DevMode
In the more than five years since the signing of the Oslo peace accords in September 1993, the Palestinian standard of living has declined noticeably. In the past two years, for example, Palestinian real per-capita GDP (gross domestic product) has declined by an annual rate of almost 4 percent, and unemployment has approached 30 percent. These developments have occurred despite the wide-scale injection of international assistance into Palestinian development projects and government institutions. Palestinian officials are quick to blame the state of their economy on Israeli policy, which has included control of Palestinian trade and closure of their borders, which prevents Palestinian workers from access to employment in Israel. While it is true that Israeli policy is damaging, it is also obvious that Palestinian policies are inflicting significant harm on their economy. The Palestinian investment climate, their attitude toward joint ventures with Israel, an inflated bureaucracy, widespread corruption (which the Palestinians themselves complain about), and an insufficient infrastructure are all strangling the Palestinian economy and preventing it from achieving reasonable levels of growth.1

Total Commitments and Disbursements to the PA and Palestinian NGOs for the Consecutive Years 1994-1998 ($U.S. million)
 
1994 & 1995
1996
1997
1998
Commitments
1,561
881
684
413
Disbursements
1,112
572
544
227
Source: PA, Ministry of Planning and International Cooperation, 1998, Third Quarterly Monitoring Report of Donors' Assistance, September 30, 1998

Estimates of Average Labor Force, Full Employment, Underemployment and Unemployment for the West Bank & Gaza Strip, QI-QII 1997 & QI-QII 1998
 
QI-QII 1997
Average
QI-QII 1998
Average
Relative Change
Labor Force
Participation
41.85%
40.60%
-2.98%
Full Employment
70.06%
77.33%
10.38%
Underemployment
9.53%
7.02%
-26.26%
Unemployment
20.18%
15.64%
-22.49%
Adjustedt
Unemployment
29.43%
24.94%
--15.27%
Source: UNSCO, 1998

It is vital that the Palestinian Authority (PA) improve upon these issues, especially when facing stiff competition for foreign investment and trade from its neighboring countries. Egypt has taken substantive measures to improve its investment infrastructure,2 and Jordan, which is an even more direct competitor, has also worked much harder to create an inviting atmosphere for foreign investors. Since the two economies bear many similar characteristics, Jordan and the Palestinian Authority can be regarded as competitors for foreign investment and trade. Regarding trade Axel Halbach noted:
The trade agreement of Israel with Jordan poses, however, problems for the West Bank and Gaza Strip (WBGS) Palestinians: quite a range of products Israel could either buy from Jordan or from the WBGS; a positive development of trade with Jordan (which everyone expects) will certainly be to the detriment of the Palestinian territories.3

Differences between the PA and Jordan

Any comparison of Jordan and the PA must concede certain overriding differences between the two. First, Jordan is a sovereign and relatively stable nation with control over its domestic, commercial and foreign policy. The PA, as of yet, is not a sovereign nation, and is much too young to be considered a stable regime even under the best of circumstances. Most significantly, the PA bears only limited control, or authority, over its commercial and domestic policy, and even less control over foreign policy.
This brings us to the second overriding difference between the two. Israel's unique authority in the occupied territories, and modified authority in PA-sanctioned areas, touches nearly every facet of the economy in the WBGS. Specifically, Israel's control over the PA's borders, and thus over trade, marks a major aspect of commercial activity that Jordan does not face directly.4 Israel also controls the flow of WBGS Palestinian workers into Israel and between the West Bank and the Gaza Strip. Jordanian workers do not face such restriction on their movement, although it must be noted that Jordanians do not have the option of working, albeit erratically, in the nearby industrialized Israeli economy. Further, since this article focuses on each entity's ability to draw foreign investment - a key element in the development of local industries that would create domestic employment - the continuing dependence of many Palestinians on work in Israel can be seen as a function of the PA's ability, or inability, to attract foreign investment.

Under PA Control

Based mostly on Israel's control over the flow of foreign trade and migrant labor, many PA, PLO, Palestinian and other representatives assert that the PA's economy is, in fact, held hostage by Israel, and that its success or failure is a matter of Israel's outright will.5 These same sources offer little acknowledgment of those areas of policy over which the PA does have control, and can shape and expand the Palestinian economy.
Such an area, and one in which Jordan and the PA exercise near equal control, is in their ability and jurisdiction to legislate commercial policy and act within the domestic sphere. Beyond the Declaration of Principles (DOP), Article IX, Section 2a of the Paris Economic Agreement states: "The Palestinian side has the right to employ various methods in encouraging and promoting the development of the Palestinian industry by way of providing grants, loans, research and development and direct-tax benefits." In more practical terms, as noted by George Abed: "Under the [Paris] Protocol, the Palestinians have the right to define their own import policy, fix tariff rates, and set inspection and valuation standards for a large number of commodities... in capital market, income tax, investment incentives, insurance, and so on... The Palestinians have complete authority to conduct their affairs as they see fit."6
Both Jordan and the PA have enacted laws designed to encourage foreign investment by providing tax breaks and other incentives. It is in this area that the most stark differences between Jordanian and Palestinian commercial policy can be seen. We assert that these differences draw investors who might otherwise show an interest in the PA rather than Jordan.

Attracting Investment

During the past five years, Jordan has exerted a much stronger effort to create an atmosphere conducive to foreign investment, and is definitely out-competing the Palestinian Authority in attracting investment.
The Palestinian Law for the Encouragement of Investment was the first commercial legislative action undertaken by the elected Palestinian Council. Compared to its reformed Jordanian counterpart, this law allows politics and politicians to play far too significant a role in the process of approving exemptions for investment proposals, resulting in a discouraged investment community. Conversely, Jordan's law was modified in 1995, and ratified in early 1996, to diminish the possibility of politics tainting the approval process, and has since been successful in attracting increased foreign investment. Moreover, Jordan also presents other competitive advantages that give it a more extensive edge.
For example, wages, rent and other production costs are significantly lower in Jordan than in the PA. One of the supposed advantages of the Palestinian Authority is that its cost of labor is lower than in Israel. However, labor costs in Jordan and Egypt are even cheaper than in the PA. A study released by the Palestinian Economic Policy Research Institute (MAS) in 1996 compared the ability of Palestinian manufacturers to compete with their Jordanian counterparts. In each sector selected, Jordanian production costs were lower, with much of this cost differential originating from wage rates. The Jordanian cost of production in pharmaceuticals, garments and shoes was 12 percent, 53 percent and 34 percent less, respectively.
In addition, Jordan's infrastructure is more developed than in the Palestinian territories, and Jordan offers a number of attractive industrial zones for investment. One of these, at Irbid, has been granted qualified industrial zone status by the United States. Goods produced there jointly by Israeli and Jordanian firms are accorded duty-free access to the American market. On March 15, 1999, the United States announced the creation of a new Israeli-Jordanian Qualified Industrial Zone (QIZ). Plans for the construction of the QIZ, which will be located on the Israeli-Jordanian border south of the Beit She'an (Bissan) Valley, are moving forward under the auspices of the Jordan Gateway Project Corporation. The Corporation has reported that a number of Israeli and Jordanian companies have already expressed interest in joint QIZ ventures. An expansion of the Irbid QIZ is scheduled to begin soon. In comparison, a QIZ recently opened on the Karni border in the Gaza Strip. Of its 25 industrial sites, only 14 have been rented out and merely two companies have commenced operations. Within this context, it should be noted that the Palestinian Authority does not encourage joint ventures with Israel, whereby in Jordan, even during precarious political periods, the Jordanian leadership has given its business leaders a clear signal to differentiate between the political and economic spheres.

Discouraged

In contrast, the Palestinian Authority has allowed only two Israeli firms to register in the territories since the signing of the Oslo agreement, and has not permitted even a single significant joint venture with an Israeli firm. In a study that was conducted by a joint body of experts for the World Bank, we discovered that this has been the case despite the fact that Israeli businesses have exhibited much enthusiasm toward investing in the Palestinian Authority. In fact, Israelis have even shown more interest than foreigners or the Palestinian Diaspora. At the same time, the Palestinian Authority itself has concluded several joint ventures with Israeli companies on a monopoly basis. This policy causes potential foreign investors to question the PA's interest in positive economic relations with Israel, and in creating a vibrant private sector and market-based economy. It also discourages local Palestinian business leaders. From a personal perspective, Info-Prod were involved in setting up most of the Israeli-Jordanian joint ventures, and have also conducted business with Palestinians. As business consultants, we found it much more problematic to work with Palestinians than with Jordanians.

The Effect of Israeli Policies

Nevertheless, there is no doubt that Israeli policies have also had a suffocating effect on the Palestinian economy. In the wake of the 1995-96 wave of suicide attacks, Israel closed off the territories in an attempt to prevent additional potential suicide bombers from entering Israel. This closure resulted in a significant loss of jobs and income in the Palestinian territories. Yet, in 1998, Israel imposed fewer than 15 days of closure, including holidays, which are not considered working days. Through the first three months of 1999, the days of closure have only amounted to 4. (It should be noted that a permanent closure has been imposed on the Palestinian territories since 1993. The writer is referring to the tightening of the closure when all entry permits into Israel are canceled - Ed.)
During the Rabin-Peres administration, closure policy was much more severe and inflicted greater harm on the Palestinian economy. Today, certain developments in Israel, including an influx of foreign workers, large-scale Russian immigration and a recession in its construction sector, have sharply reduced Israel's demand for Palestinian labor.

An Inviting Business Climate

Palestinian policy-makers should significantly improve their attitude toward foreign investment, in order to create an atmosphere conducive to commercial activity. Otherwise, it will be extremely difficult for the Palestinians to compete with their neighbors for foreign investment. Israel must bear some of the responsibility for the economic hardships facing the Palestinians. Nonetheless, Palestinian officials can and should be held accountable for their own policies, which have failed to create an inviting business climate.

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