The Palestinian economy and the Oslo “Peace Process"

Leila Farsakh, Research fellow at the Trans-Arab Research Institute, Boston

What are the demographic and territorial parameters of the Palestinian Economy?

The Palestinian economy refers to the 2.8 million Palestinians living in the West Bank, the Gaza Strip and East Jerusalem, all of which were occupied by Israel in the 1967 war.[1click to see the note] It excludes the 1.04 million Palestinian citizens of Israel, as well as the 4 million living in the Diaspora. In terms of geographic area, it encompasses a total of 6163 sq.km (5800 sq.km in the West Bank and 365sq.km in the Gaza Strip.  This represents 22% of historic Palestine (under the post WWI British Mandate).

What are the characteristics of the Palestinian Economy in the West Bank and Gaza Strip?

Growing population and Labor Force

According to the latest census conducted in December 1997 by the Palestinian Central Bureau of Statistics, 1,600,100 Palestinians are living in the West Bank, 210,000 in East Jerusalem and 1,002,207 in the Gaza Strip. The Palestinian population is particularly distinctive for its youthfulness and rapid rate of growth.  In 1999, 47% of population were under the age of 15, and they are growing at a rate of 3.9% per annum.  Total fertility rate per Palestinian woman is 6.24 (5.61 in the West Bank and 7.44 in the Gaza Strip). The Gaza Strip differs from the West Bank in so far as it is among the most densely populated areas in the world, has a lower per capita income and is predominately made up of refugees who were expelled from the 78% of Palestine conquered by Zionist Forces in 1948 and transformed into Israel.  Refugees form 65% of the Gaza Strip population compared with 26.5% in the West Bank.

The nature of the demographic structure is important because of its implication for economic growth and welfare in the Palestinian Territories.   The labor force, which includes all persons over 15 years of age who are working or searching actively for work, represents only 22% of the total population(a total of 633,000 in 1999). This means that every working Palestinian sustains five persons. In case of unemployment, five persons are without a source of income. Female labor participation in the workforce is low, thereby increasing the importance of male employment. Nonetheless, in 1999, 13% of women were economically active, compared with.23% in Jordan and 27% for the whole of the Middle East and North Africa Region.  Regardless, the Palestinian labor force has great potential, given that it is characterized by high educational attainment. In 1999 more than 50% of the West Bank labor force had more than 9 years of schooling, compared with 56% in the Gaza Strip. Less than 14% of the adult population in the West Bank and Gaza Strip is illiterate (compared with 41.4% for the whole of the Middle East and North Africa). Yet since 1970, the Palestinian economy has faced major constraints that hindered its capacity to absorb its growing population. While the labor force doubled between 1970-1992, domestic employment only grew by 33%.

Disintegration of the Palestinian Economy

Between 1967-1990, the economy of West Bank and Gaza Strip (WBGS) witnessed two major contrasting developments. On the one hand, it saw its per capita income double.  On the other hand, it witnessed the disintegration of its economic base. Gross National Product (GNP) per capita, which measure total goods and services produced by Palestinians(working in the West Bank and Gaza Strip and in Israel) spread over the total population, was of the order of $1450 in 1993.  This is higher than in Jordan ($1120)or Egypt ($650).  In 1999, WBGS per capita income was at $1,777 ( $1,915in the West Bank and $1,256 in the Gaza Strip).  This compares with a GNP per capita of $16,000 in Israel.

However, as individual income increased, the capacity of the economy to produce goods, absorb its labor force and upgrade technologically diminished.  The share of agriculture in total GDP (gross domestic product) fell from 34% to 13% between 1968-1993. Considered to be the vehicle for any economy seeking to develop and upgrade, industry failed to represent more than 8% of GDP in 1993. Compared with 25% in Jordan or 32% in Israel. Services and construction represent over 79% of GDP.

This contrasting development is the result of Israeli occupation imposed since 1967.  It is the result of Israeli economic and political strategy in the area, which consisted of four major elements:

• The pacification of the Palestinian population by allowing their individual standards of living to increase while at the same time dismantling the WBGS’s economic capacity.  This was to be achieved by the open door policy, first advocated by Moshe Dayan in 1968.  This policy consisted of allowing Palestinians to work in Israel and maintaining a free movements of goods across the green line, which separates the West Bank and Gaza Strip from the 1948 borders with Israel. Israel, however, continued to control the volume of goods and labor allowed to cross its borders. It allowed Israeli products, which were often subsidized, to flood Palestinian markets, but restricted the entry of Palestinian products into Israel through series of tariff and non-tariff barriers.
• The disintegration of the West Bank and Gaza Strip by making its economy dependent on Israel and incapable of growing autonomously. This was made possible by cutting all links between the West Bank and the rest of the world in the aftermath of the 1967 world. The Palestinian economy was only allowed to trade with Israel, and in limited amount of agricultural goods with Jordan.  Israeli policies also prevented the development of banks(only two banks were operational between 1967-1993) and restricted investment in agricultural and industrial production.  Any plans to build a factory, import machines or develop a farm needed a permit from the Israeli military governor, the deciding authority on economic policy in the area.  Permits were rarely given.
• The expropriation of land with the aim of creating the infrastructure for eventually annexing the largest parts of the area, as envisioned by the Allon Plan.  This plan, which guided Israeli governments’ policy in the area[2Click here] since 1968, envisaged the annexation of 25-40% of the West Bank.  This includes the area around Jerusalem, the Latrun salient along the green line, and10-15 km in the Jordan valley which forms the border with Jordan.  Israeli land and settlements’ policy were to be the instruments for attaining this goal.  Such policies are in violation of the Fourth Geneva convention, which applies to the West Bank and Gaza Strip.  Between 1967-1992 Israel confiscated 2.7 million dunums of Palestinian land (675,000 acres) by either declaring it state land,[3Click] closed military area or settlement master plan area. This represents more than 50%of the West Bank. This policy has led to the fragmentation of the Palestinian territory and economy.
• The usurpation and transfer of resources from the West Bank and Gaza Strip to Israel.  Three examples of this policy are to be found in Israel control’s over land, water and taxation. Israel controls the aquifers in the West Bank. It allocated to the Palestinians only one third of resources available.  In terms of per capita consumption, Palestinians were allowed to consume only one fifth of what was allocated to Israeli settlers. In terms of taxes, Palestinians were forced to pay 16-48% of their income to the Israeli tax authority Israel. In 1991, taxes collected on traded goods amounted to 8% of the WBGS GDP. This went directly to the Israeli treasury, rather than being invested in the Palestinian economy.

Structural Dependency on Israel

With the open door policy maintained up until 1990, Israel integrated the West Bank and Gaza Strip into its economic orbit.  It created a common market between the two areas that allowed a flow of goods and people. Yet, this flow was not free.  It was rather determined by Israel’s political considerations.  Israel forbade the investment of Israeli capital in Palestinian areas and restricted the exports of Palestinian goods in order to protect its own products.

The open door policy created a Palestinian structural dependence on Israel.  Israel became the major source of employment and the most important market. Between 1970-1993, Israel accounted for 90% of the West Bank and Gaza Strip’s exports, and 70% of their imports. The Palestinian industry and agriculture became dependent on subcontracted services from Israeli sectors, thereby intensifying its reliance on Israel as a source of inputs, employment and technological upgrading.

In so far as labor is concerned, Israel absorbed over 35% of the Gaza Strip labor force and 25-30% of the West Bank, between 1970-1993 (see figure 1).  It has been the major source of employment for Palestinians, given that domestic employment growth was stalled by a series of restrictions on investment, production, and trade. Access to employment in Israel helped reduce Palestinian unemployment in the territories, and provided one quarter of Palestinian GNP.  Yet, the Israeli labor market was insecure and biased towards unskilled workers.  70% of all West Bank and Gaza Strip workers in Israel were employed in menial jobs in agriculture and construction. They earned 30-50% less than Israelis working in the same occupation and sector. Employment in Israel represented a negative return for the majority of educated Palestinian workers.

The Oslo “Peace” Process aggravated, rather than improved, the economic situation

What does the Economic agreement say?

In principle, the Oslo Interim peace agreement sought to reduce Palestinian dependence on Israel and “to lay the groundwork for strengthening the economic base of the Palestinian side” (Preamble to the Economic Protocol of the Interim Agreement between Israel and the PLO, September 28^th, 1995).  The agreement sought to achieve its goal by introducing three major changes, which are:

• The establishment of a Palestinian National Authority (PNA) in the West Bank and Gaza Strip.  In contrast to the pre-1993 situation where the Israeli military authority was responsible for economic management in the West Bank and Gaza Strip, after 1995, the Palestinian authority was given some of this responsibility. The PNA could, in principle, decide on its employment, industrial, financial and tax policy.  However, while Palestinian jurisdiction extends to 93% of the people, it does not include full control over the land, a prerequisite for any attempt to make viable investment decisions.  By 1999, the Palestinian authority had full control on only 17.2% of the West Bank land (area A) and joint control with Israel over 23.8% of the land (area B).  In the Gaza Strip, itself only 27 miles long and 7-10 miles wide, the PNA had control over 85% of the land.  The Palestinian authority’s economic management capacity was thus curtailed from the very beginning.
• The establishment of a Custom Union between Israel and the PNA. This custom union differs from the de facto integration imposed before 1993 in two ways. It allows the free movement of capital and goods between the Palestinian and Israeli areas, but does not guarantee free movement of labor. It thereby puts in jeopardy the employment prospects of one third of the Palestinian labor force who used to be employed in Israel.  On the other hand, the agreements allow the Palestinian authority to trade with countries other than Jordan but only on specific goods agreed upon with Israel. This latter does not represent more than 7% of total Palestinian trade.
• The transfer of custom duties to the Palestinian authority.  According to the agreement, all goods imported by the Palestinian will have to pass by Israeli controlled areas and be subject to Israeli custom duties and trade policy (with minor exception).  Israel however accepted to transfer to the Palestinians all taxes collected on goods directed to Palestinian controlled areas.  This is an important source of income that was absorbed illegally by Israel before 1993.  In 1998, custom duties represented 70% of total PNA revenues.

However, from its outset, the agreement curtailed Palestinian economic capacity.  This is because it kept Israel in control of the land, water, and of borders. It also kept it in control over settlements, did not demand any dismantling of these illegal constructions and did not guarantee a freeze on their growth . In 1993, there was already over 140 settlements built, lodging 115,000 settlers in the West Bank and Gaza Strip, and 124,000 in East Jerusalem. The agreement also kept in Israel’s hand its right to determine the conditions under which goods and people can enter or exit the territories.

The facts since Oslo 1993

• Deterioration of standards of Living: Unemployment and poverty increased since 1993 and GNP per capita fell by 17% between 1994-1996.  37.2% of Gaza Strip and 15.4% of the West Bank population were defined as poor in 1998.  This refers to the number of persons earning less than $2.1 per day.  Unemployment soared from less than 7% before 1993 to 25%in the West Bank and 38% in the Gaza Strip in May 1996.  Unemployment was highly correlated with the degree of access to the Israeli labor market and growth in the West Bank and Gaza Strip (figure 2).
• Closures: this is an Israeli policy that consist of banning the movement of labor, good and capital between Israel and the West Bank and Gaza Strip. At times it also restricted movements within and between Palestinians areas. This policy was formalized in 1993, and has been imposed whenever Israel perceived a threat from Palestinians, or it deemed it necessary for other reasons.  Between 1994-1999, Israel imposed a total of 443 days of closure.  This is the equivalent of 90 days of unemployment per year. Closure has a devastating effect economy because of the structural dependence on Israel and the lack of free Palestinian access to the outside world. Between 1993-1996 the total cost of closure was estimated at $2.8billion.  This is the equivalent of 68% of GNP in 1996 and double the amount of aid disbursed in the area over this period.  The closure imposed after the beginning of the September 28, 2000 Al-Aqsa intifada has resulted in an estimated daily loss of $8.4million.
• Growing Dependence on Israel: in 1998, Israel was still the source of 74% of Palestinian imports and the destination of 96% of Palestinian exports.  The labor reliance on Israeli labor market diminished, but unemployment also increased.  In 1999, 125,000 Palestinian workers were working in Israel, but the majority were from the West Bank. 18% of Gaza Strip workers could access Israel (in contrast of 35% before 1993) compared with 25% of West Bankers.
• Territorial fragmentation: Israel continued to build settlements that cut through the territorial contiguity of the West Bank in particular.  Between 1993-1998, Israel confiscated over 117,000 dunums, completed the construction of over 15,000 new housing units in the West Bank between 1993-1998 and moved over 55,000 new settlers into them.  In East Jerusalem, the settler population increased by 80% over the same period.  By 1999, four major settlements blocks accommodating over 380,000 settlers are well formed, and situated in the areas that the revised Allon plan envisaged to annex. These cut the West Bank into three major unconnected cantons, the North, the Center, and the South. Settlers represent 12% of the total population living in the West Bank (including East Jerusalem) and Gaza Strip. Together with the Israeli army they control over 59% of the West Bank and 15% of the Gaza Strip.
• Weak performance by the Palestinian economic authority: closures and lack of free access to the world economy made the Palestinian Authority increasingly dependent on custom duties coming via Israel and on International aid.  The employment these generated was concentrated on the public sector, which is not usually productive or sustainable. Public employment represent 26% of total employment in the Gaza Strip and 13% in the west Bank. The absorptive capacities of the private sector has been limited due to the closure constraints.  In 1998, agriculture absorbed less than 14% of total domestic employment, industry employs 17% while services hire the rest.  In terms of production, industry does not represent more than 17% of GDP, and technological upgrading has been slow. The Palestinian Authority has also failed to create a transparent system of government or to avoid corruption and  monopolistic development.

Where are we today:

The Oslo “Peace” Process has condensed and constricted Palestinian life in the territories, and bars refugees from their right of return with full compensation.  By 2000, the Palestinians economy consists of 4 cantons (one in Gaza Strip and 3 in the West Bank) that are territorially cut from one another and yet fully dependent on Israel for all imports, exports, and labor absorption.  The system is more analogous to an apartheid economic structure than to a system capable of sustaining economically a future Palestinian state.  It is therefore not surprising that Palestinians are confronting the oppressive conditions Israel has imposed on them.

Map source: http://www.fmep.org/images/maps/map9907_1.jpg

Bibilography:

Abed, G. (ed.). (1988). The Palestinian Economy: Studies in Development Under Prolonged Occupation. London: Routledge.

ARIJ1999, Water resources in the West Bank, Jerusalem Applied Research Institute of Jerusalem.

Arnon et al. (1997). The Palestinian Economy: Between Imposed Integration and Voluntary Separation. Leiden: Brill.

Aronson, 1992: Israel, Palestinians and the Intifada: Creating Facts in the West Bank, IPS, Washington, D.C.

Benvenisti, M and S. Khayat, 1988, The West Bank and Gaza Atlas,, WBDP, Jerusalem post.

Fafo Institute for Applied Social Science. (1993). Palestinian Society in Gaza, The West Bank and Arab Jerusalem: a Survey of the Living Conditions. Oslo.

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[1Click to go back] Talking about the borders of the Palestinian economy can be at times confusing because of the nature of Israeli occupation and it redefinition of territories and spaces. All comprehensive statistics available on the Palestinian economy between 1967-1993 (provided by the Israeli Central Bureau of Statistics) exclude East Jerusalem This is because Israel annexed it and to consider it part of its “eternal capital”, in violation of UN resolutions, particularly 181 and 242. The annexation poses a serious problem because it is illegal and it deprives the West Bank of a central city that links the north with the South of the West Bank.  East Jerusalem is also considered to be the capital of any future Palestinian state.  With the establishment of a Palestinian Central Bureau of statistics in 1995, all data on the Palestinian economy includes East Jerusalemite’s population, but excludes their assets.

[2click to go back] with minor modifications, including the Oran law and the Sharon-Drobles plan for settlement expansion, and most recently, Allon Plus (for further details see Benvenisti and Khayat 1988 and FMEP 1998).

[3click to go back] Israel declared State land on all property that belonged before 1967 to the Jordanian government, those that belonged to people that fled in 1967, and all unregistered and uncultivated land (for further details see Shehadeh, 1993, or Benvenisti and Khayat 1988).

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