The closures by the Israeli authorities of the Palestinian West Bank and Gaza (WBG), which prevent Palestinian workers from entering Israel, have reduced their number from 120,000 in 1993 to some 35,000 now. This reduction of employment by 85,000 represents nearly one-quarter of the estimated Palestinian work force of 360,000. In addition, the closures have affected other Israeli-Palestinian transactions still further, so that Palestinian unemployment (even allowing for some recently-created jobs) has increased by some 100,000 and now stands at 160,000. This rep¬resents over 44 percent of the work force. The work force is estimated at only 18 percent of the population of two million, which is low by interna¬tional standards.

Industrial Zones

For our purpose, there are three types of relevant industrial zoneS.I The first is an unofficial area of concentration of industrial enterprises, mostly in or near Palestinian cities, scattered throughout the WBG - not neces¬sarily in zones of concentration.
The second and more authentic type of industrial zone (also representing only a fraction of plants) are industrial estates (IE). These are officially desig¬nated areas, privately or publicly owned, well endowed with necessary phys¬ical infrastructure for industrial operations. They may possibly have ready¬made building modules on the site. In the Palestinian context, they may be located in border areas within the WBG. While similar estates may be located (such as Erez), providing employment for thousands of Palestinians, we will not discuss this option further here.
The third type of industrial zone (and the one most involved in the authors' World Bank-sponsored research which is discussed in this article's Appendix) is an industrial free zone (IFZ). This is a combination of an industrial estate and a free trade zone (FfZ). The latter can be defined as an area physically or administratively located outside the national customs territory, wherein many of the commercial laws are modified, and where¬in relatively unrestricted trade is permitted with the rest of the world.2An industrial free zone is therefore an area wherein unrestricted production takes place, mostly for export.
In the WBG the population is currently estimated at two million, of which only 18 percent constitute the work force - i.e., 360,000. Of these, only around 240,000 are employed in the WBG, of which around 35,000 (or 17 percent) are employed in manufacturing and quarrying.
Our forecast for ten years hence (2005), which takes into account (mini¬mal) migration factors (some 400,000 net) and national demographic fac¬tors (3.5 percent per annum), is some 3.3 million inhabitants in the WBG. It has been estimated (by PLO sources - but we concur) that the work force will constitute 20 percent of the population. That is around 660,000 poten¬tial workers. With "only" a one-sixth unemployment rate (or 16.7 percent), the employed work force will reach 550,000. Of these, assuming some 50,000 will still be in Israel, there will be a half-million employed persons in the WBG, an increase of 260,000 from 1995, or more than double. Our objective (normative forecast) is that around 21 percent of total WBG employment be employed in industry - some 105,000, or three times the present level. Of this, roughly half the increase of 70,000 could/should be in new organized industrial zones - local industrial estates and industri¬al free zones (part of which will be border zones).

Industrial Development

In the past, much of the Palestinian WBG's industrial development had been subject to a colonial-type non-equitable economic integration. Apart from different starting levels, indigenous socioeconomic factors and Jordanian restrictions on industrial trade, much of the Palestinian econom¬ic and industrial backwardness since the Israeli Occupation stemmed from:

a. Unequal trade structure and relations;
b. Hostile government ordinance;
c. Lack of institutions for Palestinian self-government;
d. Underdevelopment in physical infrastructure;
e. Interference by Israel in establishing and maintaining autonomous financial institutions
f. An unfair division of tax revenue.

With an increased control of their economy, the Palestinians should have been in a position to begin to overcome these barriers, but Israeli closure policies and the "separate" economies combined to hinder Palestinian eco¬nomic development. In order to overcome this, manufacturing, as possibly one of the most dynamic long-term sectors, should be rapidly developed. At present, industry involves no more than nine percent of the industrial GDP - which is now the least productive economic sector. To reach a level of average economic productivity (added value per employed person), manufacturing and quarrying should reach 21 percent of GDP. To reach this nearly six-fold increase, it must increase at a rate of close to 20 percent per annum.
Apart from newly-created and organized industrial zones, existing industrial employment should double to 70,000. This involves a growth rate of "only" 7.2 percent per annum over the decade. The anticipated investment per job created is estimated at a modest $U.5. 10,000. Thus, $350 million is required. It is assumed that another sum - say $2,000 per existing position, will be invested to improve productivity - i.e., another $70 million.
Regarding new planned industrial free zones - based on a survey undertaken for the World Bank (see Appendix) - some $15,000 invest¬ment per position created would be required. This involves some $525 mil¬lion. The $15,000 is only half some recent estimates by the "Harvard" group, but much World Bank data indicates that $15,000 per position is adequate. This is really an average based on a low of $3,000 for some cloth¬ing units to a high of $40,000 for some "hi-tech" plants.
The total investment required would therefore be $945 million - apart from infrastructure - thus roughly only $1 billion is required to create 70,000 industrial positions and generate close to a six-fold increase in industrial GDP. The 70,000 positions will be approximately equal to (and will replace) the 70,000 Palestinians who lost their livelihood in Israel. We feel that Israel should take an active (but not dominant) role in promoting industrial development and industrial zones in the WBG. Some aspects of this are now being planned and are discussed in the Appendix.


World Bank IFZ Project in the WBG

During April 1995 an Investor Research Project for industrial free zones in the West Bank and Gaza was carried out by the Palestine/Israel Peace Economists' Consortium on behalf of the World Bank. This was coordinated by the authors and involved the participation of the Israel/Palestine Center for Research and Information, Info-Prod Research (Middle East), Data Studies and Consultancy, and Prof. Ezra Sadan. The survey concerned their possible participation in IFZs located in the WBG with World Bank support.
The survey consisted of 53 thorough and intensive interviews with three groups of potential investors: 17 overseas Palestinians, 16 international companies and 20 respondents from Israel. The fields covered food (10), apparel (10), assembly/electrical (17) and a variety of other industries (16). Twenty-three investors had made new (greenfield) investments over the past five years - mostly overseas.
Most investors (37) were at least somewhat familiar with the investment situation in the WBG. Of these, two-thirds thought that the situation was improving, against one-third who thought it was getting worse.
Legal, financial and security issues/guarantees were by far the most important concerns. Thirty-four firms stated that if a World Bank-spon¬sored package (involving many concessions, incentives and guarantees and "one window" arrangements) was offered, would invest in these industrial free zones, and 14 said no. On average, each project would pro¬vide for 280 jobs with an investment of $2.6 million - making the invest¬ment cost per job "only" $9,300 (but this may be slightly underrated). Eighteen of the remaining firms said the package would induce them to consider investment. Most of those who had decided not to invest were interested in at least meeting a promotional representative. Respondents tended to believe that grants and incentives should be high, given the secu¬rity concerns, and given the attractive conditions offered elsewhere.
All the respondents realized that these IFZs would be located in the WBG, although a few of the Israelis preferred an Israel (border) location.
There was enough interest shown in this very limited survey to justify the immediate establishment of one industrial free zone and to prepare the way for others. This is an immediate problem for the Palestinian National Authority (PNA), for the international donors, led by the World Bank, and especially for Israel.
Although the World Bank "aims" at establishing enough IFZs for 50,000 employed persons, we feel a more realistic ten-year target of half that, i.e., 25,000 positions - plus 10,000 in new local industrial estates (IE).
Finally, we see that the World Bank could directly take several steps in conjunction with Palestinian and Israeli decision-makers, international donors and overseas Palestinians. This may include the establishment of a unit of local (Palestinian and Israeli) experts that could assist in:
a. Converting existing industrial zones into IFZs and more local IEs;
b. Promotional activities to targeted investors;
c. Conducting pre-feasibility and feasibility studies at two levels - one of investment modules and one for actual proposed investment;
d. Designing an integrated plan for IFZs and local industrial estates in the WBG and their specific location and structure;
e. Designing a plan for training labor, management and entrepreneurs (including women) to enhance their contribution to industrial development within industrial zones.

If these steps are undertaken, a major improvement to the overall employ¬ment situation in the WBG would result, especially within manufacturing.


1. We define industry as including manufacturing, quarrying (mines), electricity, gas and water - while excluding construction.
2. The FTZ is not further discussed here - although, eventually, such a zone might possibly be established in the WBG.