Palestinians get control, and with it, problems Economy tops the list of challenges that come with separation from Israel ISRAELI-PLO PEACE TALKS

JERUSALEM — JERUSALEM -- The Palestinians, who fought so hard for control of Jericho and the Gaza Strip, now must figure out what to do with them.

The agreement to be signed today giving those areas over to Palestinian self-government carries with it a heavy dose of headaches.


Just what leeway -- and resources -- the Palestinians will get to tackle those problems will be sorted out in negotiations with Israel over the next months. But the Israelis will hand over many duties gladly to get rid of vexing problems.

First of all, the Palestinians must move quickly to secure political control among a populace torn by long-feuding factions.


"The first step has to be public order. Without that, you don't take the other steps," said Samir Hazboun, executive director of Data, a Palestinian research institute in Bethlehem.

The next task will be to try to harness the economy to pull up living standards, most urgently for the 850,000 Palestinians living in poverty in the Gaza Strip.

There are grand dreams to make Gaza a bustling crossroads of " Asia and Africa, a free-trade zone that would become the "Singapore of the Middle East." Palestinians talk about building a huge shipping port at Gaza and an airport to compete with Tel Aviv's Ben Gurion.

More realistic is the prospect that Gaza and the West Bank could become a backwater place of olive groves and sleepy towns living just a notch above subsistence economy, like many Arab neighbors.

Unemployment in the Gaza Strip by some estimates approaches 50 percent. The chief source of jobs -- work in Israel -- was sharply reduced by new restrictions in March. There is limited industry, and many obstacles to development.

Counting on aid

The Palestinians count with unnerving certainty on a massive infusion of money from the West.

"If Israel and Europe and America are interested in peace, economic stability is important," said Adbel Fattah Abu-Shoker, professor of economy at the Palestinian An-Najah University in Nablus. "Without economic stability, there can be no political stability."


Estimates of what is needed vary wildly: Yasser Arafat has said $6 billion right away; the World Bank yesterday proposed a $3 billion, 10-year economic development plan for the West Bank and Gaza Strip; and foreign ministers of the European Community yesterday approved a five-year aid package for the Palestinians worth $604 million.

"It's hard to define what's sufficient," said Avi Ben-Bassat, senior director at the Bank of Israel. "Do you want to be sufficient by Swiss standards? The sky's the limit."

Some chafe at this reliance on foreign aid. In the 26 years of Israeli occupation, Palestinians have become used to payments from the Palestine Liberation Organization, handouts from the United Nations and steady jobs with aid organizations, said Mr. Hazboun.

"We established a kind of welfare society," he said.

But Palestinians long cherished the education and technical skills that have put them in key government and trade posts in many Arab countries.

"As Palestinians, we have the know-how spread all over the world," said Palestinian leader Faisal al-Husseini.


"All of the world is interested in putting money into this area, to open new markets," he added. "With our potential know-how and experience, we can be one of the keys."

There has been a flush of interest in the Gaza Strip since the Palestinian-Israeli pact was announced.

Elite, a giant Israeli food company, talked about opening a factory with 100 employees in the Gaza Strip, and a Palestinian returning from Saudi Arabia is opening a solar panel factory.

But Palestinian economists acknowledge that much more private investment is needed to make a permanent change in the economy.

A big question is how closely the Palestinian areas will be tied to Israel. Now, they are intertwined; normally Palestinian workers have flowed into Israel, and goods flowed back into the territories. Flush with the prospect of independence, some Palestinians now are calling for customs posts and trade quotas.

"These economies should be combined," Israel's finance minister, Avraham Shochat, argued this week.


Jobs may dry up

Until last March, almost one-third of the Palestinian labor force held jobs in Israel. The new restrictions, imposed by Israel to stop a wave of attacks, have been hugely popular in Israel and are likely to be kept. About 120,000 Palestinians used to work daily in Israel; now only about 60,000 do so.

One-quarter of the Palestinian labor force works in agriculture. Industries employ only 10 percent in the West Bank and 14 percent in Gaza, according to a study by Harvard University's John F. Kennedy School of Government.

Most Palestinian manufacturing enterprises are small, family-owned cottage industries that make goods such as clothing or shoes under subcontract to Israelis. Many are sold with a "made in Israel" label.

Now, to protect Israeli farmers, Palestinian produce cannot legally be sold in Israel, and Israeli manufacturers can count on the regulations of occupation to hamper cheaper factories in the West Bank or Gaza.

"Some of them are afraid of the competition," said Ephraim Kleiman, professor of economics at Hebrew University.


In addition to the economy, a new Palestinian self-government ,, will face a host of other daunting problems:

* Population: Palestinians in the Gaza Strip already have one of the highest birthrates in the world. Add to this the possible return of some of the 3 million Palestinians now living outside the territories, and the new government will face a voracious demand for physical and social services.

* Health care: There are only six hospitals in Gaza, and one in Jericho, to serve a combined population of nearly 1 million. All the facilities are old and poorly equipped. But most of the staff, doctors and nurses are Palestinians, battle-hardened from treating the casualties of six years of violent confrontations and adept at working under the most difficult conditions.

* Utilities: Electric, water and sewer systems, installed under Jordanian and Egyptian administration, rusted and broke as Israel moved to make the territories more dependent on Israel's services. Some are hooked up; Israel provides virtually all of the electric power to the territories. But in the Gaza Strip, raw sewage runs in the street, water quality is poor, telephone service is spotty.

* Roads: Two-thirds of the roads need to be resurfaced. Many in Gaza are no more than dirt or gravel. While Israel has built an impressive network of good highways, the roads in the territories have been neglected for a quarter-century. The main road to the Gaza Strip is narrow and winding. Better routes are needed if Gaza hopes to become a port and trading center for Arab countries.

* Housing: The population growth alone produces a shortfall in housing, at least on paper, of nearly 10,000 homes a year.


* Schools: Palestinian teachers and administrators already run 626 schools in the Gaza Strip and 26 in Jericho under authority of the Israeli Civil Administration or the U.N. Relief and Works Agency. The Palestinian government should be able to take over authority smoothly. But classes are overcrowded.

* Banks: Both the Cairo-Amman bank and the Jordanian Bank have branches in the territories, with limited services. A Palestinian currency is seen as impractical.

* Tourism: Foreign aid agencies and Palestinians both hold out tourism as a potential gold mine. The estimates are likely overly optimistic. Tourist facilities are limited.

* Water: As elsewhere in the Middle East, the territories face a looming water crisis.