EXECUTIVE SUMMARY


       I.   MACROECONOMIC TRENDS

           The Palestinian economy performed better than expected in   1999.  As a result, the initial estimates of the Palestinian
Ministry of Finance and the IMF for real GDP and GNP growth for        1999--4.5 and 4.6 per cent respectively--were revised to 6 and  7 per cent respectively.  Most macroeconomic indicators showed progress.  These include a 15 per cent increase in labour flows to Israel; a 9 per cent increase in the value of registered        Israeli-Palestinian trade; a 14 per cent increase in planned construction; significant growth in new company registrations;  a 32 per cent increase in outstanding bank credit to private businesses; a 12 per cent increase in donor assistance and the  fewest number of border closures since 1993.

            Two key macroeconomic indicators, however, showed mixed results or were stagnant.  First, while the value of approved large investment projects increased significantly, the growth was due mainly to one large electricity plant in the Gaza Strip.  More generally, the value of approved investment  projects declined in both the West Bank and Gaza.  Second, the value of registered Palestinian exports to Israel, the main export market for Palestinian goods, declined in real terms in  1999. Thus, there was little if any improvement in the areas vital to economic development: private investment and exports.
Nonetheless, progress overall resulted in a 7 per cent increase in private sector employment (including   underemployment) in 1999 as unemployment rates continued to decline.  Improvement in the labour market led to a 2.8 per cent increase in the average real daily wage for Palestinian  workers.  Moreover, consumer price inflation continued at   moderate rate of 5.5 per cent.

            The estimated economic growth rates raised 1999 Palestinian GDP to approximately USD 4,750 million and raise   GNP to about USD 5,850 million.  This implies a per capita GDP of about USD 1,575 (1.7 per cent higher than 1998) and per capita GNP of USD 1,940 (2.6 per cent greater relative to1998).

       II.  LABOUR MARKET TRENDS

            Population growth and higher labour force participation  resulted in a 5.7 per cent increase in the size of the    Palestinian labour force, which reached an estimated average of   629,500 persons in 1999.  Total employment (including that in Israel) is estimated to have grown 9.3 per cent, with the full-employment rate rising from 77.8 to 81.7 per cent and the underemployment rate declining from 6.5 to 5.5 per cent.

            The standard unemployment rate declined from an average of 15.6 per cent in 1998 to 12.7 per cent in 1999.  The standard unemployment rate in the West Bank (10.1 per cent) remained   substantially lower than in Gaza Strip (18.8 per cent).  The  more broadly defined adjusted unemployment rate?which includes ?discouraged? workers?declined from about 25 to 22 per cent. The adjusted unemployment rate in the West Bank averaged about19.7 per cent in 1999 as compared to 27.3 per cent in the Gaza Strip.

            There was an average of 47,000 more employed Palestinians in 1999 relative to 1998.  Employers in Israel hired about
16,200 more Palestinians, about 34.4 per cent of the new jobs. Average Palestinian employment in Israel, Israeli settlements and industrial zones grew 14.8 per cent from about 108,950 in 1998 to 125,150 in 1999 (including East Jerusalem Palestinians employed in Israel).  Construction remained the dominant  employer of Palestinians, accounting for over 56 per cent of  all jobs in 1999.

            There were about 30,725 new jobs in the domestic  Palestinian economy, about 65.6 per cent of all employment
growth in 1999.  Domestic employment grew 7.8 per cent from about 393,700 in 1998 to 424,450 in 1999.  Except for commerce,  there was employment growth in every economic branch, with particularly large increases in services, agriculture and the public sector.

            Labour market trends in 1999 were noteworthy for several  reasons.  First, the rate of growth of Palestinian employment  in Israel was considerably lower in 1999 (14.8 per cent)   relative to 1998 (44.2 per cent), indicating that the Israeli  labour market has become relatively saturated.  At the same  time, the domestic economy continued to generate jobs at more or less the same pace in 1999 (7.8 per cent) as in 1998 (8.1  per cent).  The result was the expansion of the domestic        economy?s contribution to total employment creation from 43.6 per cent of new jobs in 1998 to 65.6 per cent in 1999.

            Second, a high share of domestic employment creation was accounted for by the Palestinian private sector in 1999 as in 1998.  In both years, about 70 per cent of new jobs in the domestic economy were generated in the private sector.  In  absolute terms, the Palestinian private sector added about  23,100 jobs in 1998 versus about 21,700 jobs in 1999.   The
Palestinian Authority, on the other hand, added an average of  about 9,250 persons to its payrolls in 1998 and about 9,000 in 1999.  This reversed the experience of the 1995-1997 when the  public sector accounted for most employment growth.

            Third, within the private sector, the sources of  employment growth have shifted.  In 1998 construction,     manufacturing and commerce accounted for more than 93 per cent of private employment growth.  By comparison, in 1999 services,   agriculture and construction accounted for over 86 per cent of   private job growth.  Over the two year period 1998-1999, construction generated 48.1 per cent of all new private employment while service activities accounted for 22.3 per cent such employment.  The importance of other branches has  fluctuated with manufacturing and transport also contributing to job growth during this period.

     Women's labour force participation rate increased in 1999, reversing the trend of the previous year-to-year period.  There
was a 14 per cent increase in the number of women engaged in the labour force, rising to an average of some 93,200 persons, exceeding the growth rate for men.  Total employment for women also increased more rapidly than for men, rising by about 11,700 from 67,900 to 79,600?an increase of 17.2 per cent?while employment growth for men was about 10 per cent.  Since the number of Palestinian women employed in Israel is very small, female employment growth accounted for more than 35 per cent of total domestic job growth in 1999.  This is probably the result  of the particularly rapid employment expansion in the economic branches where women are disproportionately represented?agriculture and services (including public services).

            However, the number of underemployed women increased while  the number of underemployed men declined.   Furthermore, the  number of unemployed women was nearly unchanged, while the number of unemployed men fell significantly.  While both men?s and women?s unemployment rates declined, that for men declined more rapidly, widening the gap in unemployment rates in favour of men.  The rise in women?s underemployment, a reversal of the  trend of past years, may be the result of at least two factors.First, the growth of employment in agriculture includes unpaid    family labour, many of whom are women employed on a casual basis.  Second, it may indicate that married women, perhaps   even those with children, are seeking employment to augment family incomes on a part-time basis.

       III.  TRENDS in LIVING LEVELS

            The work month of Palestinian workers?both in terms of the  number of days and number of hours--was slightly shorter in 1999 relative to 1998, reversing the trend of the previous  year.   Despite this, average real daily and monthly wages increased by 2.8 and 4.2 per cent respectively.  The average monthly wage for a fully-employed worker averaged NIS 1,413 in 1999, about USD 340.

            The main factor in the general increase in real wages was the estimated 8 per cent increase in daily wages for West Bank  workers.  The better wage performance in the West Bank labour   market is due to the significant level of unpermitted labour flow from the West Bank to Israel which has led to considerably  reduced unemployment there.   Higher labour flow to Israel has also produced secondary employment effects due to higher consumer spending from higher wages in Israel.  The combination of these effects has tended to raise real daily wage rates in  the West Bank more rapidly than in Gaza where this phenomenon is less pronounced.

            One result of the different dynamics in the regional labour markets was an increase in the disparity in daily wages as between the West Bank and Gaza.  In 1999, West Bank daily  wage rates were an average of 28 per cent higher than those in Gaza compared to 23.9 per cent difference in 1998.  On the other hand, since real daily wages earned in Israel grew only   0.7 per cent, the gap between wages earned in Israel and the   Palestinian territory declined.  The differential between the
West Bank and Israel declined from 72.4 per cent to 60.7 per cent while the gap between Gaza and Israel declined from 113.8  per cent to 105.4 per cent.  Thus relative geographical  isolation, and differences in access to the Israeli labour
market, remain sources of lower wages and higher poverty rates  in Gaza.

            Average consumer prices in the Palestinian economy rose  about 5.5 per cent in 1999 relative to 1998.   Consumer prices  in the West Bank rose by 6.5 per cent while those in Gaza   increased by 3.9 per cent.  Inflation rates for specific groups
of commodities varied.  Thus prices for beverages, housing, household goods, transportation, medical care and miscellaneous goods (e.g. personal care and restaurant meals) rose more rapidly than the average price level during this period.  At   the same time, the prices of food, clothing, education and recreational goods and services either rose more slowly or declined during the same period.

       IV.  LOOKING AHEAD

            Evidence from first-quarter 2000 suggests slower growth in  comparison to first-quarter 1999.   Despite the absence of
comprehensive border closures, the average number of permitted  Palestinian workers employed in Israel during the first three months of 2000 was 47,300, a 1.3 per cent decline in comparison to first-quarter 1999 and 4.4 per cent below the fourth-quarter 1999 average.  The volume of commercial truck movement through monitored border crossings was about the same in first-quarter  2000 as first-quarter 1999, although the number of exported truckloads from the Palestinian territory continued the decline which manifested itself in 1999. This may suggest weakness in  export capacity, as well the Israeli policy which aims to reduce truck convoys through the Erez/Beit Hanoun crossing in Gaza and to transfer these to the off-loading/on- loading  procedures at Karni/Muntar.

            The PCBS labour force survey for first-quarter 2000 indicates that the labour force participation rate and the       proportion of Palestinian workers employed in Israel both declined relative to fourth-quarter 1999.  Some of this decline may be due to the major Muslim holidays?Eid al Fitr and Eid al Adha?which fell during the first quarter.   The full-employment rate continued to grow in the first quarter, probably the   result of a significant increase in public sector hiring.
Nonetheless, the narrowly defined unemployment rate edged upward to 10.9 per cent as compared to 10 per cent in the last quarter of 1999.  As noted above, the rate of growth of employment in 1999 was lower than in 1998; the evidence from the first quarter of 2000 seems to confirm the downward trend.

         Given somewhat slower growth in the private economy,  future progress will depend to a higher degree on a more rapid pace of institutional and fiscal reforms on the part of the Palestinian Authority, assisted by the donor community and the multilateral agencies.  In order to sustain and reinforce the significant economic progress in the Palestinian economy over the past three years, serious reforms in the judiciary and sufficient public investment will be required.   Such reforms,  combined with freer access of people and commodities, would   have a positive effect on private investment and exports in  particular, the two key elements for sustained growth and development of the Palestinian economy.