PM FAYYAD AND AMBASSADOR RICE DISCUSS

C O N F I D E N T I A L SECTION 01 OF 02 JERUSALEM 001986

C O R R E C T E D C O P Y (PARA 1,9 CLASSIFICATION)

SIPDIS

NEA FOR FRONT OFFICE, IPA, AND SEMEP; NSC FOR
SHAPIRO/KUMAR, JCS FOR SELVA

E.O. 12958: DECL: 10/22/2034
TAGS: PREL ECON PGOV KWBG KPAL IS
SUBJECT: PM FAYYAD AND AMBASSADOR RICE DISCUSS
STATEBUILDING AND THE PALESTINIAN ECONOMY

JERUSALEM 00001986 001.2 OF 002


Classified By: Consul General Daniel Rubinstein for reason 1.4 (d).


1. (C) Summary. In an October 22 meeting with USUN
Ambassador Susan Rice, PM Fayyad said the Palestinian economy
is growing at an impressive pace, but can go only so far
under occupation. Increasing private sector investment is
only possible, Fayyad noted, if Israeli restrictions on
Palestinian economic activity are eased. These restrictions
go beyond those on movement and access, and include
constraints on Palestinian economic activity in Area C (the
59 percent of the West Bank currently under full GOI
control),the permit regime, and other impediments. Only
then, he said, can private sector economic activity begin to
sustain what until now has been a donor and government
stimulus-led recovery. Fayyad updated Ambassador Rice on his
two year state-building plan, which he termed "positive
unilateralism." End Summary.


2. (U) USUN Ambassador Susan Rice met PM Salam Fayyad at the
Consul General's residence on October 22. The Consul
General, NSC Senior Director Dan Shapiro, USUN Speechwriter
Bass, USUN Media Advisor Kornblau, USUN political officer
Schedlbauer, and Polchief also attended.

Fayyad Upbeat on the Economy
--------------


3. (C) PM Fayyad began the meeting with an overview of
economic developments. After his government first formed in
June 2007, Fayyad said, he spent most of his time justifying
his political strategy of institution-building as the path to
a Palestinian state. Two years later, the West Bank economy
is growing at a seven percent annual rate, and an "emerging
sense of self-empowerment" is spreading. Fayyad contrasted
the situation with Gaza, where economic conditions are
increasingly "miserable." While he stressed that the growing
disparity between the West Bank and Gaza is not a goal of his
policy, developments over the past two years have produced a
"West Bank First" result. Comment: In the summer of 2007,
after Hamas took control of the Gaza strip, non-USG
commentators coined the moniker "West Bank First" to describe
a strategy of strengthening Palestinian moderates through
economic and institutional development in the West Bank, to
draw a distinction with the impact of Hamas rule in Gaza.
Neither the USG nor the Palestinians officially used this
terminology. End comment.


4. (C) Fayyad cautioned that the current drivers of economic
growth are unsustainable. Even though these factors produced
impressive results in a small economy, new drivers must be
found. For the past two years, he said, fiscal stimulus and
foreign assistance (totaling USD 1.7 billion in 2008 alone)
were the primary contributors to the increase in Palestinian
GDP. By regularizing PA salary and supplier payments, it was
possible to "manufacture" a recovery in the small Palestinian
economy. "Our reliance on external assistance is neither
desirable nor sustainable," Fayyad said, adding, "something
else must now (drive growth). Only private sector investment
can do this."

Limits to Growth
--------------


5. (C) Increasing private sector investment is only possible,
Fayyad noted, if Israeli restrictions on Palestinian economic
activity are eased. "It is the only way to change (investor)
attitudes... and to give a sense of irreversibility to the
process," he added. Fayyad acknowledged that the GOI had
taken some limited steps in this area during the second half
of 2009, and predicted the results would only be known once
economic data for that period is released. "Removing
(obstacles to movement) is important to create a sense of
freedom," Fayyad said, but it is not enough. The GOI must go
further and address constraints on Palestinian economic
activity in Area C (the 59 percent of the West Bank currently
under full GOI control),the permit regime, and other
obstacles.


6. (C) Fayyad said that continued settlement activity creates
frictions between Palestinians and Israelis, undermining his
efforts to shape a positive attitude of empowerment. He said
that on the eve of a recent visit to the Jalazon refugee camp
near Ramallah, IDF guards had killed a young boy. "The
Israelis cannot continue to be trigger-happy against
non-violent resistance in support of our desire for
self-determination," Fayyad said. On another recent trip,

JERUSALEM 00001986 002.2 OF 002


Fayyad said he visited a man who refused to leave his house
in the middle of a settlement. When the separation barrier
was constructed, it left him surrounded on three sides.
Fayyad said he actively encourages nonviolent resistance. "I
know many (of the demonstrators) by name - including some who
are Israelis," he added.

Fayyad Describes Two-Year Statebuilding Plan
--------------


7. (C) Ambassador Rice said that she had been impressed with
PM Fayyad's two-year statebuilding plan, particularly its
emphasis on democratic values and human rights. Fayyad said
the plan is an attempt to "make the case for our freedom" by
building the institutions of Palestine even before the state
comes into existence. The target is for PA institutions to
function according to international best practices, not
merely the standards of other Arab governments in the region.
He noted that the PA's public sector financial management
systems are "superior to any other in the region, and on par
with Israel's own." He was appreciative of the transfer of
USD 200 million in cash to the PA as an important vote of
confidence.


8. (C) Now, Fayyad said, his focus is on "quick improvements"
in areas such as justice sector reform, security,
infrastructure (including wastewater management),education,
and health. He noted that a recently launched student loan
program has already expanded to 257,000 students and USD 132
million in total lending. The PA is in the "final stages" of
health insurance reform -- a debate which had been
complicated by "people watching the U.S. health care debate
on C-SPAN and Crossfire," he noted jokingly.


9. (U) Ambassador Rice cleared this cable.
RUBINSTEIN