Introduction

In July 2014, tensions in the Israeli-Palestinian conflict escalated again, and 1400 Palestinians and 61 Israelis are believed to have died. Hope for a long-lasting peaceful solution is extremely weak. But it was not always so. In 1993, the Oslo Accords were signed, committing all parties to a two-state solution; over a transitional period of five years, Israel would withdraw from the Occupied Palestinian Territories (OPT) while handing control over to a new Palestinian Authority. The accords stipulated that a final status agreement was to be reached by 1998, to conclude controversial issues such as access to water, the right of return, Jerusalem, and Israeli settlements. 

To support the peace process, representatives from forty-three countries convened in Washington one month later pledging over $2 billion to help build the foundations of a future Palestinian state. The core objectives of sending aid to the OPT were to sustain the peace process, foster the socio-economic development of Palestinian society and build the institutions of the PA. However, twenty years later, the peace process has stalled and the Palestinian economy is weaker than ever. Unemployment is high, poverty levels are rising and the Palestinian Authority (PA) is reliant on aid.

This essay seeks to explore the role of the World Bank in the OPT since 1993. The international community called upon the bank for assistance in 1993, the first time the bank had engaged with the OPT. The bank was created in the aftermath of the Second World War, and by the 1970s was firmly established as a development institution working to reduce poverty by providing developing countries with financial and technical assistance.

However, the bank’s relationship with the OPT is unusual because as a non-sovereign entity the OPT cannot be a member of the bank. It is necessary to point out that the World Bank is only one of many international agencies and donors active in the OPT, which includes the IMF, the European Union and the UN. Therefore the bank is not solely responsible for the economic decline in the region. However, the bank has been selected for study for two reasons. Firstly, it is the largest non-state donor to the OPT. Secondly, the bank is the largest international organisation producing knowledge about development, and the size of its global lending outweighs any other development institution.

This article will refer to the OPT, as opposed to ‘Palestine’, because the latter suggests a territorial contiguousness that is absent; Gaza is geographically distinct from the West Bank, and the West Bank was divided into three zones by the Oslo Accords (Areas A, B, and C). Of these three areas, sixty-one percent is controlled by Israel (Area C), and the remaining land consists of enclaves under Palestinian control. Moreover, while the bank uses the OPT interchangeably with ‘the West Bank and Gaza’, the former term is favoured here because Israel is considered an occupying power under international law, and the official terminology of the UN refers to the area as the OPT for the same reason.

The World Bank’s role in the OPT since 1993

Setting the aims of international aid

The World Bank was commissioned in 1992 to produce a report on the Palestinian economic situation. The six-volume document, entitled Developing the Occupied Territories: An Investment in Peace, was published between the Oslo Accords and the first Washington Donors conference. Those present at the conference relied heavily on the bank’s report for information on how much total investment would be needed and to what sectors aid should be directed. The report was central to forging a common donor strategy; the so-called ‘development-for-peace’ paradigm, whereby economic growth would lead to political stability, which would in turn promote peace. As explained by a World Bank official in 1993, economic growth would “help the Palestinians to make the ‘painful decisions’ that they would need to make, especially giving up the right of return. The idea was to have a strong economic rationale to buy Palestinians into agreeing to lesser political goals.”

World Bank involvement in committees

To put these objectives into effect, the international community set up various committees, in many of which the bank played a leading role. The most important committee is the Ad Hoc Liaison Committee (AHLC), established in November 1993 with the bank as secretariat. The purpose of the AHLC was to set development priorities for all donors, urging them to channel funds to projects identified as beneficial for the peace process. Another committee chaired by the bank was the Joint Liaison Committee (JLC) whose objective was to address problems in donor-recipient relations. Finally, the World Bank co-chaired the Local Aid Coordination Committee (LACC) along with Norway and UNSCO. It consisted of around a dozen ‘sectoral working groups’, each of which was led by a PA ministry, supervised by a UN agency and with a donor co-chairing in an advisory capacity. The bank served an advisory role in four of these groups: institution and capacity building, infrastructure and housing, private sector and trade, and public finance. Clearly, the bank held key positions in virtually all of the coordination bodies. Moreover this was unusual for the bank, which was asked to assume a broader leadership role than it traditionally plays.

World Bank reports

Since 1993, the bank has produced numerous reports on the Palestinian economy. The production of technical reports is a normal function of the bank, yet in the OPT these reports obtained unprecedented political clout. As discussed above, the 1993 report, An Investment in Peace, was highly influential. But after 2002, the bank’s reports became more frequent, producing annual reports on the Palestinian economic crisis, evaluating the strength of the PA, and assessing the impact of international aid and Israeli policies. These regular reports soon became the only source of information available to the international community. UNSCO retreated due to internal difficulties, and as the shaky strength of the PA evaporated with the onset of the Al-Aqsa Intifada in September 2000, it stopped collecting data after 2001. As a result, the bank became “the intellectual leader of the donor community”. The reports also influenced PA decisions with the first Palestinian Development Program (1998-2000) drawing heavily on World Bank reports.

World Bank projects

As well as being involved in the ‘high politics’ of the aid regime, the World Bank has also acted as an independent donor, funding specific projects in sectors such as education, employment, infrastructure, and institution building. As a non-sovereign entity, the OPT is unable to participate in the bank’s usual lending procedure. Instead the bank disburses money through a series of trust funds. The most important of these is the Trust Fund for the West Bank and Gaza, which was established in 1993. It is periodically replenished through allocations from the World Bank’s net income, on approval by the board of executive directors. In 2013, over $608 million had been disbursed through this fund.

The focus of the bank’s projects has changed over time. In 1994 the bank was focused primarily on infrastructure. A few years later, as Israel tightened its borders, the bank shifted its attention to job creation. Yet the bank did not disburse much money until after the outbreak of the Intifada in 2000, when total investment increased tenfold and usually took the form of emergency assistance. This suggests that the Intifada sparked such a severe crisis as to necessitate increased bank involvement. By far the most financing was delivered as budget support to the PA, which indicates the scale of the crisis. Bank funding was supposed to ‘strike a balance’ between long-term development goals and short-term emergency assistance, but the latter clearly took precedence. Of the 72 projects approved between October 2000 and January 2014, eighteen contain the word ‘emergency’ in their name, compared to two for the period from 1993 to September 2000. The focus on emergency assistance is highly unusual for the bank because its goal of generating ‘development’ is inherently long-term. Emergency budget support is usually the realm of the other Bretton Woods institution, the IMF.

The effectiveness of World Bank projects

The World Bank’s primary objective was and still is to generate economic growth. Setting the aims of international aid, being present in committees and producing reports are difficult to evaluate with regards to this objective. Instead, this section focuses on evaluating the effectiveness of the bank’s projects in producing economic growth.

One way the bank’s projects are evaluated is through the Independent Evaluation Group (IEG). The IEG is an independent branch of the bank, charged with providing an objective assessment of the results of its work. The IEG produces its own reports on the bank’s projects however the online database contains few reports for the OPT. Nonetheless the IEG has produced two reports evaluating the World Bank’s overall involvement in the OPT; one covering the period 1993-2000, and the other covering the period 2001-2009.

The former is largely positive. It states that the bank was successful in constructing over a thousand kilometres of roads and improved access to better quality water. Most importantly, the Holst Fund was essential in supporting the establishment of the PA. The report concludes with praise for the bank’s overall efforts, given that there had been relative stability until 2000. The 2001-2009 report is more critical. It shows that poverty rates in 2010 stood at roughly half of the population in the West Bank and 70 percent in Gaza. Water and sanitation continues to be a serious problem and all PA institutions are more dependent on donor financing than ten years ago. Yet there were some successes. The Emergency Services Support Projects helped keep 430 clinics and hospitals functional by supplying essential drugs and equipment, contributing to nonmedical costs of health facilities, and providing nutrition for children under five. Most importantly, the World Bank kept the PA institutions afloat throughout severe economic crisis. As such the IEG believes that the bank “played an important, and…irreplaceable, role in the West Bank and Gaza”.

However, some further conclusions can be extrapolated from the overall condition and experience of the Palestinian economy. Firstly, until 2002 bank funding took the form of loans with the long-term aim of repayment. However, after 2002 all World Bank funding has been on a grant basis. Given that Palestinian public debt rose from $212 million in 1997 to $1602 million in 2005, it is reasonable to infer that the change to grants reflected the inability of the PA to repay its debts. Secondly, a striking feature of World Bank reports is that the same problems have been consistently identified over the last twenty years. In 1993, it identified the following problem areas; high unemployment, low private sector activity, dependency on the Israeli economy, overstretched and out-dated public infrastructure, inconsistent tax collection, lack of policy coherence, and the need for legal reform. World Bank reports in 2013 identified largely the same problems. Thus it is clear that the World Bank has not been effective in achieving its long-term objective of generating economic growth.

Explaining the limited effectiveness of the World Bank

As outlined above, the bank is not solely responsible for the lack of growth, but given the bank’s role in directing international aid it is important to consider the constraints it has faced and how it has dealt with them. There are numerous potential constraints which could be explored, such as the weaknesses of the PA, inherent problems in the operation of the World Bank itself, and so on, but these constraints lie beyond the scope of my analysis. The focus here is on relations between the OPT and Israel through the Paris Economic Protocol (PEP) and Israeli closure policies.

Paris Economic Protocol

The PEP was drawn up in May 1994 to regulate labour, trade, fiscal issues and monetary arrangements between Israel and the OPT. The PEP was intended to cover the transitional five-year period but has remained in place given the absence of a final agreement. One key feature of the PEP is the regulation of trade. Under the agreement, the PA is prohibited from offering import concessions or export incentives that differ to those in Israel. As a result, the PA has little autonomy; it has made bilateral trade agreements with the US, EU, Jordan and Egypt but all had to follow Israeli trade policy. At the same time Israel is selective about which products are allowed into and out of the OPT.

A second feature of the PEP is regulation over taxation. The PEP established a system whereby Israel would collect a duty on foreign imports to the OPT as well as VAT on Israeli products entering the territories and reimburse these revenues to the PA on a monthly basis. The result is that Israel has the power to punish the PA by withholding these revenues. For example, no revenues were reimbursed to the PA between September 2000 and December 2002 as a result of the outbreak of the Intifada. $1280 million was withheld in 2007 following the election of Hamas. Finally, Israel withheld tax revenues in 2011 in response to the PA’s application for non-member observer state status at the UN. Considering that clearance revenues constitute two-thirds of the PA’s total revenue, withholding these funds is highly damaging.

Closure

Closure is a term that describes measures to restrict freedom of movement of people and goods within, between, and out of the OPT. Obstructions can be physical, for example checkpoints, roadblocks, curfews, and the Separation Barrier, or administrative, such as permit requirements and age restrictions. The government of Israel justifies these policies on grounds of security and to force the PA to take firmer action against terrorists. Closure policies have been in use since 1967 but the frequency vastly increased in the last twenty years, particularly after the outbreak of the Intifada. In 2004, the World Bank reported that 674 physical obstacles restricted movement in the West Bank, including 61 checkpoints, 102 roadblocks, and 48 road gates.

Closure is extremely damaging to the Palestinian economy. Firstly, closure makes it difficult for Palestinians to get to work in Israel because labour permits are increasingly difficult to obtain. Consequently the percentage of Palestinians employed in Israel fell from twenty-two percent of the workforce in 1999, to ten percent in 2009. Secondly, licensing procedures raise the cost of raw materials. The government of Israel imposes restrictions on imports to the West Bank through the ‘dual use’ list that requires companies to obtain a license to import goods such as chemicals, fertilizers, telecommunications equipment, and steel pipes. However, licenses are so rarely obtained that, the goods are effectively banned. The Palestinian Ministry of National Economy estimates that this leads directly to annual losses of $60 million each for industry and information technology firms, and $28.6 million for agriculture.

Thirdly, closure raises the costs of transportation due to time-consuming searches at checkpoints. For example textile goods during searches must be unpacked from Palestinian vehicles, unfolded, refolded and repacked onto Israeli vehicles, thereby tripling the cost of transportation. An Oxfam report states that Palestinian traders must pay for the use of forklift trucks to unload and reload bottles of olive oil onto Israeli vehicles at checkpoints. Not only is this costly, but it causes the oil to oxidise due to excessive movement. The decline in quality weakens Palestinian access to international markets; for example, five containers of olive oil were rejected at EU borders in 2005 for not conforming to EU standards.

Finally, the construction of the Separation Barrier has left over a tenth of fertile Palestinian land trapped in the area between the Wall and the 1967 ‘Green Line’, the so-called Seam Zone. According to Oxfam, permits to access this land are extremely difficult to obtain because many Palestinians cannot prove land ownership. This is because Palestinian land ownership is based on customary tradition whereby land is passed down through generations rather than formal land registration. The infrequent opening of the Wall gates further complicates cultivation.

The World Bank’s approach to Israeli restrictions

According to Tartir and Wildeman, the reason the bank has had limited success in generating economic growth in the OPT is because it does not take into account the reality of Israeli restrictions. They argue that while the bank does mention the occupation in all of its reports, it does not focus on the occupation as the primary reason for the lack of progress and thus its analysis is not translated into relevant recommendations. When the bank does criticise Israel, euphemistic language is used to avoid direct accusations, for example the word ‘occupation’ is often replaced with ‘security restrictions’. Another example is a quotation from a 2012 Gulf News article in which the World Bank Country Director for the West Bank and Gaza, Mariam Sherman, was quoted saying:

“The Palestinian fiscal situation appears to be worsening…This is linked to the system of restrictions on access to land, water and export markets which imposes economic costs and constrains private sector growth."

The use of the passive voice is important. Sherman blames the lack of growth on “the system of restrictions” without saying who is imposing them: the government of Israel. Tartir and Wildeman argue that this “contributes to the false illusion that development is possible under occupation” by minimalising the impact of Israel’s occupation.

However, it is not the case that the bank does not consider Israeli policies to be the greatest obstacle to economic growth. It has explicitly stated this in numerous reports. It stated in 2002 that “The proximate cause of the Palestinian economic crisis is Israel’s closure of the Palestinian territories” and argued that “Hunger, deprivation and hatred [were] increasing” as a direct consequence of closure. A 2013 report by the bank was the most explicitly critical of on-going Israeli restrictions to land, water, and free movement of goods and labour. The report was the first systematic attempt to estimate the amount of economic growth that could be achieved if the restrictions put in place by the government of Israel were lifted. Overall it estimates a total annual GDP increase of $3.4 billion and states that the occupation forces the PA to be reliant on aid.

Political neutrality

This exposes the problem at the crux of the World Bank’s involvement in the OPT. The World Bank is an organisation that sees itself as apolitical and neutral, a commitment that is set out in the bank’s Articles of Agreement:

“The Bank and its officers shall not interfere in the political affairs of any member; nor shall they be influenced in their decisions by the political character of the member or members concerned. Only economic considerations shall be relevant to their decisions, and these considerations shall be weighed impartially…”

Its main objective is to generate growth to alleviate poverty, which it achieves through financing projects and providing technical expertise. Therefore altering the political status quo in a region is beyond its mandate, so if the bank has been unwilling to explicitly criticise Israel it must be understood in this context. In an interview with Frank Heemskerk, the bank’s Executive Director for the group of countries of which Israel is a member, he stated “We try not to be too critical. We try to show facts.” He believes that the principle of neutrality is important for two reasons. Firstly, the World Bank is fact-based so maintaining a politically neutral standpoint gives it legitimacy. Secondly, this legitimacy enables the bank to implement projects to improve the quality of life for many people. Thus in the OPT the bank can be understood as attempting to improve the daily lives of the Palestinian people within a severely restricted environment.

However, is this convincing? Firstly, it is difficult to argue that the bank has been entirely apolitical when it has had such unprecedented dominance over the international aid agenda. Through the production of reports and its presence in many of the aid coordination committees, the bank has played a lead role in developing a strategy for economic growth in the OPT. Secondly, the idea of ‘buying the Palestinians into agreeing to lesser political goals’, as quoted above, is explicitly political as it links the bank’s work in the OPT to political outcomes. By encouraging Palestinians to give up the right of return, the bank is engaging in deeply political issues. Thirdly, the bank is the main economic advisor to the Quartet on the Middle East and James Wolfensohn, president of the bank between 1995 and 2005, was appointed Special Envoy to the Quartet when he stepped down as President. Finally, the bank emphasises the need for PA reform and institution building, which is a recommendation based on the idea that good governance is essential to economic growth. While this recommendation is portrayed as purely ‘technical’, it has highly political consequences.

However, the bank’s emphasis on good governance also reflects how little it can do to address the core problems posed by Israeli policies and the unequal structure of the PEP. In other contexts, the bank pressurises governments to reform by placing conditions on bank loans, in the form of Structural Adjustment Policies. Conditionalities are designed to alter the political status quo in the state receiving bank assistance, in the belief that political reform will foster economic growth. But in the OPT, conditionality is less appropriate because economic growth requires altering the political status quo between two parties, only one of which is a member of the bank (Israel). Altering this status quo is clearly a ‘political’ line that the bank is unable or unwilling to cross.

As a result, the bank has been forced to ‘work around’ the challenges posed by Israel and the PEP. For example, the bank continues to emphasise PA reform even though according to the IMF it is now one of the most reformed governments in the developing world, because it does not have a mandate to challenge Israeli policy. Another example was the bank’s recommendation that the Palestinian economy move away from reliance on the agricultural sector, on the grounds that obtaining water for cultivation was too difficult. Consequently, only one percent of the PA’s budget was allocated to agriculture between 2001 and 2005, even though agriculture holds enormous historical and cultural significance for Palestinians. A third example is microwork schemes, which the bank began to encourage in 2013. Microwork refers to small business tasks such as market research, data input, translation and graphic design, for which compensation is paid per task. All that is required is internet access, thus the reasoning for these schemes is that “the digital economy can leap geographic obstacles”. While many Palestinians may benefit from the work, these schemes do not challenge Israeli mobility restrictions but simply ‘work around’ them.

Thus there is undoubtedly a tension between the bank’s ambitious objectives and its narrow mandate. Le More believes that the bank’s focus on short-term assistance has acted as a ‘fig-leaf’ for its failure to deal with the wider conflict. But this is unfair given that the bank had never before operated in a conflict zone. However, in this context, when the Bank has had so much political influence locally and internationally, it is justified to question whether the bank should or could have brought more political pressure to bear on both parties involved in the conflict. Indeed, encouraging talks to renegotiate the terms of the PEP is not beyond the bank’s mandate and may be an important first step.

Conclusion

This paper has provided a detailed analysis of the World Bank’s involvement in the OPT since 1993. The bank was instrumental in establishing the ‘development-for-peace’ paradigm and held key positions in many aid coordination bodies, which meant that its regular reports on the Palestinian economic situation obtained unprecedented political clout. The bank became the intellectual leader of the donor community as well as financing its own projects via a series of trust funds. Due to major crises such as the Intifada and the aftermath of the election of Hamas, short-term emergency assistance took precedence over the long-term goal of economic development.

Evaluating the bank’s effectiveness is difficult, but it is clear that the bank has not succeeded in its long-term goal of generating economic growth. Israeli restrictions are an important explanation for this failure. Some scholars argue that the bank downplays the significance of Israeli restrictions on the Palestinian economy, but this paper has demonstrated that the reluctance of the bank to criticise is the result of an inherent tension in the bank’s mandate. The World Bank is stuck between an obligation to remain apolitical and neutral, and an obligation to help the Palestinian economy to grow. This means challenging Israeli policies is extremely difficult, which is further evidenced by the fact that the bank has been forced to ‘work around’ the problems posed by Israel and the PEP. The bank’s work has not been entirely apolitical but clearly the challenge posed by Israeli sovereignty is a political issue that the bank is reluctant to engage with.

This analysis raises important questions about the continued involvement of the bank in the OPT. Given the bank’s structural inability to challenge Israeli policies it is clear that its mandate needs to be radically rethought. It may be that the bank requires a specific mandate for the OPT which differs from its usual mandate for members. At the very least, the bank needs to be more honest about the shortcomings of its mandate, and how this has direct consequences on the inability of the Palestinian economy to grow. The bank also needs to be more wary of applying its typical development models in this context, because the challenges faced by the OPT are unique and thus require unique solutions.

The ‘development-for-peace’ paradigm also needs refinement, since it is currently too one-sided; the responsibility for establishing the right circumstances for a two-state solution is placed predominantly on the PA but Israel also needs to be engaged in Palestinian development. This does not necessarily mean Israel must be ‘criticised’ but the international community could for example invest in more cross-border projects to positively engage both sides. The bank’s relationship with the US is also an important area to examine. Many scholars have denounced the World Bank as being an instrument of American foreign policy and the US has for many years been the lead broker of Israeli-Palestinian political talks. It would be both interesting and informative to explore if the US government has in any way put pressure on the bank to conform to its foreign policy goals in this context. This research could potentially explain the bank’s reluctance to be explicitly critical of Israel.