Ramallah, West Bank - The economy of the West Bank has reached a crossroads, and with it so has the Palestinian Authority (PA). As Palestinian lending banks close their doors, development contracts are shelved and everyday spending slows to a trickle, the PA and international institutions speak of an economic crisis in the West Bank.

Conventional analysis blames the failure of donors to fulfill promised pledges for the paralysing PA budget deficit that has reached $.5bn. Meanwhile, Israel blames financial mismanagement by the PA.

But perhaps the standstill in the West Bank's economy is the perfect opportunity to reflect on the Palestinian Authority's chosen path since the start of the "peace process" and the signing of the Oslo Accords.

For nearly two decades, the PA has offered the promise of economic prosperity as a means to placate an occupied and colonised population. The current economic crisis that has pinched every Palestinian's pocket may prove a turning point.

Economic policies

Palestinian economic policies as they have been formed over the past 18 years have thwarted national liberation, critics argue. The PA has placed itself between the Palestinian liberation movement and Israel's settler-colonial ambitions, serving in effect as a protective shield to the colonial power from the people it controls. Alluring promises of economic prosperity have been the most potent tool of the PA.

Raja Khalidi, a senior economist with the United Nations Conference on Trade and Development in Geneva, speaking in his personal capacity, explains that the Palestinian population was seduced by the appeal of personal gains and material comforts, "A higher quality of life made postponing everything else worth it. If we can't have freedom at least we can drink a fine cappuccino in Ramallah."

Since the Oslo Peace Process began in 1993, neoliberal policies have crept into the lexicon of PA ministers and economists. The past five years in particular - since Prime Minister Salam Fayyad headed the PA government - have witnessed an emphasis on stimulating private growth and "freeing" the market as a means of reducing dependency on external aid and promoting alternative domestic sources of growth.

But reliance on aid is not what prohibits the PA or the Palestinian territories from reaching independence; and the current so-called economic crisis in the West Bank is not due to unfulfilled pledges by Western and Arab donors, as international institutions and the PA would have us believe.

The issue remains the very real and very old military occupation that has deprived the territories of their capacity to produce, trade and develop since 1967.

Under the Washington Consensus paradigm, private growth in a free market is seen as the safest route to progress and development, while excessive public sector growth is shunned. Indeed this course has been adopted by the Palestinian Authority as iterated clearly in the 2008 Palestinian Reform and Development Plan; the 2009 "Ending the Occupation, Establishing the State" and the 2011 National Development Plan.

However, there is a glaring problem with taking this approach in the Palestinian territories: the 45-year-old military occupation. This occupation cuts Palestinians from 60 per cent of the West Bank's land and public resources; and places restrictions on movement of goods and people within and outside of the territories, i.e. trade.

The Palestinian economy does not have the ability to generate self-sustained growth: UNCTAD has calculated that since the second intifada, one third of the productive capacity of Palestinians has been lost.

Reflecting on the "somewhat absurd policies of the PA," Khalidi says, "We're not dealing with a post-colonial framework where such policies have all too often been imposed with damaging, or at best mediocre, results. In no other colonial situation have we ever witnessed these kinds of economic policies."

Focusing on individualised economic growth in the Palestinian territories turns a blind eye to the occupation, thus indirectly consenting to Israeli expansion. During the first seven years after the Oslo Accords, the settler population increased by 42 per cent, a rate that exceeds any other period in the occupation.

Despite this obvious reality, the PA has carried on as if a colonial enterprise did not exist with the help and distraction of ample borrowed money.

Economy in paralysis

But now the economy is in paralysis. The money tree (i.e. private lending from banks against the assurance of monthly public-sector paycheques) has turned barren and it turns out that the hyped up economy that was growing at a widely celebrated rate of nine per cent between 2008 and 2010 had indeed been kept afloat on borrowed money. In fact, just under half of the Gross Domestic Product was supplied on credit from Palestinian private banks to the public and private sectors.

Now that the growth rate has slowed down to below six per cent, the international community - and Israel - is asking the PA to take the blame for mismanagement. The IMF's report that came out last week in preparation for the annual Ad Hoc Liaison Committee's meeting last Wednesday, faults the PA with failing to enforce tax collection (less than 40 per cent of the population comply with tax law) and urges reduced spending, structural reforms and higher income taxes.

The word occupation is not mentioned once in the report; rather the IMF politely requests the Government of Israel to co-operate with Palestinian trade and ease restrictions on movement as if in doing so, Israel would be granting the Palestinian people a favour.

Khalidi argues that blaming donor countries is a diversion from Israel's control over the Palestinian economy. "It's either the donors or the taxpayers that must solve something totally not their fault, a problem which is only about the costs of managing occupation and how much Palestinian taxpayers and donors should shoulder, while Israel pays nothing."

So will the PA take the hit for the team and stand by the Oslo framework as it's done in the past, absorbing the heat from an increasingly distressed and cash hungry population?

The traditionally obeisant Authority may do what it is told, but this year it has showed signs of balking at the leashes of Israel and the US.

The West Bank Fatah government not only opened lines of communication with the shunned Hamas government in Gaza and applied for statehood at the United Nations - to the chagrin of Israel and the US - but it has even begun to purportedly be considering its own dissolution, which would be a resounding rejection of what was begun 18 years ago.

While PA President Mahmoud Abbas publicly claims that the breakdown in the "peace process" is the reason he currently threatens to dismantle his government, the current dismal economic conditions and subsequent wrath of the West Bank population surely also drives the administration's desire to throw in the towel.

The PA's struggle to reach some externally determined benchmark of good governance and strong economy is not just an impossible battle, it's the wrong battle.

The Palestinian Authority may have surrendered its challenge to the occupation in exchange for a semblance of economic freedom and promise, but whether now or in the future, national liberation for Palestine is a battle that will have to be fought.

"I think that both for economic and political reasons, the current economic policy regime is unsustainable. The Palestinian people will indulge the quality of life paradigm only to the extent that it is not a substitute for national liberation - you can't buy these things off," Khalidi concludes.

Disclaimer: The views expressed by Raja Khalidi are his alone and do not represent those of the United Nations secretariat.