A Genealogy of Oligarchy: Part II

*Photo courtesy of snowscat (@snowscat)

**Part I of this series, detailing the provenance of the Fatah-diaspora coalition, can be read here.

Oslo and the Foundations of the West Bank’s Contemporary Political Economy

The First Intifada broke out in December of 1987. Organically local, organizationally independent, and socially transformative, the mass movement not only challenged the Israeli occupation by exposing its terrible violence for worldwide audiences, but Fatah and Arafat’s (self-asserted) claim to speak for the Palestinian nation as well. Holding strong for the better part of four years—a time during which Israel found little joy in its attempts at repressing the vast networks sustaining the popular movement and Arafat found little traction in his attempts at cooptation—the uprising prompted Israel’s Labor Party and Fatah alike to seek a change to the dynamic on the ground.

In Fatah’s case, the urgency already felt due to the intifada was soon to grow into outright desperation after the whims of intraArab politics turned against it.

The party’s misfortunes largely stemmed from Saddam Hussein’s decision to invade Kuwait in August of 1990. Despite the requests of his Khaliji financiers, Arafat was unwilling to denounce Saddam due to the latter’s long-time patronage of the Palestinian cause. In response, the royals of the Gulf summarily cut off all material support to Fatah (and the Palestine Liberation Organization that it steered) and expelled hundreds of thousands of Palestinian expats from their countries. Having been made dependent on Gulf aid and Gulf-originating remittances, these punitive moves resulted in Arafat’s outfit becoming as financially precarious as at any point in its history. Sidelined within the Madrid Conference of 1991 as well—a joint US-Soviet peace initiative that brought parties from Israel, Palestine, Jordan, Lebanon and Syria together in hopes of striking a grand bargain—the movement was very much on the brink.

Israel itself was none too pleased with Madrid, either. Despite being afforded traditional American backing, the multilateral nature of the negotiations allowed the Arab participants, regardless of their internal divisions, to leverage a collective voice in the bargaining. Concerned where such collectivity might lead and aware of Fatah’s weakness, the Rabin government took the decision to pitch Arafat on a secret, bilateral alternative.

Successful in their sell, Israel’s senior diplomats whisked away Fatah’s top lieutenants to Oslo where the self-appointed Palestinian statesmen struck a deal winning them a small fiefdom within the occupied territories and promises of a final agreement to come. In exchange for such parochial gains, they offered a series of concessions that could only but prove calamitous to Palestinian emancipation and prosperity. Locking the national project into a legal-institutional framework ensuring the enduring dedevelopment of the economy and a political framework decommissioning all the means through which Palestinians had successfully contested Israel's dominance, theirs were failings as strategic as they were moral.

As relates to our current subject matter, though the agreements Fatah’s negotiators signed onto in Oslo and later in Paris—where the economic parameters of the two state solution were decided—indeed functioned to streamline Palestinian dispossession and guarantee the impoverishment of its people, they also facilitated the party’s building of a mini-kingdom for itself and the return of Arafat’s pals from the capitalist diaspora. Empowered as co-authors of the public policies that were to be enacted under the emergent Palestinian Authority and positioned to be the primary beneficiaries of a peace business about to explode, over the course of the 1990s, each of these coalition-mates would accumulate enormous resources, institutional footholds, and unmatched influence with external patrons. With power and capital in hand, they together defined a new political economy in the West Bank.

To understand how this came to pass, one need start with how money was spent and policy made during the early years of the two state solution. At this time, there were two institutional hubs handling budgets and governance: the Palestinian Authority (PA), which effectively reduced to the person of Yasser Arafat, and the World Bank, which was conscripted to serve as the interlocutor for the international community writ large. While divided on occasion by goals and/or methods, the two hubs were largely simpatico in their shared commitments towards buttressing a dominion for Fatah internally and towards remaking the Palestinian (and regional) economy according to the tenets of the Washington Consensus.

Specific to the former, Fatah’s standing as the Palestinian partner in peace made securing their primacy within the domestic sphere an inviolable (and unconditional) priority for many in the United States and Europe. Nonplussed by the party’s obvious deficits in terms of local credibility and organizational competence (or by the corruption they knew Fatah would practice), donor countries undertook enormous efforts during the mid 1990s aimed at both boosting Arafat in particular and at degrading the leftist movements that had earned immense public esteem during the First Intifada.

In order to weaken the left, per Toufic Haddad, the United States in particular initiated a two-front campaign. First, the social infrastructure of the left’s populist appeal was subjected to designed financial neglect by aid organizations—and to institutional challenge by the PA’s emergent state apparatus.

The most obvious theater for this front was in the domain of public health, where the left’s grassroots clinics—previously providing free, high quality health services throughout the duration of the Intifada—were purposefully starved of money despite their presenting the most efficient path to an equitable health system. Politically, meanwhile, the US simultaneously greenlit the PA’s slow rolling of democracy and Arafat’s autocratic praxes as an executive, thereby blocking the left from establishing a meaningful presence in government during the decisive years of the mid-late 1990s. Unable to articulate popular grievance or build institutional power, the left as a broader political tendency would lose much of its gravity inside the oPt. (Their decline foreclosed what hope Palestine had of a pluralist political future, too).

In addition to benefiting from rearguard actions directed against their rivals, as mentioned, Fatah (and Arafat) were more directly promoted by the Rabin government and international community as well. Principally, this transpired through making sure Arafat was afforded sufficient “walking around money” with which he might build and sustain a patronage network centered on his person. Towards such ends, former Shin Bet man Yossi Ginosar helped set up an arrangement whereby all Palestine’s customs revenues were directed into a single bank account in Tel Aviv that only Arafat and his trusted advisor Muhammad Rashid could access. Ginosar also helped midwife a series of PA-controlled firms with monopoly distribution rights for (and direct supply lines to) Israeli producers and importers of cement, commercial sand, flour, oil, iron, and cigarettes. These businesses were eventually brought under the umbrella of the Palestine Commercial Services Company (PCSC) and the leadership of the same Muhammad Rashid. The PCSC generated considerable employment, rent seeking opportunities for security men on both sides of the greenline and revenues in the hundreds of millions USD. In combination with the customs account, these moneys underwrote much of the shadow fiscal policy through which Fatah re-established itself as a social force in the oPt.

If the promotion of Arafat’s personal power had invested a crass kind of cronyism into the emerging structures of the Palestinian political economy, efforts to bring the Washington Consensus to Ramallah invested it with technocratic stylings as well.

One of the chief architects of these efforts was Stanley Fischer. Fischer, who currently works as a Senior Advisor to Blackrock—the world’s largest asset management firm—was an IMF man at the time (and a future Governor of the Bank of Israel and vice chairman of the American Federal Reserve). Like many of his generational peers, he too was transfixed at the thought that the Cold War’s end had marked the end of history. Zealous adherent of neoclassical trade theory and a true believer in the teleologies of capitalist peace, when it came to Palestine, Fischer saw his mission as being to install the free market, restrict the state to the remit of a night’s watchman, unleash the private sector into every corner of social life, and to use the peace process as a jumping off point for building an integrated free trade zone that might bind the societies of the broader Middle East together in prosperous fraternity.

Prior to the formal advent of the PA and under the auspices of Harvard-MIT hosted conference in 1993, Fischer and thirty like-minded Israeli and Palestinian economists began working towards such ends. The book they collectively produced, entitled Developing the Occupied Territories: an Investment In Peace, was published by the World Bank in September of that year. Hardly an academic exercise, Developing the Occupied Territories wound up serving as a blueprint for those entrusted with building Palestine’s courts and financial systems, devising its tax policy, and regulating its markets.

While Arafat always worked to mediate the distribution of aid inflows within the oPt, in terms of development planning and policymaking, his PA was largely content in ceding the floor to the consultants sent over by the World Bank—as Nabeel Sha’ath, a PA Minister from 1995 through 2002, directly attested to Toufic Haddad. This conciliatory decision can be understood in light of points made in the previous article: namely, that Fatah was a business friendly party-movement amenable to the wider neoliberal vision that the Bank sought to advance. Arafat himself, after all, had championed much the same neoliberal vision on a number of occasions, including by expressing his desire to turn Palestine into the Singapore of the Middle East. Given these ideological affinities, it was no surprise that the Bank was given such leash or that Arafat elevated a coterie of liberally-minded economists such as the aforementioned Nabeel Sha’ath, Maher Masri, and Samir Huleileh into positions of power and influence.

This was all very auspicious for Palestine’s diaspora capitalists. In the eyes of the World Bankers descending on Ramallah as much as in the eyes of the PA’s new apparatchiks, after all, Palestinian development necessarily required the emergence and leadership of a heroic bourgeoisie. In view of Arafat’s preexisting alignments with these Gulf-based, American-friendly businessmen, the search for those who might steward Palestine’s markets into prosperity could only but lead to the Masris, Khourys, Aggads, and their fellow travelers.

In order to persuade these men to bring themselves and their animal spirits home, the PA and international community went to remarkable lengths. First, there was the corporate welfarism institutionalized through the tax code and investment promotion policies, a welfarism that explicitly privileged foreign investors. Specifically, here I refer to 1995’s Investment Act and 1998’s Law on the Encouragement of Investment in Palestine, which jointly established lengthy periods of tax abatements for non-national firms, ensured such firms (and their owners) would not be discriminated against in any manner, and removed all restrictions as relates to the repatriation of capital.

Indulging in these special privileges, the Masris and Aggads each registered the holding companies through which they would organize their business activities in the oPt in tax havens abroad. Munib and Sabih Masri legally located their Palestine Development and Investment Company (PADICO), which they had founded in partnership with two Saudi-based partners—the Hariri-owned Oger Group (a long-time equity holder in Arab Bank) and the Bin Talal-owned Kingdom Group, a conglomerate of the Saudi royal family—in Monrovia, Liberia. Omar Aggad, meanwhile, chose the British Virgin Islands as the place to establish his Arab Palestinian Investment Company (APIC). Though Hassib Sabbagh and Sa’id Khoury did not go quite as far as their peers, it is worth noting that they too took advantage of the PA’s wider acquiescence to elite tax evasion/avoidance. As documented by the International Consortium of Investigative Journalists, their local affiliate CCC-Palestine has hidden at least some portion of its assets in an obscure, Isle of Man-based entity called Phoenix International Ltd.

Safely if absurdly domiciled in these locales, PADICO, APIC, and to a lesser extent, CCC, were allowed to enjoy enormous competitive advantages over their domestic rivals while contributing next to nothing to the public coffers for the next thirty years.

Beyond benefiting from measures extended to foreign investors writ large, members of the diaspora were also assisted through more discretionary interventions undertaken by the PA and the international community.

For the engineering contractors like the Khourys and the Masris, the privatization and/or development of public utilities constituted one of the main fora for such interventions.

After initially assigning the Ministry of Post and Telecommunications the mandate for both building up the oPt’s underdeveloped telecommunications infrastructure and operating its telecommunications network, the PA reversed course and opted to privatize all Ministry functions apart from the regulatory ones. Munib and Sabih Masri’s PADICO won the tender to take over the rest of the Ministry’s remit in 1996, at which point the firm was extended a twenty-year licensing arrangement granting its subsidiary, the Paltel Group, ownership over existing Ministry assets and exclusive authority as related to the installation, management, and operation of local and international fixed line and mobile phone networks inside the oPt. Though the terms of this licensing arrangement were never made available to either the public or the Palestinian Legislative Council, the annual license fee Paltel paid to the government as reported on its income statements made clear it was but a pittance for the right to control a critical public utility. Over the course of the 1990s and particularly in the 2000s, this control translated into enormous revenues, especially with explosion of mobile phones and the internet.

Energy production and distribution was also privatized with the active encouragement of the international community. In Gaza, the Palestinian Energy Authority contracted the newly formed Palestine Electric Company—a firm led by the CCC’s Sa’id Khoury and owned by a consortium of investors including the Aggad Investment Group, APIC, Arab Bank, the PCSC, and the (soon to be disgraced) Enron Corporation—to construct and operate a power plant granted exclusive power generation rights for 20 years. Enron was provided $50 million in investment insurance by the United States Overseas Private Investment Corporation (OPIC) to secure its involvement, while the consortium’s wider investment was protected by the PA in a number of ways as well. Specifically, the PA took the odd step of assuming responsibility (legally and logistically) for procuring and delivering distillate fuel to the PEC’s power plant, as Toufic Haddad's Palestine Ltd again lays out in great detail. As part of this supply agreement, the PEA also agreed to compensate the PEC for whatever potential revenues might be lost should the delivery of distillate be delayed or of a lesser amount than requested. Due to such generous terms, the PEC was first able to accrue healthy profits in the early years of the Power Plant’s operation by pricing a kilowatt of energy use at four times the cost of its production (and by billing the PA for revenue lost whenever there was an insufficient supply of distillate). After Israel later destroyed the plant in 2006 and the PEC stopped providing energy in any meaningful amount, the firm’s earnings nevertheless held steady (with profits in excess of 7$ million) due to the risk-related provisions the PEA had provided it.

Mega development projects, some of which never came to full fruition due to the Second Intifada, offered another means for boosting the engineering-segment of the diaspora.¹ Herein, the example of the Gaza Industrial Estate (GIE) is instructive.

The first of many technocratic efforts at designing special development spaces inside the oPt, the GIE had been the brainchild of Israeli economist Ezra Sadan. Like later iterations, this venture was dually premised on anti-statism and a bizarre naivete as related to Israel’s occupation. Following from the first of these premises, USAid and associated development contractors insisted that the Estate be free from the scourge of politics—that it be governed not by the corruptible and sloth-like PA, but by the private sector itself. In the name of efficiency and anti-corruption, then, the 119 acre lot upon which the GIE would be built wound up leased to a subsidiary of the Masri’s PADICO called the Palestine Industrial Estate Development and Management Company (PIEDCO) for forty-nine years at the cost of $1 per year. PIEDCO, which was also contracted to administer the Estate, was extended $30 million in loans from the IFC, USAid, and European Investment Bank to help finance its operations.

Following from the second premise, meanwhile, all parties involved were to endorse the collective delusion that this border space on the Palestinian side of the green line might, through technical inventiveness, be insulated from the regime of confiscation and closure Israel otherwise practiced in the oPt. Toward such ends, PIEDCO even subcontracted security for the Estate to a number of private Israeli firms. Alas, despite everyone’s good intentions, the GIE has been subjected to the very same disruptions that the Israeli security state imposes on the rest of the Palestinian economy.  

Given Omar Aggad and Zahi Khoury’s commercial backgrounds, finally, additional measures—exclusive import licenses in particular—were also used to make certain that Aggad’s APIC and Khoury’s National Beverage Company (which the Masris held a stake in) were duly looked after. Leveraging distribution agreements already established with major multinational corporations as part of pre-existing Gulf-based operations, Aggad and Khoury’s firms swiftly cornered those areas of the consumer market not yet colonized by Arafat’s PCSC. As that consumer market was itself goosed by the $3.622 billion in donor aid that flowed into the oPt between 1994 and 1999, the extension of their dominant market shares and price-setting powers in sectors ranging from food stuffs and automobiles to foreign-made cigarettes ensured healthy returns.

A Genealogy of Oligarchy Part III

Footnotes

1. As it partially explains CCC’s comparatively smaller footprint in the contemporary Palestinian economy, one should note that the firm had been positioned to win a number of major development projects in Gaza in the 2000s (seaport, airport expansion, etc.). The Second Intifada and the intensification of Israeli restrictions on economic activity throughout the oPt therefore hit the Khoury-Sabbagh outfit particularly hard. That said, one ought also note that their firm hasn’t given up the ghost as relates to the airport and seaport development projects. CCC also retains a 10% claim on the Gaza Marine Gas Field, should it ever be developed.