In 2003, for the first time in its history, the Israeli economy had a negative inflation average. With an average inflation of -1.9 percent, this phenomenon has become a hot topic of discussion in the media and economist circles. Moreover, this was not an isolated incident; Israeli inflation has been relatively low since 1999 and the trend appears set to continue. For example, inflation in March 2004 was also negative at -0.1 percent. However, while average Israeli inflation was negative in 2003, in the occupied Palestinian territories (OPT) it has remained positive and high.
From the graphs, it is easy to see that inflation did not follow the same course in the two economies. Since 1999 (the period of the material disintegration of the Oslo Accords) and 2000 (the outbreak of the second Intifada), one can see a constantly widening gap between Israeli and Palestinian prices (the thick line in the graph is the accumulated difference between Israeli and Palestinian inflation rates, reflecting the price changes). This denotes that an average commodity had a price increase of seven percent in Israel between 1999 and 2003, and an average rise in price of 21 percent for the same commodity in the OPT.
Consumer prices have been rising in both Israel and the OPT, however the yearly rate of price increase in the OPT has been far more significant than in Israel — which had no inflation at all in 2000 and negative inflation in 2003. Only in 2002 did Israel have slightly higher inflation than the OPT, and since 1999 the gap has reached a peak of 14.06 percent.
Causes of Israeli Deflation
The main reason for Israel’s deflation is all too apparent. Diminishing prices are the result of the continually diminishing incomes of workers and consumers. The ongoing recession in Israel has led to a drastic redistribution of income in Israeli society, from low-wage workers and those dependent on government aid to the tycoons of big business.
This has taken the form of rising unemployment and falling wages. The buying power of the average worker has been severely eroded, while the income of the upper classes has increased. This increase is manifested in the rising value of financial assets such as stocks and bonds, which are not calculated in the Consumer Price Index (CPI) and therefore do not contribute to the official inflation figures. The demand for basic consumer products has declined sharply, though, because the profiteers of income redistribution can consume only limited amounts of bread and sugar.
With the Israeli economy absorbed in a stock-exchange rush — which now shows some signs of coming to a halt — the actual market for consumer products has been relatively abandoned.
Why is Palestinian inflation so high?
Because the Palestinian economy is so closely linked with the Israeli economy, one would assume, for example, that prices should change in the same direction in Israel and the OPT. However, the widening gap between the prices in Israel and the OPT tells a different story.
Clearly, these price increases in the OPT are not the result of rising personal incomes. In fact, the average personal income of Palestinians fell by 23 percent in 2002 and by a further 23 percent in 2003. Since the beginning of the Intifada in 2000, the average personal income of Palestinians has fallen by more than 45 percent.1
Since 2000, average private consumption fell by almost 33 percent, but imports fell by more than 48 percent due to restrictions imposed by the Israelis.2 This means that Palestinians must now rely more heavily on their own production and foreign aid to survive. Moreover, an increasing percentage of the remaining imports come from Israel.
Israeli attacks and closures have severely hampered the Palestinians’ ability to produce. Between 2000 and 2002, the Israeli army destroyed private property and infrastructure worth $643 million.3 However, the ability of local industry to import has been restricted even further, resulting in more pressure on the diminishing Palestinian industrial and agricultural sectors to meet the demands of the entire population. This situation obviously leads to an increase in prices, as people are forced to compete for the scarce supply of goods.
According to the World Bank, the cost of transportation is the principal driving force behind these increasing prices in the OPT. In order to illustrate how Israeli policy impedes imports and raises transportation costs, a consultant firm followed a shipment of imported consumer goods on its way to Gaza.
The container of goods was delayed in the Israeli port for 40 days, at a cost of $50 per day. Regulations require multiple pallets for even one container, so the container (which is the length of half a pallet) was loaded on a truck carrying two trailers. The truck had to wait two to three nights at the Karni crossing before it was cleared by the Israeli authorities to go to the transfer point, where a Palestinian truck was waiting on the other side. The container then had to be unloaded and reloaded onto the other truck, following the notorious “back-to-back” regulations, designed by the Israeli authorities to prevent trucks from crossing the border.
When the container was finally unloaded in Gaza, it was not allowed to return to Israel, forcing the importing company to compensate the shipping company $2,000, the cost of the container.
In total, this single container with $4,000 in kitchenware incurred $2000 in storage costs to the Israeli port authorities, $443 in storage costs at the Karni crossing, $2,000 for transportation costs, and $2,000 for the cost of the container. When the container was finally opened, it was discovered that $1,500 worth of goods had been stolen during the long process (nearly two months), when the Israeli authorities had supposedly been guarding the goods. The importing company ended up paying $12,443 for $2,500 woth of goods, 417.7 percent of their value.4
Furthermore, according to Adam Hanieh, a researcher and human rights worker in the West Bank city of Ramallah, the OPT suffers from many monopolies which use their power to raise prices. The largest of these is the petrol monopoly, headed by Mohammed Rashid, Arafat’s senior economic advisor. Rashid has made a deal with the Dor Energy petrol company (which is Israeli owned) to be the sole supplier of petrol to the West Bank and Gaza. Rashid buys the petrol and then sells it to the service stations in the OPT, who cannot buy petrol from any other source. The profits made from the overpriced petrol are then split between Rashid and Dor Energy. The high cost of petrol drives transport costs in the OPT up even further.5
This is why Palestinian imports are down and prices are up. Moreover, hard as it is to imagine, according to the World Bank, the high costs of transporting people in the OPT has increased the price index even more than the cost of transporting goods has.
In order to understand how this is possible, we must first understand the difficulties caused by roadblocks and checkpoints in the West Bank and Gaza, and now, by “gates” in the “Separation Wall” that runs through the West Bank. People must often make countless attempts to cross through a roadblock or checkpoint before they are allowed to pass by the Israeli military, whether the purpose of the trip is work, visiting family, attending school, or going to a hospital. They must pay the taxi every time they attempt to cross, and pay a new taxi on the other side of the roadblock or checkpoint. Mass confiscation of vehicles — both private cars and taxis — because of arbitrary decisions of Israeli soldiers at the roadblocks and checkpoints clearly contributes a great deal to the scarcity of vehicles and the cost of transportation.6
When Palestinian workers attempt to find passage to Israel to find work — a necessity for a great many, considering the poverty in the OPT and the rampant unemployment — they must pay a large portion of their wages to finance their transportation to and from Israel. Israeli buses are not an option, since guards demand identification papers from anyone who looks “Arab”. I have often heard workers complain that they work in Israel from sunrise to sunset for 100 NIS (about $23), out of which they must spend 50 NIS or more on taxis. Yet they continue to do this in order to feed their families, because they have no other income source.
Roadblocks and checkpoints not only block passengers from arriving at destinations inside Israel, but mainly prevent passage between villages and towns inside the West Bank and Gaza. For Palestinians, getting to the next village requires evading these “internal” roadblocks.
Despite all this evidence, the Palestinian Central Bureau of Statistics (PCBS) estimates that transportation costs account for only 12.68 percent of the total expenditure per household. This is because the most recent PCBS survey to estimate the distribution of expenses in an average Palestinian household was conducted between October 1995 and September 1996, before the breakdown of the Oslo agreements, before construction of the “Separation Wall” had begun and before the days of massive internal curfew and closure. Thus, it is very probable that if household expenditures were recalculated, the actual inflation in the OPT would be much higher than the currently reported figures, making the gap in inflation rates between Israel and the OPT even wider.7
Who benefits from Palestinian inflation?
At face value, inflation is meaningless. Many economists still believe that since all prices move in the same direction, there is no significance to the actual rate of change in prices. Labor, after all, is just another commodity whose value should also increase according to economic theory. However, as we have just seen, the prices of material products and labor sometimes do change in different directions. While the prices of consumer goods increased significantly in the OPT, average personal income and wages declined sharply. The Palestinian Trade Center (PALTRADE) found that the average daily wages of Palestinian workers declined from 69.2 NIS (approximately US $15) in 1999 to 61.5 NIS (approximately US $13) in the third quarter of 2002, a decrease of 11.11 percent. This happened while the price of the average consumption basket per household8 increased by almost 17 percent (according to official figures), making it impossible for Palestinian households to maintain their previous standard of living.9
This statistic for the decline in wages is understated, since Palestinians work for much lower wages when they are forced to work “illegally” inside Israel (i.e., without Israeli permits). According to Leila Farsakh, Ph.D. candidate at London’s School of Oriental and African Studies, the number of Palestinian workers who are forced to work without a permit and for lower wages is increasing steadily, and is constantly exacerbated by curfews, closures and the diminishing number of permits issued by the Israeli government.10
Nevertheless, not everyone is harmed as a result of this. Israeli companies who sell products to the Palestinians saw a significant profit from the Palestinian inflation. By counting the products which Palestinians must buy from Israel, we see that Israel is by far the largest source for Palestinian imports. Products such as cigarettes, beer, ketchup, soup cubes, tinned beans and peas, pickles, salt, coffee, jam, frozen vegetables, potatoes, garlic, onions, seeds and nuts, apples, bananas, soy oil, butter, yoghurt, pasteurized milk, various noodles and even flour — are all imported from Israel. All this is according to the Palestinian Central Bureau of Statistics (PCBS).
Although Israeli brand names make up only about 24 percent of the total number of brands that the OPT imports (Israel is still the largest source of products for Palestinians after local production), according to PALTRADE, 61.6 percent of OPT’s total imports came from Israel during 1999, and this figure rose to 73 percent in 2000.
In 2003, the OPT had $1.9 billion in imports, which was financed mostly by foreign aid. The high inflation in the OPT means that the Palestinians now get less even though they pay more. A good example for this form of exploitation is electricity. Palestinians living in the OPT must buy all of their electricity from Israel. According to Ha’aretz correspondent Danny Rubinstein, the average Palestinian pays more for electricity than the average Israeli, despite the large wage gaps between them.11
Looking at all the various facets as indicated above, it becomes clear that inflationary rates are significantly different in Israel and in the OPT due to Israeli economic policies, as well as the ongoing closure, military invasions, and other violations of human rights perpetrated by the occupation. It is clear that only an end to these policies will stabilize Palestinian inflation and allow the Palestinian economy to begin to recover, and only a political solution to the conflict will revive the Israeli economy and begin to undo the effects of the recent income redistribution.
size>Shir Hever is a graduate student in economics at the Hebrew University. This article is the second digest of AIC’s Socioeconomic Bulletin. This is the expanded version of the original article, which appeared on the website of the Alternative Information Center. This article first appeared in News from Within (The Alternative Information Center) Vol. XX, No. 3, May 2004, pp. 13-15 and is reprinted with permission. The second part of this article will appear in print in an upcoming issue of News from Within.