The economic protests of the last couple of weeks have been principally about the rising price of fuel and the government’s austerity measures. But across the Middle East, it’s the price of bread that can spark revolution or ensure political quiet, which is why Egypt spends billions of dollars annually subsidizing bread prices. Thus, the agreement reached earlier this week between the Palestinian Authority and bakery owners in the West Bank to freeze bread prices until next month is laden with symbolism.

Larbi Sadiki, a Tunisian political scientist who teaches at the University of Exeter, observed some 15 years ago that the subsidies constitute a social contract between the region’s dictatorships and their citizens to ensure peace and stability. The “democracy of bread”, he called it. The rulers promise economic sustenance to some degree or another, in exchange for which they get to run the country incompetently and despotically but without fear of riots or rebellions.

In the Gulf oil states, governments use their vast revenues to shower their subjects with jobs, subsidized prices, free healthcare and education, and other benefits. As the Arab Spring (or rather the lack thereof in the Gulf) demonstrated, it works. In those countries less blessed with natural resources, like Egypt and Jordan, the citizenry makes do with cheap bread and gasoline. It’s lousy social policy, and for countries that can’t afford it, it’s a fiscal disaster.

The PA doesn’t go in for subsidies, but it developed another kind of "democracy of bread" over the last several years. Foreign donors poured vast amount of government and private aid into the West Bank, the economy grew and living standards rose. There have been no elections since 2006, Gaza was spun off into an Islamic theocracy and the peace process has gone into in deep freeze, but all of these problems were tamped down by a modicum of prosperity. Economic growth averaged 9% annually between 2008 and 2010 in the West Bank. Never mind that it was all a function of money being pumped in from outside: there were construction cranes spouting up on the Ramallah skyline and in the street new restaurants opened to serve the first wave of aid recipients (the official representative offices and their employees, senior civil servants) and second wave (construction contractors and other restaurant owners).

Under the patina of prosperity, however, the unemployment rate was deep in the double digits and very little business activity that wasn’t dependent on aid was being developed.

For some time, economists have been warning that the situation wasn’t sustainable. The PA has been running bigger and bigger deficits as the aid flow (principally from the Arab states) has run dry, and was finally been forced to try and raise taxes and cut spending.  

Illusion of frisky growth

The World Bank estimated in a report this week that real economic growth will slow to 5% this year. That might sound like an enviable rate, but here’s where the distortions of a foreign-aid based economy come into play.

In the first quarter of the year, the manufacturing and agricultural sectors shrank 4% year over year, while construction plunged 9% as a cash-short PA failed to pay builders on time. Public administration and defense declined, too, because of the dire fiscal situation, but only by 1%. Unemployment rose from 16% in the first half of last year to 19% in the first half of 2012.

Among people ages 15 to 29, the ones most likely to throw rocks at a government offices, unemployment in the West Bank was 25.9%, even though less than 40% of that population group is in the labor force at all. (The reason for the discrepancy is that those not actively seeking work aren't counted as "unemployed".)

The democracy of bread, Palestinian-style, isn’t quite dead but it is definitely in jeopardy. The PA has long shed its revolutionary mantle. It strains these days to justify its existence as the one who will bring about a Palestinian state through a negotiated settlement with Israel. It tried more recently to inspire Palestinians with quixotic plans to win recognition of statehood from the United Nations. Prime Minister Salam Fayyad even made a lonely, and as its turns out mostly futile, quest to the PA into a Western-style democracy, with some measure of accountability and lower levels of corruption. The odds of his succeeding were remote because the most successful clean-up campaigns are free and fair elections that drive the old corrupt officials out and bring in new ones who need time to re-establish their corrupt ways.

But elections were never part of the plan. Neither did Fayyad succeed in creating independent institutions inside or outside the government. Never a bastion of media freedom, the PA had started coming down notably harder on the press in the months before the protests over high prices erupted.   What was left was the promise of some prosperity, which is can no longer deliver.

Abu Mazen’s government responded to the protests that exploded this month across the West Bank like other Arab leaders, by rolling back tax rises and price hikes and promising to scrounge up money to pay civil servants their back pay.

Does that sound familiar?

Bibi reined in gasoline prices when they were raising earlier this year, the Knesset raised the bottom threshold for income tax increases in the summer and the government is now so fearful of the measures it will have to take in the 2013 budget it has refused to talk about it in public. He has caved into demands from public sector unions and is now paying the price.

But that is where a real democracy and a democracy of bread differ. Bibi doesn’t fear angry mobs dragging him out of drainage ditches, or arrest and trial. In a real democracy, politicians like him try to entice voters to keep them in office with political and economic goodies. If he fails, the same government and institutions in place will be in place; just different people and slightly different policies. Everyone is loyal to the system – the leaders, the voters and the opposition.

Whatever, he may have aspired to, however, Fayyad never got the PA past being a democracy of bread. So now as protestors are calling for his head, he and his boss Abu Mazen have something real to fear.