{"id":187241,"date":"2001-05-14T00:00:00","date_gmt":"2019-03-11T22:12:54","guid":{"rendered":"https:\/\/www.un.org\/unispal\/?p=187241"},"modified":"2019-03-11T22:12:54","modified_gmt":"2019-03-11T22:12:54","slug":"auto-insert-187241","status":"publish","type":"document","link":"https:\/\/www.un.org\/unispal\/document\/auto-insert-187241\/","title":{"rendered":"Economy of the OPT – Third UN Conference on the Least Developed Countries – Information note"},"content":{"rendered":"
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\n

Third United Nations Conference on the<\/p><\/div>\n

\n

Least Developed Countries<\/p><\/div>\n

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Brussels, Belgium <\/p><\/div>\n

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14-20 May 2001<\/p><\/div>\n

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INFORMATION NOTE ON THE ECONOMY OF THE <\/strong><\/p><\/div>\n

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OCCUPIED PALESTINIAN TERRITORY (WEST BANK AND GAZA)<\/strong><\/p><\/div>\n

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Prepared by the Palestine National Authority<\/strong><\/p><\/div>\n

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Ministry of Economy and Trade<\/strong><\/span>*<\/span><\/p><\/div>\n

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*<\/span> The Palestine National Authority, Ministry of Economy and Trade, gratefully acknowledges the technical assistance provided by the UNCTAD secretariat in the preparation of this document.<\/span><\/p>\n

\n<\/p><\/div>\n

<\/p>\n

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CONTENTS<\/strong><\/p><\/div>\n

\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n
\n

I.<\/p>\n<\/td>\n

\n

Preface<\/p>\n<\/td>\n

\n

4<\/p>\n<\/td>\n<\/tr>\n

\n

II.<\/p>\n<\/td>\n

\n

The setting: an emerging state<\/p>\n<\/td>\n

\n

5<\/p>\n<\/td>\n<\/tr>\n

<\/td>\n\n

A.<\/p>\n

B.<\/p>\n

C.<\/p>\n<\/td>\n

\n

Legislative<\/p>\n

Executive<\/p>\n

Judiciary<\/p>\n<\/td>\n

\n

6<\/p>\n

6<\/p>\n

7<\/p>\n<\/td>\n<\/tr>\n

\n

III.<\/p>\n<\/td>\n

\n

Geography, Population, Labour and Poverty<\/p>\n<\/td>\n

\n

8<\/p>\n<\/td>\n<\/tr>\n

<\/td>\n\n

A.<\/p>\n

B.<\/p>\n

C.<\/p>\n

D.<\/p>\n<\/td>\n

\n

Location: a land-locked economy<\/p>\n

Population: a young nation<\/p>\n

Labour: dependent on external markets<\/p>\n

Poverty: modest but structural<\/p>\n<\/td>\n

\n

8<\/p>\n

8<\/p>\n

9<\/p>\n

10<\/p>\n<\/td>\n<\/tr>\n

\n

IV.<\/p>\n<\/td>\n

\n

Economic performance until 2000: chronic vulnerability to external shocks<\/p>\n<\/td>\n

\n

11<\/p>\n<\/td>\n<\/tr>\n

<\/td>\n\n

A.<\/p>\n

B.<\/p>\n<\/td>\n

\n

Aggregate performance<\/p>\n

Sectoral structure<\/p>\n<\/td>\n

\n

11<\/p>\n

12<\/p>\n<\/td>\n<\/tr>\n

<\/td>\n<\/td>\n\n

1.<\/p>\n

2.<\/p>\n

3.<\/p>\n<\/td>\n

\n

Agriculture<\/p>\n

Industry<\/p>\n

Services<\/p>\n<\/td>\n

\n

12<\/p>\n

12<\/p>\n

12<\/p>\n<\/td>\n<\/tr>\n

<\/td>\n\n

C.<\/p>\n

D.<\/p>\n<\/td>\n

\n

External trade and balance of payments<\/p>\n

Constraints on Economic Performance<\/p>\n<\/td>\n

\n

13<\/p>\n

14<\/p>\n<\/td>\n<\/tr>\n

<\/td>\n<\/td>\n\n

1.<\/p>\n

2.<\/p>\n<\/td>\n

\n

Internal constraints<\/p>\n

External constraints<\/p>\n<\/td>\n

\n

15<\/p>\n

22<\/p>\n<\/td>\n<\/tr>\n

<\/td>\n\n

E.<\/p>\n<\/td>\n

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The Crisis of 2000-2001<\/p>\n<\/td>\n

\n

29<\/p>\n<\/td>\n<\/tr>\n

\n

V.<\/p>\n<\/td>\n

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A Framework for Economic Management<\/p>\n<\/td>\n

\n

31<\/p>\n<\/td>\n<\/tr>\n

<\/td>\n\n

A.<\/p>\n

B.<\/p>\n

C.<\/p>\n

D.<\/p>\n<\/td>\n

\n

The Palestinian Development Plan<\/p>\n

Economic Policy Framework<\/p>\n

National Economic Dialogue<\/p>\n

Operational Policies<\/p>\n<\/td>\n

\n

31<\/p>\n

31<\/p>\n

32<\/p>\n

32<\/p>\n<\/td>\n<\/tr>\n

<\/td>\n<\/td>\n\n

1.<\/p>\n

2.<\/p>\n

3.<\/p>\n

4.<\/p>\n

5.<\/p>\n

6.<\/p>\n

7.<\/p>\n

8.<\/p>\n

9.<\/p>\n<\/td>\n

\n

Fiscal policy<\/p>\n

Investment policy<\/p>\n

The Legal Framework<\/p>\n

Commitment to Good Governance<\/p>\n

Strengthening Public Institutions<\/p>\n

Trade Promotion Institutions<\/p>\n

Human Resources<\/p>\n

Economic, Trade and Transport Agreements<\/p>\n

Conducive Environment for Re-Orienting the Palestinian Economy<\/p>\n<\/td>\n

\n

32<\/p>\n

34<\/p>\n

34<\/p>\n

35<\/p>\n

36<\/p>\n

36<\/p>\n

37<\/p>\n

37<\/p>\n

38<\/p>\n<\/td>\n<\/tr>\n

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VI.<\/p>\n<\/td>\n

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Palestine's Expectations for the Decade 2001-1010 in the Context of the Third United Nations<\/p>\n

Conference on the Least Developed Countries<\/p>\n<\/td>\n

\n

39<\/p>\n<\/td>\n<\/tr>\n

<\/td>\n\n

A.<\/p>\n

B.<\/p>\n

C.<\/p>\n

D.<\/p>\n<\/td>\n

\n

Better Access to Markets of Developed Countries<\/p>\n

Better Access to Transit Transport Facilities<\/p>\n

Access to Modern Production and Telecommunication Infrastructures<\/p>\n

Technical Assistance<\/p>\n<\/td>\n

\n

39<\/p>\n

40<\/p>\n

40<\/p>\n

41<\/p>\n<\/td>\n<\/tr>\n<\/table>\n

<\/p>\n

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I.    <\/span>Preface<\/strong><\/span> <\/span><\/p><\/div>\n

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On the occasion of the participation of Palestine, for the first time in a United Nations Conference on the Least Developed Countries, the Ministry of Economy and Trade of the Palestine National Authority (PNA) has prepared this Information Note. <\/p><\/div>\n

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The Note is intended to brief the Conference on the particular development challenges facing Palestine at a crucial moment in its history, and the constraints that continue to impair long-term prospects. The Note provides an overview of the economic policy and foreign trade regime of the Palestinian National Authority in the occupied Palestinian territory (West Bank and Gaza Strip), as it evolved between 1994 and 2000. It is introduced by an account of the geographic setting and main population indicators, followed by a review of the aggregate and sectoral economic performance during that period, with reference to the most recent available official Palestinian statistics. Internal and external constraints hampering the economy's sustained development are also examined, in order to identify the main policy issues that need to be addressed in the coming years.<\/p><\/div>\n

\n

Although the Palestinian economy’s performance indicators in recent years rank it within the category of middle-income developing countries, its sustained development is obstructed by structural impediments, many of which are common to Least Developed Countries (LDCs). Most notable in this respect is the poor infrastructure, coupled with a still-weak institutional set-up, and an underdeveloped industrial base. These impediments work against developing the Palestinian economy’s productive capacity, which is considered as the bedrock of economic growth and development and the basis for expansion of trade. This is not an attempt to argue in favor of ranking the Palestinian territory within the list of LDCs. Rather, the aim here is to draw attention to the relevance of the problems of LDCs for the Palestinian territory, which is striving to assume an active role at the regional and global levels after surviving long years of occupation. <\/p><\/div>\n

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A special status was granted by the General Assembly of the United Nations, in its resolution 43\/178 of 20 December 1988 on Assistance to the Palestinian people. The General Assembly then decided "to extend to the occupied Palestinian territory the same preferential treatment accorded the least developed countries, pending the elimination of the Israeli occupation and the assumption of full control by the Palestinian people over their national economy without external interference".<\/p><\/div>\n

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While adverse developments since September 2000 have led to a major contraction in economic activity and serious disruption to trade and financial flows, they have not affected the legal, regulatory and policy framework adopted by the PNA since 1994. Nor have the serious setbacks experienced in relations with Israel since 2000 diminished the Palestinian National Authority’s declared commitment to establishing a rule-based, market-driven economy, in harmony with national interests, global trends and the strategic development potentials of the Palestinian economy. <\/p><\/div>\n

\n

\n

\n<\/p><\/div>\n
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II.\t<\/span><\/span>The setting: an emerging state<\/strong><\/span> <\/span><\/p><\/div>\n

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Palestine is yet to find her place on the world’s map as an independent State after long years of conflict and military occupation that forced around 60% of the population to seek refuge in other countries. In 1948, thousands of Palestinians were forced to flee to neighboring Arab countries following the establishment of the State of Israel and the war that ensued. Following the 1967 war, Israel occupied the West Bank and the Gaza Strip and annexed Arab Jerusalem to its territories. The Israeli-Palestinian conflict developed a new dimension in 1987 upon the outbreak of the first Palestinian intifada<\/i> , which paved the way for the 1991 Middle East Peace Conference, for recognition by the two sides of their mutual right to exist and their decision to resolve the conflict through negotiations.<\/p><\/div>\n

\n

This commitment to peace was translated into a set of confidence building measures in September 1993 upon the signing of the “Declaration of Principles on Interim Self- Government Arrangements between Israel and the PLO, representing the Palestinian People” (DOP). Considered as a focal point of reference for the Palestinian\/ Israeli relations, the DOP stipulates an “interim” period that would set the stage for the establishment of an independent Palestinian State in a phased manner postponing to a later stage a final agreement on the borders of the Palestinian State, along with other issues, such as the status of Israeli settlements, the disposition of Jerusalem and the return of Palestinian refugees. The two sides signed a series of transitional agreements, according to which Israeli military forces withdrew from some parts of the occupied territories and the PNA was created to assume the tasks of government in these areas. <\/p><\/div>\n

\n

The Middle East peace process since 1993 generated high hopes of accelerated economic growth based on a strong belief that the PNA, through its commitment to liberalization, would succeed in providing a more favorable environment for restructuring the economy. The creation of a developed financial sector was expected to induce enough savings leading to financial deepening, especially through attracting sizeable capital inflows from the overseas Palestinian community. Furthermore, local and foreign investors were expected to respond positively and play a major role in strengthening the economy’s industrial base and developing the services sector. Optimism in the future of the economy was fuelled by the donor community’s commitment to support the PNA's efforts through financial and technical assistance. <\/p><\/div>\n

\n

Unfortunately, the incomplete implementation of signed agreements and the slow disbursement of donor funds contributed to frustrating these hopes. To this may be added, with a special emphasis, the recurrent closure of Palestine's main border crossings by Israeli authorities for security reasons isolating the country from the rest of the world. Border closure measures are often accompanied by internal closure, whereby Israel seals off the main entrances to Palestinian cities and villages turning these areas into isolated islands. <\/p><\/div>\n

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At present, the area of lands under the PNA jurisdiction is limited to 80% of the Gaza Strip along with the town of Jericho and 3% of the rest of West Bank areas. The economy continues to suffer from the same structural weaknesses that existed during the pre-Oslo period, while the current crisis is draining the economy inducing losses that are estimated to have exceeded $2.2 billion during the six months period October 2000-March 2001, equivalent to a third of Palestinian Gross National Income. So strong is the magnitude of these losses that the economy will need at least two years to recover.<\/p><\/div>\n

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Notwithstanding the current conflict, the interim period has entailed irreversible steps towards the establishment of a Palestinian State. Aware of this, the international community has welcomed Palestine’s participation in a number of international and regional organizations. At present, Palestine is a full member of the Asian Group of the United Nations, the Global System of Trade Preferences among Developing Countries (GSTP), Group of 77 and China, the League of Arab States (LAS), the Non-Aligned Movement (NAM), the Organization of African Unity (OAU), the Organization of the Islamic Conference (OIC), and the United Nations Economic and Social Commission for Western Asia (UNESCWA). Moreover, Palestine has maintained Observer status with the United Nations and all specialized agencies, in accordance with General Assembly resolutions since 1974. <\/p><\/div>\n

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Furthermore, in 1994, the Palestinian Liberation Organization (PLO) established the PNA that proceeded to develop the three main functions of government, as follows: <\/p><\/div>\n

\n

A. Legislative<\/strong><\/i><\/p><\/div>\n

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The Palestinian Legislative Council (PLC) is comprised of eighty-eight democratically elected representatives chosen in electoral districts established in accordance with regional population distribution. The current PLC was elected on 20 January 1996 for a five-year term, which has since been renewed for two years. The PLC is vested with the power of enacting legislation and monitoring the performance of the executive. The PLC has twelve standing working committees with the power of legislative review as well as the power of granting confidence in the executive. All meetings of the PLC and of its committees are open to the public. <\/p><\/div>\n

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B. Executive<\/strong><\/i><\/p><\/div>\n

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Executive powers are fully vested in the President of the Palestinian National Authority, elected directly by popular vote. The President is responsible for nominating the Council of Ministers, eighty per cent of whom should be members of the PLC and should be approved by it. Currently the Council of Ministers is comprised of thirty-two Ministers responsible for different portfolios, including eight Ministers of State. <\/p><\/div>\n

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Ten PNA Ministers are concerned directly with economic development and trade-related issues:<\/p><\/div>\n

\n\t\t\t\tMinister of Economy and Trade\n\t\t\t\t<\/div>\n
\n\t\t\t\tMinister of Industry\n\t\t\t\t<\/div>\n
\n\t\t\t\tMinister of Agriculture\n\t\t\t\t<\/div>\n
\n\t\t\t\tMinister of Supply\n\t\t\t\t<\/div>\n
\n\t\t\t\tMinister of Finance\n\t\t\t\t<\/div>\n
\n\t\t\t\tMinister of Labor\n\t\t\t\t<\/div>\n
\n\t\t\t\tMinister of Transportation\n\t\t\t\t<\/div>\n
\n\t\t\t\tMinister of Tourism\n\t\t\t\t<\/div>\n
\n\t\t\t\tMinister of Public Works\n\t\t\t\t<\/div>\n
\n\t\t\t\tMinister of Communications\n\t\t\t\t<\/div>\n
\n\t\t\t\tIn addition, a number of other governmental agencies are concerned with economic and trade issues, such as:\n\t\t\t\t<\/div>\n
\n\t\t\t\tPalestinian Economic Council for Development and Reconstruction;\n\t\t\t\t<\/div>\n
\n\t\t\t\tPalestinian Environmental Authority;\n\t\t\t\t<\/div>\n
\n\t\t\t\tPalestinian Industrial Estates and Free Zones Authority;\n\t\t\t\t<\/div>\n
\n\t\t\t\tPalestinian Monetary Authority, Palestinian Central Bureau for Statistics;\n\t\t\t\t<\/div>\n
\n\t\t\t\tPalestinian Civil Aviation Authority;\n\t\t\t\t<\/div>\n
\n\t\t\t\tGaza Sea Port Authority.\n\t\t\t\t<\/div>\n
\n

C. Judiciary<\/strong><\/i><\/p><\/div>\n

\n

There are three levels of courts under PNA jurisdiction. All towns and villages have a Magistrate Court that deals with small claims issues. At the second level there are the District Courts that resolves in cases of larger claims. There are two Districts Courts in the Gaza Strip and one in each of the following cities: Jericho, Nablus, Hebron and Ramallah. There are two High Courts. One in Gaza that reviews appeals from the Districts Courts of Gaza and Jericho, and one in Ramallah that reviews appeals from the rest of District Courts.<\/p><\/div>\n

\n

\n

\n<\/p><\/div>\n
\n

III.    <\/span>Geography, Population, Labour and Poverty<\/strong><\/span><\/p><\/div>\n

<\/p>\n

\n

A.<\/span>   Location: a land-locked economy<\/strong><\/i><\/span><\/p><\/div>\n

\n

The Palestinian territory of the West Bank and Gaza Strip is located on the western edge of the Asian continent and the eastern extremity of the Mediterranean Sea. It is small in area covering 6170 square kilometers; thereby constituting 23% of the area of the pre-1948 British Mandate Palestine, and about one third of the area of the State of Israel. <\/p><\/div>\n

\n

The West Bank is 5,800 square kilometers in area, 130 km long and ranges 40 to 65 km in width; it lies between Israel to the West and Jordan to the east and is divided into three main districts with eight sub-districts. These include the northern region, which comprises the sub-districts of Jenin, Tulkarem, and Nablus; the central region encompassing Jerusalem, Jericho, Ramallah and Bethlehem; and the southern region of Hebron. The Gaza Strip covers 365 square kilometers, running at 45 km length and between 5 and 12 km in width; it borders Israel to the north and east, the Egyptian Sinai Peninsula to the south, and the Mediterranean Sea to the West; and is divided into three districts: Northern Gaza, Central Gaza, and Southern Gaza<\/p><\/div>\n

\n

The Gaza Strip is mainly coastal plain and sand dune while the West Bank is more diverse, featuring four topographic zones. These include a fertile plain of around 400 sq. km. in the Jordan Valley and the Jordan river; a rocky semi-arid area of 1,500 sq. km. covering the eastern slopes and leading down to the dead sea; the central highlands constituting the largest zone with a total area of 3,500 sq. km. while rising 1000 meters above sea level in places; and the semi-coastal zone consisting of 400 sq. km in the west and north-west. <\/span>1<\/u><\/sup><\/a> <\/span><\/p><\/div>\n

\n

Although the Palestinian territory does have a seacoast of its own, its location renders it effectively a land-locked economy, since any participation in international trade, especially as regards to movement of goods and people, is impossible unless conducted via its immediate neighbors of Jordan, Egypt and Israel. These stand as Palestine's window to the world, with Israel serving mainly as a gateway to the West, while Jordan and Egypt are considered as transit routes to the Gulf States, Europe, the Arab Mashreq and Maghreb. As is the case of other land-locked economies, Palestine's location poses a serious impediment to economic development because trade expansion is conditioned by the neighboring countries’ readiness to grant the Palestinian industries access to their transport facilities. At present, such an access is hampered by complex security, customs and overland transport procedures.<\/p><\/div>\n

\n

B.   <\/span>Population: a young nation <\/strong><\/i><\/span><\/p><\/div>\n

\n

The Palestinian population of the West Bank and Gaza Strip is estimated to have reached 3.15 million in 2000, approximately 36% of who live in the Gaza Strip. It is estimated that over 5 million Palestinians live outside the West Bank and Gaza Strip, including those living in Israel.<\/p><\/div>\n

\n

The youth represent the largest percentage of the population with 47% below the age of 15 years in 1999. The age group (0-4) constitutes the second largest proportion (19%), while the age group (60 and above) constitutes 3.4 percent of the population only (Table I.1). Refugees, who fled to the West Bank and Gaza following the 1948 war, make up a large percentage of the population in Gaza representing 65% of the population, as compared to 26% in the West Bank. Most of the refugees live in over crowded camps with substandard housing and sanitation conditions representing the disadvantaged stratum in Palestine. <\/p><\/div>\n

\n

The annual rate of population growth is estimated to have reached 5.4% in 2000, however present health indicators signify that population growth is likely to decrease from its 1997 level of 3.97% to 2.21% in 2025. These include fertility rate which stood at 5.93 in 1999 (5.52 in the West Bank and 6.81 in Gaza); infant mortality rate estimated at 25.5 per 1000 (24.4 in the West Bank and 27.3 in Gaza); under five mortality rate of 28.7 per 1000 (27.2 in the West Bank and 31.2 in Gaza); and life expectancy at birth estimated at 69.9 years for males and 73 years for females in 1997. Population density differs markedly between the West Bank and Gaza standing at 342 person per sq. km. in the West Bank, whereas in the Gaza Strip the comparable figure is 2,933(Table I.2). <\/p><\/div>\n

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C.<\/span>   Labour: dependent on external markets<\/strong><\/i><\/span> <\/span><\/p><\/div>\n

\n

The economically active population (labor force) was estimated at 42% of total population by the end of 2000. Male participation stood at 71% in 1999 as compared to 12% female participation. labour force participation was highest for the age group 35-44 years reaching 57%, with males accounting for 92% of participants within this category. labour force participation for the age group 25-34 years ranked second (55%) with males accounting for 91% of participants. A review of labour force participation by region reveals a much lower participation rate in Gaza (38%) as compared to the West Bank (43%) in 1999. <\/p><\/div>\n

\n

The full employment rate stood at 83% in 1999 and was higher within the female category at 84%. Overall underemployment rate stood at 12%, and was higher within the female working force at 14%. The West Bank absorbed 53% of the employed working force, while Gaza absorbed 24%, with Israel and the Israeli settlements employing 23% of the Palestinian labour force (Table I.3). <\/p><\/div>\n

\n

Overall median daily wage is NIS 69 (NIS 60 in the West Bank, NIS 46 in Gaza, and NIS 100 in Israel and settlements: NIS 1= US$ 0.24), with discrepancy between the wage of male employees and female employees in the West Bank (NIS 61 and NIS 50, respectively) and in Gaza (NIS 46 for males and NIS 50 for females). Discrepancy in wages is more pronounced across main activities with the median daily wage for those working in agriculture reaching NIS 50 in Gaza and NIS 30 in the West Bank as compared to NIS 70 in Israel and Israeli settlements. The highest wage for employees in the West Bank is provided by the construction sub-sector (NIS 70), while services and other branches provided the highest wages in Gaza (NIS 50) as opposed to transport, storage and communication in Israel and Israeli settlements ,NIS 108, (Table I.4) . <\/p><\/div>\n

\n

Since 1967, the Palestinian economy grew to become highly dependent on external labour markets for the employment of a growing part of its working force. Fluctuations in access to those markets have a significant disruptive effect on the overall economy, as experienced most recently in 1996. The employment situation is progressively improving as domestic absorptive capacity grows, however the economy still generates a high rate of unemployment, estimated at 21% of the labour force in 1997. The average annual unemployment rate decreased to 16% in 1998, the lowest since 1995, and had reached 12% by mid-2000. This decline comes despite demographic pressures with a labour force growing at around 7% per year, thereby proving the economy’s continued ability to absorb its labour force.<\/p><\/div>\n

<\/p>\n

\n

D.   <\/span>Poverty: modest but structural<\/strong><\/i><\/span> <\/span><\/p><\/div>\n

\n

During the period 1996-1998, the proportion of the population living below the poverty line decreased by 3.5% from 26.9% to 23.2%. However, poverty affected 23.2% of the population in 1998. This figure masks significant differences between the West Bank and Gaza with 37% of the population in Gaza living in poverty as compared to 15% in the West Bank. Poverty rates differ markedly between female and male-headed households (26% and 20%, respectively) though female-headed houses representing 11% of the poor stratum only. <\/p><\/div>\n

\n

As is the case of many developing countries, poverty rates increase consistently among families with more than two children. Households with the least incidence of poverty (13%) are those with 1-2 children, while those with 7-8 children witness higher incidence of poverty (31%) as opposed to 34% for households with at least 9 children (Table I.7). On the other hand, poverty rates are inversely related with the head of the household’s level of education, ranging from 28% for those with less than elementary education to 7% for those with a university degree (Table I.8).<\/p><\/div>\n

\n

Such high poverty rates are in contrast to GNI per capita indicators that registered an 11% increase during the period 1996-98, thereby reflecting a number of structural weaknesses within the economy. Most notable is a limited capacity to create enough jobs to absorb its labour force as indicated by the modest growth rates of GDP per capita at around 2% during the two years. The high poverty rates are also attributed to the high prices Palestinians face given the economy’s integration with its Israeli counterpart, with wage the discrepancy between the two economies increasing the incidence of poverty among the Palestinians. <\/p><\/div>\n

\n

\n

\n<\/p><\/div>\n
\n

IV.   <\/span>Economic performance until 2000: chronic vulnerability to external shocks<\/strong><\/span><\/p><\/div>\n

<\/p>\n

\n

A.   <\/span>Aggregate performance<\/strong><\/i><\/span> <\/span><\/p><\/div>\n

\n

In the period since 1994, the Palestinian economy has commenced a process of transformation and modernization. The PNA has been engaged in a process of re-construction and development aimed to upgrade infrastructure and improve the efficiency and productivity of the economy. However, the Palestinian economy remains predominantly based on traditional activities, with preponderance of small cottage industries and sole proprietorship undertakings. This section provides an account of economic developments until 2000, based primarily on statistical series published by the Palestinian Central Bureau of Statistics. <\/p><\/div>\n

\n

The Palestinian economy experienced a severe contraction in the late 1980’ s and early nineties, only to revive as of 1992. Following the setbacks of 1996-1997 accompanied by sharp falls in aggregate and per capita income levels, the economic situation has somewhat stabilized. By 1999, GDP of the West Bank and Gaza Strip stood at US$4,5 billion and GNP at US$5.2 billion, with a per capita GDP of US$$1,614 and per capita GNP of US$1,782. Since 1994, GDP has constituted less than 15% of GNP, compared to historic levels of over 25%. Net factor income from abroad in 1997 was around US$600 million, while net transfers in that year equaled US$407 million, and gross national disposable income was US$4,557 million. GDP in 1998 is estimated to have reached over US$3,660 million (Table II.1).<\/p><\/div>\n

\n

The Palestinian economy grew in real terms by 1% in 1997, and the growth rate for 1998 has been estimated at over 2%. In 1999 and 2000, GDP growth was projected at rates surpassing 6% in current prices. However, these rates are still below historic performance and demonstrated potentials for economic growth, and well below population growth rates. With increasing levels of domestic and foreign investment, and as an outcome of the market oriented policies being implemented by the PNA , the economy had begun by 2000 to demonstrate its potential for even stronger growth rates in the future. Performance in 1999-2000 is reminiscent of 1992-1993 and pre-1988 expansion periods, which were usually followed by steep decline, highlighting the Palestinian economy's vulnerability to external pressures and shocks <\/p><\/div>\n

\n

In 2000, gross fixed capital formation accounted for 46% of GDP. Construction, mainly in housing, accounts for 80% of total private investment, while private productive activities absorb the balance. The low level of investment in the productive sectors reflects a combination of factors, including uncertainty about regional conditions and insufficient credit facilities, notwithstanding the dramatic expansion of the banking system in recent years. Private consumption expenditure in recent years has been equivalent to around 96% of GDP and government consumption expenditure around 23% of GDP. Imports of goods and services absorbed 83% of GDP, and the Palestinian trade deficit (goods and services) was 65% of GDP in 1997, though this ratio declined somewhat in 1998-1999.<\/p><\/div>\n

\n

Consumer price increases have moderated in the last several years increasing by 2.5% in average monthly basis during 1999. The general inflation rate, which averaged 12% during the 1993-1995 period, declined to 7.6% in 1997 and fell to 5.5% by December 1999. Price trends in the Palestinian economy are highly sensitive to external events and the economy is open to such effects through the Israeli Shekel and the Jordanian Dinar, both of which the PNA has adopted as currencies in circulation during the interim period. <\/p><\/div>\n

\n

B.   <\/span>Sectoral structure<\/strong><\/i><\/span><\/p><\/div>\n

<\/p>\n

\n

1.   <\/span>Agriculture<\/strong><\/span> <\/span><\/p><\/div>\n

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Until the late 1980s, the agricultural sector’s contribution to Palestinian GDP averaged over 30%. This share has experienced a dramatic reduction during the past decade. In 1990 agriculture still represented 35% of GDP, but declined steadily to an average of around 12% in 1994-1996 and fell further to an historic low of 7% by 2000. Cultivated land in the West Bank covers around 33% of total land, while in Gaza Strip it covers approximately 50% of the area. The agricultural sector accounted for around 14% of the employed work force in 2000, though the potentials of Palestinian agriculture have been constrained by restrictive access to land and water.<\/p><\/div>\n

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2.   <\/span>Industry<\/strong><\/span> <\/span><\/p><\/div>\n

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The level of industrialization in the West Bank and Gaza was historically low, under 10%. Since 1994, available data has re-estimated (upwards) the annual average share of industry in GDP at around 16% in 2000. In addition to the significant branch of construction-related industries, the principal industrial activities are food processing, plastics, soap, pharmaceuticals, clothing and shoes. The industrial sector employs 9% of the work force in the West Bank and 14% in the Gaza Strip. About 35% of total industrial employment is in the textile, clothing and leather sectors.<\/p><\/div>\n

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3.  <\/span>Services <\/strong><\/span><\/p><\/div>\n

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The Palestinian economy is dominated by services, contributing 54% of GDP in 2000. Wholesale, retail trade and transport account for a substantial portion of service activities (19% of GDP), though the share of public services is also high (at 12% of GDP), and real estate services account for a similar share of GDP (11%). Public administration and defense account for less than 10% of GDP. Construction has traditionally played an important role in the Palestinian economy, contributing over 10% of GDP in previous decades, but has been re-estimated since 1994 at around 10% of GDP. <\/p><\/div>\n

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In 1999, services represented the main field of employment (absorbing 28% of the employed labour force), followed by construction (22%). Services were the main field of employment for the female working force, accommodating 46% of this category, followed by agriculture (providing jobs for 32% of females). <\/p><\/div>\n

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There has been a marked growth in the banking industry, and financial intermediation services account for around 3% of GDP. The number of banks increased from 2 in 1993 to 23 in 1999 with a total of 114 branches in the West Bank and Gaza Strip. Assets and deposits have also surged (see below). The insurance industry has also expanded over the past several years. It is dominated by auto insurance, which is not a source of long-term investment. The PNA Controller of Insurance at the Ministry of Finance is entrusted with developing the requisite legal and regulatory framework and supervises the insurance sector and licenses insurers.<\/p><\/div>\n

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The PNA has recognized the importance of advanced telecommunications networks and moved promptly to develop its infrastructure. Under arrangements with the PNA, the privately owned Palestine Telecommunication Company (PALTEL) is developing this sector on a sound commercial basis, to ensure wide domestic coverage and international connections with modern and diversified facilities. Palestine has been accorded its separate international dialing gateway (970) and has been assigned an independent Internet domain (ps).<\/p><\/div>\n

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Given Palestine's endowment of religious and archaeological sites, tourism remains a sector with high growth potential. This growth has been hampered by the prevailing uncertain conditions in the region and the weak support infrastructure for tourism in the West Bank and Gaza Strip. Nevertheless, some important developments have been achieved in the hotel, travel agency and tourism-related transport and restaurant sectors as a result of domestic private sector investment and some foreign direct investment.<\/p><\/div>\n

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C.    <\/span>External trade and balance of payments <\/strong><\/i><\/span><\/p><\/div>\n

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The Palestinian economy has a high degree of exposure to foreign trade, with a ratio of total merchandise trade to GDP at 80% at the end of 1998. <\/span>2<\/u><\/sup><\/a> This trade openness is accompanied by an import bias manifested in the rising ratio of (merchandise) imports from below 40% in 1990 to approximately 57% in 1998, while the export ratio, which was above 40% in 1980, declined to stagnate at a historically low level of about 10% since 1990. <\/span><\/p><\/div>\n

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In 1998, imports amounted to an estimated US$2,375 billion, while exports did not exceed US$495 million. Although manufactured investment goods, utilized in infrastructure projects, accounted for 36% of the value of total imports in 1998 (Table II.2), the growing deficit is mainly attributed to the economy’s heavy reliance on imports to meet local demand reflecting unrestrained consumption and structural weaknesses within the economy. This has had a negative impact on the trade balance, which manifests a persistent deficit, growing from US$1,658 billion in 1996 to US$1,980 billion in 1998. Compared to 1990, trade deficit has grown over 300% from US$ 600 million. Consequently, the ratio of trade deficit to GDP has soared up to well over 50% since 1995 from 27% in 1990. <\/span>3<\/u><\/sup><\/a> <\/span><\/p><\/div>\n

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Palestinian trade is heavily concentrated with one partner, namely Israel, accounting for nearly 80% of total value of trade in 1998. A wide gap separates value of trade with Israel and Jordan, Palestine’s second trade partner that accounted for 2.4% of the total value of Palestinian trade (Table II.3). A breakdown of trade flows reveals a positive shift with the years 1997 and 1998 witnessing growing imports from the rest of the world representing 29% of total imports in 1998 from 12% in 1996. This development reduced Israel’s share of the total value of Palestinian imports from 86% in 1996 to 69% in 1998 (Table II.4). However, on the export side, Israel remains as the main trade partner accounting for 95% of total exports in 1998 compared to 85% in 1990. Exports to the rest of the world have been declining sharply at levels of US$ 1-4 million annually since 1993<\/span> <\/span>4<\/u><\/sup><\/a> , thereby accounting for less than 0.5% of total exports in 1998. <\/span>5<\/u><\/sup><\/a> <\/span><\/p><\/div>\n

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It would be misleading to attribute such a performance to limited niche markets for Palestinian produce since these represent a significant share of total exports. A review of the commodity composition of the trade ranks manufactured goods as the largest category of exports with a 42% share of the total value of exports in 1998. Food and live animals ranked as the second largest category of exports (16%), followed by miscellaneous manufactured articles (15.6%), beverages and tobacco, along with chemicals and related products (6% each) and crude materials (4%). Exports of vegetables and fruit reached US$35 million, representing 8% of total exports followed by furniture (US$24 million), iron and steel ($US18 million) and footwear (US$19 million). Meanwhile, stone and marble continue to be the single most significant Palestinian export worth over US$100 million in 1998. <\/p><\/div>\n

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At the same time, manufactured goods also ranked as the largest category of imports (23%), followed by food and live animals (19%), mineral fuels lubricants (17%) and machinery and transport equipment (16%). Other major import items include miscellaneous manufactures (7%), chemicals and related products (6%) and beverages and tobacco (4%).<\/p><\/div>\n

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The current account balance, which was historically in surplus, has acquired a deficit position since 1996, when it was approximately one quarter of GDP, or around US$793 million. By 1998, the current account deficit had reached US$1,256. Exports, net factor income from work in Israel and current transfers from Palestinian expatriates and other non-official sources help to finance the huge import bill. These items, however, are insufficient to balance the current account deficit, which is partially offset by official donor finance. The capital account consists almost exclusively of capital transfers, i.e. unrequited transfers related to capital goods. In 1994, a surplus amounting to US$822 million was recorded in this account, whereby this account had acquired a deficit position of over US$700 million by 1998 (Table II.5).<\/p><\/div>\n

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D.   <\/span>Constraints on Economic Performance<\/strong><\/i><\/span> <\/span><\/p><\/div>\n

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Although the Palestinian economy's main performance indicators rank it within the category of middle-income developing countries, its sustained development is obstructed by structural impediments that are common to Least Developed Countries (LDCs). In addition to the major factor of the impact of prolonged occupation and strife, most notable is Palestine’s poor infrastructure that is coupled with a weak institutional set-up, and an underdeveloped industrial base. Just as the case of the LDCs, these impediments work against developing the Palestinian economy’s productive capacity. Hence, the relevance of these countries’ experiences for the Palestinian economy that is striving to assume a distinct role in line with global economic trends and regional specificities.<\/p><\/div>\n

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Moreover, UNCTAD observations on the economic performance of land-locked states are of clear relevance to the Palestinian economy in that the lack of access to world markets is “aggravated by prohibitive transport costs associated with conditions of inadequate infrastructure, imbalance of trade, inefficient transport organization, poor utilization of assets and weak managerial, procedural, regulatory and institutional systems pos[ing] serious constraints on the trade and economic development”. <\/span>6<\/u><\/sup><\/a> <\/span><\/p><\/div>\n

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1.   <\/span>Internal constraints<\/strong><\/span><\/p><\/div>\n

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a.   <\/span>Political turmoil and uncertainty<\/strong><\/span> <\/span><\/p><\/div>\n

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The importunate deadlocks in the political process and delayed implementation of signed agreements have resulted in prolonging the interim period increasing the level of uncertainty with regards to the future. The European Union (EU), which is actively involved in the support of the PNA's development efforts, emphasizes the difficulty of proceeding with planned activities under such circumstances:<\/span> <\/sup><\/span>7<\/u><\/sup><\/a><\/p><\/div>\n

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"The present situation of the Palestinian Territories is complex: it is a transitory situation from a state of war and revolution, under long and varied foreign rule, towards a state of peace and the rule of law. Indeed, the optimism that permeated at the beginning of the peace process was not translated into increased investments and exports, as investors are simply discouraged by the increasing level of economic and political risks. The high incidence of border closures by the Israeli Authorities has been inflating these risks inducing direct economic losses in the form of declining exports and lost job opportunities in Israel."<\/p><\/div>\n

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The total number of days of imposed closures during the period 1993-1999 reached 469 days, while the estimated induced losses owing to border closures for the period 1993-1996 were US$ 2.8 billion which is close to the GDP for an entire year and to the amount of aid received from donor countries within this period. <\/p><\/div>\n

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Aside from draining the economy, political turmoil has been diverting the PNA's attention away from policy making to emergency needs generated by deteriorating economic conditions. Operating under such circumstances, the PNA has not been able to develop its institutions as planned; "its ministries and administrations are still in their formative stages and therefore do not have clear and definitive administrative procedures and organizational structures", while the economy continues to operate within the absence of well orchestrated financial and legal systems, notes the same report by the EU. The same argument applies to donor funds that are persistently re-channeled for financing emergency programmes aimed at creating new jobs for the unemployed. In addition, there have been repeated delays in the implementation of major development projects, especially in the field of infrastructure as is the case of Gaza Sea Port that has been on the PNA's agenda since the signing of the peace accords in 1993, and even before.<\/p><\/div>\n

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b.  <\/span>Trade Regime<\/strong><\/span> <\/span><\/p><\/div>\n

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Of particular relevance to Palestinian economic and trade policy is the “ Protocol on Economic Relations between the Government of Israel and the PLO representing the Palestinian people”, signed in Paris on 29 April 1994. The Protocol, also known as the “Paris Protocol”, is intended to lay the groundwork for “strengthening the Palestinian economic base and for the PNA to exercise the right of economic decision-making in accordance with its own development plan and priorities”. This framework has enabled the PNA to implement its separate economic and trade policy throughout the territory of the West Bank and Gaza Strip under its jurisdiction. The framework has also provided the basis for organizing trade relations between Israel and Palestine stipulating a trade regime that is something of a mixture between a free trade area and a customs union. <\/p><\/div>\n

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Although the regime allowed the PNA to reap some benefits, its continued enforcement beyond the five-year interim period it was originally conceived for poses increasing obstacles to the development of the Palestinian trade sector, perpetuates distortive policies on the economy and encourages a skewed integration with the much more advanced Israeli economy. This section reviews the current Palestinian trade regime and outlines its built-in limitations that are built in it.<\/p><\/div>\n

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Import regime <\/strong><\/p><\/div>\n

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The current Palestinian customs duties are a pledge to the Israeli tariff schedule. Under the terms of Paris Protocol, the PNA agreed not to set its customs duties below those of Israel except for limited quantities of commodities from specified sources identified in List A-1 and List A-2 and on imports with no restrictions on quantities in List B. This means that the PNA can determine its own rates of customs duties, purchase tax, levies, excise and other charges on imports included in these lists within the specific quantities, while products not on Lists A-1, A-2 or B, or those on the first two lists but exceeding the quotas will be subject to a minimum of Israeli rates. However, the PNA may decide on any upward charges. <\/p><\/div>\n

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When first negotiated, List A-1 contained some 24 goods whose origin, or at least 30% of their value added stems from an Arab State. Of these, 11 items have to come exclusively from either Egypt or Jordan. List A-2 contains mostly food-related items, which the PNA has the right to import from anywhere in the world, keeping in mind that eleven items on list A-2 also appear on list A-1. List B includes a large number of items needed for investment and development. In mid-2000 the scope of the Lists was expanded to include 1,400 additional tariff line items. <\/p><\/div>\n

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For other imports, such as automobiles and petroleum products, special import regime and standards are adopted. These allow the PNA to impose its own rate of customs and purchase taxes on motor vehicles imported to, and registered with, the PNA. The PNA is also allowed to import used passenger cars up to three-years-old, subject to approval by a joint Palestinian-Israel committee, and is free to determine the price of petrol derivatives, except gasoline, as long as the price derivatives does not exceed 15% of the consumer price in Israel.<\/p><\/div>\n

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The PNA has chosen to adopt the Israeli import classification, evaluation, procedures, licensing and standards policy, which is applicable to all Palestinian imports, except for the quantities agreed upon under Lists A1 and A2. The clearance of customs revenues and fees levied on imports are based on the principle of final destination. This means that collected tax revenues should be allocated to the PNA, even if Israeli importers carried out the importation, when the final destination explicitly stated in the import documentation is a corporation registered by the PNA and conducting business activity in areas under its jurisdiction.<\/p><\/div>\n

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The PNA has not introduced to date, any change to the prevailing custom duties on non-listed goods and therefore the Israeli tariff schedule is being applied to most PNA imports. A direct benefit that the PNA can reap from the existing trade regime is the opportunity to exploit bilateral trade agreements between Israel and other countries since they apply to the PNA. Moreover, adopting the Israeli import classification and standards means that the valuation of all PNA imports is based on the GATT 1994 agreement, while classification of goods for customs purposes is in line with the principles of the Harmonized Commodity Description and Coding System (HS).<\/p><\/div>\n

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