The Economic Impact of the Conflict on Israelis and Palestinians

Can the Palestinian economy be revived?

By Steve Schifferes
BBC News Economics Reporter
November 10, 2005

The Palestinian economy is in crisis.

Since the Al-Aqsa intifada began in 2000, poverty and unemployment rates have risen, and the economy has become increasingly dependent on foreign aid.

The future development of the Palestinian territories will depend on key decisions made on trade and work relations with Israel.

Further internal reforms will also be needed to attract foreign investment.

But Mr Brown’s hopes of encouraging further aid from official donors and stimulating business investment face daunting obstacles.

Poverty and struggle

Despite a modest economic revival in 2004, the Palestinian economy has been deeply wounded by the intifada and the closure of its borders with Israel.

The economy was highly dependent on remittances from Palestinians who worked in Israel.

Overall, the Palestinian economy declined in per capita terms by 38% in the four years from 1999 to 2003.

And the result was a rapid increase in the level of poverty and unemployment.

For both the West Bank and the Gaza Strip, unemployment rose to 27% and the poverty rate to 48%.

However, conditions were worse in Gaza, where there was little agriculture or light industry.

The official unemployment rate there doubled to 35% in the five years to 2004, compared with unemployment of 23% in the West Bank.

And many who list themselves as self-employed or working for family members may be under-employed.

Even worse, the poverty rate (those living on $2 or less per day) rose to 65%, twice as high as that in the West Bank.

Measured on an Israeli poverty line, 88% of the population would be poor.

Foreign aid

The Palestinian economy has been saved from total collapse only by a doubling of foreign aid to nearly $1bn per year, adding more than $400 per year to per capita income.

This aid pays for basic needs of many people, and funds the activities of the Palestinian Authority.

But the World Bank warns that donor fatigue may make it hard to maintain this level of support indefinitely.

And it says that further reforms are needed if private investment is to be attracted to replace such funds.

These include reforms to make the legal system fairer and more transparent, measures to tackle corruption, and less arbitrary rules for investment.

The Palestinian reforms are closely linked the battle for control of the security situation, with the result still uncertain.

The World Bank estimates that with economic reform and further donor aid, the Palestinian economy could grow by 2008 to a GDP per capita of $1,180, with unemployment reduced to 13%.

Conversely, if there is no change in the status quo, the Bank projects a decline in GDP per capita to $807, with unemployment rising to 37%.

Trade and agriculture

The Israeli withdrawal from Jewish settlements in Gaza this summer might have become a symbol of closer cooperation between the two economies – but instead it seems to have become another marker on the road to further separation.

The key role that Gaza could play is helping the expansion of trade, giving the Palestinians a port on the Mediterranean Sea which could be linked by road or rail to the West Bank.

But investment in port facilities and the airport, which was bombed by the Israeli air force and never repaired, awaits some key decisions about the future relations between Israel and the Palestinian Authority.

At the moment, the two are linked in a common customs union as far as external trade goes – so Palestinian goods can, in theory, pass freely through Israel and be exported.

But a series of extended border closures has trapped Palestinian products inside Gaza and prevented Palestinian businesses from importing vital goods from Israel.

Furthermore, Israel has signalled it might abolish the customs union in Gaza.

According to the World Bank, this could further disrupt the Palestinian economy, reduce its access to the Israeli market, and lead to significant losses of customs revenues for the Palestinian Authority.

And the promised physical link between the West Bank and the Gaza Strip – which would help ease these problems – is now an even more urgent priority, if Gaza is not to be isolated economically.

Linkages needed

Meanwhile, Israel is making other moves to de-link its economy from the Palestinians, such as the construction of its barrier on the West Bank.

It also plans to stop issuing permits for Palestinians to work in Israel from 2008.

As the World Bank said in its report on Israel&rsquos Gaza withdrawal, “an emphatic doctrine of physical and economic separation cannot be expected to encourage private investment – particularly since the immediate potential for Palestinian economic recovery lies in rebuilding trading links with Israel.”

It says there is a high economic cost to the closures, which must be reversed if the Palestinian economy is to prosper.

Israel argues that it is going to invest millions to improve the border crossings, and wants to encourage Palestinian autonomy.

But the Palestinians are in desperate need of quick progress on easing border restrictions.

Without it, there is little prospect of reducing the vast disparity between the $3bn Palestinian economy and the $130bn economy of its Israeli neighbour.