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
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
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
10) The building of the separation wall, which forces more than
120,000 residents to cross military checkpoints daily to access
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
* greatly reduced the number of shoppers from outside the
* severely increased the difficulties faced by Jerusalem shop
owners holding West Bank identity cards, as now they need entry
* 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
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
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
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
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
5) The contraction in exports via Israeli seaports, as well as
border crossings with Jordan and Egypt, due to security
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
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
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.
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
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
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.
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
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.
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
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
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
1) Finance construction plans for locations suitable for
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
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
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
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
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
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.
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
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.
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
4. Feedback from members of the Chamber of Commerce in East