Three years ago, Palestinian Prime Minister Salam Fayyad launched an ambitious plan to build effective, responsive, and clean government institutions. The results were impressive, and Fayyad was hailed as a figure who was making true progress toward a two-state solution even as formal negotiations faltered.
These days, however, the entire project is under dire threat. The political and social worldview that informs Fayyad's vision has been undermined by Hamas's apparent ability to leverage armed conflict to its political advantage. To reverse this disturbing trend, the international community and Israel need to recognize that Palestinian institution building is a strategic priority -- not merely an economic or technical one. Urgent steps on all sides are required to save this project, or its vision for Palestinian independence and peace with Israel may give way to more confrontational approaches, to the detriment of all.
There is no denying the progress that has been made. Under Fayyad, the Palestinian Authority (PA) eliminated structural corruption in ministries and other public agencies under its control. Palestinian security forces have been providing both Palestinians and Israelis with unprecedented security. In 2011, the United Nations, World Bank and the International Monetary Fund all issued reports certifying that the PA fully met the criteria for independence. The PA "is well positioned for the establishment of a state at any point in the near future," read a 2011 World Bank report. In April 2011, international donors noted, "Palestinian institutions compare favorably with those in established states."
It has been downhill since then. In stark contrast to the situation in 2011, Fayyad's government is now unable to meet payroll for more than 140,000 public sector employees -- including teachers, nurses, police officers, and civil servants. The PA's institutions are on the verge of collapse. One million Palestinians are threatened with the prospect of falling into poverty over the course of the coming year as a result of the economic crisis.
The ongoing PA fiscal crisis was aggravated by the Palestine Liberation Organization's failed 2011 bid for Palestine to be granted member-state status at the United Nations, which led to a reduction in U.S. and European Union aid. This is now compounded by Israel's decision to withhold Palestinian tax revenues in retaliation for the successful 2012 push to win non-member observer state status at the United Nations.
According to the 1994 Paris Protocol, Israel collects taxes accruing to trade transactions with the Palestinians -- amounting to 50 percent of the PA's monthly budgetary commitments -- and is obliged to transfer the revenue to the PA. In practice, this gives Israel an easy way to plunge the authority into fiscal crisis whenever it wants to put pressure on the Palestinian leadership.
Israel also announced plans to use the withheld money to pay the Israel Electric Company more than $350 million in outstanding bills owed by Palestinians. But these debts are not owed by the PA government -- they are owed by privately owned Palestinian electric companies in the West Bank and Gaza. The latter, of course, are under the control of Hamas, which does not distract itself by trying to collect money from consumers. Israel's decision not only harms the PA, it directly benefits Hamas -- and bails out deadbeat Palestinian businessmen -- all at the expense of ordinary Palestinian public sector employees and their families.
Politically, this move also undercuts the one Palestinian leader who has been unwavering about working openly with the global community and Israel. Fayyad has consistently worked to create and maintain law and order, and rooted out systemic corruption within the ministries and agencies under his control. The tumult of the recent war in Gaza again demonstrated the effectiveness of PA governance, as Palestinian security forces successfully maintained order in the West Bank under difficult circumstances. Today, however, Fayyad is increasingly identified in the public consciousness with the inability of the government to pay public sector salaries.