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state formation in PalestineArrow vol 4 no 1 contents
About borderlands Volume 4 Number 1, 2005



State Formation in Palestine

Mushtaq Husain Khan, George Giacaman & Inge Amundsen eds. State Formation in Palestine: Viability and governance during a social transformation London: RoutledgeCurzon, 2004.

Victor Kattan
Director, Arab Media Watch


1. It is becoming increasingly trendy in international discourse to talk of "exporting" democracy to the Middle East. George W. Bush, waxing lyrical in his State of the Union Address on 2 February 2005 said, "[t]he only force powerful enough to stop the rise of tyranny and terror, and replace hatred with hope, is the force of human freedom...The beginnings of reform and democracy in the Palestinian territories are now showing the power of freedom to break old patterns of violence and failure...To promote this democracy, I will ask Congress for $350 million to support Palestinian political, economic and security reforms...". Tony Blair, in an exclusive interview with the Guardian newspaper during the London Conference "Supporting the Palestinian Authority" on 2 March 2005, said that a Palestinian state "has to have a sustainable democracy, the political institutions to go along with it, proper security structures and proper economic institutions" (Freedland & MacAskill: 2005). Whilst these reforms might have a nice ring to them, there was little discussion of substance about the issues that really matter: independence, sovereignty and statehood.

2. Democracy and statehood are fundamentally different and are not necessarily complementary. Democracy by itself will not lead to a Palestinian state. Therefore, to expect that "Palestine" can achieve democracy and have all the political institutions and trappings of a state, before it is a state, is an unusual way to go about things. "Palestine" is still territory occupied by the Israeli army. In this context, throwing money at the Palestinian National Authority (PNA) is not going to solve anything as long as Israel can interfere in the daily lives of the Palestinian people through its command and control structure in East Jerusalem, the West Bank and Gaza. By pushing for good governance reforms without addressing the core issue of occupation, there is a serious risk that the process leading to Palestinian statehood could falter.

3. In this context, State Formation in Palestine is particularly welcome, because it addresses the problems that the good governance model poses in the Palestinian context at a time when the international community seems to be coming perilously close to adopting this approach as a step towards the creation of an "independent and viable" Palestinian state. As such, it is a timely and exceptional work featuring a collection of essays that range from institutions and monopolies, to taxation and donor assistance, by emerging Palestinian intellectuals with assistance and input from, Mushtaq Husain Khan, the Oxbridge-educated Senior Lecturer in Economics and Associate Dean (Research) in the Faculty of Law and Social Sciences at the School of Oriental and African Studies, University of London. Khan sets the tone of this work in the first two chapters. He argues that the "good governance model" based on neo-liberal economic theory, and the neo-patrimonial model based on extensions of Weberian sociology, are inappropriate in assessing the process of state formation in Palestine.

4. Instead of adopting the good governance model which compares developing countries with an abstract model of a liberal democratic state as it is supposed to work in an advanced capitalist economy, Khan looks at the social transformation that took place in Palestinian society during the years of state formation from 1994-2000. He says that while "the social transformation framework suggests that there can be no disagreement about the desirability of democracy or a corruption-free society as goals, there is considerable doubt about whether policy to push either agenda as a means of accelerating development is likely to be effective in the typical development context" (Khan 2004: 16). Applying the good governance model to "Palestine" in a period of state formation is problematic since "Palestine" lacks almost all the powers and territorial sovereignty of a normal state (no control over a contiguous territory, no fiscal autonomy, no control over borders, including internal borders between enclaves). It might also be added, that as matters stand at present, "Palestine" lacks many of the characteristics of a state for international law purposes: rather it has a fragmented territory, a dispersed population, and a government which lacks sovereignty and authority and is constrained, by agreements it has signed with Israel, from entering into relations with states and international organizations. (Crawford 1990: 307-313 and Dajani 1997: 27 - 92).  

5. The PNA, as the authors of State Formation point out, was not primarily set up through the Oslo Agreements to deliver democracy to the Palestinian people. Rather, "[i]ts primary objective was to negotiate the territorial and constitutional limits of a Palestinian quasi-state in the context of an extreme asymmetry of power and resources vis-à-vis Israel. To get anything at all, it had to demonstrate its ability to deliver security to Israel on terms determined by the latter. In turn, this meant that from the beginning, there were serious conflicts between the immediate democratic rights of the Palestinian opponents of this particular 'peace process' and the imperative of maintaining security" (Khan 2004: 43). It therefore makes little sense, as the authors argue, to criticise the PNA's leadership for not delivering a "satisfactory democracy" before the "peace process" has delivered a state. As Khan points out: "[e]ven in a more typical developing country where a sovereign state already exists, it is not clear that a democratic state can be entrenched without addressing the problem of how to create a viable and dynamic economy" (Khan 2004: 44). It is therefore even more implausible in the case of a crisis quasi-state like "Palestine".

6. The foundation of the good governance model is that a rent-free economy with stable property rights is the most efficient market structure for development. ("Rent" is a politically generated income, which would not exist without some specific rights, subsidies or transfers that were artificially maintained through a political process. Monopoly profits, subsidies, transfers, unnecessary job creation in the public sector are all examples of rent-creation). Khan argues that this fundamental proposition of liberal economic theory has significant shortcomings, particularly when applied to developing countries: "Economic development is not just a process of making 'the market' work better. Development historically has involved the emergence and growth of a capitalist sector. Even in the most volatile and vulnerable contexts, the creation of a viable capitalist sector is usually a critical requirement for achieving economic, and therefore political viability" (Khan 2004: 29). The PNA had access to relatively large blocks of private capital (which were not available to Egypt, Algeria, Iraq and Syria where the public sector had to be the driver of accumulation and economic management) which it could control politically and which could rapidly bring in expertise and development capacity. Khan points out that this created strong incentives to resist the containment strategy imposed on "Palestine" by Israel which had always insisted on a "security-first route" to state formation. This reliance on Israel and the international donor community prompted the Palestinian leadership to look for more creative ways of raising funds independently, and creating incentives to attract foreign investment, in particular from the Palestinian Diaspora, to assist in the process of state formation in Palestine.

7. In many instances, Israel's containment strategy left the Palestinian leadership with little choice but to resort to corrupt practices; creating monopolies and using special accounts (which Israel was aware of) to dish out handouts to protégés with the aim of breaking Israel's stranglehold over the Palestinian economy. There was a desperate need on the part of the PNA to generate independent revenues, in particular, off-budget revenues that could be used in a discretionary way to manage an extremely volatile and unpredictable political context. Moreover, the unstable context in which the PNA was operating discouraged private investment. So the monopoly concessions the PNA granted to the private sector were aimed at inducing investments in large infrastructure projects such as electricity and telecommunications. Mohamed M. Nasr argues (Chapter 5) that these rents "[i]n a context of deep political instability, ... could be judged to have played a useful role in attracting much needed investment into what was essentially a conflict zone" (Nasr 2004: 168). Whilst, some of these rents were damaging to the process of Palestinian state formation; Khan thought that the best way to target and eliminate them, would be to address the conditions that resulted in their creation and maintenance, rather than by pushing for general good governance reforms (Khan 2004: 113). Thus, one would have to take a step back, and look at the overall impact of Israel's containment policy, its security-first agenda, the architecture of the Oslo agreements, and Palestinian dependence on foreign investment, which are all leading towards the creation of a "client state" rather than a "developmental state", something which is inconsistent with the legitimate hopes and aspirations of the Palestinian people. An uncritical application of good governance reforms could make matters much worse, reducing the PNA's financial viability and therefore its developmental capacity.

8. No government can function properly without access to revenue. If this revenue is controlled by another state, then that government cannot function independently. In 1994 Israel and the PNA signed the Paris Economic Protocol (PEP) which, according to Zagha and Zomlot (Chapter 3) circumscribed the financial viability of the PNA; being sufficiently vague to allow Israel to interpret its provisions in particularly damaging ways from the perspective of the Palestinians. Under PEP, Israel could collect and transfer to the PNA taxes and customs duties imposed on Palestinian imports from or via Israel. Israel also imposed a Value Added Tax (VAT) on Palestinian goods and services and corporation tax. The PEP marked a significant break in what had been in the years prior to Oslo, one of economic integration into a process of control and containment. The PEP, has been described by Zagha and Zomlot as "peculiar" because its provisions and wording are ambiguous (probably deliberately): "From the Israeli perspective, vagueness was an advantage as their negotiators were more aware of the range of rents a state could generate through trade and monetary arrangements and they were happy to leave open questions that could be later interpreted in a way favourable to Israel. On the other hand, ambiguity was highly damaging for the Palestinian side because the PEP failed to say anything about working procedures, processes of arbitration or of enforcement the Joint Economic Committee would follow in case of disagreements" (Zagha & Zomlot 2004:123). Israel always had the political and military dominance to impose its interpretation of the Protocol on the Palestinian side.

9. Taxation was another system of Israeli control over the Palestinians as highlighted by Fjeldstad and Zagha (Chapter 6): "On several occasions during the 1997-2000 period, Israel withheld tax revenues in prima facie violation of the PEP. To reduce its vulnerability, the PNA undertook various types of off-budget activities and established 'secret' accounts ... Given the unstable political situation and the fact that Israel on several occasions stopped transferring tax revenues collected to the PNA, it seems both legitimate and rational that the PNA operated with such accounts as a buffer to meet urgent needs and commitments" (Fjeldstad & Zagha 2004: 206). In a report in the Financial Times by Roula Khalaf and Stephen Fidler ("Arafat's $200 million gamble pays off" FT, 8 February 2004) a $200 million investment by Yasser Arafat and his financial advisor Mohammed Rashid, in Orascom's global depository receipts at a share price of $0.63 in November 2002, were recently quoted on the London Stock Exchange to be worth $30.00 per share. According to the report, PNA officials say that "all the money diverted at Mr Arafat's behest from the PA between 1995 and 2000, estimated at $900m, has been accounted for".

10. In the aftermaths of Mahmoud Abbas' election to the Presidency of the PNA, the Government of Japan announced that it would extend an additional $60 million in financial and humanitarian aid to the Authority. This took Japan's total aid to the PNA to about $90 million, more than double the preceding year ( Agence France Presse Tokyo: 10 January 2005). At the London Conference on 1 March, Dr. Benita Ferrero-Waldner, European Commissioner for External Relations, said that EU assistance to the Palestinians "would be in the order of $250 million" ( External Relations, SPEECH/05/126: 2005). The British government announced a contribution of £10 million to help the Palestinian Authority "improve the lives of its people" which will bring total UK financial assistance to the Palestinians this year to £61 million (DFID, 3 March 2005). At his State of the Union Address, the President of the United States also pledged £350 million of aid to the PNA. Thus, this looks like a repeat of events which took place ten years ago. Then, the donor community pledged $3.4 billion to aid the PNA during the initial phases of the Oslo "peace process" (Khadr 1999). As Hanafi and Tabar recall (see chapter 7): "[D]uring this period of political transition (i.e. 1994 - 2000) the Israeli occupation was not fully removed but was replaced by a complex system consisting of three players: The Israelis, the PNA and Western donors of international aid " [my emphasis] (Hanafi & Tabar 2004: 215).

11. What Hanafi and Tabar mean by this is that strategic interests, political considerations and foreign policy agendas affect the way donor countries distribute aid. They observed "tensions between the political objectives of supporting the peace process (and specifically the concern for a strong authority capable of clamping down on opposition) and donor willingness to use conditionality to promote transparency" (Hanafi & Tabar 2004: 222). Instead of conditioning donor aid on reform and transparency within the PNA; all too often donors were concerned with short-term political concerns such as regime stability. As a result, "donor assistance unwittingly allowed for the bloating of the bureaucracy and the formation of mechanisms that created opportunities for rent-seeking and patronage" (Hanafi & Tabar 2004: 222). Similar characteristics could be observed in the Palestinian NGO sector as well: "The empowerment of ex-leftist NGO leaders had little to do with the peace process of political stabilisation. If anything, the absence of any political constituency for these leaders and their growing competition for rents resulted in a political fragmentation of civil society together with a recognition on the part of the NGOs that their best political strategy was to work with the PNA and to desist from too many overt criticisms of PNA performance" (Hanafi & Tabar 2004: 235).

12. Overall, State Formation is a solid, illuminating and fascinating piece of work on the processes of Palestinian state formation in the West Bank and Gaza from 1994-2000. It is a must for any student of social sciences, politics, economics, law and development studies, both generally and in the Palestinian context. Likewise, policy and decision makers specialising on the Middle East would be advised to heed its central message: that good governance reforms will not by themselves lead to the creation of an independent and viable Palestinian state nor will they necessarily assist the PNA on the road to Palestinian statehood. Whilst regular free and fair democratic elections, an independent judiciary promoting the rule of law, and security reform are all worthy goals, these reforms alone will not satisfy Palestinian national interests for an independent, sovereign and viable Palestinian state, one that can function without outside interference. This can only come to fruition when Israel's prolonged military occupation of Palestinian territory, nearing its 38th year, is brought to an end in line with UN Security Council resolutions 242 of 1967 and 338 of 1973. Feints, tricks and guises in the form of a unilateral, or even a negotiated, "disengagement" plan (which really should be referred to as the qualified military redeployment plan from certain parts of the Gaza strip and the West Bank only) will not satisfy Palestinian national demands for justice, independence and statehood.


Victor Kattan is a Director of Arab Media Watch. He worked in Bethlehem, in the Occupied Palestinian Territories, during the Palestinian intifada as a UN Development Program consultant to the Badil (Alternative) Resource Center for Palestinian Refugees, a Palestinian NGO advocating a rights-based approach to solving the Palestinian refugee problem in accordance with international law and UN resolutions. Since graduating from Leiden University in 2002 with an LL.M in European Community Law he has focused on legal aspects of the "Question of Palestine". Two of his articles are due to be published in the Nordic Journal of International Law and the Palestine Yearbook of International Law. He is currently writing an in-depth primer on "Israel's wall and the International Court: What every journalist should know". Email:


George W. Bush, State of the Union Address, Chamber of the US House of Representatives, The United States Capitol, Washington, D.C. 2 February 2005, URL:

Jonathan Freedland and Ewan MacAskill (2005) "Interview: Tony Blair", The Guardian, 2 March. For full transcript:,2763,1428454,00.html

James Crawford (1990) "The creation of the state of Palestine: Too much too soon?" 1 European Journal of International Law pp. 307 - 313

Omar Dajani, (1997) "Stalled between seasons: the International Legal Status of Palestine during the Interim Period" 26 Denver Journal of International Law and Policy pp. 27 - 92.

Khadr, A. (1999) 'Donor Assistance' in Diwan and Shaban (eds.) Development under Diversity: The Palestinian Economy in Transition (Washington: International Bank for Reconstruction and Development, World Bank Group).

Roula Khalaf and Stephen Fidler (2005) "Yasser Arafat's $200 million gamble pays off" The Financial Times 8 February.

For the web site of the UK's Department for International Development (DFID) and news on Palestine visit:

For the web site of the European Union's External Relations visit:

For the web site of Agence France Presse (subscription needed for some news feeds) visit:

Israel's "disengagement plan" and related documents can be located at the Prime Minster's web site:

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