DAVID H. WELLS / CORBIS A boy waves the Palestinian flag as he marks International Labor Day by marching through Ramallah demanding Palestinian statehood.

The Palestinians have never had their own nation, but the seeds for such have been sowed in West Bank and the Gaza Strip.

It was understood that the Palestinian Authority, formed after the 1993 Oslo Declaration, would establish the bureaucracy that would run the future Palestinian state, says Denis Sullivan, an adviser to the Palestinians in the late 1980s and a consultant to the World Bank and the U.S. State Department.

"So much was understood without really being said," said Sullivan, chair of the political-science department at Northeastern University in Boston.

In the heyday of the peace process in 1994 and 1995, the PA took over some grassroots organizations — health care and education, for example — and started its own bureaucracy. Today, there are ministries of health, education, social welfare, taxation, culture, agriculture, civil affairs, finance, transportation and planning. There's also a Central Bureau of Statistics, a Land Registry, municipal administration buildings, a Palestinian Legislative Council and other agencies.

The authority created a police force of some 35,000 members, as much to act as a buffer with the Israelis as to fight crime.

Since the Oslo accords, $4.4 billion has been plowed into the Palestinian territories from the United States, the European Union and the Gulf states, according to the World Bank.

At first, the aid was channeled to reconstruction and infrastructure such as roads, schools and hospitals. In subsequent years, the money has gone toward strengthening the institutions of an emerging government and for private-sector economic development, said Sereen Juma, a Middle East expert for the World Bank.

That aid also pays the salaries of the Palestinian Authority. Arafat has been widely criticized as running an organization that is bloated, corrupt and not very effective. For example, gaps in health care are filled in by the Islamic fundamentalist group Hamas or by nongovernmental organizations such as Mercy Corps.

The PA has been severely damaged by the second intifada and subsequent Israeli attacks. Since the renewal of fighting in September 2000, tax revenues have dwindled and the PA is nearly bankrupt. Many PA agencies have been damaged, if not destroyed. After intense fighting in April this year, Palestinian officials told The New York Times that hard drives, files, video sessions, tax records, test scores, payroll data, health records and other documents were taken or ruined.

But even before the fighting, the Palestinian territories didn't have a viable economy and were highly dependent on aid.

Compared with Third World standards, the Palestinian territories are above average, said Stephen Zunes, associate professor of politics at the University of San Francisco who has studied the situation. The major roads are paved, he said, and all the standard services are offered. The population is fairly well-educated.

"We're not talking about Central Africa here," said Zunes. "But the Palestinian Authority has fallen short of high hopes" because of its ineptitude.