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Source: United Nations Special Coordinator in the Occupied Territories (UNSCO)
15 April 1998
UNSCO REPORT on
ECONOMIC and SOCIAL CONDITIONS in the
WEST BANK and GAZA STRIP


Spring 1998


UNITED NATIONS NATIONS UNIS

OFFICE OF THE SPECIAL COORDINATOR IN THE OCCUPIED TERRITORIES

Gaza, 15 April 1998


ACKNOWLEDGMENTS


In addition to the Government of Norway, whose generosity has made this report possible, UNSCO would like to extend its gratitude to several institutions for their assistance in providing data, information and support.

Numerous institutions of the Palestinian Authority have generously provided vital data, information and assistance in preparing this report. These include: the Palestinian Central Bureau of Statistics (PCBS), and particularly the PCBS President, the Economics Statistics Directorate, the Labour Statistics Unit and the Department of Living Standards; the Ministry of Labour, the Ministry of Economy and Trade, the Ministry of Finance, the Companies Registrar in the Ministry of Justice, the Palestinian Monetary Authority, the Ministry of Planning and International Cooperation, the National Security Service, Northern Area Command--Gaza and Border Security--Muntar and the Crossings Authority. Likewise, several agencies of the Government of Israel have kindly provided data and assistance. These include: the Economics Branch of the Coordinator of Government Activities in the Territories, Ministry of Defense; the Ministry of Finance; the Ministry of Foreign Affairs.

In addition, this report benefitted from the data, research and analysis of our colleagues at the World Bank and the International Monetary Fund. This report has also borrowed from the work of the Palestine Economic Policy Research Institute (MAS).

A number of Non-Governmental Organisations also provided data and assistance for this report. These include the Palestinian Development Fund, the Save the Children Foundation, American Near East Refugee Aid, the Arab Center for Agricultural Development and Oxfam-Quebec. Appreciation is also extended to two of our sister UN agencies for providing data and information used in this report--the United Nations Relief and Works Agency for Palestine Refugees (UNRWA) and the United Nations Conference on Trade and Development (UNCTAD).

Any shortcomings in the use of the data and information provided by these sources remain the sole responsibility of UNSCO.


__________________
Note: Due to time lags in the production and release of data from the various sources on which we rely, the name of this report series has been changed. Beginning with this issue, the title of the report will be the UNSCO Report on Economic and Social Conditions in the West Bank and Gaza Strip.


EXECUTIVE SUMMARY

The Office of the United Nations Special Coordinator in the Occupied Territories’ Spring 1998 Report on Economic and Social Conditions in the West Bank and Gaza Strip presents updated data and information from Palestinian, Israeli and international sources on conditions and trends in the macroeconomy, the labour market and in household living levels in 1997 and in relation to 1996. The report also provides an analysis of the economic effects of the March-April and August-September 1997 closures imposed on the West Bank and Gaza Strip and presents new information on the economic branch contributions to GDP, private investment activity and trends in consumer prices in the WBGS.

AGGREGATE TRENDS in the WBGS ECONOMY

Economic forecasts for the West Bank and Gaza Strip (WBGS) were reasonably optimistic at the beginning of 1997. Initial PA Ministry of Finance and IMF estimates were for real GDP and GNP growth of 5.5 and 8 per cent respectively, assuming average monthly labour flows to Israel of 35,000 workers; a 14 per cent increase in exports; an 8 per cent increase in imports; stagnation in private investment; significant expansion in public investment under the donor-assisted Palestinian Public Investment Programme; and no severe border closures.

Estimates of labour flows indicate there were an average of 38,000 WBGS workers employed in Israeli-controlled areas on a monthly basis in 1997--a 14.4 per cent increase over the 1996 average of 33,200. Trade flows, as indicated by commercial truck traffic through monitored crossings, rose marginally. As compared to 1996, there was a 2.2 per cent increase in average monthly truckload flows through monitored crossings. The number of monitored trucks entering the WBGS grew by 2.4 per cent, while the number exiting increased by only 1.2 per cent on a monthly basis.

Contrary to expectations, private investment, as measured by construction activity, business registrations and credit creation, also grew in 1997, suggesting a partial recovery after declines in 1996. There was notable growth in construction activity, the main type of private investment in the WBGS. The new licensed surface area rose 13 per cent while cement consumption, an indicator of construction project execution, increased by 9.8 per cent. Business investment trends were also positive in 1997. New company registrations increased by 14.7 per cent while credit extension by bank and non-bank sources rose substantially. The average value of outstanding bank loans to the private sector grew to US$ 545.8 million--a 58.8 per cent increase over 1996. The average term maturity of bank loans also increased significantly. Credit extended by UNRWA and NGOs, mainly to small and medium-sized businesses grew by 94 per cent to US$ 35. 5 million.

Public investment was lower than anticipated due in part to lower than expected donor disbursements. As compared to 1997 pledges of some US$ 881 million, commitments to the Palestinian Public Investment Programme were US$ 627.1 million and total disbursements were US$ 432.2 million for the year. Disbursements were 21.3 per cent below their 1996 level and 15 per cent below average annual disbursements for the 1994-1996 period, suggesting that public investment did not achieve anticipated levels in 1997.

While the general closure and separation policy persisted throughout the year, there were fewer comprehensive closure days imposed on the WBGS, but substantially more internal closure days imposed on the West Bank in 1997 relative to 1996. Comprehensive closures disrupted 20.5 per cent of potential work days in 1997, compared to 29 per cent in 1996. However, the number of internal closure days imposed on parts or all of the West Bank rose from 27 in 1996 to 40 in 1997--an increase of about 50 per cent. Direct income losses due to closures--estimated at about US$ 4 million per day thus totaled about US$ 228 million, equal to about half the value of donor disbursements for the year. The extent of the negative impact of these closures resulted in subsequent downward revisions by the PA Ministry of Finance and the IMF for real GDP and GNP growth rate estimates from 5.5 and 8 per cent to 1.2 and 3.4 per cent respectively.

While there were moderate overall improvements in aggregate economic conditions in comparison to 1996, in the context of regional economic performance, WBGS results over the last two years have been relatively meager. Non-oil producing countries in the Middle East and North Africa achieved average real GDP growth rates of 5.5 and 3.8 per cent in 1996 and 1997 respectively. This compares to WBGS real GDP growth estimates of -1.6 and 1.2 for the two years respectively. Relative improvement in 1997, therefore, must be seen in the context of the continuation of the closure policies which have produced declining incomes for the past several years. The inherent potential for growth of the WBGS economy--and therefore the opportunities forgone--must also be evaluated in light of relatively robust regional economic growth.

WBGS LABOUR MARKET CONDITIONS

The working-age population in 1997 grew an estimated 4.4 per cent to an average of 1,300,000 while the total labour force increased to an average of 552,600--a 4.6 per cent increase. The average labour force participation rate remained unchanged at 42.3 per cent. The total number of fully employed persons in 1997 increased by about 13.1 per cent to an average of 383,630, reflecting a general improvement in employment conditions. The full employment rate averaged 69.1 per cent in 1997 as compared to 64.1 per cent in 1996. There were corresponding declines in the average number and proportion of underemployed in the labour force. There were an average of 52,000 underemployed persons in 1997 as compared to 63,600 in 1996--a decline of over 18 per cent, while the underemployment rate declined to about 9.4 per cent from 12 per cent in 1996.

Generally improved labour market conditions resulted in an overall decline in the absolute number and the proportion of the labour force which was unemployed. Using the narrowest definition, there were an average of 116,000 unemployed persons in the WBGS in 1997--a decline of 8.1 per cent from 1996. Factoring “discouraged workers” into the calculation raises the average number of unemployed to 188,600 for 1997 relative to 194,900 in 1996--a 3.2 per cent decline. The overall average unemployment rate also declined from 24 per cent in 1996 to 21 per cent in 1997. Including discouraged workers, the average unemployment rates for 1996 and 1997 were 32.6 and 30.1 per cent respectively. The rates for West Bank in 1996 and 1997 were 29.3 and 27.5 per cent, while those for Gaza were 41.1 and 37.5 respectively.

There were an average of 33,115 new jobs created in 1997. Except for private services, there was employment growth in every main economic branch. Commerce and construction activities, as well as public sector employment grew by more than average and these three branches accounted for 91 per cent of all new jobs created in 1997. In the aggregate, the public sector accounted for one-quarter and the private sector (including employment in Israel) for about three-quarters of employment growth in 1997.

Women’s average labour force participation rate declined in 1997 relative to 1996 with the estimated average female labour force falling from 83,730 to 80,580. Women’s full employment rates and the total number of fully-employed women also declined in 1997. Both female and male underemployment rates fell substantially in 1997 but the men’s rate fell more rapidly. While men’s average unemployment rates fell from 23.5 to 21.1 per cent, women’s average unemployment rate increased from 20.6 to 21.4 per cent during the same period.

WBGS workers worked an average of 2.1 per cent more days per month in 1997 as compared to 1996 while the inflation-adjusted average daily wage fell 7.5 per cent to US$ 15.93. Real daily wages in Gaza fell 15.7 per cent, in the West Bank declined 9.6 per cent and for those working in Israel fell 4.4. The average real monthly wage for WBGS workers declined by an average of 5.8 per cent. Those employed in Israel had an .8 per cent increase due to an increase in the average number of days worked. Workers employed in the West Bank suffered a 9.3 per cent decline in their average monthly wage while workers in Gaza lost an average of 11 per cent in real monthly wages.


HOUSEHOLD EXPENDITURES and the LEVEL of LIVING

Average real monthly expenditures for seven-person households in WBGS in 1997 averaged US$ 750 as compared to US$ 828 in 1996--a decline of 9.4 per cent. Comparing averages for the two years, there was a 7 per cent decline in basic expenditures (housing, food, clothing, medical care, transportation, education and taxes) and a more than 15 per cent fall in secondary expenditures (household operations, furniture, personal care, recreation and other cash expenditures).

The completion of two years of monthly household expenditure surveys on the part of the PCBS provides insight into medium-term household adaptations to reductions in average incomes. In the course of 1996, WBGS households responded to economic distress by greater reductions in basic expenditures (7.1 per cent) relative to secondary expenditures (4.8 per cent). Households initially reduced purchases of items occupying the largest share of their consumption expenditures--such as food--by greater proportions. The persistence of declining incomes, however, has altered this behaviour. In 1997, as average expenditures declined by 9.4 per cent, there was a 15.2 per cent average decline in monthly secondary expenditures and a 7.1 per cent decline in basic expenditures. Thus, household purchases of secondary items fell more rapidly--a reversal of the pattern witnessed in 1996. This indicates that in the longer run, WBGS households may have adjusted to harder times by forgoing non-essential goods and services in proportionally greater amounts.

The rate of inflation on consumer prices in the WBGS was 6.1 per cent in 1997. The consumer price index rose by 4.8 per cent in West Bank, 6.9 per cent in the Gaza Strip and 7 per cent in East Jerusalem. There were substantial variations in inflation rates as between the West Bank and the Gaza Strip. Except for beverages, tobacco and medical care services, the inflation rates for all major items were higher in Gaza relative to the West Bank. The largest difference in regional inflation rates was for personal care and restaurants meals, where prices increased by 10.8 per cent in Gaza with virtually no change in the West Bank. More troubling was the fact that the prices of food rose more rapidly in Gaza (3.3 per cent) than in the West Bank (1.4 per cent). Gazan families, being poorer on average, spend a higher share of their income on food. While absolute prices are lower in Gaza, the evidence suggests that Gazan families bore a disproportionate share of food price inflation in 1997.

LOOKING AHEAD to 1998

Daily WBGS labour flows to Israeli-controlled areas during first-quarter 1998 averaged 44,500 workers, about the same as first-quarter 1997, but 18 per cent more than the daily average for 1997 as a whole. Furthermore, the commencement of the Israeli policy to allow some WBGS workers to remain in Israel during the work week and during closures may contribute to more stable flows of labour in the future. Commercial truck movements during first-quarter 1998, as compared to the same period in 1997, were higher with a 12 per cent increase in exported truckloads on a monthly basis and a 21 per cent increase in the number of imported ones. There were also no comprehensive closures imposed during first-quarter 1998. Such trends, which are indicative of Israel-WBGS economic relations, suggest a good economic start for the year. Actual outcomes, however, will depend to a large extent on private investment and employment trends generally, as well as progress in the public sector’s ability to create the infrastructural and institutional enabling environment for longer term economic growth.
TABLE of CONTENTS
Page
Executive Summary
1
I. AGGREGATE TRENDS in WEST BANK and GAZA STRIP ECONOMY
1.
An Overview of 1997 in the WBGS
1
A.
WBGS Labour Flows to Israeli-Controlled Areas
2
B.
WBGS Trade Flows
4
C.
WBGS Private Investment Trends
6
D.
Palestinian Public Investment Programme and Donor Disbursements
9
E.
General, Comprehensive and Internal Closures
10
F.
Summarising Macroeconomic Trends in 1997
11
2.
A Note on the Branch Distribution of Private GDP, 1994-1996
12
II. POPULATION, LABOUR FORCE and WAGES
1.
Population and Labour Force Growth
15
2.
Employment, Underemployment and Unemployment
15
3.
Underlying Labour Market Dynamics
17
A.
Social Composition of Employment
17
B.
Economic Branch Distribution of Employment
19
C.
Women in the Labour Market
23
D.
Working Time and Real Wage Incomes
26
III. HOUSEHOLD EXPENDITURES and the LEVEL of LIVING
1.
Household Consumption Expenditures
29
2.
Household Consumption Expenditures: A Two-Year Retrospective
31
3.
Household Wage Incomes and the Level of Living
33
4.
Consumer Price Inflation
34
5.
A Note on Relative Price Dynamics: A Two-Year Overview
36
IV. LOOKING AHEAD to 1998
38
LIST of TABLES

Table 1: Permits Issued to WBGS Workers for All Israeli-Controlled Areas and Estimates of Average Monthly Labour Flows, 1997

Table 2: Estimates of Average Monthly and Daily WBGS Truckload Exports and Imports through Monitored Commercial Crossings, 1997

Table 3: Total New Licensed Construction Areas in the WBGS by Project Type, QI-QIII 1996 and QI-QIII 1997

Table 4: Contributions and Relative Changes in Contributions of Economic Branches in Private Gross Domestic Product in the WBGS, 1994-1996

Table 5: Estimates of the Working-Age Population, Labour Force, Employment,
Underemployment and Unemployment for the WBGS, Average 1996, QI-QIII 1997, Average 1997

Table 6: Social Composition of the Employed WBGS Labour Force, Average 1996, QI-QIII 1997, Average 1997

Table 7: Estimates of Employed Labour Force Branch Distribution in the WBGS Including Employment in Israel, Average 1996, QI-QIII 1997 and Average 1997

Table 8: Comparing Male and Female Labour Force Profiles for the Working-Age Population in the WBGS, Average 1996, QI-QIII 1997 and Average 1997

Table 9: Estimates of Average Monthly Days and Hours Worked and Average Real Daily and Monthly Wages for Employed WBGS Workers By Place of Work, Average 1996, QI-QIII 1997 and Average 1997

Table 10: Estimates of Average Real Monthly Expenditures on Basic and Secondary Commodities and Services in Seven-Persons Households in WBGS, QI-QIV 1997

Table 11: Estimates of Average Real Monthly Expenditures on Basic and Secondary Commodities and Services in Seven-Persons Households in WBGS, 1996 and 1997 Averages

Table 12: Estimates of Basic and Total Households Expenditures in Seven-Persons Households in the WBGS and the Average Real Monthly Wage as a Proportion of Expenditures, 1996 and 1997 Averages

Table 13: Inflation Rates for Major Commodity Groups in the Palestinian Territories (including East Jerusalem), 1997

Table 14: Inflation Rates and Relative Price Changes for Major Commodity and Service Groups in the WBGS, 1996-1997

I. AGGREGATE TRENDS in the WBGS ECONOMY

1. An Overview of 1997 in the WBGS

Economic forecasts for the West Bank and Gaza Strip (WBGS) for 1997 were reasonably optimistic at the beginning of the year, based on significant improvements in the latter half of 1996 with respect to labour and commodity flows between the WBGS and Israel, as well as progress in donor-assisted infrastructural development and capacity-building on the part of the Palestinian Authority (PA).1 Initial PA Ministry of Finance and IMF estimates were for real Gross Domestic Product (GDP) and Gross National Product (GNP) growth of 5.5 per and 8 per cent respectively. These projections assumed that WBGS labour flows to Israel would average 35,000 workers on monthly basis; that the value of WBGS exports and imports would expand by 14 per cent and 8 per cent respectively over 1996 levels; that private investment would continue to stagnate while public investment would expand under the donor-assisted Palestinian Public Investment Programme; and that comprehensive closures would not be as severe as those imposed in 1996.

Estimates of labour flows surpassed expectations, despite the comprehensive and internal closures imposed during March-April and August-September. However, trade flows, as measured by truck movements through monitored crossings grew only slightly with import growth exceeding export growth. Contrary to expectations, private investment, as measured by construction activity, business registrations and credit extended through banks and non-governmental organisations, also grew. This suggests a partial recovery in investment activity after declines in 1996. Public investment, on the other hand, was lower than anticipated due in part to lower than expected donor disbursements.

Comprehensive closures were less disruptive of economic activity in 1997 as compared to 1996 and less frequent. Internal closures imposed on the West Bank, however, were the most severe to date. The extent of the negative impact of these closures was reflected in the subsequent downward revisions of real GDP and GNP growth rate estimates for 1997 from 5.5 and 8 per cent to 1.2 and 3.4 per cent respectively.2

There was improvement in the labour market in 1997 with growth in employment and marginal reductions in levels of unemployment. Real wages, on the other hand, continued to deteriorate under the impact of a growing labour force, historically high rates of unemployment, stagnant nominal wages and consumer price inflation averaging 6.1 per cent for the year. Inflation and falling real wages also contributed to further compression in real value of average household expenditure levels, indicative of continuing declines in WBGS living levels.

A. WBGS Labour Flows to Israeli-Controlled Areas in 1997

There were about 38,000 WBGS workers employed in Israel, Israeli settlements and Israeli industrial zones on an average work day in 1997, a 14.4 per cent increase over 1996 when the daily average was about 33,200. Labour flows reached their peak during June and July. However, week-to-week labour flows in 1997 remained subject to considerable fluctuations due to two significant periods of closure in March-April and August-September, when flows fell below half the monthly average for the year. Furthermore, as indicated in Table 1, there was a continuing discrepancy between the number of permits issued and the actual estimated labour flows. On average, labour flows were estimated to be 24 per cent less than the number of permits issued on a monthly basis in 1997, as compared to 37 per cent less in 1996.

Table 1
Permits Issued to WBGS Workers for All Israeli-Controlled Areas and Estimates of Average Monthly Labour Flows, 1997 3
Total Permits Issued for Work in Israel
Total Permits Issued to Work in Settlements and Industrial Zones
Total Work Permits Issued for All Israeli Controlled Areas
Estimated Labour Flows to All Israeli-Controlled Areas
Month
(WBGS)
(WBGS)
(WBGS)
(WBGS)
January
44,807
10,388
55,195
47,680
February
45,014
10,743
55,757
48,092
March
46,902
9,798
56,700
36,130
April
35,657
9,874
45,531
18,386
May
46,053
9,654
55,707
43,520
June
50,156
9,764
59,920
51,672
July
50,330
10,321
60,651
51,014
August
0
10,321
10,321
9,481
September
32,830
10,321
43,151
15,130
October
40,579
10,321
50,900
41,067
November
44,353
10,321
54,674
46,296
December
46,713
10,321
57,034
47,621
Monthly Averages
40,283
10,179
50,462
38,007

This may be due to several factors. First, while permits are issued for two-month periods, issued permits are not honoured by Israeli border officials during periods of comprehensive and/or internal closures. Thus, at any given time, there may be tens of thousands of valid permits which effectively cannot be used. There are also cases of issued permits not being honoured, even during periods of no comprehensive closures.4 Secondly, an issued permit does not insure the existence of a job in Israel, where the labour demand may have contracted somewhat in 1997, as compared to 1996 when the discrepancy between permits issued and actual labour flows was due mainly to closures. Thirdly, some number of work permits issued by the Israeli authorities to Palestinian labour offices may not have been distributed in a timely manner to eligible workers. Finally, there are some permitted workers who do not attend their jobs due to illness or other reasons.


In addition, while actual day-to-day flows are difficult to measure, non-permitted labour flows to Israel may have been as high as 35,000 on days when comprehensive or internal closures were not in effect during 1997.5 Such labour flows--nearly all from the West Bank, where there are numerous unmonitored entry points to Israel--are estimated from indirect evidence. Non-permitted flows are significant for at least two reasons. First, they reduce unemployment rates and raise the incomes of the West Bank work force. Second, they suggest that the GNP of the West Bank (defined as GDP plus net income earned by residents from abroad) may have grown more than that of the Gaza Strip.

B. WBGS Trade Flows in 1997

Trade flows were only marginally higher in 1997 than in 1996. There was a 2.2 per cent increase in average monthly flows of commercial truckloads through monitored crossings.6 The number of monitored trucks entering the WBGS grew by 2.4 per cent, while the number exiting increased by 1.2 per cent on a monthly basis in comparison to 1996.

As indicated in Table 2, aggregate truck movements reached their peak in May and June and were noticeably reduced during April and August, periods of comprehensive closures, when truck movements fell to about two-thirds of their monthly average for the year. Like labour flows, aggregate trade flows rebounded quickly in May after comprehensive closures in April. But, unlike labour flows which remained depressed, aggregate trade flows also rebounded quickly in September, despite the continued formal imposition of comprehensive closure. The relatively rapid rebound of trade flows through monitored crossings suggests the intention of Israeli and PA authorities to facilitate such flows during comprehensive closures and/or improved efficiency of security and customs procedures at the crossings.

As noted, WBGS truckload exports through the monitored crossings grew more slowly than truckload imports. Furthermore, in-bound commodity flows were more severely reduced than out-bound flows during the April closures while out-bound movements were reduced more drastically during the closures in August-September. Outflows during the last quarter of the year also took longer to rebound to pre-closure levels, although this may in part be due to seasonal fluctuations of such trade flows.
Table 2
Estimates of Average Monthly and Daily WBGS Truckload
Exports and Imports through Monitored Commercial Crossings, 1997 7
Month
Monthly Exported Truckloads
Monthly Imported Truckloads
Daily Exported Truckloads
Daily Imported Truckloads
January
3,371
12,215
138
499
February
3,011
9,290
143
442
March
3,654
10,207
152
425
April
3,599
6,373
171
303
May
4,154
15,024
185
668
June
2,791
16,624
121
723
July
2,103
14,029
84
561
August
907
8,758
39
373
September
1,504
14,663
63
611
October
1,313
12,835
63
611
November
2,884
15,113
125
657
December
3,941
16,304
158
652
Averages
2,769
12,620
120
544


C. WBGS Private Investment Trends in 1997

When seeking to measure changes in private investment in the WBGS, it is important to distinguish residential construction, i.e. the construction of private dwellings, from business investment, which entails the expansion of the productive capacity of individual enterprises, including the addition of physical structures. Such investment entails the building of new work space and/or net additions to the stock of machinery and equipment used in producing goods and services. Residential construction has been and remains the main type of private investment in the WBGS.8

1. Trends in Private Construction Activity

Changes in the construction component of private investment can be measured using at least two variables: 1) the total area licensed by Palestinian local authorities for private new residential and non-residential (mainly business) construction projects in 1997 as compared to 1996; 2) the total consumption of cement, the key input in construction projects, in 1997 as compared to 1996. Changes in the area licensed for construction are indicative of private household and business plans to build new structures or to add to existing ones.9 Changes in cement consumption reflect trends in the implementation of construction projects.

The evidence in Table 3 suggests that, in the aggregate, there was a 13 per cent increase in the total new surface area licenced for construction projects in the WBGS during the first three quarters of 1997 in comparison to the same period in 1996.10 The increase was due solely to newly planned residential construction projects since the licensed non-residential area declined by about 3 per cent. This evidence suggests an increased intention to build new residential structures and a decline in such intentions among businesses.

Table 3
Total New Licensed Construction Areas in the WBGS by Project Type,
QI-QIII 1996 and QI-QIII 1997 11
Total Area in Square Meters
Total Area in Square Meters
Percent Change
Type of Project
(1996)
(1997)
(1996-1997)
Residential
1,276,851
1,477,851
15.74%
Non-Residential
217,906
211,395
-2.99%
Total
1,494,757
1,689,246
13.01%

The data in Table 3 can be compared to estimates of cement consumption in the WBGS for 1996 and 1997. Evidence suggests that total cement consumption, while unchanged in the Gaza Strip at about 500,000 tonnes, rose from 902,335 to 1,039,970 tonnes in the West Bank between 1996 and 1997.12 This indicates an increase in cement consumption of 9.8 per cent in the WBGS. While total cement consumption includes public sector and informal private construction activity, the lower public investment figures for 1997, in comparison to 1996 (see below), suggest that the increase in cement use was due mainly to private construction activities.

The growth in new licensed construction area and cement consumption suggests that private investment, as measured by construction activity, may have increased by about 10 per cent in 1997 relative to 1996. Furthermore, the decline in licensed construction area by businesses suggests that residential construction accounted for the bulk of private construction activity, a continuation of the pattern witnessed in the WBGS over the last 30 years.

2. Trends in Business Investment and Credit Creation

Changes in business investment activity can be measured using at least two variables: 1) the number of new companies registered during 1997 as compared to 1996; 2) credit extended to the private sector through the formal banking system and Non-Governmental Organizations (NGOs) engaged in financing activities in 1997 relative to 1996. New company registrations indicate business expectations about the near future. Like the issuance of construction permits, new company registrations indicate an intention to invest.13 Credit extension to the private sector is indicative of new business formation, expansion and/or growth in levels of operating capital, all of which suggest growth in business investment activity.

There were a total of 1,195 new companies registered in the WBGS in 1997--an increase of 14.7 per cent as compared to 1996. This suggests a partial recovery in business confidence levels, given the 45 per cent decline in new company registrations in 1996 and the peak of 1,614 new companies registered in 1994.14 While only a small fraction of the total, the registration of new foreign-based companies rose to 16 in 1997, a 60 per cent increase over 1996. Such registrations declined 75 per cent in 1996 as compared to 1995.

Complementing growth in company registrations, credit extension by the formal banking system also increased in 1997. Three new banks and 17 new bank branches were established in the WBGS in 1997 resulting in an end-year total of 22 banks and 86 bank branches. The value of outstanding bank loans to the private sector averaged US$ 545.8 million in 1997--an increase of 58.8 per cent above the 1996 average. The branch distribution of bank lending indicates that 42.8 per cent of outstanding loans at end-1997 were for commercial and service activities; 12.9 per cent for manufacturing; 12.2 per cent for construction; and 3.6 per cent for agriculture.15 This indicates that there was slightly more lending for commerce and services as compared to productive activities at end-1997. By comparison, productive activities accounted for slightly more than commerce and services in total bank lending at the end of 1996.

The loan-to-deposit ratio, a measure of the willingness of banks to lend and businesses to borrow, grew from under 24 per cent at end-1996 to about 29 per cent at end-1997. The portion of total bank lending accounted for by short-term overdraft facilities, with average maturities of less than one year, fell from 60.2 per cent at end-1996 to 54.1 per cent at end-1997. During the same period, the portion of lending in the form of longer term loans, with maturities of 1-3 years, increased from 34.5 per cent to 41.2 per cent.16 The marginal increase in the term maturity of bank lending suggests relatively more long-term investment capital--as opposed to working capital--was made available in 1997 relative to 1996. The growth in total lending and the loan-to-deposit ratio, and the longer-term maturity of loans, are evidence of growth in the financial intermediation function of banks--i.e. channeling savings (deposits) to private investment (via loans)--in the WBGS.

In addition to the formal banking system, a number of non-bank agencies, mainly NGOs, presently provide credit to small and medium-sized enterprises, which constitute most businesses in the WBGS.17 The bulk of such credit was provided by the Palestinian Development Fund, UNRWA, the Save the Children Foundation, American Near East Refugee Aid, the Arab Center for Agricultural Development and Oxfam-Quebec. The combined value of disbursed loans provided by these non-bank agencies grew from US$ 18.3 million in 1996 to US$ 35. 5 million in 1997--a 94 per cent increase.18

Based on the evidence, business investment, as measured by new company registrations and bank and non-bank credit creation, grew considerably during the year. The apparent improvement in business investment, combined with the growth in construction activity, suggests 1997 was a relatively good year for private investment by comparison to 1996.

D. Palestinian Public Investment Programme and Donor Disbursements, 1997

At the Fourth Consultative Group Meeting in Paris in November 1996, donors pledged some US$ 881 million in assistance for 1997. As of mid-1997, donors had committed about US$ 483.3 million to the Palestinian Public Investment Programme while disbursements were running at about US$ 116.1 million.19 By end-1997, donor commitments had risen to US$ 627.1 million and total disbursements were US$ 432.2 million for the year.20 Donor disbursements in 1997 were 21.3 per cent below their 1996 level and about 15 per cent below average annual disbursements for the 1994-1996 period.

This suggests that public investment in infrastructure and institution-building, which relies mainly on donor assistance, did not achieve anticipated levels for the year. Gross fixed capital formation in the WBGS public sector, a measure of the public investment in infrastructure, averaged about US$ 137.1 million per year during 1994-1996 while donor disbursements averaged US$ 510.3 million.21 Given the below average donor disbursements in 1997, it is reasonable to expect that public investment will also be less than average for the transitional period to date. This highlights the urgency of the Palestinian Development Plan, 1998-2000 which emphasizes the development of the public infrastructure and enabling environment for private sector development.22

E. General, Comprehensive and Internal Closures, 1997

The general closure and separation policy, applied by the Israeli authorities since March 1993, remained in force during the entirety of 1997. Residents of the West Bank could not enter East Jerusalem or Gaza without permits from the Israeli authorities. Likewise, residents of the Gaza Strip could not enter the West Bank, including East Jerusalem, without such permits. East Jerusalem residents were also restricted from entering Gaza. The Israeli authorities did permit a number of students, teachers, patients and health care workers from the West Bank to enter Jerusalem during the year, but such entry was restricted during periods of comprehensive and internal closure. WBGS businessmen were issued an average of 5,450 permits per month to enter Israel, while an average of 500 permits were issued to businessmen from one Palestinian region to allow them to enter the other region Palestinian region.

There were fewer comprehensive closure days imposed on the WBGS as a whole but substantially more internal closure days imposed on the West Bank in 1997 relative to 1996. Excluding weekends and Muslim and Jewish holidays, there were 277.5 potential days (from a 365-day calendar year) during which labour and commodity flows between the WBGS and Israel could take place. Of these, 57 potential working and trading days were effectively disrupted by comprehensive closures (from a total of 77 days of comprehensive closure). This resulted in a loss of 20.5 per cent of potential work days in 1997, compared to a 29 per cent loss in 1996. However, the number of internal closure days imposed on parts or all of the West Bank rose from 27 in 1996 to 40 in 1997--an increase of about 50 per cent.23 Most internal closures were imposed simultaneous to comprehensive closures during March-April and August-September and were, in general, more stringent in 1997 than in 1996.24

There were marginally reduced degrees of disruption in labour and commodity flows caused by comprehensive closures in 1997 relative to 1996. Comparing the major closures of February-March 1996 and August-September 1997, estimated monthly labour flow reductions were 80 per cent in the former and 75 per cent in the latter. This may be due to the Israeli policy of allowing Palestinians employed in Israeli settlements and industrial zones to return to work several days after the imposition of comprehensive closures in 1997. Monthly commercial truck flows were reduced 50 per cent in February-March 1996 in comparison to a 40 per cent reduction in such flows in August-September 1997. In both cases truck flows returned to pre-closure levels within one month after the imposition of comprehensive closures, with WBGS imports rebounding more quickly than exports. Total labour flows, however, took about five months to reach their pre-closure levels after both closures.25

This suggests that labour flows, and therefore labour incomes, were more adversely effected by closures than commodity flows and WBGS importers’ incomes. Lost income to residents of the WBGS due to closures in 1997 has been estimated at about US$ 4 million per effective closure day.26 This suggests total losses of about US$ 228 million, equal to about half the value of donor disbursements for the year.

F. Summarising Macroeconomic Trends in 1997

In comparison to 1996, there was overall improvement in economic performance in the WBGS during 1997. This is due, in part, to the fact that 1996 was a particularly bad year with regard to closures. Fewer closure days in 1997 was reflected in positive developments in labour and trade flows between the WBGS and Israel, although imports grew faster than exports. There were also some improvements in labour market conditions (see below) and in private investment activity. Public investment, however, fell below expectations, further hindering the development of an adequate enabling environment for long-term economic growth and development.

In the context of regional economic performance, WBGS results over the last two years were relatively meager. Estimates indicate that non-oil producing countries in the Middle East and North Africa (MENA) achieved average real GDP growth rates of 5.5 and 3.8 per cent in 1996 and 1997 respectively. In Jordan the growth rates were even higher than the MENA averages. This compares to WBGS real GDP growth estimates of -1.6 and 1.2 for the two years respectively.27 Relative improvement in 1997, therefore, must be seen in the context of the continuation of the general, comprehensive and internal closure policies which have produced declining incomes for the past several years. The inherent potential for growth of the WBGS economy--and therefore the opportunities forgone--must also be evaluated in light of relatively robust regional economic growth.

2. A Note on the Branch Distribution of Private GDP, 1994-1996

The previously published PCBS 1994 preliminary estimates of national income, combined with the recent publication of estimates for 1995-1996,28 allow for deeper insights into conditions and trends in the WBGS economy. While it is not possible to estimate growth rates in real GDP and GNP, due to the absence of a price deflator series from the PCBS, the available data allow for an analysis of the relative contributions of various economic branches to GDP during this period. This provides more accurate insights into the general character of the economy. Furthermore, changes in relative branch contributions over time reflect underlying dynamics in the economy, i.e. retrenchment or growth in the different branches.

To better understand underlying trends, the private economy can be analysed by subtracting the public sector’s contribution to GDP for the three-year period.29 Excluding the public sector, and as indicated by Table 4, three economic branches experienced declines in relative GDP share--construction, commerce and transportation--while three had relative increases--agriculture, manufacturing and private services.

The share of agriculture (including fishing) in the private GDP is subject to considerable fluctuations from year to year due to the bi-annual olive crop cycle (a good harvest followed by a bad one). This cycle is indicated by the fluctuations in agriculture’s contribution to private GDP over the three-year period. On average, agriculture contributed 15.3 per cent of private GDP while its relative contribution rose 1.5 per cent between 1994 and 1996. The relative importance of agriculture was apparently maintained during this period.

Manufacturing and mining accounted for an average of 18.9 per cent of private GDP and the relative increase in the branch contribution, despite a decline in share in 1996, was 18.6 per cent--more than any other private economic branch. The significant relative growth in this branch suggests resilience in the context of stagnant overall economic growth.30

Table 4
Contributions and Relative Changes in Contributions of
Economic Branches in Private Gross Domestic Product
in the WBGS, 1994-1996 31
Average Contribution
Relative Change
West Bank and Gaza Strip
1994
1995
1996
(1994-1996)
(1994-1996)
Agriculture and Fishing
15.87%
14.00%
16.11%
15.33%
1.52%
Manufacturing and Mining
16.24%
21.26%
19.26%
18.92%
18.64%
Construction
10.51%
10.09%
10.08%
10.22%
-4.09%
Commerce, Hotels, Restaurants
19.07%
19.87%
18.13%
19.02%
-4.92%
Transport, Communication
8.46%
5.19%
5.35%
6.33%
-36.72%
Services and Other
29.86%
29.59%
31.07%
30.17%
4.04%
Private GDP
100.00%
100.00%
100.00%
100.00%
Construction activity accounted for an average of 10.2 per cent of private economic activity during the three-year period. While construction’s contribution remained fairly stable throughout the period, the relative decline in its share of GDP was 4 per cent. Since construction activity is the main part of private investment, this suggests a relative decline in investment spending in total private economic activity during this period.

Commerce, hotels and restaurants accounted for an average of 19 per cent of private economic activity. After a relative increase in 1995, the contribution of this branch declined in 1996. For the period as a whole, the share of commerce in the total output of the WBGS economy declined 4.9 per cent. As this branch is dominated by retail trade activity in which there are a large number of small businesses with low levels of capitalization,32 the relative decline may be due to reduced sales and firms exiting the industry. The decline in national income, as well as household expenditures, are probably the main reasons for this decline.

The transport and communications branch (trucking, shipping, storage, taxis and travel agencies) contributed to an average of 6.3 per cent of private GDP. In relative terms, there was a 36.7 per cent decline in the contribution of this branch. This is probably the result of closure-related obstacles which increasingly hindered mobility within the Palestinian Territories and between the latter and Israel during this period. The size of the relative decline indicates significant retrenchment in this branch.

Private services (real estate; financial intermediation; business services; private education, health care and social work; NGOs; recreation and personal services) averaged 30.1 per cent of GDP--the largest branch contribution to GDP--and there was a 4 per cent relative increase in the service share of output during the 1994-1996 period. Real estate, financial intermediation (especially the banking system) and business and personal service activities probably account for most of the relative growth in this branch. On the other hand, the growth of the public sector has partly displaced the relative GDP contributions of private education, health, social work and NGO services.

Thus, services accounted for nearly one-third of the value of privately-produced output in the WBGS economy, manufacturing and commerce accounted each for one-fifth, agriculture for about one-sixth, construction for about one-tenth and transport and communication for about one-twentieth of the value of private output. During the three year period, manufacturing, agriculture and services became relatively more prominent in the private economy while transport and communication, commerce and construction proportionally receded.


II. POPULATION, LABOUR FORCE and WAGES

1. Population and Labour Force Growth

The average monthly population of the WBGS in 1997 was estimated at 2,684,347 persons--an increase of 4.3 per cent in comparison to the 1996 average.33 The average working-age population, i.e, those persons 15-64 years of age, grew by an estimated 4.4 per cent as compared to 1996 to an estimated average of 1,300,000. The total labour force--the total number of persons working or seeking work--increased to an average of 552,600 or by about 4.6 per cent.34 Thus in 1997, as in 1996, labour force growth exceeded the growth in the working- age population as well as overall population growth. The average labour force participation rate--the proportion of the working-age population employed or actively seeking work--was nearly identical to that in 1996 at 42.3 per cent. This indicates that growth in the absolute size of the labour force was due to growth in the working-age population, rather than an increase in the portion of that population actively engaged in the work force.

2. Employment, Underemployment and Unemployment

The total number of fully employed persons in 1997 increased by about 13.1 per cent to an average of 383,630 persons, reflecting a general improvement in employment conditions relative to 1996. The total number of fully-employed persons rose an estimated 5.3 and 0.5 per cent in the second and third quarters of 1997, respectively, in comparison to the first quarter as indicated in Table 5. The reduction in the growth of such employment in the third quarter was probably due to the August-September closures as well as reduced growth in public sector employment. The full employment rate--the portion of the labour force working at least 35 hours per week--averaged 69.1 per cent during 1997 as compared to 64.1 per cent in 1996.

There were corresponding declines in the average number and proportion of underemployed in the labour force, i.e., workers employed less than 35 hours per week. In absolute terms, there were an average of 52,000 underemployed persons in 1997 as compared to 63,600 in 1996--a decline of over 18 per cent. The proportion of the total labour force that was underemployed in 1997 averaged about 9.4 per cent compared to about 12 per cent in 1996. On a quarterly basis in 1997, the first quarter registered the lowest underemployment rate, the second quarter witnessed the worst with an improvement in the third quarter.

Table 5
Estimates of the Working-Age Population, Labour Force, Employment,
Underemployment and Unemployment for the WBGS,
Average 1996, QI-QIII 1997, Average 1997 35
Relative Change
Rates
AVG 96
QI-97
QII-97
QIII-97
AVG 97
AVG 96-97
Labour Force Participation
42.33%
40.91%
42.79%
43.39%
42.36%
0.07%
Full Employment
64.18%
70.32%
69.80%
68.21%
69.44%
7.58%
Underemployment
12.03%
9.13%
9.93%
9.22%
9.42%
-27.67%
Unemployment
23.90%
20.57%
19.81%
22.57%
20.98%
-13.90%
Unemployment (Adjusted)
32.65%
29.51%
29.35%
31.55%
30.14%
-8.32%
Totals
Total Change AVG 96-97
Working-Age Population
1,248,218
1,285,499
1,304,138
1,322,913
1,304,183
4.48%
Labour Force
528,319
525,898
558,050
574,035
552,661
4.61%
Fully-Employed
339,037
369,814
389,503
391,574
383,630
13.15%
Underemployed
63,576
48,000
55,390
52,902
52,097
-18.05%
Unemployed
126,305
108,084
110,576
129,559
116,073
-8.10%
Unemployed (Adjusted)
194,886
174,929
185,931
204,914
188,591
-3.23%

Generally improved labour market conditions in 1997 were reflected in an overall decline in both the absolute number and the proportion of the labour force which was unemployed. According to the narrowest definition, the average number of unemployed persons in 1997 was about 116,000 as compared to 126,300 in 1996--a decline of 8.1 per cent. When “discouraged workers” (the unemployed who have ceased searching for employment) are included, the adjusted average number of unemployed in 1997 was about 188,600 in comparison to 194,900 in 1996--a decline of 3.2 per cent. Thus, despite an 8.2 per cent increase in average employment (the fully-employed plus the underemployed), and a similar decline in officially-defined unemployment, total unemployment declined only 3.2 per cent in 1997.

The average unemployment rate--the proportion of the labour force unsuccessfully seeking employment--also declined from about 24 per cent in 1996 to about 21 per cent in 1997. Including discouraged workers, average adjusted unemployment rates for 1996 and 1997 were 32.6 and 30.1 per cent respectively, indicating modest improvement. Adjusted unemployment rates in the West Bank in 1996 and 1997 were 29.3 and 27.5 per cent, while those for Gaza were 41.1 and 37.5 respectively.



3. Underlying Labour Market Dynamics

A. Social Composition of Employment

Increased employment in 1997 was reflected in growth in the number of engaged persons of all social categories, e.g. employers, unpaid family labourers, the self-employed and wage-workers. As noted in Table 6, while overall growth in year-to-year average employment was 8.4 per cent, growth in the average number of employers and unpaid family members was less than average, while growth in the numbers of self-employed and wage-labourers was greater than average. Self-employment grew most quickly, followed by wage-labour, unpaid family employment and, finally, the number of employers.

Table 6
Social Composition of the Employed WBGS Labour Force,
Average 1996 and QI-QIII 1997, Average 1997 36
Relative Change
Ratios
AVG 96
QI-97
QII-97
QIII-97
AVG 97
AVG 96-97
Employers
5.70%
5.20%
5.30%
5.60%
5.37%
-6.21%
Unpaid Family Labour
10.70%
9.00%
11.60%
9.60%
10.07%
-6.29%
Self-employed
22.77%
22.10%
23.10%
24.20%
23.13%
1.59%
Wage-workers
60.83%
63.70%
60.00%
60.60%
61.43%
0.98%
Total Employed
100.00%
100.00%
100.00%
100.00%
100.00%
Total
Total Change AVG 96-97
Employers
22,961
21,726
23,716
24,891
23,444
2.11%
Unpaid Family Labour
42,853
37,603
51,907
42,670
44,060
2.82%
Self-employed
91,579
92,337
103,366
107,563
101,089
10.38%
Wage-workers
245,220
266,148
268,484
269,353
267,995
9.29%
Total Employed
402,613
417,814
447,474
444,476
436,588
8.44%

Year-to-year changes in the composition of the WBGS work force reflect general economic conditions, seasonality in agricultural employment and the effects of closures. Despite closures in the second and third quarters, there was slow but steady growth in the proportion and the number of employers in 1997. This suggests improvement in business conditions in 1997 relative to 1996 and the formation of new businesses. This is consistent with the investment trends noted above.

Unpaid family labour in the WBGS is found mostly in agriculture and small merchant businesses.37 Such employment in agriculture is conditioned by the seasonality of planting and harvesting, as well as the closure-induced reversion of disemployed labourers to work on family plots, especially in the West Bank.38 Peak demand for agricultural labour--including unpaid family labour--in the West Bank occurs during the olive harvest in the autumn and in Gaza during the winter and early spring. Yet there was an increase in unpaid family labour, in both relative and absolute terms, during second-quarter 1997. The increase in unpaid family labour and in agricultural employment specifically (see below) during the second quarter (April-June), therefore, seem to have been the results of the April comprehensive closure.

The slower than proportional growth in unpaid family labour in 1997 may be due to two factors. First, the 1997 average does not include the fourth quarter when such labour would be in high demand. Second, there were, on average, greater work opportunities in Israel during the year which reduces the phenomenon of unpaid family labour, especially in the West Bank. The growth that did occur in unpaid family labour was probably related to growth in commercial activities employment (see below) where there are also concentrations of such labour.

Given the continued reliance of about one-sixth of the WBGS labour force on employment in Israel, the wage-work category is the most sensitive to closures. The marked improvement in first-quarter 1997 wage-employment, relative to the 1996 average, was mainly due to increased labour flows to Israel and, to a lesser extent, growth in PA employment.39 In the second and third quarters, growth of wage-employment moderated considerably, no doubt the result of closures in each of those quarters and to much lower growth in PA employment. Despite closures and slower recruitment in the PA, there were small increases in wage-work during the first three quarters of 1997, indicative of the relative improvement in labour flows to Israel and in WBGS labour market conditions.

Self-employment witnessed the largest average increase of any social category of employment in 1997--10.3 per cent--a continuation of the trend witnessed in 1996.40 In absolute terms the self-employed increased from 92,337 to 107,563 during the first three quarters of the year. Growth in this type of employment--one-person businesses, both formal and informal--is related to continuing high levels of unemployment as well as instability in the WBGS labour market. This may be an indication of a growing informal economy, especially in commercial activities where there has been simultaneous employment growth (see below).

B. Economic Branch Distribution of Employment

On average, there were 33,115 new jobs created in the first three quarters of 1997, an increase of 8.2 per cent in total employment. As indicated in Table 7, except for services, there was employment growth in every branch. Commerce, hotel and restaurant and construction activities registered average employment growth of more than 15 per cent in comparison to 1996 while average PA employment rose by 12.2 per cent. Manufacturing employment rose 5.5 per cent while agriculture and transportation and communication employment growth was about 1 per cent. There was a 3.7 per cent average decline in employment in private services.

Of the total new jobs created in 1997, 91 per cent were in commerce, construction and the public sector. Commerce accounted for 33.7 per cent, construction for 31.8 per cent and the PA for 26.5 per cent of average employment growth during this period. Increased employment in the commerce, hotels and restaurants branch is dominated by commerce which accounts for the bulk of establishments in the combined category.41 As most commerce consists of internal trade, formal and informal, closures did not thwart employment in this branch, which experienced consistent quarter-to-quarter growth.

Growth in construction employment is due to increased employment in Israel, where about 60 per cent of Palestinian workers are engaged in this branch, as well as increased construction activity in the WBGS. Growth in PA employment has been due mainly to the establishment of new governing institutions and the expansion of public services, including security services. It is significant that growth in public sector employment in 1997 was considerably reduced, as compared to the previous three years.

In the aggregate, the public sector accounted for one-quarter and the private sector for about three-quarters of employment growth during 1997. The private sector in this case includes Israel where a significant portion of WBGS construction workers were employed.

Changes in the relative branch distribution of employment may reflect relative growth or decline in those branches and, therefore, changes in the underlying structure of the economy. As between 1996 and 1997, the proportion of WBGS employment in agriculture declined from 14.5 to 13.4 per cent--a relative decline of 7.9 per cent. Agricultural employment, which has been stagnant in recent years, normally increases in the autumn, winter and early spring (the fourth and first quarters). Despite the steep jump in agricultural employment in the second and third quarters of 1997--probably closure-induced reversions to working on family-owned land--the average proportion of the work force employed in agriculture declined slightly. The inclusion of fourth-quarter 1997 data would probably raise agriculture’s share in total employment.

With regard to other branches of the private economy, manufacturing employment in 1997 witnessed relative stability, while construction employment’s share rose from 16.9 to 18.2 per cent--a 7.1 per cent relative increase. This was probably the result of greater average employment in Israel and domestic growth in construction activity. A 6 per cent relative increase in commerce’s share of employment, e.g. internal wholesale and retail trade, may be due to the widening of the informal economy which is fueled by high levels of unemployment and underemployment. The relative ease of entry into such activity, given the small capital requirements,42 may have contributed to this as well.

Table 7
Estimates of Employed Labour Force Branch Distribution
in the WBGS including Employment in Israel,
Average 1996, QI-QIII 1997, Average 1997 43

Relative Change
Ratios
AVG 96
QI-97
QII-97
QIII-97
AVG 97
AVG 96-97
Agriculture, Fishing
14.50%
11.60%
15.60%
13.10%
13.43%
-7.94%
Manufacturing, Quarrying
16.87%
16.60%
16.70%
16.00%
16.43%
-2.64%
Construction
16.93%
19.00%
17.30%
18.40%
18.23%
7.13%
Commerce, Hotels, Restaurants
18.07%
19.20%
18.60%
19.90%
19.23%
6.07%
Transport, Communication
5.13%
4.40%
5.10%
4.90%
4.80%
-6.94%
Services and Other
10.58%
10.48%
8.37%
9.35%
9.40%
-12.54%
Palestinian Authority
17.81%
18.72%
18.33%
18.35%
18.47%
3.55%
Total Employed Persons
100.00%
100.00%
100.00%
100.00%
100.00%
Totals
Total Change AVG 96-97
Agriculture, Fishing
58,085
48,466
69,403
58,226
58,699
1.06%
Manufacturing, Quarrying
67,810
69,357
74,297
71,116
71,590
5.58%
Construction
68,851
79,385
76,966
81,784
79,378
15.29%
Commerce, Hotels, Restaurants
72,622
80,220
82,750
88,451
83,807
15.40%
Transport, Communication
20,750
18,384
22,690
21,779
20,951
0.97%
Services and Other
42,433
43,787
37,217
41,551
40,852
-3.73%
Palestinian Authority
71,654
78,215
81,569
81,569
80,451
12.28%
Total Employed Persons
402,613
417,814
444,893
444,476
435,728
8.23%
The 6.9 per cent relative decline in the share of employment in transport and communication, despite overall employment growth in the economy, may reflect a structural decline in this branch. As noted elsewhere, the restricted mobility of people, vehicles and goods caused by the policy of general, comprehensive and internal closures, as well as falling incomes, may be responsible for the retrenchment in this branch of the economy.44 Thus the relative decline in transportation and communication employment--which includes trucking, shipping, storage, taxi and travel agencies45--may be a longer-term structural transformation induced by closures.

Private service branches of the WBGS economy include a spectrum of activities including real estate; financial intermediation; business services; private education, health care and social work (public education, health care and social work is part of PA employment); NGOs; recreation; and personal services such as hairdressing and dry cleaning.46 Proportional employment in these services declined 12.5 per cent. Given the broad range of activities, and the lack of disaggregated data in the labour force surveys, it is difficult to make generalizations. It is clear, however, that there has been growth in financial intermediation employment (mainly banks) and probably NGOs as well. On the other hand, it is likely that the relative decline in private service employment is related to the increase in the size of the public sector, which produces similar services (e.g. education, health care and social work) and which probably account for the bulk of employment in the services branch. Thus the expansion of the public sector and public services and employment may have displaced employment in private services to some extent.



C. Women in the Labour Market

Women’s average labour force participation rate declined from 13 per cent in 1996 to 12.3 per cent in 1997--a 5.8 per cent relative decline, compared to a 1.5 per cent relative decline for men. In absolute size, the estimated average female labour force fell from 83,730 to 80,580--a decline of 3.7 per cent compared to a 4.2 per cent increase for males. Thus there were less women in the formal labour force in 1997 in both relative and absolute terms than in 1996, as indicated by Table 8.

Women’s full employment rates and the total number of fully-employed women also declined in 1997 while those for men rose substantially. In relative terms, the female full-employment rate fell 2.5 per cent while that of males increased 10.3 per cent. At the same time the absolute number of fully-employed women fell from 64,104 to 59,838 or 6.6 per cent, while the number of fully-employed men rose 14.8 per cent. Nonetheless, women’s full-employment rate remained higher than that of men’s. This may be due to the fact that, given the structural and cultural constraints on female employment in the WBGS, women’s participation in the labour market is more dependent on the availability of full-time work. Both female and male underemployment rates fell substantially in 1997 but the men’s rate fell more rapidly. On the other hand, the absolute number of underemployed females fell faster than for males.

Men’s average unemployment rates fell from 23.5 to 21.1 per cent--a relative decline of 10.5 per cent and the average number of unemployed men fell 11.5 per cent in 1997 compared to 1996. Women’s average unemployment rate, on the other hand, increased from 20.6 to 21.4 per cent during the same period--a relative increase of 3.8 per cent--even though the absolute number of unemployed women fell slightly. The decline in the number of unemployed women, despite an increase in their unemployment rate, was due to the higher proportion of women outside the formal labour force during 1997, as indicated by their lower labour force participation rates. The bulk of persons outside the formal labour force continued to be women as indicated in successive labour force surveys.

Table 8
Comparing Male and Female Labour Force Profiles
for the Working-Age Population in the WBGS,
Average 1996, QI-QIII 1997, Average 1997 47

Relative Change
Rates
AVG 96
QI-97
QII-97
QIII-97
AVG 97
AVG 96-97
LFPR
Males
73.06%
70.98%
72.02%
72.74%
71.92%
-1.57%
Females
13.06%
10.86%
13.13%
12.90%
12.30%
-5.82%
Full-Employment
Males
62.10%
69.60%
68.86%
67.11%
68.52%
10.35%
Females
76.16%
73.17%
76.60%
72.80%
74.19%
-2.59%
Underemployment
Males
13.81%
9.84%
11.08%
10.20%
10.37%
-24.88%
Females
5.34%
4.94%
4.01%
4.07%
4.34%
-18.74%
Unemployment
Males
23.59%
20.57%
20.06%
22.70%
21.11%
-10.51%
Females
20.68%
21.89%
19.38%
23.13%
21.47%
3.83%
Totals
Total Change
Labour Force
AVG 96-97
Males
448,304
453,967
467,663
479,567
467,066
4.19%
Females
83,730
70,158
85,958
85,623
80,580
-3.76%
Full-Employment
Males
278,528
315,958
322,039
321,827
319,941
14.87%
Females
64,104
51,335
65,846
62,333
59,838
-6.65%
Underemployment
Males
59,771
44,649
51,812
48,899
48,453
-18.93%
Females
4,471
3,465
3,449
3,481
3,465
-22.51%
Unemployment
Males
111,580
93,360
93,812
108,841
98,671
-11.57%
Females
17,427
15,358
16,663
19,809
17,276
-0.87%


While there were quarter-to-quarter fluctuations, in general women’s labour market profile deteriorated in 1997 as compared to 1996--a trend that was already manifest in the first quarter.48 Women’s average representation in the labour market declined, their full-employment rate declined and their unemployment rate rose to slightly above the rate for men. The only positive trend was the continued decline in women’s underemployment rates. At the same time, there were significant improvements in men’s labour market profile.

Several factors seem to explain these different results for men and women in the labour market in 1997. First, the greater labour flows to Israel--nearly all of which were men--was an important factor accounting for the improvement in men’s labour market indicators in general and in relation to women. Second, there was substantial growth in several economic branches where women are under represented due to structural and cultural factors, such as construction and commerce. Third, there was retrenchment, stagnancy or relatively slow growth in economic branches where women are concentrated, such as services, agriculture and manufacturing.49 Finally, slower growth in public sector employment--where women’s representation is higher than their average in the labour market as a whole--also hampered improvements in their labour market standing. Successive PCBS labour force surveys also indicate that women’s average daily wages were consistently below men’s and that average wages in the economic branches where women are disproportionately represented had below-average wages.

D. Working Time and Real Wage Incomes

As indicated by Table 9, there was a 2.1 per cent increase in the average number of days and a slight decline in the average number of monthly hours worked by WBGS workers in 1997 as compared to 1996. Most of the increase in average monthly days worked were accounted for by Gazans and workers employed in Israel which rose 5.9 and 5.6 per cent respectively. The decline in monthly hours was accounted for by employees in the West Bank, perhaps the effect of increased internal closures there. The increase in the number of monthly days and hours worked by those employed in Israel is an indication of the larger average labour flows to Israel.

The inflation-adjusted average daily wage rate in the WBGS fell 7.5 per cent--to US$ 15.93--as between 1996 and 1997 and there were declines in every region. There were substantial variations in real daily wage declines with workers in Gaza sustaining a 15.7 per cent loss, those in the West Bank a 9.6 per cent decline, and those working in Israel a 4.4 per cent reduction. Trends in real daily wages in 1997 were substantially different than those seen during 1996. First, the average decline was smaller, 7.5 in 1997 versus 16 per cent in 1996. Second, the average decline in Gaza in 1997 was greater than the decline in the West Bank, unlike the situation in 1996 when the West Bank suffered greater losses.50 This may be due to the higher West Bank labour flows to Israel--both permitted and non-permitted. Third, the decline in wages for workers in Israel was larger in 1997 relative to 1996. Nonetheless, the differential between daily wages in Israel and those in the WBGS continued to grow. Real daily wages in Israel were an average of 81.9 per cent above those in the West Bank and 124 per cent higher than those in the Gaza Strip.

There were marginal improvements in the real daily wage rates in the WBGS in the course of 1997, although not in Israel. The evidence indicate that there was an 8.5 per cent increase in the real daily wage rate in the second quarter as compared to the first in the West Bank and a 16.8 per cent increase in Gaza. The daily wage in Gaza declined in the third quarter while that in the West Bank remained unchanged. Reduced unemployment and underemployment rates probably explain the relative improvements in WBGS daily wages. In Israel, real wages for Palestinians fell throughout the year. A slackening labour market in Israel may be responsible for the decline in Palestinian wages earned there. The partial recovery of daily wages during 1997 was still insufficient to result in net gains relative to 1996.

Table 9
Estimates of Average Monthly Days and Hours Worked and
Average Real Daily and Monthly Wages for Employed WBGS Workers
By Place of Work, Average 1996, QI-QIII 1997, Average 1997 51
(wages expressed in constant 1996 US$)
Total Change
All WBGS Workers
AVG 96
QI-97
QII-97
QIII-97
AVG 97
AVG 96-97
Monthly Days
21.87
22
22
23
22.33
2.12%
Monthly Hours
173.73
168
176
176
173.33
-0.23%
Real Daily Wage (US$)
17.23
15.62
16.30
15.85
15.93
-7.59%
Real Monthly Wage (US$)
377.11
341.63
358.64
364.63
354.97
-5.87%
Workers in West Bank
Monthly Days
22.60
22
18
20
22.67
0.29%
Monthly Hours
173.73
168
180
176
173.33
-0.23%
Real Daily Wage (US$)
15.26
13.04
14.16
14.16
13.79
-9.66%
Real Monthly Wage (US$)
345.08
286.84
325.69
325.78
312.77
-9.36%
Workers in Gaza Strip
Monthly Days
23.60
26
24
25
25.0
5.93%
Monthly Hours
175.47
192
172
176
180.0
2.58%
Real Daily Wage (US$)
13.29
10.31
12.05
11.23
11.20
-15.75%
Real Monthly Wage (US$)
313.81
267.98
289.23
280.70
279.30
-11.00%
WBGS Workers in Israel
Monthly Days
18.30
20
18
20
19.33
5.65%
Monthly Hours
170.13
180
180
176
178.67
5.02%
Real Daily Wage (US$)
26.26
26.64
25.06
23.57
25.09
-4.46%
Real Monthly Wage (US$)
480.90
532.89
451.14
471.44
485.16
0.88%

The average real monthly wage for WBGS workers declined by an average of 5.8 per cent. Real monthly wages for those employed in Israel rose .8 per cent, despite the decline in daily wages, due to the increased average number of days worked. Thus greater work effort on the part of those employed in Israel prevented real declines in their average monthly incomes. This was not the case for workers employed in the WBGS. In the West Bank there was little change in monthly work time in 1997 in comparison to 1996 but a 9.3 per cent decline in the average monthly wage. In Gaza, there was an increase of 2.5 per cent in monthly work time with an 11 per cent decline in real monthly wages on average.

As in the case of daily wages, there were marginal improvements in average monthly incomes from quarter-to-quarter in 1997. These were a result of the marginally improved employment picture but insufficient to prevent additional declines in real labour incomes. High real unemployment rates are the main factor in this decline, combined with stagnant or falling nominal wages and persistent, though declining, inflation.





III. HOUSEHOLD EXPENDITURES and the LEVEL of LIVING

1. Household Consumption Expenditures, 1997

Average real monthly expenditures for seven-person households in WBGS in 1997 averaged US$ 750. Second-quarter average expenditures were US$ 791, a 4.8 per cent increase over the first quarter. Third-quarter expenditures declined to US$ 717, a 9.3 per cent decrease over the second quarter, while fourth-quarter expenditures recovered to 737, a 2.7 per cent increase over the third quarter as indicated by Table 10. Overall, there was a 2.3 per cent real decline in average expenditures as between the first and fourth quarters of the year. This compares to a real decline of about 5 per cent between the first and third quarters of 1996.52

Quarterly fluctuations in spending patterns reflect seasonality, changes in labour and other incomes, as well as closure-induced effects. The relative recovery of economic conditions and labour incomes, as well as the advent of the most important Muslim and Christian holidays, raised first and second quarter average expenditures, especially for food, transport, recreation and other cash expenditures (cash and non-cash gifts for relatives and friends). The declines in almost every spending category during the third quarter reflect the passing of the holidays, as well as the effects of the August-September comprehensive and internal closures, which disrupted over half the total working days during that quarter. The absence of closures and generally improved conditions in the fourth quarter are reflected in the partial recovery of spending.

The seasonality of specific expenditures are indicated by the quarterly data. As compared to the annual average, housing expenditures were over 10 per cent higher during the fourth quarter, reflecting increased use of fuel and electricity for heating. Education expenditures were more than 50 per cent of average in the third quarter, indicating the beginning of the academic year in September. Taxes were 70 per cent more than average in the fourth quarter, reflecting end-year income tax payments. Recreation expenditures were 60 per cent above the annual year average in the second quarter because of the main holidays.

Table 10
Estimates of Average Real Monthly Expenditures on Basic and Secondary Commodities and Services in Seven-Persons Households in WBGS,
QI-QIV 1997 53
(in constant 1996 US$)
QI-97
QII-97
QIII-97
QIV-97
Basic Expenditures
Housing
US$ 51.73
US$ 56.23
US$ 51.83
US$ 60.94
Food
291.81
300.11
288.84
306.65
Clothing and Footwear
75.51
61.41
59.38
51.98
Medical Care
24.88
32.46
29.56
28.81
Transport and Communication
76.44
85.14
73.32
88.81
Education
21.38
16.14
38.66
21.62
Taxes
2.21
2.56
1.61
4.69
Basic Expenditures Sub-Total
US$ 543.96
554.04
543.20
563.49
Secondary Expenditures
Household Operations
9.04
10.85
9.02
9.79
Furniture and Utensils
30.97
32.76
30.67
34.27
Personal Care
15.21
16.92
13.96
14.81
Recreation
14.11
29.71
18.15
12.45
Tobacco
35.54
34.58
34.10
38.00
Other Cash Expenditures
105.65
111.87
67.69
64.30
Secondary Expenditures Sub-Total
US$ 210.53
236.70
173.60
173.62
Total Average Expenditures
US$ 754.49
790.74
716.79
737.10

2. Household Consumption Expenditures: A Two-Year Retrospective

The completion of two years of monthly household expenditure surveys on the part of the PCBS provides an opportunity to gauge medium-term household adaptations to reductions in their average incomes. As in 1996, household expenditures continued on a generally downward trend in 1997, as shown in Table 11. Real expenditures for a Palestinian household in WBGS declined from a monthly average of US$ 828 in 1996 to US$ 750 in 1997--a decline of 9.4 per cent. Comparing monthly averages for 1997 with those of 1996, there was a 7 per cent decline in basic expenditures (housing, food, clothing, medical care, transportation, education and taxes) and a more than 15 per cent fall in secondary expenditures (household operations, furniture, personal care, recreation and other cash expenditures). This suggests a change in consumer adaptations to lower incomes during this period.

Table 11
Estimates of Average Real Monthly Expenditures on Basic and Secondary Commodities and Services in Seven-Persons Households in WBGS,
1996 and 1997 Averages 54
(in constant 1996 US$)
Total Change
AVG 1996
AVG 1997
AVG 96-97
Basic Expenditures
Housing
US$ 55.49
US$ 55.18
-0.55%
Food
321.69
296.85
-7.72%
Clothing and Footwear
70.37
62.07
-11.80%
Medical Care
28.58
28.92
1.22%
Transport and Communication
81.56
80.93
-0.77%
Education
31.47
24.45
-22.31%
Taxes
4.29
2.77
-35.51%
Basic Expenditures Sub-Total
593.44
551.17
-7.12%
Secondary Expenditures
Household Operations
11.85
9.68
-18.37%
Furniture and Utensils
39.34
32.17
-18.23%
Personal Care
18.29
15.23
-16.76%
Recreation
26.27
18.60
-29.19%
Tobacco
35.75
35.56
-0.53%
Other Cash Expenditures
102.90
87.38
-15.08%
Secondary Expenditures Sub-Total
234.41
198.61
-15.27%
Total Average Expenditures
827.85
749.78
-9.43%


In the course of 1996, WBGS households responded to economic distress by greater proportional reductions in basic expenditures (7.1 per cent) relative to secondary expenditures (4.8 per cent).55 Households initially purchased less of items occupying the largest share of their consumption expenditures--such as food--but which, proportionally, would be less affected. For example, a US$ 10 reduction in monthly food expenditures in 1996 would have reduced expenditures on this basic item by about 3 per cent. By contrast, a US$ 10 reduction in spending on household operations--a secondary item accounting for a small share of total expenditures--would yield an 85 per cent decline in consumption. Given the constraints on income, households may have reallocated their reduced expenditures from basic to secondary items (such as gifts to others at holidays) to avoid the appearance of falling living levels. This may have involved the use of savings or reliance on other sources of income (e.g informal inter-household social assistance).

The persistence of declining incomes has apparently altered this behaviour. While average real monthly expenditures as between 1996 and 1997 declined 9.4 per cent, there was a 15.2 per cent average decline in monthly secondary expenditures and a 7.1 per cent decline in basic expenditures (see Table 11). Thus, household purchases of secondary items fell twice as fast as purchases of basic items, a reversal of the pattern witnessed in 1996. This indicates that in the longer run, WBGS households may have adjusted to harder times by forgoing non-essential goods and services in proportionally greater amounts.

Among basic expenditures, the largest real declines were on taxes, education, clothing and footwear and food. The large decline in taxes may be explained by lower income taxes due to lower average incomes. The drop in education expenditures reflects a higher than average expenditures in 1996, which excludes the fourth quarter of that year. Reduced expenditures on clothing and footwear reflect, in part, the higher than average price increases on such commodities and the ability of households to extend the use of such commodities, while food purchase declines represent adjustments in the single largest expenditure group. The reductions in housing and transport were the smallest and there was a small increase in medical care expenditures as between the two periods.

There were much larger average declines in secondary goods and services purchases, with the largest reduction in recreation, indicating the tendency among households to forgo entertainment and cultural activities. Expenditures on both households operations and furniture and utensils declined by more than 18 per cent while expenditures on personal care and other cash expenditures fell by over 15 per cent. The decline in other cash expenditures--which mainly reflect informal social assistance between households--may indicate a reduced ability of families to extend such help.



The longer term changes in consumer behaviour can be gleaned by comparing real average monthly expenditures in the fourth quarter of 1995 with those of the fourth quarter of 1997. Such a comparison corrects for seasonal variations and, thus, provides a clearer measure of changes in household expenditure levels and patterns resulting from economic adversity. Average total monthly expenditures between these periods declined by about 16 per cent, with declines in basic purchased falling 11.8 per cent and secondary purchases dropping by 27 per cent. This underlies the declines in the year-to-year comparison and confirms the sharper declines in secondary purchases in the longer term.

3. Household Wage Incomes and the Level of Living

Developments in wages and expenditures are indicative of employees’ relative ability to cover the living expenses of their households--a relationship defined as wage sufficiency. As noted above, the average monthly wage of a fully-employed WBGS worker fell an average of 5.8 per cent between 1996 and 1997, while average monthly household expenditures fell 9.4 per cent. Because expenditures fell more rapidly than wages, the share of the average household’s consumption basket which could be purchased with the average wage actually increased over this period. While a single average wage could cover 63.5 per cent of basic household needs and 45.5 per cent of total household expenditures during 1996, these ratios rose to 64.4 and 47.3 per cent respectively in 1997.

The evidence in Table 12 therefore suggests that the level of economic distress has declined for households whose main source of income is wages. However, the apparent improvement is somewhat misleading since it occurred in the context of declining wages and expenditures. The increase in wage sufficiency is due to the fact that the rate of decline in household expenditures was faster than the rate of decline in real wages during this period. This points to the marginal improvements in labour market conditions which may have prevented wages from falling more quickly. It also highlights the fact that households in 1997 were adapting to declining wages by reducing overall expenditures more quickly than in 1996.

Table 12
Estimates of Basic and Total Households Expenditures in Seven-Persons Households in the WBGS and the Average Real Monthly Wage as a Proportion of Expenditures,
1996 and 1997 Averages 56
(in constant 1996 US$)
1996 AVG
1997 AVG
Average Basic Expenditures
US$ 593.44
US$ 551.17
Average Total Expenditures
827.85
749.78
Real Monthly Wage
377.11
355.00
Real Monthly Wage as a Percentage of Basic Expenditures
63.5%
64.4%
Real Monthly Wage as a Percentage of Total Expenditures
45.5%
47.3%

4. Consumer Price Inflation, 1997

Rates of inflation in the WBGS over the past several years have generally declined, i.e. there has been a disinflationary trend. Inflation rates which averaged 11.9 per cent per year during the 1993-1995 period57 declined to 7.7 per cent in 1996. This is explained partly by the fact that Israel, the main exporter to the WBGS, has also experienced a disinflationary trend and by the fact that declines in per capita income have moderated household demand for goods and services generally. The rate of inflation for consumer prices in the WBGS fell to 6.1 per cent in 1997. The consumer price index (CPI) rose by 4.8 per cent in West Bank, 6.9 per cent in the Gaza Strip and 7 per cent in East Jerusalem.

The differences in inflation rates in the three areas, as indicated in Table 13, are due to the different characteristics of their markets. Inflation in East Jerusalem, the area whose labour and commodity markets are most closely integrated into the Israeli economy, tends to closely reflect Israeli inflation rates. Both the West Bank and Gaza Strip have more domestically produced goods and services whose costs reflect the lower (and declining) wage rates in the two regions and, thus, have tended to have lower rates of inflation than those of Israel in recent years. Declining incomes in the West Bank and Gaza have also tended to reduce price increases from the demand side.

Table 13
Inflation Rates for Major Commodity Groups in the
Palestinian Territories (including East Jerusalem), 1997 58
(1996=100)
Major Groups
Palestinian Territories
West Bank
Gaza Strip
Food
4.06%
1.42%
3.32%
Beverages and Tobacco
6.86%
8.28%
5.08%
Textiles, Clothing and Footwear
15.55%
14.96%
20.63%
Housing
5.15%
5.20%
7.59%
Furniture, Household Goods & Services
10.06%
6.75%
10.04%
Transport and Communications
5.12%
5.01%
4.01%
Education
0.65%
0.68%
4.51%
Medical Care
7.86%
12.77%
8.41%
Recreation, Cultural Goods & Services
7.66%
8.27%
13.77%
Miscellaneous Goods and Services
4.01%
0.70%
10.81%
All-Item Consumer Price Index
6.10%
4.84%
6.92%

Gaza Strip price inflation exceeded that of the West Bank by 2.1 percentage points in 1997. Except for beverages, tobacco and medical care services, the inflation rates for all major items were higher in Gaza than for the West Bank. Price increases for clothing and footwear were the greatest in both regions, with higher increases in Gaza. The prices of recreational goods and services had the second largest increase in Gaza, while in the West Bank medical care costs had the second highest increase. The largest difference in regional inflation rates was in miscellaneous goods and services, which include personal care and restaurants meals, where prices increased by 10.8 per cent in Gaza with virtually no change in the West Bank.

More troubling was the fact that the prices of food rose more rapidly in Gaza (3.3 per cent) than in the West Bank (1.4 per cent). Gazan families, being poorer on average, spend a higher share of their income on food. While absolute prices are lower in Gaza, the evidence suggests that Gazan families bore a disproportionate share of food price inflation in 1997.

The difference in inflation rates between the West Bank and Gaza Strip requires some explanation. While the overall price level--i.e. the absolute currency cost for a standard basket of commodities--is lower in Gaza than in the West Bank, the higher rate of inflation for that basket in Gaza may be explained by several factors. First, while both the West Bank and Gaza import large amounts of Israeli inputs and final goods--and are consequently affected by the Israeli inflation rate--the West Bank’s larger and more diverse economy allows for a larger proportion of domestically-produced goods and services. The costs of these commodities are conditioned by lower (and falling) West Bank wages. For example, a larger proportion of West Bank households have access to some amount of land on which they can grow vegetables and fruits that, in the case of Gaza, would be imported from Israel.

Second, West Bank merchants have relatively free access to Israeli--and by extension--foreign suppliers, given the relatively open borders. Israeli-licensed vehicles can enter the West Bank without restriction--even during periods of comprehensive closure--and there are no security or customs points to delay such entry. Consequently, West Bank consumers have access to more diverse and regular sources of supply which leads to more price competition, and mitigates consumer inflation. On the other hand, Gaza’s borders are tightly controlled with no unhindered access for merchants in either direction. Furthermore, there are delays and substantial additional costs associated with acquiring import permits, using higher-cost Israeli transport services and the time-consuming security and customs procedures at all Gaza Strip crossing points. Such obstacles constrain supplies and raise wholesale costs for Gazan merchants, costs which are passed on in the form of higher consumer prices.

Third, in addition to raising costs, the tighter border restrictions on Gaza create an enabling environment for import monopolies for certain commodities, monopolies which are currently sanctioned by the Palestinian Authority. This gives certain merchants greater pricing power which exacerbates to some extent price increases in Gaza. Thus, in addition to closure-induced higher wholesale costs, the monopoly power of merchants--a non-market factor--may be partly responsible for Gaza’s higher consumer inflation rates.

5. A Note on Relative Price Dynamics: A Two-Year Overview

Consumer price inflation, as measured by increases in the CPI, reflects changes in the overall price of a representative group of goods and services. While the general price of the representative group may rise by a given rate, specific goods and services have individual inflation rates which differ from the average. Goods and services whose individual inflation rates are rising significantly faster than CPI inflation have rising relative prices, the opposite being the case for goods whose price increases are significantly below the average.

Changing relative prices reflect changes in underlying conditions of supply and demand in the market. Goods whose supplies are restricted, or for which there is growing consumer demand, may experience price increases, making them more expensive absolutely and in relation to other goods. Goods whose market supplies are growing, or the market demand for which is declining, may experience relative price declines.

The evidence from two years of price data collected by the PCBS suggests the CPI rose 14.2 per cent between December 1995 and December 1997. There were substantial variations in the average price increases of specific good and service groups as shown in Table 14. The relative prices of clothing, medical care, furniture, beverages and transportation rose while those for education, housing, miscellaneous goods (personal care and restaurant meals), food and recreation declined. This is indicated by the percentage point differences in the price increases for the various groups in relation to overall CPI inflation where a positive term indicates a relative price increase and a negative one indicates a relative price decrease.

Table 14
Inflation Rates and Relative Price Changes for
Major Commodity and Service Groups
in the WBGS, 1996-1997 59
(with 1996 base period)
Inflation Rates
Percentage Point
Difference Relative
to All-Item CPI
Inflation Rate
Major Groups
(1996-1997)
(1996-1997)
Food
11.72%
-2.57
Beverages and Tobacco
18.20%
3.91
Textiles, Clothing and Footwear
25.42%
11.13
Housing
8.73%
-5.56
Furniture, Household Goods & Services
19.04%
4.74
Transport and Communications
15.84%
1.55
Education
8.57%
-5.72
Medical Care
20.73%
6.44
Recreation, Cultural Goods & Services
11.74%
-2.55
Miscellaneous Goods and Services
10.72%
-3.57
All-Item Consumer Price Index
14.29%
0.00

These relative price increases suggest changes in the market conditions affecting these individual groups of goods and services. The implications of these changes for living levels are important as they may stimulate reallocations of household expenditures. For example, the largest share of household expenditures is for food, the relative price of which has declined. This may be due to the decline in household food expenditures, as indicated in Table 11. The relative decline in housing prices could indicate a relative decline in the ability of consumers to rent or buy homes or flats. Clothing prices, the third most prominent expenditure for WBGS households, had the highest relative price increases, which may reflect a decline in the number of producers and/or non-competitive practices.

The implications of these relative price changes for businesses or potential investors is that they may indicate opportunities. For example, higher relative prices for clothing, furniture, and transportation may indicate restricted supply and, therefore, relatively high profits to be earned in such activities. On the other hand, lower relative prices for housing, personal care, restaurant meals and recreation may be indicative of greater price competition and associated lower profitability. Likewise, rising relative costs of medical care may indicate more lucrative opportunities for medical professionals, while relatively lower education prices may suggest lagging salaries for teachers, professors and/or administrators in the schools, colleges and universities.

IV. LOOKING AHEAD to 1998

Daily WBGS labour flows to Israeli-controlled areas during first-quarter 1998 averaged 44,500 workers, about the same as first-quarter 1997, but 18 per cent more than the daily average for 1997 as a whole. Furthermore, the commencement of the Israeli policy to allow some WBGS workers to remain in Israel during the work week and during closures may contribute to more stable flows of labour in the future. Commercial truck movements during first-quarter 1998, as compared to the same period in 1997, were higher with a 12 per cent increase in exported truckloads on a monthly basis and a 21 per cent increase in the number of imported ones. There were also no comprehensive closures imposed during first-quarter 1998. Such trends, which are indicative of Israel-WBGS economic relations, suggest a good economic start for the year. Actual outcomes, however, will depend to a large extent on private investment and employment trends generally, as well as progress in the public sector’s ability to create the infrastructural and institutional enabling environment for longer term economic growth.
NOTES


1. See UNSCO Quarterly Report, 1 April 1997. For copies of previous UNSCO Reports, call 07-822746. From outside the WBGS and Israel, call +972-7-822746. For e-mail communications use: ajluni@un.org. UNSCO Reports can also be accessed at the UNSCO website at: www.arts.mcgill.ca/mepp/unsco/unfront.html

2. Palestinian Ministry of Finance “Report on Fiscal Developments in April-September 1997 and Outlook for Remainder of 1997,” 31 October, 1997.

3. Labour flow estimates in this table exclude unofficial--non-permitted--labour flows from the West Bank. In estimating total labour flows, it was assumed that the per cent difference between the number of permits issued and actual labour flows on a monthly basis in the West Bank was the same as that in Gaza (for which relatively accurate data exist). Furthermore, because there are no accurate data on actual flows of labour to Israeli settlements, the assumption is made that all permits issued for this purpose were used, an assumption which overestimates to some extent total actual flows. Daily labour flow averages are calculated exclusive of weekends and all officially celebrated Jewish and Muslim holidays. Estimates are based on data and assistance provided by the Palestinian Ministry of Labour, the Palestinian National Security Service, Northern Command Area, Gaza and the Economics Branch of the Coordinator of Government Activities in the Territories (COGAT), Israeli Ministry of Defense, Tel Aviv.

4. Based on information from the PA Ministry of Labour.

5. Estimates of non-permitted West Bank labour flows to Israel are based on PCBS survey estimates of the proportion of WBGS workers employed in Israel during the first three quarters of 1997 in relation to UNSCO estimates of permitted labour flows. See PCBS Press Conference on the Labour Force Survey Results for the February-March, April-June and July-September 1997 Rounds.

6. These include the Gaza Strip crossing points at Erez/Beit Hanoun, the Erez Industrial Zone, Nahal Oz/Shuja’iyeh, Karni/Muntar, Sufa and Rafah and the West Bank bridges to Jordan---the Damiyeh/Adam and the Allenby/Karameh. The significant volume of commercial truck traffic between Israel and the West Bank is not monitored at fixed crossing points and is, therefore, not included in these estimates. Thus data and analysis here are mainly illustrative of trends in Gaza-Israel trade.

7. Data were gathered by UNSCO researchers with the cooperation of the PA Ministry of Economy and Trade, the PA crossing authorities and COGAT. Estimates exclude exports through the Rafah crossing--generally quite small--for which no data were made available. Daily averages are calculated exclusive of half the Fridays and all Saturdays and officially celebrated Jewish and Muslim holidays during which truck flows cease altogether or are negligible. See UNSCO Quarterly Report, 1 April 1997, pp. 45-46.

8. UNCTAD Private Investment in the Palestinian Territory; Recent Trends and Immediate Prospects, 30 July 1996, Chapter III. Over 80 per cent of WBGS private investment during the 1980s and early 1990s was concentrated in the construction branch--mainly for private residences. In the early 1990s, the World Bank estimated that WBGS residential construction contributed to over 20 per cent of the GDP, as compared to about 7.3 per cent in other economies with similar levels of income. World Bank Developing the Occupied Territories, volume three, p. 11.

9. There may be a significant lag time between the licensing of a project and the actual commencement or completion of work. Furthermore, in addition to formally licensed projects, there are unlicensed construction activities not reflected in the licensing data. With the assistance of the PCBS.

10. Comparing the same period in two years largely eliminates fluctuations which may be caused by seasonal factors. Data for fourth-quarter 1997 are presently not available from PCBS.

11. PCBS Construction Statistics: Building Licences vol. 1, issues 1-3 (1996); vol. 2, issues 1-3, (1997).

12. COGAT, Israeli Ministry of Defense, Tel Aviv, 12 January, 1998.

13. Whether the intention is translated into actual investment, however, depends on a number of variables including expectations about future business conditions and perceptions of political risk factors.

14. Data on company registrations are from the Companies Controller in the West Bank and the Companies Registrar in Gaza. With the assistance of the respective offices.

15. Data on bank activity are from the Palestinian Monetary Authority (PMA), 2 March 1998. With the assistance of the PMA.

16. Data on outstanding loans are from the PMA Monthly Statistical Bulletin, December 1997 and PMA unpublished data. Information on the composition of lending is from the PMA, unpublished data. With the assistance of the PMA. Also, see MAS Economic Monitor, Number 2, December 1997, pp. 18-20.

17. See UNSCO The West Bank and Gaza Strip Private Economy: Conditions and Prospects; Special Report, February 1998.

18. Information and assistance provided by the mentioned NGOs and UNRWA.

19. Draft Minutes of Joint Liaison Committee Meeting, 5 December 1996; Palestinian Ministry of Planning and International Cooperation, Aid Coordination Department Summary Tables of Donor Assistance, 4 October 1997.

20. Palestinian Ministry of Planning and International Cooperation, Aid Coordination Department 1997 Fourth Quarterly Monitoring Report of Donor Assistance, 31 December, 1997.

21. Gross fixed capital formation figures are from PCBS National Accounts-Preliminary Estimates 1994, 1995 and 1996. Public gross fixed capital formation was about US$ 56.9, 192.8 and 161.7 million in 1994, 1995 and 1996 respectively. With the assistance of the PCBS. Annual donor disbursement levels are from MOPIC Monitoring Report of Donor Assistance, 31 December 1997.

22. See Palestinian National Authority Palestinian Development Plan, 1998-2000; Summary Document, December 1997.

23. Closure days are UNSCO estimates based on data from the Palestinian Ministry of Labour. See UNSCO Quarterly Report, 1 April 1997, p. 45.

24. Internal closures prevented personal and commercial mobility between cities in the West Bank. See LACC Secretariat “Fact Sheet: Closure on the West Bank and Gaza, August-September 1997,” 6 October 1997.

25. Estimates of labour and commercial truck flows through monitored crossings for the February-March 1996 and August-September 1997 periods are UNSCO estimates based on data from Palestinian Authority and Government of Israel agencies.

26. See Local Aid Coordination Committee Secretariat “Fact Sheet: Closure on the West Bank and Gaza, August-September 1997,” 6 October 1997.

27. Regional estimates of GDP growth rates are from Mohamed El-Erian and Susan Fennell The Economy of the Middle East and North Africa in 1997, Washington, DC: International Monetary Fund, November 1997, pp. 4-5. WBGS estimates are from various reports of the Palestinian Ministry of Finance and the IMF.

28. PCBS National Accounts, 1994: Preliminary Estimates (January 1997) and National Accounts 1995-1996: Preliminary Estimates (Draft), December 1997.

29. The public sector share of GDP includes the following: producers of government services, education, health and social work, customs duties and net VAT on imports. The public sector share rose from 13.5 to 24.1 per cent of GDP during 1994-1996. Excluding the public sector from the analysis raises the relative contribution of the various economic branches in GDP. Caution is therefore warranted in using the results of this exercise.

30. See UNSCO Quarterly Report, 1 April 1997.

31. The relative branch contributions are based on nominal estimates of GDP by branch in PCBS National Accounts, 1994: Preliminary Estimates (January 1997) and National Accounts 1995-1996: Preliminary Estimates (Draft), December 1997. The economic branches have been consolidated to make them consistent with those used in the labour market section of the present report.

32. See PCBS Internal Trade Survey, 1994: Main Results (November, 1996).

33. This is the average population for the year based on PCBS Demography of the Palestinian Population, 1994. The end-year estimate according to this same source is 2,760,947. The preliminary estimates for the de facto WBGS population at end-year, based on the December 1997 census conducted by the PCBS, is 2,890,631. See PCBS Population, Housing and Establishment Census 1997; Press Conference on the Census Preliminary Results, 7 February 1998.

34. All population and labour force figures pertaining to 1996 are based on the last three quarters of the year due to the fact that PCBS did not conduct a labour force survey during first-quarter 1996. Figures for 1997 are based on the first three quarters of the year since PCBS has yet to release data on the fourth quarter.

35. Calculations are based on PCBS Labour Force Survey: Main Findings, Nos. 2-7. Labour force participation, full-employment, underemployment and unemployment rates are weighted by age group for persons 15-64 years of age. The adjusted unemployment rate is defined as the weighted unemployment rate plus the proportion of the working-age population who were “discouraged workers”--i.e., unemployed and not actively searching for employment for a reason other than illness, temporary work stoppage, school attendance, homemaking responsibilities or old age. Population data used to calculate total magnitudes are middle-series estimates for 1996 and 1997 from PCBS Demography of the Palestinian Population, 1994.

36. Based on PCBS Labour Force Survey: Main Findings, Nos. 2-7.

37. See UNSCO The West Bank and Gaza Strip Private Economy, February 1998.

38. See UNSCO Quarterly Report, 29 October 1996.

39. See UNSCO Quarterly Report, 4 October 1997.

40. ibid. , p. 12.

41. See UNSCO The West Bank and Gaza Strip Private Economy, February 1998. Eight new hotels were opened in the WBGS in the first half of 1997. See MAS Economic Monitor, Issue No. 2, 1997, p. 14. Nonetheless, the employment impact of both hotel and restaurant activity is relatively limited.

42. See UNSCO The West Bank and Gaza Strip Private Economy, February 1998, Annex IV.

43. Based on PCBS Labour Force Survey: Main Findings, Nos. 2-7. PA employment estimates are from Palestinian Ministry of Finance “Report on Fiscal Developments” various issues.

44. See UNSCO Quarterly Report, 4 October 1997, p. 14.

45. See PCBS The Establishment Census, 1994; Final Results, August 1995.

46. See PCBS Services Survey, 1994: Main Results, November, 1996 and UNSCO The West Bank and Gaza Strip Private Economy, February 1998, Annex IV.

47. Based on PCBS Labour Force Survey: Main Findings, Nos. 2-7. Labor force participation, full employment, underemployment and unemployment rates are weighted by age group for persons 15-64 years of age.

48. See UNSCO Quarterly Report, 4 October 1997, p. 17.

49. For female participation in various economic branches, see PCBS Labour Force Surveys.

50. See UNSCO Quarterly Report 1 April, 1997, p. 32.

51. Data in this table are from PCBS Labour Force Surveys and weighted averages of employment in the West Bank, Gaza and Israel from PCBS Press Conference on Labour Force Results Rounds 2-7. Nominal daily and monthly wages were converted from NIS to US$ using average quarterly exchange rates and deflated using the average regional CPI with a 1996 base period. See PCBS Consumer Price Index, various issues. The depreciation of the NIS relative to the US$ is responsible for approximately 2.5 percentage points of the reduction in daily and monthly wages. Monthly wage incomes are calculated by multiplying the average daily wage rate by the average number of days worked per month.

52. PCBS did not conduct the household expenditure survey during the fourth quarter of 1996.

53. Expenditures data for the first and second quarter of 1997 are from PCBS Expenditure and Consumption Levels; Semi-annual Report (January-June 1997), September 1997. Third and fourth quarter expenditures are from unpublished PCBS data. Original survey data, expressed in nominal JDs, were converted to US$ using the average JD/US$ exchange rates. Expenditures are deflated using the average CPI for each expenditure group for each period with base period in 1996. See PCBS Consumer Price Index (Revised Series), various issues. Taxes and other cash expenditures were deflated using the overall CPI.

54. Household expenditure averages for 1996 were calculated based on the first nine months of that year, as fourth quarter data are unavailable. PCBS Expenditure and Consumption Levels; Annual Report, January 1997.

55. UNSCO Quarterly Report, 1 April, 1997, p. 35.

56. Household expenditure calculations are taken from Table 11. Real monthly wages are taken from Table 9. Expenditures and were converted to US$ from data expressed in JDs while wages were converted to US$ from NIS. While the US$/JD exchange rate was relatively stable during the period under analysis, the NIS depreciated against the US$. Therefore, the decline in real monthly wages, expressed in US$, includes the effects of the exchange rate movement. This overstates, to some extent, both the purchasing power decline of monthly wages and the improvement in wage sufficiency.

57. See IMF Recent Economic Developments, February 1997, p. 13.

58. Data in this table are based on PCBS Consumer Price Index, Revised Series, various issues and unpublished data for the fourth quarter of 1997. Data in this table cover the period December 1996-December 1997. PCBS notes that the CPI for the Palestinian Territories is a separate composite index--not the average of East Jerusalem, the West Bank and the Gaza Strip.

59. Data in this table are derived from PCBS Consumer Price Index, Revised Series, various issues and unpublished data for the fourth quarter of 1997 using a 1996 base period. Inflation rates and relative price changes are for the period December 1995-December 1997.


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