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.
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
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
· Contribute financially to agricultural production and
· 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
· Encourage the establishment of small enterprises in
· 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
· Establish an insurance fund.
· Encourage mortgage institutions to provide residential loans
with easy repayment and interest conditions to those on low
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
· 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.
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
· 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
The health sector (public and private) could be enhanced by:
· The reconstruction of damaged health institutions.
· Locally producing medical equipment, ambulances, and
· 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 growing number of people living in poverty can be assistd
· 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
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
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 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
The diversification of economic and trade relations to increase
integration with Arab and Islamic countries can be facilitated
· Encouraging exports to Arab and Islamic countries, under
trade agreements stipulating preferential treatment for Palestinian
· 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
· 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
· Investment from the Arab world and Palestinian
· 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
· 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
· 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
· Continuing the privatization of PNA investments and
corporations, and preventing monopolies unless there is a national
· Adopting a transparent policy for public employment to
attract qualified personnel to the administration.
· Enacting disclosure laws applicable to high-ranking
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.