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As the donors move away from budget support and emergency rehabilitation to sustainable development assistance, focus is shifting to poverty alleviation. As the Palestinian Authority (PA) matures and evolves, the degree of poverty will likely account for the bulk of grant-based donor assistance. This article attempts to open a dialogue on poverty in the West Bank and Gaza (WBG). How much poverty is there? How to measure it? How does the level of poverty in the WBG compare with the level of poverty in other MENA (Middle East North Africa) countries and internationally? It should be stated at the beginning of this inquiry that the tools, ways and means of measuring and comparing poverty leave much to be desired. Data is irregular and economists continue to debate its analysis. Still, data for the WBG is greatly improved and we need to begin this serious inquiry in order to better determine assistance needs and results.
The data presented in the article indicates that the observed incidence of poverty in the WBG is actually somewhat higher than in the MENA region countries, despite a relatively favorable level of per-capita income. The relatively high observed incidence of poverty may be explained in part by taking into account that the purchasing power of incomes in the WBG is fairly low due to a high price level.

How Can Poverty Be Defined?

This article employs the same definition of poverty as was used in the National Poverty Commission Report from 1998: the poor are those who cannot afford a basic basket of goods consisting of food, clothing and housing, as well as a minimum of other needs, such as health care, transportation and education. Specifically, a household with two adults and four children is considered poor if its yearly consumption in 1998 was below US $4,600, equivalent to US $765 per person or approximately US $2 per person a day.

What Is the Level of Poverty in the WBG?

In 1998, 20.3 percent of the households in the West Bank and Gaza had to live on the equivalent of less than US $2 a day, according to the Household Expenditure and Consumption Survey carried out by the Palestinian Central Bureau of Statistics (PCBS) (see Table 1). This shows a decline in the share of the population living in poverty from 23.6 percent in 1996 and 22.5 percent in 1997. Despite rapid population growth, the absolute number of poor also declined between 1996 and 1998: from approximately 680,000 persons in 1996 to 610,000 persons in 1998.

Table 1: A schematic description of economic regimes
   
1996
WB   G   WBG
1997
WB   G   WBG
1998
WB   G   WBG
% of
population
below
poverty
16.2   41.9   23.6
15.6   38.2   22.5
14.5   33.0   20.3
Number
of poor
(1,000)
277.5   399.7   677.2
278.4   379.6   658.0
268.8   342.4   611.2
Source: PCBS

The share of the population living in poverty is more than twice as high in Gaza as in the West Bank - 33 percent as compared to 14.5 percent, implying that the absolute number of poor is in fact higher in Gaza than in the West Bank, even though the overall size of the population is significantly larger in the West Bank.

What Is the Level of Poverty in the MENA Region?

Poverty rates in the MENA region are generally relatively low when compared to other countries at the same level of development. Data for poverty rates exists for six countries in the MENA region, namely Algeria, Egypt, Jordan, Morocco, Tunisia and Yemen, as well as for the WBG. The generally low levels of poverty in the regional countries are probably linked to the relatively low degree of inequality in the MENA region. For a given level of average incomes, a more equal distribution will result in a lower share of the population living in poverty. This may in turn be explained by a variety of factors, e.g., the presence of strong informal safety nets - partly due to the widespread prevalence of the extended family as a way of living (in the WBG 30 percent of the population live as part of extended families) - and a generally high educational level.
Since there is a tendency for poverty rates to be relatively low in the MENA region, it may be relevant to ask the question of whether the poverty rate is high in the WBG compared to the MENA region? The comparison must take into account both the level of average income in the WBG and the fact that the WBG is located in a region generally characterized by low levels of poverty. From this perspective, poverty in the WBG does in fact appear somewhat higher than the regional average. Of the six MENA countries considered in this article, only Egypt and Yemen have a poverty rate higher than the WBG (see Figure 1). Poverty in Egypt is very high by regional standards. Poverty in Yemen is actually higher than in Egypt, but this should seen against the background of a much lower level of average incomes in Yemen, US $280 as compared to US $1,290 in Egypt and US $1,560 in the WBG.
The average income in the WBG is roughly the same as that of Algeria, but the poverty rate in the WBG of 20.3 percent is higher than Algeria's 15.1 percent. By contrast, poverty rates in Jordan and Morocco are quite low. Despite lower average incomes than in the WBG and Algeria, approximately only 7.5 percent of the population live on the equivalent of US $2 a day or less in these two countries.
Apart from the dimension of absolute poverty discussed above, an important dimension is the percentage of relative poverty, i.e., magnitude of people living for less than what is considered adequate given the level of average incomes. The perceived relative poverty is probably higher in the WBG than in most other countries, due to its high degree of integration with a high-income country like Israel.

What Is the Purchasing Power of Incomes in the WBG?

One important factor behind the relatively high poverty rate in the WBG is probably that the price level is significantly higher than the regional averages. Therefore, the purchasing power of incomes in the WBG is relatively low. In order to meaningfully compare living standards measured by average income across countries, it is necessary to adjust for differences in the cost of living in the individual countries. Obviously, in cross-country comparisons, significant differences in the general price level of goods and services must be considered.
The most common way to take differences in national price levels into account is to apply the Purchasing Power Parity (PPP) exchange rate. The PPP tells us how much US $1 spent in, e.g., Egypt buys as compared with the same amount of goods and services as US $1 spent in the United States. PPP exchange rates used by the World Bank are derived from price surveys around the world conducted by the International Comparison Program (ICP), a joint program of the World Bank and the regional economic commissions of the United Nations. The latest round of surveys were completed in 1996 and covered 118 countries.
Unfortunately, the ICP did not collect separate price data for the WBG, but it did collect data for Israel. And, if it is assumed that consumers in the WBG face the same prices as Israeli consumers, this information can be used to measure the purchasing power of incomes in the WBG. According to the ICP, Israeli consumers pay on average approximately twice as much, or more, for the same goods compared to Jordanian or Egyptian consumers. The price level in Israel is less than 10 percent lower in the United States. By contrast, the price level in the other selected MENA countries is less than half of the price level in the United States.
It may be questionable to assume that consumers in the WBG face exactly the same prices for all goods and services as Israeli consumers. Most likely, Israeli prices are the upper level of prices for the WBG residents. Anecdotal evidence suggests that the price level in the WBG in fact may be a bit lower than in Israel, especially for a number of non-tradable goods, e.g., housing, and, in Gaza, for some food products, fresh fruits and vegetables. The (statistically significant) parallel movement in the price of level of tradable goods, e.g., food, clothes and furniture in the WBG and Israel, however, generally supports the assumption that most prices in Israel and the WBG are nearly the same.
The high price level in the WBG, compared to other countries in the region, has of course direct impact on purchasing power of incomes in the WBG and consequently, GNP per capita measured at PPP rates. In the WBG, GNP per capita in PPP terms is only approximately two-thirds the size, US $1,650, as GNP per capita in, e.g., Jordan where it is US $2,500. Actually, using GNP per capita measured at PPP rates, Yemen is the only country of the MENA region that has a lower average income than the WBG. Thus, while GNP per capita in current US dollars in the WBG compares relatively favorably with other countries in the region, average incomes measured in PPP terms are among the lowest in the region. To put it simply, GNP per capita in US dollars for the WBG is higher than the regional averages. But, when the purchasing power of Palestinian income is considered, the GNP per capita for the WBG falls lower than all countries in MENA except Yemen.
Also, compared to countries outside the MENA region, GNP per capita in PPP terms is low in the WBG. Average incomes in PPP terms in the group of countries usually labeled "Low Income" are approximately US $2,200, e.g., somewhat higher than the WBG. Thus, if GNP per capita alone is considered, the WBG usually would be placed in the group of "Lower Middle Income Countries," but, a comparison based on GNP per capita in PPP terms will place the WBG in the "Low Income" group, with countries such as Ghana, Nicaragua or Vietnam.
With respect to the level of poverty, Figure 2 shows the comparative poverty rate in the WBG given the level of average incomes measured in PPP terms.
Conclusions drawn from the comparison of poverty rates and income per capita across countries must evidently be considered with caution. Figures are not always strictly comparable from one country to another. Moreover, this exercise does not tell us anything about the dynamics of poverty within each country, which are ultimately critical to our diagnosis and prescription for recovery.
However, a comparative exercise suggests that a significant part of poverty in the WBG may be attributed to its actual level of development, which is probably lower than generally stated. The income distribution dimension, which may have a very detrimental impact on poverty as observed, for example, in Egypt does not seem to play a very important role in the WBG in comparison to other countries. This means, in turn, that policies aimed at fostering economic growth in the WBG should have a positive impact on poverty alleviation, as was more generally stated in a recent World Bank research study on growth and poverty.
The findings in this article will be further elaborated in a forthcoming work carried out jointly by the World Bank and the National Poverty Commission, which will notably focus on the linkage between macroeconomic developments and poverty. The study will also explore in detail the regional dimension of poverty within the WBG, and will evaluate the functioning of the social safety net. The aim of this "Poverty Note" is to enhance our understanding of the macroeconomic determinants of poverty, to provide poverty maps for a better targeting of the poor, and to highlight key social security issues and options for reform of the safety net and development of the social insurance system.

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