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Source: Special Coordinator in the Occupied Territories (UNSCO)
30 June 2001
Office of the United Nations Special Co-ordinator

Report on the Palestinian Economy

Spring 2001




ACKNOWLEDGMENTS

In addition to the Government of Norway, whose generosity has made this report possible, UNSCO would like to extend its gratitude to the institutions which have provided data, information and assistance.

Numerous institutions of the Palestinian Authority have generously provided information and assistance for the preparation of this report. These include: the Palestinian Central Bureau of Statistics (PCBS) and, in particular, the PCBS President, the Economics Statistics Directorate, the Labour Statistics Unit, Foreign Trade Statistics Department and the Living Standards Department; the Ministry of Labour, the Ministry of Economy and Trade, the Ministry of Finance, the Ministry of Agriculture, the Companies Registrar of the Ministry of Justice, the Palestinian Monetary Authority, the Ministry of Planning and International Cooperation, the National Security Service, Northern Area Command – Gaza, the Border Security Service (Muntar), the General Administration for Crossings and Borders Authority (Allenby/Karameh Bridge).

Likewise, we extend our thanks to the Economics Branch of the Coordinator of Government Activities in the Territories, Israeli Ministry of Defense, which has provided data and assistance for this report.

The UNSCO Report benefits from the data, research, publications and advice of our colleagues at the World Bank and the International Monetary Fund, as well as 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, FATEN, (formerly Save the Children Foundation), American Near East Refugee Aid, the Arab Center for Agricultural Development, Oxfam-Quebec, CARE International, the Business Support Centre of the Palestinian Agricultural Relief Committees, Culture and Free Thought Society, the Catholic Relief Services and the Co-operative Housing Foundation. Appreciation is also extended to the United Nations Relief and Works Agency for Palestine Refugees in the Near East (UNRWA) for providing information used in this report.

Thanks are extended to the Palestinian Development InfoNet at McGill University in Montreal for hosting the UNSCO website.

Any shortcomings in the use of the data and information provided by these sources are the sole responsibility of UNSCO. This edition of the UNSCO Report was assisted by the FAFO Institute of Applied Social Science in Oslo, Norway.


Note to the User

The geographic designations used in this report refer to the areas where economic activity of various sorts is conducted by the Palestinians. The designations do not imply any judgements on the legal status of current jurisdictional boundaries.

Throughout the report, change in indicators is normally given as a percentage, with the exception of where the indicator is a percentage rate (e.g., unemployment), when change is given as the absolute difference between percentage points.

Copies of this report may be downloaded at the UNSCO website at: www.unsco.org

For more information about this report please contact UNSCO, Gaza at 08-2822746 (phone) or 08-2820966 (facsimile), or West Bank Office at 02-2965942 (phone). For calls from abroad, use +972-8-2822746 or +972-2-2965942. Electronic mail communications should be addressed to unsco@un.org or unsco-wb@palnet.com


TABLE OF CONTENTS

List of Tables

List of Figures

EXECUTIVE SUMMARY

1. MOBILITY RESTRICTIONS AND BORDER CLOSURES


2. MACROECONOMIC TRENDS 2.3 Trade Flows
3. LABOUR MARKET TRENDS 3.3 Underlying Labour Market Dynamics 4. TRENDS IN LIVING LEVELS 4.2 Wage income losses in the context of the crisis
4.3 Coping strategies as a response to income decline
5. OUTLOOK



List of Tables

Table 1: Number of Days with Imposed Border Closures on the Palestinian Territory, 1993-2000

Table 2: Internal closures Imposed in the Palestinian Territory, October-December 2000

Table 3: Growth Estimates Inclusive and Exclusive of the Crisis, Aggregate and Per Capita, 1999-2000

Table 4: Breakdown of Permits Issued and Estimated Palestinian Labour Flows to ISI, 2000

Table 5: Registered Palestinian-Israeli Non-agricultural Trade, 2000

Table 6: Truckload Movements through Monitored Commercial Crossings, 2000

Table 7: Cement Imports to West Bank and Gaza by Entry Point, 2000

Table 8: Registration of New Companies by Legal Status, 1999-2000

Table 9: Registered Investment in West Bank by Residence of Investor, 1999-2000

Table 10: Registered Investment in West Bank by Economic Branch, 1999-2000

Table 11: Outstanding Bank Credit to Private Business by Economic Branch

Table 12:Outstanding Bank Credit to Trade

Table 13: Population and Labour Force Estimates, 1999-2000

Table 14: Estimates of Employment, Unemployment and Adjusted Unemployment, 1999-2000

Table 15: Employment by Status, 1999 and 2000

Table 16: Employment by Place of Work, 1999-2000

Table 17: Distribution of Employment by Industry (domestic and ISI), 1999-2000

Table 18: Distribution of Employment by Industry and Location (domestic and ISI), 1999-2000

Table 19: Estimated Real Wage Income for Palestinian Households, 1999-2000

Table 20: Estimated Real Wage Income for Palestinian Households, QIII-QIV 2000

Table 21:Consumer Price Inflation Rates, 2000


List of Figures


Figure 1: Estimated Annual Real GDP Growth, Inclusive and Exclusive of Crisis, 1994-2000

Figure 2: Permits Issues to Palestinian Workers in ISI, 2000

Figure 3: Truckload Movements through Monitored Commercial Crossings, 2000

Figure 4: Cement Imports to West Bank and Gaza, 2000

Figure 5: Number of New Companies Registered, 1999 and 2000

Figure 6: Labour Force Participation Rates by Region, 1999 and 2000

Figure 7: Unemployment Rate in the Palestinian Territory, mid-1996-2000

Figure 8: Employment by place of work, 1999-2000

Figure 9: Quarterly Changes in Employment, Distributed by Industry (domestic and ISI), QIII-QIV 2000

Figure 10: Consumer Price Index for Food, Housing and Transportation, from January 1998



EXECUTIVE SUMMARY

This Report on the Palestinian Economy covers macro-economic and socio-economic developments during the year 2000. As is widely known, the eruption of a severe political and security crisis at the beginning of the fourth quarter dramatically affected economic indicators for the year as a whole. The persistence of that crisis through 2001 has led to even deeper and longer-lasting economic effects than are reported in the pages below. For the purposes of this report, UNSCO has tried to capture the impact of fourth quarter developments on annual economic performance for 2000. A forthcoming update on Impact on the Palestinian Economy of Confrontation, Border Closures and Mobility Restrictions, 1 October 2000 - 30 June 2001 , provides further data.

Confrontation, Movement Restrictions and Border Closure

The factor most responsible for negative developments in the fourth quarter, and consequent effects on annual development, is the combination of movement restrictions and border closures imposed by Israeli authorities in response to crisis and confrontation. What is often described in short-hand as “ closure” has entailed the imposition of mobility restrictions on people and goods at the Occupied Palestinian Territory’s external borders (with Israel and with the neighboring countries of Egypt and Jordan) and at multiple points internally within the West Bank and Gaza.

The Palestinian border with Israel was effectively closed for 72 days during the 92 days of the last quarter of 2000, restricting Palestinian exports and imports and inhibiting Palestinian workers from reaching their place of work – and thus their source of income – in Israel, Israeli Settlements and Industrial Zones (ISIs). International crossings were even more heavily restricted.

More consequential to the domestic economy were internal movement restrictions imposed within the West Bank and Gaza. During the last quarter, what this Report characterizes as “severe” internal closure was in effect for 52 days in the West Bank and 10 days in Gaza. What can be characterized as “partial” internal closure was in place for 40 days in the West Bank and 75 days in Gaza. The short-term and direct economic effects of such conditions were to reduce income to farmers, workers, merchants and business people who could not reach their places of employment or who were unable to obtain inputs and/or sell their goods and services. In turn, the effect of income loss has been a decrease in demand for goods and services produced in the domestic economy, generating a further decline in production and employment.

Macroeconomic Trends

In the spring of 2000, the International Monetary Fund (IMF) and the Palestinian Authority (PA) Ministry of Finance projected that the Palestinian economy would continue to grow as it had since 1997 and that real growth rates for GDP and GNP for the Palestinian territory would reach 5 and 6 percent respectively. Instead, the onset of political crisis in the fourth quarter and, with it, the imposition of movement restrictions and border closures disrupted macroeconomic progress, leading to an overall annual decline in GDP (-8.2 percent ) and GNP (-7.6 percent). As a result of high population growth, the figures for per capita income decline are even higher.

UNSCO estimates that during the last quarter of 2000, economic activities in the West Bank and Gaza dropped by 51 percent, corresponding to income losses of USD 671 million and reducing annual GDP from the projected USD 5,338 million to USD 4,677 million. The effective “disemployment” of Palestinian workers in Israel caused further wage losses estimated at USD 182 million, reducing annual GNP from the projected USD 6,654 million to USD 5,801 million.

Economic Indicators

Selected economic indicators further show the negative impact of fourth quarter developments on economic performance for the year as a whole.

Work Permits Issued and Used : The number of permit-holding Palestinian workers estimated to be working in ISI plummeted by 93 percent between the third and fourth qurater of 2000, from approximately 52,000 on a daily basis to fewer than 4,000. Moreover, the average number of permits used dropped from 93 percent during the third quarter to 43 percent during the fourth, indicating the difficulty for even permit-holding workers to reach their workplace in ISI.

Trade Flows : In nominal terms, the total value of registered bilateral trade between Israel and the West Bank and Gaza dropped sharply in 2000 due to a steep decline during the last quarter. Between the third and fourth quarters, imports decreased by 37 percent and exports by 15 percent. Palestinian trade, measured in terms of truckload movement, also showed a steep decline. During the fourth quarter of 2000, the monthly average of imported truckloads decreased by 75 percent and exported truckloads dropped by 58 percent.

Private Investment : Cement imports, which can be used as a proxy measure of construction activity, declined 64 percent in the fourth quarter of 2000. Even more dramatic, new company registrations, which can be seen as an indicator of planned investment, declined 80 percent in the fourth quarter.

Banking System : The value of bank deposits grew for the year as a whole (up 22 percent from 1999), although their value declined between the third and fourth quarter (from USD 3,721 million to USD 3,506 million). Meanwhile, the value of outstanding loans grew by over 34 percent between 1999 and 2000 with short-term credit – specifically overdrafts – making up a higher share of the overall portfolio of banks operating in the West Bank and Gaza. The growth rate of bank credit to businesses also declined to 22 percent in 2000 (compared to over 32 percent in 1999), indicating concern about the impact of deteriorating economic and social conditions on business prospects.

Donor disbursements : While donor commitments marginally increased between 1999 and 2000, disbursements decreased by 30 percent in absolute terms (to USD 369.3 million from USD 523.9 million) and the ratio of disbursements to commitments dropped to 51 percent in 2000 from 76 percent in 1999.

Labour Market Trends

The sudden economic depression that hit the Palestinian economy in the last three months of 2000 significantly affected labour force participation and both level and distribution of employment.

While the average size of the Palestinian working-age population grew by 3.9 percent in 2000, average participation in the labour force actually declined. On a quarterly basis, the “labour force particiation rate” fluctuated considerably, increasing in the first half of the year to a peak of 43.5 percent in the third quarter before falling to 39.2 percent in the last quarter. This decline in labour force participation is largely due to the phenomenon of “discouraged workers” (who are “discouraged” by labour market conditions from seeking work). It is estimated that during the fourth quarter of 2000 the number of “discouraged workers” increased by 35 percent (from 94,000 to 127,000).

In absolute terms, the number of employed Palestinians declined sharply from 661,000 in the third quarter to 479,000 in the fourth quarter of 2000, a drop of 182,000 who either joined the ranks of the unemployed or left the labour force within just three months. Indeed, unemployment, which had reached a low of 10 percent in September 2000 after years of steadily falling, spiked sharply in the fourth quarter to 28.3 percent of the labour force (a jump from 73,000 to 189,000 persons). The broader measure of “adjusted unemployment” (which counts discouraged workers along with the unemployed) shows an even larger increase of 89.2 percent during the last quarter.

The crisis also appears to have exerted a structural impact on the Palestinian labour market. The proportion of wage-workers and employers in the labour force has steeply declined while the number of unpaid family labour and self-employed has risen. This shift reflects increasing “ informalisation” of the economy and worsening labour market conditions in the context of declining domestic production and income.

Fourth quarter data on domestic employment also shows a shift in sectoral distribution of employment. Employment in the construction and manufacturing sectors, traditionally considered to be primary sources of employment for Palestinians, decreased significantly while employment in agriculture and the public sector has increased. The public sector accounted for an especially high share of domestic employment creation, in contrast with previous years when the private sector generated the bulk of new jobs.

Trends in Living Levels

Declining employment in the fourth quarter combined with high population growth has caused per capita income for 2000 to decline by 4.1 percent.

The reduction in employment and the associated losses of wage income combined to generate the steep increase in the poverty rate. While the poverty rate declined from 27 percent in 1996 to 21 percent in September 2000, the number of people living below the poverty line rose sharply to 35 percent by the end of December 2000. The crisis is also estimated to have had a disproportionate impact on the poorest households.

The Palestinian population has adapted to income loss in multiple ways. Although comprehensive data on household coping strategies are scarce, existing information suggests that most Palestinian households have reduced overall consumption and are starting to spend down savings. Many also appear to have shifted to agricultural work, a traditional labour market “shock absorber,” especially in the West Bank. Individual coping strategies have apparently been insufficient, however. Reportedly, 32 percent of the Palestinian population (more than one million people) received some form of emergency assistance, mainly food donations, between October and December.

Outlook

The economic crisis that characterized the last three months of 2000 has persisted through the first half of 2001. Early economic figures for 2001 show continuing decline in multiple indicators such as productive capacity utilization, service sector sales, construction, and hotel occupancy, giving concern for near and medium-term development, even if a political resolution is reached to end the crisis.

Although employment has shown some improvement in early 2001 – largely due to slightly higher labour flows to ISI – unemployment remains high. Persistent high unemployment, combined with decreasing participation in the labour force and increasing dependency rates, suggests that living standards for the Palestinian population may continue to decline in 2001.

The fiscal situation for the Palestinian Authority also remains fragile. The drop in domestic tax revenue and the continued withholding of Palestinian tax revenues by Israeli authorities is expected to lead to a USD 371million budget deficit (22 percent of total public expenditures) for 2001.

Finally, it is important to note that the depth and severity of the current crisis is unprecedented. After three years of economic recovery following the previous crisis in 1996, the current shock will undoubtedly take even longer to overcome. Even if a political resolution is reached quickly and brings with it a full lifting of movement restrictions and resumption of “normal” economic life, genuine economic recovery will take years and will require substantial resources and sustained policy attention from all stakeholders in Palestinian economic and institutional development.


1. MOBILITY RESTRICTIONS AND BORDER CLOSURES

As is widely known, the eruption of a severe political and security crisis at the beginning of the fourth quarter dramatically affected economic indicators for the year as a whole. In this context, the primary factor negatively affecting the Palestinian economy in the fourth quarter was the combination of movement restrictions and border closures imposed by Israeli authorities in response to the crisis, making this issue the appropriate starting point for this report.

The political crisis that erupted in September 2000 has been characterised by unprecedented levels of confrontation and the most severe movement restrictions imposed on the Palestinian population and territory since 1967. Mobility restrictions have taken three basic forms: closure of the border between Israel and the West Bank and Gaza, particularly affecting Gaza; closure of international crossings between the West Bank and Gaza and neighbouring countries; and “internal closures” within the West Bank and Gaza.

1.1 Border Closures with Israel

In the last three months of 2000, the border between Israel and the Palestinian Territory was effectively closed 72 days, compared to only three days of border closure in the first nine months of the year. 1 This raised the number of lost working days to their highest annual level since 1997 (Table 1).

The closure of borders with Israel also resulted in the effective closure of the “Safe Passage” route, designed to allow Palestinians to move relatively freely between the West Bank and Gaza and which had been in operation for nearly one year. The route was closed by Israeli authorities on 6 October 2000 and remained so to the end of 2000.

TABLE 1

Number of days with imposed border closures on the Palestinian Territory, 1993-2000 2

Total days of border closure
Of which working days lost
Lost Days in % of

Potential Work Days

1993
26
17
6.1%
1994
89
64
23.1%
1995
112
83.5
29.9%
1996
121
89.5
31.9%
1997
79
57
20.5%
1998
26
14.5
5.2%
1999
16
7
2.5%
2000
75
52
18.8%

1.2 Closure of International Crossings

International crossings were also heavily affected by movement restrictions imposed during the fourth quarter, reducing the flow of goods and people between the West Bank and Gaza and the rest of the world. These included the closing of the Allenby/Karameh bridge to Jordan (29 days), the Rafah crossing to Egypt (49 days) and Gaza International Airport (42 days). Even these figures underestimate the effective ability of Palestinians to use international crossings since internal closures impose a “prior” impediment on movement from within the West Bank or Gaza to international crossings on even those days when the crossings have been formally open.

1.3 Internal Closures

In the fourth quarter of 2000, severe movement restrictions were also imposed within the West Bank and within Gaza.

Severe internal closures - entailing intensified security checks, the prohibition of the use of primary roads and the placement of physical barriers on many secondary roads between Palestinian villages and towns - were imposed on 52 out of a total 92 days in West Bank, and 10 out of 92 days in Gaza (Table 2). For Palestinians, travel during severe internal closure entailed having to use secondary or tertiary roads, presenting various difficulties including time delays and increased travel costs, higher instances of road accidents, damage to vehicles, and risk and fear of intimidation and harm by military authorities or Israeli settlers at checkpoints. In Gaza, severe internal closure further entailed the complete cessation of north-south travel, effectively creating three isolated enclaves in the Gaza Strip, with personal or vehicle mobility on main roads reserved exclusively for Israeli military personnel, Israeli settlers and non-Palestinians. 3

TABLE 2

Internal closures imposed in the Palestinian Territory, October-December 2000 4

Region
Type of closure
Number of days
Percent of days affected during the fourth quarter
West Bank
Partial Closure
40
44%
Severe Closure
52
56%
Gaza Strip
Partial Closure
75
82%
Severe Closure
10
12%

Partial internal closures – where most secondary roads but only some main roads are accessible to Palestinians – were imposed in the West Bank on 40 days during the last quarter of 2000 and in Gaza on 75 days.


2. MACROECONOMIC TRENDS

2.1 Overall Macroeconomic Performance

Initial projections of the PA Ministry of Finance and the –International Monetary Fund for the year 2000 anticipated that real growth rates of Gross Domestic Product (GDP) and Gross National Product (GNP) would amount to 5 and 6 percent respectively. 5 The estimates were based on the assumption that the positive macroeconomic trends witnessed since 1997 would persist throughout 2000. Yet this failed to materialise. Instead, the outbreak of the political crisis in September 2000 and the imposition of border closures and movement restrictions on the Palestinian Territory by Israeli authorities disrupted the macroeconomic progress recorded in the first nine months of the year.

Available macroeconomic indicators point to significant progress in the first three quarters of 2000. These include a 7.4 percent increase in the value of registered commercial transactions with Israel, a 14.9 percent increase in construction (as measured by cement imports from Israel and other countries) a 31.9 percent increase in the credit extended by commercial banks and a 17 percent increase in credit extended by UNRWA and NGO credit programmes. Labour force participation and employment also increased while unemployment declined to the relatively low level of 10 percent.

Thus, projected economic growth was expected to raise the estimated GDP to USD 5,338 million and GNP to USD 6,654 million; this implies a per capita GDP of USD 1,678 and a per capita GNP of USD 2,092. The onset of the crisis at the start of the last quarter, however, and in particular the imposition of border closures and internal movement restrictions, heavily affected Palestinian economy, resulting in negative development for the year as a whole (Table 3).

TABLE 3

Growth Estimates Inclusive and Exclusive of the Crisis, Aggregate and Per Capita, 1999-2000 6

(constant prices)

1999
2000

In the Absence

Of Crisis

2000

Inclusive of

Crisis Impact

1999 –2000

Growth Rate (%)

Real GDP (USD million)
5,083
5,338
4,667
-8.2%
Real GNP (USD million)
6,278
6,654
5,801
-7.6%
Real GDP Per Capita (USD)
1,656
1,678
1,467
-11.4%
Real GNP Per Capita (USD)
2,045
2,092
1,824
-10.8%

According to UNSCO estimates, the crisis led to a 51 percent drop in internal Palestinian economic activities (or GDP) in the last three months of 2000. 7 The corresponding value of domestic income losses during this period is USD 671 million, reducing the estimated GDP from the projected USD 5,338 to USD 4,677 million (or from USD 1,678 to 1,467 per capita).

In addition, the economy was deprived of wages from Palestinian workers who could no longer report to their jobs in Israel, Israeli Settlements and Industrial Zones (ISI). In the last quarter of 2000, wage income losses for Palestinian workers in the Israeli labour market were estimated at USD 182 million, reducing GNP from the projected USD 6,654 million to USD 5,801 million (or from USD 2,092 to 1,824 per capita) 8 .

Excluding material and other indirect losses, the Palestinian economy thus incurred direct losses of USD 853 million and a negative turn in annual growth rates. Due to fourth quarter losses alone, annual GDP growth rate dropped from its projected 5 percent to –8.2 percent, and annual GNP growth rate from its projected 6 percent to –7.6 percent. As a result of high population growth, per capita income reduction was even higher: per capita GDP declined by 11.4 percent relative to 1999, and GNP per capita by 10.8 percent.

FIGURE 1

Estimated Annual Real GDP Growth, Inclusive and Exclusive of the Crisis, 1994 1994– 2000 9

2.2 Work Permits to Israel, Israeli Settlements and Industrial Zones (ISI)

The closure imposed on the West Bank and Gaza during the last quarter of 2000 drastically reduced Palestinian labour flows to Israel, Israeli Settlements and Industrial Zones (ISI).

In the third quarter, over 52,000 permit-holding Palestinian workers were estimated to be working in ISI on a daily basis. In the fourth quarter, the number of permit-holding Palestinian workers working in ISI plummeted by 93 percent to fewer than 4000. On an annual basis, this meant a drop of 23 percent, from an average of over 50,000 workers going to ISI on a daily basis in 1999 to just over 38,000 in 2000 (Table 4).

The average number of work permits issued by the Israeli authorities to Palestinian also dropped from the third to the fourth quarter, by 84 percent. On an annual basis, the average number of work permits issued declined by 25 percent to 42,335 permits in 2000 from 56,752 permits in 1999. Estimates further suggest that Palestinian workers in Israel were impeded from reporting to their jobs to a greater extent than workers in Israeli settlements and industrial zones. The monthly average of permits issued for work in Israel decreased by almost 29 percent from 1999 to 2000, while permits issued for Palestinian workers in the settlements and industrial zonesdecreased by less than 14 percent.

It is noteworthy that the average proportion of permitsused decreased to 43 percent in the last three months of 2000, indicating that at times even permitted workers could not reach their workplace in ISI. 10

FIGURE 2

Permits Issued to Palestinian Workers in ISI, 2000 (per month)

TABLE 4

Breakdown of Permits Issued and Estimated Permitted Labour Flows to ISI, 2000 11

WORK PERMITS ISSUED
WORK PERMITS USED
To Israel
To Settlements/ Industrial Zones
Total to ISI
Permitted Labour Flows to ISI (Estimated)
January
43,032
12,446
55,478
43,546
February
41,719
13,002
54,721
48,820
March
41,170
13,682
54,852
50,528
April
40,664
13,816
54,480
53,492
May
38,706
12,460
51,166
47,430
June
39,154
10,185
49,339
47,787
July
40,668
11,757
52,425
50,470
August
41,080
13,722
54,802
51,587
September
40,370
14,872
55,242
54,654
October
0
9,465
9,465
6,667
November
0
3,863
3,863
1,500
December
8,076
4,109
12,185
2,956
Annual Average
2000
31,220
11,115
42,335
38,359
Change 1999-2000(%)
-29%
-14%
-25%
-23%
Quarterly Figures
Monthly Avg. QIII 2000
40,706
13,450
54,156
52,526
Monthly Avg. QIV 2000
2,692
5,812
8,504
3,708
Change QIII – QIV (%)
-93%
-57%
-84%
-93%

2.3 Trade Flows

Registered Trade with Israel

In nominal terms, as indicated by value-added tax (VAT) clearances, the total value of registered bilateral trade (exports plus imports) dropped sharply in 2000 due to a steep decline in the last quarter. Between the third and fourth quarter, imports decreased by 37 percent and exports by 15 percent. As a result, the annual value of trade for 2000 was 3 percent lower than for 1999 12 , a sharp contrast with the 9 percent increase in 1999 relative to 1998.

The size of unregistered trade between Palestinian and Israeli traders is also expected to have declined compared to 1999.

Both imports and exports were heavily affected by the mobility restrictions imposed in the fourth quarter. Imports were particularly hit by declining consumer demand due to unemployment and subsequently lower household income. In addition, the launch of campaigns aimed at encouraging nationally produced commodities, may have reduced demand for imports.

In nominal terms, registered Israeli exports are estimated at USD 1,729 million (NIS 7,045 million), while Palestinian exports are estimated at USD 455 million (NIS 1,858 million). This indicates a registered Palestinian trade deficit with Israel of about USD 1,274 million (NIS 5,188 million) for the year 2000 compared to USD 1,305 million (NIS 5,409 million) in 1999.

TABLE 5

Registered Palestinian-Israeli Non-agricultural Trade, 2000 13

(estimated value in nominal NIS million)

Registered Exports to Israel
Registered Imports from Israel
January
185
561
February
127
620
March
172
630
April
128
624
May
181
668
June
209
685
July
158
705
August
182
738
September
121
559
October
124
408
November
163
412
December
107
435
Annual figures
Total 2000
1,857
7,045
Total 1999
1,881
7,290
Change 1999-2000 (%)
-1%
-3%
Quaterly figures
Monthly Average QIII 2000
154
667
Monthly Average QIV 2000
131
418
Change QIII-QIV (%)
-15 %
-37 %

Commercial Truckload Movement

The reduction in Palestinian trade as well as the extent of border controls can also be measured by interruptions in the flow of commercial trucks through monitored commercial crossings.

Between October and December 2000, monitored crossings were either partially or completely closed as part of the movement restrictions imposed by Israeli authorities, drastically affecting Palestinian trade. All commercial crossings between

FIGURE 3

Truckloads Movements through Monitored Commercial Crossings, 2000 14 (per month)

TABLE 6

Truckload Movements through Monitored Commercial Crossings, 2000 15 (per month)

Monthly exported truckloads
Monthly imported truckloads
January
2,261
9,898
February
2,716
11,713
March
2,185
13,016
April
2,245
11,877
May
2,332
15,155
June
1,804
12,759
July
1,808
15,319
August
1,516
14,113
September
1,626
11,679
October
593
4,475
November
680
2,503
December
829
3,156
Annual figures
Average 1999
1,671
10,520
Average 2000
1,716
10,472
Change 1999-2000 (%)
2.7 %
0.5 %
Quarterly figures
Monthly Average QIII 2000
1,650
13,704
Monthly Average QIV 2000
701
3,378
Change QIII-QIV (%)
-57.6 %
-75.4 %


Israel and the Gaza Strip were sealed, except for Karni/Muntar. 16 Between the third and fourth quarter of the year, the monthly average of imported truckloads decreased by over 75percent and exported truckloads by over 58 percent. That the movement of commercial trucks showed only marginal changes on an annual basis – the monthly average of exported truckloads increasing by 2.7 percent and imported truckloads decreasing by 0.5 percent – primarily reflects the balancing effect of positive trends in the first nine months of the year (Table 6).

Both truckload movements and VAT clearances indicate a sharper decline in imports than in exports, which is likely to be due to a drop in consumer demand and substitution of Palestinian for Israeli goods.

2.4 Private Investment

Cement imports

Construction investment, the main component of private investment in the Palestinian economy, was severely affected in the last quarter of 2000, leading to a negative development for the year as a whole.

Cement imports, which can be used as a proxy measure to track developments in construction activity, dropped dramatically by 64 percent between the third and fourth quarter of 2000, leading to a decline in average monthly cement imports of 12 percent in 2000 relative to 1999 (Table 7 and Figure 4).

FIGURE 4

Cement Imports to West Bank and Gaza, 2000 17 (per month)

Factors causing the fourth quarter drop in cement imports include the severity of movement restrictions between the Palestinian Territory and Israel, a decrease in construction activities due to increased uncertainty affecting investment decisions, and income shortfall affecting households demand for new housing.

TABLE 7

Cement Imports to West Bank and Gaza by Entry Point, 2000 18 (tons)

West Bank

from Israel

From Jordan
Gaza Strip

from Israel

Through

Ashdod Port

West Bank/Gaza Total
January
47,824
5,688
31,575
3,900
88,987
February
78,352
8,901
31,269
8,000
126,522
March
77,797
10,508
47,773
11,300
147,378
April
104,506
11,160
47,091
7,150
169,907
May
115,722
12,998
49,835
33,000
211,555
June
110,015
12,390
40,621
19,650
182,676
July
105,951
10,170
43,504
33,700
193,325
August
108,878
9,510
39,715
20,600
178,703
September
96,002
12,060
33,730
30,500
172,292
October
70,036
1,344
5,294
0
76,674
November
66,000
392
1,556
0
67,948
December
23,240
5,708
23,347
0
52,295
Annual figures
Total 2000
1,004,323
100,829
395,310
167,800
1,668,262
Monthly Average 1999
91,921
10,808
4,075
14,167
157,646
Monthly Average 2000
83,694
8,402
32,943
13,983
139,022
% Change 1999-2000
-9 %
-22 %
708 %
-1 %
-12 %
Quarterly figures
Monthly Average QIII 2000
103,610
10,580
38,983
28,267
181,440
Monthly Average QIV 2000
53,092
2,481
10,066
0
65,639
% Change QIII-QIV
-49 %
-77 %
-74 %
-100 %
-64 %

New Company Registrations

New company registration, which is an indicator of planned investment, declined for 2000 as a whole due to a steep fall in new company registration in the fourth quarter. Between third and fourth quarter of 2000, the number of new companies registered fell by 80 percent (from 560 to 107 new companies), reflecting high economic uncertainty induced by the crisis (Figure 5). For 2000 overall, the number of new companies registered dropped by 5 percent, to 1,765 from 1,860 in 1999 (Table 8). 19 An estimated 52 percent of these were registered in Gaza and 48 percent in the West Bank.

In keeping with the trend witnessed in past years, private companies remained the dominant form of new business in Gaza; private limited companies predominated in the West Bank; and private and private limited companies, together, constituted an overwhelming proportion of new enterprises (99 percent in 2000). More than 74 percent of the 976 new private companies in 2000 were located in Gaza, while more than 76 percent of private limited companies were registered in West Bank. Only two public companies were registered in 2000 compared to four in 1999.

FIGURE 5

Number of new companies registered, 1999 and 2000 20 (per quarter)

TABLE 8

Registration of new companies by legal status, 1999 – 2000 21

Legal Status
1999
2000
Change 1999-2000 (%)
Private
1,014
976
-4.6%
Private Limited
831
776
-6.6%
Public Limited
4
2
-50.0%
Foreign Companies
11
11
0.0%
Total
1,860
1,765
-5.1%

Foreign company registration remained at the same level as in 1999, with eleven companies registering in 2000 (two in the West Bank and nine in Gaza)

Registered Investment Projects in West Bank

The value of West Bank projects registered by the Palestinian Investment Promotion Agency decreased by 73 percent in 2000 relative to1999 from USD 134.1 million to USD 36.6 million (Table 9). 22 Manufacturing and tourism sectors continued to count for more than 75 percent of West Bank registered investments in 2000 (Table 10). The share of registered investments in agriculture was 8.6 percent and construction 3 percent. It is estimated that the execution of all registered investment would create 1,236 new jobs in the West Bank. 23

TABLE 9

Registered investment in West Bank by Residence of Investor, 1999- 2000 24

(value in USD million)

Local
Foreign
Joint
Total
1999
94.20
4.86
35.06
134.13
2000
29.70
5.96
0.96
36.63
Change 1999-2000 (%)
-68.5%
22.7%
-97.3%
-72.7 %

TABLE 10

Registered investment in West Bank by Economic Branch, 1999-2000

(value in USD million)

Value (USD million)
Percentage distribution
1999
2000
1999
2000
Manufacturing
75.96
20.89
56.7%
57.0 %
Construction
0
1.10
0.0%
3.0%
Agriculture
1.57
3.14
1.2%
9.0%
Tourism
28.02
7.36
20.9%
20.1%
Health
15.98
1.27
12.0%
3.5%
Education
10.70
1.00
8.0%
2.8%
Other Services
1.89
1.88
1.4%
5.1%
Total
134.13
36.63
100.0%
100.0%

2.5 Trends in Private Business Finance

Bank Activity

The Palestinian banking system expanded at a lower rate in 2000 compared to 1999. The number of operating banks remained unchanged at 22 (nine Palestinian and thirteen foreign, mainly Jordanian).Only one new branch was established (in January 2000), bringing the total number of branches to 115.

Overall, deposits in the banking system grew at a rate of about 22 percent between December 1999 and December 2000, with the increase occurring exclusively in the first nine months of the year. 25 In the last three months of 2000, the value of bank deposits declined from USD 3,721 million at the end of September to USD 3,506 million at the end of December due to the decline in household income and business revenues.

The value of total outstanding bank loans grew by more than 34 percent between December 1999 and December 2000 reaching USD 1,348 million, relative to 21 percent growth rate between December 1998 and December 1999. 26 The crisis that began at the end of September impacted negatively on the overall commercial banking performance, with the value of commercial bank credit declining by more than 4 percent between September and December.

Short-term credits increased their share in total credit at the expense of long-term loans. The proportion of overdrafts – which have a repayment period of less than one year – in total bank credit increased from 53 percent to 57 percent from December 1999 to December 2000. At the same time, loans with repayment period of 1-3 years decreased their share from 43 percent to 38 percent.

The overall lending-to-deposit ratio, a measure of the degree of financial intermediation on the part of the banking system, increased from 34.9 percent in 1999 to 38.4 percent in the year 2000. Despite this increase, the lending-to-deposit ratio in the Palestinian economy remains low by regional and international standards. This reflects high levels of political risk perception on the part of banks – even prior to the outbreak of the crisis – combined with a lack of clarity in the commercial and economic laws.

Deteriorating economic conditions led to a substantial increase in the value and number of bounced cheques in the Palestinian banking system, particularly in the first month of the crisis. The value of bounced USD cheques increased to USD 10 million (1,835 cheques) in October from USD 6.6 million (1,334 cheques) in September, a rise of over 51 percent; the value of bounced NIS cheques increased to NIS 301 million (about USD 74 million; 47,189 cheques) from NIS 133 million (about USD 33 million; 28,188 cheques), a rise of over 125 percent. In November and December, the value and numbers of bounced cheques decreased slightly from the October spike, but were still substantially higher than in September. 27

Bank Credit to Business

While overall bank credit accelerated in 2000 as indicated above, credit to businesses decelerated, indicating concern among lenders and investors about the impact of deteriorating economic and social conditions on business prospects. Between 1999 and 2000, business credit grew by 22 percent, reaching about USD 750 million, compared with a more than 32 percent growth rate between 1998 and1999 (Table 11).

The deceleration of credit to private business was witnessed in almost all economic branches and was heavily affected by fourth quarter developments. In the productive branches – agriculture, manufacturing and construction – credit absorption grew by almost 17 percent in the first half of 2000, but declined by over 11 percent in the second half, making for a change in these branches between December1999 and December 2000 of only a 3.8 percent increase to USD 255 million (Table 11). This stands in sharp contrast to an 18.4 percent increase between December 1998 and December 1999.

TABLE 11

Outstanding bank credit to private business by economic branch 28 ( value in USD millions)

Annual figures
Quarterly figures
Dec. 1999
Dec. 2000
% Change
Sep. 2000
Dec. 2000
% Change
Agriculture
15.9
21.0
32 %
17.4
21.0
20 %
Manufacturing and Mining
105.9
109.9
4 %
110.6
109.9
-1 %
Construction
124.0
124.2
0 %
138.5
124.2
-10 %
Trade
265.3
357.8
35 %
335.8
357.8
7 %
Transportation Services
38.0
30.0
-21 %
45.8
30.0
-35 %
Tourism, Hotels & Restaurants
35.0
49.0
40 %
33.6
49.0
46 %
Financial Services
29.6
57.7
95 %
27.4
57.7
110 %
Total
613.8
749.6
22 %
709.2
749.6
6 %

Between December 1999 and December 2000, loans to agricultural activities increased by 32.3 percent, to manufacturing by 3.7 percent and to construction by 0.2 percent. Over the second half of the year 2000, credit extended to manufacturing and construction declined significantly by 10.7 and 14.5 percent respectively.

Credit to the service branches – financial services, tourism and transportation– expanded by only 29 percent in 2000 (reaching a value of USD 136.6 million) compared to an increase of more than 500 percent the previous year. In financial services and tourism, the trend was a dramatically lower growth rate: between December 1999 and December 2000, credit to financial services rose by 94.8 percent compared to 442.5 percent in the previous year-to-year period and to tourism by 28.9 percent compared to 59.4 percent. In transportation, the trend was an actual decline in credit: dropping by 21 percent between December 1999 and December 2000, compared to an increase of 59.8 percent in the previous year-to-year period. At the end of 2000, credit extended to service branches constituted 18 percent of total credit absorbed by private enterprises, a small increase in comparison with end year 1999.

Only the trade sector experienced an increased rate of growth in extended credit, with a rise of 34.9 percent between December 1999 and December 2000 (compared to an increase of 28.9 percent in the previous year-to-year period), to USD 357.8 million from USD 265.3 million (Table 12). This rapid growth raised the share of bank trade financing in total lending from 43.2 percent at end-year 1999 to 47.7 percent at end-year 2000; a relative increase of 10.4 percent.

Credit for foreign trade continued to grow at a faster rate compared to overall commerce credit – 91.7 percent – and accounted for 31 percent of all commercial lending by the end of 2000. Within foreign trade bank financing, loans extended to facilitate exports grew from USD 8.1 million to USD 17.2 million, an increase of 112 percent. This reflects a continued interest by commercial banks in export development and facilitation. Value of loans extended to finance imports increased by almost 90 percent, reaching USD 94.3 million, or 85 percent of total external trade lending.

TABLE 12

Outstanding bank credit to trade 29 (USD millions)

Dec. 1999
Dec. 2000
Change
Internal Trade
206.5
246.4
19.3 %
External Trade
58.1
111.4
91.7 %
Exports
8.1
17.18
112.1 %
Imports
50.0
94.3
88.6 %
Total
265.3
357.8
34.9 %

UNRWA and NGO Credit Programmes

Credit programmes administered by UNRWA and various NGOs continued to play an important role in loan extension in the Palestinian economy in 2000, with the total value of extended loans remaining at 1999 levels of around USD 31.7 million.30

Nonetheless, the volume of credit dropped by over 65 percent between the first three quarters of 2000, when the quarterly average was USD 9.4 million, and the fourth, when credit extended reached USD 3.2 million. Repayment rates were also significantly affected by the crisis. For example, the Palestinian Development Fund reported that only 42.2 percent of dues were repaid in October compared to more than 97 percent in August. 31

There was also considerable variation among the nine main lending programmes, however. One (Care International) transferred its programme to a Gazan NGO, five registered a decline in their operations (ANERA, Culture and Free Thought Society, Oxfam Quebec, the Cooperative Housing Foundation and the Business Support Centre of the Palestinian Agricultural Relief Committees), while the remaining three actually expanded lending activities in 2000. UNRWA increased lending by 7 percent to USD 11.6 million, FATEN increased lending to USD 4.4 million and the Arab Centre for Agriculture Development to USD 700,000 from USD 40,000.

2.6 Donor Disbursements

Since the Conference to Support Middle East Peace convened in Washington DC in October 1993, total financial commitment to the development of the Palestinian economy and society has amounted to USD 4,847 million. 32 By December 2000, 68.3 percent of these commitments had been disbursed, a total of USD 3,314 million. About 87.5 percent of disbursements were grants (USD 2,899 million) and 12.5 percent were loans (USD 414 million).

While donor commitments increased between 1999 and 2000 by 2 percent (to USD 699.3 million from USD 685 million), disbursements decreased by 30 percent in absolute terms (to USD 369.3 million from USD 523.9 million) and the ratio of disbursements to commitments dropped to only 51 percent in 2000 compared to 76 percent in 1999.

Disbursements in 2000 were primarily distributed among seven sectors: water and sanitation (19 percent), human and social development (9.9 percent), institution building (8.1 percent), health (7.4 percent), education (7 percent), productive sector development (6.8 percent) and infrastructure (6.6 percent). These funds were mainly allocated to public sector public investment (42.2 percent) and technical assistance (33.9 percent).


3. LABOUR MARKET TRENDS

3.1 Labour Force Growth

The average size of the Palestinian working-age population is estimated to have grown by 3.9 percent from 1999 to an annual average of 1.676 million persons in 2000.33 The labour force participation rate (LFPR) – the proportion of the working age population working or seeking work – declined slightly, from 41.7 to 41.5 percent (Table 13). 34 On a regional basis, average labour force participation declined by 0.4 percentage point in Gaza, whereas it increased marginally by 0.1 percentage point in the West Bank.

The absolute size of the labour force in the Palestinian economy reached an estimated annual average of 695,000 persons in 2000. The 3.5 percent increase in the labour force was thus exclusively a product of population growth, as the participation rate contributed negatively to labour force growth between the two periods.

TABLE 13

Population and Labour Force Estimates, 1999 and 2000 35

Annual Averages
Quarterly Averages
1999
2000
Change
QIII-00
QIV-00
Change
Working Age Population (1,000 persons)
1,613
1,676
3.9%
1,689
1,704
0.9%
Labour Force (1,000 persons)
672
695
3.5%
734
668
-9.1%
Labour Force Participation Rate (LFPR)
41.7%
41.5%
-0.2
43.5%
39.2%
-4.3
West Bank LFPR
43.5%
43.6%
0.1
45.3%
42.9%
-2.4
Gaza LFPR
37.9%
37.5%
-0.4
40.1%
32.0%
-8.1

On a quarter-to-quarter basis, the labour force participation rate fluctuated considerably: the rate increased in the first half of 2000, peaked at 43.5 percent in the third quarter, and then fell sharply to 39.2 percent in the last quarter. The decline was so steep that it led to a contraction in the absolute size of the labour force in the fourth quarter of the year. Notably, this drop in labour force participation contrasts sharply with the experience of 1996-1997, when periodic closures resulted in more people entering the labour market, presumably to offset declines in household income. 36

This decline in labour force participation is largely due to what is called the "discouraged workers" phenomenon. 37 Faced with protracted closures, mobility restrictions and macroeconomic depression, an increasing number of Palestinians appear to have given up finding employment altogether, and thus are no longer classified as part of the labour force. 38

While labour force participation fell in both the West Bank and Gaza in the fourth quarter, the decline was disproportionately steep in Gaza, where it fell from 40.1 to 32.0 percent between the third and fourth quarters of the year. By the fourth quarter the difference in labour force participation between West Bank and Gaza was nearly 11 percentage points, the highest of the year, further widening the gap in economic activity between the two regions (Figure 6).

FIGURE 6

Labour Force Participation Rates by Region, 1999 and 2000 39 (quarterly averages)

3.2 Employment and Unemployment

Since 1997, the Palestinian labour market had experienced an upward trend. This sustained positive development, which had continued through the first three quarters of 2000, was severely disrupted by the onset of the crisis, according to all employment indicators.

In the first nine months of the year, total employment (encompassing both “ ;full employment” and “underemployment”) grew by nearly 8.4 percent compared to the corresponding period in the previous year. Between the third and fourth quarter, employment fell by 27.6 percent.

In absolute terms, the number of employed 40 declined sharply from 661,000 workers in the third quarter to 479,000 workers in the fourth quarter of the year, resulting in the “disemployment” of 182,000 workers. This drastic fall in the number of employed in the last quarter of the year pushed annual employment growth down to an estimated 0.5 percent in 2000, particularly low in comparison to 1999 when employment grew by nearly 9.3 percent (Table 14). 41

TABLE 14

Estimates of Employment, Unemployment and Adjusted Unemployment, 1999-2000 42

Annual Averages
Quarterly Averages
1999
2000
Change
QIII-00
QIV-00
Change
Rates (% of labour force)
Employment
88.2%
85.5%
-2.7
90.0%
71.7%
-18.3
Full Employment
82.7%
80.5%
-2.2
83.6%
66.9%
-16.7
Underemployment
5.5%
5.0%
-0.5
6.4%
4.8%
-1.6
Unemployment
11.8%
14.5%
2.7
10.0%
28.3%
18.3
Total
100.0%
100.0%
100.0%
100.0%
Adjusted Unemployment
21.7%
24.9%
3.2
20.2%
39.8%
19.6
Persons (1,000)
Employed
593
596
0.5%
661
479
-27.6%
Fully Employed
556
561
0.9%
614
447
-27.3%
Underemployed
37
35
-4.7%
47
32
-31.8%
Unemployed
79
99
25.4%
73
189
157.2%
Unemployed (Adjusted)
164
198
20.4%
167
316
89.2%

Both components of total employment –full employment and under-employment – fell in the last quarter, strongly affecting annual averages and rates (Table 14). The full employment rate, representing those working at least 35 hours a week, dropped steeply in the last three months of 2000, marking the first decline observed since the launch of the PCBS Labour Force Surveys in 1995. While the full employment rate had reached 85.8 percent in the second quarter – its highest reading in recent history – it tumbled to 67 percent in the fourth quarter – its lowest reading since mid-1996. On an annual basis, this lowered the full employment rate from an average of 82.7 percent in 1999 to 80.5 percent in 2000.

The number of underemployed workers also declined, dropping 31.8 percent between the third and fourth quarter of 2000, which made for an annual decline of 4.7 percent (from 37,000 in 1999 to 35,000 in 2000). 43 The proportion of underemployed in the labour force – the underemployment rate – also fell, from about 5.5 percent of the labour force in 1999 to 5.0 percent in 2000.

In turn, after years of steadily falling unemployment, the number and rate of unemployed workers rose sharply. Between the third and fourth quarters of 2000, the number of unemployed rose by an estimated 157.2 percent, from an average of 73,000 persons to 189,000 persons. The relatively low rate of 10 percent unemployment that had been reached in the first three quarters of the year spiked to 28.3 percent in the last quarter for West Bank and Gaza combined – nearly the same rate recorded at the height of the 1996 closure (Figure 7). Regionally, unemployment in the West Bank rose from 7.5 to 26.3 percent, and in Gaza, from 15.5 to 33.5 percent between the third and fourth quarter.

On an annual basis, the unemployment rate increased from 11.8 percent of the labour force in 1999 to 14.5 percent in 2000. In absolute terms, the annual average number of unemployed people grew by nearly 25.4 percent to 99,000 persons.

FIGURE 7

Unemployment rate in the Palestinian Territory, mid-1996 to 2000 44 (quarterly)

To appreciate the extent of the unemployment crisis that hit the West Bank and Gaza in the last quarter of 2000, it is worth comparing the above estimates of standard unemployment with the broader measure of “adjusted unemployment” which includes workers “discouraged” from entering or remaining in the labour force (see footnote 37 and section 2.1 above). Using this broader definition, the adjusted unemployment rate climbed to 39.7 percent during the last quarter of 2000, compared to 20.2 percent in the last quarter of 1999. The number of adjusted unemployed then rises to 316,000 persons in the last three months of 2000 (189,000 unemployed according to the standard definition plus 127,000 discouraged workers), representing an increase of 89.2 percent in adjusted unemployment between the third and fourth quarter of the year.

The substantial rise in unemployment in the fourth quarter of the year was due to the disemployment of 102,000 workers formerly employed in Israelcombined with 80,000 newly unemployed in the domestic economy. The drop in domestic employment was largely caused by declining consumer demand and reduced productive capacity due to shortages in raw materials and other inputs, higher transaction costs and restricted access to markets.

3.3 Underlying Labour Market Dynamics

Employment by Status

Data on the composition of the employed Palestinian labour force suggest deep structural changes in the labour market between 1999 and 2000, arising principally from fourth quarter effects due to the crisis. There was a steep decline in the number of wage-workers and employers, notable since more than 95 percent of net new employment between 1998 and 1999 was in these segments of the labour force. 45 By contrast, there was an annual increase in the number of unpaid family labour and self-employed (Table 15). This change in labour composition indicates worsening labour market conditions and increasing " informalisation" of the economy, which reinforces a regressive trend of falling output and income in the Palestinian economy. 46

The number of wage-workers in the labour force fell steeply by 36.5 percent (163,000 persons) between the third and fourth quarter of 2000, making for an annual drop in the number of wage-workers of 1.9 percent between 1999 and 2000. The proportion of wage-workers in the labour force dropped by over 8 percentage points between the third and fourth quarter, making for an annual decline of 2.1 points to 65.6 percent of the labour force in 2000.

Significantly, the decline was greatest among private sector wage workers, whose numbers fell by 49.5 percent (166,000 persons) in the fourth quarter alone and whose proportion of the labour force dropped by 15.3 percentage points (from 50.6 to 35.3 percent) in the same period, reflecting the impact of the crisis on the labour market. Annually, the number of private sector wage workers declined by over 20,000 persons from 1999 and their proportion of the labour force decreased by 4.5 percentage points to 46.6 percent. By contrast, the number of public sector wage workers increased both in the fourth quarter and annually, and the proportion of public sector wage-workers in the labour force grew by 7 percentage points (from 17 to 24 percent) in the fourth quarter of 2000. Public sector growth tempered the annual decline in number and proportion of wage-workers in the labour force.

TABLE 15

Employment by Status, 1999 and 2000 47

Annual Averages
Quarterly Averages
1999
2000
Change
QIII-00
QIV-00
Change
Proportion of Employed (%)
Employers
5.6%
4.6%
-1.0
4.4%
4.6%
0.2
Unpaid Family Labour
7.9%
9.9%
2.0
9.9%
13.0%
3.1
Self-employed
18.9%
19.9%
1.0
18.1%
23.1%
5.0
Wage-workers
67.7 %
65.6%
-2.1
67.6%
59.3 %
-8.3
Public Sector Wage Workers
16.6%
19.0%
2.4
17.0%
24.0%
7.0
Private Sector Wage Workers
51.1%
46.6%
-4.5
50.6%
35.3%
-15.3
Total Employed
100.0 %
100.0%
100.0%
100.0 %
Persons (1,000)
Employers
33.0
27.2
-17.5%
29.1
22.0
-24.3%
Unpaid Family Labour
46.7
58.1
24.3%
65.5
62.3
-4.9%
Self-employed
111.8
117.2
4.8%
119.7
110.6
-7.6%
Wage-workers
401.1
393.4
-1.9%
447.1
284.0
-36.5%
Public Sector Wage Workers
98.4
111.0
12.8%
112.5
115.0
2.2%
Private Sector Wage Workers
302.7
282.4
-6.7%
334.6
169.0
-49.5%
Total Employed
593
596
0.5 %
661
479
-27.6%

The number of Palestinian employers in the labour force also fell between the third and fourth quarter by 24.3 percent, contributing to an annual reduction in employers of 17.5 percent between 1999 and 2000. The proportion of employers in the labour force dropped in 2000 to 4.6 percent of the labour force – the lowest annual reading since the inception of the labour force surveys. These results arise from a decline in employers in the West Bank which began prior to the onset of the crisis, suggesting a deterioration in the business proprietors’ environment. The share of employers in the labour force in Gaza actually rose slightly from 2.8 to 3.4 percent.

As workers left the ranks of wage-labour and employers, they moved either into unemployment or into the ranks of the marginally employed, such as unpaid labour in family farms and businesses, especially those concentrated in the informal sector. The proportion of unpaid family labour in the labour force increased from 9.9 percent to 13 percent between the third and fourth quarter of 2000. On an annual basis, the number of unpaid family labourers rose by some 11,000 persons. This increase is consistent with employment growth in the agricultural branch (see following section), where unpaid family labour tends to be concentrated, especially in the West Bank. The growth in self-employment, which tends to be concentrated in the informal sector, also accelerated in the fourth quarter of the year. 48 This is likely to be due to the decrease in the availability of wage employment in the formal sector.

Place of Employment

Employment dropped steeply at the onset of the crisis both for Palestinians who worked in Israeli, Israeli settlements and industrial zones (ISI) and for those who worked in the domestic economy of West Bank or Gaza.

On an annual basis, the number of Palestinians employed in ISI dropped by about 13.9 percent, from 135,000 persons in 1999 to 116,000 in 2000. In the last quarter of 2000, Palestinian employment in ISI fell by 70.2 percent (Table 16, see also section 1.2). The steep annual decline contrasts sharply to the previous year, when employment in ISI grew by 14.8 percent.

TABLE 16

Employment by Place of Work, 1999 and 2000 49 ( thousands)

Annual Averages
Quarterly Averages
Persons Employed
1999
2000
Change
QIII-00
QIV-00
Change
In the Palestinian Economy
458
480
4.8%
515
435
-15.5%
In ISI
135
116
-13.9%
146
44
-70.2%
Total
593
596
0.5%
661
479
-27.6%

Domestic employment, in turn, fell by 15.5 percent in the last quarter of the year.50 High rates of employment growth earlier in the year – nearly 9.4 percent compared to the corresponding period in 1999 – helped offset last quarter decline, however, making for an overall net gain in domestic employment in 2000. On an annual basis, the number employed in the domestic economy grew by over 4.8 percent to an estimated 480,000 persons, a net increase of 22,000 new jobs.

FIGURE 8

Persons Employed by Place of Work, 1999 and 2000 51 (thousands)

Industrial Branch Distribution of Employment

In tandem with weak employment growth, employment shifted between industrial branches. In relative terms, there were employment share increases in the public sector, agriculture, transport and commerce, whereas there were substantial decreases in the relative share of construction and manufacturing sectors (upper panel of Table 17). The relative share of services remained unchanged. In absolute terms, there were increases in the size of the work force in all the branches, except for construction and manufacturing, which registered strong net declines (lower panel of the Table 17).

Between the third and fourth quarters of the year, employment in the construction sector, traditionally one of the primary sources of employment for Palestinians, fell by 64 percent, a loss of 92,000 jobs (Figure 9). This decline was largely due to the restriction of labour flow to Israel, where about 80,000 construction workers were employed prior to the onset of crisis in September.

F IGURE 9

Quarterly Changes in Employment, Distributed by Industry (domestic and ISI), QIII-QIV 2000 52

On an annual basis, high rates of growth in this sector in the first three quarters offset fourth quarter losses somewhat, though the year still registered a decline from 1999 of persons working in construction by 11.6 percent, from an estimated 132,000 to 117,000 persons. The greater portion of annual losses in construction employment occurred in ISI (which dropped by 16.5 percent) compared to a 5.1 percent drop in construction employment in West Bank and Gaza (Table 18). Domestic employment losses in the construction branch, which absorbs a significant amount of private sector investment, can be attributed to decline in private investment due to income losses and high economic uncertainty as well as to internal mobility restrictions, shortages in raw materials and imported capital inputs and the disruption of public investment programs.

In the manufacturing sector, the number of workers employed decreased by 38.2 percent (38,000 persons) between the third and fourth quarters of 2000, leading to an annual decline in the number of workers employed in this branch of 7.8 percent. This decline stems from both the curtailment of labour flows to Israel and the impact of the crisis on the domestic economy which employs an average of 78 percent of workers in the manufacturing branch.

TABLE 17

Distribution of Employment by Industry (domestic and ISI), 1999-2000 53

1999
2000
Change
RatiosAgriculture, Fishing
12.7%
13.9%
1.2
Quarrying, Manufacturing
15.5%
14.2%
-1.3
Construction
22.3%
19.1%
-3.2
Commerce, Hotels, Restaurants
16.8%
17.6%
0.8
Transport, Communication
4.7%
5.0%
0.3
Services 54
11.4%
11.4%
0.0
Public administration and services
16.6%
19.0%
2.4
Total Employed Persons
100.0%
100.0%
Persons (1,000)Agriculture, Fishing
75
82
8.7%
Quarrying, Manufacturing
92
85
-7.8%
Construction
132
117
-11.6%
Commerce, Hotels, Restaurants
100
104
4.6%
Transport, Communication
28
29
6.5%
Services
68
68
0.0%
Public administration and services
98
111
12.8%
Total Employed Persons
593
596
0.5%

Overall, the secondary sector (construction and manufacturing) was disproportionately affected by the crisis and accounted for nearly 71 percent of employment decline in the fourth quarter of 2000.

By contrast, the primary sector (especially agriculture) registered a strong increase in private employment between 1999 and 2000 (Table 17). Although the number employed in agriculture decreased between the third and fourth quarters of the year as in other sectors, the net decline was relatively low at 3.6 percent (Figure 9). In the domestic economy, agricultural employment actually grew over the same period, with the primary sector absorbing an additional 9,000 persons in the last quarter of the year.

Geographical breakdown of data on agricultural employment highlights structural differences in the labour markets between the West Bank and Gaza. In the former, the share of agriculture in total employment increased from 11.3 to 17.1 percent between the third and fourth quarters and the number of workers employed by 15 percent. By contrast, in Gaza although its share in total employment in the second half of the year remained nearly unchanged, there was a striking decline of some 37 percent in the number employed. The crisis thus precipitated a movement of workers into agriculture in the West Bank, where agriculture has traditionally functioned as a labour market “shock absorber” in times of high unemployment, while in Gaza, restricted mobility and border closures adversely affected the marketing and export of cash crops, leading to a steep decline in agricultural employment. In addition, evidence suggests that the direct damage to agricultural land and equipment, crop and livestock production hasbeen more extensive in Gaza.

TABLE 18

Distribution of Employment by Industry and Location (domestic and ISI), 1999-2000 55

Palestinians Working in ISI
Palestinians Working in West Bank/Gaza
1999
2000
Change
1999
2000
Change
Ratios
Agriculture, Fishing
8.7%
8.4%
-0.3
13.9%
14.8%
0.9
Quarrying, Manufacturing
13.4%
13.9%
0.5
16.1%
14.4%
-1.7
Construction
56.1%
52.8%
-3.3
12.3%
11.0%
-1.3
Commerce, Hotels, Restaurants
13.1%
15.6%
2.5
17.9%
18.2%
0.3
Transport, Communication
1.6%
2.4%
0.8
5.6%
5.7%
0.1
Services and Other
7.0%
7.0%
0.0
12.7%
12.6%
-0.1
Public administration and services
21.5%
23.3%
1.8
Total
100.0%
100.0 %
100.0%
100.0%
Persons (1,000)
Agriculture, Fishing
11.7
11.0
-5.9%
63.5
70.7
11.3%
Quarrying, Manufacturing
18.2
15.3
-15.5%
74.0
69.9
-6.0%
Construction
75.8
63.1
-16.5%
56.3
53.5
-5.1%
Commerce, Hotels, Restaurants
17.7
17.0
-3.7%
82.2
87.1
6.4%
Transport, Communication
2.2
2.2
-1.5%
25.4
27.3
7.2%
Services and Other
9.4
7.4
-22.0%
58.2
60.5
4.1%
Public administration and services
98.4
111.0
12.8%
Total Employed Persons
135
116
-13.9%
458
480
4.8%

The tertiary sector (services, transport and commerce) saw employment in all three branches decline in the fourth quarter of the year. (Figure 9). However, on an annual basis, this sector registered moderate employment increases in 2000 relative to 1999. Combined, the three branches accounted for nearly 32 percent of domestic employment growth.

Public administration and services grew by 12.8 percent, from approximately 98,000 to 110,000 persons, and accounted for a high share of domestic employment creation. The majority of new jobs in the domestic economy were generated by the public sector in 2000. This contrasts with the experience of 1997-1999 when the private sector accounted for most of domestic employment creation, suggesting that the closure has considerably weakened the capacity of the private sector to generate employment.


4. TRENDS IN LIVING LEVELS

4.1 Development in household incomes

For the vast bulk of the Palestinian population, wage employment constitutes the principal source of household income, which can be considered the basis of household consumption and material well-being. 56 The development of wage rates and the changing availability of wage work are thus crucial determinants of the trends in level of living of Palestinian families, and provide good indicators of the development in levels of living among Palestinian households in the absence of more comprehensive income data.

TABLE 19

Estimated Real Wage Income for Palestinian Households, 1999 and 2000 57

1999
2000
Change (%)
Working in West BankAverage Daily Real Wage (NIS)
54.8
56.0
2.2 %
Average Real Monthly Wage (NIS)
1,291
1,340
3.8 %
Average Number of Wage Employees (thousands)
172
180
4.7 %
Total Annual Real Wage Income (million NIS)
2,665
2,895
8.6 %
Working in GazaAverage Daily Real Wage (NIS)
42.9
43.4
1.2 %
Average Real Monthly Wage (NIS)
1,031
1,058
2.6 %
Average Number of Wage Employees (thousands)
94
98
4.3 %
Total Annual Real Wage Income (Million NIS)
1,163
1,244
7.0 %
Working in ISIAverage Daily Real Wage (NIS)
88.1
89.7
1.8 %
Average Real Monthly Wage (NIS)
1,776
1,816
2.3 %
Average Number of Wage Employees (thousands)
135
116
-14.1 %
Total Annual Real Wage Income (Million NIS)
2,877
2,528
-12.1 %
Total Real Income, Palestinian Wage Employees (Million NIS)
6,705
6,667
-0.6 %
Total Real Wage Income Per Capita (NIS)
2,184
2,096
-4.1 %

Real daily wage rates for Palestinian workers increased in 2000 relative to 1999, though at a much slower pace than in preceding years. Real daily wage rates grew most rapidly for workers employed in the West Bank (2.2 percent), followed by workers in Israel (1.8 percent) and in Gaza (1.2 percent), as indicated in Table 18. By comparison, in 1999 real daily wage rates increased by 8.1 percent and 4.9 percent in the West Bank and Gaza respectively.

In the domestic economy, the moderate increase in real wage rates coincided with an increase in the average number of wage employees – producing an 8 percent increase in total annual wage income for workers in the West Bank and Gaza. By contrast, the total number of wage employees in ISI declined steeply in 2000, precipitating a downward trend in the total annual wage income derived from workers in ISI. From 1999 to 2000, the number of Palestinians employed in ISI declined by nearly 14 percent, and total wage income from ISI declined by 12 percent.

The decline in wage income from Israel was sufficiently sharp to lead to a marginal decrease of 0.6 percent in total real wage income earned by Palestinian households, despite the relatively robust increase in domestic earnings.

Importantly, due to high population growth in Palestinian society, estimated per capita wage income – a better indicator of the population’s level of living – decreased by 4.1 percent.

4.2 Wage income losses in the context of the crisis

As indicated in Sections 2.3 and 3.1, the dramatic decline in the number of wage employees during the extended closure, led to a substantial decline in aggregate wages during the last quarter of 2000. Between the third and fourth quarters of the year, total income for Palestinian wage employees (domestically and in ISI) declined by an estimated 785 million NIS or 41 percent. 58

TABLE 20

Estimated Real Wage Income for Palestinian Households, QIII-QIV 2000 59

QIII-00
QIV-00
Change
Working in West BankAverage Daily Real Wage (NIS)
57
56
-1.8%
Average Real Monthly Wage (NIS)
1,387
1,290
-7.0%
Average Number of Wage Employees (1,000)
194
163
-16.0%
Total Quarterly Wage Income (Million NIS)
807
631
-21.8%
Working in GazaAverage Daily Real Wage (NIS)
41
47
14.6%
Average Real Monthly Wage (NIS)
981
1,154
17.6%
Average Number of Wage Employees (1,000)
108
78
-27.8%
Total Quarterly Wage Income (Million NIS)
318
270
-15.1%
Working in ISIAverage Daily Real Wage (NIS)
90
90
0.0%
Average Real Monthly Wage (NIS)
1,834
1,837
0.2%
Average Number of Wage Employees (1,000)
146
44
-69.9%
Total Quarterly Wage Income (Million NIS)
803
242
-69.9%
Total Income, Palestinian Wage Employees (Million NIS)
1,928
1,143
-40.7%

Given the substantial curtailment of wage employment in ISI in the fourth quarter of the year and relatively high wage rates in ISI, wage income losses from foregone employment opportunities was the highest for workers in ISI. Quarterly wage income for workers in ISI declined by nearly 70 percent between the third and fourth quarters of the year, despite a marginal 0.2 percent growth in real monthly wages (for Palestinians who managed to reach their place of employment in ISI).

Wage income also declined in the domestic economy by 20 percent . In Gaza, the drop in the number of employed persons coincided with rising average real daily wages: from the third to fourth quarter, wages increased by 14.6 percent to NIS 47 from NIS 41. The rise in real daily wages indicate that worsening economic conditions have pushed low-paid workers into the ranks of unemployed or discouraged workers. Hence, the crisis may have had a disproportional impact on the poorest households in the Palestinian Territory, primarily those dependent on low-paid employment in Gaza.

In the West Bank, real daily wages fell slightly from NIS 57 in the third quarter to NIS 56 in the fourth quarter. An explanation of this decline may be the increased importance of the agricultural sector in the West Bank, which is generally characterised by low productivity and low wages.

The reduction in employment due to border closures and movement restrictions, and the associated losses of wage income largely explains the dramatic rise in poverty rates, reversing gains achieved between 1996 and September 2000, when poverty rates declined from 27 percent to 21 percent. In the first three months of the crisis alone (October to December 2000), the number of people living below the poverty line rose by 50 percent to nearly 35 percent of the population, according to World Bank estimates. 60

Over one million people were therefore living below the poverty line by the end of 2000, having risen from an average of about 654,000 in the first nine months of the year. If the conditions that prevailed at the end of 2000 persist, the World Bank estimates that the poverty rate will rise to over 50 percent by the end of 2001. Evidence also suggests that the poorest segments of the population, concentrated in Southern Gaza and Southern West Bank, have been disproportionately affected by the protracted economic crisis. 61

4.3 Coping strategies as a response to income decline

Households may have adapted to loss of wage income in several ways. These include an intensification of household production, the reduction of expenditure levels, the use of savings or selling of assets to maintain essential consumption and borrowing to pay for current expenditures (or not repaying existing loans or liabilities).

Although data on household coping strategies are scarce, they suggest that most Palestinian households responded to the crisis by reducing consumption and spending savings. According to a recent public opinion poll by Birzeit University, 62 84 percent of respondents indicated that they had reduced expenditures to cope with economic downturn, and 55 percent had spent accumulated savings. In addition, 43 percent polled had taken new loans and 22 percent had sold dowry or wedding gifts. The opinion poll further indicates that 17 percent had resorted to agriculture and animal husbandry, which corresponds to the reported increase in agriculture employment, a traditional labour market “shock absorber” in the West Bank.

After several years of growth, bank deposits marginally declined in the last quarter of 2000 and have remained relatively stable since then, suggesting that households are coping with loss of income through a combination of decreased consumption and refraining from further savings. Private safety nets have thus been relatively weakened, while reduced household expenditures have further dampened domestic economic activity and employment. There are also indications that increasing economic hardship is giving rise to a growth in default payment on loans.

Responding to economic distress, households have also increasingly sought relief from formal and informal social assistance. Between October and December, over 32 percent of the Palestinian population – more than one million persons – was reported to have received some form of emergency assistance, mainly food donations. 63 UNRWA, alone, reports that some 220,000 registered refugee families have turned to them for immediate food and cash assistance. 64

4.4 Cost of living 65

Inflation measured by the growth in the annual average of the Consumer Price Index (CPI) was reduced to 2.8 percent in 2000 compared to 5.6 percent the previous year. This indicates that, in aggregate, declining incomes were not aggravated by price increases in consumer goods and services. In particular, food prices – which are crucial to the purchasing power of poor households – grew less than average (Table 21). The sharpest price increases were for housing (8.3 percent) and transportation (6.5 percent).

Monthly data indicate that overall consumer prices in the Palestinian economy were generally stable throughout the year (Figure 10), rising by a marginal 0.7 percent between the third and fourth quarters of the year. The relative stability of prices for most consumer goods and services suggests that upward pressure on prices from shortage and increased transportation costs was counteracted by opposite pressure from reduced incomes and demand.

TABLE 21

Consumer Price Inflation Rates 66

(Increase in the annual average of consumer price index, 1999-2000)

West Bank/Gaza
West Bank
Gaza
Jerusalem
Food
1.6 %
1.7%
3.8%
-0.2%
Beverage and Tobacco
2.6%
2.0%
4.0%
1.8%
Textiles, Clothing, Footwear
2.2%
3.2%
0.6%
2.5%
Housing
8.3%
10.1%
6.8%
4.3%
Furniture, Household Items
-1.4%
-0.9%
-3.6%
-0.3%
Transport and Communication
6.5%
6.8%
3.6%
10.7%
Education
3.8%
6.8%
5.7%
0.2%
Medical Care
2.1%
3.9%
2.4%
1.3%
Recreational and Cultural Goods
-8.1%
-4.0%
-5.0%
-11.8%
Miscellaneous Goods and Services
5.9%
3.3%
3.9%
6.7%
All Item Consumer Price Index
2.8%
3.2%
3.0%
2.3%

Transport prices were the one exception, which rose by 8.6 percent between September and December, illustrating the impact of movement restriction on this commodity, especially in the West Bank.

Moreover, it is important to note that while food prices declined marginally in aggregate (by 0.5 percent), there is considerable evidence of sharp variation in food prices among localities, especially in the West Bank, due to transportation problems. In food-producing areas, prices have been depressed because goods cannot make it to market, whereas in non-agricultural areas – ; especially larger cities – food prices have risen steeply because of relative scarcity of these same goods.

FIGURE 10

Consumer Price Index for Food, Housing and Transportation, from January 1998 67

(per month, using base of 1996=100)

Indeed, price changes in the last quarter of the year generally varied between the West Bank and Gaza, illustrating regional differences in market structure and adjustments to crisis situation. Relative to the first nine months of the year, prices in the last quarter rose in the West Bank by 1.2 percent whereas prices fell by 1.5 percent in Gaza. Divergence in price levels was particularly discernible with regards to food commodities, which constitute more than 40 percent of the average Palestinian household's expenditure. In the West Bank, food prices increased by 2.1 percent between September and December, whereas prices declined by 1.0 percent in Gaza over the same period.

Overall, the West Bank appears to have been generally more affected by supply factors –reduction of flow of commodities between villages and towns and relatively higher increases in transportation cost – leading to upward pressure on prices, especially for food. Gaza, by contrast, appears to have been more affected by demand factors – declining income and consumer demand – placing downward pressure on prices, especially in combination with tighter restrictions on exports.


5. OUTLOOK

The relative economic progress that characterised the Palestinian economy in the first three quarters of 2000 was sharply curtailed from the end of September onward as a consequence of political crisis, confrontations and the deepest, most sustained movement restrictions ever imposed on Palestinian society and its institutions. These crisis-related conditions have persisted through mid-2001, giving reason for concern about both near and medium-term development, even if a political resolution of the crisis is forthcoming.

Early economic figures for 2001 are worrying. The results of a recent survey of private enterprises indicate that the productive capacity and revenues of all branches continue to be negatively affected by the crisis. 68 Utilisation of productive capacity in the manufacturing branch declined from 41 percent in the fourth quarter of 2000 to 34 percent in the first quarter of 2001. The level of sales in the service branch dropped by more than 10 percent between fourth quarter 2000 and first quarter 2001. Building contractors describe a drop in construction activity to 51 percent of normal during the last quarter of 2000 and a further decline to 30 percent of normal in the first quarter of 2001. Hotel occupancy rates appear to have declined to 8 percent in the last quarter of 2000 and, further, to 2 percent in the first quarter of 2001, compared to 53 percent prior the crisis.

The employment picture has somewhat improved in early 2001, though the structural effects of prolonged crisis on the labour force may present continuing problems. Data indicate that the absolute number of unemployed, including discouraged workers, declined from 316,000 in the fourth quarter of 2000 to 297,000 in the first quarter of 2001. This coincided with marginal gains in employment and higher full-employment rates. These marginal gains may be partially explained by higher labour flows – largely unpermitted – to Israel, Israeli settlements and industrial zones, along with the launch of internationally funded emergency employment projects.

Nevertheless, as of this writing, unemployment remained at a high rate of 26.1 percent. Along with a declining rate of labour force participation and high dependency rates, living standards of the Palestinian population continued to decline in the first quarter of 2001. Preliminary results of a recent field survey indicate that an increasing number of Palestinians, especially in Gaza, have lost their principal source of income and are failing to meet basic consumption needs.69 Median monthly household income has decreased by 48 percent since September 2000, from a nominal value of NIS 2,300 to NIS 1,200. 70

The fiscal situation for the Palestinian Authority also remains fragile. The decline in domestic revenue-generating capacity, along with reduced labour and trade flows and the continued withholding of Palestinian tax revenues by Israeli authorities, has severely compressed the budgetary situation of the Authority, especially in a context of increased need for basic social services. Indeed, fiscal expenditure is expected to increase in 2001, with an estimated deficit of USD 371 million, or about 22 percent of total expenditures. 71

An additional and troubling consequence of these trends is an increased reliance on credit in various forms by both governmental and private actors. While this has significantly helped to forestall a deeper fiscal or financial crisis in the Palestinian economy, such short-term support creates an additional source of longer-term vulnerability.

Finally, it is important to note in relation to previous periods of crisis and recovery, that the depth and longevity of the present crisis is unprecedented. In September 2000, the Palestinian economy had finally turned the corner from the previous episode of crisis-induced economic downturn after three years of recovery. In mid-2001, even if political resolution arrives swiftly and brings with it a full lifting of movement restrictions and resumption of “ normal” economic life, genuine economic recovery will take considerable time, substantial resources and sustained policy attention from all stakeholders in Palestinian economic and social development.


_____

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