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Source: World Bank
30 September 1993


DEVELOPING THE OCCUPIED TERRITORIES
AN INVESTMENT IN PEACE

Volume III: Private Sector Development

The World Bank
Washington, D.C.
September 1993


Copyright (c) 1993
The International Bank for Reconstruction and Development/THE WORLD BANK
1818 H Street, N.W.
Washington, D.C. 20433, U.S.A.

All rights reserved
Manufactured in the United States of America
First printing September 1993
Second printing October 1993

The six-volume series, Developing the Occupied Territories: An Investment in Peace, is published to communicate the results of the Bank's work to the development community with the least possible delay. The typescript of this paper therefore has not been prepared in accordance with the procedures appropriate to formal printed texts, and the World Bank accepts no responsibility for errors.
This paper has been prepared by staff of the World Bank and should not be attributed in any manner to its affiliated organizations, or to members of its Board of Executive Directors or the countries they represent. The World Bank does not guarantee the accuracy of the data included in this publication and accepts no responsibility whatsoever for any consequence of their use. Any maps that accompany the text have been prepared solely for the convenience of readers; the designations and presentation of material in them do not imply the expression of any opinion whatsoever on the part of the World Bank, its affiliates, or its Board or member countries concerning the legal status of any country, territory, city, or area or of the authorities thereof or concerning the delimitation of its boundaries or its national affiliation.
The material in this publication is copyrighted. Requests for permission to reproduce portions of it should be sent to the Office of the Publisher at the address shown in the copyright notice above. The World Bank encourages dissemination of its work and will normally give permission promptly and, when the reproduction is for noncommercial purposes, without asking a fee. Permission to copy portions for classroom use is granted through the Copyright Clearance Center, 27 Congress Street, Salem, Massachusetts 01970, U.S.A.
The complete backlist of publications from the World Bank is shown in the annual Index of Publications, which contains an alphabetical title list (with full ordering information) and indexes of subjects, authors, and countries and regions. The latest edition is available free of charge from the Distribution Unit, Office of the Publisher, The World Bank, 1818 H Street, N.W., Washington, D.C. 20433, U.S.A., or from Publications, The World Bank, 66, avenue d'IĆ©na, 75116 Paris, France.

ISBN 0-8213-2690-2
ISBN 0-8213-2694-5 (6-vol. set)

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Private Sector Development in the Occupied Territories

Preface - vi
Main Report - 1 Annex I Private Sector Activities - 27 Annex II Regulatory, Trade and Tax System - 51 Annex III The Financial Sector - 70 Annex IV The Governance System - 107 Appendices
Preface

1. At the request of the sponsors and organizers of the Middle East Peace Talks, the World Bank has been supporting the work of the Multilateral Working Group on Economic Development by providing analyses of the key economic issues and developmental challenges facing the Middle East region. At its second meeting in Paris in October 1992, the Working Group requested the Bank to expand its contribution to include, inter alia, an assessment of the development needs and prospects of the economies of the West Bank and the Gaza Strip (commonly referred to as the Occupied Territories). In response to this request, a Bank mission visited the Occupied Territories during the period January 21-February 24,1993. The mission comprised five teams focusing on the following areas: Private Sector Development, Agriculture, Human Resources, Infrastructure and Macroeconomics. Each team was in the field for about two weeks. The mission was led by Prem Garg who, together with Samir El-Khouri, stayed in the field throughout to provide continuity and guidance to the five teams. The staffing of the five teams was as follows:

Macroeconomics:
Michael Walton (Team Leader)
Samir El-Khouri (Fiscal Analyst)
Ishac Diwan (Macroeconomist)

Private Sector Development:
Albert Martinez (Team Leader)
Robert Mertz (Financial Sector Specialist)
Joseph Saba (Legal Specialist)
Dileep Hurry 1/ (Regulatory Environment and Tourism Specialist)

Agriculture:
Gert van Santen (Team Leader)
Ulrich Kuffner (Water Resource Engineer)
Merle Jensen 1/ (Horticulture Specialist)

Infrastructure:
Alastair McKechnie (Team Leader)
Ulrich Kuffner (Water Resource Engineer)
Lawrence Hannah (Urban Specialist)
Nail Cengiz Yucel (Transport Sector Specialist)
Ted Moore 1/ (Power Engineer)

Human Resources:
Fredrick Golladay (Team Leader)
Maureen Field 1/ (Education Specialist)
Radwan Ali Shaban 1/ (Human Resource Economist)

2. Mission members travelled extensively in the West Bank and Gaza, visiting municipalities, farms, businesses, industries, academic institutions, refugee camps and NGO-run facilities. Mission members also travelled in Israel, as needed, and paid several visits to Amman. The representatives of the key bilateral and multilateral donors in Jerusalem, Tel Aviv and Amman responsible for the Occupied Territories were kept briefed about the work of the mission. Close contact was also maintained with the field staff of UN agencies.

3. The Bank mission was received warmly by all sides, who took keen interest in the work of the mission and provided superb logistical and counterpart support for the field work. The main counterparts on the Israeli side were the Bank of Israel and the Civil Administration in charge of the Occupied Territories. On the Palestinian side, the main counterparts were the Technical Committees of the Palestinian Team to the Peace Conference, consisting mainly of Palestinians who are members of the bilateral or multilateral peace teams. The Ministry of Planning was the main contact on the Jordanian side. The Bank would like to thank all concerned parties, especially the Israeli, Jordanian and Palestinian hosts, for the excellent support and cooperation that the Bank mission received for this field work.

4. This report is based on the findings of the above mission. This report is in six volumes:

5. It is worth highlighting two limitations of this study right at the outset. First, a number of key issues bearing upon the future development of the OT (e.g., the allocation of land and water resources, the disposition of Israeli settlements in the OT, the future status of expatriate Palestinians, the territorial issues surrounding Jerusalem and, most importantly, the nature of the proposed "self-governing" arrangements for the OT) are the subject of ongoing bilateral negotiations between the Israelis and the Palestinians. The resolution of these issues is likely to be based primarily on political and security considerations. As the Bank mission to the OT was a technical mission, with neither the mandate nor the expertise to deal with political or security aspects, this study does not take any positions on issues that are on the agenda for bilateral negotiations. The focus instead is on policies, institutions and investments - where optimal choices are largely invariant to the eventual political arrangements to be agreed at the bilateral negotiations. Thus, for example, while analysing, where appropriate, the economic links between East Jerusalem and the West Bank and Gaza, the report avoids making any judgements regarding the future status of East Jerusalem.

6. Second, the study has had to cope with very serious data gaps and inconsistencies. Much of the data on the OT are, directly or indirectly, from official Israeli sources. There are, however, serious gaps in the OT data base. A population census has not been carried out in the OT for more than 25 years. As a result, most of the demographic and labor force data are based on extrapolations and on sample surveys, the reliability of which are undermined by problems of nonresponse, especially since the onset of the Intifada (popular uprising) in 1987. Data on East Jerusalem and on Israeli settlements in the OT, both of which are treated as part of Israel by the official Israeli sources, are mostly unavailable. Data available on trade between the OT and Israel and on the profitability and competitiveness of the agricultural, industrial and service enterprises are also very limited. Data on the OT from Palestinian and Israeli nonofficial sources are sparse and selective. Also, Palestinian data, when they exist, are often based on ad hoc surveys that do not lend themselves easily to cross-sectional or longitudinal comparisons. In many instances, data differ between sources, and, even when the same source is used, there are gaps and apparent inconsistencies. Given these data problems, the report uses estimates that appear most plausible in light of the mission's field observations. In cases where the data differences among various sources are particularly sharp (e.g., population, unemployment and social indicators), the report attempts, where possible, to examine the reasons for these differences and to indicate the implications of alternative estimates for the results of the analysis.

7. In view of the limitations on the mission mandate, the data difficulties and the time and resource constraints, this study can only be considered a beginning. The analysis in the study, especially for the longer term, is necessarily incomplete; as, and when, progress is made in the bilateral negotiations, the study will need to be updated and expanded to take account of the agreements reached. Also, notwithstanding the care exercised in locating and interpreting the data from various sources, the empirical underpinnings of this study leave something to be desired, and, therefore, the conclusions of the study should be treated only as indicative of broad trends and priorities. Further, in-depth studies and project feasibility work will be required before the findings of this report could be used to make operational decisions.

8. An earlier draft of this report was discussed with the Israeli, Jordanian and Palestinian authorities by a Bank mission to the region during July 12-26, 1993. Where appropriate, the report has been revised to incorporate the comments received by the mission during the July discussions.
_________________
1/ Bank consultant.


PRIVATE SECTOR DEVELOPMENT IN THE OCCUPIED TERRITORIES

Introduction

1. The private sector has been the dominant economic force in the Occupied Territories (OT), accounting for approximately 85 percent of GDP in 1991. In contrast to many other economies public sector institutions play a very small role in the economy -- the vast majority of productive assets are privately owned. Notwithstanding the significant role of the private sector, the economy is currently experiencing a deep crisis, with poor prospects in the short term and an unclear outlook for the longer term. While the crisis was brought about by a series of shocks starting from the early 1980s, the severity of the impact was in large part due to the past patterns of development and the existing economic structure which have three major characteristics: about a quarter of GNP was accounted for by export of labor to two areas, Israel and the Gulf countries; more than 70 percent of trade exports was to Israel, a significant portion of which was through subcontracting arrangements; and approximately 85 percent of gross fixed capital formation went into construction, primarily housing. The dependence on a few markets and on the export of labor brought about growth during the 1970s and part of the 1980s, but with demand from the Gulf countries for Palestinian labor drying up and the demand from Israel uncertain, future sustained economic growth requires a reorientation of the economy towards diversification of markets, transformation from labor to merchandise and service exports, and the development of new sources of growth. The ability of the economy to adjust would depend on the response of the private sector in increasing investment in directly productive activities.

2. This report describes the environment in which the private sector currently operates and examines the conditions under which the private sector would invest in directly productive activities. The report recognizes the unique situation in the OT, of which three characteristics are worth noting. One, security is of major concern to the Israeli authorities and this drives many of the actions described in this report. However, the major issue with regard to security in the context of private sector development is the transparency of the definition of security and the limits that circumscribe the actions that can be undertaken to maintain law and order. Two, geopolitical uncertainty is an arching constraint to private investment. In the OT, this is exacerbated and to a large extent driven by the popular lack of acceptance and credibility of the governance system. In turn, the restrictive effects of the regulatory system are magnified as entrepreneurs view the system as lacking effective mechanisms for recourse in case of grievances. Three, perceptions drive the investment decisions of the private sector, even if such perceptions are not intended by the policies instituted. This report focuses on the private sector perceptions to the existing policies and practices, and makes no judgement on the intentions behind the policies. As such, negative perceptions would result in a critical evaluation of policies. This is the case for any private sector development report especially in economies where the regulatory climate is wideranging.

3. Part I describes the private sector setting, focusing on the macroeconomic framework, the financial system and the physical infrastructure in the OT; Part II examines the economic activities that the private sector is engaged in, which include industry, agriculture, construction and housing, tourism, and services; Part III provides the prerequisites for private sector development; Part IV lists the recommended accompanying measures that would encourage private sector development; and Part V concludes with some prospects for the future. Some recommended institution building initiatives are included. Four annexes are attached to this report: (a) private sector activities; (b) the regulatory, trade and taxation system; (c) the financial sector; and (d) the governance system.

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