The business environment in the Palestinian territories has been
subject to significant shifts in the legal and regulatory
frameworks during the past decade, i.e., following the inception of
the Palestinian Authority (PA) in 1994. Following the outbreak of
the intifada in September 2000, it witnessed even more drastic
transformations which reflected heavily on investment,
competitiveness of firms, the labor market, and living
The magnitude and predisposing causes for the predicament of the
Palestinian economy and business sector have been extensively
assessed by many local and international organizations, such as the
World Bank and the International Monetary Fund (IMF). In addition
to inherent constraints relating to scarcity of natural resources
and deformations in the educational and training systems, the
Palestinian economy and private sector have been severely
influenced by a wide range of policies and measures taken by the
Israeli authorities, including those connected with the ongoing
political and military confrontations. It is obvious that Israeli
measures and sanctions such as curfews, sieges and severe
restrictions on mobility have all led to devastating consequences
on the economic and business sectors.
Notwithstanding the enormous effects of Israeli policies and
sanctions, one should still admit that the course of the
Palestinian economy and private sector during the past 11 years has
also been heavily influenced by the performance of PA-affiliated
The nature and impact of changes in the PA's institutional
frameworks and economic policies have been extensively evaluated in
a great number of reports, especially those published by the
resident World Bank mission. The present report, however, is
focused exclusively on monitoring the perceptions of the business
community pertaining to the ongoing shifts in the regulatory and
institutional frameworks, especially with regard to major
The results of the abovementioned study are based on a field survey
involving a sample of 750 firms - 450 from the West Bank and 300
from Gaza Strip. Respondents included only owners or senior
executives in sampled firms. The field work was conducted in April
1. The PA's commitment to market economy principles:
One of the basic questions on many people's minds is the degree to
which the PA is committed to a market economy in its policies.
While numerous top Palestinian leaders have repeatedly reiterated
their commitment to market economy principles, the PA has
systematically engaged in direct commercial activities (e.g., fuel
and cement) ever since it was established in 1994. Furthermore, the
PA has consistently embarked on excessively interventionist
policies, which are widely viewed as gross violations of a modern
market economy. Sampled business leaders expressed the following
views on these issues:
* The impact of the PA's commercial activities on the interests of
citizens and business firms is viewed negatively by 49 percent of
sampled respondents, as against 43 percent who view it
* Contrary to frequent promises, 46 percent of sampled respondents
did not feel that the PA was actually withdrawing from direct
commercial activities; 17 percent thought otherwise.
* Thirty-three percent of business leaders characterized the
overall PA's interaction with private sector firms in a positive
way, whereas 27 percent gave a negative rating, and 35 percent
thought it was "fair."
2. Public sector workforce and recruitment policies:
* The recruitment procedures and size of the public sector
workforce have had considerable impact on the business sector
during the past 11 years. Viewed from a private sector perspective,
the PA's workforce suffers from deep structural problems, as
indicated in the following data.
* In terms of overall size, 50 percent of sampled firms believe
that the public sector workforce is too large, whereas only 27
percent think it is reasonable.
* The PA's hiring policies, as they were in the middle 1990s, were
rated negatively by 37 percent, as compared with 30 percent who
expressed a positive rating.
* Ten years later (April 2005), the PA's recruitment policies
became worse (25 percent) or remained just as bad (35
* Perceptions regarding the relative weight of the different
credentials for securing a job reflect profound distortions in the
recruitment process. "Partisan loyalties" was viewed as the most
important credential, followed respectively by: personal and family
relations, political track record of applicants and, lastly, their
academic and professional qualifications.
3. Quality of governance:
The quality of governance in public-sector institutions, especially
those bearing on the investment climate, has attracted considerable
attention during the past 10 years. The following results are
indicative of deep concern on the side of the private sector.
* Transparency in economic public sector institutions is described
as "good" by 18 percent of the sample, whereas 42 percent think it
* Forty-eight percent of the sample said that economic public
sector institutions do not have clear missions and functions,
whereas 16 percent thought they did.
* The level of coordination between economic public sector
institutions was described as "good" by 16 percent of the sample,
whereas it was rated as "bad" by 48 percent.
The term "corruption" was loosely used during the past ten years,
and it often involved a widely heterogeneous mix of indicators. The
following are the perceptions of leaders in the private sector
vis-à-vis some forms of mismanagement and irregularities which
bear heavily on their interests.
* Do you feel that some firms or businessmen obtain favors and
privileges from public sector institutions on account of personal,
family or political connections? In response to this question, 77
percent said "yes" and 16 percent said "no."
* The adverse impact of favoritism on the business environment is
rated as serious or very serious by 79 percent of the sample.
* In response to a direct question on the prevalence of bribery as
means employed by firms for procuring services and other privileges
from public sector institutions: 39 percent thought it was widely
spread, 34 percent believed it existed on a limited scale, and 18
percent thought it was not used.
5. Performance of economic public sector institutions:
* The performance of economic public sector institutions has been
widely viewed as a major obstacle to an enabling investment
environment. The sample business leaders were asked to rate the
performance of specific institutions (8 ministries and autonomous
agencies). An overall positive rating "good" or "very good" was
reported by 36 percent of the sample, whereas 46 percent gave a
* To the question of how optimistic were the respondents regarding
the prospects of improvement in the performance of economic public
sector institutions, 32 percent were optimistic, 35 percent were
cautiously optimistic, while 16 percent thought that they did not
expect any improvement.
6. Performance of the judiciary system in settling commercial
The performance of the judiciary system in settling commercial
disputes and fostering the rule of law is widely viewed as one of
the most important obstacles for developing a healthy investment
environment. Given the turbulent political and regulatory
circumstances in the Palestinian territories, the role of the
judiciary system becomes even more critical. This role has been
assessed as follows:
* "Speed of settling commercial disputes" was rated negatively by
62 percent of the sample, whereas 33 percent gave a positive
* Seventy-four percent of the sample gave a negative rating for the
"implementation of court resolutions," as compared to 18 percent
who gave positive rating.
7. Security of persons and property:
Taking into account the current situation, how do you rate the
performance of the PA in providing security to ordinary citizens
and their property?
Only 26 percent of the sample gave a positive rating for the
performance of the PA security system in this connection, whereas
73 percent gave a negative response.
8. The Palestinian Legislative Council (PLC):
The performance of the PLC in relation to economic and private
sector issues has been assessed as follows:
% of sampled businessmen
Promulgating growth enabling laws 38 56
Overlooking the enforcement of laws 35 64
Monitoring the PA's economic performance 25 68
9. The performance of non-governmental organizations:
The business environment in Palestine is particularly sensitive to
the performance of certain non-governmental organizations. The
following is a summary of perceptions as expressed by sampled
% of sampled businessmen
Private sector institutions 58 38
Commercial banks 57 38
Local universities 63 32
Labor unions 41 55
10. Optimism about the future:
Despite expressing noticeably negative views relative on nearly all
assessment indicators, sampled business leaders seemed to be
somewhat optimistic about the future. Such perceptions were
manifested in the following indicators:
* In response to a direct question about how optimistic they were
relative to the investment environment in Palestine, 33 percent
were "optimistic" or "cautiously optimistic." Only 13 percent of
respondents were pessimistic.
* In response to the question What are your plans for your firm
with regard to production operations? 56 percent of sampled firms
intended to expand production, while 10 percent expected to reduce
it, and 18 percent expressed intentions to stop production or go
into another business.
The Palestinian business community seems to have been deeply
conscious of the potential economic dividends of the peace process
which was launched in 1993. But economic transformations following
the establishment of the Palestinian Authority in 1994 were
adversely influenced by gross distortions in the governance
structure of the economics-related public sector institutions.
Despite repeated proclamations concerning privatization,
transparency, the rule of law, the adoption of prudent hiring
policies, and the institution of overall reforms, the private
sector representatives seem to be still unsatisfied with the pace
and direction of the reform process.
The quiet and democratic transition of authority earlier this year
seems to have rekindled hope for accelerating a more enabling
investment environment. Such hopes, however, remain heavily
contingent on fostering a more substantive reform process on one
hand, and on dismantling the enormous web of Israeli sanctions and
constraints bearing on the business environment on the other hand.