UNCTAD’s assistance to the Palestinian people in 2013:
Economic developments in the Occupied Palestinian Territory (oPt)
After yet another year of prolonged occupation in Palestine, 2013 proved to be one more year of lost development. The economy continued to lose ground, and the slowdown that was witnessed in 2012 worsened in 2013. As a result, real per capita income in the occupied Palestinian territory (oPt) declined, and unemployment, poverty and food insecurity worsened. The Israeli occupation of Area C deprives the economy of Palestine of much of its natural resource base and costs at the very least one third of its gross domestic product (GDP) every year.
Despite difficult field conditions and limited resources, UNCTAD has continued to respond to the complex needs of the Palestinian economy during 2014. Middle East Business Magazine provides a shortened version of the full report, which can be found in our online edition.
Economic stagnation under occupation
Although in 2013 donor aid recovered somewhat from its decline the previous year, it was not sufficient to compensate for the severe effects of the Israeli restrictions on the movement of Palestinian people and goods, pervasive uncertainty, persistent fiscal crisis and gloomy political horizons. Economic growth in the oPt declined from an average of about 11% in 2010 and 2011 to a mere 1.5% in 2013, the lowest rate of growth since 2006, well below that of population growth.
Weak growth, fragile fiscal position and mass unemployment
In response to the recognition of Palestine as a non-member observer State in November 2012 by the United Nations (UN) General Assembly, Israel applied its traditional economic restrictions and withheld the transfer of clearance revenue to the Palestinian National Authority (PNA), further constraining its already thin fiscal space and curtailing its ability to pay its employees and suppliers. As a result of this and other long-standing constraints, real GDP growth was particularly weak in the West Bank. It fell from 5.6% in 2012 to just 0.4% in 2013. Growth in the West Bank contracted by 0.6% in early 2013, mainly as a result of the economic disruption caused by Israel’s withholding of clearance revenue, but it picked up again with the resumption of clearance revenue transfer.
In Gaza, despite the prolonged Israeli economic siege, growth was strong in the first half of 2013, mainly driven by the implementation of donor-funded projects. However, performance was reversed later in the year mostly due to the scarcity of inputs caused by the crackdown on the tunnel economy on the border with Egypt. Consequently, Gaza’s growth fell from an average of 26% in 2010 and 2011, to 4.5 % in 2013. Real GDP per capita in Gaza in 2013 was 20% below its level in 1994 (Office of the UN Special Coordinator for the Middle East Peace Process, 2013).
The economic prospects of the oPt depend on political trends, aid flows, the blockade of Gaza and Israeli restrictions on movement and access, as well as access to Area C. If the aid levels and political situation that prevailed in early 2014 persist, growth may not increase more than one point above its level of 2013, to hover around 2.5% in 2014. This will not be sufficient to absorb the new labour market entrants; nor will it be high enough to keep up with population growth. It will therefore produce higher unemployment and lower per capita income.
Palestinian official data indicate that the overall rate of unemployment in the oPt remained high in 2013 at 27%, in Gaza at 36% and the West Bank at 22%. The unemployment crisis is particularly severe in Gaza due to the persistence of the Israeli blockade and the shutdown of the tunnel economy, which virtually brought the construction and transportation sectors to a halt.
In 2013, the Palestinian labour force expanded further by 3.7%, but the rate of labour force participation remained unchanged at 43.6%. This rate is very low, even by regional standards; it reflects the fact that many working-age adults have been discouraged from participation by the dearth of decent work opportunities. The low rate also reflects the weak participation of women, which stood at 17% in 2013, compared with 69% for men. With 70% of the Palestinian population under 30 years of age, it is alarming that the unemployment rate is 41% among Palestinian youth in the 15–24 years age group. The youth unemployment problem is even worse among women, with two out of three young women out of work.
It is erroneous and misleading to view the fiscal crisis as the reason for the weakness of the economy of the oPt. Fiscal weakness is the result, not the cause, of an economic weakness that is rooted in occupation. Long-term sustainable development cannot be achieved without addressing the fundamental weaknesses and structural distortions that were fuelled by decades of occupation.
This structural deformation was driven by diverting investment towards the non-tradable goods sector, mainly services and residential construction, at the expense of agriculture and manufacturing, which were relatively employment intensive.
Prior to the blockade of Gaza, the local economy in the Gaza Strip was largely export oriented. However, exports to Israel have been banned, and trade with the West Bank has been severely restricted since 2007. These measures have wiped out the exports of Gaza almost completely. In 2013, only 182 truckloads of agricultural produce were exported, a substantial drop from the over 15,000 trucks recorded in 2000 (International Labour Organization (ILO), 2014).
Gaza’s low value added exports lack competitiveness for reasons related to the ongoing blockade, lack of access to inputs (some of which are considered by Israel as “dual-use”), destruction of infrastructure and high production and transportation costs.
Despite sluggish GDP growth, declining per capita income and below-expectation aid, the PNA remained committed to fiscal reforms, pursuing fiscal sustainability, controlling the budget deficit and mitigating the structural dependence on aid. Moreover, the PNA was successful in enhancing revenue performance, while controlling expenditure, and thereby reduced the recurrent budget deficit on a commitment basis from 30% of GDP in 2009 to 14.5% in 2012 and 11.7% in 2013.
Economic costs of the occupation on Area C
The economic costs of the Israeli occupation of Area C include the economic benefits that Israel and its settlements presently derive from Area C, as well as the potential benefits to Palestinians if the Israeli restrictions on access are lifted. Recently, the World Bank (2013) released a report providing partial estimates of the cost of occupation of Area C. The report constructs a counterfactual scenario assuming no physical, legal or regulatory constraints on Palestinian investment and no restrictions on Palestinian economic agents to freely invest, produce and sell in Area C. The study estimates the direct and indirect economic cost in specific sectors: agriculture, Dead Sea minerals exploitation, stone mining and quarrying, construction, tourism, telecommunications and cosmetics.
The report estimates that Palestinian GDP could increase by 7% ($704 million in 2011) with free access to 326,400 dunums of arable land, hundreds of thousands of dunums of rangeland and forests, and access to irrigation water in Area C. However, the study excludes from the land notionally available to Palestinians the 187,000 dunums controlled by Israeli settlers.
Allowing Palestinian investors access to the large, cheap and easily exploitable deposits of potash and bromine of the Dead Sea could increase Palestinian GDP by 9% ($918 million in 2011). Moreover, free access to 20,000 dunums of land that can be quarried could double the size of the Palestinian stone mining and quarrying industry, the oPt’s largest export industry, and could add 2% ($241 million) to GDP. The latter could further increase by 3.5% ($413 million) if Israeli restrictions on the construction, tourism and telecommunication sectors in Area C were lifted.
The sum of the direct increase in output from the sectors evaluated in the report amounts to 23% of GDP ($2.2 billion in 2011). However, once the direct benefits are obtained and injected into the economy, additional indirect benefits would be generated as a result of the economic forward and backward linkages. This would have sizeable multiplier effects on the demand for output of other sectors. The report assumed a conservative multiplier of 1.5, which leads to the generation of indirect benefit of 12% of GDP ($1.2 billion in 2011). Hence, the total direct and indirect benefit could be at least 35% of GDP. In other words, the cost of occupation of Area C (considering the evaluated sectors only) is estimated at a minimum of 35% of GDP.
At the fiscal level, if the improvement in GDP were to take place, the 2011 tax revenues of the PNA would rise by some $800 million, which would cut the fiscal deficit by half and significantly lower its dependence on aid. Also if the 35% increase in output were to materialise, employment would rise by 35%, and would thus ease the stress on the budget by removing the pressure on the PNA to act as an employer of last resort and provider of large social transfers to the poor and unemployed.
Finally, the lack of Palestinian control over Area C forestalls the development of institutional infrastructure such as banking and financial services. Although the World Bank report acknowledges that the cost of these restrictions and the potential benefits of lifting them are considerable, it makes no attempt to quantify them. Furthermore, the report does not consider that the restrictions in Area C have serious constraints on the rest of the Palestinian economy in Areas A and B, and Gaza. The report also confines itself to a number of specific sectors and does not consider all sectors in the economy. Therefore, the true total cost of the occupation of Area C is certainly far greater than 35% of GDP.
Moreover, the report’s estimated potential increase in the output of Area C itself is partial, conservative and non-exhaustive. For instance, the 187,000 dunums directly used by the settlements have been excluded from the calculations of land potentially cultivable by Palestinians. If the land in Area C had been transferred to the PNA by 2000 as envisaged in the Oslo Accords, the cultivatable land area available for Palestinians would be 57% larger than the land area cited in the World Bank report, that is to say, 513,400 dunums, instead of 326,400 dunums. This would imply a cost of occupation of at least 41% of GDP, a 41% increase in employment and a 60% reduction in the fiscal deficit.’
Recommendations for action
In its report to the Ad Hoc Liaison Committee in March 2013, the PNA affirmed that “Area C is an integral part of the State of Palestine, the backbone of the Palestinian economy, and true sovereignty thrives or dies with control over it” (State of Palestine, 2013). This was reaffirmed in the Palestinian National Development Plan 2014-2016, which was released in early 2014. The position of Area C in the Plan, and how to operationalise its strategic framework, was further outlined in another document released by the State of Palestine in May 2014 (State of Palestine, 2014).
The Office of the UN Special Coordinator for the Middle East Peace Process (2013) emphasised that Area C was fundamental to the contiguity of the West Bank and the viability of the oPt and its economy. It was essential not only for the expansion of public infrastructure, but also for the development needs of communities in Areas A and B and for the fiscal sustainability of the National Palestinian Authority.
Furthermore the European Parliament, in its resolution 2012/ 2694 (RSP) of 5 July 20121, expressed deep concern about developments in Area C and stressed the critical importance of social and economic developments in the Area for the viability of a future Palestinian State and keeping the prospects for the two-State solution alive. The resolution called on Israel to meet its obligations under international humanitarian law and protect the rights of the Palestinian population in Area C and East Jerusalem by ending house demolitions, evictions and the forced displacement of Palestinians and removing restrictions on access to land and water.
However, this broad international attention to Area C needs to be coordinated among the different domestic and international stakeholders to translate it into effective action.
It is necessary, therefore, to establish coherent policies, strategies, mechanisms and coordinated actions to achieve these goals. With the help of the international community, the PNA should take the lead in establishing such a coordinated approach within the framework of its National Development Plan 2014 – 2016.
There is an urgent need for action by the PNA, Israel and the international community to ensure that Palestinians have unhampered access to their productive assets in Area C, without which economic development and the two-State solution are inconceivable.
To read more key economic indicators, the disenfranchisement of Palestinian women, prerequisites for transforming the economy, and the report’s final recommendations please visit our online version.
Note: One dunum equals 1,000 metres2, and 1 km2 equals 1,000 dunums.
1See http://www.europarl.europa.eu/sides/getDoc.do?type=TA&reference=P7-TA-2012- 0298&language=EN (accessed 4 July 2014).