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I. Political change impacts donor funding
1. As anticipated in the secretariat’s previous report on assistance to the Palestinian people (UNCTAD, 2006a), suspension of direct donor support to the Palestinian Authority following the Palestinian legislative elections of January 2006 has contributed to a further economic decline in the West Bank and Gaza. This reinforced the momentum of de-development triggered by repeated violent confrontations, and tightened Israeli restrictive measures and the closure policy which had been in place since September 2000. In 2006 and early 2007, Palestinians have suffered harsher travel restrictions, with increased checkpoints, expanded and deeper impact of the separation barrier in the West Bank, and greater restrictions on the mobility of people and goods.
2. The deterioration in movement and access in the West Bank increased in the last quarter of 2005, following Israeli unilateral disengagement from Gaza, and picked up momentum after the formulation of the first Government following the Palestinian Legislative Council elections in early 2006. The United Nations Office for the Coordination of Humanitarian Affairs (OCHA) counted 527 checkpoints and other obstacles by the end of December 2006, a 40 per cent increase since the Gaza disengagement benchmark. The situation in the Gaza Strip is particularly acute. Since 2000, when access to Israel for work began to decline, Gazans have depended on Palestinian Authority government payrolls for 45 per cent of total employment (OCHA, 2007). It is not surprising, therefore, that budgetary assistance has been described by the World Bank (2002) as the most efficient method for injecting cash into the landlocked and fragmented Palestinian territories. Recently, the World Bank (2007a) has underscored how Palestinian Authority achievements in transparency and accountability have been “undermined” by donor mechanisms to sidestep the Palestinian Authority.
3. Israeli withholding of Palestinian clearance revenues collected on behalf of the Palestinian Authority (in contravention of the Paris Protocol of 1994) and the absence of budget support from most Western nations have further reduced the already limited policy space available to Palestinian decision makers. This has effectively prevented the Palestinian Authority from paying the bulk of public employee salaries since April 2006, and when they have been paid, it has been only partially and irregularly. As a result, public service strikes have been recurrent, affecting Palestinian Authority essential service delivery personnel such as doctors, nurses, teachers and local municipal workers. This in turn has deepened the ongoing socio-economic decline. An urgent redirecting of aid through the Palestinian Authority is needed so that it can address vital social and economic concerns. UNCTAD has already highlighted concern for a declining Palestinian Authority role in “guiding allocation of donors funds”, affirming the importance of seeking all options to expand policy instruments available to the Palestinian Authority, especially the trade, fiscal and monetary arrangements of the 1994 Paris Protocol (UNCTAD, 2006a, b).
4. The UNCTAD secretariat has also emphasized that reversing Palestinian economic de-development requires dealing with the Israeli policy of asymmetric containment as a constraint to development (UNCTAD, 2006b). An essential step in addressing development distortions wrought by occupation and containment is for international support to be non-distorting. Ad hoc and extemporaneous aid can end up sustaining distortional development and occupation-generated structural deformation. Aid policies are therefore needed to address the different sources of Palestinian economic vulnerability and to break the isolation imposed on the occupied Palestinian territories. Comprehensive donor engagement should strive for unimpeded Palestinian trade flows to the outside world through alternative trading routes such as Egypt and Jordan. This report elaborates on the effectiveness of these alternatives.
5. Lifting the Palestinian people out of the recent wave of hardship by empowering officially-recognized national institutions is critical for realizing a region where two States – Israel and Palestine – live side by side within secure and recognized borders as envisioned by the relevant United Nations resolutions. The Palestinian Authority should, therefore, be supported to implement national economic policies that seek to address emerging needs generated by the crisis. Above all, reducing restrictions on Palestinian access to the rest of the world will be the sine qua non for economic stabilization and the cornerstone of an economic foundation for peace.
6. If this is to happen, Palestinian Authority trade policy – supported by appropriate macroeconomic and labour policies – will have to address manifold contorted imbalances imposed upon the Palestinian economy. Contextualizing the work of UNCTAD within this environment, this report briefs the Board on the rationale, scope and thrust of operational activities currently under way, as well as future orientations. It also attests to the continued interest and support from the donor community and UNCTAD members for the secretariat’s technical cooperation activities, while also highlighting policy recommendations in areas of UNCTAD technical assistance activities.
II. Prolonged economic deterioration A. Economic aggregates
7. Preliminary Palestinian Central Bureau of Statistics (PCBS) data suggest that per capita gross national income (GNI) declined 15 per cent in 2006 (table 1), while gross domestic product (GDP) is estimated to have declined by 6.6 per cent. Other estimates suggest that the decline could be even worse, by as much as three to four percentage points (World Bank, 2007a). Israeli security measures and mobility restrictions imposed on goods and people have squeezed the economy to a size smaller than a decade ago, with debilitating conditions, and have caused investment levels to plummet. Existing enterprises are facing precarious conditions, evidenced by enterprise closings and the expansion of the informal sector. In 2006, exports declined 3 per cent while imports rose 20 per cent. These changes reflect greater Palestinian isolation from regional and world markets, a widening trade deficit and increased vulnerability. The trade deficit has reached unprecedented proportions of 73 per cent of GDP – 30 per cent higher than its 30-year average (figures 1 and 3).
14. In this discouraging environment, private investors are unlikely to invest above current levels, which are already relatively high by historical trends (figure 3). The post-Oslo investment surge can be seen as exceptionally high investment levels reflecting an optimistic environment and high expectations of the peace process. However, this surge was followed by extraordinary Israeli restrictive measures and the destruction and losses of up to one third of the existing physical capital and productive capacity (UNCTAD, 2006b). It would be imprudent from a public policy perspective, therefore, to anticipate or rely on changes in private sector behaviour, given the current circumstances of occupation and closure policy.