1.1 Introduction
A basic requirement for sustained economic development is the presence of a suitable economic environment. Attracting investment depends to a great extent on favorable and fair laws and regulations that govern business. It is also affected by the degree of political and economic stability, the adequacy of the infrastructure, and the development of the financial sector.
The Palestinian economic environment during the years of Israeli occupation was clearly deficient and was described as being ‘ambiguous, complex and unpredictable’ (World Bank, 1993).
Laws that go back to the British Mandate era remained in force in the Gaza Strip, with amendments that were introduced by Israeli military orders after 1967. As for the West Bank, Jordanian laws amended by Israeli military orders were in force. Researchers, politicians and observers agree that this legal framework is not adequate, that it does not take into consideration Palestinian public interests, and that it has been reshaped so as to serve the interest of Israel.
In addition, the Israeli Occupation Authorities neglected the Palestinian infrastructure, rendering it inadequate for the needs of economic development, and prohibited the development of the financial sector, closing all the banks that were in operation before occupation. Banks remained closed until 1981, when Israel allowed the opening of the Palestine Bank in Gaza, followed in 1986 by the reopening of the Cairo -Amman Bank in Nablus.
Aggravating the situation even further, the Occupation Authorities offered the least possible in terms of public services. These services sunk to dismal levels, which motivated local and foreign NGO’s to focus on providing a good part of the missing services.
This was the situation when the PNA took over the self-government areas in the West Bank and Gaza Strip in 1994 and 1995. In order to prevent a legal void, the first decree by the PNA was to declare valid the laws that were in force in the Palestinian areas before June 5, 1967, until the two legal systems are unified.
The PNA set out to assume the powers and responsibilities of a governing authority and to establish the institutions of the self-government and its departments. Some laws that pertain to economic activities were enacted and other economic legislation and procedures were drafted. But this process is still in the initial stage and there is a great deal that needs to be done in the area of economic laws and legislation and trade procedures.
As for the infrastructure, only limited investment has taken place so far in the sectors of electricity, water, sewerage and pavement of roads Because of Israeli impediments, there is a limit to what the PNA can do. Israel still controls the borders of the West Bank and the Gaza Strip and this enables it to close-off the Palestinian areas and sever their ties to the outside world. This causes a state of uncertainty to prevail among local and foreign investors, making them reluctant to invest in the Palestinian economy, and leading to prolonged stagnation.
In addition, Israel still controls about 40% of the area of the Gaza Strip and more than 74% of the area of the West Bank (Area C), which leaves zoning and building in these areas under Israeli jurisdiction, thus limiting Palestinian ability to build and develop in these areas. Land registration procedures in these areas as well as in Area B, which constitutes 23 % of the area of the West Bank, are also under Israeli control. The suspension of land registration procedures by Israel in 1967 has resulted in leaving more than 70% of the lands of the West Bank and 10% of the lands of the Gaza Strip without registration. This constitutes an important obstacle to various economic activities that depend on land ownership, such as using land as a collateral for bank loans. The PNA could resume land registration operations in Area A, which it ought to do as soon as possible. Resuming such operations in 40% of the Gaza Strip and in Areas B and C in the West Bank is subject to approval by the Israeli authorities.
In the next section, the most important features of the legal environment and the changes that have taken place since the PNA took over its responsibilities are presented. Next, the most prominent economic and trade regulations and measures that have been introduced by the PNA are examined. Finally, the Israeli closures and land confiscation, which cause serious harm to the Palestinian economy, are discussed.
An important role for the state in a free market economy is the provision of a legal environment that promotes economic and commercial activities essential for economic growth and for the improvement of standards of living. A sound legal environment creates an atmosphere that provides the greatest certainty possible for investors, traders and the financial sector. It is not possible to achieve economic growth in a legal environment that is complicated and lacks transparency because these lead to an atmosphere of uncertainty toward investment, which is an additional cost that is difficult to assess making investment risky. A crucial component is the freedom and independence of the judiciary. It is not possible to attract investors and businessmen if the rule of law and respect for the law are lacking.
Although there is not a legal void in the literal sense of the word (since there were laws that existed before the PNA took over), and although the commercial laws are relatively modern, there are many problems in the body of commercial laws that need attention (Birzeit University Law Center). Most important of these problems are those pertaining to the legal dichotomy resulting from the existence of laws and regulations in the Gaza Strip that differ from those in the West Bank. This stems from the differing historical backgrounds of the two regions, as mentioned earlier. Many legal experts believe that this dichotomy is not a problem in itself, but that problems arise because of the separation of the two systems and the lack of a mechanism for mutual recognition. In addition, the different legal treatments affect the geographic distribution of businesses and investments.
Opinions differ as to what would be an adequate mechanism for changing the situation, but within the conditions in which the PNA operates, a slow transition may be the safest. The process of change has already started through the laws and regulations that were passed and enacted by the elected legislative Council and the PNA, which are valid in all the areas that are under the jurisdiction of the PNA. But there is an urgent need for issuing the Palestinian Basic Law and for new laws to deal with the differences arising historically between the two regions. There is also a need for the establishment of a higher judicial body that would rule on legal differences and settle legal disputes, and that would coordinate the two court systems in the West Bank and the Gaza Strip.
The PNA has enacted some economic and trade laws and it has drafted other laws that it intends to place before the Legislative Council for passage. Most important of these laws is the Encouragement of Investment Law, which was passed on May 14, 1995 (Al Waqa’i AI-Filistiniyah, 1995),( look somewhere else on this page). The Encouragement of Investment Law relies on tax exemptions as an incentive for attracting foreign investments and for encouraging local investments.
Economic experts consider this reliance on exemptions its main drawback because experience in developing countries has demonstrated the failure of such an incentive to attract investment. In addition, although the law stipulates the setting up of an independent board to oversee its enforcement, this board consists mainly of government officials. The private sector’s role is very small, thus limiting the board’s independence. Furthermore, there is the issue of unnecessary complications and lack of transparency in the articles and in the procedures prescribed by the law. Other criticisms pertain to the rights of investors and the setof disputes between them and official and unofficial parties. As a result of all these criticisms, the PNA has suspended the enforcement of the original law and is now working on drafting a new version, and it is hoped that this new version will resolve the problems encountered in the original version .
Other draft laws still being studied are the Income Tax Draft Law, Banking Draft Law, Establishment of Small and Medium Economic Ventures, and the Development Authority Draft Law, in addition to a draft law on the General Budget and another on Social Security. There are also laws pertaining to car rental and goldsmiths that are being considered.
There are many laws that are necessary for economic development that have not been addressed yet and do not appear in the list of laws under preparation. Most important among these laws are the Companies Law, Antitrust Law, and Proprietors and Tenants Law. There is an urgent need for unifying the Companies Law in the West Bank and Gaza Strip, especially since the two areas form one economic unit and companies have the right to operate in both regions.
For example, banks in the West Bank must be public share holding companies, whereas in the Gaza Strip this is not required, which creates problems for branches of banks registered in one region when operating in the other. Also, the present law governing proprietors and tenants constitutes a burden on the housing and building sector. The law keeps the rents fixed and does not allow the period of rental to be terminal. This issue requires the attention of the executive as well as the legislative authority, especially since the housing and building sector has the potential to take the lead in Palestinian economic development during the transition period. For this reason, this law must be amended in a way that creates a balance between the rights of the proprietors and the rights of the tenants. The absence of a basic law for the general budget, which would regulate public spending and revenue collection as well as the mechanism for preparing and approving the general budget, leads to disorder in the area of public spending. Therefore, a budget law is urgently needed. There is also an urgent need for the enactment of laws that prohibit monopolistic practices and prepare the ground for healthy competition. Furthermore, the economic role of government must be defined in way that minimizes its involvement in production and limits it to mainly providing an appropriate economic environment for the private sector.
1.3 Regulations and Procedures
The PNA has introduced many changes to the procedures relating to economic and commercial activities and plans to introduce additional changes. But the procedures still suffer from a general lack of clarity and rely heavily on licensing. Some of the requirements seem unnecessary and it is hoped that they will be abolished with time. The assumption is that the investor should be the one to decide on the choice of investment. If the PNA chooses to encourage a certain sector of the economy, that could be achieved by providing incentives for investment in that sector.
In external trade, all exporters to the Palestinian market now need to deal with Palestinian agents or distributors, which helps to limit the monopoly that Israeli importers of goods from abroad and exporters to WBCS exercise over the Palestinian market. Importing goods that are listed in lists Al and A2 requires a special license from the Palestinian Ministry of Trade. The issuance of a license depends largely on the discretion of officials in the Ministry, and although the Ministry asserts that no request for a license has so far been denied and that the waiting period is usually short, issuing import licenses without establishing transparent criteria for granting them may lead to problems in the future. The fact that such problems have not surfaced yet may be due to the limited amount of direct imports to date, as a result of Israeli impediments. Until the present, the quantities that Palestinian merchants have requested to import do not exceed the quantities allowed under the Economic Protocol, and therefore, there was no need to introduce quotas. But in the case of quantities exceeding the allowed limit, it may become necessary to distribute the total quantity among those applying for import licenses by auction, as it is done in many countries. Emphasis must be placed here on transparency and lack of nepotism.
As for public safety and consumer protection, the PNA made it mandatory that the labels on local and imported products be clear and in Arabic. The Department of Inspection in the Ministry of Trade is currently ensuring that goods are in proper condition and properly labeled. The Ministry of Labor established a department for occupational safety and health that aims to protect the worker in the work place. The officials of this department make field visits to work places, but as of December 1996, the department was still lacking regulations or laws that set the general conditions for occupational safety and health, the penalties for breaches of these conditions, and the mechanisms for enforcement.
The Department of Economic Activities in the Ministry of Labor and the Palestinian Petroleum Agency have begun licensing domestic gas refilling stations and setting conditions for their operation in order to reduce accidents involving exploding gas bottles.
Finally, the establishment of an Institute for Specifications and Standards was decreed by the President of the PNA in 1994 . This is an important step on the road to controlling Palestinian specifications and standards. But the Specifications and Standards Law is still under preparation and discussion. There is also a draft Jewelry Law as well as ongoing research on the possibility of establishing laboratories to test gold and jewelry.
In spite of the launching of the peace process in Madrid and the signing of the Oslo, Taba and Cairo agreements, Israel has persisted in practices that put economic and political pressure on the Palestinians. It has even developed a new method for economic blockade under security pretexts, which is the closure. The closure includes banning movement of goods, factors of production and people between the Palestinian areas and Israel and settlements, between the West Bank and the Gaza Strip, and between the rest of the West Bank and Jerusalem. Closure also often entails banning movement between the West Bank and Jordan and between the Gaza Strip and Egypt. Jordan and Egypt are the only entry points for the Palestinian economy to the Arab World and to the rest of the world, especially during closure.
Closure is usually accompanied by strict measures at the border crossings, which hamper the movement of people and goods. Many imported and exported goods have been spoiled because of these practices. In some cases, closure entails banning of movement between Palestinian towns and villages, in addition to banning of travel to Israel and to the outside world. In other cases, the closure is confined to a certain area, town, or village.
Available data show that the number of days of closure per year has increased during the last four years, reaching an overall total of 342 days in the Gaza Strip and 291 days in the West Bank. 1996 was the worst year: the number of days of closure reached 138 in the Gaza Strip and 132 in the West Bank. The 1996 figures indicate an increase of 35% in the Gaza Strip and 57% in the West Bank, as compared to 1995. What distinguishes the 1996 closures is that they were in effect during most of the months of that year (Figure 1.2), which had a significant effect on the continuity and the regularity of production, marketing and income generation. This exacerbated the confusion and distortion that affected Palestinian economic activities in general.
In addition to the days of closure , there were periods of closure that were limited to certain areas in the West Bank, effectively sealing them off from the rest of the West Bank, Jordan and Israel. Ramallah was sealed off twice, first in Jul1996 for one day and then in November for five days. The closure of Nablus, in the wake of the September 1996 clashes, continued two weeks beyond the lifting of the closure on the rest of the West Bank. Bethlehem was closed off for one day in January and for another in February.
A closure has a devastating effect on the Palestinian economy because it deprives thousands of workers of their only source of income-particularly work inside Israel-and consequently lowers the Palestinian GNP. The purchasing power of those workers and their families diminishes appreciably because of closure, which has negative repercussions on the macroeconomy. The labor market is the most affected by closure. As soon as such a measure is announced, thousands of workers become immediately unemployed as the permits they hold that allow them to reach their work places in Israel and in settlements become invalid. This practice has led to the spread of poverty and other negative social phenomena. The banning of the movement of goods from one region in the West Bank to another, between the West Bank and Gaza, and between the rest of the West Bank and Jerusalem obstructs the marketing process and increases the pressure on the Palestinian market, thus frustrating the hopes for increased productivity and a better exploitation of the unemployed production capacity. This also requires additional investments and mechanisms for storage and transportation that reduce profit and add to the obstacles facing production and -investment in Palestine.
Looking at another aspect, the banning of export of Palestinian manufactured goods and agricultural products to Israel causes a great loss in the short run and impedes production plans, which might lead to losing the Israeli market in the long run as the Israeli importer turns to more stable markets. The situation is particularly bad when it comes to agricultural products, which cannot endure long shipping delays and require special arrangements for storage. In addition, the delay in arrival of raw materials from Israel to the West Bank and Gaza leads to the upsetting of production plans and to a lowering of capacity utilization.
Closure also has a very negative effect on investment. The economic environment that accompanies closure is not conducive to attracting investments, foreign or local. Furthermore, closures have forced the PNA to divert funds that were allocated for spending on investments in order to cover recurrent expenditures and emergency employment programs.
Ever since Israel occupied the West Bank and Gaza Strip in 1967, it has pursued a policy of controlling Palestinian natural resources, in particular land and water. The establishing of Israeli settlements has been employed as a means of imposing a fait accompli and dismembering the Palestinian Territory in order to make it easier to control the land and the life of its inhabitants. Israel has employed several methods to seize Palestinian land and forbid its inhabitants from using it. These methods include the following: declaring a certain area of land to be abandoned property, declaring a certain area as ‘state land’, compulsory acquisition of land by recourse to Jordanian Law and Israeli military orders, purchase of land, usually by impersonation or other subterfuge and with the help of restrictions on sale of land between Palestinians, and requisition of land for military or for settlement purposes and for the building of infrastructures that serve the settlements.
The proportion of land in the West Bank seized by Israel, using various methods, was estimated at 60% of the total area of the West Bank by mid-l 991 (Coon, 1995, Arabic translation). In the Gaza Strip, the proportion reached more than 40% of the total area of the Strip by the end of 1993 (Palestinian Ministry of Information, 1996, in Arabic).
Israeli seizure of land has continued during the last three years in order to expand existing settlements and build by-pass roads. The land that has been confiscated since 1993 is more than 85,000 dunums (PHRIC, 1996). land areas that have been confiscated for the purpose of opening by-pass roads since the Oslo Accords has amounted to about 30,000 dunums (Tufakji, in Arabic).
The number of settlers has increased substantially since the launching of the peace process, rising from 105,000 in 1992 to 145,000 in 1996, i.e. an increase of around 38%. This increase took place during the rule of the Labor Party in Israel which signed the Oslo Accords (Tufakji, in Arabic).