Washington, DC, March 27 -- The international community must act urgently support the Palestinian Authority and its institutions or face a looming “crisis” a panel of experts today warned at a Washington event today co-hosted by American Task Force for Palestine and The Carnegie Endowment for International Peace. The panel, "Palestine: Economic Challenges and Political Implications," featured the Council on Foreign Relations' Robert Danin, the International Monetary Fund's Oussama Kanaan, and Prince Firas Raad, acting head of mission of the Office of the Quartet Representative Tony Blair, and was moderated by Marwan Muasher, vice president for studies at the Carnegie Endowment. Muasher summed up the implications of the entire conversation by bluntly concluding that “we are headed for a disaster and both sides may be surprised by it.”

Kanaan said that "a crisis is looming if international actors don't move quickly." "Donors, especially regional ones must fulfill their pledges to the PA; Israel must ease restrictions on access and mobility; and Palestinians must persist with institution building or there could be a serious crisis in a matter of weeks," he cautioned. Raad agreed that, “something must be done this year in terms of building momentum; the Palestinians cannot wait a year, and some form of momentum must be found.” Danin said the most important factor is that "the regional donors must pay up, and even if they fear that they are in effect bankrolling the occupation, they're actually harming the people they're trying to help.”

In summarizing the overall situation, Kanaan said the economic strategy currently undergoing a significant crisis had its origin in 2007 when Salam Fayyad took office as prime minister. “We had targets for growth, unemployment and fiscal policy, which is the main macroeconomic tool for the Palestinians,” he said, “originally structured as a three-year plan.” For most of period since then, he said, "performance on growth and living standards overall has been much better than expected, which was an anticipated 4% annual improvement but proved to be about 8% in practice.” He also praised the PA performance on fiscal stability and reduced reliance on international aid, which he noted had declined from $1.8 billion in 2008 to to $1 billion in 2010. However, he said, “the current crisis is the result of sudden failures on these two fronts.” "The PA is facing a big financing gap due to lack of donor aid and might be forced to cut wages and essential social services. Moreover, growth has not lead to a decline in unemployment.” He said this was “mainly a result of Israeli restrictions and lack of access, which produces a decline in labor-intensive industries and disparities in different areas - growth looks impressive but is not balanced both sectorally and regionally and is not sustainable, especially because access is not being eased.”

Kanaan said that in his experience, “the PA has done a great job of trimming waste but it has had to cut back on wages. Less than half of expected aid has been delivered, and expenditures for development and long-term growth have therefore been very disappointing.” “Until donors give more and Israeli restrictions are lifted, this will not improve,” he continued. He also noted that, “revenue performance has also been disappointing, especially given the difficulties in securing Palestinian tax funds supposed to be delivered by Israel.” Kanaan said that "all three sectors need urgent attention; PA revenue must be increased to relieve the current crisis; it is very well known what Israeli restrictions on movement and access and tax revenue transfer are need to be lifted, but the political decision needs to be made; and increased donor aid is vital, including for development projects to sustain long-term growth.” He noted that the PA has developed “some contingency measures but they will be hard to implement given public pressures and continued withholding of funds by donors, especially regional ones, who sometimes cite the occupation as a reason to withhold funds, but this is politically short-sighted.”

Raad said one of the biggest problems facing the Palestinian economy is that its youth unemployment is one of the highest in the world - overall in the 30 percent range. He cited Israeli restrictions on many aspects of economic life regarding Gaza and said that, "in the West Bank the most important restrictions are those on movement outside the area, internationally and into Israel.” He noted that “political instability is a major impediment to real investment, confidence and the free flow of individuals entering and exiting the occupied territories.” Raad cited housing and mortgages; dual use import restrictions; and lack of access to natural resources -- especially a large gas reserves off the Mediterranean coast -- as key areas for improvement in the Palestinian economy.

"External trade is essential and an export-oriented positions would be a good policy, although easing Israeli restrictions and improving crossings are needed to make that work," he added. Raad said that "Palestinians need to get more access to their trade agreements with Arab states," and that "eased restrictions on Gaza should allow for more exports and what is especially needed is Gaza exports to the West Bank.” He cited three economic sectors with “tremendous potential” if there is stability and more coordination with Israel and Jordan: the tourism industry, from which all three countries can benefit; agriculture, especially in the Jordan Valley, provided Israel lifts significant ongoing restrictions; and pharmaceuticals, which also face a number of restrictions.

Danin said that the approach in recent years was based on three interlocking and mutually-reinforcing aspects: one, "Palestinian self-improvement under occupation but in spite of the occupation"; two, that this self-improvement "was predicated on a larger context that included security to provide law and order for Palestinians and security for Israelis, and reverse restrictions imposed during the second intifada"; and three, "diplomacy such as negotiations at Annapolis." "This was a virtuous circle, building the basis for the state from the ground up while laying the basis for successful negotiations," he said, and was meant to be "a self-reinforcing dynamic with a popular basis that could support negotiations." "Two thirds of the triangle have receded if not disappeared: the economic crisis and the diplomatic impasse," he said, “and the security aspect remains but is at risk due to the crisis in the other two legs."

Danin proposed four steps "to move forward and restore the virtuous cycle." “First,” he said, “we must return to the model of all three as an integrated whole: development, security and negotiations must all support each other. A return simply to negotiations is not enough: we need progress on all three.” “Second,” he continued, “There has to be a sense that we are moving towards an end to the occupation. Without this there will not be progress on any front or any real support for negotiations themselves. Israel has a very important role to play in this.” “Third,” Danin observed, “The Palestinians need to come up with a coherent strategy. The Fayyad strategy of preparing the ground for independence and removing any reasons for the occupation must be returned to.” He said that, “Palestinians are now pursuing a set of disparate policies that do not support each other, are sometimes in tension and often work against each other.” Among these he listed institution building, UN initiatives, negotiations with Israel, national unity efforts, peaceful resistance and potential elections. "Palestinians need a clearly defined and integrated strategy,” he insisted. “Fourth,” he concluded, “there is no such thing as benign neglect in this context and the security cooperation which is a sine qua non for all other progress could unravel.” Danin warned that “extremists on all sides want to, and could, bring it down. So far, it has held together but the situation on the ground is volatile and the international community needs to be more robust. The parties left on their own have shown they will not resolve their issues.”