TWN Info Service on WTO and Trade Issues (Sept09/09)
15 September 2009
Third World Network

Palestinian economy at an all-time low
Published in SUNS #6770 dated 9 September 2009

Geneva, 8 Sep (Riaz K. Tayob) -- In all aspects, the Palestinian economy today is facing a real challenge to its integrity, solvency and indeed the very viability that it must enjoy for the two-state solution to become a reality, the United Nations Conference on Trade and Development (UNCTAD) said on Tuesday.

In a report on its assistance to the Palestinian people, UNCTAD said that the devastation visited upon the occupied Gaza Strip and its economy has plunged its 1.5 million inhabitants into depths of poverty and disintegration unknown for generations. The blockade it has endured has isolated it from the rest of the occupied Palestinian territory and the world.

At a media briefing, Mr Mahmoud Elkhafif, Coordinator of the Assistance to the Palestinian People, said that prospects of establishing an independent Palestinian state are bleaker than ever before.

According to the report, the sustained programme of UNCTAD assistance to the Palestinian people not only addresses the realities of stunted development under occupation, but also supports building the economic institutions required for a sovereign and viable Palestinian State, as called for by the international community.

Yet another lost year for Palestinian development was chalked up in 2008 as the economy not only failed to recover but continued to lose ground for the ninth year in a row, says the report. Per capita GDP has fallen by 1.2% in 2008 with a cumulative effect of a 34% drop in real per capita GDP between 2000 and 2008.

This is despite substantial foreign aid and institutional reforms carried out in an unfavourable environment by the Palestinian Authority (PA) within the framework of the Palestinian Reform and Development Plan.

The report focuses on productive capacity of the Occupied Territories and states that there has been the loss of at least one-third of the Palestinian productive base since 1998. There is stifled entrepreneurship with high transaction costs, and increased uncertainty due to closure and movement restrictions, making business planning impossible.

There is a distorted productive structure with enterprises making choices for internal and external markets not based on comparative advantages, but based on the cost of Israeli security measures, the report adds.

There is also thwarted agricultural development with the loss since 1967 of 40% of West Bank land to settlements and related infrastructure, and almost one fifth of its most fertile cultivable land lost to the Separation Barrier. Thirty percent of Gaza's arable land cannot be accessed by farmers due to the Israeli military campaign and proximity to the border with Israel.

The separation barrier has forced 3,551 enterprises out of business and disrupted road and water networks of 171 villages. Barriers to the movement of goods and people within the occupied Palestinian territory has given rise to price differentials, goods being damaged at checkpoints and transportation costs doubling in some areas. The situation is worse for exporting sectors, which have to pay an additional cost at external borders.

"The net result is the atavistic atomization of domestic production enclaves and a Palestinian economy edged toward autarkic isolation from global markets - except for more dependence on the already sizeable imports from Israel," says the report.

There is an expanded trade deficit especially with Israel. The total deficit was 79% of GDP in 2008, and 71% of that is accounted by Israel. This is equivalent to more than 140% of the $1.9 billion of international donor support to the Palestinian Authority in 2008. Palestinian trade with Israel accounted for more 90% of the territories' GDP.

Palestinian exports fell in 2008 from their 2007 level and continued to be below their 1999 level, implying a steeper decline in real terms, says the report.

The private sector's inability to cope with mobility restrictions and other Israeli measures and the resulting inability to create jobs, combined with the Palestinian Authority's pursuit of fiscal sustainability and the exhaustion of its ability to act as an "employer of last resort", resulted in the rise of the unemployment rate from 28% in 2007 to 32% in 2008. Gaza's unemployment is 13% above the national average.

According to the report, poverty continues to widen and deepen. The percentage of households living in the occupied Palestinian territory in relative poverty jumped from 20% in 1998 to 57% in 2007. The latter figure includes 48% living in extreme poverty. In blockaded Gaza, poverty touched 79% of the population in 2007, of which 69% were living in extreme poverty. By early 2009, relative poverty affected 90% of Gazans.

Food insecurity has reached 38% of Palestinians, says the report. Food insecurity affects 80% of Gazans. Ninety percent of Gazans have limited access to drinking water, while more than half experience intermittent electricity supplies, the report adds.

Israeli restrictions on shipment of cash from the West Bank financial institutions to Gaza have effectively paralysed Gaza's banking system, inflicting serious damage on the economy. It has led to a shift of financial activities towards unregulated informal channels that are not amenable to the supervision of the Palestinian Monetary Authority.

The report calls this financial "de-development" a serious setback to efforts to lay the institutional foundations of a future viable state.

According to the report, the massive Israeli military campaign in Gaza from 27 December 2008 to 18 January 2009 cost the Palestinian economy $4 billion in direct and indirect losses, which is almost three times the size of Gaza's economy. Despite a UN-brokered ceasefire, the tight blockade on Gaza remains intact. The erratic entry of aid packages renders even emergency relief a difficult task. In-depth sectoral estimates indicate that total direct losses, from the campaign, could reach $2.5 billion in addition to an estimated $88 million in GDP losses.

While donors pledged $4.5 billion at an international conference in Sharm el-Shaikh on 2 March 2009, disbursement of international commitments has yet to begin in earnest with most donors conditioning the release on Palestinian political developments, says the report.

It is also difficult to establish the additionality of the pledged aid. The $4.5 billion pledged came after $7.7 billion was pledged in Paris in December 2007. Given historical trends and donor attitudes, " it is not reasonable to assume that the total pledged amounts to $12 billion."

Rather, this suggests double pledging by some donors, and overlap of medium- with short-term programming. Only 39% of the UN Emergency Appeal has been financed, states the report.

According to the report, the aid effort should be based on a coherent development strategy for the envisioned state of Palestine that goes beyond budgetary allocations and generic statements of objectives. It should aim at supporting, rebuilding and expanding the eroded productive base, otherwise the viability of the envisioned Palestinian state will be an elusive task.

The report further states that there is a need for a departure from previous economic development strategies for a viable envisioned Palestinian State, which can safeguard its sovereignty in a world of global interdependence and market liberalism, such as:

(1) restoring the territorial integrity of the West Bank and Gaza Strip;

(2) recognising the separateness of the Palestinian Authority customs territory, which is implicit in the choice made in 1994 by Palestine to opt for a customs union with the separate customs territory of Israel;

(3) addressing the special needs of a newly independent, war-torn state as it emerges into the community of nations and ensuring that it has access to all possible tools to manage and gradually enhance its economic policy space as its development needs evolve;

(4) beginning today to form the institutions for a viable state rather than pursuing incessant reform of institutions of self-government that function according to a set of promises whose fulfilment remains elusive - a policy process leading nowhere.

One multilateral platform where Palestine can translate these principles into a policy platform for a sovereign national economy in the making is the World Trade Organisation (WTO), according to the report. In concrete terms, this should entail consideration of the acceptance of Palestine as an observer in the WTO.

While it would take years to shape the economic policy and institutions of the new state, such an initiative would confer immediate economic benefits and a measure of economic policy autonomy, for Palestine, says the report. +