Bankers.

Assuming that negotiations do progress, what advice would you give Palestinian negotiators on the economic chapter of the agreement?

If the agreement is on final-status issues, a free trade agreement (FTA) would be the maximum demand - not because we want it, but because we have to evaluate the realities of 2007: First, we will have a border or something similar, and it's possible to check the origins of the goods coming in. This was not possible in 1995, when the Paris Protocol was signed. So there is a possibility, theoretically, to have an FTA, not just a customs union (CU). Second, the difference between the two economies is becoming too wide. Israel will not consult with the PA on any agreement with other countries; we know that Israel's interests are different from ours. The third, main component is that Israel still has and will have security concerns, so it will impose, in the coming 10 years, a strict security check on goods going into Israel or through Israel to the Palestinian side. We can neither jeopardize nor link our economy to that component. If Israel accepts a border with us, no matter what and where it is, this will create a potential for diversification and divergence from Israel - not completely but marginally.
We have not yet utilized the potential for trade with Arab countries to the maximum. With Jordan it's in the range of $50 million or 60 million, but the main problem is that our imports from Jordan are very restricted. If you want to build an open relationship with a country, it has to be more or less on an equal basis. But Egypt, for example, consciously doesn't open up, because it cannot export a lot of oil products into Gaza and the West Bank, for obvious reasons. Now, if we think that we can negotiate better deals with Egypt and Jordan and the rest of the Arab world, Israel will pay the price, because much more of our imports will come through Arab countries or from them, instead of through or from Israel. This shift would immediately lower our import costs dramatically, as well as the cost of the final goods. However, it would require a differently structured economy.

In our Roundtable Discussion, there was a general debate whether the Palestinian economy should look towards Israel or towards the Arab world. Which direction should it look to, or should it look to both?

We have not looked to any countries beyond Israel for a very long time. The problem is Israel, not us. If Israel is ready to make it smooth and easy for our goods to cross into Israel - all the time, not just sometimes - to have it as a standard procedure, then things will be based on competition, better prices and better markets. However, Israel makes it very difficult for us now: it's haphazard, it's security-based, we cannot intervene, etc.
For agriculture, Israel is still a major market. We have to invest wherever we can, including in the Arab world. We shall not close ourselves to Israel; this isn't an option. But we should have the freedom to deal with Israel as we deal with the other countries. The CU with Israel means that we have a preference toward Israel, who does not want to facilitate for us movement into Israel. That's why we should look for other markets.

If Israel were to say, "We want to take steps to open up our markets to Palestine," would you then recommend continuing a CU arrangement?

No, I think the FTA could go into a CU. Free trade is not the way to separation; it's a restructuring of the relationship to guarantee the basic interests of the Palestinians until Israel is satisfied with, or is ready to make compromises on, the security component, which we don't see happening.

What about the question of the labor force? There were, in the past, 200,000 Palestinians working in Israel. Do you aspire to return to that, or is that not desirable, or not possible? What's the alternative?

We prefer that the Israeli labor market be open to our workers as for others, with fair competition. If this is guaranteed, at least we'd have a fair chance like the others. Currently there is a system working against us; we are at a disadvantage. You don't need to go back to the 200,000 level; a lot of our workers were absorbed into the Palestinian work force. The total number of unemployed in the West Bank and Gaza is around 200,000, and to lower the unemployment rate to 10%, we'd have to employ 140,000. So if Israel can take 40,000 or 50,000, this would make the unemployment rate very reasonable.

Do you see a Middle Eastern Economic Union evolving in the future, or is that too far ahead?

It's still a very distant vision. The political reality in the region is not moving towards more cohesion. We need consistent political structures in the region to be able to work together smoothly economically: stability in Iraq, Iran, Lebanon, Syria and, of course, in Palestine. Some regional groupings are possible, including with Israel or Egypt or Jordan; however, to talk about the region as a whole, as one body, a lot of work needs to be done at the political level to build the infrastructure.

What is your vision for the future of the Palestinian economy? Some people say that there will never be a viable economy, as there are no natural resources.

I have full confidence, because we have a lot of special people. What is missing in Palestine is stability; what is available is something extremely unique in the Arab world: entrepreneurship and a good human resource base - people who were trained the hard way. With good people, and with this determination, good management of the economy can take you wherever you want. It doesn't matter if you don't have natural resources. We need stability, a lot of investment in human resources, technology and innovation. I believe in the Palestinian people and individual, who have done a lot in the past and can again.