Palestine-Israel Journal: It seems the most important recent
cause of economic decline is the siege. What are the
crisis-management measures that can be taken on the economic front?
Do you foresee any lifting of the closure?
The West Bank and Gaza Strip have been under siege since September
28, 2000, and the devastating effect this has had on the
Palestinian economy has been severely aggravated by the March-April
incursions into major cities in the West Bank, in addition to the
continuous bombardment of these cities.
The most severe consequence of the closure has been the increase in
unemployment. Around 144,000 Palestinians who were employed in
Israel have been laid off due to the closure, while further jobs
have been lost inside Palestine as a result of restrictions on
movement or factory and business closures. More than 120,000 people
have also joined the working age population since the beginning of
the Intifada. Unemployment, which was previously around 10 percent,
is affecting as much as 53 percent of the total labor force, which
is approximately 651,000.
This means a total of 350,000 people without work. And if you
multiply that number by seven (average family size) it means that
2.5 million people have been directly affected by the closure.
Consequently, the Palestinian economy is functioning at no more
than 30 percent capacity. Gross National Income losses amounted to
US$2.4 billion at the end of 2001, and have continued to
As a result, there has been a significant increase in the number of
people in the West Bank and Gaza who have been pushed beneath the
poverty line (US$2 per person, per day). Present estimates state
that over 60 percent of the population is now living in poverty,
having exhausted the savings they were subsisting on. I think we
have entered a phase in which more than 500,000 Palestinians have
become hungry after 20 months of closure. The poorest areas in Gaza
are in Rafah and Khan Yunis. In the West Bank the poorest region is
Hebron followed by east Bethlehem, the North Jordan Valley region
(Jiftlik Area), South West Jenin and East Jenin.
In addition, Gaza has been cantonized into 2 main regions, while
the West Bank has been split into 8 regions, with all major cities
completely disconnected from each other. Military checkpoints exist
on all major and secondary roads, and all traffic into and out of
the territories sporadically experiences complete shutdown. These
closures have raised economic costs and crippled the business
For example, a truck full of sand which used to cost 300 NIS now
costs 1600 NIS because of the rise in logistics and transportation
costs. Another example is that my staff used to pay 2 NIS to come
to PECDAR but now they have to pay 24 NIS, with many people reduced
in some cases to traveling by donkey, where roads have been dug up
by the Israeli army and can no longer be used by cars.
The Palestinian Authority (PA) is suffering a huge budget deficit
as taxation has dwindled to just a fifth of previous levels. Lack
of tax collection relates to the decline in production and internal
and external trade. Under normal circumstances, some two-thirds of
Palestinian revenue derived from taxes is collected by Israel on
the PA's behalf. In the past these revenues were remitted to the PA
on a regular basis, but no such payments have been made by Israel
since October 2000. Total gross revenues withheld by Israel are
estimated at nearly US$1 billion as 230 million NIS are collected
each month on the Palestinians' behalf.
Following the introduction of an "austerity budget" in March 2001,
the PA's monthly budget needs a total of US$90 million, US$60
million dollars of which are salaries. Currently, revenue collected
by the PA amounts to less than US$20 million per month. Before the
outbreak of the Intifada, the Palestinian economy was growing at an
annual rate of 6 percent and private sector investment had reached
US$360 million per year. The closure has put a definite end to
that. The state of public finances is mirrored by that of the
private sector. I would say that we have slipped over the edge and
are now sliding towards total collapse.
In light of this deprivation how do people manage?
At grassroots level, households have reduced their expenditures and
drawn on their savings, while informal self-help and share systems
lessen economic difficulties. Donors, often working through NGOs,
are also providing much needed emergency assistance. Informal Arab
money has been sent to poor families, while remittances transferred
by Palestinians abroad to their relatives are estimated to total
around US$1 billion.
However, this is helping people subsist, not live. In the present
climate the hunger and need of our people are a threat to Israel's
security and the security of the whole region.
The donor countries say that they have invested some US$4.5 billion
in the West Bank and Gaza since 1993. Do you think that they will
continue donating now that the infrastructure they helped to build
has been damaged or destroyed? What implications will this have on
their stand towards Israel?
There has been donor support for the past two years and I think
that as the situation today is worse than ever, we have to expect
them to continue. Donations are not merely social gestures of
goodwill, they are also a political symbol, showing support for the
peace process. Donations from the international community pass
through four different steps before they reach their recipient. The
first step is the pledge, the second the commitment, the third the
allocation of money to a certain project, and the fourth and most
important, disbursement, when the money starts to flow from the
donor's bank account to that of the recipient.
Given the large variations that normally appear between the first
and fourth stages, this can be described as an inverted pyramid
approach. Take the Arab donations, for example. The Arabs pledged
US$1 billion, they committed US$697 million, they have allocated
about US$500 million, US$300 million has been transferred and the
amount disbursed to projects is US$60-70 million, (not including
salaries which have all been disbursed).
Also, of the US$4.5 billion which you quoted, around US$1 billion
went through local and international NGOs. The administrative costs
here erode part of the donations and none of this money is received
by the PA. But one has to accept the totality of the aid rather
than consider only the drawbacks. I think I can assume that the
donors will continue to stay with us because their contribution is
so important. The only money in circulation in the veins of the
Palestinian economy is from donors.
What are your estimates so far of the total cost of physical damage
and who will fund the reparations?
Damage can be separated into three categories - closure,
bombardment and incursion. The total damage, direct and indirect,
to the Palestinian economy, taking into account all three
categories, is estimated at around US$8.2 billion for the last 19
months. A direct loss is damage incurred when an agricultural field
is uprooted or a school or police station destroyed. Indirect
damage is the closure of the airport, for example, which includes
revenue lost by Palestinian airlines and the cost of ground fees
for planes to remain in Jordanian airports.
Also included in this figure are transfers that used to come from
Israel and tax revenues owed by Israel. In addition, the
Palestinian workers in Israel brought in US$800 million every year
to the Palestinian territories. The World Bank has estimated total
damages from the recent incursions at US$300 million. Our estimate
is US$455 million. The disparity comes from the fact that we
include security structures in our calculations.
During the first Intifada, the popular committees encouraged
household and localized production, as well as a boycott of Israeli
products. Has the present Intifada revived these actions and how
could the population be more economically
The two Intifadas are not the same. In the first Intifada the
Palestinian economy was worth no more than US$2 billion. By the
time this Intifada broke out, it was worth US$6.5 billion. The
effects are now much more severe because people have more to lose.
In the first Intifada, Palestinian employees continued to work in
Israel, while small-scale industries in the territories, such as
farming, were largely unaffected. By 2000, family businesses had
evolved into large companies, which resulted in greater job and
economic losses when they were forced to close. Also in 1987 we did
not have the PA - over 132,000 people are currently employed by the
PA. Under present conditions, with it already US$650m in arrears in
2001, that is unsustainable. Salary payments are a sign that the PA
continues to function and is in control of the areas it
administers, despite the cantonization and lack of movement. If the
authority fails to pay salaries one month, it can be argued that it
has effectively collapsed - leaving a void of control.
Has there been any attempt at PA coordination between Western and
Arab donors for example? Has the Arab league pledge been
transformed into a regular flow of funds to the PA?
Arab money has largely gone to cover salary payments. The Arabs
gave US$45 million every month for six months to cover this.
Following the Beirut summit they decided to support Palestine on a
quota basis, according to each Arab country's contribution to the
Arab League budget. This means we have to chase each nation
individually for payment. Countries such as Yemen and Jibuti are
simply unable to fulfill this commitment. The load has been divided
but not everyone can carry it. This month we should receive about
US$55 million from the Arab countries. So far we have received only
US$4 million. Libya for example is not paying a penny!
How important have investments from Palestinians abroad been and do
you think this can be encouraged in any way?
Palestinian entrepreneurs and investors should not be considered
revolutionaries or 'Che Guevara' types, who have no interest or
stake in what happens to their investments. Between 1994 and 2000,
a number of Palestinian investors chose to back businesses and
projects here, and saw a return for their capital outlay. Large
companies and banks were established by wealthy Palestinians, but
such ventures are untenable under present circumstances.
People need to operate in an investment environment. They want a
clear political scenario to predict where events are heading in
order for them to minimize risk. But look at the reality! Even the
Israeli economy is experiencing a severe downturn, with losses of
more than US$17 billion. Tourism and construction have been
severely hit on both sides, farmers are demonstrating because they
have no casual labor for harvesting, while the high-tech industry
is on its knees. Israel has predicted negative growth this year.
Economic instability has rippled out into the rest of the region,
with investors even nervous of backing projects in Egypt and
Do you have any final remarks?
Perhaps the most important issue is that economic instability does
not only pose a problem for investors and bankers. In basic terms,
it means poverty and hunger, and in this climate that breeds
political radicalism. The Israelis have begun to pay the price for
this, and will continue to do so if the situation does not change.
They have planted enmity in the heart and mind of every single
Palestinian due to their actions during the continuous incursions
and at the checkpoints. The wanton destruction of files and
infrastructure at a number of ministry buildings in Ramallah, such
as the Ministry of Education and the Ministry of Transport, for
example, helps neither side and shows that the incursions were not
just for security purposes. What sort of threat can these files
pose? Israel has to try another approach. They have to give people
hope, phase their withdrawal and allow the Palestinians to live in
a dignified and prosperous way - that is how you make peace, you do
not impose it! A political solution is also necessary as World Bank
projections indicate that recovery to pre-Intifada per capita
income levels would take two years-assuming private investor
confidence could be restored. As well as prioritizing emergency
needs, the PA, for its part, will have to maintain strong budget
discipline and reform its structures.