In the past decade, most studies on the future of the Palestinian economy were based on the assumption that political and economic relations would be coordinated between an independent Palestinian state (with full control of its resources and borders) and Israel, in the wake of a peace settlement resolving the conflict and initiating a new era of mutual interest and cooperation. These hopes faded some time after the Israeli-Palestinian Declaration of Principles in 1993, as Israeli practices demonstrated their intention to continue their occupation of the Palestinian territories. This necessitated a revision of the prevailing assumptions regarding Israeli goals.

Palestinian goals can be divided into different interrelated stages, each tied to specific political obligations and conditions and requiring different policies and mechanisms. In this study, short-term refers to the continuation of the Israeli occupation prior to an agreement on the final status issues and the establishment of an independent Palestinian state. For the sake of analysis, this period will be divided into two; the first is the current stage, the "survival stage," which will end when Israel withdraws to the lines of September 2000.

The second stage, "enhancing the local capacity of the Palestinian economy," will follow the withdrawal of Israeli military forces to the lines of September 28, 2000 and will last until the conclusion of an agreement on the establishment of a viable, independent Palestinian state within the 1967 borders, with Jerusalem as its capital. It is presumed that the Palestinian goal at this stage will be to reform the distortions in the Palestinian economy, enhance its local capacity, minimize its dependency on Israel, and diversify trade relations regionally and internationally. The long-term view relates to the establishment of an independent Palestinian state. It is presumed that Israel will withdraw at the beginning of this stage to the 1967 borders, dismantle settlements and resolve all other final status issues. The main goal for the Palestinian economy will be to eradicate any heritage of the occupation and gear itself towards comprehensive, sustainable development that will guarantee better quality of life for the Palestinian people. Short-term goals may contradict long-term ones due to variations in the prevailing political environment. The short-term political goal - ending the occupation - may be accomplished through a strategy that increases the costs of occupation and minimizes its profits for the Israelis. At the same time, this strategy should minimize the negative impact on the Palestinian economy. This study will focus on enhancing the local capacity of the Palestinian economy.

Survival Policies

In view of the aforementioned assumptions, strengthening the survival of the Palestinian people in their homeland would require reconstruction and compensation for damage resulting from Israeli siege and closures. Attention should be focused on the repair of infrastructure and emergency humanitarian needs, mainly ensuring basic food supplies. Equally, support for major production sectors, primarily agriculture, industry and construction, would provide essential commodities for Palestinian consumers and create job opportunities.

In the agricultural sector:

· Focus on agricultural products that supply local Palestinian demand and consumption rather than external markets.

· Provide incentives to increase meat and diary production.

· Contribute financially to agricultural production and marketing.

· Invest in rural infrastructure.

· Assist in providing property and production insurance, especially for small farmers.

In the industrial sector:

· Encourage Palestinian industry to provide alternatives to Israeli products, especially essential commodities.

· Encourage the private sector to use local raw materials.

· Encourage the establishment of small enterprises in Palestinian areas.

· Give priority to local products in public purchases. Also, encourage local and international institutions to purchase local products for charitable 'in kind' programs for Palestinians rather than imported products.

In the construction sector:

· Rapid repair and reconstruction of damaged houses.

· Financing housing associations.

· Giving priority to local contractors in public construction projects.

· Establish an insurance fund.

· Encourage mortgage institutions to provide residential loans with easy repayment and interest conditions to those on low incomes.

The internal trade sector must be also encouraged to focus on marketing, distributing and supplying sufficient national products to meet local demand. The promotion of products from Israel or the settlements that have Palestinian-manufactured substitutes must be discouraged. Palestinian businessmen should abstain from exploiting the current circumstances to raise the prices of essential goods or sell perished or expired goods. The Ministry of Procurement should play an active role in monitoring and taking action against those who violate these rules.

Job opportunities can be created in the local Palestinian economy by:

· Encouraging labor-intensive industries such as food production and construction.

· Providing incentives for industrial enterprises to absorb the unemployed, through tax exemptions, for example.

· Provide rapid retraining for unskilled workers.

· Continue emergency job creation programs.

Palestinian Institutions

The collapse of Palestinian institutions must be prevented to ensure that these bodies carry on their role of supporting the Palestinian population. Educational institutions can be supported through:

· Contribution to fees payment for needy students, or provision of supplies in kind, of national origin.

· Provide loans for students to enable them to continue their education and support themselves.

· Build new schools and maintain existing ones.

· Increase allocations to the Ministry of Education for equipment provision.

The health sector (public and private) could be enhanced by:

· The reconstruction of damaged health institutions.

· Locally producing medical equipment, ambulances, and medication.

· Increasing allocations to the Ministry of Health to cover rising expenses caused by the large numbers of casualties.

· Establishing health centers in rural areas.

· Providing health insurance and medication, especially for the needy.

The growing number of people living in poverty can be assistd by:

· Increasing allocations to the Ministry of Social Affairs to assist poor households.

· Putting pressure on international organizations to provide more financial and in-kind assistance for the needy.

Improve public sector performance

Although some steps, such as holding elections, cannot currently be undertaken, other measures should be taken immediately:

· Adoption of a clear mechanism for identifying political, economic and social priorities.

· Coordinate international assistance to achieve optimal utilization, by following transparent monitoring systems.

· Reform and modernization of all public institutions, especially the judiciary.

· The privatization of PNA companies and investments, in particular trade monopolies.

· Elimination of non-principal public expenditures, reallocating public revenues towards supporting the survival of the Palestinian people.

Enhancing Local Capacity

Once Israeli forces withdraw to pre-September 28, 2000 lines, the main strategic goal should be the enhancement of the Palestinian economy's local capacity by alleviating distortions in the Palestinian economy, particularly in the labor market and trade. It will also be necessary to eliminate or reduce distortions in production, which will require an improvement in public performance and political and economic reforms to improve investment and encourage competition. Corporations that promote investment and rebuild infrastructure should be set up to reduce production, transportation and distribution costs and improve the competitiveness of Palestinian goods.

Distortions in the labor market could be reduced by absorbing the majority of the Palestinian labor force into the private sector. Worker productivity must be increased to provide well-paid job opportunities, strengthening the export of Palestinian products. Vocational training programs are also required. Dependency on Israel must be reduced by increasing economic and trade relations with Arab countries. Palestinian trade relations have been almost entirely limited to Israel due to the imposition of restrictions based on security and political considerations. The Palestinian economy has been deprived of the opportunity to export to Arab and Islamic countries and to import cheaper raw materials and machinery from them.

Distortions in resources, public services, and utilities demand a review of Palestinian economic agreements with Israel in respect to water allocations, while international pressure needs to be put on Israel to halt land confiscation policies. Agreements regarding the transfer of taxes, tariffs and excises collected by Israel on behalf of the PNA must be revised and modified. Extra resources need to be allocated in the PNA budget for infrastructure projects. Distortions resulting from ties with the Israeli economy serving the interests of some Palestinian groups can be reduced by the reorganization of economic relations with Israel through specified channels and implementing the economic and administrative public reforms outlined above.

Preparing the Economy for Independence

The following are recommended measures to achieve Palestinian economic independence.

· Economic legislation and modern mechanisms conducive for investment. This includes providing information on investment opportunities, conditions, and corporations, as well as facilitating licensing and registration.

· Develop and enhance the capacity of Palestinian public institutions to attract local and foreign investment.

· The reconstruction, maintenance and development of damaged infrastructure, especially the airport, port and major roads.

Another basic requirement to promote investment and economic development is an improvement in education, health and social conditions. Investment in education is needed at the primary level, to retrain teachers, develop school curricula, and improve school buildings and equipment. Palestinian universities should be assisted to make their programs compatible with Palestinian development priorities, giving special attention to vocational training in view of labor market needs. The private sector should be encouraged to participate in vocational training and support for scientific research.

The diversification of economic and trade relations to increase integration with Arab and Islamic countries can be facilitated through:

· Encouraging exports to Arab and Islamic countries, under trade agreements stipulating preferential treatment for Palestinian exports.

· New bilateral trade agreements, particularly with the Gulf Cooperation Council (GCC).

· Ensuring international standards are abided by and provide marketing, technical, and promotional services for Palestinian products.

· The participation of Palestinian businessmen in international trade shows.

· Encouraging imports of raw materials in line with the economic agreements concluded with Israel, in particular the Paris Protocol.

· Investment from the Arab world and Palestinian Diaspora.

· Connecting Palestinian areas to Arab infrastructure, especially electricity, water, communication and telecommunication networks which might otherwise be obstructed by Israel.

Political and economic reforms also need to be carried out by:

· Providing a transparent and adaptable legal and institutional framework, ensuring the independence of the judiciary, improving the performance of courts and modernizing economic legislation to encourage competitiveness.

· Building modern public institutions based on transparency.

· Reorganizing the public budget, reducing public employment in the security services and reallocating public revenues for educational and health services.

· Restructure the tax system to encourage investment and limit tax evasion.

· Continuing the privatization of PNA investments and corporations, and preventing monopolies unless there is a national economic interest.

· Adopting a transparent policy for public employment to attract qualified personnel to the administration.

· Enacting disclosure laws applicable to high-ranking government officials.


Israel is expected to continue its actions, unless the price of extending occupation of Palestinian areas becomes too high, comparative to costs incurred at political, economic and social levels. At the same time, the Palestinian people must feel that the cost of resisting Israeli occupation is not beyond endurance, or this will result in a wave of emigration. There should therefore be a united Arab and Islamic stance in support of the Palestinian people. This support should not be limited to formal assistance from governments but should include other financial institutions such as the Arab Fund for Economic and Social Development and the Arab Corporation for Investment Guarantee, in addition to local and private sector institutions.