Trade, not aid, is key to peace

According to consecutive World Bank and IMF reports, the main obstacles to Palestinian economic growth remain issues connected to the Israeli occupation and control. Those obstacles include full Israeli control over 62 per cent of the West Bank, where almost no economic activity is allowed by the Israeli military, and the added costs of "security-related expenses", which make competition almost impossible for Palestinian businesses.

Off-loading goods at checkpoints, giving them a security check and then uploading them onto a new truck all take up extra time and money.

Palestinian containers at the ports are held for an average of two weeks, while Israeli containers are cleared within 48 hours. The Palestinians have very little leverage in getting competitive prices from customs agents and freight forwarders.

Like many other poor countries, the PA also has an inflated bureaucracy that it cannot afford. It needs to create employment. The PA budget is about $4.25 billion. Some 70 per cent of its income comes from customs charges and the VAT collected by Israel (because they have no ports of their own). Israel deducts three per cent from that as a service charge and, in past years, automatically deducted the amount the PA owed for health care, electricity and water. In the past, this procedure was done within the framework of the Joint Economic Committee, but the JEC has not functioned for years and Israel unilaterally deducts that money.

Additionally, there have been occasions, for months at a time, when Israel has unilaterally withheld customs and VAT transfers, throwing the PA economy into virtual bankruptcy.

Over 50 per cent of the PA budget is spent in Gaza, even though Hamas threw the organisation out in June 2007. The PA continues to pay salaries of its people there, in addition to covering the costs of water, electricity and a large part of the health care system not covered by Unwra. Some 51 per cent of the PA budget pays administrative costs - salaries of civil servants - of which about 28 per cent of the total budget goes to the security services.

Simply, not enough is being spent on productive economic activities. A lot of donor money has been spent directly on infrastructure projects in the West Bank. There are many new, well-paved roads. Many villages have been hooked up to the electricity grid and the water network. Schools, police stations, medical centres, hospitals and court houses have been built all around the West Bank. Without donor cash, these institutions and infrastructure would not exist.

But there is donor fatigue and in the absence of any peace process, funds are shrinking. The Palestinians need to start weaning themselves off donor money. This can only be done successfully by increasing trade. This does not mean importing cheaper products to Palestine but exporting more goods to the world - including Israel.

The lack of any peace process has led to decreased Israeli interest in Palestinian goods and services and a decreased interest on the part of Palestinians to sell to Israel. This is so counterproductive to both sides and must be confronted. The largest and richest market with the easiest access and greatest potential for the Palestinian economy is Israel. It is right next door, in the same time zone, with the same currency, banking systems that know how to interact, and similar languages. There are 1.5 million Israeli citizens who are also Palestinian Arabs and they represent a huge market.

There is no need to compromise on security needs to make this happen. It is first and foremost a matter of policy; market forces can take care of the rest. There must be a common will on both sides. The Palestinians must also divert as much income as possible to infrastructure development and productive activities.

Gershon Baskin is the Co-Chair of the Israel Palestine Creative Regional Initiatives