In recent weeks, both the Government of Israel (GOI) and donors have been considering a variety of economic responses to the outcome of the Palestinian Legislative Council (PLC) election of January 25, 2006, some of which are already under implementation. GOI has suspeneded the regular transfer of revenues which it collects on behalf of the PA; other forms of economic interaction at issue are Palestinian labor access to Israel, and the flow of imports and exports across Palestinian borders with Israel. Donors are planning to reduce various categories of foreign assistance.
By way of introduction, two points are worth noting. First, the Palestinian economy is highly sensitive to external stimuli, due to its degree of dependence on Israel and on foreign assistance; consistent with this, the Ad Hoc Liaison Committee (AHLC) in December 2005 agreed that achieving desirable rates of Palestinian GDP growth would depend on Israel continuing to transfer revenues, rolling back the system of movement restrictions in force and maintaining or increasing labor access to Israel — and on sustained high rates of donor and private investment as well as Palestinian governance reform.
It follows that suspending revenue transfers, constraining Palestinian movement and access and reducing aid flows would cause severe economic damage if the available tools were employed with sufficient vigor. Second, the impact of the suspension of clearance revenue transfers and restrictions on movement and access would be much greater than the impact of reduced aid flows.
The relative impact of GOI and donor actions is borne out by the economics of the second intifada—a period in which the various restrictions placed on the movement of people, labor and goods, and on the transfer of revenues collected by GOI on the PA’s behalf, led to a contraction in real personal incomes of almost 40 percent between the third quarter of 2000 (Q3/2000) and Q3/2002—despite a doubling of annual donor disbursements in the same period.
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