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.