Struggle in Occupied Arab Areas Turning to Economics : Palestinians: A major challenge for peace is improving living standards and business opportunities.

Portable phone to his right, Turkish coffee and three other telephones to his left, Said Kanaan was ready.

The smiling face of Yasser Arafat on the wall behind left little doubt about Kanaan’s political loyalties, but for him--as for other influential Palestinians who have spent the last quarter of a century under Israeli occupation--the true struggle suddenly was no longer political.

In a very real way, the challenge of making the historic Israeli-Palestinian agreement work has become economic--improving living standards and business opportunities in a region where both could hardly drop further.

The pitted roads and rundown buildings in this city of 120,000 reflect a far broader economic neglect of the occupied territories during the 26-year occupation.

If supporters of the accord fail to generate improvements, Islamic fundamentalists will almost certainly capitalize on the disillusionment.

The proliferation of mosques in the city, from six to more than 60 during the past decade, is a reminder of just how fast religious fundamentalism has grown in the region.

“We’ve got to show short-term impact,” Kanaan said, tapping his desk for emphasis. “If we don’t, there’ll be trouble.”

Speaking at a news conference in Jerusalem, the governor of the Bank of Israel, Jacob A. Frenkel, also spoke of the need for visible projects that will draw support for the agreement. He also spoke of the need for necessary, but longer-term, infrastructure development.

“Each area has its needs,” he said.

An opinion survey, released Sunday by the Center for Palestinian Research and Studies here, indicated that Palestinians link their support for the agreement far more closely to the prospect of economic improvements than to the belief that the accord will be a first step toward the dream of an independent Palestinian state.

When asked if they support the agreement, 65% of Palestinians questioned in the region said yes. And 65% said they expect it to lead to improved living standards. But only a minority considers it the first step toward a Palestinian state and achievement of Palestinian rights.

At present, average per capita income for a resident of the occupied territories is roughly a fifth of the average Israeli’s, and unemployment--around 25%--is 2 1/2 times that of the Israelis, according to a Harvard University study on the region published last June.

Kanaan, who is chairman of the center that produced the opinion survey, argued that the quickest way to demonstrate change would be to tap existing funds, such as a surplus of insurance contributions paid by Palestinians, for immediate distribution to needy families.

Industrial and agricultural development, plus water and sewage treatment projects would then follow, he said.

The United States has headed efforts to raise aid for such projects.

A World Bank report released Sunday set out a 10-year, $3-billion development plan to revive the occupied territories.

The plan envisioned an additional $2.5 billion in private investment.

Produced in connection with the peace process, the report is scheduled to be discussed in Washington next week by Israeli and Palestinian representatives.

While PLO representatives are expected to press for more aid, Frenkel said the $3 billion is all the region can absorb.

The Israeli central banker also called for “something as close to free trade as possible” between a self-ruled Palestinian region and Israel, saying both sides would benefit from the arrangement.

“You can’t talk of winners and losers on something like this,” he said. “There will be mutual gains--more for everyone.”

If there is free trade and substantial development funds materialize, several factors suggest that prospects for genuine growth would be good.

Among them:

* The Palestinian diaspora scattered throughout the Middle East is a highly skilled, well-educated source of manpower that could provide badly needed technical, administrative and financial assistance to the development effort.

* Serious economic planning for a self-ruled Palestinian region has been in progress since the Palestine National Council approved the idea of coexisting with Israel five years ago and has been an integral part of the current peace talks.

* The relatively small population--nearly 2 million in the Gaza Strip and West Bank--means a high level of assistance per capita, adding to its potential impact.

Despite these favorable conditions, there are also serious dangers in the process.

Much, for example, depends on the ability to contain opponents of the agreement prepared to use violence to undermine its impact, since terrorist activity in the region would discourage both private investment and the return of skilled Palestinians to build a new homeland.

“We’re not afraid of a civil war, but instability will prevent us building an economy,” Kanaan said.