An Economy Under Siege:
A Palestinian View

Presented to the Second International Conference
"Mediterranean Cooperation and Development"
26-29 September 1997, Kozani - Hellas

At present, the Palestinian economy is an "economy under siege."

In my view, this is caused by three major actors adopting three specific policies that are hindering economic development in Palestine - on the international level there is the Donors and their Funding Policy; on the regional level there is the Israelis and their Closure Policy; and on the domestic level there is the Palestinians and their Investment Policy.

First: Donors Funding Policy
In a meeting held in Washington in 1993, the Donor Nations pledged to contribute 3,840 million dollars to the PNA. However, Donors transferred only 1,557 million dollars so far. In 1997, Donors have contributed nearly 107.5 million dollars only out of a total of 483.5 million dollars committed to be transferred by them to the PNA for that year.

No doubt, this policy of delayed delivery cripples PNA ability to plan and to implement economic development projects.

Second: Israeli Closure Policy
During the period of its military occupation of Palestinian Territories since 1967, Israel linked the Palestinian economy to the Israeli economy, making it a dependent economy. The Israeli policy of employing Palestinian workers aimed at pulling the Palestinian working force away from the Palestinian economy. In 1993, the number of Palestinian workers in Israel reached more than 120,000 workers.

While Israel maintains that the closure imposed on the West Bank and the Gaza Strip is for security reasons, the Palestinian view it as collective punishment against a people aiming at creating impossible living conditions to facilitate Palestinian evacuation from their homeland, particularly since there is no indication that Palestinian workers were involved in any of the suicide bombing attacks against Israeli civilian targets.

The first major Israeli closure of the Palestinian Territories was implemented following the 1973 October War when Palestinian workers were not allowed to cross to Israel for work. This measure was followed within Israel by a heated debate on the need to replace Palestinian workers either with foreign workers or with increasing mechanization.

At the outbreak of the Intifada in late 1987, more than 170,000 Palestinian workers were working in Israel at the time. However, the outbreak of violence and feelings of hostility prevented them from working in Israel. This caused Israel to increase the numbers of imported foreign workers. Later, Palestinian workers returned to work in Israel when they could not find work in the Palestinian Territories but at a much reduced rate. The Second Gulf War of 1991 led Israel to close the Palestinian Territories for nearly seven weeks.

The days of closure since the PNA took over in July 1994 till July 1997 totaled 335 days. In 1996, the days of closure reached 180 days at a loss of nearly 471 million dollars. In 1997, the days of closure reached 55 days and the estimated loss was 144 million dollars.

The Israeli closure policy resulted in the following negative effects on the Palestinian economy :

1. It dealt a serious blow to PNA hopes of improving Palestinian economic performance and the rate of economic growth for 1997, and perhaps for the first quarter of 1998.

The daily Palestinian losses accumulating as a result of the closure amounted to 13.6 million dollars daily: exports 3.1; industry 1.8; agriculture 2.0; transportation 1.0; wages of workers in Israel 2.4; wages of workers in Palestinian Territories 1.3.

2. It resulted in a decline in the National Palestinian Income and the share of individuals from the total real Gross National Income.

3. It caused nearly 55,000 Palestinian workers to lose their jobs. At the rate of an average of 50 dollars per day, this meant an average loss of 2.5 million dollars daily.

Under normal conditions, unemployment in the Palestinian Territories reached nearly 18 % with the percentage of workers within the "Green Line" reaching nearly 40 %; however, under the closure, the percentage of unemployment among Palestinian working force rose to more than 70 %. This was due to the following main reasons:

a. Preventing Palestinian workers from going to their work sights inside the "Green Line" in Israel;

b. Forbidding entry of essential building materials to the Palestinian Territories which led to a total standstill in the construction sector.

The Palestinian Ministry of Labor estimated that the total number of those unemployed as a result of the closure reached 285,000 workers from a total of 554,000 workers which constituted the working force in the West Bank and the Gaza strip, that is 51.5 %. There were nearly 55,000 Palestinian workers working in Israel before the recent closure. Their number was expected to rise to 70,000 workers.

According to a World Bank report, the total closure Israel imposed on the West Bank and the Gaza Strip since the beginning of 1997 had prevented the entry of goods and people to the Palestinian Territories. The percentage of working days lost as a result of the closure was 24.6 %, and the total closure days since January 1997 amounted to 144 days. The report indicated that the loss to the families of workers as a result of the closure amounted to 1.32 million dollars daily, and that the financial loss resulting from preventing exports of Palestinian goods during one month amounted to 39 million dollars.

4. It hurt other sectors such as construction, fishing, agriculture, industry, trade, etc.

5. It prevented Palestinians living in the rural areas from getting to their working places in the cities.

6. It caused daily losses to the PNA of revenues generated from income taxes, and medical insurance charged to work permits inside Israel which normally reached a monthly average of 4 million dollars.

7. It resulted in the rise of PNA budget deficit to USD120 million.

8. It obliged the PNA to seek financial assistance from the United Arab Emirates and Egypt to pay the salaries of its employees. The PNA also borrowed from local banks to meet this obligation, a step which added interest to its financial burdens.

9. It hit hard the Palestinian banking sector whose activities usually center on deposits, loans, and transfer of funds. At present, there are 20 banks with 80 branches operating in the West Bank and the Gaza Strip. While there was a rush by Palestinian to withdraw from their accounts and savings to meet their daily obligations, at the same time, deposit operations ceased. Such a one-way flow resulted in the following:

1. It obliged Palestinian banks to run short on liquidity causing them to withdraw their deposits from other banks to cover withdrawal demands by their clients.

2. It caused a shortage in loaning facilities provided to individuals and establishments.

3. It resulted in a decline of transfer of funds from abroad as it arose anxiety among businessmen and investors from the uncertain economic environment it had created. Many foreign as well as Palestinian investors became hesitant to proceed with their investment schemes due to the rise in the rate of risk factor resulting from the closure.

10. It prevented the World Bank as well as other Donors and international organizations from implementing their development projects in the Palestinian Territories due to the laof material, rising cost, and difficulties in transportation

In addition to its economic effects, the closure has had also social and psychological repercussions. It created a state of depression among Palestinians. There is no doubt that this feeling of isolation affected the psychological, behavioral and emotional state of mind among Palestinians. The head of a family cannot sit at home and face the demands of his family for their daily needs, resulting in frustration and anxiety within society.

In addition, by the end of July 1997, the unpaid tax money accumulated with Israel which belonged to the PNA amounted to more than 65 million dollars.

On 22 August 1997, the UN Committee for the Elimination of Racial Discrimination condemned the closure and Israeli refusal to refund the tax and customs revenues collected on behalf of the Palestinian National Authority (PNA). It considered those economic measures as collective punishment which is contrary to international law as stipulated by Article 33 of the Fourth Geneva Convention. The Committee maintained that the closure had tragic consequences on the life of the Palestinians and their welfare in the Palestinian Territories. It considered such measures to constitute a major obstacle to the peace process and demanded that they be lifted.

Third: Palestinian Investment Policy
The PNA investment policy had so far lacked the vision and dynamics needed to create the proper environment for attracting Palestinian, Arab, and international investors. The Palestinian Legislative Council still needs to issue investment laws necessary to create a legal framework that would make investors feel secure about their investment projects in the Palestinian Territories.