12 September 2002
The Report, which will be reviewed at the forthcoming meeting of UNCTAD’s governing body, the Trade and Development Board (Geneva, 7-18 October), notes that tightened mobility restrictions since April 2002 have created a situation in the Palestinian territory that resembles ‘complex humanitarian emergencies’. In such situations, vulnerability is great and the impact on productive capacity, institutional infrastructure and the economy as a whole is severe.
The Palestinian Authority (PA) has been forced into heavy dependence on donor support for maintaining emergency and basic activities, diverting its attention away from key development objectives, the Report suggests. This renders even more urgent the need for concerted efforts to identify strategies and policies to set the Palestinian economy on a path of recovery and sustained development — a ‘still-elusive’ goal that remains intertwined with the achievement of peace and security in the region.
Economy ‘on the brink of collapse’
By the most conservative estimates, between October 2000 and March 2002 the crisis cost the Palestinian economy the equivalent of 40% of its 1999 gross national income (GNI). By 2001, Palestinian GNI was estimated at $4.2 billion, down from $5.5 billion in 1999. GNI per capita declined by 12% in 2000 and by a further 19% last year. According to the most recent estimates, GNI losses in the second quarter of this year averaged $7.6 million daily, with almost $3.3 billion in total accrued losses between October 2000 and July 2002. As a result, close to half the population is now living below the $2-a-day poverty line. Unemployment has soared — from 10% of the labour force in September 2000 to 29% by the end of March 2002, and 34% by July 2002 — leaving at least 200,000 Palestinians of working age without a job. This number climbs to as many as 600,000 during curfews.
The income losses are mainly due to the recurrent internal and border closures, which have become increasingly stringent since April 2002. Production activities in manufacturing, construction, commerce and public and private services have been impaired and external trade disrupted. Last April alone, Palestinian domestic output contracted by about 75%, while physical damage to basic utilities and to the assets of public and private institutions in the period October 2001-April 2002 meant an additional $665 million in direct economic losses.
A cycle of de-development
The UNCTAD report also highlights the profound changes that have taken place in the functioning of the economy. These are unlikely to be easily reversed, even if stability is attained. In particular, the purchasing power of the Palestinian population has been depleted as households’ coping strategies have been exhausted, making them dependent on emergency support in order to meet basic needs. The informal sector has expanded, as impoverished households resort to survival activities to eke out a living. Many enterprises have been forced to scale down production to maintain operations in crisis conditions, while others have been left with no choice but to shut down completely.
The PA is effectively bankrupt and increasingly dependent on donor aid to cover current expenditures. Its budget deficit climbed steeply from $19 million in September 2000 to $73 million last December, with around $430 million in accumulated arrears, owed mainly to commercial banks. Moreover, its institutional capacity has been seriously undermined by persistent uncertainty, disruption of government services and heightened challenges to its jurisdiction.
Regardless of how capable, streamlined and transparent the PA proves to be in economic management and policy-making, it has to contend with an economy beset by deep-seated structural weaknesses and imbalances arising from prolonged occupation. The Report contends that, as the PA embarks on a series of major institutional reforms, there is a twin challenge for Palestinian development efforts: recovery and reconstruction in a post-conflict situation need to be pursued, but against a background of prolonged disappointing economic performance.
Recovery efforts will have to proceed in the context of a distorted trade regime that offers limited policy autonomy to the PA and embodies policies more responsive to the commercial interests of the stronger Israeli economy, the Report says. Palestinian preferential or free trade agreements with regional and international partners, which could have been a driving factor for stimulating economic growth, feature market access conditions that do not adequately address the economy’s development interests. Meanwhile, the institutionalization of Israeli restrictions on mobility has worsened the humanitarian crisis and rendered attempts to address development needs particularly difficult, since the impact of the emergency situation is likely to continue even after stability has been attained.
Linking relief to development
While an adequate level of aid is critical for supporting reconstruction, the quality of aid is even more important, the Report asserts. More effective mechanisms for aid coordination are needed, among donors and within the PA, to ensure that aid is linked to PA public finance and development priorities and to promotion of the private sector. Efforts are also required to strengthen the economy’s resilience through promoting dynamic synergies among rehabilitation, reconstruction and strategic development needs.
In particular, the Report calls for rehabilitation efforts that can reinforce the economy’s capacity to withstand the crisis, especially through emergency job creation programmes. At the same time, reconstruction efforts should dovetail with strategic development policies, targeting the root causes of economic vulnerability and offsetting the mechanisms through which their adverse effects occur. In view of the economic impact of the conflict on external trade, special efforts should be made to restore export capacity, re-establish financial and trade links with traditional markets, develop new product lines and help industries penetrate new export markets.
UNCTAD cautions that, in view of the deteriorating terms of trade of Palestinian labour-intensive products, the pace of, and policies related to, economic and trade liberalization must be carefully considered. Such a dynamic industrial policy might necessitate resorting to temporary measures of protection based on a thorough assessment of the different sectors’ export potentials and development needs.
To help the PA cope with new developments, UNCTAD has stepped up its technical assistance activities in support of small and medium enterprise (SME) development
— its Empretec programme — establishing a training and support capacity centre within the Palestinian Banking Corporation as host organization. The Corporation has assumed responsibility for operating the project and integrating it into the regional and international Empretec network. Meanwhile, UNCTAD is also preparing a comprehensive study on the Palestinian SME sector in cooperation with the Palestinian Central Bureau of Statistics.
Major institution-building projects are being implemented by UNCTAD as well, in the areas of customs automation (ASYCUDA Phase I) and debt management (DMFAS), in conjunction with the PA Ministry of Finance. In close cooperation with the PA, UNCTAD is examining the possibility of responding to requests for targeted technical assistance in the areas of food security and commodity trade; trade logistics and facilitation; trade promotion; regional and multilateral trade policy; and investment promotion.
For more information, please contact: Raja Khalidi, Coordinator Assistance to Palestinian people, Division on Globalization and Development Strategies, Tel: +41 22 907 5857, E-mail: raja.khalidi@unctad.org or UNCTAD Press Unit, Tel: +41 22 907 5828, Fax: +41 22 907 0043, E-mail: press@unctad.org.
