"The Palestinian Economy on the Path of De-development"
Samar Assad

Overview:

A United Nations (UN) report found that the Palestinian economy is on "a path of de-development" as a result of stringent Israeli restrictions on freedom of movement and the prolonged occupation. The restrictions—imposed since April 2002—and the intensification of violence have created complex humanitarian emergencies which have had a severe impact on the productive capacity, institutional infrastructure, and the economy as a whole. The grave humanitarian crisis in the Palestinian territories that emerged as a result of Israel's military incursions, comprehensive and recurrent curfews, and the continued violence has diverted the attention of the Palestinian Authority (PA) away from development plans and has increased its dependency on donor support for emergency and basic services.

The report found that in the 18 months since October 2000, the Palestinian economy lost over half of its annual gross domestic product (GDP) and unemployment has increased threefold. Half the population is living under the UN designated poverty line of $2 per person per day. Conservative estimates show that between October 2000 and July 2002, the Palestinian economy lost almost $3.3 billion of its gross national income (GNI) in accrued losses, compounded by at least $305 million in infrastructure losses due to Israeli tank and helicopter assaults.

De-development:

Even if stability is achieved, the setbacks to the Palestinian economy are unlikely to be easily reversed. Some experts predict that the damage could prove impossible to repair. The purchasing power of the Palestinian people has been depleted and they now depend on emergency aid to meet basic needs. Internal and external trade has been severely disrupted by constant internal and border closures and stifling restrictions on the movement of goods and people. Closures and curfews have led to lost jobs in the Occupied Territories and Israel.

Production in manufacturing, construction, trade, and public and private services have severely deteriorated. Many Palestinians cannot afford to pay for public services and an informal economy has begun to emerge. The Israeli restrictions have caused widespread business paralysis and Palestinian businesses are barely surviving. According to a United States Agency of International Development (USAID)-funded study of 526 Palestinian companies, 91 percent of businesses reported significant revenue losses. Thirty-three percent of companies sustained physical damage inflicted by Israeli soldiers. In all, Palestinian businesses laid off 45 percent of their workforce and 32 percent of businesses predict additional layoffs. Some companies have suspended operations and others have shut down.

The tourism sector has been the hardest hit with 90 percent in revenue losses. The agriculture sector has also suffered. Closures compounded by the uprooting of 17 percent of cultivated land and approximately half a million olive and fruit tress have lead to a 70 percent drop in the sector's output. The closures have prevented farmers in rural areas from marketing their products. This has caused a shortage of food supplies in West Bank cities and surrounding villages, and in the Gaza Strip.

International Involvement:

International relief agencies and economic forums, in particular the United Nations Conference on Trade and Development (UNCTAD), hold Israel mainly responsible for the economic devastation in the Palestinian territories. They point to the restrictions on movement, recurrent closures and curfews, and the destruction of infrastructure as the immediate cause for the economic collapse and the prolonged occupation as the root cause for "deep-seated structural weaknesses and imbalances" plaguing the Palestinian economy. They conclude that under these conditions it would be impossible for the PA to meet its domestic and international demands for reform. Furthermore, the Palestinians'ability to sustain themselves has been exhausted and they are now completely dependent on aid from international donors.

Already having poured millions into the development of Palestinian infrastructure and institution-building, the international community will be called upon to repair what Israel has damaged. The rehabilitation efforts must also deal with reinforcing the Palestinian economy's capacity to withstand the current crisis through emergency job creation programs and technical assistance which will help the PA cope with the new developments.

The PA’s Challenge

In the absence of a political solution, The PA will be fully dependent on donor support for maintaining its activities. Dependent on aid, the PA will slip further into debt. The PA's administrative and planning capacity has been seriously undermined by the uncertain political situation, constant disruption of government services, and loss of institutional data.

Private investment continues to decline as Israeli restrictions on freedom of trade discourages investors from investing in the Palestinian territories. Massive investment will be needed to repair damage to infrastructure initially developed by donor countries.

The key to sustained recovery is the restoration of the PA's capacity to manage the economy and to maintain basic social and public services. In June 2002, the PA prepared a 100-day reform plan. It includes streamlining the civil service payroll, merging ministries such as the Ministry of Economy and Trade with the Ministry of Industry, and appointing professional ministers in key ministries such as finance and justice. At the same time, the PA is working on a comprehensive privatization plan. However, reform will be hard to carry out while Israeli continues to occupy the Palestinian areas and ring the cities and villages with military checkpoints.

Despite how capable and transparent the PA proves to be in economic management and policymaking, it must struggle with an economy plagued by deep structural weakness and imbalances arising from prolonged Israeli occupation. As the PA embarks on major institutional reforms, the development efforts will face the challenge of recovery and reconstruction in a post-conflict situation. Meanwhile, the institutionalization of Israeli restrictions on movement has deepened the humanitarian crisis and rendered attempts to address development needs difficult, since the impact of the emergency situation is likely to continue even after stability has been restored.

Samar Assad is publications manager at the Palestine Center (Palestine Center). The above text may be used without permission but with proper attribution to Palestine Center. To contact Assad, write to sassad@palestinecenter.org