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Source: United Nations Special Coordinator in the Occupied Territories (UNSCO)
1 April 1997

United Nations Special Coordinator in the Occupied Territories

Second Quarterly Report on Economic and Social Conditions

in the West Bank and Gaza Strip



Acknowledgments

This is the second in UNSCO's series of quarterly reports on economic and social conditions of the Palestinian population in the West Bank and Gaza Strip (WBGS). The report presents an overview of economic and social developments in the WBGS during 1996 with emphasis on the last half of the year. Data and information on which the report is based were produced by international, Palestinian, Israeli and non-governmental agencies. The second report continues in the series' coverage of national and per capita income and provides some elaborations on the constituent elements of the macro economy which generate these incomes. Trends in the labour market, wage incomes and household living levels are also updated. Finally, there is a special report on the history and effects of Israel's closure policy on the WBGS during the period 1993-1996.

UNSCO would like to acknowledge and thank several institutions for their assistance in the provision of data, information and support. Foremost among these is the Palestinian Central Bureau of Statistics (PCBS). In particular, the President, the Labour Statistics Unit, the Economics Statistics Directorate, the Income and Expenditures Unit and the Public Relations and User Services Unit have been most generous with their time and resources. Our colleagues at the World Bank and the International Monetary Fund (IMF) have also provided vital data and assistance. A number of Palestinian Authority ministries contributed their data, time and talents in preparing our second report. These including the Ministry of Labour, the Ministry of Finance, the Ministry of Agriculture, the Ministry of Planning and International Cooperation Department of Statistics. The Palestine Economic Policy Research Institute (MAS) has hosted stimulating fora for the presentation and discussion of original research on economic conditions and policy in the WBGS from which this report has benefited.

The second report, like the first, has been enriched by the work of sister United Nations organisations and, in particular, the International Labour Organisation (ILO), the World Food Programme (WFP) and the United Nations Conference on Trade and Development (UNCTAD). Last but not least, this report has benefited from the work of several non-governmental organisations. Needless to say, any shortcomings in the use of the data and information provided by the sources enumerated above remain the sole responsibility of UNSCO.

This report is made possible through the generosity of the Government of Norway.

Foreword

The purpose of the Quarterly Report series is to meet the needs of the parties in the development process for more, better and timely information on general economic and social conditions. It was with this need in mind that UNSCO established the Economic and Social Monitoring Unit (ESMU) in mid-1996 whose main task is to produce the Quarterly Report series. I wish to acknowledge Dr. Salem Ajluni, Head of the ESMU, as well as the Unit's researchers, who have worked so diligently in producing the Quarterly Reports.

The second Quarterly Report reveals some troubling trends:

Alleviating these ponderous economic and social conditions must remain a central focus of the triangular partnership between the Palestinian Authority, the Government of Israel and the donor community, supported by the United Nations, the World Bank and the International Monetary Fund. The collective experience of the past several years has highlighted the centrality of the economic and social development effort which underpins the Palestinian-Israeli track of the peace process. If this effort fails, peace will prove elusive.

It is my belief that a fuller understanding of economic and social conditions will facilitate the development effort and, ultimately, will contribute to the peace process. It is with this conviction that the second Quarterly Report is presented to you.


TABLE OF CONTENTS


I. AGGREGATE TRENDS in WEST BANK and GAZA STRIP ECONOMY

1. Recounting the 1990s

2. The February 1996 Comprehensive Closure

3. Partial Recovery from the Closure Shock: Second-Half, 1996

4. An Update on Aggregate and Per Capita Income Estimates for the WBGS

5. An Update on Regional Income Estimates

6. Macroeconomic Elaborations

7. A Note on Private Investment and Exports



II. POPULATION, the LABOUR FORCE and WAGES

1. An Update on Population and Labour Force Growth

2. An Update on Employment and Unemployment

3. Underlying Labour Market Dynamics

4. An Update on Women in the Labour Market

5. An Update on Work Effort and Monthly Incomes



III. HOUSEHOLD EXPENDITURES and the LEVEL of LIVING

1. Household Consumption Expenditures: A One-Year Retrospective

2. An Update on Household Wage Incomes and the Level of Living

3. Regional Comparisons of Household Consumption Levels

4. Regional Comparisons of Total Household Income and Consumption



IV. SPECIAL REPORT: AN ANALYSIS of the ISRAELI CLOSURE POLICY


1. Introduction

2. Defining Closures: A Taxonomy

3. Essentials of the Closure Policies

4. The Time Dimension: A Calendar of Closures, 1993-1996

5. Lost Opportunities: Estimating Economic Effects of the Closures

6. Social Effects of the Closure Policies

7. Some Concluding Observations on Closures



V. LOOKING AHEAD



LIST of TABLES

Table 1: Real National Income and Per Capita Income Estimates for the WBGS, 1988-1992 Average and 1992-1997
Table 2: Growth of National Income, Population and Per Capita Income in the WBGS, 1992-1997
Table 3: Real National Income and Per Capita Income Estimates for the West Bank, 1988-1992 Average and 1992-1997
Table 4: Growth of National Income, Population and Per Capita Income in the West Bank, 1992-1997
Table 5: Real National Income and Per Capita Income Estimates for the Gaza Strip, 1988-1992 Average and 1992-1997
Table 6: Growth of National Income, Population and Per Capita Income in the Gaza Strip, 1992-1997
Table 7: Estimates of the Production and Service Components of the WBGS GDP, 1988-1995
Table 8: Estimates of Expenditure Components of the WBGS GDP, 1988-1996
Table 9: Estimates of Gross Domestic, Private and Public Investment as a Percentage of Real GDP of WBGS, 1988-1996
Table 10: Estimates of Exports and Imports as a Percentage of GDP of the WBGS, 1988-1996
Table 11: Estimates of Gaza-West Bank Trade as a Percentage of Total Gaza Trade, QI-1995-QIII 1996
Table 12: Per Capita GNP, Exports, Imports and Total Trade as a Percentage of GDP for Selected Countries and the WBGS, 1994
Table 13: Estimates of the Working-Age Population, Labour Force, Employment and Unemployment for the WBGS, QIV-1995, QII-1996,
QIII-1996 and QIV-1996
Table 14: Social Composition of the Employed WBGS Labour Force, QIV-1995, QII-1996, QIII-1996, QIV-1996
Table 15: Estimates of Employed Labour Force Branch Distribution in the WBGS Including Employment in Israel, QIV-1995, QII-1996,
QIII-1996, QIV-1996
Table 16: Comparing Female and Male Labour Force Profiles for the Working-Age Population in the WBGS, QIV-1995, QII-1996,
QIII-1996
Table 17: Estimates of Average Monthly Days and Hours Worked and Average Real Daily and Monthly Wages for Employed WBGS
Workers, QIV-95, QII-96, QIII-96, QIV-1996
Table 18: Estimates of Average Real Monthly Expenditures on Basic and Secondary Commodities and Services in Seven-Person
Households in WBGS, QIV-1995, QI-1996, QII-1996, QIII-1996
Table 19: Basic and Total Household Expenditures in Seven-Person Households in the WBGS and the Real Monthly Wage as a
Proportion of Expenditures, QIV-95, QII-96 and QIII-96
Table 20: Average Monthly Household Expenditures in the West Bank and Gaza Strip, QIII-1996
Table 21: Potential Work Days, Effective Closure Days and Effective Work Days for the WBGS, 1993-1996
Table 22: Israeli Work Permit Quota and Estimates of Actual Permitted Labour Flows from the WBGS to Israel on a Monthly Basis, 1996
Table 23: Estimates of Long-Run Potential Real GNP and Post-1993 Growth Scenario for Real GNP with Annual and Cumulative Closure
Losses for the WBGS, 1993-1996
Table 24: Estimates of Real Net Factor Income for the WBGS, West Bank and Gaza Strip, 1988-1995


AN EXECUTIVE SUMMARY

The Office of the United Nations Special Coordinator in the Occupied Territories' second Quarterly Report on Economic and Social Conditions in the West Bank and Gaza Strip analyses and presents updated data and information from international, Palestinian and Israeli sources on three main areas: aggregate and per capita national income during the period 1992-1996 with a special focus on private investment and exports; labour market conditions, including wages and incomes, during 1996; household income and consumption expenditures from the fourth quarter of 1995 to the third quarter of 1996. The Report includes a special section on the phenomenon of closures and their economic and social effects in the West Bank and Gaza Strip during the period 1993-1996. The Report is dated 1 April 1997.

An Update on Aggregate and Per Capita National Income

The most recent estimates indicate that the real GNP, the broadest measure of national income, in the West Bank and Gaza Strip (WBGS) has declined by 18.4 per cent between end-1992 and end-1996. Measured in constant 1995 US$, the real GNP declined from about US$ 5,000 to about US$ 4,100 million during this period. The decline is mainly attributable to the loss of employment in Israel and the decline in trade flows due to the Israeli closure policy. Current estimates also indicate that real GDP, which is GNP minus the incomes earned Palestinian workers in Israel, rose by 4.4 per cent during the same period. In constant 1995 US$ the GDP rose from about US$ 3,725 to US$ 3,900 during the period. Construction activity and public sector expenditure have been the main sources of GDP growth.

Real per capita GNP, a measure of potential living levels, according to the updated estimates, has declined 36.1 per cent between 1992 and 1996, this being the combined effect of falling aggregate incomes and robust population growth. With end-1992 real GNP at about US$ 5,000 million, and the WBGS population estimated at 1,865,000, per capita GNP was about US$ 2,700 in constant 1995 US$. At the end of 1996, real GNP was about US$ 4,100 with a total population of about 2,383,000, yielding a per capita GNP of about US$ 1,700.

Recent estimates indicate that the WBGS's real GNP and real GDP declined by about 3 per cent and 1.5 per cent respectively in 1996. Mid-1996 estimates had anticipated much steeper declines as a result of the February 1996 closure. Improved second-half economic performance, however, was unable to eliminate the traumatic effects of the February. Per capita GNP and GDP in the WBGS declined an estimated 8.5 and 7.5 per cent respectively in 1996.

An Update on Regional Aggregate and Per Capita National Incomes

Revised estimates confirm that, while average incomes in the West Bank remain significantly higher than the Gaza Strip, both aggregate and per capita income declines have been disproportionately high in the West Bank, despite lower than average population growth, during 1992-1996 as indicated below:

West Bank
Gaza Strip
Real GNP
-19.0 per cent
-16.3 per cent
Real Per Capita GNP
-36.0 per cent
-35.3 per cent
Real GDP
1.2 per cent
11.5 per cent
Real Per Capita GDP
-20.0 per cent
-13.7 per cent
Population Growth
26.6 per cent
29.3 per cent

This disparity has been especially large in regard to real and per capita GDP. This may be the result of the West Bank's loss of normal access to Jerusalem, the main centre of West Bank commercial activity prior to 1993. Another factor is the greater than average economic weight of the private sector in the West Bank, a sector whose relative output and employment have declined since 1993. On the other hand, the public sector, disproportionately large in the Gaza Strip, has expanded significantly since 1994. Gaza has also received a disproportionate share of donor assistance.

An Update on the Palestinian Labour Market

The third and fourth quarters of 1996 witnessed a marked improvement in labour market conditions as compared to mid-year. The labour force surveys of the Palestinian Central Bureau of Statistics indicate the following:

4th Quarter
2nd Quarter
3rd Quarter
4th Quarter
1995
1996
1996
1996
Full-employment rate
59.8%
56.3%
65.3%
70.9%
Unemployment rate
19.1
29.5
22.8
19.3
Underemployment rate
21.3
14.3
11.8
9.9
Average monthly days worked
21.0
21.6
22.0
22.0
Average real daily wage
US$ 19.61
US$ 14.91
US$ 16.47
US$ 16.82
Average real monthly wage
US$ 411.77
US$ 321.96
US$ 362.24
US$ 369.94

By end-1996, the most negative unemployment effects of the February 1996 closure had been eliminated. Moreover, the full-employment rate was considerably higher (and the underemployment rate considerably lower) than late 1995, prior to the February closure. Expanding public sector employment, higher numbers of WBGS employed in Israel and a partly revived private sector accounted for this progress. The number of weekly hours worked was also slightly higher indicating greater labour market effort on the part of Palestinian workers.

The greater work effort, unfortunately, was not reflected in higher in wage incomes. The real purchasing power of the average daily wage was 14 per cent less at the end of 1996 as compared to the end of 1995. On a monthly basis, the average real wage in the WBGS fell from an estimated US$ 411 at end-1995 to US$ 370 at end-1996--a nearly 10 per cent decline--despite an almost 5 per cent increase in the average number days worked per month. Thus, Palestinian labourers seem to be compensating for falling real wages with greater work efforts. This problem is indicative of the deeper labour market problems posed by the last four years of economic depression.

An Update on Household Income and Living Levels

The recently-completed Palestinian Central Bureau of Statistics one-year field survey of household living levels (October 1995-September 1996) indicates that inflation-adjusted household consumption expenditures fell by about 5 per cent with basic expenditures falling by over 7 per cent. This is indicative of a reduced average level of living in the WBGS during 1996, although the last quarter of the year--not covered by the survey--may have witnessed a marginal improvement in household consumption levels.

Distress in the labour market, where most Palestinians derive most of their income, has reduced the ability of an average wage income to cover average monthly household expenditures. In the last quarter of 1995 a single labourer's monthly income could only cover 67 per cent of basic needs. By the third quarter of 1996, an average monthly wage could purchase only 64 per cent of such needs. This is indicative of increased levels of economic pressures at the household level.

An Overview of the Economic and Social Effects of the Closure Policy

The general, comprehensive and internal closures, progressively imposed by Israel on the WBGS since March 1993, have resulted in considerable losses in income-generating opportunities. Between March 1993 and end-1996, closures have reduced by over 20 per cent the total number of days during which normal economic interactions between Israel and WBGS could take place. The aggregate economic effect has been to reduce by about half the long-run real GNP growth rate after 1993 (2.5 per cent) as compared to the period 1980-1992 (4.9 per cent). The resulting estimated cumulative losses in income-generating opportunities are estimated at US$ 6,450 million for the period 1993-1996 which, when distributed over the total number of calendar days, yields a loss of US$ 4.4 million per day.

Underlying these losses have been declines in household living levels, shifts in public expenditures from investment to consumption activities to counter the social hardships of closures, and significant declines in private sector investment along with an accumulation of excess productive capacity. More ominously, the spatial and economic separation of the WBGS from Israel, the West Bank from the Gaza Strip and these latter from Jerusalem, as well as the increased difficulties in intra-West Bank circulation have led to a less optimal use of resources. Comparative regional advantages, developed over 25 years of relatively free economic interactions between Israel and the WBGS, have been undermined in the process. Under these circumstances, Palestinian producers are unable to fully utilize whatever economic advantages they possess in the inter-regional division of labour and specialization which developed over the quarter-century prior to the closure policy.

At the social level, closures have, at times, threatened the health and food security of the WBGS population. The disruptions in access to medical services and food supplies have intermittently caused acute hardships. Closures have also hampered the process of capacity-building of the Palestinian Authority, as well as the operations of international organizations and aid donors contributing to capacity-building. But the biggest potential cost of the closures has been the spatial separation of Palestinians and Israelis, more so than at any time since the late 1960s. This has blocked the people-to-people interactions which must be the basis of any durable peace in the long-term.

Looking Ahead

With lower unemployment rates in the second half of 1996, and no comprehensive closures in the fourth quarter, there was reason to be optimistic about economic prospects in 1997. The number of permits issued by the Israeli authorities to Palestinian workers exceeded 50,000 during the last quarter of 1996. During the first quarter of 1997, there were about 60,000 permits issued, approximately 55,000 WBGS workers employed in Israel and commodity flows had been restored to early 1996 levels.

Under the improved conditions, the Palestinian Ministry of Finance and the IMF projected continued macroeconomic progress in 1997, with real growth rates for GDP and GNP of about 5.5 and 8 per cent respectively. These projections assumed a monthly average of 35,000 WBGS workers in Israel, an expansion of merchandise trade between the WBGS and Israel and an active Public Investment Programme on the part of the Palestinian Authority, supported by donors and multilateral institutions. The Ministry of Finance warned, however, that such a growth scenario is highly sensitive to border closures--such as that imposed by the Israeli authorities on 23 March 1997.

These growth rates would mean, at a minimum, the restoration of aggregate incomes to their end-1995 levels. Per capita incomes, under current estimates, would be below their end-1995 levels. This suggests that a solid year of economic growth in 1997 would restore overall income to its end-1995 level but not result in improvements in the average incomes of Palestinians in the WBGS. On the other hand, the WBGS economy has exhibited considerable resilience and an ability to regenerate growth after repeated external shocks. While the sources of the renewed growth have been construction, public consumption and private service activities--rather than in industry and agriculture--and partly financed by donor assistance, the private sector currently possesses a significant amount of unused productive capacity. Under more stable economic and political conditions, and in the absence of closures, much of that capacity could be beneficially utilized.


I. ECONOMY

1. Recounting the 1990s

As reported in the autumn issue of the Quarterly Report,[1] the economy of the West Bank and Gaza Strip (WBGS) has been in a state of depression since 1993, except for some notable, but brief, periods of economic recovery (as in late 1995 and early 1996). The four-year old depression, due in large part to the post-March 1993 Israeli closure policies, has been marked by a disruption in previously-established labour and commodity market relationships between Israel and the WBGS. The decades prior to the closure policy were characterised economically by significant labour-service and agricultural commodity exports from the WBGS to Israel and the export of a broad array of consumer durable and non-durable goods, construction materials and other production inputs from Israel to the WBGS. To a large extent, the growth in income and the rise in living levels in the WBGS during the 1970s and 1980s were based on the access of Palestinians to the labour and commodity markets of the larger and more productive Israeli economy, where real wage and price levels offered for Palestinian labour and products were higher than in the WBGS.

The closure and separation policy disrupted the relatively unhindered access of Palestinian workers and exporters to the Israeli markets. The ensuing dislocations, as noted in the first Quarterly Report, have produced substantial losses in national income since early 1993. While real GDP (the market value of goods and services produced in the WBGS) stagnated during the 1992-1995 period, real GNP (the market value of goods and services produced in the WBGS plus the income earned by WBGS residents abroad--mainly wage incomes from employment in Israel) fell some 18 per cent. This was mainly due to the sharp decline in the number of WBGS labourers permitted to work in Israel.

Reflecting this decline has been the reduction in the shares of GDP accounted for by private investment and exports--two vital components of aggregate spending. Private investment's share indicates the proportion of economic resources used to maintain the economy's present, and build up the economy's future, productive capacity. The share of exports in GDP suggests, among other things, the relative cost and/or quality advantages of goods produced in the country as perceived by foreign consumers of those products. In the WBGS, real private investment as a proportion of GDP averaged 24 per cent during 1988-1992 but fell to under 14 per cent during 1992-1995. Exports as a percentage of GDP averaged 13 per cent during 1988-1992 but fell to less than 10 per cent during the 1992-1995 period.[2] Thus, from the point of view of long-term private sector and export growth prospects, the last four years have been the worst in recent history.

Symptomatic of the post-1992 economic depression, and its most serious negative social implication, has been the emergence of chronic unemployment. Average unemployment rates in the WBGS during the 1980s were generally under 5 percent of the labour force.[3] After 1992 the closure policies limited Palestinian access to jobs in Israel and average unemployment rates surged to around 10-15 percent during 1993 and 1994.[4] By late 1995 and early 1996, a period of relative stability and above-average economic growth, the overall unemployment rate was nearly 20 per cent--over four times its 1980s average--with as much as one-fifth of those employed reporting some amount of underemployment.[5]

2. The February 1996 Comprehensive Closure

The already pronounced downward trend in national income during 1992-1995 was exacerbated in the first half of 1996 by the most comprehensive closure since the 41-day curfew and closure imposed during the Gulf War in early 1991. After two tragic suicide bombings on the same day in late February 1996, the Israeli authorities imposed a near complete closure on the WBGS for 38 days in late February, March and early April.

The closure paralysed much economic activity in the WBGS, raised unemployment rates to unprecedented levels and caused analysts to revise their forecasts. Late 1995 estimates of macroeconomic prospects for 1996 anticipated 5 and 6 per cent growth rates for real GDP and real GNP respectively. After the five-week closure, anticipation of growth changed to expectations of further declines in real GDP and GNP of 11 per cent and 17 per cent respectively for the year as a whole.[6] By mid-year, after further easing of the closure, aggregate income estimates were revised to declines of only 5 and 6 per cent respectively.[7] Private investment, including construction activity, continued its downward spiral as investor confidence was undermined by the reality of closure. Exports were all but halted during most of several months.

Average unemployment rates rose from about 20 per cent of the labour force in late 1995, to over 50 per cent during March and early April 1996, dropping to about 30 per cent at mid-year with significantly higher than average rates in Gaza and slightly lower than average rates in the West Bank. The result of this shock to the labour market was, in part, a greater tendency for working-age adults to actively seek jobs in the formal labour market--a phenomenon which was especially pronounced among working-age women. Under the weight of the unemployment surge, daily wage rates declined, resulting in average monthly wage income losses of about 15 per cent in nominal terms and 20 percent in purchasing-power terms during the first half of the year.[8]

The dual pressures of collapsing wage rates and higher consumer prices contributed to real reductions in household consumption levels. In real terms, average overall household expenditures in the WBGS declined about 6.7 per cent between late 1995 and mid-1996. With living levels under pressure, households responded by sending more family members (including many more women and children) into the labour market, consuming from accumulated savings and taking on more debt through informal credit channels.

3. Partial Recovery from the Closure Shock: Second-Half, 1996

Despite additional closures, most notably those associated with the military clashes during late September 1996, and some 25 days of total and partial closure during the last quarter of the year, evidence suggests that aggregate economic activity rebounded in the second half of the year.[9] With the easing of the February closure in April, pre-closure labour and commodity export patterns, albeit in fits and starts, gradually increased. The private sector response, combined with donor-assisted employment creation and public investment activities, provided enough impetus to slow the decline in aggregate income.

The number of Israeli-issued work permits for WBGS workers rose from about 35,000 at mid-year to over 45,000 during the third quarter, with actual labour flows to Israel lagging behind the number of permits.[10] Emergency employment programmes undertaken by the Palestinian Authority with donor, World Bank and UN support employed almost 8,200 persons on a monthly basis in the second half of the year.[11] The volume of trade between the WBGS and Israel was revived although, because of continuing restrictive measures on exports, WBGS imports rebounded more quickly. In real terms, total trade remained below its 1995 level.[12]

Despite a comprehensive 15-day closure during and after the September military clashes between Israeli and Palestinian forces and another 25 days of closure during October and November, fourth quarter average labour flows between WBGS and Israel were higher than the average for the first three quarters of the year. WBGS permitted employment in Israel averaged about 32,000 per month with actual employment at about 38,000 during the fourth quarter.[13]

Combined with continued easing of restrictions on commodity trade, the third quarter average unemployment rate was one-quarter lower than at mid-year,[14] reversing to a large extent the labour market shock of the February closure. By the fourth quarter, the average unemployment rate had returned to its end-1995 level. More encouraging were the continuous reductions in underemployment rates (and corresponding increases in full-employment rates) during the second half of 1996.[15] The improvement in the labour market was also reflected in household consumption expenditures which regained almost half of their first-half losses.

Revised estimates of aggregate economic growth for 1996 are reflective of the underlying improvement in the labour and commodity markets. Early 1997 estimates of real growth rates of GDP and GNP for 1996 were revised to about -1.5 per cent and -3 per cent respectively (as compared to -5 and -6 per cent estimates in June), indicating significant, though not total, recovery from the February shock.[16]

4. An Update on Aggregate and Per Capita Income Estimates for the WBGS

Revised estimates suggest the post-March 1993 closure policy caused a sharper drop in WBGS aggregate and per capita income than was earlier thought.[17] As indicated in Table 1, the initial economic shock of the general and comprehensive closures resulted in a loss of one-seventh of real GDP, one-fifth of real GNP, one-fifth of per capita GDP and one-quarter of per capita GNP. Recent evidence also suggests there was a strong recovery of real GDP during 1994-1995, generated by a resurgence of construction activity, household expenditures and public sector spending in the post-Declaration of Principles optimism, with real GDP surpassing its 1992 level. The real GNP's recovery in that period, however, was not nearly as robust, reflecting drastically reduced post-closure wage income from WBGS employment in Israel.

Both national income measures were further compressed in 1996 due to significant political volatility and closures. Expectations are that real GDP losses for the year will leave both measures slightly below their 1995 levels and reverse the trend toward recovery evidenced in 1994-1995. One positive note is that real GDP for 1996, despite losses, will be near its highest level during the past decade. Based on current estimates of income performance, the real GDP could be 4.4 per cent--about US$ 165 million--higher in 1996 relative to 1992. Real GNP, however, the more encompassing measure of national income, will be about US$1,500 million below its 10-year apex and 18.4 per cent lower than its 1992 level.


Table 1

Real National Income and Per Capita Income Estimates for the West Bank and Gaza Strip,

1988-1992 Average and 1992-1997 [18]

(in constant 1995 US$)


Real GDP
Real GNP
Population
Per Capita GDP
Per Capita GNP
End-Year
(US$ millions)
(US$ millions)
(WBGS)
(US$)
(US$)
1988/92 Average
3,657.13
4,910.69
1,710,200
2,150.52
2,889.87
1992
3,728.55
5,003.68
1,864,500
1,999.76
2,683.66
1993
3,196.55
3,892.25
1,974,000
1,619.33
1,971.76
1994
3,551.90
3,996.65
2,114,000
1,680.18
1,890.56
1995
3,956.48
4,203.99
2,242,500
1,764.32
1,874.69
1996
3,893.17
4,082.07
2,383,000
1,633.73
1,713.00
1997
4,107.30
4,408.64
2,554,000
1,608.18
1,726.17


Table 2

Growth of National Income, Population and Per Capita Income in the West Bank and Gaza Strip, 1992-1997

(percentages indicate changes from previous year)


Real GDP
Real GNP
Population
Per Capita GDP
Per Capita GNP
End-Year
(% changes)
(% changes)
(% changes)
(% changes)
(% changes)
1988/92 Average
---
---
---
---
---
1992
1.95%
1.89%
9.02%
-7.01%
-7.14%
1993
-14.27%
-22.21%
5.87%
-19.02%
-26.53%
1994
11.12%
2.68%
7.09%
3.76%
-4.12%
1995
11.39%
5.19%
6.08%
5.01%
-0.84%
1996
-1.60%
-2.90%
6.27%
-7.40%
-8.62%
1997
5.50%
8.00%
7.18%
-1.56%
0.77%
1992-1996
4.41%
-18.41%
27.80%
-18.30%
-36.16%

The restoration of economic growth during 1994-1995 was apparently strong enough to reverse the collapse in per capita GDP (the market value of goods and services produced in the WBGS divided by the total population). However, continued substantial population growth-- including continued repatriation of Palestinians from abroad--and the economic crisis of 1996, were enough to reverse this trend with per capita GDP falling 7.4 per cent for the year. Per capita GNP has continued its uninterrupted post-1992 slide with a 1996 estimated loss of 8.6 per cent. For the post-closure period as a whole per capita GDP is estimated to be 18.3 per cent lower, and per capita GNP 36.1 per cent lower, in 1996 as compared to 1992.

5. An Update on Regional Income Estimates

a. West Bank

Updated estimates indicate that the West Bank economy suffered much larger initial losses stemming from the March 1993 closure than reported in the first Quarterly Report. Estimates in Table 3 suggest the West Bank real GDP dropped 15.5 per cent in 1993 relative to 1992 with real GNP falling 22.7 per cent, both declines being above the WBGS average. Furthermore, while earlier estimates showed further declines in 1994-95, the current calculations show a strong recovery for the same period with real GDP growing nearly 22 per cent, surpassing both its 1988/92 average and 1992 level, but still some US$200 million below its 10-year apex. While the real GNP registered positive growth during 1994-95, it was insufficient to regain its pre-closure level, given the restricted access to employment in Israel. Based on current estimates, overall real income at the end of 1996 was 19 per cent lower than in 1992. Current estimates also confirm the greater than average losses in West Bank per capita GDP and GNP, despite the lower than average population growth rate.

The West Bank's greater than average losses seem to be due to the disruptive effects of restricted access to Jerusalem for West Bank agriculture, industry and commerce. Another factor is the disproportionate weight of the private sector in the West Bank, a private sector which has experienced declines in output since 1993.


Table 3

Real National Income and Per Capita Income Estimates for the West Bank, 1988-1992 Average and 1992-1997

(in constant 1995 US$)


Real GDP
Real GNP
Population
Real Per Capita GDP
Per Capita GNP
End-Year
(US$ millions)
(US$ millions)
(WB)
(US$)
(US$)
1988-1992 Average
2,779.34
3,573.59
1,007,600
2,774.70
3,568.20
1992
2,826.00
3,681.26
1,097,500
2,574.95
3,354.23
1993
2,387.92
2,843.33
1,159,000
2,060.33
2,453.26
1994
2,615.45
2,898.95
1,240,000
2,109.24
2,337.86
1995
2,907.31
3,068.88
1,308,500
2,221.86
2,345.34
1996
2,860.79
2,979.88
1,390,000
2,058.12
2,143.80
1997
3,018.14
3,218.27
1,500,000
2,012.09
2,145.51



Table 4

Growth of National Income, Population and Per Capita Income in the West Bank, 1992-1997

(percentages indicate changes from previous year)

Real GDP
Real GNP
Population
Per Capita GDP
Per Capita GNP
End-Year
(% changes)
(% changes)
(% changes)
(% changes)
(% changes)
1988-1992 Average
---
---
---
---
---
1992
1.68%
3.01%
8.92%
-7.20%
-6.00%
1993
-15.50%
-22.76%
5.60%
-19.99%
-26.86%
1994
9.53%
1.96%
6.99%
2.37%
-4.70%
1995
11.16%
5.86%
5.52%
5.34%
0.32%
1996
-1.60%
-2.90%
6.23%
-7.37%
-8.59%
1997
5.50%
8.00%
7.91%
-2.24%
0.08%
1992-1996
1.23%
-19.05%
26.65%
-20.07%
-36.09%

b. Gaza Strip

Current estimates also point to much steeper declines in Gaza's real GDP and GNP for 1993, stronger recovery in 1994 but much weaker performance in 1995 as compared to earlier assessments. Overall, 1995 real GDP was 13.3 per cent above its 1992 level and surpassed by US$100 million its highest level in the past decade. Based on current estimates, Gaza's end- 1996 real GDP was near the past decade's peak and 11.5 per cent above its 1992 level. The real GNP, on the other hand, was over US$400 million below its 10-year high and 16.3 per cent below its 1992 level. When population growth is factored into the equation, real per capita GDP was 13.7 per cent, and per capita GNP 35.3 per cent, below their 1992 levels. As in the West Bank, such declines indicate severe erosion in average living levels of the population. Of note here are Gaza's below average per capita declines, despite higher than average population growth rates. This may be the result of the disproportionate effects of public sector spending and employment, supported by donor assistance, in Gaza relative to the West Bank.


Table 5

Real National Income and Per Capita Income Estimates for the Gaza Strip, 1988-1992 Average and 1992-1997

(in constant 1995 US$)


Real GDP
Real GNP
Population
Real Per Capita GDP
Per Capita GNP
End-Year
(US$ millions)
(US$ millions)
(GS)
(US$)
(US$)
1988-1992 Average
892.64
1,334.31
702,900
1,276.26
1,911.48
1992
924.98
1,314.81
767,500
1,205.18
1,713.11
1993
831.47
1,041.61
815,500
1,019.58
1,277.26
1994
952.71
1,097.89
874,000
1,090.05
1,256.16
1995
1,048.84
1,133.37
934,000
1,122.95
1,213.45
1996
1,032.06
1,100.50
993,000
1,039.33
1,108.26
1997
1,088.82
1,188.54
1,054,000
1,033.03
1,127.65


Table 6

Growth of National Income, Population and Per Capita Income in the Gaza Strip, 1992-1997

(percentages indicate changes from previous year)


Real GDP
Real GNP
Population
Per Capita GDP
Per Capita GNP
End-Year
(% changes)
(% changes)
(% changes)
(% changes)
(% changes)
1988-1992 Average
---
---
---
---
---
1992
3.62%
-1.46%
9.19%
-5.57%
-10.38%
1993
-10.11%
-20.78%
6.25%
-15.40%
-25.44%
1994
14.58%
5.40%
7.17%
6.91%
-1.65%
1995
10.09%
3.23%
6.86%
3.02%
-3.40%
1996
-1.60%
-2.90%
6.32%
-7.45%
-8.67%
1997
5.50%
8.00%
6.14%
-0.61%
1.75%
1992-1996
11.58%
-16.30%
29.38%
-13.76%
-35.31%

6. Macroeconomic Elaborations

Macroeconomic output (e.g. the value of GDP) can be understood and measured in two ways: as the production of goods and services for the market and as expenditures in the market on the goods and services produced. Each measurement approach offers a different view of the determinants of the size of the GDP, but both yield the same total GDP value. Moreover, both production of goods and services and expenditures in the market can be further sub-divided into constituent parts in order to analyse underlying sources of GDP growth, decline or stagnation.

For example, the value of the production of goods and services is usually measured on the basis of the following constituent parts:[19] agriculture, industry, public and private construction, public and community services (e.g. social services provided by civil authorities and NGOs) and other services (e.g. commerce and personal services). Expenditures on goods and services produced is usually measured by the following categories:[20] private (household) and public (government) consumption expenditures, private (business) and public (government) investment expenditures, exports (expenditures by foreigners on domestic output) and imports (residents' expenditures on foreign output).

a. GDP as the Value of Produced Goods and Services

Using the production approach, the estimated value of the output produced by the various parts of the WBGS economy are given in Table 7.


Table 7

Estimates of the Production and Service Components of the WBGS GDP, 1988-1995 [21]

(in constant 1995 US$ millions)

Public and
Community Services
Other
Services
Agriculture
Industry
Construction
1988
1,572.31
317.59
525.42
374.73
1,080.18
1989
1,016.21
257.46
479.62
351.16
1,141.73
1990
1,364.46
276.03
480.52
407.71
1,148.08
1991
930.53
253.27
401.46
374.97
1,157.62
1992
1,334.27
276.95
485.63
396.84
1,256.97
1993
943.70
271.38
531.58
385.47
1,085.81
1994
1,070.24
264.24
587.99
434.34
1,099.76
1995
799.00
315.61
732.23
555.15
1,246.51
1992-1995
-40.12%
13.96%
50.78%
39.89%
-0.83%

These recent estimates indicate that the sources of GDP growth during 1988-1992 (the years of the intifada) were mainly public, community and other services. Sources of decline were industry and public and private construction. The large oscillations in agricultural output are the result of the bi-annual olive cycle (a good year followed by a bad one) but there was also a downward secular trend with progressively lower output in both good and bad years, suggesting retrenchment in that branch of the national economy.

Except for construction, there were declines in every category of production in 1993, largely the result of the initial shock of the closure (which coincided with a bad year in agriculture). In 1994 there was continued compression in industry, small gains in other services, a significant rebound in public and community services and continued robust growth in construction. While 1994 was a "good" agricultural year, its peak was quite low. In 1995 there was a significant revival across the board, except in agriculture where the "bad" year's output was significantly below those of previous "bad" years.

During the 1993-1995 period, the sources of growth were mainly construction and the provision of public and community services--the only two realms of activity where the value of output significantly exceed pre-closure levels. Industry and agriculture, the two most important branches of production for the WBGS in the medium- to long-term, have continued to stagnate. This is especially troubling given that private manufacturing activity and agricultural production are the sources of the WBGS's regional comparative advantage and the basis for the sustained development of the private sector.

b. GDP as Expenditures on Produced Goods and Services

Using the expenditure approach to GDP, the estimated market value of the purchases by the private and public sectors in the WBGS are given in Table 8.


Table 8

Estimates of Expenditure Components of the WBGS GDP, 1988-1996 [22]

(in constant 1995 US$ millions)


Private
Public
Private
Public
End-Year
Consumption
Consumption
Investment
Investment
Exports
Imports
1988
4,233.57
386.04
1,054.37
116.72
560.01
2,162.87
1989
3,650.53
343.34
773.32
78.39
382.41
1,683.09
1990
3,950.81
415.47
895.49
78.65
494.18
1,879.60
1991
3,854.80
358.38
737.48
101.47
453.50
2,134.99
1992
3,994.38
401.96
1,012.33
114.44
495.28
2,232.15
1993
3,439.18
341.58
584.37
153.64
237.05
1,363.64
1994
3,573.79
355.20
527.33
143.53
344.56
1,373.03
1995
4,137.54
847.51
320.27
220.00
473.09
1,908.97
1996
3,935.62
762.75
255.79
239.46
382.26
1,565.00
1995-1996
-4.88%
-10.00%
-20.13%
8.85%
-19.20%
-18.02%
1992-1996
-1.47%
89.76%
-74.73%
109.26%
-22.82%
-29.89%

The estimates of expenditures on output offer another view of the sources of growth and stagnation in the WBGS's economy. During the intifada years, private (i.e. household) consumption expenditures declined and stagnated and public consumption (i.e. civil authority spending on social services) fluctuated radically. Private investment spending on productive capacity and public investment in infrastructure collapsed as did WBGS exports to, and imports from, Israel and abroad. The various categories of spending stabilized in 1992 at approximately their 1988 levels, except for exports, which remained significantly below the 1988 level.

Expenditures on WBGS output as well as imports (mainly from Israel) fell sharply in 1993 as a result of the March closure. Two vital areas of spending activity--private investment and exports fell 40 and 50 per cent respectively. Household expenditures declined by about 10 per cent while imports dropped by about 40 per cent. While public services spending dropped sharply, public infrastructure spending rose by almost half. During 1994 expenditures were stabilized, except for exports which continued to fall. Two years after the closure, growth was restored in consumption expenditures--private, public and from foreign sources (imports)--as well as exports. But investment spending, both private and public, continued to plummet. Thus the GDP's recovery in 1994-1995 was led by consumption rather than investment expenditures, a pattern that cannot sustain healthy, long-term income growth.

Preliminary evidence for 1996 suggests that real household consumption expenditures may be about 5 per cent below its estimated 1995 level . Real public consumption expenditures in the WBGS--Palestinian Authority current expenditures (including employment-generating programs) are estimated to be about 10 per cent below their 1995 level. Real private investment expenditures are estimated to have fallen about 20 per cent in 1996. This preliminary estimate is indirectly supported by data from the Company Register Office in Ramallah (the official registry for the West Bank) and the Commerce Registry Office in Gaza which show, respectively, a 24 and 29 per cent decline in new company registrations as compared to 1995.[23] One factor in this decline may be the greater risk perceptions of businesses stemming from the February 1996 comprehensive closure.[24] Inflation-adjusted public investment expenditures, funded by donor countries, are estimated to have risen by about 9 per cent,[25] one of the few bright spots in 1996 economic performance. Finally, exports fell by an estimated 19 per cent while imports fell about 18 per cent. Thus export opportunities were lost and the WBGS ended the year with a worse balance of trade problem.

Over the four-year period end-1992-end-1996, and from the point of view of expenditures on WBGS goods and services, the public sector has been chiefly responsible for the resilience in GDP growth--and especially public consumption expenditures. Private sector spending has exerted a negative influence on GDP growth with household consumption more or less stagnant and a collapse in private investment expenditures. Because imports have fallen more quickly than exports, the foreign sector has had a net positive influence on GDP growth. That is, the decline in WBGS purchases from abroad was faster than the decline in foreign purchases of WBGS goods, resulting in a relative improvement in the balance of trade picture.

7. A Note on Private Investment and Exports

The foregoing analysis of expenditures sheds light on two factors in creating a sustainably growing private sector: private investment and exports. Expenditures in these two areas are inextricably linked and, together, they form the basis for recreating the Palestinian private sector and for potential long-term growth.

Private investment bolsters future private-sector productive capacity, and therefore future employment and income-generating opportunities, laying the foundation for improved levels of living. The long-term consequences of the decline in public and private investment spending are a slower growth, development and transformation process as well as constricted future income-generating possibilities. An healthy export capacity is indicative of the relative competitiveness of WBGS products in international markets, allows for the fuller use of specialized domestic human and physical resources and encourages domestic and foreign investment aimed at taking advantage of international market opportunities.

a. Private Investment

Due to the inhospitable political and policy atmosphere created by the Israeli occupation and the lack of adequate and appropriate financial institutions capable of mobilizing and channelling household savings into productive endeavours, over 80 per cent of WBGS private investment during the 1980s was concentrated in the construction branch--mainly for private residences. Such activity was financed by private household savings, the bulk of which was generated by labour incomes from work in Israel and by the remittances sent to WBGS families by relatives working abroad.[26] Private investment in productive--rather, reproductive- -activity was minimal, given the high risks and inadequate enabling environment.

During the intifada period, real private investment activity accounted for about one- quarter of GDP. Beginning with the closure in 1993, private investment spending experienced absolute and relative declines such that, by 1995, it formed under one-tenth of GDP--despite the interest generated in such investment among local and international businesses (mainly owned by expatriate Palestinians) in the post-1993 period (see Table 9). While construction activity has been maintained, investment in reproductive branches, e.g. agriculture and manufacturing has, according to available evidence, been compressed.[27]

Since the financial sector--especially banks--has been developing at a rapid pace since 1993,[28] the main factors in the post-1993 relative decline in private investment seem to be, on the one hand, the uncertainty and considerable risk to investors posed by closures--mainly a Government of Israel responsibility--which make long-term investment planning precarious. On the other hand, investors face other risks due to the underdeveloped state of the rule of law in the WBGS, including the absence of a transparent and enforced system of property rights and tax regime--which are mainly the responsibility of the Palestinian Authority. Mobilizing local capital resources and attracting foreign investment require political and economic stability and an appropriate legal framework, something not likely under a regime of closures and in an unclear legal and institutional environment.

Also noteworthy is the trajectory of public investment (expenditures on physical and institutional infrastructure), which plays a crucial role in providing the necessary conditions for a more efficient private sector. Physical improvement in roads, communications and health and education facilities improve the quality of life for the population and, at the same time, constitute part of the "enabling environment" for private sector investment. Thus public investment is complementary to--and not a substitute for--private investment. Table 9 indicates that public investment, after a surge in 1993-1994, was drastically reversed in 1995 owing to the Palestinian Authority's consumption spending exigencies created by a year of significant closures and political turbulence. This, no doubt, produced negative collateral effects on private sector investment.


Table 9

Estimates of Gross Domestic, Private and Public Investment as a Percentage of Real GDP of WBGS, 1988-1996[29]

(in constant 1995 US$ millions)

Gross Domestic
Percentage
Private
Percentage
Public
Percentage
Investment
of GDP
Investment
of GDP
Investment
of GDP
End-Year
(US$ millions)
(US$ millions)
(US$ millions)
1988
1,168.31
28.78%
1,054.37
25.97%
116.72
2.87%
1989
849.73
25.18%
773.32
22.92%
78.39
2.32%
1990
971.94
25.24%
895.49
23.25%
78.65
2.04%
1991
836.85
25.57%
737.48
22.54%
101.47
3.10%
1992
1,124.08
30.15%
1,012.33
27.15%
114.44
3.07%
1993
735.77
23.02%
584.37
18.28%
153.64
4.81%
1994
738.01
20.78%
527.33
14.85%
143.53
4.04%
1995
670.86
16.96%
320.27
8.09%
220.00
5.56%
1996
540.27
13.88%
255.79
6.57%
239.46
6.15%
1995-1996
-19.47%
-20.13%
8.85%
1992-1996
-51.94%
-74.73%
109.26%
The decline in gross domestic investment (private plus public investment) in 1996 was apparently due to the continuing decline in private sector investment. Since 1992, private investment has continuously been reduced both in absolute terms and as a proportion of total investment activity. Public investment, on the other hand, has more than doubled since 1992 and, in 1996, was nearly as large as private spending in overall investment activity.

b. Exports

The other area of concern regarding the long-term growth and development prospects of the WBGS economy is exports. As already noted, exports were depressed due to the closure policies and revived to nearly their pre-closure level only in 1995. Evidence suggests this trend was reversed in 1996 due to closures. [30] Because the February closure came at a time of normally peak agricultural export volume, there were particularly significant lost export opportunities in this key area of comparative cost advantage for the WBGS. [31] These losses and the continued compression of exports throughout 1996, due in part to higher transportation costs imposed by security measures at the borders, are only one part of the picture.


Table 10

Estimates of Exports and Imports as a Percentage of GDP of the WBGS, 1988-1996[32]

(in constant 1995 US$ millions)


Percentage
Percentage
Percentage
End-Year
Exports
of GDP
Imports
of GDP
Trade Balance
of GDP
1988
560.01
13.79%
2,162.87
53.28%
-1602.86
-39.48%
1989
382.41
11.33%
1,683.09
49.88%
-1300.68
-38.55%
1990
494.18
12.83%
1,879.60
48.81%
-1385.42
-35.97%
1991
453.50
13.86%
2,134.99
65.25%
-1681.49
-51.39%
1992
495.28
13.28%
2,232.15
59.87%
-1736.87
-46.58%
1993
237.05
7.42%
1,363.64
42.66%
-1126.59
-35.24%
1994
344.56
9.70%
1,373.03
38.66%
-1028.47
-28.96%
1995
473.09
11.96%
1,908.97
48.25%
-1435.88
-36.29%
1996
382.26
9.82%
1,565.00
40.20%
-1182.74
-30.38%
1995-1996
-19.20%
-18.02%
-17.63%
1992-1996
-22.82%
-29.89%
-31.90%
Closure as a policy seems to have altered the flow of internal trade between the West Bank and Gaza Strip. The degree of "disarticulation" in West Bank-Gaza Strip trade is indicated in Table 11. According to these estimates, total Gaza interregional trade with the West Bank reached a two-year high in the fourth quarter of 1995, accounting for nearly 11 per cent of total trade. By the third quarter of 1996, total trade with the West Bank had been reduced to only one-fifth that level, while Gaza trade with Israel--and West Bank trade with Israel--has expanded accordingly.[33] Thus closure-related obstacles have apparently diverted WBGS interregional trade into more tightly integrated West Bank-Israel and Gaza-Israel trade.


Table 11

Estimates of Gaza-West Bank Trade as a Percentage of Total Gaza Trade, 1995-QIII 1996 [34]

(in current US$ millions)


Total Gaza
Total West Bank-Gaza
West Bank-Gaza Trade
Trade
Trade
as a Percentage
1995
(EX+IM)
(EX+IM)
of Total Gaza Trade
Total
US$ 601.44
US$ 48.26
8.03%
1996
QI
US$ 134.50
$US 5.16
3.84%
QII
185.91
2.69
1.45%
QIII
171.87
3.97
2.31%
QIV
n.a.
n.a.
n.a.
Total
US$ 492.29
US$ 11.83
2.40%

Taken as a unit, the WBGS is a small and fairly open economy. But its external economic relations for the past 30 years have been overwhelmingly dominated by trade with Israel which, in the 1980s, accounted for over three-quarters of all WBGS trade. Because of its generally weak productive capacity, hindered in its development by policies designed to protect Israeli home industries, exports tended to be a narrow range of agricultural commodities, construction materials and, in the case of Gaza, textiles and garments produced by sub-contracting workshops. In general, exports averaged 13 percent of GDP, imports 55 per cent of GDP and the balance of trade deficit 42 per cent of GDP during the intifada period. During 1993-1995, estimates indicate exports averaged only 9.5 per cent of GDP, imports 43 per cent of GDP and the trade deficit 33.5 per cent of GDP (refer to Table 10). The large trade deficits have generally been financed by the incomes earned by Palestinian workers in Israel and by remittances of Palestinians living and working abroad. According to 1996 estimates, the trade deficit shrank considerably (in real terms, to near its lowest point in the past 10 years) as a result of closure-related trade restrictions. The trade deficit in 1996 is estimated at over 30 per cent of GDP.

By comparison to other Middle East and North African countries with similar levels of per capita income, the share of WBGS exports in GDP in 1994 were about half the average proportion (excluding Egypt and Israel). Even the higher export ratios of the intifada period are low by comparison as indicated in Table 12. WBGS imports as a share of GDP by comparison to such countries, were somewhat above average in 1994 and considerably higher than average if the intifada period is used as the benchmark.


Table 12

Per Capita GNP, Exports, Imports and Total Trade as a Percentage of GDP for Selected Countries

and the WBGS, 1994[35]

(per capita GNP in current US$)


GNP Per Capita
Country
(US$)
Exports/GDP
Imports/GDP
Total Trade/GDP
Egypt
720
8.07%
23.73%
31.80%
Jordan
1,440
23.33%
55.40%
78.72%
Algeria
1,650
20.49%
19.07%
39.57%
WBGS
1,712
9.65%
38.44%
48.09%
Tunisia
1,790
29.55%
41.72%
71.27%
Turkey
2,500
13.82%
17.76%
31.58%
Israel
14,530
21.70%
32.45%
54.15%
G-7 Average
23,809
12.41%
12.37%
24.77%

Using the ratio of total trade (exports plus imports) to GDP as a measure of the degree of trade openness, the WBGS economy is somewhat below the regional average for countries of similar incomes, but considerably more open (with significant import-bias) than the wealthy G-7 countries. [36] This relative openness poses a challenge; namely, to develop private sector export capacity capable of effectively competing in the fields in which the WBGS economy has relative advantages in order to counter the current import-bias. This entails the development of the productivity of the private sector generally which depends on private investment expenditures.

The opportunities to raise the level of exports in the medium-term could expand considerably, given the emergence in the last five months of free trade agreements between the Palestinian Authority and, respectively, the United States and the European Union, the two largest economies in the world. [37] Moreover, the WBGS's customs union with Israel provides it with a potentially large market close to home. The dilemma and the paradox is that Israeli- imposed obstacles to WBGS internal and external trade have become more restrictive at the same time that international barriers are being eliminated. For trade to serve as a source of growth and economic transformation, the obstacles to Palestinian interregional and international trade must be removed. This entails eliminating closure-related trade impediments as well as the broader task of developing private sector capacity, especially in those areas of production in which the WBGS has relative cost advantages.


NOTES: SECTION I

[1] For a copy of the first Quarterly Report on Economic and Social Conditions in the West Bank and Gaza Strip, call the Office of the United Nations Special Coordinator at 07-822746. For those calling from outside the West Bank, Gaza Strip and Israel, call 972-7-822746. Both the autumn and current reports can be downloaded as WordPerfect 6.0 files from the World Wide Web at: http//www.arts.mcgill.ca/MEPP/UNSCO/unfront.html.

[2] Ratios derived from preliminary working estimates of the World Bank. With the assistance of the World Bank.

[3] World Bank Developing the Occupied Territories; An Investment in Peace, volume two (Washington, DC, September 1993), p. 165.

[4] International Labour Office Report of the Director General, 1994 p. 20 and Report of the Director- General, 1995, p. 15.

[5] Palestinian Central Bureau of Statistics (PCBS) Labour Force Survey: Main Findings (September-October 1995) Round, April 1996.

[6] Palestinian Ministry of Finance "Revised Macroeconomic and Fiscal Projections for 1996," 8 April, 1996 assuming average monthly employment of 7,500 Palestinians in Israel for 1996 and gradual easing of restrictions on the mobility of goods.

[7] Palestinian Ministry of Finance "Report on Fiscal Developments During the First Half of 1996," 26 June, 1996 assuming an average monthly employment of 25,000 Palestinian workers in Israel for 1996 and relatively unobstructed movements of goods.

[8] UNSCO Quarterly Report, Autumn, 1996, pp. 12, 35.

[9] This evidence includes the higher number of WBGS Palestinians working in Israel in the second half of the year relative to the period just after the partial lifting of the February-April closure and the rather robust Palestinian Authority revenue collections from all sources. Palestinian Ministry of Finance "Report on Fiscal Developments in January-September 1996," 21 October 1996.

[10] Palestinian Ministry of Finance "Report on Fiscal Developments," 21 October 1996, p. 3. Actual labour flows on a monthly basis averaged 15,000 during the second quarter, rising to about 31,000 at the end of the third quarter according to this source.

[11] UNSCO Quarterly Report, Autumn 1996, p. 20.

[12] Based on nominal 1996 IMF estimates, with exports deflated using PCBS 1996 CPI and imports deflated using estimates of Israeli CPI. See IMF Recent Economic Developments, Prospects, and Progress in Institution Building in the West Bank and Gaza Strip, February 1997, pp. 13, 33.

[13] The average permitted--i.e. legal--employment figure compares to a monthly permitted average for 1996 as a whole of about 28,000. Estimates are based on information from the Palestinian Ministry of Labour and the Ministry of Planning Central Statistics Department. Estimated average actual monthly employment figure comes from Palestinian Ministry of Finance "Report on Fiscal Developments in October-December 1996 and an Overview of Developments in 1996," 23 February 1997, p. 3.

[14] PCBS "Press Conference on the Labour Force Survey Results, July-October 1996," 30 December 1996, Table 3-6.

[15] PCBS "Press Release on the Results of the Labour Force Survey, October 1996-January 1997," 14 March 1997, p. 7.

[16] Revised growth estimates are from the IMF Recent Economic Developments, February 1997, p. 4.

[17] UNSCO Quarterly Report, Autumn 1996.

[18] All nominal GDP and GNP estimates, NIS/US$ exchange rates and GDP and GNP deflators for 1988- 1995 are from World Bank preliminary working estimates. All income figures are quoted in constant 1995 US$, i.e. the US$ is adjusted for inflation such that its purchasing power is equalized in all periods. Due to depreciation of the NIS over time, the deflated US$ value of GDP and GNP, and the calculated growth rates of these, tend to be overstated. Thus income estimates should be used with caution. With the assistance of the World Bank. Income calculations for 1996 and 1997 are based on IMF estimates of growth rates for real GDP and GNP as given in Recent Economic Developments, February 1997. Population data are end-of-year calculations based on mid-year estimates (medium series) in PCBS Demography of the Palestinian Population in the West Bank and Gaza Strip, December 1994.

[19] World Bank Developing the Occupied Territories; An Investment in Peace, volume two (Washington, DC, September 1993), p. 149.

[20] ibid., p. 136.

[21] Nominal component NIS values, NIS/US$ exchange rates and component deflators are from preliminary World Bank working estimates.

[22] Nominal component NIS values, NIS/US$ exchange rates and component deflators for 1988-1995 are from preliminary World Bank estimates. Refer to footnote 18. Private consumption for 1996 is based on average declines in deflated household expenditures during QIV-1995-QIII-96 from PCBS The Palestinian Expenditure and Consumption Survey 1995/1996; Annual Report, January 1997. All other 1996 figures, and 1995 public investment, are based on estimates from IMF Recent Economic Developments, February 1997, pp. 13, 32. Data for 1996 public consumption and exports are deflated using the WBGS 1996 CPI (108.4) from the PCBS. Estimates for private and public investment and imports are deflated using the Israeli 1996 CPI (111.5) as given by the IMF.

[23] With the assistance of the respective offices.

[24] See the results of the survey conducted by the Small Business Support Project of Development Alternatives, Inc. in conjunction with the Palestinian Trade Promotion Organisation "Case Studies Impact of Closure on Palestinian Businesses in the West Bank and Gaza Strip," 27 May 1996.

[25] Based on Palestinian Ministry of Finance estimates of 1996 total capital expenditures deflated by the average CPI for 1996 (8.4 per cent). See "Report on Fiscal Developments in October-December 1996," 23 February 1997, Table 1.

[26] UNCTAD Private Investment in the Palestinian Territory: Recent Trends and Immediate Prospects, 30 July 1996, Chapter III.

[27] ibid.

[28] IMF Recent Economic Developments, February 1997, pp. 25-27.

[29] Refer to sources and methods in Table 8.

[30] World Bank A Background Note on the Economy for the Consultative Group Meeting of 19-20 November, 1996, November 1996, p. 3.

[31] US Consulate Reports, 14 and 29 March 1996 and UNSCO "Costs of Closure; Some Preliminary Indicators on Costs of Closure in the Gaza Strip," 12 April 1996.

[32] Refer to sources and methods in Table 8.

[33] US Embassy Report, 18 December 1996.

[34] Palestinian Ministry of Planning and International Cooperation, Central Department of Statistics, Annual Statistical Bulletin 1996, p. 115. Average quarterly NIS/US$ exchange rates are calculated from monthly rates as given in PCBS Consumer Price Index, January 1997, p. 15. Data collection on Gaza-West Bank trade from this source was discontinued during the last quarter of 1996.

[35] World Bank World Development Report 1996, pp. 188-89, 210-11, 216-17. WBGS estimates for 1994 come from World Bank preliminary working estimates.

[36] The Group of Seven includes the United States, Germany, Japan, the United Kingdom, France, Italy and Canada.

[37] The Palestinian Authority is also currently in negotiations for free trade agreements with Canada and the European Free Trade Association (Central European countries). PalDev Digest, 9 December 1996 and 13 February 1997. The United States in December 1996 also expanded somewhat the range of WBGS agricultural commodities which can enter the country, including cut flowers. Trade cooperation agreements with Jordan and Egypt have also been negotiated. See Palestine Economic Pulse, September-October 1996, p. 6.




II. POPULATION, the LABOUR FORCE and WAGES

1. An Update on Population and Labour Force Growth

The total population of the WBGS grew by an estimated 147,000 persons (about 6 per cent) during 1996 reflecting high natural growth rates and continuing return of Palestinians from abroad. The working-age population (persons aged 15-64) grew by about 72,500 (also about 6 per cent) during the same period.[38] Between the first and fourth quarters of 1996 the labour force participation rate (LFPR)--defined as the proportion of the working-age population working or seeking work--grew approximately 1 percentage point in the same period from 40.6 to 41.5 per cent. The labour force grew over 8 per cent about during 1996, about 25 per cent faster than the general and working-age populations. In absolute terms, the WBGS labour force in 1996 grew by about 40,000 persons, from 485,500 to 525,500, or an average of 3,300 persons per month (see Table 13).[39]

2. An Update on Employment and Unemployment

As reported in the first Quarterly Report, the labour market shock stemming from the February 1996 closure significantly reduced employment and raised unemployment to unprecedented levels. The unemployment rate--defined as the percentage of the labour force which did not work a single hour for pay during the survey week--climbed from an average of 19 per cent at the end of 1995, rose to about 50 per cent during the height of the closure in March and settled at over 29 per cent by mid-year. The easing of the closure, along with emergency employment measures, public sector employment and the private sector response, combined to significantly raise employment and reduce unemployment in the second half of 1996.

By end-1996, the full-employment rate had surpassed its end-1995 rate and the unemployment rate had returned to its end-1995 level. Part of this was due to the decline in the LFPR in the fourth quarter. With relaxed closure, the labour market rebounded sufficiently to raise the total number of fully-employed workers by over 28 per cent and to reduce the total number of underemployed workers by about 50 per cent. However, economic growth was insufficient to absorb the rapidly growing labour force resulting in an annual increase of 9 per cent in the total number of unemployed persons who numbered over 100,000 at the end of the year.


Table 13

Estimates of the Working-Age Population, Labour Force, Employment and Unemployment for the WBGS, QIV-1995, QII-1996, QIII-1996 and QIV-1996[40]


Rates
QIV-1995
QII-1996
QIII-1996
QIV-1996
Labour Force Participation Rates
40.66%
42.99%
42.51%
41.50%
Full Employment Rates
59.85%
56.34%
65.31%
70.90%
Underemployment Rates
21.35%
14.35%
11.84%
9.90%
Unemployment Rates
19.17%
29.54%
22.86%
19.30%
Total Annual
Totals
Change
Total Working-Age Population
1,194,280
1,229,576
1,248,218
1,266,859
6.08%
Total Labour Force
485,594
528,595
530,617
525,746
8.27%
Total Fully Employed
290,628
297,810
346,546
372,754
28.26%
Total Underemployed
103,674
75,853
62,825
52,049
-49.80%
Total Unemployed
93,088
156,147
121,299
101,469
9.00%

3. Underlying Labour Market Dynamics

The economic depression and the disemployment shock caused by the February 1996 closure have produced noteworthy changes in the labour market. There has been a change in the relative social composition of the employed labour force, i.e. in the relative proportions of employers versus employees among all working people. For example, there was a relative and absolute decline among employers which, given the small-scale nature of most Palestinian businesses, suggests many business failures. While the proportion of wage-workers in the labour force at the end of the year had not changed significantly, the absolute number of such workers grew. The closure also caused a surge in the proportion of unpaid family labour but this declined as the economy rebounded. There was also a small relative--but a marked absolute--increase in self-employed persons (owners of small businesses not employing others). These trends suggest a continuing wave of small business bankruptcies and the growth of "micro enterprises," probably informal commerce and service activities. Thus the economic crisis is creating less employment-generating enterprises and generating more single-person ones (see Table 14).


Table 14

Social Composition of the Employed WBGS Labour Force,
QIV-1995, QII-1996, QIII-1996, QIV-1996
[41]


Percentages
QIV-1995
QII-1996
QIII-1996
QIV-1996
Employers
6.80%
5.60%
5.80%
5.70%
Unpaid Family Labour
10.10%
12.30%
9.80%
10.00%
Self-employed
21.10%
23.30%
22.60%
22.40%
Wage-workers
61.60%
58.80%
61.80%
61.90%
Total Employed
100.00%
100.00%
100.00%
100.00%
Total Annual
Totals
Change
Employers
26,813
20,925
23,744
24,214
-9.69%
Unpaid Family Labour
39,825
45,961
40,118
42,480
6.67%
Self-employed
83,198
87,064
92,518
95,156
14.37%
Wage-workers
242,890
219,714
252,991
262,953
8.26%
Total Employed
394,303
373,664
409,371
424,803
7.74%

The decline in employers as a proportion of all employed Palestinians was especially pronounced in Gaza where there was a decline of almost 25 per cent. Rather than a growth in the number of self-employed "micro enterprises," something especially prevalent in the West Bank, in Gaza there was a 20 per cent expansion in wage-workers. In the West Bank, on the other hand, there was a significant, though apparently seasonal, rise in unpaid family labour associated with the olive harvesting season.

The stresses in the economy during the year were evident in shifts in the economic branch distribution of the employed labour force. At the end the year, when unemployment rates returned to their end-1995 levels and with total employment over 7.5 per cent higher, the proportion and the absolute size of the labour force engaged in manufacturing, commerce and personal services were below their end-1995 levels. Agricultural employment was significantly higher which suggests a good year in agriculture. Construction employment was also higher relatively and absolutely, largely due to the higher labour flows to Israeli construction sites in the latter half of the year. Thus, the evidence suggests, except for the cyclical growth in agricultural employment, the main private sector economic branches--manufacturing, commerce and services--all experienced relative and absolute employment declines during 1996. This indirectly confirms the retrenchment in private sector investment and growth noted above.


Table 15

Estimates of Employed Labour Force Branch Distribution in the WBGS Including Employment in Israel,

QIV-1995, QII-1996, QIII-1996, QIV-1996 [42]


Percentages
QIV-1995
QII-1996
QIII-1996
QIV-1996
Agriculture, Fishing
12.30%
16.80%
12.60%
14.10%
Manufacturing, Quarrying
17.80%
17.40%
17.00%
16.20%
Construction
18.80%
12.20%
19.50%
19.10%
Commerce, Hotels, Restaurants
19.50%
18.80%
17.90%
17.50%
Transport, Communication
4.90%
4.60%
5.30%
5.50%
Services and Other
14.60%
11.60%
10.10%
10.03%
Palestinian Authority
12.49%
18.27%
17.50%
17.67%
Total Employed Persons
100.00%
100.00%
100.00%
100.00%
Total Annual
Totals
Change
Agriculture, Fishing
48,499
62,775
51,581
59,897
23.50%
Manufacturing, Quarrying
70,186
65,017
69,593
68,818
-1.95%
Construction
74,129
45,587
79,827
81,137
9.45%
Commerce, Hotels, Restaurants
76,889
70,249
73,277
74,341
-3.31%
Transport, Communication
19,321
17,189
21,697
23,364
20.93%
Services and Other
57,568
43,345
41,346
42,608
-25.99%
Palestinian Authority
49,250
68,260
71,654
75,047
52.38%
Total Employed Persons
394,303
373,664
409,371
424,803
7.74%

While the non-agricultural private sector was releasing workers during the year, public sector employment expanded by more than 50 per cent. Employment in Palestinian Authority agencies was the main source of employment growth absolutely and relatively, accounting for one-in-eight employees at the beginning, and one-in-six of all employees at the end of the year. Some of this growth was due to security exigencies generated by considerable political volatility. Another part was due to the natural growth in the evolving civil authority. While public sector employment has provided a needed safety net to the labour market during a time of acute unemployment, fiscal constraints limit the capacity of the Palestinian Authority to continue along this path. Only a revived private sector can create sustainable employment in the long-run. The regional labour force branch distributions show some interesting trends. Agricultural employment in the West Bank, reflecting the olive harvest season, was substantially higher at the end of 1996 than at the beginning. In Gaza, where agriculture is mainly irrigated and therefore less erratic, there was nonetheless a 20 per cent decline in agricultural employment. This probably reflects the export nature of Gazan agriculture and the losses imposed by the closures in 1996. While manufacturing employment in the West Bank fell about 5 per cent, Gazan manufacturing employment was basically unchanged, although there was a slight decline at mid-year. While commerce employment declined by 3.5 per cent in the West Bank, it grew about 1.5 per cent in Gaza. Most important, services (including Palestinian Authority employment) rose over 23 per cent in Gaza but only 11.5 per cent in the West Bank.



4. An Update on Women in the Labour Market

The above-average growth in female labour market participation, reported in the first Quarterly Report, abated in the third quarter of 1996. While the female labour force grew by almost 16 per cent (from 69,000 to 80,000 women) between end-1995 and mid-1996,[43] both the female participation rate and the absolute number of females in the labour force declined in the third quarter (74,500). While the aggregate data for the WBGS are not yet available, it appears from the regional data that the female labour force participation rate fell once again in the fourth quarter of 1996.[44] Over the first three quarters of 1996, the female labour force grew nearly 8 per cent, out pacing population growth, as compared to a male labour force growth rate of 9.5 per cent. But average labour market participation for women remained under 12 per cent as compared to over 72 per cent for men. The decline in female labour market participation, part of the overall decline in the LFPR, may be the result of the relative improvement in employment opportunities for men in the second half of the year. Thus, while women rapidly increased their entry into the labour force in order to support family incomes during the acute crisis in the fist half of the year, the relative improvement in employment conditions may be responsible for their labour market exit.


Table 16

Comparing Female and Male Labour Force Profiles for the Working-Age Population in the WBGS,

QIV-1995, QII-1996, QIII-1996 [45]


Rates
Totals
QIV-1995
QII-1996
QIII-1996
QIV-1995
QII-1996
QIII-1996
QIV95-QIII96
LFPR
Total Changes
Males
69.58%
72.87%
72.70%
411,565
444,624
450,709
9.51%
Females
11.46%
12.92%
11.85%
69,056
80,051
74,482
7.86%
Full Employment
Males
58.69%
53.56%
63.84%
241,534
238,136
287,716
19.12%
Females
69.87%
76.06%
71.72%
48,250
60,887
53,415
10.71%
Underemployment
Males
31.40%
15.77%
13.18%
129,229
70,119
59,386
-54.05%
Females
15.76%
8.50%
3.92%
10,886
6,802
2,923
-73.15%
Unemployment
Males
19.48%
30.95%
22.95%
80,153
137,601
103,452
29.07%
Females
18.65%
23.96%
24.36%
12,877
19,181
18,144
40.90%

Women's labour market profile continued to be, on average, better than men's. Female full employment rates remained consistently higher than those of males and women's underemployment rates fell far more rapidly than men's over the first three quarters of the year. Average female unemployment rates, except for the third quarter, were lower than those of males and the fourth quarter regional data confirm this pattern. There was no significant change in the branch distribution of the female labour force in the third quarter. The highest concentrations of female labour remained agriculture (33 per cent of all workers), services (22 per cent of all workers and manufacturing (14 per cent of all workers). These three branches have the lowest average daily wages[46] suggesting that, while the female employment profile may be better than that of males, actual female employment conditions may be worse in general.

Women's labour force participation during 1996 seemed especially sensitive to family living conditions. Labour market entry and exit seemed to coincide with the degree of crisis facing family incomes. While some expected the expansion of the public sector work force to be a catalyst for higher female labour market participation, there was little evidence of this. Palestinian Authority employment grew by about 50 per cent during the year, but the female labour force grew only about 8 per cent in the first three quarters and the female LFPR is expected to be no higher at end-1996 than at end-1995.

5. An Update on Work Effort and Monthly Incomes

Employed Palestinians, as noted in the first Quarterly Report, were dedicating more time to work during the first half of 1996, apparently as a way to counter the effects of declining wage incomes. The trend toward more work continued in the second half of the year with monthly days of work rising 4.75 per cent and monthly hours rising 4.5 per cent for the year as a whole.


Table 17

Estimates of Average Monthly Days and Hours Worked and Average Real Daily and Monthly Wages

for Employed WBGS Workers, QIV-95, QII-96, QIII-96, QIV-96[47]

(wages expressed in constant 1995 US$)

Total Annual
QIV-95
QII-96
QIII-96
QIV-96
Change
Monthly Days
21
21.6
22
22
4.76%
Monthly Hours
168.4
169.2
176
176
4.51%
Real Daily Wage
US$ 19.61
US$ 14.91
US$ 16.47
US$ 16.82
-14.24%
Real Monthly Wage
US$ 411.77
US$ 321.96
US$ 362.24
US$ 369.94
-10.16%

The greater work effort, however, was not sufficient to reverse the decline in the purchasing power of daily and monthly wages, despite the fact that the decline in real wages was partly reversed in the second half of the year. Despite an increase in employment opportunities both in the WBGS and Israel, and the return of unemployment levels to their end-1995 levels, average real daily wages fell over 14 per cent while average real monthly wages declined by over 10 per cent over the course of 1996.

While this trend affected workers regardless of place of employment, Palestinians working in the West Bank, were disproportionately affected. Average real daily wages in the West Bank dropped over 23 per cent and average monthly wages fell almost 20 per cent. The declines for Gaza were closer to the average--16 and 7.5 per cent respectively. The overall average declines were smaller than either the West Bank or Gaza only because of WBGS employment in Israel, where real average daily wages fell only 2.4 per cent and average monthly wages fell by 4 per cent.

The greater than proportional declines in the WBGS raised the relative premium on a day's work in Israel. In real terms and on the average, a West Bank worker could earn 44.5 per cent more per day working in Israel at the end of 1995. By the end of 1996, the daily difference was 83.6 per cent. A Gazan worker could earn 82.7 per cent more on a daily basis working in Israel at the end of 1995 and 113 per cent more at the end of 1996. Thus, even with the general wage declines, the relative advantage of working in Israel has grown significantly. This is due to the collapse of real wages in the WBGS relative to wages paid in Israel.

The tendency toward convergence of West Bank and Gaza wage rates, noted in the first Quarterly Report, continued unabated in the second half of the year. The West Bank/Gaza Strip daily real wage differential was 26 per cent in favor of the West Bank at the beginning of the year. By year-end, the West Bank's advantage had been reduced to only 14 per cent. This leveling process indicates greater than proportional impacts of the economic crisis on the West Bank labour market. The labour market dimension of the crisis consists of the rapid growth rate of the labour force relative to the indigenous creation of jobs and greatly reduced access to the Israeli labour market. The resulting relative labour surplus has, in the absence of effective minimum wage laws and strong labour unions, created falling real wages.

The experience of the last year suggests that policy makers should seriously and simultaneously address the unemployment problem and the decline in the purchasing power of the wage incomes of the employed labour force. In the long-term, policies designed to revive and develop the private productive branches of the economy would enhance labour productivity and potentially lead to higher real wages. In the short-term, greater employment in Israel would moderate the problem to some extent. So too would greater work opportunities in the Arab countries of the Gulf.


Notes: Section II

[38] Population growth estimates are based on data from PCBS Demography of the Palestinian Population, 1994. PCBS labour force surveys, consistent with international standards, define "manpower" as the total population 15+ years of age. The analysis in this report uses the narrower "working-age population," defined as the population aged 15-64, which better reflects the reality in the WBGS where retirement age is nominally 60 years of age. See PCBS in Expenditures and Consumption Levels; A Quarterly Report , April 1996, p. 15.

[39] Labour force participation rates are weighted by the proportion of each age-group in the total population aged 15-64 years. They, therefore, differ from PCBS's reported average rates. The surge in labour force growth was particularly pronounced in the second and third quarters of the year. See UNSCO Quarterly Report Autumn 1996.

[40] Population data are medium series estimates from PCBS Demography of the Palestinian Population, pp. 167-168, 216. Labour force rates are from PCBS Labour Force Survey: Main Findings, Nos. 1-3 and PCBS "Press Release on the Results of the Labour Force Survey, October 1996-January 1997," 14 March, 1997. Because the final results of the fourth labour force survey are not currently available, labour force ratios for QIV-1996 are UNSCO estimates. All labour force ratios are weighted averages of the population aged 15-64.

[41] PCBS Labour Force Survey: Main Findings, Nos. 1-3 and PCBS "Press Release on the Results of the Labour Force Survey, October 1996-January 1997," 14 March, 1997 and data in Table 13.

[42] Labour force share distributions are from PCBS Labour Force Survey: Main Findings, Nos. 1-3 and PCBS "Press Release on the Results of the Labour Force Survey, October 1996-January 1997." Distribution percentages for commerce and transport for QIV-1996 are estimates. Palestinian Authority employment estimate for late 1995 are from World Bank "Size and Quality of Civil Service; Executive Summary," July 1996 (draft). The second-quarter 1996 figure is an estimate based on Palestinian Ministry of Finance "Report on Fiscal Developments during the First Half of 1996" 26 June, 1996, p. 5. and a Ministry of Finance estimate of 71,500 as of end-September. Fourth quarter estimate is from Palestinian Ministry of Finance "Report on Fiscal Developments in October-December 1996," 23 February 1997, p. 3.

[43] From revised PCBS data. Data are weighted by the share of the female population in the working-age population.

[44] PCBS "Press Release on the Results of the Labour Force Survey, October 1996-January 1997."

[45] PCBS Labour Force Survey Nos. 1-3. With the assistance of the PCBS Labour Statistics Office. Labour force participation, unemployment, underemployment and employment rates are weighted averages.

[46] PCBS Labour Force Survey July-October 1996 Round No. 3, pp. 80, 83-84.

[47] Data are weighted averages of WBGS workers employed in the West Bank, Gaza and Israel. PCBS Press Release on the Results of the Labour Force Survey, October 1996-January 1997, p. 7. Nominal NIS daily and monthly wages were converted to US$ using average quarterly exchange rates and deflated using the average regional CPI for the relevant quarter with November 1995 as the base period. PCBS Consumer Price Index, various issues. Real monthly wage incomes calculated by multiplying the average daily wage rate by the average number of days worked per month.




III. HOUSEHOLD EXPENDITURES and the LEVEL of LIVING

1. Household Consumption Expenditures: A One-Year Retrospective

The level of household expenditures is the key indicator of the living level, defined as the quantity of goods and services households are able to consume over a given period. Furthermore, changes in the relative composition of such expenditure are indicative of underlying stresses that may exist in household economies. The Palestinian Central Bureau of Statistics has completed a one-year continuous field survey of household expenditure levels and patterns, the results of which offer important insights into changes in Palestinian living conditions.[48]

Basic expenditures (housing, food, clothing, medical care, transportation and education) absorbed about three-quarters of all household purchases throughout the survey (October 1995-September 1996) with secondary expenditures (household operations, furniture, personal care, recreation and other cash expenditures) accounting for the other quarter. Total monthly real expenditures between the first and last quarters of the survey declined from US$ 804 to US$ 765--about 5 per cent--with expenditures on basic goods and services falling by over 7 per cent and secondary expenditures rising by over 2 per cent.

Among basic expenditures, there were declines in average real monthly expenditures in every category except education and taxes. Average food expenditures-- which accounted for nearly 40 per cent of all expenditures--declined by 11.5 per cent. There were also pronounced declines in average clothing expenditures (10.3 per cent), indicating postponed purchases, in medical care (11.2 per cent), suggesting families were foregoing medical treatment, and in transportation (26.5 per cent), suggesting reduced mobility due to closures. The sharp increase in real average tax expenditures reflects the development of Palestinian Authority fiscal institutions while the sharp rise in education expenditures is probably due to normal academic year variations.


Table 18

Estimates of Average Real Monthly Expenditures on Basic and Secondary Commodities and Services

in Seven-Person Households in WBGS, QIV-1995, QI-1996, QII-1996, QIII-1996[49]

(in constant 1995 US$)


Total
QIV-95
QI-96
QII-96
QIII-96
Annual
(US$)
(US$)
(US$)
(US$)
Change
Basic Expenditures
Housing
54.00
56.64
56.14
53.09
-1.68%
Food
322.58
317.11
303.53
285.26
-11.57%
Clothing and footwear
69.67
81.27
58.35
62.46
-10.34%
Medical care
29.63
27.66
26.55
26.31
-11.19%
Transport and communications
112.81
78.34
74.38
82.88
-26.53%
Education
20.00
24.23
19.77
49.63
148.16%
Taxes
1.72
3.28
5.29
3.76
119.25%
Basic Sub-Total
610.40
590.02
546.61
566.70
-7.16%
Secondary Expenditures
Household operations
11.16
11.38
10.91
11.59
3.91%
Furniture and utensils
56.01
42.54
33.93
38.94
-30.48%
Personal care
18.47
19.60
17.85
17.99
-2.62%
Recreation
24.48
19.10
22.38
36.90
50.75%
Tobacco
35.27
32.21
35.60
36.09
2.31%
Other Cash Expenditures
48.26
80.38
77.83
60.70
25.79%
Secondary Sub-Total
193.49
202.64
194.63
197.99
2.32%
Total Average Expenditures
803.89
792.65
741.23
764.68
-4.88%


Among secondary expenditures there was a sharp decline in average monthly expenditures on furniture and appliances (30.5 per cent), indicating the postponement of durable goods purchases, a common response to economic distress. There was an even sharper increase (50.7 per cent) in recreation expenditures on TVS, VCRs, radios, still and video cameras and periodical literature.[50] In combination with reduced transportation expenditures, the increased consumption of recreational goods suggests people were spending more time at home, rather than traveling--the likely result of restricted mobility due to closures and a raised perception of the hazards of traveling, given the political turbulence in 1996. Finally, there was a significant rise in monthly average "other cash expenditures" (25.8 per cent) most of which are inter-household transfers of cash. This is indicative of the growth of informal social assistance mechanisms that permeate Palestinian society by which members of extended families or neighbors extend assistance to those experiencing economic distress.


2. An Update on Household Wage Incomes and the Level of Living

As already noted, the purchasing power of the average monthly wage income of a WBGS worker was compressed by over 10 per cent during 1996. Average monthly wage income at mid-year was almost 22 per cent below its end-1995 level, reflecting the severe effects of the February closure, but rebounded by about 12 per cent by end-1996 to about US$ 370.

One way to indicate the level of distress in WBGS household economies is to measure the portion of average monthly household expenditures which can be purchased with a single average monthly wage income. While real monthly wage data for the fourth quarter are available, household consumption expenditures for that period are not. Thus only changes between the last quarter of 1995 and the third quarter of 1996 can be used to indicate the trend in wage sufficiency.


Table 19

Basic and Total Household Expenditures in Seven-Person Households in the WBGS and the Real Monthly Wage

as a Proportion of Expenditures, QIV-95, QII-96 and QIII-96

(in constant 1995 US$)


QIV-95
QII-1996
QIII-96
(US$)
(US$)
(US$)
Average Basic Expenditures
610.40
546.61
566.70
Average Total Expenditures
803.89
741.23
764.68
Real Monthly Wage
411.77
321.96
362.24
Real Monthly Wage as a
Percentage of Basic Expenditures
67.46%
58.90%
63.92%
Real Monthly Wage as a
Percentage of Total Expenditures
51.22%
43.44%
47.37%


While the sufficiency of the average worker's income in average household expenditures improved somewhat as compared to its low-point in the second quarter of the year, the proportions still indicate relative distress as compared to fourth-quarter 1995. A single average worker's monthly income could only cover about 67 per cent of basic needs and only 51 per cent of all expenditures in the fourth quarter of 1995. By the third quarter of 1996, these had been reduced to about 64 and 47 per cent respectively. While this method excludes income earned by additional working family members, transfers received from government, United Nations agencies or NGOs, remittances received from family members abroad and the value of home-produced food and other goods (which are relatively insignificant), it nonetheless indicates that the level of economic pressure on average-sized households has increased.

On a monthly basis, the level of living, as measured by household consumption, has declined by about 5 per cent during 1996. Households have reduced average monthly food, clothing, medical care and durable goods expenditures in the process. Closure-related restrictions seem to have induced families to substitute home entertainment and recreational goods for travel. Moreover, the economic distress facing many families seems to have increased the inter-household informal transfers and lending of money, reflecting the degree of social solidarity that exists in Palestinian society which is experiencing wrenching economic changes. In addition to this informal social welfare mechanism, households have adapted to these changes in 1996 by working longer hours and more days on average, drawing down stocks of savings and by increasingly seeking relief from the Palestinian Ministry of Social Affairs, United Nations agencies and NGOs.[51]



3. Regional Comparisons of Household Consumption Levels

As reported in the first Quarterly Report, there was in 1995 and early 1996 a growing disparity between West Bank and Gaza living levels. There were growing expenditures on food, clothing, medical care and education in the West Bank while those in Gaza were falling.[52] The latest indications are that the gap is still wide (see Table 20) but the results of the first one-year survey suggest that, while average monthly household secondary expenditures are nearly identical in the two Palestinian regions, West Bank average basic expenditures were nearly one-third higher than Gaza's while total expenditures were almost one-quarter higher.

The average West Bank family was consuming 25 per cent more food, almost 70 per cent more medical care, more than 50 per cent more transportation and education, and paying 14 per cent less taxes on a monthly basis. Among the secondary expenditures, the average West Bank household expenditures on furniture and household utensils was 23 per cent higher than in Gaza and personal care (which includes hair care and toiletries) were over 45 per cent higher. On the other hand, Gazan families were expending 37 per cent more on average on recreational goods (mainly electronic appliances, cameras and photography, children's toys and periodical literature). Gazan families were, on average, transferring more cash between households than West Bank families--an indication of the greater need for such social solidarity in the Gaza Strip.


Table 20

Average Monthly Household Expenditures in the West Bank and Gaza Strip, QIII-1996

(in constant 1995 US$)[53]


West Bank
Gaza Strip
West Bank Percent
Annual

Average

Annual

Average

Advantage/

Disadvantage

Basic Expenditures
(US$)
(US$)
(%)
Housing
57.13
47.66
19.86%
Food
310.81
248.02
25.32%
Clothing and footwear
71.75
52.58
36.46%
Medical care
29.96
17.81
68.25%
Transport and communications
94.93
60.93
55.81%
Education
31.40
20.14
55.89%
Taxes
3.20
3.73
-14.39%
Basic Sub-Total
601.03
452.66
32.78%
Secondary Expenditures
Household operations
11.12
9.83
13.18%
Furniture and utensils
44.07
35.86
22.91%
Personal care
20.24
13.92
45.39%
Recreation
21.96
35.27
-37.73%
Tobacco
35.84
27.87
28.61%
Other Cash Expenditures
60.90
71.84
-15.22%
Secondary Sub-Total
190.16
190.46
-0.16%
Total Expenditures
791.20
643.12
23.02%

4. Regional Comparisons of Total Household Income and Consumption

Another way of illustrating the disparities between West Bank and Gaza Strip living levels is to compare estimates of total annual average household income and total average annual expenditures of average-sized households in the two Palestinian regions. As noted in Table 3, per capita income (GNP) in the West Bank in 1996 was an estimated US$ 2,143.80 while the average household in the West Bank has 6.5 persons. Multiplying this number by per capita income yields an average annual household income of about US$ 13,935. In Gaza, as noted in Table 5, per capita income was estimated at US$ 1,108.26 while the average household had 8.0 persons. Thus average annual household income in Gaza was an estimated US$ 8,866.08. Thus per capita income in Gaza was only about 52 per cent of the West Bank's while average household income was 64 per cent of the West Bank's.

The average monthly household consumption expenditures in Table 20 are based on seven-person households. Since average West Bank households were somewhat smaller, and Gaza Strip households considerably larger than average, an adjustment is required to account for the variance.[54] Adjusted average monthly household expenditures in the West Bank were thus US$ 734 and average annual household expenditures were US$ 8,816. For Gaza, adjusted average monthly household expenditures were US$ 735 and average annual household expenditures were $8,820. Thus average household consumption expenditures were nearly identical in the two regions at the end of 1996. The disparity in living standards lay in the fact that the same expenditure level supported 6.5 persons in the West Bank and 8.0 persons in the Gaza Strip, i.e. 23 per cent more people.

An interesting product of the annual household income and expenditure comparison is what it implies about average annual household savings--the difference between household income and household expenditures. For Gaza, the 1996 estimated annual average household income was US$ 8,866 while the average annual household expenditures were US$ 8,820. This implies average annual household savings of about US$ 46. The West Bank on the other hand had an annual average household income of US$ 13,935 and average annual household expenditures were US$ 8,816. This implies an average annual household savings of over US$ 5,100. While the estimates of household savings suffer from the same measurement problems as the underlying data which generate them, these preliminary estimates do suggest that Gaza households are far closer to the point of dissaving, i.e. spending previously saved money assets, than West Bank households.


Notes: Section III

[48] PCBS Expenditure and Consumption Levels; Annual Report (October 1995-September 1996), January 1997. Survey results are expressed as expenditures of average seven-person households. With the assistance of the PCBS.

[49] Original survey data, expressed in nominal Jordanian Dinars (JD), were converted to US$ using average JD/US$ for the respective periods. The results were then deflated using the average CPI for each expenditure group for the respective periods with base period in November 1995. Taxes and "other cash expenditures" have been deflated using the average overall CPI. See PCBS Expenditure and Consumption Levels; Annual Report, January 1997 and PCBS Consumer Price Index, various issues.

[50] See PCBS Bulletin of Consumer Prices for itemized expenditure group categories.

[51] See UNSCO Quarterly Report, Autumn 1996.

[52] PCBS Living Levels in the West Bank and Gaza Strip; Statistical Indicators (in Arabic), April 1996.

[53] This table and the subsequent analysis are based, unless otherwise noted, on PCBS Expenditure and Consumption Levels; Annual Report, January 1997. Deflated figures obtained by using average price indexes for each commodity group as well as average JD/NIS and NIS/US$ exchange rates for the third quarter of 1996.

[54] Since West Bank households are 92.8 per cent of average size, adjustment entails multiplying average monthly expenditures by .928. Gaza Strip households are 14.2 per cent larger than average; thus adjustment for Gaza is made by multiplying average monthly expenditures by 1.142.




IV. SPECIAL REPORT: AN ANALYSIS of the ISRAELI CLOSURE POLICY

1. Introduction

The system of closures imposed by the Israeli authorities have had profound consequences for the economic and social development of the WBGS, as noted in the first Quarterly Report. The negative effects of the February 1996 closure focused much attention on the effects and costs of the closure policies. This section seeks, first, to provide a taxonomy of closures and to distinguish between the different types of closures imposed on the WBGS since March 1993. Second, the section documents the number and duration of closures over the last four years. Third, estimates of the economic losses stemming primarily from the closure policies at the macroeconomic and microeconomic levels are presented. Finally, the section presents an accounting of some of the social consequences of closures, as well as their effects on the development effort in the WBGS. The most recent comprehensive closure, imposed on 23 March, 1997 after a suicide bombing in Tel Aviv, and still in force, highlights once again the relevance of understanding the meaning, dimensions and effects of the closure policy.

2. Defining Closures: A Taxonomy

More than any year in the past, 1996 became synonymous in the WBGS with the word "closure." It was during 1996 that closure and separation, a policy whose implementation began in 1991, became more systematic and thorough. For the first time since the 41-day curfew and closure imposed during the Gulf war in early 1991, Palestinians were prevented from traveling between villages and cities in the West Bank, while movement restrictions to and from the Gaza Strip were tightened and further institutionalized.

To understand economic and social trends in the WBGS in 1996, and the period after 1992 more generally, it is essential to understand closure. It is important, however, to distinguish between the general closure--a policy of distinct separation between the populations of Israel and the WBGS, the intermittent comprehensive closures, the type used by Israel in the past, several times in 1996 (and again in March 1997) and the internal closures imposed within the West Bank for the first time in 1996. Thus, Israeli policy toward the WBGS with respect to mobility of persons, vehicles and merchandise during 1993-1996 can be seen as a three-tiered policy.

The general closure has imposed explicit restrictions on the interaction between the populations of the WBGS and Israel, between the WBGS and Jerusalem and between the populations of the West Bank and Gaza Strip. Its effect has been the quantitative reduction, through formal controls, of the physical mobility of persons, vehicles and merchandise between the WBGS, Israel and Jerusalem. The policy has been in effect formally since 30 March, 1993.

Comprehensive closures have intermittently blocked personal, vehicular and merchandise mobility completely. Such closures have generally been used after, or in anticipation of, acts of violence against Israeli military personnel or civilians whether in the WBGS or Israel, acts of violence against Israeli settlers in the WBGS or before and during Jewish holidays or important Palestinian political anniversaries. Such closures have produced major disruptions in economic relations, although the severity of the disruptions has varied depending on the length of such closures. Between 30 March, 1993 and the end of 1996, there were approximately 329 calendar days of comprehensive closure imposed on the WBGS, approximately one-fifth of the days during this period.[55]

Internal closures have intermittently impeded or entirely halted movement of people, vehicles and commodities within the West Bank. Specifically, during 1996 this has meant obstructed mobility between locales designated as Area A and the rest of the West Bank and between many Palestinian towns in Area B.[56] Furthermore, the restrictions on entry to Jerusalem, part of the general closure policy, have blocked access to the main north-south transportation route within the West Bank, requiring lengthy detours.[57] During 1996 there were a total of 27 internal closure days imposed either throughout the West Bank or on one or more of its locales.

3. Essentials of the Closure Policies

The layered system of general and ad hoc closures has produced significant barriers to personal and economic interactions for the population of the WBGS and, as a result, generated profound economic and social effects over the past four years, particularly acute in 1996.[58] Curfews and restrictions on travel between the WBGS and Israel, as well as between the West Bank and Gaza Strip, were a recurrent feature of the 1967-1987 period. Generally, such curfews and restrictions were imposed during periods of intensified civil unrest such as demonstrations and strikes or acts of violent resistance to the Israeli occupation. Curfews were generally short in duration and mobility restrictions were usually removed after public order was restored.

During the intifada (1988-1992), however, curfews of longer duration became a regular feature of life in the WBGS. Israeli authorities also began to impose measures which, in 1993, became part of the generalized closure and separation policy. In particular, the authorities began to exclude former political prisoners and administrative detainees from Jerusalem and Israel. In June 1989, the authorities began to require Gazans seeking to enter Israel to carry magnetic identity cards, denying them to former prisoners and the politically active,[59] while in the West Bank distinct identity cards were distributed to such persons.

There was more or less continuous civil resistance throughout 1990, with the imposition of curfews and closures and a stringent 41-day curfew during the Gulf war in 1991. In January 1991 the Israeli authorities rescinded the policy, in place since 1972, which had allowed Palestinians in the Occupied Territories free personal and vehicular access to Israel without permits.[60] In its place the authorities established a formal system for controlling mobility for all those seeking to enter Israel from the WBGS. Enforcement of this permit system resulted in the loss of thousands of jobs in Israel, many on a permanent basis.

The formal imposition of a permit system in 1991, however, did not immediately result in a significant reduction in the number of Palestinians allowed to work in Israel. Permits with a duration of one year were widely issued and access was still relatively free access, albeit interrupted by intermittent closures. But there was continual formalisation and extension of the permit system. On 30 March, 1993, after a four-month period of violent incidents involving Palestinians from the WBGS, both in Israel and the Occupied Territories, the Israeli military authorities decreed a separation of the West Bank and Gaza Strip from East Jerusalem and Israel for an indefinite period by means of permanent military checkpoints.[61] What followed was a comprehensive closure of the WBGS which lasted six-weeks. Work permits which previously had been valid for one year were canceled and replaced by permits requiring renewal every two months. The new permits were also issued on the basis of minimum age and marital status criteria.[62] Most significantly, access to Jerusalem was permanently restricted after the lifting of the comprehensive closure.

While the general closure became a formal policy, the stringency with which it was enforced varied. For example, the closure was eased later in 1993 and early 1994. After several Hamas-claimed bomb attacks in Israel in April 1994, enforcement was tightened, work and travel permits were canceled and there were greater efforts to arrest Palestinians entering Israel without permits. Easing of the general closure entailed the issuing of new differentiated permits to specific categories of persons such as workers, physicians and students[63] but, generally, the number of permits issued after comprehensive closures has become progressively smaller.[64] Moreover, the enforcement of the general closure and separation have become more systematic and institutionalized over time.

Thus for four years, the general closure has consisted of the following two elements:

In addition, it has been the policy of Israel to impose comprehensive closures on the WBGS, according to security considerations. On May 16, 1996, then-Israeli Prime Minister Peres authorised the imposition of comprehensive closure on the WBGS "whenever warnings of terrorist attack are received."[67] During 1996, the policy of internal closures was used for the first time and for a total of 27 days in the West Bank. The general closure affecting Jerusalem, combined with intermittent internal closures, has had the effect of dividing the Palestinian territories into at least four quasi-separate economic regions: the northern and southern regions of the West Bank, Gaza and East Jerusalem.

4. The Time Dimension: A Calendar of Closures, 1993-1996

Closures have disrupted, and in some cases reconfigured, personal, social, cultural and professional relationships for Palestinians in the WBGS and Jerusalem. But the general closure's main economic impact has been to reduce the size of the flow of labour and commodities between the WBGS and Israel. Simultaneously, comprehensive and internal closures have led to a progressively reduced number of days per year during which normal market activities can take place. In a context where labour and commodity flows are an integral part of economic activity and well-being, closures have resulted in a shorter effective work year for the WBGS, particularly for that portion of the population whose incomes are directly dependent on access to the Israeli labour or commodity markets. That is, closure has limited the opportunities for such Palestinians to carry on normal income-generating activities.

The relevant question here is: what is the potential length of a "normal" work year in the WBGS, given the importance for income levels of economic relations with Israel? A related question is: how much has the length of the potential work year been shortened as a result of comprehensive closures?

Determining the potential length of a normal work year requires, first, subtracting the universally-celebrated Jewish and Muslim holidays[68] from the 365-day calendar year. Second, the 52 Saturdays (the Jewish weekend) in the year should also be subtracted since the overwhelming majority of Israeli employers and businesses suspend operations meaning, effectively, WBGS workers with jobs in Israel cannot work, WBGS exporters to and through Israel cannot deliver and WBGS importers from Israel have little to receive from Israeli exporters. Third, half the Fridays should also be subtracted since, even though it is the Muslim weekend, data for 1996 indicate that only about half of Palestinians working in Israel normally attend their jobs on Fridays, while trade flows are about half their average daily volume.[69] The sum total of such holidays for 1993-1996 is summarized in Table 21.


Table 21

Potential Work Days, Effective Closure Days and Effective Work Days for the WBGS, 1993-1996 [70]


Calendar Days
- Saturdays and Half Fridays
-Potential Holidays
=Potential Work Days
-Effective Closure Days
=Effective Work Days
1993
365
78
10
277
17
260
1994
365
78
10
277
61
216
1995
365
78
10
277
73
204
1996
365
78
10
277
82
195
Totals
1,460
312
40
1,108
233
875

Excluding such holidays, there were about 277 potential "normal" work days in each of these years. To determine the number of effective work days, the number of effective closure days must be subtracted from potential work days. Effective closure days are calculated as the total number of closure days imposed on the WBGS during potential work days, i.e. comprehensive closure days minus Saturdays, half the Fridays and all universally-celebrated Jewish and Muslim holidays which occur during comprehensive closure days.

As a result of comprehensive closures, the number of potential work days has been progressively reduced. Thus the number of days when economic interactions between the WBGS and Israel could be undertaken--albeit in the restricted manner dictated by the system of general closure--was reduced from 260 in 1993 to 195 in 1996. Effective closure days have eliminated a larger portion of potential work days each year: 6 per cent in 1993, 22 per cent in 1994, 26 per cent in 1995 and 29 per cent in 1996. For the period as a whole, effective closures have consumed 21 per cent of all potential work days. Thus, fully one-fifth of the normal income-generating time for Palestinians working in, exporting to, or importing from, Israel were eliminated during this period.

In addition, there are two factors which compounded the severity of closures on income-generating potential. First is the phenomenon of internal closure entailing the disruption of labour and commodity flows between regions, villages and towns within the West Bank. There were 27 such days during 1996, most of which occurred during comprehensive closures. Second, after the lifting of comprehensive closures, labour and commodity flows do not return to their pre-closure levels immediately. Israeli policy has been to cancel (or not honour) issued permits and to reissue new ones after rescinding a closure. Thus there is a lag time, sometimes quite significant, between formal cancellation of a comprehensive closure and the restoration of the level of pre-closure labour and commodity flows. This dynamic can be illustrated by comparing the average number of permits issued and estimates of actual monthly WBGS permitted labour flows to Israel during 1996, as shown in Table 22.


Table 22

Israeli Work Permit Quota and Estimates of Actual Permitted Labour Flows from the WBGS

to Israel on a Monthly Basis, 1996


Israeli-Issued Permits
Estimated Permitted
Month
to WBGS Workers
WBGS Labour Flows[71]
January
49,479
42,565
February
52,025
33,391
March
52,025
0
April
9,036
2,889
May
10,882
4,519
June
22,130
17,749
July
30,617
24,985
August
32,925
32,515
September
39,843
29,235
October
35,709
13,729
November
40,279
25,761
December
42,575
39,674
Monthly Averages
34,794
22,251

The data suggests that, after the February-April 1996 comprehensive and internal closures, permitted labour flows did not fully recover to their pre-closure levels as of the end of the year.[72] Commodity flows, as measured by commercial truck traffic between Israel and the WBGS, did not return to their pre-closure levels until the beginning of 1997.[73]

5. Lost Opportunities: Estimating Economic Effects of the Closures

The most obvious economic effects of closure and separation have been the disruption and reduction of commodity and labour flows between Israel and the WBGS (and from the WBGS to the rest of the world) after more than a quarter-century during which such market interactions were promoted, often by unilateral actions of the Israeli occupation authorities. Such disruptions have produced an unprecedented economic depression since 1993. The economic effects of the three-tiered closure policy have manifested themselves on the macroeconomic and microeconomic levels.

a. Macroeconomic Effects: National Income

In the most general terms, the absolute decline in real GNP--the broadest measure of overall income-generating activity--between end-1992 and end-1996 was (according to the latest estimates and in constant 1995 US$) over US$900 million in real terms, a decline of about 18 per cent. It is revealing to note that in no year after 1992 did the WBGS economy generate income as high as that in any single year during 1988-1992-- the years of the intifada, but also a period of relatively open borders for Palestinian workers, importers and exporters. That is, even during a period of considerable political and social unrest the WBGS economy, as measured by aggregate income, performed better than during the post-1993 period which, paradoxically, has coincided with the peace agreements, the establishment of the Palestinian Authority and much attention paid to improving economic conditions in the WBGS, but also with the period of closure.

But the aggregate income losses should be seen not simply as the reduction in the absolute size of GNP in 1996 as compared to 1992. Rather, the closure policies have resulted in lost opportunities for income generation in a cumulative manner, i.e. the closures have resulted in reductions in potential income-generating possibilities in each of the years after 1992. One way to estimate such cumulative losses is to sum the differences between the WBGS's potential real GNP[74] in the absence of the closure policies and the actual real GNP achieved for each year of the closure. [75] Thus to estimate the opportunity losses of the closure policies the relevant questions are: 1) had economic growth after 1992 continued on its pre-closure, long-run path, what would have been the size of the WBGS's real GNP in 1993, 1994, 1995 and 1996, i.e. the period of the general, comprehensive and internal closures; 2) what is the magnitude of the difference between potential and actual GNP in each year during the period of the closure?; 3) what is the total cumulative effect of the difference between potential and actual GNP during this period?

The WBGS's real GNP during 1981-1992, grew at an average rate of 4.96 per cent per year.[76] Using this growth rate and the estimate of 1992 real GNP from Table 1, the potential real GNP for 1993-1996 is estimated in the second column of Table 23.


Table 23

Estimates of Long-Run Potential Real GNP and Post-1993 Growth Scenario for Real GNP

with Annual and Cumulative Closure Losses for the WBGS, 1993-1996

(in constant 1995 US$ millions)


Potential
Estimated
Estimated
Real GNP
Real GNP
Annual Losses
(1981-1992 Path)
(Post -1993 Path)
(1993-1996)
End-Year
(US$ millions)
(US$ millions)
(US$ millions)
1992
5,003.68
5,003.68
0
1993
5,252.17
3,892.25
1,359.92
1994
5,512.99
3,990.72
1,522.27
1995
5,786.77
4,091.68
1,695.08
1996
6,074.14
4,195.20
1,878.93
Cumulative Loss
6,456.21

Based on current working estimates and measured in 1995 US$, the WBGS's real GNP was about US$5,000 million in 1992 and, had it continued to grow on its long-run path, would have been about US$6,000 million in 1996.[77] The closure which began in March 1993 precipitated a collapse in production and income-generating activity and had the effect of diverting the WBGS economy to a significantly lower growth path. Emerging from this economic rupture, the real GNP's post-1993 growth path is estimated at 2.53 per cent--about one-half its pre-closure long-run rate.[78] The effects of the 1993 disruption and the lower real GNP growth rates for 1994-1996 are given in the third column of Table 23.

Subtracting the estimates of post-1992 real GNP (which reflect both the 1993 collapse and the lower post-1993 average growth rates) from estimates of the steady-growth potential real GNP for each year during 1993-1996 yields estimates of the annual aggregate losses in income-generating opportunities which stem primarily from the closure policies. The estimated opportunity loss from the 1993 downturn is approximately US$1,360 million while post-1993 estimates of annual opportunity losses rise from about US$1,500 in 1994 to US$1,875 million in 1996. Losses as a proportion of potential annual GNP also progressively increase, from an average of about 25 per cent in 1993 to over 30 per cent in 1996, indicating rising opportunity costs as the closures have been prolonged, elaborated, and as their effects have accumulated.

Average daily losses have also mounted. If estimated total losses are distributed evenly over the calendar year, average daily opportunity losses in constant 1995 US$ were approximately US$3.7 million in 1993, US$4.1 million in 1994, US$4.6 million in 1995 and US$5.1 million in 1996.[79] The cumulative opportunity loss for the 1993-1996 period as a whole is estimated at about US$6,450 million which, if distributed over four calendar years, yields a daily loss of about US$4.4 million. These substantial losses represent irreplaceable income-earning opportunities for the population of the WBGS. It is sobering to note here that the total estimated loss over the 1993-1996 period is about twice the amount of total donor pledges to the Palestinian Authority since 1993 and approximately five times the amount of total donor disbursements as of the end of 1996.

b. Macroeconomic Effects: Household Expenditures

The lower household expenditures discussed above are due mainly to lower levels of household income caused by the closure policies. The component of income most fundamentally affected by closures has been the wage income earned by Palestinians in Israel, referred to as net factor income or the difference between GNP and GDP. Thus the larger declines in GNP relative to GDP are attributable to the decline in wage incomes earned in Israel. Real net factor income in the WBGS, as shown below, fell by about three-quarters between 1992 and 1995 with a disproportionately larger decline in the West Bank. Given the smaller labour flows to Israel in 1996, as well as mid-year declines in real wages earned in Israel, there have been further declines, perhaps on the order of 20 per cent as compared to 1995.


Table 24

Estimates of Real Net Factor Income for the WBGS, West Bank and Gaza Strip, 1988-1995[80]

(in constant 1995 US$ millions)


Real Net
Real Net
Real Net
Factor Income
Factor Income
Factor Income
End-Year
WBGS
West Bank
Gaza Strip
1988
2,399
1,440
963
1989
2,335
1,616
705
1990
2,620
1,685
911
1991
2,414
1,555
850
1992
3,084
2,091
977
1993
1,955
1,356
588
1994
1,284
848
434
1995
745
489
256
Per cent Change
1992-1995
-75.84%
-76.63%
-73.80%

The loss in labour incomes from Israel-employment has been compensated for in several ways. Households have reduced expenditures, have drawn down savings, borrowed money, used more remittance income from relatives abroad and sought relief from private and public social services and international organisations.[81] The fact that household expenditures did not fall further is partly due to the expansion of employment opportunities provided by the Palestinian Authority. Because the Authority's wage and salary expenditures depend to a large extent on donor sources, this is not a sustainable situation. It also must be noted that household dissaving--the result of reduced incomes--reduces a key source of potential pool of investment funds capable of financing current and future investment.

c. Macroeconomic Effects: Public Consumption and Public Investment

Public expenditures, both in the form of consumption and investment, contribute to social stability and provide essential conditions for a more efficient private sector. As already noted, both private and public investment have declined as a proportion of real GDP since 1992. One of the most serious effects of the general closure has been the diversion of Palestinian Authority expenditures, financed in large part by donors, from public investment to public consumption spending, i.e. helping to alleviate the hardships caused by closure. Civil authority recurrent expenditures--i.e. public consumption--in 1995 were more than twice their 1992 level. These include the costs of Palestinian Authority employee salaries, social services and the costs of the security services.

There were further increases in 1996 due to the security and hardship exigencies caused by the February comprehensive closure. Such crisis spending came at the expense of long-term capital expenditures--i.e. public investment in physical and institutional infrastructure. The Palestinian Authority's draft budget for 1996 envisioned US$ 272.7 million in capital expenditures; final results for the year show capital spending of only US$ 160 million--more than US$ 100 million below initial plans[82] Thus, while the larger than anticipated budget deficits caused by closures are worrisome, the more serious effect of the diversion of public resources from investment to consumption is the disruption and delays in building an efficient and enabling public infrastructure and civil service.

d. Macroeconomic Effects: Imports

As already noted, the closures have created considerable obstacles for the development of WBGS exports. It must be added here that the closures' economic shocks to the productive private sector, combined with an infusion of spending on the part of the Palestinian Authority and international organisations, have reinforced the import-bias of WBGS trade. Table 10 indicates that while imports as a proportion of GDP fell significantly in 1993-1994, there was a strong rebound in 1995 and 1996. The significant commodity trade imbalance suggests a high WBGS tendency to consume imports.

In the past, the labour incomes of WBGS workers in Israel offset this imbalance. But closures have constrained the flow of net factor income from Israel which allowed the WBGS to reach equilibrium in the balance of payments with Israel. Simultaneously, closures have hindered the development of the private sector and its export capacity. The result has been significant continuing, and perhaps increasing, absorption of imports in the WBGS. Given the considerable impediments which face imports from countries other than Israel (both tariff-related and security measures), the closures have resulted in increases in the Israeli share of WBGS imports.[83] With freer trading arrangements, the WBGS would have a much more diversified spectrum of trading partners.[84] Under a more liberal trade regime, WBGS producers would have a larger potential consumer base and one better matched to their comparative advantages.

e. Macroeconomic Effects: Diverging Rates of Inflation

The macroeconomic compression resulting from the closure policies have had the effect of causing a divergence in the rates of inflation as between Israel and the WBGS. For most of the 1970s and 1980s, rates of inflation between the two economies paralleled one another due to the fact that most WBGS imports originated in, or came through, Israel[85] and over one-third of the WBGS work force was employed in the Israeli labour market. Thus consumer prices and wages in the WBGS closely reflected trends in the dominant Israeli economy.

As late as 1993, consumer price inflation rates were nearly identical in the two economies (at about 11 per cent). The introduction of the general closure policy in that year seems to have ruptured the coincidence of these inflation rates. The WBGS inflation rates in 1994 and 1995 were 1.7 and 2.7 percentage points above those of Israel, probably reflecting the supply-side shortages and/or higher transport costs of supplying goods to the WBGS.

Preliminary estimates for 1996 show the WBGS rate of inflation to be 3.6 percentage points below that of Israel.[86] This probably reflects the constraints on WBGS agricultural exports, leading to a collapse of agricultural prices locally, especially pronounced after the February closure. Such declines in locally-produced basic commodity prices probably outweighed the higher prices caused by higher transport costs and the existence of monopoly arrangements in Israel-WBGS trade. More fundamentally, the lower rate of WBGS inflation probably reflects the compression of wages caused by the closure-induced unemployment crisis. Wage compression has lowered the costs of production for Palestinian businesses, thereby slowing the rate of growth of retail prices. But real wage declines have also contributed to reduced demand for final goods in the WBGS market, also contributing to lower prices. Judging by the divergence in inflation rates, the closure and separation policies seem to be creating separate markets from formerly unified ones.

f. Microeconomic Effects: Closures at the Level of the Business Enterprise

As already noted, there has been a significant decline in private investment spending and stagnation in industry's contribution to the GDP at the macroeconomic level. A less visible effect of the post-1992 period, however, has been private sector adaptation to the business environment created by the closure policies. Thus, the question at the microeconomic level is: how have individual productive enterprises been affected by these altered conditions?[87] The answer to this question provides insight into the underlying and fundamental processes responsible for the macroeconomic trends discussed earlier. They also provide policy makers, donors and NGOs involved in private sector development a clearer understanding of the challenges facing the mainly small business enterprises in the WBGS.

A survey of 17 mainly light manufacturing firms in the WBGS conducted by the Small Business Support Project of Development Alternatives, Inc. (in conjunction with the Palestinian Trade Promotion Organisation) during March-April 1996 reveals some of the main effects of the February closure on the private sector.[88] The survey's results indicate a pattern of three major effects on firms' operations due to stringent comprehensive and internal closure. These effects can be summarized as lost sales opportunities, supply-side shocks and liquidity crises.

Most firms reported declines in monthly sales revenues on the order of 30-40 per cent over pre-closure levels. An inability to transport goods or provide services because of movement restrictions both external and internal (in the West Bank) was the main reason for the decline. This was true of West Bank firms with main markets in Gaza[89] (and vice versa) as it was for WBGS firms with main markets in Israel. In addition, firms reported sales revenue losses due to restrained consumer incomes and, in cases in which firms manufactured production inputs, to the lower sales of client firms. Several firms reported the importance of face-to-face contacts with their clients to secure current and future sales--contacts rendered impossible by the closures. Many surveyed firms, some with long years of experience and well-established customer relations, reported that the lack of contact and delays in deliveries were reducing client confidence in them as suppliers. Higher transport costs were cited almost universally as another factor in the reduced marketability of products.

The majority of firms indicated that acquiring inputs had become either difficult or impossible and more costly. This was especially true of raw materials, most of which were purchased in Israel or through Israeli ports. Procuring inputs required higher transport and storage costs due to Israeli security measures at the ports of Ashdod and Haifa, as well as the imposed requirement that goods be transported on Israeli-licensed trucks. Firms reported that transportation costs had risen 100-200% during the closure. One effect of movement restrictions and higher shipping costs (including back-to-back shipping) was the collapse in trade between the West Bank and Gaza.[90] West Bank firms also reported the inability of workers to reach their places of work due to the internal closure, in some cases imposing higher costs on the firms to house workers in the locale of the firm. The magnitude of the supply- side shock forced several firms to shut down operations completely while nearly all of the rest significantly reduced their levels of output.

Many of the surveyed firms reported that Israeli suppliers and banks were reluctant to extend them credit, as they regularly did prior to the closures, to facilitate their exchanges. Israeli input suppliers were demanding payment in full for purchases made by the firms and Israeli banks were refusing to accept checks from these firms drawn on banks in the WBGS. Survey respondents also reported their inability to reach clients or suppliers in Israel and the WBGS to collect payments or goods owed to the firms. Thus the credit squeeze for many firms was closely linked to their blocked access to legal recourse--i.e. the inability to enforce contractual obligations. Another part of the credit crunch was related to the accumulation of large inventories of goods due to their inability to sell; therefore, needed operating capital was tied up in the process.

Some survey respondents suggested that they would be forced to close down operations if the comprehensive and internal closures persisted. The comments of several respondents indicated an enhanced perception of investment risk and extreme caution about future investment expenditures. It should be noted here that, although the February comprehensive and internal closures were particularly severe, the private sector effects cited in the survey have been, in varying degrees, part of the economic landscape since the general closure policy began in March 1993.

g. Microeconomic Effects: Diseconomies of Scale Effects

Mobility restrictions on commodities and people between the WBGS and Israel, and between the West Bank, Gaza Strip and East Jerusalem have created higher transactions costs, thus creating four spatially quasi-separate economic regions--the northern West Bank, the southern West Bank, East Jerusalem and Gaza. This separation, along with restricted access to Israeli and foreign markets, has had short-term and long-term implications.

The short-term effect, as witnessed during the closures of 1996, was considerable excess capacity for existing firms, i.e. their productive potential could not be fully utilized because of the restrictions on their ability to sell output. The losses in sales revenue were the immediate outcome. Less apparent were the costs imposed on firms stemming from their inability to cover their fixed costs--e.g., interest, rental and premium payments on machinery, buildings and insurance--costs which they must pay no matter the volume of their output. Restricted markets and lost sales mean such payments are more difficult to shoulder. Furthermore, and more to the point, restricted market size limits the cost effectiveness of firms with significant fixed costs in that they cannot distribute these costs over a greater number of units produced. Thus average fixed costs on the lower production level are higher--a condition that suggests reduced profitability or losses.

Such a condition is a disincentive to investment in the long-term. In an environment of restricted markets, it does not make sense for firms to expand the size of their operations through the purchase of more modern equipment and facilities if they are unable to recover the costs of such investments. Moreover, firms will find that their current capacity levels are too large for the size of the market--a condition known in economic theory as diseconomies of scale. In the longer term this will lead to fewer and smaller, potentially less cost efficient firms. Thus the development of the private sector, premised on the increased size and productivity of business enterprises, will be thwarted to the extent that the consumer base is limited by the closure policy.

h. Microeconomic Effects: Price Distortions and the Mis-Allocation of Resources

Relatively free movement of commodities between the WBGS and Israel and between the West Bank and Gaza Strip during the 1967-1992 period, spawned regional specialisation in the production of goods. Thus, commercial agriculture in the WBGS was increasingly specialised in producing a certain range of commodities that would fetch relatively high prices in the Israeli and WBGS markets. Likewise, lower labour costs gave WBGS producers advantages in textile and garment subcontracting activities and in a range of consumer non-durable and durable goods such as processed foods, pharmaceuticals, confectionaries and furniture. These advantages developed over a 25-year period in the context of access to Israeli input and output markets.

Impediments to the circulation of productive inputs and finished goods, and the resulting higher transportation costs caused by Israeli-imposed movement restrictions, have altered the relative costs, and therefore, the relative prices of commodities produced in the West Bank, Gaza and Israel. The relative prices resulting from the higher transactions costs of conducting business--i.e. the higher costs associated with purchasing and selling productive inputs and final goods and services--therefore do not reflect the relative cost advantages that exist in the absence of movement impediments and restrictions. In such an environment Palestinian producers (as well as Israeli producers) are unable to capture the full potential value of their time-developed comparative advantages. This means that economic resources (e.g. land, labour and other inputs) are being used in a sub-optimal manner.

While product and service specialities--i.e. comparative advantage--are a dynamic process and can change over time, closure and separation are disrupting the evolved specialized uses of human and natural resources in the WBGS, specialisation which has required a large investment of real economic resources. Specific skills accumulated through long years of work experience cannot be optimally used if there are impediments to the circulation of the goods produced with such skills. In the same way, the full benefits from accumulated capital investments in machinery, land, technical means, agricultural facilities, infrastructure and buildings for the production of specific commodities and services cannot accrue to owners of such resources. While difficult to measure, the inability to take full advantage of existing skills and resources and the considerable time, effort and resources required to regain or generate new ones, constitute the forgone income-generating opportunities in the present and for the future and, as such, comprise the largest, though hidden, economic losses produced by the closure policies.

6. Social Effects of the Closure Policies

a. Spatial and Social Separation

The social consequences of the closure and separation policies imposed on the WBGS, while more difficult to estimate than the economic effects, have been severe. Aspirations engendered by the peace process were for an improvement in the quality of life, and socioeconomic improvement, at both the general and personal level. Such expectations created popular support for the peace process.

However, at a basic level, the closure and separation policies have made personal, familial and social contacts more tenuous, and have tended to accentuate social and cultural differences in the different regions of the WBGS at a time when political progress might have been expected to strengthen national identity and unity. Israeli policy with regard to noncommercial travel of Gazans to the West Bank expressly excludes family reunions (except for women), visits to religious sites and study in West Bank institutions as valid reasons for such travel.[91] In particular, East Jerusalem, the cultural, religious and economic centre of the Palestinian community has suffered from the denial of entry to the majority of Palestinians who might have both benefitted from its resources and contributed to its social and economic development. Consequently, even to the casual visitor, the city has lost some of its unique qualities and characteristics as the hub of Palestinian cultural and commercial life.

The Gaza Strip, after numerous and long curfews and considerable repression imposed especially on its refugee camps during the intifada period, experienced a phase of considerable optimism upon the creation of the Palestinian Authority in 1994. The simple freedom to walk the streets and beaches at night did much to convince public opinion that the peace process could result in tangible improvements in their daily lives. By contrast, the comprehensive closures which followed the Hamas suicide bombings of 1994 and 1995 and the tightening of the general closure were widely viewed as punitive and exceeding reasonable security considerations. The consequent decline in living levels have added to the disillusionment with the peace process.

b. Food and Health Security

The February 1996 comprehensive closure is generally considered to be the most stringent to date. It accentuated the social stresses inherent in the general closure policy and constrained the developmental effort in the WBGS. The economic and social hardships it imposed on the Palestinian population[92] were felt most acutely by the poorest sections of the population, the most vulnerable groups already living in poverty. Local and international organisations reported a steady increase in the number of hardship cases during the first two months of the closure seeking relief assistance.[93]

Poor households soon exhausted their savings, sold off their assets and could no longer buy on credit. The situation in Gaza was exacerbated by Israel's closure of the Karni crossing point for ten days, the main transfer point for goods into Gaza, prohibiting entry to emergency food and medications.[94] By July, when the closure had significantly eased, the United Nations World Food Programme was still reporting steadily increasing destitution and dependence of families on the Palestinian Authority Ministry of Social Affairs and NGOs for relief assistance.[95] Most affected were women--especially women heads of households--and children. A PCBS health survey conducted in the summer found that stunting (8.2 per cent of children in Gaza and 6.7 per cent in the West Bank) was the most common indicator of nutritional problems in children. Undernutrition was also reported in 5.2 per cent of Gazan children and 3.9 per cent of children in the West Bank.

The severity of the food and nutrition situation was matched in the field of health care. Due to movement restrictions on patients, medical personnel, health-related products and medical technicians, primary and specialized health care was denied to a large number of WBGS residents during 1996. Because of the automatic revocation of permits during closures, patients requiring ongoing treatment were forced to reschedule medical appointments and to reapply for permits and were also excluded from the category of emergency cases theoretically permitted access to treatment in East Jerusalem or Israel on humanitarian grounds. However, because of the lack of clear directives the decision to issue a permit or allow an emergency case through a checkpoint was often left to the judgement of individual bureaucrats and soldiers. Consequently, in the first nine days of the closure there were nine documented fatalities, many because of long delays as ambulances were searched at checkpoints.[96]

The isolation of East Jerusalem, the location of the major hospitals and specialized medical care, was especially serious, affecting not only health of those patients refused entry, but provoking a funding crisis in several hospitals. Patients requiring specialized treatment not available in Palestinian hospitals, also suffered. In the case of Mokassad Hospital, the denial of access to medical personnel meant that only 150 of 435 employees were permitted entry by the end of April. Residents of West Bank rural communities without health care facilities suffered from the internal closure while, as customary during comprehensive closures, the residents of the Gaza Strip suffered most.[97]

By the end of the year the situation in the realms of food and heath had been relieved to some extent but significant bureaucratic and arbitrary restrictions on movement of people, including medical patients continues. Furthermore, some 1,200 Gazan students enrolled at universities in the West Bank continue to be denied access to the West Bank.[98]

c. Institution-Building and Developmental Effects

The free movement of Palestinian Authority personnel was also severely restricted during 1996. Coordination between Palestinian Authority institutions based in Ramallah and Gaza City became a more difficult, resource-consuming task. Scarce Palestinian Authority resources had to be spent on duplicating efforts in building Palestinian institutions. Each ministry, for example, has two seats--one in West Bank and one in Gaza. The closures have created physical obstacles for the free travel between the northern and southern parts of the West Bank, disrupting training activities designed to build the technical capacity of Authority personnel. During the 27 days of internal closure in the West Bank, a significant number of employees in Palestinian institutions there, like private sector employees, could not reach their places of work. PCBS estimated that one-third of public sector employees were absent during the February closure.[99]

Many donor countries and United Nations agencies reported disruptions, postponement and cancellation of planned activities during 1996. While international diplomatic and United Nations staff mobility was hindered, the mobility of the Palestinian employees of these agencies to Jerusalem, to Gaza, to the West Bank and within the West Bank was nearly paralysed during much of the year. Numerous missions, delegations and workshops were postponed or canceled during the first month of the February closure.[100] Continuing impediments on the movement of personnel and supplies--oftentimes in contravention of the 1946 Convention on Privileges and Immunities of the United Nations--imposed substantial additional costs on United Nations organisations throughout the year.

Such costs stemmed from three main sources. First, the difficulty in moving Palestinian staff between the West Bank and Gaza and Jerusalem has necessitated the use of relatively high cost international staff and the duplication of meetings, conferences and training courses with counterparts who are unable to travel freely between the West Bank and Gaza Strip. Second, there have been higher administrative costs associated with applying for, and following-up on, permits for the movement of Palestinian staff and international consultants. Third, higher transportation and storage fees have been incurred due to stricter Israeli inspection and more circuitous transport procedures for United Nations agency supplies and equipment imported from abroad. These constraints have hindered and disrupted project implementation including a 10-20 week delay in the Gaza European Hospital project.[101]

7. Some Concluding Observations on Closures

The three-tiered closure policy, as detailed above, has produced far-reaching economic and social dislocations over the past four years. The evidence presented also suggests that, even with conditions of significant political instability--but relatively open avenues for labour and commodity trade flows--the WBGS economy has the ability to generate healthy rates of income growth which underpins living levels. The years of the intifada were such a period. By comparison, the years since 1993 have been a relatively stable period in Palestinian- Israeli relations, even though political and security conditions have oftentimes been tense and the pace of implementation of the Interim Agreements has been slower and bumpier than expected. Yet economic conditions have been quite bad by historical comparison.

These facts suggest that the basis for greatly improved economic and social conditions in the WBGS exists. But in order to achieve this the security arrangements and concerns of both Israelis and Palestinians must be resolved in a way that permits relatively free economic interaction in the context of the economic agreements signed by the leaderships of the two peoples. Once sufficient security arrangements are in place, there are substantial mutual benefits if freer economic interaction between Israel and WBGS can be regenerated. Moreover, the customs union relationship between the WBGS and Israel, as well as the free trade agreements between the Palestinian Authority and the U.S. and European Union, can greatly broaden the economic space in which the Palestinian private sector functions. This would permit Palestinian and Israeli producers to more fully and effectively employ resources and better develop their respective competitive advantages between each other and within the larger international market. Tangible improvements in the living levels of both populations would provide needed reinforcement for the peace process.

At the social level, closures and separation, in addition to imposing added hardships on the population of the WBGS, have restricted normal daily contacts between Palestinians and Israelis. The open borders policy which lasted over 20 years resulted in interpersonal contacts, which were oftentimes strained by repressive measures of the Israeli occupation authorities and resistance to the occupation. But personal and social contact between the two populations, although complicated by the political situation, fostered more realistic and sensible perspectives among most Palestinians and Israelis about each other. This is an often overlooked, but important, element which enabled the peace process and mitigated the influence of extreme elements on both sides. Spatial separation has weakened this crucial foundation for a durable peace process.

The lack of contact, whether commercial, social or cultural, enables simplified and stereotyped characterisations of one people about the other to grow unchecked. Further impediments to such contact will almost surely impose greater hardships on residents of the WBGS and will further dissolve whatever people-to-people goodwill that still exists. This cannot but advance the agendas of elements on both sides who oppose the peace process into which the leaderships of the two peoples have entered. In the long-run, this could be the most devastating effect of the current closure policies.


Notes to Section IV

[55] Palestinian Ministry of Labour Employment Situation in Palestine, June 1996, Tables 1-4.

[56] According to the Israeli-Palestinian Interim Agreement on the West Bank and Gaza Strip of 28 September, 1995 (the "Taba Agreement"). There are eight non-contiguous and mainly urban locales in Area A (Jenin, Tulkarem, Nablus, Qalqiliya, Ramallah, Jericho, Bethlehem and Hebron) where the Palestinian Authority has civil and security powers. Area B covers some 440 Palestinian towns and villages where the Palestinian Authority has civil and security powers as they pertain to Palestinians.

[57] Human Rights Watch Israel's Closure of the West Bank and Gaza Strip, July 1996, p. 17.

[58] See UNSCOQuarterly Report, Autumn 1996.

[59] Human Rights Watch Israel's Closure of the West Bank and Gaza Strip, July 1996, pp. 16-17. This policy was extended to the West Bank only in 1995.

[60] Amira Hass "From Punishment to Policy; Gaza Under Closure," Challenge, May-June 1996, p. 19; Palestinian Centre for Human Rights The Israeli Policy of Closure; Legal, Political and Humanitarian Evaluation, 1996, p. 2.

[61] It was during this period that an Israeli soldier was kidnaped and murdered, allegedly by members of Hamas and Israel responded with the arrest and deportation of 417 alleged Hamas activists to Lebanon. The ensuing months were characterized by violent incidents, including a series of stabbings committed by Palestinians against Israelis and armed attacks against military and police personnel, and harsh retaliation by Israeli security forces and settlers. The Israeli authorities during this period actively encouraged Israelis to arm themselves against possible attacks. See International Labour Office Report of the Director-General appendix II, 1993, p. 9.

[62] International Labour Office Report of the Director-General, 1996 p. 7 and Report of the Director- General, Part II, appendix, 1994, pp. 28-29.

[63] International Labour Office Report of the Director-General, Part II, appendix, 1994, p. 7 and Report of the Director-General, 1996, p. 7.

[64] Geir Ă˜vensen Responding to Change; Trends in Palestinian Household Economy FAFO Report 166 (Oslo, FAFO 1994), p. 10.

[65] Human Rights Watch Israel's Closure of the West Bank and Gaza Strip, July 1996, p. 3.

[66] Israel continues, as it has for nearly 30 years, to control, through a system of permits, the movement of people and goods leaving and entering the WBGS to and from foreign countries.

[67] Human Rights Watch Israel's Closure of the West Bank and Gaza Strip, July 1996, p. 3.

[68] There are, depending on the year, eight to nine official Jewish holidays in Israel during which the majority do not work: Rosh Hashana, Yom Kipur, Sukhot, Toda, First Day of Pesah, Last Day of Pesah, Independence Day and Sheve'ut. Among WBGS workers employed in Israel, only two Muslim holidays are generally taken as holidays: the first day of each of the Al Fitr and the Al Adha feasts. The majority of Palestinians employed in Israel work during the other Muslim holidays. Researched with the assistance of the Palestinian Ministry of Labour, Gaza.

[69] Trade flow calculations based on 1996 daily agricultural exports and imports by tonnage (from the Palestinian Ministry of Agriculture, Gaza). Agricultural trade flows were weighted by Gaza quarterly trade flow data (in value terms) for 1995 and the first three quarters of 1996 (from the Ministry of Planning and International Cooperation Central Statistics Department, Gaza). Labour flow estimates for Fridays and Saturdays during 1996 are from the Ministry of Labour, Gaza. Because of a lack of daily data on the West Bank, the simplifying assumptions made here are, first, that West Bank labour and commodity flows generally conform to this pattern and, second, that this pattern is applicable to the period 1993-1995.

[70] Based on information from the Palestinian Ministry of Labour and the Israeli Ministry of Foreign Affairs. See Palestinian Ministry of Labour Employment Situation in Palestine, June 1996 and Statistical Report of the Israeli Siege During 1996, January 1997. With the assistance of the Palestinian Ministry of Labour, Gaza.

[71] Table 22 excludes West Bank unofficial labour flows (for which permits have not been issued) as well as WBGS residents working in Israeli settlements and industrial zones. Because of the multiplicity of entry points to Israel, estimating actual permitted West Bank labour flows is problematic. The assumption is made that the per cent difference between the number of permits issued and actual labour flows on a monthly basis in the West Bank was the same as that in Gaza (for which relatively accurate estimates exist). The assumption implies that the degree of easing of restrictions on labour flows in the West Bank is the same as that in Gaza at a given point in time. Estimates are based on information provided by the Palestinian Ministry of Labour (West Bank and Gaza), Palestinian Ministry of Planning and International Cooperation Central Statistics Department (Gaza) and the Israeli Ministry of Foreign Affairs.

[72] In reality, since 1993 the number of permits issued for work in Israel has been progressively reduced. See Palestinian Ministry of Labour Employment Situation in Palestine, June 1996. With the assistance of the Ministry of Labour, Gaza.

[73] U.S. Embassy Report, Tel Aviv, 8 January 1997 referring to Gaza.

[74] Potential real GNP refers to the level the real GNP would have attained had past growth rates continued after 1992. This differs from its conventional usage where it connotes the level of real GNP under conditions of fully-employed human and physical resources.

[75] Using real GNP, rather than real GDP, as the relevant national income measure is justified by the fact that the former includes net factor income which is almost exclusively the value of wages earned by Palestinian workers in Israel. Net factor income during 1980-1992 averaged about one-quarter of real GNP. See World Bank Developing the Occupied Territories; An Investment in Peace, volume two (September 1993), p. 139. Using real GDP would, by definition, miss the effects of closure on potential income generation.

[76] The long-run average growth rate of real GNP for the period 1981-1992 was determined by calculating the two-year moving average growth rates for the period. This procedure adjusts for the radical fluctuations in year-to-year growth rates caused by political turbulence and the bi-annual agricultural cycle in the WBGS. Real GNP levels for the period are taken from World Bank working estimates. The estimated long-run growth rate is generally consistent with Israeli Central Bureau of Statistics estimates. See WBGS national income data in ICBS Statistical Abstract of Israel (various years) and World Bank Developing the Occupied Territories, volume two (September 1993), p. 139.

[77] The potential growth scenarios would be dependent to a large extent on the growth of the Israeli economy. The rapid acceleration in real GDP growth rates in Israel after 1993, as well as the surge in construction spending and employment (where Palestinian workers were and are concentrated), reinforces the validity of the potential growth scenario presented here. See ICBS Statistical Abstract of Israel volume 47, 1996, pp. 167, 172-73, 298.

[78] The post-1993 two-year moving average growth rate for real GNP is based on World Bank estimates of real GNP for 1994-1995 and on the most recent IMF estimate of the real GNP growth rate for 1996 (-2.9 per cent) as given in Recent Economic Developments, February 1997, p. 4.

[79] It must be emphasized that actual daily opportunity losses in any given period are dependent on such factors as the agricultural cycle, the level of export prices, the number of Israel-employed workers, their wage rates and seasonal variations in construction employment opportunities in Israel where WBGS workers are concentrated. For example, a study conducted by the Palestinian Central Bureau of Statistics estimated the economic losses of the 25 February-4 April, 1996 closure at US$244 million for an average daily loss of US$6.1 million. That closure came at a time of relatively high Palestinian employment in Israel and when agricultural exports were seasonally high. See PCBS "Loss Estimates Incurred by the Palestinian Economy due to the Israeli Closure 25/2 - 4/4 1996," 9 April 1996 (in Arabic). See also UNSCO "Costs of Closure; Some Preliminary Indicators on Costs of Closure in the Gaza Strip," 10 April 1996.

[80] From World Bank preliminary working estimates deflated by GNP deflators with a 1995 base year.

[81] See UNSCO Quarterly Report, Autumn 1996.

[82] Palestinian Ministry of Finance "Report on Fiscal Developments in January-September 1996," 21 October, 1996 and "Report on Fiscal Developments in October-December 1996," 23 February 1997. See also World Bank A Background Note on the Economy for the Consultative Group Meeting, November 1996, p. 2.

[83] See Palestinian Ministry of Planning and International Cooperation, Central Department of Statistics, Annual Statistical Bulletin1996 and US Embassy Report, 18 December 1996 on Gaza trade.

[84] See World Bank Developing the Occupied Territories (volume two), 1993, pp. 45-47

[85] Yousef Daoud "Bulletin of Consumer Prices: December 1995-June 1996" in First Reading in PCBS Statistical Reports Series Palestine Economic Policy Research Institute (MAS), September 1996, pp. xiv-xvi.

[86] See IMF Recent Economic Developments, Prospects, and Progress in Institution Building in the West Bank and Gaza Strip (Washington, DC February 1997), p. 13 for estimates of WBGS and Israel inflation rates for 1993-1996.

[87] The focus here is on non-agricultural producing units.

[88] See "Case Studies Impact of Closure on Palestinian Businesses in the West Bank and Gaza Strip," 27 May 1996.

[89] See "Losing Gaza," Palestine Economic Pulse, Arab Economists Association, Ramallah, May-June 1996.

[90] U.S. Embassy Report, Tel Aviv, 18 December 1996, p. 1.

[91] As a result, the number of applications for non-work, non-commercial travel to the West Bank from Gaza during 1996 were only 6,656, of which 6,041 (90 per cent) were allowed. This compares to pre-Gulf War estimates of some 600,000 visits by Gazans to the West Bank each year. Palestinian Centre for Human Rights Report by the Palestinian Centre for Human Rights on the Closure Imposed by Israel on the Gaza Strip No. 16, 27 February 1997.

[92] See UNSCO Quarterly Report, Autumn 1996.

[93] World Food Programme "The Unnatural Disaster of the Closure," Gaza, 15 May 1996, p. 2.

[94] Human Rights Watch Israel's Closure of the West Bank and Gaza Strip, July 1996, pp. 27-28.

[95] World Food Programme "The New Economic Context of the Closure," Gaza 9 July 1996, p. 4.

[96] Human Rights Watch Israel's Closure of the West Bank and Gaza Strip, July 1996, pp. 27, 33, 35-36.

[97] ibid., pp. 32-33, 36-37.

[98] Palestinian Centre for Human Rights "Report on the Closure Imposed by Israel on the Gaza Strip" No. 16, 27 February 1997.

[99] PCBS "Estimates of the Palestinian Economy Losses Due to Closure Presented to the Palestinian Legislative Council," (in Arabic) April 1996, p. 5.

[100] UNSCO internal document, March 1996.

[101] UNSCO "Movement Related Constraints Facing United Nations Organisations in November 1996," Report Number 1, 6 December 1996.


V. LOOKING AHEAD

With lower unemployment rates in the second half of 1996, and no comprehensive closures in the fourth quarter, there was reason to be optimistic about economic prospects in 1997. The number of permits issued by the Israeli authorities to Palestinian workers exceeded 50,000 during the last quarter of 1996. During the first quarter of 1997, there were about 60,000 permits issued, approximately 55,000 WBGS workers employed in Israel and commodity flows had been restored to early 1996 levels.

Under the improved conditions, the Palestinian Ministry of Finance and the IMF projected continued macroeconomic progress in 1997, with real growth rates for GDP and GNP of about 5.5 and 8 per cent respectively. These projections assumed a monthly average of 35,000 WBGS workers in Israel, an expansion of merchandise trade between the WBGS and Israel and an active Public Investment Programme on the part of the Palestinian Authority, supported by donors and multilateral institutions. The Ministry of Finance warned, however, that such a growth scenario is highly sensitive to border closures--such as that imposed by the Israeli authorities on 23 March 1997, a closure which threatens to reverse much of the progress that has been achieved since the end of the February 1996 closure.

These growth rates would mean, at a minimum, the restoration of aggregate incomes to their end-1995 levels. Per capita incomes, under current estimates, would be below their end-1995 levels. This suggests that a solid year of economic growth in 1997 would restore overall income to its end-1995 level but not result in improvements in the average incomes of Palestinians in the WBGS. On the other hand, the WBGS economy has exhibited considerable resilience and an ability to regenerate growth after repeated external shocks. While the sources of the renewed growth have been construction, public consumption and private service activities--rather than in industry and agriculture--and partly financed by donor assistance, the private sector currently possesses a significant amount of unused productive capacity. Furthermore, the WBGS has substantial underutilised human resources. Under more stable economic and political conditions, and in the absence of closures, much of that capacity and resources could be beneficially utilized.


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