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Source: United Nations Conference on Trade and Development (UNCTAD)
31 August 2010


Signs of Economic Growth In 2009, but Rehabilitation of Palestinian Economy Requires Complete Lifting of all Israeli Restrictions, Report Says

Geneva, 31 August 2010 -- Small signs of improvement in GDP and other economic indicators in the occupied Palestinian territory (oPt) during 2009 must be seen in context, given the major obstacles still blocking the way to a sustainable rehabilitation, an UNCTAD report says.

It is estimated that GDP climbed by 6.8%, and that the unemployment rate declined by 1.6%. Still, per capita GDP is 30% lower than it was 10 years ago, and at least 30% of the Palestinian work force is jobless. Problems with food security remain widespread and are especially severe in Gaza, where they affect 60% of the population.

The annual Report on Assistance to the Palestinian People argues that the Palestinian economy is still held back by fallout from the Israeli military operation in Gaza in 2008-2009 and by the costs of Israel´s closure policy in the West Bank and its continued economic blockade of Gaza.

At the heart of the Palestinian development impasse is a tradable goods sector whose competitiveness is crippled by the use of foreign currencies (the Israeli Shekel, US dollar and Jordanian dinar), by closures, and by an eroded productive base, the report says. It contends that revitalizing the tradable goods sector and rebuilding productive capacity are essential for Palestinian economic development. While donor support is vital, its economic effectiveness will only be sufficiently realized when the Israeli closure policy and blockade of Gaza are lifted, the report says.

UNCTAD is the UN agency mandated to assist the Palestinian people to alleviate the adverse economic conditions in the occupied Palestinian territory and to create conditions conducive to building a sovereign and viable Palestinian State. Its work, which includes this annual report, is guided by specific resolutions of the General Assembly of the United Nations and its member States.

Economic performance well below potential

An estimated 6.8% increase in gross domestic product (GDP) comprising 1% in Gaza and 8.5% in the West Bank was recorded in 2009, but this is by no means indicative of recovery, the report warns. Rather, such growth spurts should be cautiously viewed in the context of the slow economic growth in previous years, and hence the low base of the Palestinian GDP in 2008 against which the 2009 growth is compared; the continued isolation of the Palestinian economy from regional and global markets; a 30% decline in per capita GDP over the last 10 years; an eroded productive base; and shrinking access to land, economic, and natural resources.

The economy continues to perform well below potential, the report says. The unemployment rate declined by 1.6% but is still a grave concern, exceeding the pre-Intifada level of 1999 by 9%, with at least 30% of the Palestinian workforce unemployed. Joblessness in Gaza exceeds the national average by 14%. As a result, poverty persists and food insecurity affects more than 60% of the population in Gaza and 25% of the population in the West Bank.

No signs of private-sector resurgence

Private-sector revival continues to be hampered by Israeli movement restrictions both within the oPt and at border crossings, in addition to the effects of the Israeli separation barrier, settlements, and confiscation of land, the report says. These have deprived productive sectors of their most vital resources while inflating transaction costs to prohibitive levels and therefore reinforcing an economic shift towards low value-added activities. The situation in Gaza is far worse than in the West Bank, where the so-called "tunnel economy" and informal economy expanded at an unprecedented rate to compensate for the collapse of the productive sector, the report says.

As a result, the Palestinian trade deficit worsened from 57% of GDP in 2008 to 59% in 2009. This deficit continued to be coupled with heavy dependence on Israel, which accounted for more than three quarters of Palestinian trade. Although the trade deficit with Israel declined from 82% to 65% of the overall trade deficit between 2008-2009, it is still high, exceeding the $2.4 billion in donor support provided to the oPt in 2009.

Despite significant fiscal reforms, the Palestinian Authority (PA) public deficit on a "commitment" basis -- which reflects what was actually committed for public spending during the fiscal year -- deteriorated by 2.6% to reach $1.6 billion in 2009. The report warns that while fiscal reforms and a narrowing of the public deficit can be important policy goals, they should not be pursued in a manner that worsens already serious poverty levels, nor should they undermine the ability of local governments to deliver services and respond to the needs of their constituents.

The economic cost of war, blockade, and closures

The Palestinian economy continues to pay for the indirect costs of war, of the blockade of Gaza, and of closures in the West Bank, the report says. UNCTAD analysis estimates that the indirect cost in terms of lost output ranges from $600-800 million per year -- about 13% of GDP. When the $1.3 billion in direct costs of physical damage caused by the 2008-09 Israeli military operation in Gaza are taken into account, the direct and indirect economic losses add up to $3.1 billion for 2008-2010.

The report uses a quantitative-scenario analysis to estimate that, had the Gaza blockade been lifted and had closures elsewhere in the oPt been relaxed, the economy should have been able to produce 60,000-80,000 more jobs per year. The report adds that the continuation of the Israeli occupation carries with it long-term economic costs that "improved movement and access" alone cannot redress.

Ineffective economic rehabilitation under closures and blockade

Development of the Palestinian tradable goods sector has been stunted by the erosion and destruction of the productive base, by high transaction costs, and by an uncompetitive exchange rate as a result of the use of Israeli currency, the report says. This led to an increased economic share for the non-tradable goods sector, mainly services, at the expense of the industrial and agricultural sectors. This structural shift has been combined with a drop in agricultural and industrial productivity; as the share of agriculture in total employment increased from 12% to 18%, in spite of agriculture´s reduced contribution to total oPt output.

Overcoming the Palestinian economic crisis, widespread unemployment, and deepening poverty is not possible unless all Israeli restrictive measures are lifted, the report contends -- palliative measures will not re-launch sustained growth or promote development, and donor support has its limits. UNCTAD´s quantitative-scenario analyses estimate that an injection of $1.6 billion in aid for public investment from 2010-2012 under conditions of continued blockade and closure may increase annual GDP by less than 1% on average. However, the same level of investment under a scenario of full lifting of the blockade of Gaza and a relaxation of the West Bank closures may increase annual GDP by 14%, on average, and could help spur the creation of 80,000 jobs per year. UNCTAD argues that reviving the Palestinian tradable goods sector requires: (i) replenishing the eroded productive base; (ii) reducing transaction costs; and (iii) establishing a development strategy that targets promising subsectors in agriculture and industry.

UNCTAD´s response

Security considerations have compelled the UNCTAD Secretariat to suspend planned technical assistance activities in the Gaza Strip. Nonetheless, UNCTAD was able, through a selective and flexible mode of operation, to achieve steady progress in implementing its programme of work in the oPt. Significant achievements were recorded in the area of trade facilitation under the ASYCUDA III project for customs modernization. The Secretariat has also continued to support the Palestinian Shippers´ Council´s ( efforts to address the needs of the importers and exporters who are its members, along with the Palestinian shipping community at large.

In addition, UNCTAD was able to include the oPt in a broader project for promoting sub-regional growth-oriented economic and trade policies towards achieving Millennium Development Goals (MDGs) 1 and 8 in five Arab countries. (Goal 1 is "eradicate extreme poverty and hunger," and Goal 8 is "develop a global partnership for development.") Three regional workshops were held as part of the project, and a number of policy-oriented country-level as well as regional studies are being finalized to promote poverty-sensitive, pro-growth trade policies, and to expand regional economic integration.

The Secretariat, meanwhile, has designed and begun preparatory work on a programme to support the Palestinian Authority´s renewed development efforts, within the framework of the UN Chief Executives Board (CEB) interagency cluster on Trade and Productive Capacity. At present, the proposed programme includes five agencies: UNCTAD, the United Nations Development Programme (UNDP), the United Nations Industrial Development Organization (UNIDO), the Food and Agriculture Organization (FAO), and the International Trade Center (ITC).

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