RAMALLAH, West Bank (AP) " Massive aid to the Palestinians can slow economic decline, but won't revive their private sector sufficiently to gradually ease their need for external support, the World Bank said Thursday, challenging assumptions that have long guided donor countries.
The Palestinian economy has considerable potential for growth, the bank said in a report. However, development continues to be stymied by Israeli restrictions on Palestinian trade and movement in the West Bank and the growing isolation of the Hamas-run Gaza Strip, the bank said.
As a result, Palestinians are becoming more, not less, dependent on foreign aid, the report said.
"In this policy environment and pending a political resolution to the conflict, aid should be recognized for what it is " more of a stabilizing measure, slowing down socio-economic decline, than a catalyst for sustainable economic development," the report said.
At a pledging conference in December 2007, the international community set out a far more ambitious agenda " pumping huge sums into the Palestinian territories in hopes of stimulating the private sector in the West Bank and gradually reducing Palestinian dependence on aid.
At the time, donor countries pledged $7.7 billion over three years, a large chunk of it as direct support for the government of Western-backed Palestinian President Mahmoud Abbas. The large pledges coincided with a resumption of Israeli-Palestinian peace talks.
However, the talks ended inconclusively a year later, and Israel's new prime minister, Benjamin Netanyahu, has not endorsed the principle of Palestinian statehood. He has proposed "economic peace," an idea the Palestinians reject because it falls short of independence.
Netanyahu has set up a ministerial committee that looks at ways to spur Palestinian growth, including by removing bureaucratic obstacles by Israel, said government spokesman Mark Regev.
"We want to work with the Palestinians and the international community," he said. "Any good idea that can move the Palestinian economy forward, we want to hear it."
However, the World Bank noted that Israel has been slow in relaxing the sweeping restrictions on trade and movement " closures, a network of checkpoints, cumbersome cargo checks " first set up after the outbreak of the second Palestinian uprising in 2000.
Israel has removed a few physical obstacles in recent months, but not on a scale that would boost the economy or investor confidence, the bank wrote. Israel took down a main checkpoint near the city of Nablus on Wednesday but insists it needs roadblocks to prevent attacks by Palestinian militants.
The real gross domestic product grew about 2 percent in 2008 which, the bank said, "translates to an almost 1 percent decline in real per capita terms."
What little growth there was took place in the West Bank, the report said.
Gaza, already buckling under two years of border closures since Hamas overran the territory, suffered another setback with Israel's war on the Islamic militants earlier this year. Israel launched the three-week offensive to halt Gaza rocket fire on border towns.
At a March pledging conference, donor countries promised $5.2 billion to the Palestinians, some of it recycled pledges and some of it new funds, to rebuild what the war destroyed. However, with Gaza's borders still closed, reconstruction has not begun.
Meanwhile, Abbas is also struggling to keep his Palestinian Authority afloat, despite the aid.
Since November, his government has had to borrow $530 million from banks to help pay the salaries of some 150,000 civil servants, including tens of thousands of former government employees in Gaza who are still loyal to Abbas.
Analysts said the crunch is mainly due to Arab donors who have been withholding funds to pressure Abbas and his Hamas rivals to reach a power-sharing deal.
Despite the scaled-back expectations of what aid can achieve, the World Bank urged donors to keep making good on their pledges. The Palestinian Authority needs to provide basic services, and it will be the key to unlock the potential of the Palestinian economy once conditions are right, the bank said.