Par Paolo Napolitano, MEDPRO Technical Report No. 5/June 2011[1]

 The Israeli–Palestinian conflict is a main cause of the lack of intra-Mediterranean integration. The signing of the Declaration of Principles in 1993 (i.e. the Oslo Accords)1  raised hopes for the political and economic development of the region and the spurring of democratization across the Arab world.

The expected resolution of the conflict would have had positive effects on the rest of the region as well, in both political and economic terms. Palestine would have become the first truly democratic Arab state (Ibrahim, 1995). Sixteen years later, however, with the collapse of the Oslo process, those hopes have dissipated and the conflict remains the prime source of instability in the region. In the early years of the 21st  century, the US strategy for the Greater Middle East and the spiralling of the  Israeli–Palestinian conflict during the second intifada plunged the region to an all-time low. With the inception of the Obama administration, interest in conflict resolution regained relevance, revitalizing  hopes for the Middle East among the international community. But the current stalemate in direct talks and the consequent ups and downs in the media and political discourse have brought back the  mantle of impasse and inaction.

In this paper, conflict resolution in the Israeli–Palestinian context is viewed as a political, just and  credible agreement between the two parties, which will then play a decisive role in the development of the Mediterranean region. We examine the developments in Israel and Palestine in recent years and the  major challenges ahead. These developments and the prospects for a solution are judged against the notion of the (un)sustainability of state structure(s): namely, the prospects for long-term development at the political, social and economic levels.

*    Paolo Napolitano is PhD in Political Science and International Relations, University  of Turin. The author is indebted to Nathalie Tocci for her helpful editing and review. The author also wishes to thank Rym Ayadi, Samir Abdullah, Samir Awad, Daniela Andreevska and Benoit Challand for their valuable comments and reviews.

1   In the present work we refer to the Oslo Accords as the entire body of agreements settled between the Israeli government and the Palestinians during the ‘peace process’ from 1993 to 1999: the Declaration of Principles on Interim Self-Government Arrangements (1993), the Cairo Agreement on the Gaza Strip and the Jericho Area (1994), the Agreement on the Preparatory Transfer of Powers and Responsibilities between Israel and the PLO (1994), the Protocol on Further Transfer of Powers and Responsibilities (1995), the Hebron Protocol (1997), the Wye River Memorandum (1998) and the Sharm el-Sheikh Memorandum (1999).

State sustainability is a very broad notion, and in the context of Israel–Palestine, its working definition depends on the political resolution to the conflict. Thus, resolution is viewed as an independent variable for any change and progress in the area. Yet it is possible to sketch out the main political, economic and social drivers of sustainability/unsustainability based on the nature of the solution achieved, in order to delineate future scenarios (Colombo, 2010).

Before proceeding, two preliminary observations are in order. First, a Palestinian state does not exist.  Hence, talking about state  sustainability in Palestine under the current conditions is meaningless. In  Palestine, given the absence of a state, debates have instead focused on the “viability” of achieving a state through negotiations (Khan et al., 2004). In other words, the non- existence of the state represents the a priori obstacle for testing its sustainability.2  Second, Israel is  usually  considered  the  only  democracy  in  the  Middle  East,  where  a  certain  level  of governance, rights and development are ensured. Nevertheless, as later discussed Israel exhibits critical problems inextricably tied to the conflict,  despite being a state in all its features and prerogatives.

We look at Israel and Palestine as two separate political entities (evidently not equal in terms of power,  international standing or legitimacy) and assume that the framework for a solution remains the achievement of two states, even though many obstacles and changes have emerged, making that option increasingly impracticable on the ground (Abunimah, 2006; Falah, 2005). Therefore, we believe that while the interaction between the two entities and broader regional dynamics are critical, the internal political processes occurring within them represent the key indicators for evaluating their paths towards sustainability or unsustainability.

As depicted in Figure 1, sustainability and unsustainability lie on a continuum with the option of weak stability halfway between the two ends.

Figure 1. Sustainability and unsustainability continuum

Sustainability    Weak stability    Unsustainability

In Israel–Palestine, if sustainability entails a development path set in motion following the establishment of two viable states, unsustainability refers to the perpetration of the status quo and the progressive deterioration of all political, economic and social indicators. The two parties see the status  quo  differently. In Israel, the status quo reflects a conscious political choice – purposely leaving unresolved all the core issues of the military conflict and the character of the state. From an Israeli  perspective, the status quo appears to be stable and profitable, leaving substantially unaltered its power in the context of the conflict. That said, the perpetuation of the situation exacerbates three critical issues:  internal decision-making processes, the nature of

2  There are key differences between these two notions, however. While state viability refers to the aim of establishing a Palestinian state in the short to medium terms, state sustainability relates to the long-term development of the political, economic and social potential of the future state’s structures. Certainly, the establishment of a viable state in the short term is a necessary condition for a sustainable Palestinian state in the long term. Thus, sustainability and unsustainability are necessarily two empirical referents of the state, and not the contrary. This is a critical point of departure that brings to the fore a key paradox: the search for a sustainable Palestinian state is part of the process of state-building, which is ongoing in the occupied Palestinian territories, notwithstanding the fact that a viable state, with attributes of sovereignty and which would represent the starting point for a sustainable state, does not exist.



Israeli democracy, particularly with regard to the Palestinian minority in the country, and uncertainty regarding Israel’s regional relations. A seemingly stable status quo, in other words, leads to growing unsustainability. In Palestine, the status quo perpetuates the prerogatives and the privileges of  the political leadership in power and serves Israeli economic and political occupation interests (Allegra and Napolitano, 2009; Perthes, 2004). The recent reform process in the occupied Palestinian territories (OPT) is leading to a certain degree of stability, especially in  the  West  Bank,  but  it  lacks  social  legitimacy  and  a  real  alternation  of  power.  That notwithstanding, the status quo gives rise  to  many risks for Palestinians in the OPT. More precisely, if the reform process is not accompanied  by a viable political settlement to the conflict,  it  is  unlikely  that  the  Palestinian  leadership  will  be  able  to  hold  on  to  power indefinitely: unsustainability and consequent political instability are likely to follow. Summing up, for different reasons, in both Israel and Palestine the persistence of the  status quo, while viewed by some as guaranteeing the semblance of stability, firmly casts the trajectories of both entities towards long-term unsustainability.


What  we  define  as  weak  stability  is  an  intermediate  point  on  the  continuum  between

unsustainability and sustainability and represents the achievement of a sterile political stability

– able to sustain the status quo, but unable to confront the main challenges for the future of the country(ies). Such stability is based on a simple assumption: only a Palestinian counterpart that is  politically stable, capable of satisfying Israeli security demands, able to control internal turmoil and ease the living conditions of the population will be able to sign a comprehensive agreement with  Israel.  This assumption reflects the position of the international community towards the conflict. Israel, by contrast, is primarily concerned with the security functions of the Palestinian Authority (PA), insisting upon security guarantees as a precondition for any future settlement. So the only chance for Palestinians to have their ‘state’ is to exercise tight security control over the population, reducing at the same time the level of political pluralism and the popular legitimacy of the PA (Schlumberger, 2007; Albrecht  and Schlumberger, 2004). The whole  process  of  Palestinian  reform  appears  to  be  inspired  by  a  model  of  “competitive authoritarianism”, whereby formal democratic institutions work alongside an authoritarian way of governing (Way and Levitsky, 2002). We can thus view the current status quo as aspiring to achieve a form of weak stability. Such stability, while far from attaining two viable  states, nonetheless sustains the status quo through a mitigation of the most immediate and acute social and economic problems of the Palestinians and through tight security control, but with little or no concern for the broader challenges of sustainability.


To explore these arguments in detail, this paper examines a set of variables (political, socio- economic and external) as they apply to the present situation in Israel–Palestine and determines the conditions under which a specific scenario is more likely to apply.


From a methodological point of view, this paper is mainly based on primary sources, such as official documents and in-depth interviews with key commentators in Israel and the OPT, such as scholars,  journalists, members of associations and NGOs, as well as senior officials and political representatives of the main parties and factions.3  Secondary sources refer to the socio- economic data for the two entities.









3  For the purposes of this report, 25 interviews were conducted with Israelis and Palestinians in the period from 26 November to 6 December 2010. Some of their remarks are directly quoted in the text, while others have been used as background to inform the author’s reasoning. Not all of the interviewees agreed to be quoted by name and thus all are quoted anonymously.


1.      State sustainability in Palestine: The challenges and risks of institutional reform


Ensuring a certain level of development may be an aim of any political leadership, but a development trajectory is not always sustainable in the long run. Sustainability implies some level of planning and farsightedness by the political leadership, both of which are almost absent in the Palestinian  case because of the heavy external constraints (Israel and the international community) on the political system and the inherent features of the incumbent elites.


In principle, a sustainable Palestinian state is the goal of the reform project adopted by the PA leadership  in the West Bank (Brown, 2010; PNA, 2008). In reality, however, this process is leading to a modicum of political stability that serves, on the one hand, to fulfil Israeli security requests, and on the other to consolidate the power of the PA. As mentioned above, the concept of sustainability in Palestine cannot be divorced from the existence of a state: without statehood as a final-status settlement, there is no possibility to discuss the sustainability of a state that does not exist. Thus, without a sovereign  Palestinian  state, all talk about sustainability in practice refers to the administration of day-to-day life  and a sterile process of institution-building. Institution-building in the OPT without the accomplishment of a state entails building the core functions of a state – public taxation and  expenditure, administration and internal security, education and planning – without the sovereign prerogatives that constitute the essence of the state itself. As one interlocutor aptly put it, “How can a state that has no power to impose and implement its choices be sustainable?”4


So the first step towards sustainability is the establishment of a viable Palestinian state. In this respect, three options are on the table:

1)      dismantling  the  Palestinian  Authority  and  proclaiming  a  state  of  permanent  crisis.5

Alongside  this,  the  Palestinian  national  movement  would  relinquish  the  goal  of  a

Palestinian state and realign the debate on the one-state solution;


2)      a unilateral declaration of statehood. Around 130 countries have already recognized the Palestinian  state  on the basis  of  the 1988 declaration of independence.  A  unilateral declaration of statehood would seek to build on this momentum, renewing the diplomatic push for a Palestinian state on the pre-1967 borders with East Jerusalem as its capital, and regaining international consensus on the Palestinian cause;6  and


3)      a continuation of the current ‘peace process’ despite its discrediting through repeated failures and recently leaked documents (i.e. the Palestine papers).


The first option is unlikely to be endorsed by the Palestinian leadership and even less so by Israel. Dismantling the PA and abandoning the goal of a two-state solution involves high costs for both Israel  and the Palestine Liberation Organization (PLO)/PA leadership: the former would be left with the pressing question of what to do with the Palestinians in the OPT, and the latter would have to abandon the ideological and political framework that has given rise to its




4   Remark by a Palestinian scholar at Bir Zeit University, Ramallah, in an interview with the author, 29

November 2010.

5   This idea regained currency after a speech by Palestinian President Mahmoud Abbas (also known as Abu Mazen) in early December 2010, in which he “threatened” the international community with dismantling the PA. The topic was and remains relevant, but the lack of credibility of the threat, particularly in view of its deliverer, has provoked little interest in this option.

6      See  “Abbas:  Britain  and  France  would  recognize  Palestinian  state”,  Haaretz,  20  April   2011 (

1.356814); see also Al Jazeera, 28 December 2010 (




existence. The second option – a unilateral declaration of statehood – is at present on the PLO/PA’s political agenda, despite its limited prospects of bringing about tangible results. International  recognition  would  actually  bring  positive  effects  only  if  it  culminates  in international pressure on Israel and that is not the case at the moment.


Third  parties  (the  United  Nations,  the  US  and  the  EU)  are  broadly  committed  to  the establishment of a Palestinian state by the end of August 2011 in the framework of the two-state solution and following the precepts of the Palestinian Reform and Development Plan that they have  contributed   to  formulating  and  sustaining.  Yet,  the  role  of  the  US  is  especially questionable: the US tends to impose its influence on the peace process, forcing the Palestinian leadership to negotiate on those matters on which Israel agrees to negotiate. At the same time, the US administration has not been able to impose any freeze or stop to the Israeli settlement activities in the West Bank in spite of openly declaring its position against such activities on multiple occasions.7   For this reason, the US is losing  its image as a ‘credible broker’ in the conflict, creating a vacuum for other actors. Notably Turkey, following its new strategic concept of “strategic depth”, which is aimed at acquiring new political centrality in the region (Kirişci et al., 2010), has significantly shifted its political stance towards Israel and Palestine. It has moved from an intensive strategic alliance with Israel in the 1990s to a more pro-Palestinian-oriented politics in the 2000s, especially after the accident with the Turkish flotilla near the Gaza Strip shore of May 2010. The Turkish leadership has continually kept open contacts with Hamas and has all the geopolitical potential to replace Egypt in the context of the conflict, not just as a mere reiteration of the US administration, but with a more autonomous and incisive role.


Finally, the  third  option  persists by  default and  reflects the  stark  reality  that  Palestinians continue to face: their inability to effect a solution in view of the Israeli military, political and economic  power  and  an  American  mediation  essentially  pressing  Palestinians  to  “accept whatever Israel ‘concedes’,  and only subsequently considering forms of compensation”.8    In turn, as suggested by an Arab-Israeli scholar, the Palestinian red lines remain only on paper: a state on the pre-1967 borders with East Jerusalem as its capital, full national sovereignty over the natural resources and a just resolution to the refugee problem.9  In practice and as revealed






7  This position was exacerbated by the US veto in the UN Security Council on 18 February 2011, against a resolution to freeze settlement activity in OPT. This veto contradicted the formal US position on settlements as articulated by Secretary of State Hillary Clinton. Moreover, the speeches by President Barack Obama on the 19th   and 20th   of May 2011, respectively to the ‘Arab World’ and to the AIPAC (American Israel Public Affairs Committee) Policy Conference, indicate revitalized US  interest in the conflict. Upon a close reading of the two speeches, however, they do not appear to add anything new to the debate: the US will continue to maintain a low profile in the conflict resolution,  and the general reference to the 1967 borders, although important discursively, implies a land swap that has already and informally been on the table for a long time. The speeches by Obama are available on the White House website  (see  “Remarks  by  the  President  on  the  Middle  East  and  North  Africa”,  State  Department,

Washington, D.C., 19 May 2011, president-middle-east-and-north-africa; and “Remarks by the President at the AIPAC Policy Conference

2011”,    Walter    E.    Washington    Convention    Center,    Washington,    D.C.,   20    May    2011,


8    As remarked by a Palestinian journalist at Al Ayyam, in an interview with the author, Ramallah,  5

December 2010.

9  At Tel Aviv University, Tel Aviv, in an interview with the author, 1 December 2010. Indeed, the ‘battle for Jerusalem’ is being lost by the Palestinians: the possibility of the Palestinians keeping the Holy City as their capital is quite low. The recent tensions in Silwan, Essawia and Sheikh Jarrah reveal how Israel is unlikely to budge on this issue.



by the Palestine papers, the PLO leadership appears to be ready to compromise on critical issues such as settlements, Jerusalem and refugees.10


Beyond the peace process and the prospects of achieving statehood, internal political dynamics pose  critical problems as well (Jarbawi and Pearlman, 2007): the political split between the Fatah-led  West  Bank  and  the  Hamas-led  Gaza  Strip  has  marred  the  Palestinian  political spectrum since  June  2007.  Here, common knowledge suggests that reconciliation between Hamas and Fatah is a precondition for any future political agreement with Israel. Yet, contrary to this view, the only practical  possibility for Hamas and Fatah to reconcile their differences prior  to  statehood may  well be  on  the  basis of  a  renewed commitment  to  resistance. As suggested by a Palestinian journalist, longer-term reconciliation based on agreed formulas for power sharing and representation seems only possible alongside or after the establishment of a state.11 In this sense the deal between Hamas and Fatah,12  signed in Cairo on 4 May 2011, can be read as a beginning; the agreement has probably been made possible as a consequence of the changes that have occurred in Egypt since the fall of former President Hosni Mubarak, but its functioning must be tested practically on the ground in the following months. On the one hand, it shuffles the cards on the table from the Palestinian side; on the other hand, it  consists practically in the extension of economic and reconstruction programmes from the West Bank to Gaza. A genuine process of state-building and national reconciliation, however, requires the prior existence of a state, rather than the reverse (Wesley, 2008).


By contrast, since 2003 the PA has seriously engaged in state-building and reform, in keeping with the demands of Israel and the international community (Brown, 2003). At the outset, the reform was supposed to be conducive to a resolution of the conflict following the controversial pattern  of   reinforcing  democracy  before  the  achievement  of  statehood:  through  reform, Palestinians would become equipped with effective institutions, which would make statehood possible.13  Over the years,  however, as the prospects for a political solution have dimmed, reform and institution-building have acquired lives of their own, increasingly detached from the prerequisites of genuine statehood (Napolitano, 2010).


Among other aims, reform is supposed to provide stability, good governance and a new class of senior, middle- and lower-ranking civil servants, rule of law, transparency, economic and social development,  as   well  as  civic  engagement  and  political  participation.  The  Palestinian government has issued several development plans, supported by international agencies (UNDP), following to the letter the precepts of the international community and Israel. Some results have




10    The ‘Palestine papers’ consist of nearly 1,700 files released by Al Jazeera in January 2011.  They concern  diplomatic  relations  (reports,  minutes,  private  messages  and  emails)  between  Israelis  and Palestinians from 1999 to 2010. The reports contain sensitive revelations about concessions  that the Palestinian leadership was prepared to grant Israel in particular about Jerusalem, settlements and refugees. The  papers  are  extremely  important  although  their  reliability  is  still  under  discussion.  See  “The Palestinian  Papers”,  Al  Jazeera,  2011  (;  see  also  “Secret papers   reveal   slow   death   of   Middle   East   peace   process”,   Guardian,   23    January   2011 (

11  Journalist at Al Ayyam, Ramallah, in an interview with the author, 5 December 2010. On 4 May 2011, a new deal between Hamas and Fatah was agreed, including the formation of a national unity government. The deal has probably been made possible as a consequence of the changes that have occurred in Egypt since the fall of former President Hosni Mubarak, but its functioning must be tested practically on the ground in the following months.

12   The deal provides for the formation of a unity government, the renewal of the Palestinian  National

Council, legislative and presidential elections, and the reorganization of security services.

13  Since the outset, the PA has been accused of being incapable of administering the OPT (Khalidi, 2007, p. 158).









been achieved.14   Yet the reform has been criticized by many observers for its  underlying political logic, such as the following remark by a Palestinian researcher:


[E]asing Palestinian living conditions in the occupied Palestinian territories, in fact, would entail a sort of appeasement of their main requests in negotiations and in general of their attitudes towards the conflict. However, the reform, a complex set of measures mainly financed by external aid, has just produced some scratches on the surface, while

the core problems remain unaltered.15


In particular, institutions can change but the way the OPT is governed has remained the same (Parsons,  2005). While concrete results are being achieved in terms of institution-building, security and the economy, they are being done so at the expense of a growing gap between the PA and Palestinian  society, and the progressive erosion of the Authority’s social legitimacy. The security apparatus, for example, has grown significantly, exhibiting strict control over the population and the intensification of security cooperation with Israel. The rising authoritarian features of the PA and the lack of social legitimacy would seem to represent the highest risks for the Palestinians in the absence of the state.16  Moreover, considering the split between the West Bank and the Gaza Strip that occurred after the clashes between Hamas and Fatah in June 2007, and the de facto existence of two governments, it is notable that the reform process is showing effect in the West Bank alone, thus increasing the separation within the Palestinian community. As for Hamas, the Islamist party has always criticized the reform, considering it impracticable to reform institutions under occupation and refusing any likelihood of cooperation with Israel in terms  of  security.  That  notwithstanding,  the  Hamas–Fatah  rivalry  is  still  perceived  by Palestinians as a determinant and as controversial for Palestinian interests.17  Following the recent  revolts erupting in the Arab world, on 15 March 2011 a ‘Day of Reconciliation’ was promoted by  several Palestinian youth organizations to put an end to the divisions among Palestinians and to ask the political leaderships for a new and shared political platform based on the renewal of the Palestinian National Council and including all the Palestinians living in the West Bank, the Gaza Strip, the refugees and the diaspora. The demonstration was repressed by the Hamas police in Gaza, however, while in the West Bank Fatah tried to take the lead in the movement, increasing the sense of fragmentation and blindness within Palestinian politics and betraying the spirit of reconciliation.


Delving  into  the  progress  achieved  by  the  reform  effort,  in  terms  of  the  economy, macroeconomic indicators suggest that in 2009 GDP grew by 6.9%, GDP per capita by 3.7%, and unemployment dropped by 5.4% (Table 1). In the third quarter of 2010, GDP grew by 7.8% compared  with  the third quarter of 2009 while GDP per capita rose by 4.7%, although the unemployment rate  swelled to 26.6%.18  The Palestinian economy has thus registered positive



14    See the Palestinian Reform and Development Plan (PNA, 2008); see also Palestine: Ending  the

Occupation, Establishing the State (PNA, 2009).

15    Senior  researcher  at  the  Palestine  Economic  Policy  Research  Institute  (MAS),  Ramallah,  in  an interview with the author, 5 December 2010.

16   Elections (presidential, legislative and local) have not been convened since 2006. According to the latest opinion poll conducted by the Palestinian Centre for Policy and Survey Research (PCPSR, 2011),

37%  of  respondents  say  that  both  governments  (Fayyad  in  West  Bank  and  Hamas  in  Gaza)  are illegitimate, with a decrease among those who believe that the Fayyad government is the legitimate one (from 29% to 25%).

17   In this regard, 62% of population holds both Fatah and Hamas responsible for the continuation of the split, 61% opposes Abbas’s acceptance of the conditions set by Hamas to end the division, while the belief that the split is permanent has fallen to 21% (39% in the previous poll) – see PCPSR (2011).

18    Macroeconomic indicators and main findings have been drawn from recent reports issued by the

Palestine Economic Policy Research Institute (MAS) (see the MAS website,




growth in recent years. Yet disaggregating the data reveals the snag: recent growth rates have been high because of the extremely low performance in 2003–07. The Palestinian economy was and remains entirely dependent upon external aid.19 The ever-rising influx of foreign assistance in recent years, particularly after Salam Fayyad’s appointment to lead the cabinet, coupled with relative quiet on the  security front (in the West Bank), have resulted in GDP growth there. Moreover, GDP consists mainly of public expenditure and private consumption, while private investments remain extremely low,  entailing a structural “inability to create sufficient capital accumulation to generate sufficient job opportunities, capable of absorbing the annual increase in the labour force” (Abdelkarim, 2009, p. 40). Indeed, development in the private sector has been  rather  hesitant  because  of  Israel’s  aggressive  behaviour  since  2002,  resulting  in  an unprecedented  high  risk  for  this  sector.  Hence,  unemployment  and  poverty  levels  remain extremely high (26.6% and 34.5%, respectively, in the third quarters of 2010 and 2009). The situation in the Gaza Strip is far graver. The closure of the Strip has resulted in a persistently acute economic situation and an ever-growing detachment from the developments in the West Bank.


The weak functioning of the private sector and an over-reliance on external aid has in turn led to a bloated public sector (consisting of around 157,800 employees), the size of which is expected to rise over the years (Abdelkarim, 2009, p. 6). This generates a high level of deficit that can be managed only through  the inflow of external aid (leading to a net deficit of US$). In other words, the Palestinian economy  is  evidently unsustainable, requiring the heavy assistance of international donors to prevent its  collapse. Indeed, Prime Minister Salam Fayyad and his cabinet are perfectly aware of the Palestinian dependency on external aid and they are strongly committed to progressively reducing it by the end of 2013.20 Such external intervention, while assuring a modicum of social stability, cannot spur sustainable growth (Abdelkarim, 2009, p.



Table 1.  Main economic indicators in the occupied Palestinian territory in 2009 and 2010 ($ million)


  Q3 2009 Q4 2009 Q1 2010 Q2 2010 Q3 2010
GDP 1,307.1 1,327.4 1,344.3 1,417.8 1,409.5
GDP per capita 351.8 354.6 356.6 373.4 368.4
Participation in the labou

force (%)



41.6 40.7 41.5 40.5
Unemployment rate (%) 25.8 24.8 22.0 22.9 26.6
Total net revenues 453.8 397.3 447.1 455.5 504.2
Public expenditures (excl

development expenditu


res)            952.2









Surplus/deficit before sup port           (555.2) (258.3) 311.4 352.6 263.9
Surplus/deficit after supp rt             (113.4) 35.8 (101.6) (12.9) (92.2)
Total public debt

1,732 1,813 1,845 1,940


Note: Negative values in brackets.

Source: Palestine Economic Policy Research Institute (2011).




19  For an interesting evaluation of external aid in the West Bank and Gaza, see The World Bank Group in

West Bank and Gaza 2001–2009: Overview (IEG, 2010); see also Challand (2008).

20  In this regard, see PNA (2010).



Aware of these problems, the private sector has represented a core focus of the PA’s reform efforts, such as the establishment of a public–private partnership to ensure a greater return on investments   in    strategic   sectors   (residential   and   commercial   construction,   ICT   and agriculture).21  Many  attempts have been made to revitalize this sector, mainly consisting of services (in retailing, hotels and restoration) and small industry (furniture, food and handicrafts), to make it as vibrant and independent as possible. But apart from a few large companies, which have hugely benefited from the reform effort, the bulk of the Palestinian private sector has not recorded any structural progress.


The banking system has also represented a core focus of the reform effort: a decree issued by the  government and the Palestinian Monetary Authority called upon banks to invest from a minimum of 40% to a maximum of 55% of their deposits in the West Bank and the Gaza Strip, limiting their  activities  overseas. This has meant that banks make local loans primarily for private consumption  over and above what the banks can afford: according to a Palestinian researcher, the volume of loans has spiralled from $1 billion in 2007 to $2.6 billion in 2010.22

This has certainly stimulated domestic demand, but it has also dramatically reduced savings.

Moreover, the bulk of liquidity is provided by external aid: once again, unless the economy reduces  its dependence on external aid, a prospect that is close to nil until a viable political settlement is reached, the consumption bubble in the West Bank will ultimately burst.


Summing up, the reform process has brought with it some achievements (GDP growth and transparency in public administration), but it has not been able to tackle the principal structural deficiencies of the Palestinian economy, which is characterized by a bloated public sector, weak private  enterprise and investment, the absence of external economic ties and high rates of unemployment and poverty. In addition, the significant differences between the West Bank and the Gaza Strip are sharpening the division between the two areas. These structural deficiencies in turn require an end to the conflict and the establishment of a viable state. In the absence of these conditions and in an attempt to sustain a modicum of stability, many of the actions of the PA and the international community could result in the long-term unsustainability of the OPT.


A parallel story can be told of the political level. Through reform, the OPT has seen an increase in security  with a reformed security sector in strong cooperation with Israel. Yet largely as a result of  this, the PA’s legitimacy has plummeted. Parliament has effectively been dormant since the 2006 elections; the government is appointed by the president, whose own mandate has long  expired. The  security  apparatus increasingly displays the  features of  an  authoritarian system,  despite (and in part  because of) its  ‘efficiency’. The reform effort thus serves to perpetuate the PA’s control at the expense of its popular legitimacy. At both the economic and political levels, ‘weak stability’ has taken root, marked by external economic aid and internal security control, the long-term sustainability of which is not on the horizon. In this respect, the EU, the most important financial backer of reform, risks finding itself on shaky ground. More specifically, if promoting and financing institution-building and democracy results in no state for the Palestinians, or even worse in the rise of authoritarian features of a controlled Palestinian administration, evidently this cannot be considered a good result for EU  involvement in the conflict resolution.23 For this reason, the EU is entering a blind alley: on the one side, it cannot abandon the international framework of a two-state solution and refrain from supporting reform, despite the risk of complying with an increasingly authoritarian dynamic, while on the other, it is experiencing rising internal divisions on how to urge Israel to respect international law and



21  Ibid., p. 25.

22  At the Palestine Economic Policy Research Institute (MAS), Ramallah, in an interview with the author,

5 December 2010.

23   For a critical evaluation of the EU’s attitude towards the Israeli–Palestinian conflict, see Institute of

Security Studies’ publication by Aymat (2010).



obligations. For this reason, the EU has positively welcomed the deal signed between Fatah and Hamas in Cairo; looking forward to further developments, the formation of a unity government would be judged positively, given that Palestinian reconciliation is one of the goals of the EU.24



2.      The (un)sustainability of the state of Israel


As in the case of Palestine, the questioning of Israel’s sustainability is an arduous task, but for different  reasons. Israel is a strong state and a regional power in the Middle East, which is economically stable and experiencing continual growth (GDP growth of 4% in 2009, with an unemployment rate of 6.6% in 2010).25  Theoretically, Israel has all the attributes of a modern state (Poggi, 1990), and a rather successful one at that. It is nonetheless a state without a clear definition of its borders, with a political and economic trajectory that is entirely divorced from its region, and a highly fragmented political and social situation. Thus, the sustainability of the state of Israel cannot be taken at face value.


At the political level, the core tension is that between the definitions of Israel as a Jewish and as a democratic state. Whereas the former stresses the cultural, religious and ethnic features of the majority Jewish population, the latter hinges on the equal rights and political participation of all citizens, including the Palestinian Arab minority (Ghanem et al., 1998; Rouhana, 1998; Lustick,

1980).26 The main concern for the sustainability of the state refers to Israel’s ability to manage this tension adequately. Granting priority to the former appeases the nationalist aspirations of the Jewish  majority, but also leads to rising tensions among communities and the absence of prospects for a comprehensive peace (Neuberger, 2003). At the heart of this tension is also the

broader conflict with the Palestinians: without a successful conclusion to the peace process

through the establishment of a Palestinian state, not only will Israel continue to confront the situation in the OPT, but also the tensions within Israel between the Jewish majority and Arab minority are set to grow.


In addressing the sustainability of the state of Israel, the following paragraphs focus on two main  indicators: i) the internal political dynamic with particular reference to the stalemate in Israeli decision-making over the peace process, and to relations between the state and the Arab minority and the nature of Israeli democracy; and ii) the regional dimension in terms of both the security dilemma and economic integration in the Mediterranean region.


Starting with the Israeli political system, over the last decade the Israeli political leadership has shown an unprecedented degree of non-decision-making on issues related to the conflict. Non- decision-making has constituted the dominant Israeli strategy and has alternately taken the form of maintaining the status quo and pursuing blind unilateralism. It seems that the Israeli political leadership is not following any strategic path in the peace process; it has no clear answer to the question, “What does Israel want from the peace process or from the Palestinians?” As put by one interlocutor, “there is one man in the political system able to take the fundamental decisions for the country, and historically that man is the prime  minister. I have a clear sense that the





24   See the position of EU Foreign Affairs Council on 23 May 2011 as set out in “Remarks by EU High Representative                        Catherine    Ashton    at    the    end    of    Foreign    Affairs     Council”,    A201/11 (

25      Statistics    are    available    on    the    website    of    Israel’s    Central    Bureau    of    Statistics ( and ( publications/isr_ in_n09e.pdf).

26   An interesting perspective on the Jewish character of the state is provided in the article “The ‘Jewish state’ condition”,, Edition 20, 25 October 2010 ( bl251010ed20.html).



present one has no idea of how to carry out the political agenda, and that is quite astonishing!”27

In this respect, there appears to be an interesting parallel between the Israeli and the Palestinian political leaderships.


Looking at the present stalemate in the peace process, the two-state solution is distant from the horizon. That notwithstanding, there is no political room for an alternative (Hilal, 2007). The mainstream consensus within the Israeli body politic converges on neither the greater Israel nor the bi-national  one-state solution. Hence, Israel persists in the discourse of two states but practically continues to pursue its policies of dispossession and separation, as demonstrated by its policies and activities on the ground (Gordon, 2008). As stated by one interlocutor, “Israel accepted de jure or discursively the two-state solution only when it became impossible to reach it de facto on the ground”.28  This  dichotomy serves to protract the status quo, distracting the international community and boxing the Palestinians into a diplomatic process that buys Israel time to pursue its policies on the ground. The  present status quo is founded upon a tangible disequilibrium whereby Israel holds the greatest power and the Palestinians have little chance to impose any solution or drive to modify the situation.


But while sustaining the status quo, this approach generates progressive unsustainability within the Israeli democracy itself. There are two factors that influence each other: the general conflict with the Palestinians (in the West Bank, the Gaza Strip, the refugees and the diaspora) and the fact that around 20% of the Israeli population consists of Palestinians living within the Israeli political system. Our  hypothesis is that the non-resolution of the general conflict with the Palestinians would have negative effects on Israeli democracy too. Among recent poll findings, relations between Jews and Arabs in the country, for example, impress the reader: among the Jewish  population a  narrow majority (54%)  supports full  equality of  rights  for  all  Israeli citizens, while “53% of Israeli Jews believe that the state has the right to encourage its Arab citizens  to  emigrate”.29   A  recent  report  on  Israeli  democracy30   also  points  to  problems: respondents were asked for their views on the possibility of  Arabs being appointed to senior positions in Israel. A stark 70% were opposed. Moreover, there is “a  large majority of the Jewish  public  that  is  opposed  to  including  Arab  parties  and  Arab   ministers  in  the government”.31


Israelis themselves  have  questions  about  their  democracy.  One  Israeli  journalist  strongly criticizes the very nature of Israeli democracy:


[D]emocracy is not the tyranny of majority, but the respect of minorities; democracy does not mean that if we are the majority, we trample on the basic rights of people, especially those of the minority. In Israel there is a sense of racism and nationalism that is  only partially connected to the conflict with Palestinians, but that is taking root

within society.32





27  Remark by an Israeli activist at the IPCRI (Israel Palestine Centre for Research and Information), in an interview with the author, Tantur, 6 December 2010.

28   Remark by an Arab–Israeli scholar, Tel Aviv University, in an interview with the author, Tel Aviv, 1

December 2010.

29   See “Poll: Most Israeli Jews believe Arab citizens should have no say in foreign policy”, Haaretz, 30

November    2010    ( should-have-no-say-in-foreign-policy-1.327972).

30  See Arian et al. (2010), op. cit.,

31  Ibid., p. 140.

32   Statement by an Israeli journalist at Haaretz, Tel Aviv, in an interview with the author, 1 December




The clarity of such a statement points to a widespread trend within Israeli public opinion: the present system of power is entrenching public attitudes towards the particularistic features of the state, settlements and relations with the Palestinians. Maintaining the status quo is increasingly taking the form of a default strategy and a pervasive state of mind. Indeed, the hard-line policies carried out by the composite Israeli government33 in the labour market and in social and civil affairs have contributed to nourishing this particular feeling.


Relations with the Arab minority represent the litmus test for the content and quality of Israel’s democracy. First, Arab citizens symbolize a demographic time bomb within the Israeli Zionist imagery: in 2020 Palestinians living in Israel will reach 2 million, and 3.1 million in 2050. If we add to this the  inhabitants of the West Bank and the Gaza Strip, the number of Palestinians living in historic Palestine (the territory including Israel and the OPT) will rise to 7.6 million in

2020 and 14 million in 2050.34  Second, despite the formal bond of citizenship, there is no organic  tie between the Arab minority and the Israeli state: citizenship is just a legal link between the citizens and the state, but there is no emotional or symbolic relationship between

Palestinians and the state of Israel. In the view of an Arab-Israeli scholar, to some extent, Israel is encouraging this in order to become the state of the Jewish people.35 In this context, we can interpret the loyalty oath bill approved by the Knesset in 2010, whereby all non-Jewish citizens have to swear loyalty to the ‘Jewish and democratic state’, as a tool to discriminate against those who do not feel an emotional bond with the (Jewish) state. Israel’s independence day coincides with the commemoration of al-Nakba, the catastrophe for the Palestinians.36 How can the Arab minority swear loyalty to a state whose official narrative celebrates uncritically what is viewed by  the  minority  as  its  greatest  historical  catastrophe?  Are  these  the  premises  for  mutual recognition and reconciliation? No doubt the establishment of a Palestinian state would assuage Israeli demographic fears, opening the possibility for a more open political debate in Israel. In its  absence, the matter of  state  sustainability for Israelis  is  quintessentially emotional  and

existential, and inextricably tied to relations with the Arab minority and the composition of

Israeli society as a whole.


A recent report published by the Mossawa Centre37 shows how the status of Palestinians living in Israel remains unclear at both the structural and institutional levels, and how discrimination against Arabs is  expected to rise in the near future.38  Discrimination ranges from the scarce opportunities for building houses and finding jobs to the series of daily obstacles faced by the community.39 In addition, all socio-economic data reveal how public expenditure devoted to the



33   The present Israeli government is based on a composite coalition formed by right and extreme right parties (Likud and Ysrael Beitenu), a leftist (Labour party) and a religious one (Shas).

34    We refer to the medium value projections elaborated by Sergio della Pergola (2007) in Israele  e

Palestina: la forza dei numeri. Il conflitto mediorientale fra demografia e politica, p. 169.

35   Remark by an Arab–Israeli scholar, Tel Aviv University, in an interview with the author, Tel Aviv, 1

December 2010.

36  The term nakba [catastrophe] refers to the expulsion of around 725,000 Palestinians from their homes during the first Arab–Israeli war in 1948.

37  See Norwich et al. (2010), p. 27.

38   In recent years, many tragic clashes have characterized relations between Jewish and Arab Israelis: Akka, Rahat Umm al-Fahem, Jaffa and Ramla are just few of the places where rising tensions between the two communities have erupted in violence, especially after the Israeli decision to relocate to these areas some of the settlers removed from the Gaza Strip in 2005. This step has raised the level of tension in mixed cities.

39   The Israel–Lebanon war in 2006 represented a drama for the Arab community living in the north of Israel. As remarked by a representative at the Mossawa Centre (Advocacy Centre for Arab Citizens in Israel), in an interview with the author, Haifa, 6 December 201, the evacuation of cities reminded them of the 1948 nakba, with the serious likelihood of losing their properties once again.



Arab community is expected to drop dramatically, while a greater share of public funds is needed  to  counter existing discrimination in education, employment and local development.40

The Supreme Court increasingly seems to implement the government’s decisions instead of acting as  a supreme arbiter of the political, civic and legal life of the country, a role that it

played in the past. What Palestinians living in Israel call for is the full recognition of their rights as citizens and members of a community. They do not claim internal self-determination, but just demand equality of rights without losing touch with their homeland. Rather than being viewed as an obstacle to the country’s national aspirations, Arab citizens of Israel believe they could act

as “a bridge for reconciliation and integration; integration does not mean accepting passively any acts of the government, but listening to the demands of all communities”.41


Moving on to the regional dynamic, the deepening conflict with the Palestinians has increased the security and economic dilemmas for Israel, making the balance of power in the region much more unstable. Yet Israel is a regional power, with strong economic drivers, a leading position in the high tech industry and military technology, and a recently discovered gas field offshore of Haifa. Despite its  impressive economic performance, the socio-economic inequalities in the country are stark: around 20.1% of families are living below the poverty line.42 In view of this mixed economic picture, would a sustainable Israeli state require regional cooperation with its Arab neighbours? On the one hand, Israel enjoys strong bilateral ties with the EU as well as with other regions (the Balkans). On the other  hand, the absence of organic economic and political ties with its immediate neighbours – the Arab states – has placed Israel in a situation of chronic isolation. Indeed, Israel does not show interest in or worry about reshaping its economic ties with the Arab countries in the region, nor about the recent Turkish activism in leading this effort.43  Israeli positions on this matter show a sharp dichotomy, as revealed in a statement by an Israeli journalist at Haaretz: “Israel must work to become accepted in the region, but now it works in the opposite direction; Israel is [doing] everything not to be accepted in the region.”44

This  dichotomy  is  also  reflected  in  the  remark  by  an  Arab–Israeli  scholar  at  Tel  Aviv University: “It seems that Israel stays in the Middle East but lives in Europe, whilst it must be integrated  firstly in the security system of the Middle East and then in the economic one.”45

Politically, US–Israeli relations reached an all-time low in 2010 on the question of settlements, when  Israeli Prime Minister Benjamin Netanyahu publicly defied the US administration by

announcing several times the continuation of settlement-building in the West Bank and de facto

block of any possibility to revive side-by-side talks with the Palestinians. These tensions have not been  tangibly detrimental, however, and the US remains Israel’s major ally. At the same time, they reveal the extent to which Israel enjoys a high level of bargaining power in orienting the peace process.


Israel looks at the regional dimension only in terms of security, but the uncertainty caused by the recent turmoil in Egypt, one of the pillars of Middle Eastern regional security, has increased the  alert   levels  for  the  Israeli  government,  which  is  now  seriously  concerned  about developments in the area. In the regional context Israel has never seriously considered the Arab Peace Initiative, the attempt made by the Arab League to cease the conflict by granting Arab recognition to Israel in return for the  creation of a viable Palestinian state (Baghat, 2009); probably in this respect, Israel has underestimated or miscalculated the strategic significance of



40  Norwich et al. (2010), p. 44.

41    Remark by a representative at the Mossawa Centre (Advocacy Centre for Arab Citizens in  Israel), Haifa, in an interview with the author, 6 December 2010.

42  See the National Insurance Institute report by Endeweld et al. (2010).

43  Remark by an Israeli official, in an interview with the author, Jerusalem, 29 November 2010.

44  Interview with the author, Tel Aviv, 1 December 2010.

45  Interview with the author, Tel Aviv, 1 December 2010.



that initiative but a sudden change on this matter seems very distant on the horizon. In the end, when   debating  the  country’s  long-term  sustainability,  its  complete  detachment  from  its surrounding environment places a clear question mark over the country’s future.



3.      Between sustainability and unsustainability: Weak stability


Looking at Israel–Palestine, the scenario of weak stability seems to sum up the current situation on the ground. In reality, Israel looks favourably at the process of PA reform in the West Bank and the  resulting  weak stability as a tool to preserve the status quo, which is the dominant strategy for the Jewish state. At the same time, Israel is experiencing growing tension internally, which it is able to manage at the moment, but which risks deteriorating dramatically towards unsustainability, particularly with respect to relations with the Arab minority. The PA, for its part, is also heading towards weak  stability or sterile political stability – able to sustain the status quo, but unable to confront the main challenges for the future. The Palestinian leadership is ready to accept any solution that can bring to life the semblance of a state, in whatever form.


Israel prefers the status quo. The state retains the upper hand and shows no interest in ending the conflict.  Yet when people start demanding equal rights and the improvement of social and economic conditions, the state’s security-first approach reveals all its weakness with regard to the Palestinians  living in both Israel and the OPT. Nevertheless, the present Israeli political leadership does not show  notable interest in or appear to see the strategic implications of deterioration in the levels of  equality in the country. In this respect, the aim seems clear: reinforcing the Jewish character of the state and transforming Israel into an “ethnic democracy” (Smooha, 1997), rendering painfully  transparent  the inherent tension in and vacuity of the

‘Jewish democratic state’. As for the region, a sustainable development trajectory for Israel cannot be entirely divorced from security and economic integration in the Mediterranean and the Middle East.  Still, at present Israel does not seem worried by its economic or security isolation: the agreements with Jordan and Egypt seem tenable despite the recent turmoil, and in general a condition of weak stability at the regional level allows Israel to control the broader Arab–Israeli  conflict. Obviously a  probable  extension of  revolts in  neighbouring countries (Jordan, Syria and Lebanon) will raise the alert levels in Israel, inducing a serious rethinking of its attitude towards the Arab countries, starting  with the revival of the Arab Peace Initiative (API).46  Moreover, Israel will face the changing role of  Turkey in reshaping the geopolitical framework of the region: indeed, Turkey is supposed to become  an autonomous and credible pillar of the Mediterranean security system with a prosperous economy  and  a stable political system.


The US is still decisive in the process of conflict resolution but is progressively losing its image as a credible broker, being unable to achieve any significant results on the ground in the last few years. For this reason, the EU can intervene in the present framework. The Palestinian reform process is financially  backed by the EU, which has room to operate more directly in the mediation process. The threat of  cutting aid for Palestinian institution-building, for example, although highly risky for the Palestinians, can be used as a credible threat to both the Israeli and Palestinian leaderships. In this sense, Israel would cease to bypass the occupation costs being mitigated by international aid and would have to take up its responsibilities for the Palestinians, while the Palestinian leadership would fear losing its power and all the political capital invested and dispersed in the last 20 years. Probably this option would take the  conflict back to the beginning of the 1990s, before the start of the Oslo process, but at least it would  compel a serious redefinition of the terms of the peace process. The EU has a window of opportunity to play a more decisive role in the area, but it depends on the political will of its members to do so.



46   Formally, the API was revived by the Arab League in 2007, yet given the recent turmoil in the Arab world, a re-examination of this initiative by the Arab League seems understandable.



In relation to the Palestinian case, until now the leadership has been marked by a certain degree of realism: they have never capitulated, at least discursively, on Palestinian red lines (Jerusalem, borders, natural resources and refugees), although they have shown flexibility in negotiations. At present, the  tightening of the security system within the OPT is protecting the current leadership from the risk  of  internal turmoil. Hence the PA has been more ready to appease Israel, as  revealed by  the  Palestine  papers. This process is  potentially dangerous: without statehood,  social  legitimacy  and   civic  engagement  the  Palestinian  political  system  risks collapsing.  For  the  Palestinian  leadership,  weak  stability  means  securing  its  power  while waiting for a state. In doing so, the authoritarian features of the regime are entrenching and a dramatic deterioration in economic and social indicators will follow, generating a situation of increasing instability. Moreover, the reform efforts are highly concentrated in the West Bank, which contributes to the separation between the West Bank and Gaza,  leaving the relations between  Fatah  and  Hamas  in  a  continual  stalemate  and  casting  the  Palestinian  national movement in a limbo that undermines both the viability and the sustainability of  any future Palestinian state. As for economics, the reform effort – maintained by copious external support

– tries to ease Palestinian living conditions but faces structural obstacles, first of all being the perpetration of Israeli occupation. The Palestinian leadership can keep the PA afloat but cannot plan for  the future of the state. The Palestinian economy has great potential: in the case of statehood, many  sectors could boom easily (tourism, real estate and services) while the Gaza Strip could become a tax-free trade area between the Mediterranean and the Arabian Peninsula. All this remains purely speculative, however, in the absence of a state.


Sustainability and unsustainability may have different features in Israel and Palestine. Yet both externally  and  internally  these  two  cases  remain  indivisible;  any  progress  in  Israel’s sustainability is premised upon the creation of a viable Palestinian state, where a new political leadership  will enjoy the autonomy to make free choices for the future of the country. This prospect is nowhere near on the horizon.







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[1] This paper was produced in the context of the MEDPRO (Mediterranean Prospects) project, a three-year project funded under the Socio-economic Sciences & Humanities Programme of DG Research of the European Commission’s Seventh Framework Research Programme. MEDPRO Technical Reports give an indication of work being conducted within MEDPRO thematic Work Packages (WPs) and aim at stimulating reactions from other experts and academics in the field. Unless otherwise indicated, the views expressed are attributable only to the author in a personal capacity and not to any institution with which he is associated.

ISBN-13: 978-94-6138-107-1

Available for free downloading from the MEDPRO (

and CEPS ( websites

© Copyright 2011, Paolo Napolitano


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