Many contentious issues could bedevil the Israeli-Palestinian
negotiations that began Wednesday, but on one subject both sides can
largely agree: The state-building program launched last year by
Palestinian Authority Prime Minister Salam Fayyad has made measurable
progress. While the terrorist group Hamas rules in the Gaza Strip,
Palestinians in the West Bank are trying to build the framework of a
future state.

The West Bank economy grew by 8.5% last year (according to the
International Monetary Fund), despite the global recession and
regional factors inhospitable to foreign investment. Palestinian GDP
for the third quarter of 2009 was $1.24 billion, up from $1.18 billion
a year before.

Real estate in the West Bank is booming. Property prices in Ramallah
have risen 30% in the last two years, according to local developers.
In July, construction began on Ramallah's Ersal Commercial Center, a
$400 million project expected to create thousands of new jobs. And a
joint Palestinian-Qatari company is currently building Palestine's
first planned city, Rawabi, a high-tech suburb with business and
commercial districts and 5,000 homes. A further accelerant to the
housing market will be a new $500 million mortgage fund, established
by the Palestine Investment Fund, which will begin issuing loans later
this year.

These promising trends are reflected in the Palestine Securities
Exchange, especially its main Al Quds Index, which in June experienced
a 5% market capitalization increase to reach $76.8 million. According
to the Portland Trust, four out of the five main sectors of the PSE
increased in 2009, with banking up by 30.6%. That's one reason the
European Investment Bank last December made a $6.4 million "anchor"
investment in Palestine's first venture capital fund. The fund will
target export-oriented information and communications technology
businesses, which represent the only area of the Palestinian economy
that has seen almost uninterrupted growth over the past decade.

Enticing foreign capital is a main goal of the PSE. Last March, the
exchange (and the Palestine Telecommunications Company) took an
investor road show to London, with further tours planned for New York,
Jordan and the United Arab Emirates. Like the Jewish Agency in the
years before Israel achieved statehood, the PSE has strategically
targeted members of a far-flung and prosperous diaspora. Among other
things, it recently established a $25 million mutual fund for Chilean
Palestinians, who constitute the largest Palestinian exile population
outside of Jordan.

The sine qua non for economic expansion has been the creation of the
new Palestinian security services, which are a model for the
state-building program in general. Palestinian forces have restored
law and order in now-thriving towns like Jenin and Nablus and have
coordinated effectively with Israeli forces, allowing Israel to remove
a significant number of roadblocks and checkpoints.

Palestinian state-building also includes institutional and civil
society reforms. The most recent was an intervention in the field of
education announced on Aug. 8. Mr. Fayyad identified three key goals
for reforming the curriculum: improving language skills, including
Arabic; promoting analytical and critical thinking; and combating
fundamentalism and extremism. The aim is not only to create future
generations of entrepreneurs and thinkers, but to ensure that they're
accustomed to notions of peaceful coexistence with their Israeli
neighbors.

The state-building program has qualities of perestroika—efforts to
separate party from government and to replace a patronage-based
government designed to satisfy political constituencies with a
technocratic meritocracy. As part of this, the Justice Ministry
recently announced that it will seek increased separation of powers
and protection from political interference in legal cases, which has
been a persistent problem in recent years.

Mr. Fayyad's efforts have generated significant opposition from within
the ranks of Fatah, the ruling party of the Palestinian Authority. As
an independent, Mr. Fayyad is held in suspicion by some of the
Arafat-era old guard. He is, however, supported by Palestinian
President Mahmoud Abbas.

In other quarters—including in a recent report by Washington's
Carnegie Endowment—Mr. Fayyad has been criticized for running his
state-building program outside the context of Palestinian democracy,
since the terms of all elected officials have expired and no new
elections have been held. (Hamas adamantly opposes any new national
elections, as they have every reason to fear the results, and Fatah
has proven unable to organize more limited municipal elections.)

This criticism misses the fact that Mr. Fayyad and his program are
neither causes nor symptoms of the lack of elections, and the
state-building efforts go on in spite, rather than because, of the
electoral impasse. Moreover, although elections are important,
democracy does not consist merely of polling but requires transparent
and accountable institutions. Mr. Fayyad's state-building program is
creating the institutional framework that is essential to a
functioning democracy.

To be sure, Mr. Fayyad is somewhat compromised by being the appointee
of Mr. Abbas, rather than an elected representative. And he has made
some miscalculations, such as trying (unsuccessfully) to block
Israel's recent admission to the Organization for Economic Cooperation
and Development, which was widely seen by Israelis as unnecessarily
provocative.

But the important point is that Palestinians have taken up the
responsibilities of self-government while pushing for the right of
self-determination. As direct Israeli-Palestinian negotiations
continue, the U.S. and the rest of the international community have a
vital interest in providing the technical, financial and political
support needed so that this project succeeds.