While the current state of the Palestinian economy is nowhere near as bad as one might think from reading the Western press, writes Hillel Frisch, it is beset by serious problems:
According to the standards of the World Bank, West Bankers are middle-class and Gaza residents lower-middle-class. [But] it is a matter of serious concern that neither in Gaza nor in the territory controlled by the Palestinian Authority is [there] a functioning domestic economy. By far the most important element propping up Palestinian economic welfare levels is financial aid [from] donors such as USAID, the EU, and church-related organizations, which underwrites roughly one-third of the [Palestinian] gross national product in the West Bank and considerably more in Gaza. . . .
[T]he substantial economic aid the PA receives from the EU, USAID, and individual EU member states enables it to reward incarcerated terrorists, terrorists released from prison, and the families of terrorists both living and dead with generous stipends and financial support. . . . Such support acts as an incentive to commit acts of terrorism and lowers deterrence against those who would commit such acts even without incentives.
Yet the problem is even broader. The most important group of actors on the Arab side—the PA, its militia Fatah, and Hamas—have perfected a deadly political economy rather than built a functioning one. It is the use of force, or the threat of the use of force, that assures the flow of aid from international actors, many of whom want to pacify the situation. The [donors] thus become accessories to a form of protection racket that demands, “Support me or I’ll attack Israel and its Jewish citizens.” The EU, anxious lest Israel retaliate and create a refugee problem whose imprint will be felt in Europe, plays the game and pays up.
Unfortunately, this state of affairs will only worsen if a Palestinian state comes into being. Why is this? Because manufacturers in the PA and Gaza are shut out from their most important markets: Jordan and Egypt.