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Source: United Nations Special Coordinator in the Occupied Territories (UNSCO)
20 October 1997
Quarterly Report on Economic and Social Conditions in the West Bank and Gaza Strip, Summer 1997

The Office of the United Nations Special Coordinator in the Occupied Territories' Summer 1997 Quarterly Report on Economic and Social Conditions in the West Bank and Gaza Strip has been completed. The report presents updated data and information from Palestinian, Israeli and international sources on macroeconomic, labour market and household living level conditions during the first half of 1997. The report also examines the economic effects of the August-September closures imposed on the West Bank and Gaza Strip. The main findings of the report, which is dated 4 October 1997, are presented below.

WBGS Macroeconomic Performance: First-Half 1997

The comprehensive and internal closures imposed on the West Bank and Gaza Strip (WBGS) in August and September have undermined the significant economic recovery witnessed over the preceding year. In late 1996, based on improved second-half 1996 economic performance, the Palestinian Ministry of Finance (MoF) and the International Monetary Fund (IMF) projected 1997 real GDP and real GNP growth rates of about 5.5 and 8 per cent respectively based on certain assumptions: 1) WBGS labour flows to Israel of 35,000 workers on monthly basis; 2) expansion in exports of 14 per cent with an 8 per cent increase in imports; 3) significant public sector investment growth under the Palestinian Public Investment Programme (PPIP), with the assistance of donors, the United Nations, the World Bank and the IMF; 4) no severe comprehensive closures.

During the first six months of 1997, average monthly WBGS labour flows to Israeli-controlled areas were an estimated 37,100, somewhat higher than the MoF/IMF assumptions and two-thirds higher than monthly average in 1996. The volume of merchandise flows leaving and entering the WBGS through monitored commercial crossings, based on truckload movements, rose by about one-third during first-half 1997 relative to 1996. Specifically, truckload exports rose an estimated 37.3 per cent while truckload imports grew by about 32.4 per cent. These estimates suggest an expansion in trade flows beyond the MoF/IMF projections.

Regarding the PPIP, donors pledged about US$ 881 million in assistance for 1997 at the November 1996 Consultative Group meeting. By mid-1997 about US$ 483.3 million had been committed. Disbursements at mid-year were only about US$ 116.1 million. The amount of funds disbursed during the first half of 1997 for public investment has been about 50 per cent lower on an annualized basis as compared to 1996.

As of end-June 1997, comprehensive and internal closures had disrupted about 14 per cent of potential annual working days as they relate to labour and merchandise trade flows between the WBGS and Israel. On an annualized basis, this was under half the proportion of lost working and trading days as compared to 1996. Despite these closures, labour and commodity flows were significantly higher during first-half 1997 as compared to 1996 averages.

Thus the overall macroeconomic picture during first-half 1997 appeared better than predicted by the MoF/IMF. This was confirmed by modest improvements in the WBGS labour market in comparison with 1996. There was a small increase in the number of employed persons, a reduction in the number of underemployed and a stabilization in the number of unemployed in the first half of the year. Until the August-September closures, the one area of concern regarding growth projections was the pace of donor disbursements for the PPIP.

WBGS Labour Market Conditions

The fifth Palestinian Central Bureau of Statistics (PCBS) labour force survey indicates the labour force participation rate in the WBGS declined from a 1996 average of 42.3 per cent to 40.9 during the first-quarter 1997. In absolute terms, the labour force declined from a 1996 average of 528,319 to 525,898 during the first-quarter 1997, despite the growth in the working-age population. This may reflect a discouraged worker phenomenon--the unemployed who have ceased looking for work--but also the sharp seasonal decline in the number of unpaid family members in the agricultural labour force.

The PCBS labour force surveys indicate that the full-employment rate rose from a 1996 average of 64.1 per cent to 70.3 per cent during first-quarter 1997. The total number of fully-employed persons rose by more than 9 per cent from about 339,037 to 369,814 persons, reflecting improvements in full-time job opportunities. The underemployment rate fell from about 12 to 9.1 per cent reducing the number of underemployed persons from an average of 63,576 to 48,000. The average unemployment rate fell from about 24 per cent in 1996 to about 20.5 per cent during first-quarter 1997, with a reduction in the number of unemployed from an average of 126,000 to an average of 108,000. When discouraged workers and the severely unemployed are factored into the calculation, PCBS estimates the actual unemployment rate in the WBGS during first-quarter 1997 at 49.1 per cent of the labour force--about 258,000 persons.

Most job creation during 1996-1997 has been dominated by employment in Israel and in Palestinian Authority agencies, with the WBGS private economy producing only about one-quarter of new jobs. On the other hand, most job destruction has occurred in the private economy with certain economic branches--like transportation--experiencing closure-related structural retrenchment.

Women's formal labour force participation declined more rapidly than that of men during first-quarter 1997. In addition, women's full-employment rate declined and their unemployment rate rose to a level higher than that for men. Part of this regression was due to the seasonal decline in agricultural employment, one-third of which was female. Moreover, economic branches which witnessed significant average employment increases (e.g. employment in Israel, PA employment, construction and commerce) hire relatively few women. Manufacturing and services, where women have relatively high participation rates, grew only modestly. More generally, the method of labour force surveys underestimates work in the informal economy where women constitute over half the persons engaged. If such work were included, women's labour force participation and full-employment rates would be higher and their unemployment rate would be lower than indicated in the formal labour force surveys.

There was continued downward pressure on wages in 1997. Employed Palestinians suffered real daily and monthly wage declines of 9.3 and 9.4 per cent respectively. Average real daily wages fell from US$ 17.23 to US$ 15.62 while average monthly wages fell from US$ 377.11 to US$ 341.63. Real monthly wage levels in the West Bank fell more rapidly than in Gaza. Real daily wages for WBGS workers employed in Israeli-controlled areas rose about 1.4 per cent to US$ 26.64 while the average real monthly wage rose 10.8 per cent to US$ 532.89. This reflected the increase in average monthly days worked, the result of higher and more regular labour flows to Israel in 1997 as compared to 1996. The higher average labour flows to Israeli-controlled areas thus mitigated, to some extent, the decline in average real wages for WBGS workers.

Despite the general improvement in employment conditions, as shown by successive PCBS labour force surveys over an 18-month period, wages--nominal and real--have continued to decline. Real wages in early 1997 were considerably lower than in late 1995, despite the fact that the full employment rate was higher, and the underemployment rate lower, in 1997, while unemployment rates were virtually identical in the two periods. Declining real wages appear to be the cumulative effective of repeated closure-related shocks to the labour market, which have created historically high average unemployment rates and falling nominal wage rates. At the same time consumer prices in the WBGS have risen persistently, although there have been reduced inflation rates since 1994. This suggests a fundamental change in the WBGS real wage structure where the lack of strong unions or a minimum wage policy, combined with a consumer price level still largely determined by high Israeli prices, have compressed the purchasing power of wage incomes.

While lower wage costs have improved the potential international competitiveness of WBGS products, lower real wages have resulted in reduced living levels. Pressure on living levels could be mitigated through increased importation of less expensive consumer goods from neighbouring Arab countries or the world market. This would soften the blow of the realignment in wages. Other policy options would be a significant increase in WBGS employment in Israel or in Arab countries to reduce the unemployment rate, and/or the enforcement of minimum wage laws, to arrest the decline in nominal wages.

WBGS Household Living Levels

PCBS data indicate that real monthly household expenditures declined from an average of US$ 801 during 1996 to US$ 754.5 during the first quarter-1997--a drop of 5.8 per cent. This can be explained, in part, by declines in household income, partly due to falling real wage incomes. Basic monthly expenditures (food, housing, medical care, education, etc.) fell an average of 8.3 per cent and accounted for three-quarters of monthly household purchases during first-quarter 1997 as compared to two-thirds of such purchases during 1996. This suggests adaptations in household consumption patterns in response to continuing income losses.

Looking Ahead

The extended comprehensive and internal closures imposed on 30 July 1997, following a double suicide bombing in Jerusalem, have negatively changed growth prospects. The official unemployment rate, which stood at about 20 per cent in June, rose immediately to over 30 per cent as a result and to over 60 per cent when including the severely underemployed and discouraged workers. By end-September, direct income losses to workers and export business owners were an estimated US$ 113.5 million. Second-round losses and those associated with the extended internal closure in the West Bank are expected to be as large, and perhaps larger, than the direct income effects. Thus, total losses from the recent closures could top US$ 227 million--nearly twice the amount disbursed by donor countries for assistance to the Palestinian people during the first half of 1997.

The collapse in labour and trade flows will also result in significant fiscal losses for the Palestinian Authority which derives over 60 per cent of its revenues from clearances associated with trade and labour flows. Slower economic activity in the WBGS in the third-quarter will further erode the PA's domestic tax base, while higher unemployment and reduced household income will probably raise fiscal expenditures in the form of social assistance to mitigate the economic distress caused by the closures. A significantly higher recurrent budget deficit can be expected for 1997.

The longer term effect of the August-September closures will be to further undermine investor confidence and exacerbate the decline in private investment experienced in the WBGS over the past few years. This will further weaken the ability of the WBGS to produce output and create employment and income in the future. Thus, while macroeconomic performance during the first half of 1997 was better than anticipated, the aftermath of the recent closures necessitates a less optimistic revision in economic growth and development prospects for 1997 and beyond.

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