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30 September 1993
DEVELOPING THE OCCUPIED TERRITORIES
AN INVESTMENT IN PEACE
Volume III: Private Sector Development
The World Bank
Copyright (c) 1993
The International Bank for Reconstruction and Development/THE
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,
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.
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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'Iéna, 75116 Paris, France.
ISBN 0-8213-2694-5 (6-vol. set)
Private Sector Development in the Occupied Territories
I. Private Sector Setting - 2
II. Private Sector Activities - 8
III. Prerequisites for Private Sector Development - 15
IV. Other Measures to Support PSD - 16
V. Prospects for the Future - 23
VI. Schematic for Accelerating Private Sector Development - 25
Annex I Private Sector Activities
I. Industrial Sector - 27
II. Services Sector - 42
Annex II Regulatory, Trade and Tax System
I. Licensing Process - 52
II. Trade Regime - 55
III. Taxation System - 62
IV. Security Procedures - 64
V. Impact of the Regulatory, Trade and Taxation System - 65
Annex III The Financial Sector
I. Financial Sector Development Since 1967 - 71
II. Investment and Demand for Credit - 85
III. Recommended Policy and Institutional Changes - 91
Annex IV The Governance System
I. Applicable Law - 107
II. The Courts - 108
III. Administration - 111
IV. Economic Effects of Legal and Administrative System - 112
A. Conceptual Framework - A-1
B. Methodology of Mission Survey - B-1
C. DRC and ERP Analysis - C-1
D. References - D-1
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,
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:
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)
/ (Regulatory Environment and Tourism Specialist)
Gert van Santen (Team Leader)
Ulrich Kuffner (Water Resource Engineer)
/ (Horticulture Specialist)
Alastair McKechnie (Team Leader)
Ulrich Kuffner (Water Resource Engineer)
Lawrence Hannah (Urban Specialist)
Nail Cengiz Yucel (Transport Sector Specialist)
/ (Power Engineer)
Fredrick Golladay (Team Leader)
/ (Education Specialist)
Radwan Ali Shaban
/ (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:
provides a summary
of the key findings and recommendations of the study. After commenting selectively on the current socioeconomic situation in the OT and its evolution over time, it discusses prospects for sustainable development in the future and outlines the priority agenda of policies and programs needed to promote such development.
explores the strategic choices at the
level that will be faced by the OT in the future and the implications for economic relations between the OT and the rest of the region. The study looks at the current situation and its evolution over the past 25 years. The study then examines several policy choices for the future affecting the structure of development in the OT. Finally, it outlines some illustrative scenarios for the future, focussing on the consequences of current developments in the region.
reviews the performance of the
(including, in particular, the industry and tourism sectors) in the OT. The study assesses the environment in which the private sector operates and its future prospects and makes recommendations for accelerating private sector development in the future.
reviews the evolution and structure of the
sector in the OT; analyzes its current characteristics; assesses OT competitiveness in the immediate and longer term; outlines the main policy options and their implications; and provides a preliminary assessment of sectoral financial and technical assistance (TA) needs.
assesses the current situation in the
sectors (electricity, water supply and sanitation, transport, housing and solid waste services) in the OT; identifies the major issues confronting these sectors; and outlines priorities for TA and investment needs. As local authorities are major institutions in the delivery of public services in these sectors, the study also includes a review of their current situation and makes recommendations for improving the functioning of municipalities.
reviews the current status as regards
development; analyzes options for enhancing individual welfare and labor productivity in the OT; and outlines investment and TA priorities for strengthening existing programs and for laying the foundation for later reforms.
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
, 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
(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
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.
/ Bank consultant.
PRIVATE SECTOR DEVELOPMENT IN THE OCCUPIED TERRITORIES
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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