The World Bank's new report, "Two Years of Intifada, Closures and Palestinian Economic Crisis", surveys the economic and social damage caused by the current conflict and proposes measures to help stabilize the ailing Palestinian economy. A first draft was presented in February 2003 to the recent meeting in London of the Ad Hoc Liaison Committee which is comprised of representatives from Canada, the European Union, Israel, Norway, the Palestinian Authority, Russia, Saudi Arabia and the United States.
All Palestinian economic indicators continued their dramatic decline through the second year of the intifada. Gross national income per capita has fallen to nearly half of what it was two years ago. More than 50 percent of the work force is unemployed. Physical damage resulting from the conflict amounted to US$728 million by the end of August 2002. Between June 2000 and June 2002, Palestinian exports declined by almost a half, and imports by a third. Investment shrunk from an estimated US$1.5 billion in 1999 to a mere US$140 million last year. Overall national income losses in just over two years have reached US$5.4 billion ― the equivalent of one full year of national income prior to the intifada.
The Palestinian Authority's (PA) financial situation remains precarious. As a result of rising unemployment, reduced demand and the Government of Israel's withholding of taxes collected on the PA's behalf, monthly revenues dropped from US$91 million in late 2000 to US$19 million today. A collapse of the PA has been avoided by donor budget support, which totals US$1.1 billion over the last two years. Seventy-five percent of this has come from Arab countries. The recent resumption of revenue transfer by the Government of Israel is a positive development.
With unemployment rising and incomes collapsing, over half a million Palestinians in this formerly middle-income economy are now fully dependent on food aid. Per capita food consumption has declined by 30 percent in the past two years, and the incidence of severe malnutrition recently reported in Gaza by Johns Hopkins University is equivalent to levels found in some of the poorer sub-Saharan countries.
The proximate cause of Palestinian economic crisis is closure ― the imposition by the Government of Israel (GOI) of restrictions on the movement of Palestinian people and goods across borders and within the West Bank and Gaza. Closure is viewed by GOI as regrettable but necessary in order to protect Israeli citizens from violent attacks.
"Two Years of Intifada, Closures and Palestinian Economic Crisis" identifies three main reasons why the battered economy has not collapsed. The most important is the cohesion and resilience of Palestinian society. Lending and sharing are widespread and families for the most part remain functional, despite economic hardship and severe disruptions to daily life. Another critical factor has been the continued delivery of basic services by the PA. Third, donor support has been essential ― particularly budget support to the PA, which employs one-third of those still working and pays half of all wages earned in the West Bank and Gaza. Donor disbursements as a whole doubled from pre-intifada levels to US$929 million in 2001, and increased again in 2002 to just over US$1 billion.
The report warns that confrontation and closures will continue to throttle the Palestinian economy, with each passing month making ultimate recovery more difficult.
"Continued high levels of donor assistance are vital, but they cannot prevent further economic decline. Under closure, every additional billion in foreign aid will only pull down the poverty rate by about 6 percentage points. This is not a crisis that can be resolved with money alone," says Nigel Roberts, World Bank Country Director for West Bank and Gaza.
"An agreed framework for political progress remains indispensable to reestablish the conditions for the resumption of economic and social development in both Israel and the Palestinian territories," adds Roberts. "This poses many challenges to the three main groups: the Palestinian Authority, the donors, and the Government of Israel."
The report underlines the need for the Palestinian Authority to develop a National Emergency Plan to cope with further economic hardships in 2002, particularly in light of the possibility of regional war. The PA is commended for its early successes in reforming Palestinian governance but urged to go further. The report also points out that there is no way back from reform, and that the legitimacy of the PA is now tied to the successful delivery of the reform program.
The report also calls on donors to disburse a minimum of US$1.1 billion in 2003, and to give top priority to budget support and humanitarian/welfare assistance. Comparing different assistance instruments, the report finds that budget support is more efficient on welfare grounds than food aid or employment schemes, and for this reason expresses great concern at recent signs that Arab and European budget support is less than secure for 2003. Donors are also urged not to abandon their medium-term development programs, and to continue their commitment to the creation of the institutions and infrastructure of a future state.
The report reflects donor concerns at the need for GOI to do more to facilitate the work of humanitarian agencies, and to permit the free movement of Palestinian officials vital to the reform process. It also underlines that closure remains by far the most significant factor affecting the Palestinian economy, and the Government of Israel is urged to ease closure in ways compatible with its security requirements. In this regard, the Bank welcomes GOI's decision to resume the transfer of PA tax revenues and to issue more permits for Palestinians to work in Israel as positive steps.
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Two Years of Intifada, Closures and Palestinian Economic Crisis
This is a summary of a report which is currently under review by the Palestinian Authority, the Government of Israel and the donors, and will be published in mid-March 2003.
Palestinian Economic Crisis
Continued Sharp Deterioration
The second year of the intifada witnessed a further steep decline in all Palestinian economic indicators. Gross National Income (GNI) in 2002 mounted to 40 percent less than in 2000. With a 9 percent growth in the population of the West Bank and Gaza over the past two years, real per capita incomes are now only half of their September 2000 level. Unemployment stands at 53 percent of the workforce2.
Physical damage resulting from the conflict jumped from US$305 million at the end of 2001 to US$728 million by the end of August 2002. Between June 2000 and June 2002, Palestinian exports declined by 45 percent in value, and imports contracted by a third.
Overall GNI losses reached US$5.4 billion after 27 months of the intifada. Given that GNI amounted to US$5.4 billion in 1999, the opportunity cost of the crisis is now equivalent to one full year of Palestinian wealth creation.
The Palestinian Authority (PA)'s fiscal position remains precarious. As a result of rising unemployment, reduced demand, and the withholding by the Government of Israel (GOI) of taxes collected on the PA's behalf, monthly revenues fell from some US$91 million in late 2000 to just US$19 million by mid-2002. A collapse of the PA has been averted by emergency budget support from donor countries, which averaged US$40 million per month through 2002 -- a half of total PA budget outlays over the period3. In this context, the recent decision by GOI to resume the monthly transfer of the PA revenues is a highly positive step.
The domestic private sector has absorbed much of the shock to the economy. Well over 50 percent of the pre-intifada private workforce has been laid off. Private agricultural and commercial assets have suffered over a half of all physical damage. Bank credit to the private sector is drying up, while the PA currently owes private suppliers about US$370 million in unpaid bills. In addition, direct donor assistance to private firms has been negligible, despite a consensus that the private sector must drive any economic recovery. Real private GDP (measured at factor costs) declined by some 30 percent between 1999 and mid-2002.
The proximate cause of Palestinian economic crisis is closure -- GOI's imposition of restrictions on the movement of Palestinian goods and people across borders and within the West Bank and Gaza. GOI has regretted the impact of these measures, which they view as necessary to protect their citizens against violent attacks. The restrictions take two major forms: internal restrictions reinforced by curfews, and external closure of the border between Israel and the Palestinian territories, including limitations on the entry of Palestinian workers.
In March/April 2002, following an escalation of violence, IDF operations transformed many West Bank cities, towns and villages into restricted military zones, with residents under sustained curfew for days at a time. The movement of goods inside the West Bank has been seriously interrupted by a new "back-to-back" system, which requires all non-humanitarian goods to be off- loaded from incoming trucks and re- loaded onto local trucks at eight checkpoints near major West Bank cities. In practice, these restrictions are applied more rigorously to manufacturers and traders attempting to move goods out of Palestinian cities than to those bringing goods in from Israel.
In September 2000, an estimated 128,000 Palestinians worked in Israel and the Israeli settlements. With the outbreak of the intifada, GOI at first cut back heavily on the issuance of reduced work permits, but in recent months has begun to provide considerable numbers once again. Some 32,000 were being issued by the end of 2002, though only about a half of these were being used -- internal closures make it hard for many workers to move though the West Bank and Gaza to the designated workplace.
Averting Economic Collapse
A year ago, many observers feared that the Palestinian economy was on the brink of collapse. Although battered, the economy still functions.
One key reason is that the PA still operates. Thanks in large measure to donor budget support, 125,000 people receive a regular monthly salary and provide essential services to the population. Today the PA employs one third of those still working, and pays a half of all wages earned in the West Bank and Gaza. These wages have helped to support the livelihoods of the other two-thirds still employed, and have made the difference between the halting survival of the domestic private sector and its virtual disappearance.
Another reason is that high levels of donor assistance continued. In 2001, donor disbursements doubled from pre-intifada levels to US$929 million, and in 2002 rose again to US$1,051 million.
Third, Palestinian society has displayed great cohesion and resilience. Despite violence, economic hardship and the daily frustrations of living under curfew and closure, lending and sharing are widespread and families for the most part remain functional. Even with a dependency ratio4 of over 18 in Gaza and a dearth of formal safety nets, outright destitution is still limited -- those who have income generally share it with those who do not. The West Bank and Gaza has absorbed levels of unemployment that wo uld have torn the social fabric in many other societies.
Even though the rate of economic decline is slowing down, it would be a mistake to think that a stable equilibrium has been reached. The combination of political insecurity and closure continues to choke the economy, and each passing month makes ultimate recovery more difficult. Industrial and human capital continue to erode, impairing Palestinian longer-term competitive prospects -- total investment has contracted from about US$1.5 billion in 1999 to some US$140 million in 2002, and declining health and educational standards are eroding the skills base of Palestinian youth.
1 Gross Domestic Product plus remittances from abroad.
2 If those no longer seeking work are included. Under the more restrictive definition of unemployment, the current rate is estimated at 42 percent.
3 A total of approximately US$1.1 billion by the end of 2002, of which US$840 million came from Arab League countries and US$230 million from the EU.
4 The number of those dependent on each employed person.
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