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Source: World Bank
30 September 1993


DEVELOPING THE OCCUPIED TERRITORIES
AN INVESTMENT IN PEACE

Volume II: The Economy

The World Bank
Washington, D.C.
September 1993


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

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

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

ISBN 0-8213-2689-9
ISBN 0-8213-2694-5 (6-vol. set)

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CONTENTS

PREFACE - vii
1. OVERVIEW & SUMMARY - 1 II. ECONOMIC HISTORY SINCE 1967 - 10 III: STRUCTURAL POLICY CHANGES FOR THE FUTURE - 45 IV: MACROECONOMIC POLICIES FOR THE FUTURE - 59 V: SCENARIOS FOR THE 1990s - 73 FIGURES TABLES ANNEXES REFERENCES - 171

Preface

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

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

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

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

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

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

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

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

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

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

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

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

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

I. OVERVIEW AND SUMMARY

A. Introduction

1.1 The economy of the West Bank and Gaza is presently in a state of crisis. Following the Gulf war in January 1991 there was a substantial reduction in Palestinian employment in most Gulf states. With the partial closure of the border in March 1993 employment in Israel fell drastically and in June was still less than half of previous levels. Municipalities are starved of cash. Many public services are in disarray: power outages are frequent, drinking water is often below WHO health standards, and garbage rots on the streets in refugee camps in Gaza. Meanwhile, urban land prices have gone through the roof in West Bank towns and Gaza City.

1.2 The present crisis in the Occupied Territories is in sharp contrast to a history of large increases in incomes, which are now about three times the level of 25 years ago. Household conditions improved substantially, with a many-fold rise in possession of consumer durables (albeit many second hand) and in water and electricity connections, including in relatively disadvantaged refugee camps and villages. There was also a substantial reduction in infant mortality and rise in school enrollments. Since unskilled labor played a central role in past growth, it is almost certainly the case that the poor participated in the gains implying a large reduction in poverty.

1.3 This report attempts to analyze the issues and choices thrown up by the current state of development in the OT and the economic agreements that could emerge from the on-going peace negotiations. The report attempts to adhere to a strictly economic perspective, recognizing that many of the questions will be subject to bilateral negotiations between the Israelis and Palestinians. The companion volumes on economic infrastructure, human resources and social services, private sector development and agriculture examine sectoral conditions and policy choices. As with the other volumes, this report must contend with uncertainty surrounding the outcomes of present and future negotiations.

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