Palestinians build their state on the shifting sands of corruption

It is, quite literally, a house built on sand. On a bluff above the coast road overlooking the stagnant pools of Wadi Gaza stands a half- built mansion belonging to Mohammed Dahlan, the head in Gaza of Preventive Security, the largest of the 11 Palestinian security forces.

Not all is going well with construction. Mr Dahlan's four-storey house, said to have another two storeys under ground, and the new road built to its gate, are proving too heavy for the sand on which they are built. In recent months a 10ft wall of oil barrels has been built along the base of the bluff to stop the house sliding into the sea.

For many among the million Palestinians in the Gaza strip, living on average income of pounds 1,100 a year, the new wealth of Mr Dahlan and the leaders of the Palestinian Authority is a sign that they alone are benefiting from the Oslo peace accords, under which they returned to rule Gaza in 1994.

In the refugee camp of Bureij, Yusuf al-Khaldi, a money-changer, was almost in tears: "I live in one-and-a-half rooms with eight children. I earn 500 shekels [pounds 100] a month. I am so worried because I look at our sack of flour every morning and there is not enough in it."

Corruption scandals are the talk of Gaza. Mr Dahlan, who was born in the nearby Khan Younis refugee camp, is not alone in his ostentatious expenditure. In the heart of Gaza a new house has just been completed for Abu Mazen, the chief Palestinian negotiator of Oslo, at a reputed cost of $2m.

Palestinian leaders protest that this is unfair. Ten years ago two-thirds of the income of Gazans came from working in Israel or the Gulf states. Now Israel has sealed off Gaza with frontier fortifications that rival the old Berlin wall. Gazans cannot get out of their tiny enclave to seek work. Last year the local flower crop withered in the fields because the Israelis would not let it through. "You could see donkeys eating carnations in the streets," recalls Salah Abdel Shafi, an economist.

Gaza is unique in being under a permanent state of siege. More than half the population are refugees expelled from Israel in 1948. (In Ashkelon, the nearest Israeli city up the coast, Palestinians were forced into trucks and dumped in Gaza two years after the war). It is these who are most vulnerable to the closure. In Bureij, Nasser al-Khaldi, who owns a truck, explained: "It's getting worse. There are just eight permits issued by the Israelis for trucks from Boureij to pass into Israel. So I can work just one day a week. It isn't enough to cover insurance and maintenance."

The leadership of the Palestinian Authority is not directly responsible for such misery, but their style of life shows extraordinary arrogance. Unlike most Gazans they have the right to travel. Umm Jihad, the wife of Abu Jihad, the Palestinian hero and lieutenant of the Palestinian leader Yaser Arafat, assassinated by Israel in 1988, was said to be furious at a press report that she shopped in Israel. "I don't shop in Tel Aviv," she told a friend angrily. "I shop in Paris."

The ghetto atmosphere of Gaza encourages such envious anecdotes about VIPs with Israeli passes allowing them to come and go through the checkpoints. But there is no doubt that many members of the PA have been quick to benefit from the fact that goods and services supplied to Gaza are not really bought and sold but have to be negotiated with Israel. Petty corruption includes a black market in the sale of permits to work in Israel; workers pay about 4,000 shekels (pounds 800) to cross out of Gaza.

More important are the monopolies. Gaza consumes about 3,000 tons of cement a day, which is all supplied by one company. Mr Dahlan reputedly has interests in the gravel and freight businesses.

Most famous of the monopolies is al-Bahar (the Sea). "It is like a huge monster," says one specialist. "It penetrates everywhere. Those in charge are mostly the sons and daughters of senior officials." If you want to advertise in Gaza, buy computer software or rent one of the new red-roofed tourist chalets on the sea front, it will be through al-Bahar.

Curiously the scandal of over corruption in the PA in Gaza and the West Bank erupted into public view over a misunderstanding. In May, Mr Arafat, apparently moved by allegations that money was being stolen, ordered the release of a 600-page report by the Palestinian Public Monitoring Department. The press gave the impression that the report claimed $329m (pounds 205m) had disappeared from PA coffers. In fact the document essentially dealt with opportunities to maximise revenue foregone by the PA for many reasons, including the sale of land cheaply to help industry and the inability to stop smuggling into the West Bank.

Mr Arafat's lieutenants were forced to defend themselves against an allegation which had not been really made. At the same time Mr Arafat tried to suppress a tough report on economic mismanagement by a committee of the Palestinian parliament; even MPs were not allowed to have copies.

This asked what was happening to profits from the sale of cement, petroleum and tobacco, revenues from which do not enter the official budget. It noted there was no free competition for jobs and pointed to ministries' "luxurious and extravagant spending".

In the past, the PA could claim some success in ending the Israeli occupation to set against its corruption and brutality. But this is true no longer. Popular anger may in the future turn in the first instance against Mr Arafat's men rather than against Israel.