East Jerusalem's economy has gone through a good deal of ups and downs during the past 40 years of occupation, especially as the state of the economy is inextricably linked with the political situation in the area. With the outbreak of the first intifada (1987) the economy of East Jerusalem took a serious dip. Its gradual but inexorable fall continued throughout the al-Aqsa intifada, reaching catastrophic proportions, especially with the construction of the separation wall.
Although East Jerusalem was not subjected to Israeli military rule under the annexation law, its citizens have suffered from Israel's discriminatory policies in various aspects of their lives. Israel's government proceeded to tighten its hold on the eastern part of the city through certain measures like the expansion of the municipal boundaries, the imposition of economic and social laws and various forms of taxation, especially the escalating municipal tax (arnona), without any consideration for the asymmetry in income levels between the inhabitants of East and West Jerusalem. Added to that is the near-impossibility of obtaining building permits for the Palestinians. The underlying aim of such measures is to "encourage" the migration of East Jerusalemites. The last straw came with the construction of the separation wall, which spelled the death knell of the economy as it fragmented East Jerusalem and isolated it from the rest of the Palestinian territories - its natural hinterland - and left it open only to the western side, i.e., to Israel.
This study will focus on the repercussions of the wall and other measures on the various economic sectors in the city.
The Trade Sector

In addition to the city's residents, the trade sector in East Jerusalem is largely dependent on:
* villagers from the environs of East Jerusalem;
* West Bank and Gaza residents;
* Israeli shoppers;
* Israeli Arabs; and
* tourists.
Since 1994, the number of shoppers arriving from the villages around East Jerusalem and from the West Bank and Gaza had been gradually dwindling, and had reached a trickle by the onset of the al-Aqsa intifada (2000). It is estimated that the level of trade activities is down by about 40% from its original level, which can be attributed to the following:

1) The military checkpoints that bar villagers from the Jerusalem district, as well as other Palestinians from the occupied territories, from entering Jerusalem.
2) The rise in the cost of the transportation of goods, due to the checkpoints and closures.
3) The rise in the cost of the clearance of cargos from Israeli seaports, due to security inspections.
4) The growing number of peddlers resulting from the rising unemployment and high taxes.
5) A decline in the average income per capita leading to a decline in buying power, thus confining retail shopping to basics like foodstuff.
6) A considerable drop in shopping by Israelis, which has come to a complete halt with the eruption of the intifada.
7) The total absence of tourism - especially between 2001 and 2004 - and the reduction in visiting hours to holy and historical sites, like the al-Aqsa Mosque.
8) The restrictions on the marketing of Palestinian products in Jerusalem, especially food items like dairy products and eggs, which are priced lower than similar Israeli products.
9) The firing of a number of workers due to the drop in sales.
10) The building of the separation wall, which forces more than 120,000 residents to cross military checkpoints daily to access Jerusalem.

A. Retail Trade
The retail business inside the city of Jerusalem is considered the largest in volume of production and manpower. Statistics show that 5,921 commercial organizations exist in East Jerusalem, although only a third are registered members of the Arab Chamber of Commerce and Industry in Jerusalem. The commercial sector is the largest and is tightly linked with the other sectors, especially tourism.
The Chamber of Commerce data also show that production has fallen to half the level seen in 2001. Therefore, we can say that the negative impact on retail is again due to the closure, which has:
* greatly reduced the number of shoppers from outside the city;
* severely increased the difficulties faced by Jerusalem shop owners holding West Bank identity cards, as now they need entry permits;
* made it impossible for West Bank merchants to enter East Jerusalem without permits; and
* forced half of East Jerusalem citizens to shop outside the city, given the troubled retail sector.

B. Wholesale Trade (Distribution and Commission Agencies)
Wholesale trade, commission agents and distributors are all faced with unfair terms of competition with their Israeli counterparts. Between 1995 and 2000, a number of businessmen in East Jerusalem succeeded in becoming direct agents for foreign companies and to import directly from them - instead of being only subagents, importing through Israel. Nevertheless, these foreign companies have agents also in Israel. These sell to the West Bank and compete with East Jerusalem companies that are at a great disadvantage and stand to lose their foreign agencies or, at least, to face reduced sales. Here again, the military and inspection checkpoints set up at the entrances to Jerusalem make difficult the distribution of goods.
The intensification of security inspections on imported commodities, particularly on merchandise originating from Arab countries, and the delay in the clearance of goods by Israeli custom officials have increased the cost of goods. The result has been a reduction in the volume of wholesale activities and a rise in the price of commodities. The situation has been exacerbated by the isolation of East Jerusalem from some of its vital centers in the district, like Bir Nabala, a city that handles all the storing of wholesale commodities and their distribution to East Jerusalem and the West Bank. Access restrictions have also been applied to the southeast, the north, the northwest and the northeast of Jerusalem.

C. Interregional Trade
The Chamber of Commerce prepared a questionnaire on trade transactions in the Jerusalem District to study and research East Jerusalem's economy. The purpose was to devise ways to face Israel's ongoing closure measures and the erection of the separation wall. The study showed the following:
1) The wholesalers of foodstuffs in East Jerusalem are working at half capacity due to a 30-40% increase in transport costs, as most of their stores are located in the West Bank. In addition, a problem has arisen in the Bir Nabala region, where merchants are forced to take the longest route possible to move their goods to Jerusalem, which bumps up the cost of transport by 40%.
2) Movement of goods through the Israeli checkpoints at Za'ayyem for merchants arriving from Ezzariyya is largely dependent on the whim of the soldiers manning the checkpoint. The goods get delayed or, sometimes they are turned back. This happens whenever the labels are printed in Arabic.
3) Most East Jerusalem companies are obliged to register as both Arab and Israeli companies - with repercussions on their activities and profit margins.
4) A fall in the number of Jerusalemite shoppers living outside the wall, because the wall and the checkpoints hinder their access to the city, in addition to the considerable rise in transportation costs.

The Industrial Sector

Industry accounts for 14% of East Jerusalem's economy. The Jerusalem Cigarette Company is the biggest industry in the city. The taxes levied on local cigarettes constitute one of the most important taxes, totaling some US$80 million annually, and form a sizable part of the Palestinian Authority's income.
A number of factories in Jerusalem and the district were obliged to curtail their production or close down, such as the shoe industry, textiles, leather and baby nappies. The reasons can be summarized as follows:
1) The demand for local products (especially non-food items) has been reduced to a third of its previous level.
2) The inability of the local products to compete, due to a hike in distribution costs and to the closures.
3) The delay of the labor force in arriving at their workplaces, and the reduction in working hours to nearly a third.
4) The increase in the cost of raw material, due to the increase in transportation costs from the seaports and in security inspection procedures.
5) The contraction in exports via Israeli seaports, as well as border crossings with Jordan and Egypt, due to security considerations.
6) The increase in the amount of damaged goods, due to security inspections and the long delays before clearance.
7) The shift among many industrialists to importing the very same article they previously had been producing, due to globalization and competition.

The Tourism Sector

The tourism sector in East Jerusalem forms 40% of the economy of the city, and it is the one that has been hardest-hit since the onset of the intifada (2000).
1) The flow of tourism to East Jerusalem has been cut off, and bookings cancelled from October 2000 until 2005. Since then, a slight improvement has been registered.
2) Some of the 43 Arab hotels in East Jerusalem have proceeded to close down and to dismiss their employees. About 37 hotels have bottomed at 8% of their previous occupancy rates. The six more fortunate hotels have maintained 10-23% of their previous occupancy rates.
3) The local banks have demanded from the tourist transport companies - 17 companies owning 220 buses - to settle their financial commitments arising from the modernization in 2000 of 90% of these buses. More than 70% of the buses have been sold in auctions or were repossessed by the banks because the companies were unable to settle their debts. As a result, the number of buses has been reduced to 60.
4) Hundreds of souvenir shops have closed down completely, due to the high expenses and steep taxes.
5) Tourist agencies have seen their work come to a standstill and have turned to ticketing. Additionally, 160 Palestinian tourist guides live in a state of semi-unemployment. Tourist restaurants also have greatly deteriorated.
6) Since the beginning of 2005, the tourism situation has improved and some of the hotels have reopened. The Israelis, however, have intensified their competition against Palestinian hotels by building three large hotels close to tourist locations.

The Monetary Sector

The East Jerusalem economy is still dependent on Israeli banks. Arab banks are prohibited from functioning inside the city, but are competent to offer Jerusalem merchants certain services through their branches in the Palestinian Authority (PA) areas. These services remain imperfect, as the banks do not offer credit facilities to East Jerusalemites, nor do they accept real estate as collateral from them.
In addition, Israel has been falling hard on the city's money changers, although this profession is considered one of the mainstays of Jerusalem's economy and has been a legal occupation and part of the city's tradition, even predating the occupation. Over US$1 million have been confiscated after the Israeli military broke into a number of money changers shops. The money changers have been denied permits to operate, unless they adhere to the Israeli system pertaining to this line of activity.

Construction

The construction of the separation wall came in tandem with still more stringent measures by the Jerusalem Municipality regarding unlicensed building. The only way for East Jerusalem to ease the housing shortage is to proceed with building without permits, as these are subject to tight restrictions and rationing by the municipality. Additionally, the fee for a building permit has risen to over US$100 per square meter.
The Jerusalem Municipality has adopted the following measures:

1) The cost of demolishing an unlicensed house - which is charged to the owner - has been raised considerably. The owner whose unlicensed house is to be demolished is now charged a considerably higher price for the bulldozers used to demolish his house.
2) The contractors responsible for building without permits have their equipment confiscated and are required to pay an exorbitant sum in fines.
3) Pressure is brought to bear on suppliers of building materials.
4) West Bank construction workers are denied permits to work in East Jerusalem. This leads to an increase in the cost of building, as labor wages, as a rule, are lower in the West Bank. The municipality actually carries out spot checks on both licensed and unlicensed building sites in search for West Bankers working without permits. They are arrested and the contractors or owners are heavily fined.

Faced with the threat of having their Jerusalem residency rights revoked, East Jerusalemites in districts outside the separation wall are increasingly migrating to within the wall. Yet this rise in migration has not been accompanied by a parallel rise in the number of housing units. Rent has shot up inside Jerusalem, but has fallen outside the wall, along with the value of property. In A-Ram, for example, 20% of the apartments are now vacant.
Employment

A general overview of the economic institutions in Jerusalem shows that 45% are located inside the municipal borders and 55% outside, within the Jerusalem District. Of the 45% that are inside the borders, 28% are tourism institutions. There is no industrial area inside the city. A close analysis shows that the number of institutions has been dwindling at an average of 100 institutions per year since 1999, to reach the current number of 5,000 - 97% of which are small businesses. The reason for the decline is the current depressed economic situation, the troubled tourism sector, the closures, the checkpoints and, lastly, the separation wall. All this leads to the speculation about a yet gloomier future. Each year, about 9,000 new applicants enter the labor market in East Jerusalem. About 15% are university graduates; others have either completed or left secondary school. The Israeli market usually absorbs 35-40% of the new labor force. The rest go to Palestinian markets in East Jerusalem and in the PA areas in both the public and private sectors. The public sector has the capacity to assimilate no more than 10% of the workforce, which places the bulk of the responsibility squarely on the shoulders of the private sector.
Unemployment in East Jerusalem has reached a high of 23% for those with blue identity cards, issued to East Jerusalem residents, and 30% among those with West Bank identity cards within the Jerusalem District. This means that there are more than 20,000 unemployed in Jerusalem and its district. Thus, the creation of jobs is a huge problem facing the city, and especially the private sector. But job creation calls for investment, which is not secure given the political climate, coupled with the flight of capital from conflict areas to safer regions. This can only lead to a dead end and increasingly pessimistic indicators regarding the unemployment issue and the absorption of newcomers into the labor market.

The Infrastructure

Despite the fact that the Jerusalem Municipality is responsible for the infrastructure in East Jerusalem, it is clear that it has not been doing its job in the Arab part of the city. According to Israeli statistics, the municipality spends only 5% of its total budget in East Jerusalem, although the Palestinians account for 35% of the total population and pay 33% of the total municipal taxes.
A major problem with which East Jerusalem has to contend is the reverse migration from outside the separation wall to inside it. Approximately 20,000 individuals have left their houses in the surrounding neighborhoods and have gone to live within the wall.
Jerusalem has seen a significant fall in its income level and a rise in its expenses, especially in housing costs. The Israeli policy of demolishing unlicensed buildings and withholding of building permits will leave the city in need of at least 1,000 housing units per year. With the scarcity of land as a result of land confiscation, the building of Jewish settlements along the municipal boundaries and the blocking of land proprietorship, the following steps are suggested to help fill the gap in infrastructure:
1) Finance construction plans for locations suitable for building.
2) Encourage vertical construction on existing buildings to increase the number of floors and living capacity, and have an engineering office oversee building plans and follow up on licensing.
3) Increase financing to the Palestinian Housing Council to expand its loan offers.
4) Provide additional financing to the organizations that are responsible for maintenance and renovation of Old City houses, to preserve the Arab architectural style.
5) Support legal advocacy in Jerusalem to address the problem of migration, especially because of the separation wall, land confiscation and the revoking of identity cards.
6) Put pressure on the Arab banks to accept Jerusalem property guarantees, to enhance loan facilities to the citizens of Jerusalem.

Capacity of the Economy to Adapt to the Present Circumstances

It is certain that the Israeli measures, and especially the separation wall, will choke Jerusalem's economy. East Jerusalem will have to manage its economic situation, especially in the absence of Arab sovereignty. The responsibility, thus, falls on the private sector to transform the economy in order to meet the challenges ahead. Below are some steps to follow:
1) Recognize that East Jerusalem is a first-category tourism city and this should be the focus of its economy.
2) Realize that if a tourist spends one extra hour in East Jerusalem, this will translate into an additional annual income of US$25 million.
3) Divert the available economic potentials and investments towards the tourism sector through:
a) the restoration of the tourism infrastructure, which was damaged between 2000 and 2005;
b) the creation of new tourist attraction sites, and the follow-up on the modernization of the tourism industry;
c) the expansion in marketing and promotion of tourism to the city of Jerusalem separately or within a tourist package with neighboring countries;
d) the development of entertainment and cultural life in Jerusalem, to accommodate the needs of tourists, and to encourage the private sector to invest in this area;
e) an increase in the number of hotel rooms through the construction of new hotels that would compete with Israeli ones;
f) the rehabilitation of the handicraft industries in Jerusalem, through the training of the young generation, locally or through training courses abroad; and
g) the renovation of Souk al-Qattaneen in the Old City and the Mameluke or Turkish baths.
4) Invest in housing projects to secure enough housing capacity for the Palestinians of East Jerusalem.
5) Give importance to the renovation of old houses, both inside the Old City and outside it, in order to provide better living conditions for the residents.

Conclusion
According to our estimates, East Jerusalem needs an immediate investment of nearly US$150 million, as a starting point. These will concentrate on housing, tourism, the renovation of Old City houses and the development of handicraft industries for the next three years.
In order to encourage Arab and foreign investment, we need to have an insurance fund of US$50 million to secure new investments in Jerusalem. Investment in East Jerusalem must not be considered an economic demand, subject to profit and loss considerations only; it is also a national and religious duty.

Sources Used
1. Jerusalem Statistical Yearbook, No.8, Palestinian Central Bureau of Statistics, June 2006.
2. Questionnaires conducted by the Jerusalem Arab Chamber of Commerce and Industry, 2006.
3. Recommendations resulting from several meetings organized by the Chamber of Commerce with representatives of the various sectors.
4. Feedback from members of the Chamber of Commerce in East Jerusalem.