Washington Report on Middle East Affairs, September 1998, pages 31, 94

Special Report

World Bank Statistics Show Tunisia as Arab Bright Spot, Gaza and West Bank as Potential Flash Points

By Pat McDonnell Twair

Most people think bankers and financiers have a soft life. That’s not so, however, for Dr. Odin Knudsen, who has lived under curfews and political tensions few could comprehend over the past three years in his capacity as country director and resident World Bank representative to the West Bank and Gaza. The Stanford-educated economist delivered a remarkably straightforward presentation of some very complicated data at a meeting of the Middle East Fellowship of Southern California. Handouts of charts illustrated economic statistics for the region.

The first handout, entitled “Macroeconomic Indicators for the Middle East and North Africa,” presented a gloomy financial picture of the region.

Whereas Tunisia has a 1.9 percent GNP per capita growth for 1985-95 and Egypt follows with a 1.1 rate, Syria and Morocco register less than 1 percent growth at 0.9. More depressing, Algeria is –2.4 and Jordan is –4.5. The West Bank and Gaza stand at –5 for 1993-96.

Surprisingly, despite its GNP of $133.8 billion, Saudi Arabia shows a –1.9 GNP growth rate. But Knudsen attributes this to generous social programs along with real petroleum prices, which actually have dropped beneath 1973 prices once inflation is deducted from the current price. The healthiest growth rate is 2.5 for Israel, which still enjoys an annual $2 billion inflow of foreign investments. After the euphoric beginning of the peace process, growth accelerated to between 4 and 6 percent. He noted, however, that Israel is starting to show signs of economic weakness while it tries to keep the shekel up and begins privatization efforts.

In the Middle East in general, “basically, we’re looking at economic stagnation and unemployment,” Knudsen continued. Two factors that will turn the situation around, he explained, are peace (no one invests where there is a threat of instability) and economic reforms (privatization of state enterprises and market-oriented policies).

Knudsen arrived in Palestine in June 1994. The World Bank, he explained, is an institution created after World War II to reconstruct Europe and later to provide development aid. Today, it borrows money by issuing bonds to raise capital throughout the world so that it can lend money at lower interest rates to needy countries. A problem arose over the West Bank and Gaza because the World Bank can only lend to member countries, and members must be sovereign states.

The problem was solved when the president and executive directors of the World Bank created a $50 million trust fund from its profits for the West Bank and Gaza. Since then, an additional $180 million had been allocated at no interest to be paid back over 40 years with a 10- to 15-year grace period.

Whereas in 1993 the per capita income of a Palestinian was $1,680—compared to nearly $16,000 for an Israeli—today it has fallen to under $1,500 for Palestinians. Furthermore, about 20 percent of the Palestinians are living on less than $2 a day.

“For someone who has spent the last three years of his life [in the region], it is tragic to see the situation reverse, with the Palestinians economically worse off today than at the start of the peace process,” Knudsen commented.

Israeli closures of the borders damaged the Palestinian economy as all exports were stopped and the 30 percent of the Palestinian labor force that worked inside Israel dropped to zero. Whereas workers from Eastern Europe and Asia were minuscule in number in 1990, they accounted for over 100,000 laborers in 1996. Many foreign workers have difficulty adjusting to life in Israel. The Israelis do not permit their wives to enter the country and their presence has brought on public criticism.

“When the level of desperation became so volatile and the situation was so tough we thought it would blow up, we moved investment money to pay for jobs,” Knudsen recalled. At the peak of the crisis, the World Bank created 16,000 rotating jobs in the civil service.

“We got the frustrated young men off the streets and made them construction workers,” Knudsen said. “We even created street- sweeping jobs. The Palestinian Authority on its part expanded the civil services and police, making some unarmed traffic directors.”

This was a period of rapidly expanding the civil service and police force that swelled to an estimated 76,000 employees. The World Bank, he noted, did not hire or pay the salaries of the police.

Knudsen added that donors have performed “reasonably well” in living up to their commitments, which now stand at actual disbursements of more than $1.5 billion since 1993.

When we asked Dr. Knudsen to break down some World Bank-financed projects, he explained that Emergency Rehabilitation Projects I and II attempt to rebuild medium-scale physical and social infrastructure including water and sewage systems, schools and health clinics. A housing project has attempted to show Palestinians that affordable low- and medium-income housing can be built commercially. At present, he added, “We’re trying to set up a secondary mortgage facility where commercial banks can rediscount their mortgages.”

Other planned activities are the Gaza al-Muntar Industrial Estate, a Financial Sector Development Project and an Electricity Distribution and Management Project in the West Bank. The Norwegians, he said, are repairing a comparable electricity system in Gaza.

When asked about a report in the West that the Palestinian Authority had “misplaced” millions of dollars, Knudsen said this might better be described as lost opportunities to generate revenues. The Palestinian Authority, for example, gave or leased land to hotels and industrial parks rather than charging for it; it failed to charge custom duties on vehicles the PLO returnees brought into the West Bank and Gaza; and it probably should have tried to collect on electric bills that were in arrears, he said. “The PA might have been able to collect on these; again, it might not have been able to politically,” he added.

Is he pessimistic over the future of the region?

“I compare it to the Cold War,” he explained. “We were aware of the terrible cost of a nuclear war and it was too terrible to contemplate. I’m sure the U.S., Israel, all the parties are aware of what the cost will be if this process collapses. The situation is extremely unstable. You realize this when you see the dissatisfaction on the faces of the people. It wouldn’t take much for a flash point that could spread to south Lebanon and Syria and possibly to the rest of the Middle East. We must get Gaza and the West Bank on course quickly.”

An assessment of the World Bank’s performance in Gaza and the West Bank was offered by Dr. Peter Gubser, president of American Near East Refugee Aid (ANERA).

When we asked if the World Bank has played a significant role in helping the Palestinians to develop a viable economy, he replied, “No. But let me qualify that by explaining that no institution could under the current political climate. In order to have development, a state must have significant private investment (which could come from wealthy Palestinians, rich Arabs or the international community). No sound investor is going to invest in a highly volatile region.”

Dr. Gubser says he has received positive reports on World Bank efforts to launch mortgage institutions for low-income housing and projects to rebuild the infrastructure. “Palestine of the mid-1990s is basically the Palestine of 1967 with considerable deterioration of the 1967 infrastructure,” he continued. “The World Bank has operated fairly well under the constraints imposed by the Israeli military occupation that remains in some form.

“The World Bank has come through with substantial grant money as well as significant low-interest loans to the Palestinian Authority to improve the economy.”

Dr. Gubser says he has heard individual Palestinians criticize the World Bank for bringing in experts to study development projects. “These exasperated Palestinians seem to say ‘let’s see some rubber hit the road,’ they want more action and fewer feasibility studies. On the other hand, the World Bank has an obligation to assess investments.”