Palestinian Economy in Dire Straits

By ZIV HELLMAN
An article in Issue 13, October 13, 2008 of The Jerusalem Report. To subscribe to The Jerusalem Report click here. The good news: The downward economic spiral appears to have slowed down. The bad news: Growth in the first half of 2008 was registered at only 0.8 percent. The structure of the Palestinian economy is weakening, with dependency on aid growing and productive capacity declining. The population is becoming more dependent on the public sector because the private sector has been shrinking. The latest in a regular series of World Bank reports on the current state of the Palestinian economy, issued on September 22, was pervaded by a sense of gloom. Even measurements of economic recovery might be more a reflection of increased public sector spending of aid money than of a reviving private sector, leading the World Bank to note that "under these circumstances, any recovery cannot be assessed as immediately significant and does not necessarily indicate a sustainable positive trend." The bank prepared the report for a meeting of key donor country representatives, during the United Nations General Assembly in New York at the end of September. The Palestinian Authority economic figures are almost invariably negative. Palestinian GDP fell by 0.5 percent in 2007. Real per capita GDP is now 30% below its peak in 1999. It is estimated that in the Gaza Strip an incredible 98 percent of industrial operations are now inactive. The PA's 2008 budget requires an infusion of $1.85 billion in donor support. Add to that an additional $300 million in development aid, and the result is that at least 32 percent of Palestinian GDP comes from external donations. At the same time, cash wages paid by the PA are equivalent to 27 percent of GDP, as the public sector crowds out the private sector. The continuing lack of economic progress is frustrating international observers, who point out that economies in post-conflict periods typically experience explosive growth, with Bosnia adduced as a recent example of a country that experienced 35 percent growth in its first post-conflict year and 20 percent in its second. The Palestinian economy is considered to have sufficiently positive potential to surpass those figures, but it continues to be mired in anaemic growth at best, languishing since the beginning of the last round of conflict between Israel and the Palestinians in late 2000. According to World Bank officials, the blame for the current impasse can be shared by all the relevant parties: donor aid, they note, has been largely "ad-hoc, unpredictable and short of total commitments," leaving the Palestinian Authority with little ability to plan finances; the steps taken by Israel to remove obstacles to Palestinian movement have been isolated and partial; and Palestinian Authority efforts to increase law and order have excluded the Gaza Strip, which is under Hamas control. Nevertheless, as in previous World Bank reports, the heaviest blame is placed on Israel. While admitting that Israel has removed a not insignificant number of physical barriers to movement, World Bank officials say that this has had a limited effect on overall access. They say that Israeli restrictions "go beyond concrete and earth mounds, and extend to a system of physical, institutional and administrative restrictions that stifle Palestinian economic potential." Restrictions on Palestinian movement, they add, reduce economies of scale for Palestinian businesses, limit access to natural resources and create an atmosphere of business uncertainty, thus driving away potential investors. There are a few positive steps singled out. Significant progress is noted in the PA's implementation of a reform to contain public sector bloat and reduce its recurrent fiscal deficit. PA efforts to curb the activities of armed militias in Nablus and Jenin are praised, as are Israeli measures, such as the issuance of an additional 5,000 permits for Palestinian workers to enter Israel and a moratorium on house demolitions in Palestinian areas under Israeli control. But the bottom line of the report is that the Palestinian economy is in dreadful shape. Reviving it, in the bank's own words, will require "a profound revision in the fundamentals of the Palestinian economy." An article in Issue 13, October 13, 2008 of The Jerusalem Report. To subscribe to The Jerusalem Report click here.