The Palestinian Economy: In the Red


The months of Intifada that began in September 2000 and continue today have been characterized by a visible deterioration in Palestinian infrastructure resulting both from wartime damage and under-investment. For 18 months, there has been zero private investment, which means that the country’s capital stock is declining. There has also been a loss of half of Palestinian purchasing power, due to massive unemployment not only among those who can no longer work in Israel, but for those who previously worked in the Palestinian market.

Sixty percent of Palestinian exports have been lost and government spending is halved. Previously, the Palestinian Authority spent over $100 million a month, now it puts little more than $50 million a month into the economy. Even this flow of cash is dependent upon Arab donations.

Poverty is widespread, affecting about half of the population. Direct and indirect losses for the entire economy have been estimated at somewhere between $3.5 billion by international agencies and $10 billion by Palestinians. But even a loss of $3.5 billion means that Palestinians have lost their Gross Domestic Product for an entire year. Prior to September 2000, the Palestinian Authority GDP was nearly $4 billion. The losses continue to add up.

Among the various Palestinian industries, 95 percent of tourism and construction companies, regardless of their size, have come to a standstill. While some businesses may open their doors, they no longer have customers. Transportation, hotels and restaurants are all in decline because no one is coming in to the Palestinian areas. Even internal tourism is almost non-existent due to the impossibility of travel from one town to the next.

Since the start of the confrontations, there have been nearly no new building starts. The construction sector, which makes up 22 percent of the Palestinian GDP and 80 percent of private Palestinian investments, is probably working at 15 percent of its capacity.

While the food industry continues to produce at 60 percent of its capacity, light industries are working at less than half their abilities. This is due to the sharp decline in Palestinian purchasing power and the abrupt interruptions in the ability to transport and market goods locally, to Israel and to other export markets. It is impossible for those in Hebron to send their products to Nablus and Jenin and to Gaza. When they are able to transport their products, the cost is ten times that they used to pay, which cramps competitiveness and business possibilities. Every Palestinian industry faces the same problem.

At the same time, Palestinians increasingly are forced to depend on Israeli products, which are infiltrating the Palestinian market. It is clear that Israeli products have less trouble passing through Israeli checkpoints and that the Israeli military is facilitating access of Israeli products to Palestinian markets.

Small businesses have been hurt deeply by the ongoing crisis, with start-ups disappearing, as they are unable to survive the difficult conditions. Those who can survive are large businesses with savings and resources, but even these companies are only just managing the crises that they face every day: how to get past the checkpoints, how to market their products, what to do when employees cannot come to work and all the daily problem-solving of the current situation.

There are always some few who are able to make riches in wartime, but in our case, these fattening purses are not Palestinian. Only the Israeli food sector, which has returned its monopoly to the Palestinian areas, has gotten lucky here. For example, Gaza’s only flourmill has been damaged and unable to import wheat to mill. In the gap, the Haifa flourmill has now infiltrated that lost market.

Most of the businesses created as a result of economic cooperation between Palestinians and Israelis were the first to be shut down in the crisis. Karni and other industrial zones have been hit hard, if not closed. The Jericho casino, a controversial moneymaker for Palestinians, was one of the first establishments to shut its doors. If one looks at the private monopolies inside the country – the Palestinian-owned telecommunications companies Jawwal and PalTel, for example – they have been hit hard and are in serious trouble. Still, they have more resources than the small businesses and will probably survive.

On top of all these mounting losses, the most recent Israeli incursion in the West Bank was devastating. The damage to commercial and residential properties was extensive, amounting to perhaps half of the damage done by the Israeli military over the last 18 months. According to World Bank estimates, the physical damage to the infrastructure adds up to a loss of $350 million dollars. To give some idea of what that means, Palestinian public investment is not more than $200 million a year. In one month, the Israeli army destroyed what the Palestinian Authority might have built in two years.

Further, this Israeli invasion carried a special message for the Palestinian businessperson: that there is no safe haven for Palestinian investment. Business owners now know better than any other Palestinian that there will be no private investment in Palestine until there is a final settlement with Israel. It is no exaggeration to predict that even if there is sudden calm and no confrontations, there will be no private investment in Palestine. Israel must be taken to task for destroying the nascent hope of the Palestinian economy. For at least as long as the Israelis remain in control and the occupation continues in whatever form, investment in the Palestinian areas will be considered a high risk venture at best.

Years ago, some people would get very angry when I described the system created by the Oslo accords as one that relies on cooperation between the Palestinian and Israeli authorities in order to facilitate the very services of Palestinian citizens. At the time, I said that the Palestinian Authority is no more than a front office for the Israeli government, which controls the back office where decisions are made and business is done. With cooperation, imports and exports and licensing for infrastructure and projects all continue. When there is no cooperation, as now, the Palestinian Authority is helpless. Now, the back office is not cooperating, which means that the Palestinian Authority cannot provide the services that its people require.

There are those who have been trying to pick up the pieces. The Palestinian Ministry of Public Works, the Palestinian Economic Council for Development and Reconstruction (PECDAR) and some municipalities have been fixing broken roads, water pipes, the electricity network, as well as mending doors and repairing the glass of shop windows and some walls. Still, they have limited resources and can’t fix everything. In general, it must be said that Israeli Prime Minister Ariel Sharon has succeeded in paralyzing the Palestinian Authority for all intents and purposes.

Further, there is little hope that others will step forward to facilitate service provision on the Palestinian Authority’s behalf. The donor countries are not willing to put any investment into the Palestinian community unless they see that there is progress in the peace process. Those who previously gave money for investment projects see that most of these projects have been rendered useless or destroyed by the Israeli military machine. Humanitarian aid is helping the poor in Gaza and the West Bank, especially those who are now jobless. While this aid might be better distributed, it does provide some stopgap against the scourge of hunger.

Right now, the major lifeline for the Palestinian economy is the $45 to $50 million coming to the Palestinian Authority to finance the salaries of the public sector. This cash bumped into the economy each month jumpstarts flagging finances. But other donor aid will continue to be only promises and pledges until we see at least a halt in the Israeli aggression and concrete moves forward in the peace process.

In this crisis, the deficiencies and shoddy places in Palestinian structure and governance and society have never been clearer. Nor are there any further excuses for avoiding their remedy. At this stage, the solution to our economic crisis is not economic, but political. We need real reform that returns the credibility to our system and our cause.

We must start now with presidential, legislative and elections in order to provide a new soul for our drive for independence and statehood. Elections, of course, will be a forum to bring forward those who are educated to look at all of these issues and to rebuild the Palestinian Authority in a way that assures efficiency and transparency. There should be a division of labor between its authorities and there should be an independent judiciary that works for social and political stability. These are the places where we can and must start.

Elections will be a period for contemplating and evaluating what has happened and how to make up for our losses. It will also be the time for holding accountable all of those responsible for mistakes and shortcomings. This is the way that all civilized nations handle the apex of crisis that we find ourselves in.

It is unlikely, however, that the Israeli government will allow us to pursue this agenda, nor that the United States has an agenda mirroring ours. While Israel speaks of reform, what it wants is to Palestinian Authority into a police state for running after those who violate Israel’s security. In addition, Israel’s agenda appears to have no room for human rights, civil liberties and for Palestinians to rebuild their institutions and strategies. There is also resistance to reform inside the Palestinian leadership itself.

Still, reform is a must and should be enforced by the will of the people. I think that we can win this battle if we gain international support from the European Union, the United States and our Arab brothers. Reform will be a shot of immunization for our political position against Israel and help us to end Israeli aggression and return to some kind of mechanism for resolving the Palestinian problem. We must protect the credibility of our struggle to end the Israeli occupation, and to speak up against all actions that damage it. I speak here about actions that target Israeli civilians, actions that receive increasingly less support from the Palestinian public. We must have some kind of discipline in our political struggle.

All of this can be achieved in a smooth and civilized manner. The main responsibility for this drive lies largely in the hands of our president. It is up to him and I am certain that he is able to lead us to success in this process. I am not sure, however, if he feels that this is the only route to success. If he chooses to succumb to the pressures from the powers around him who feel that this reform process will end their influence and cut short their personal interests, we will enter even tougher times. In that case, chaos will reign and Sharon will have more ammunition for escaping from his nightmare of the peace process, damaging the Palestinian economy and suppressing our political cause.

Samir Abdullah is an economist and was a member of the first Palestinian peace delegation in Madrid and Washington, and a member of the Palestinian-Israeli Peace Coalition.