War-torn Palestinian economy needs to bridge relief and development, says UNCTAD report

GENEVA - Protracted occupation and conflict have effectively transformed the occupied Palestinian territory into a “war-torn economy”, with serious implications for Palestinian development prospects, says the United Nations Conference on Trade and Development (UNCTAD) in a new report.

The report, issued annually on UNCTAD’s assistance to the Palestinian people, calls for a new policy framework to bridge relief and development efforts. Compounding the complexity of the tasks ahead is the economy’s prolonged dependence on, and skewed integration with, the much more advanced Israeli economy.

The report details the adverse impact of prolonged occupation on Palestinian economic growth, employment, poverty, trade and finance, which has intensified in the past three years. By 2003, the pace of decline had put the territory in the same class as many other economies ravaged by civil strife and war. The small enterprise sector was especially hard hit, while agriculture and informal services became the “sectors of last resort” for an impoverished population.

The important role of the private sector as a main source of new investments, jobs and income is highlighted by the report. Even under conditions of uncertainty, the Palestinian Authority will have to develop integrated trade and labour policies based on an economic and development vision with quantifiable, time-bound, achievable and sectorally focused objectives. Setting clear sectoral priorities will help the Palestinian Authority to attain synergies capable of bridging relief efforts to development objectives.

The report suggests that the State of Palestine as envisioned in Security Council resolution 1397 (2002) should ensure that its relief and development policies do not repeat mistakes made elsewhere in dealing with the burdens imposed by the economic legacy of war. Future policies should be based on a clear understanding of the structural distortions and imbalances that in this case have been long ignored by policy makers.

Adverse Impact

According to UNCTAD, the impact of the conflict since 2000 has seriously curtailed the supply capacity of the productive sectors. These losses were associated with profound changes in the economy, leading to greater reliance on informal and subsistence activities. Some key developments:

  • In the past three years the growth achieved in the previous 15 years was lost, with real gross domestic product (GDP) today below its 1986 level;
  • In 2002, per capita gross national income (which includes non-domestic income) fell to 46 per cent of its 1999 level;
  • Almost two thirds of the population in the West Bank and Gaza (2 million) live below the $2-a-day poverty line;
  • Unemployment soared to unprecedented levels, with the average annual unemployment rate exceeding 40 per cent well into 2003;
  • The manufacturing sector’s contribution to the economy declined from 16 per cent in 1999 to an estimated 14 per cent of the much smaller economy of 2002, and construction is estimated to have lost half of its share in GDP;
  • Agriculture’s share in GDP grew to 15 per cent by 2002 as this strategic sector absorbed unemployed labour and increased its share in domestic markets;
  • A statistical survey conducted by the Palestinian Central Bureau of Statistics (PCBS) for UNCTAD indicates that between 2001 and 2002, employment of Palestinian small- and medium-sized enterprises (SMEs) in manufacturing, construction, tourism and other services experienced declines ranging from 14 per cent to 27 per cent;
  • Capital-intensive enterprises SMEs in information technology and pharmaceuticals were more resilient in the face of the ongoing economic crisis; and
  • A significant contraction was observed in the average size of Palestinian enterprises, implying an additional shift towards the informal economy.

    Imposed Dependence

    Economic collapse since 2000 has demonstrated the deep economic dependency on Israel engendered by decades of occupation. For example, 55 per cent of Palestinian private consumption last year was imported from Israel, while Israel accounted for 71 per cent of the total Palestinian trade deficit. In terms of GDP, this implies that 45 per cent of every dollar produced in the West Bank and Gaza was channelled into the Israeli economy through imports. Over two thirds of Palestinian foreign borrowing in 2002 (which comprised mainly donor support funds) apparently financed the lopsided merchandise bilateral trade with Israel.

    “The implications of this excessive imposed leakage of economic resources to Israel for the development prospects of the Palestinian economy are significant”, UNCTAD says. The leakage implies that donor funds would not necessarily generate the desired income multiplier effect in the Palestinian territory. On the contrary, that effect would be felt more in Israel. At the same time, the Palestinian share of total Israeli trade is shrinking. In 2002, Palestinian goods and services trade with Israel represented less than 2 per cent of total Israeli external trade, compared to over 5 per cent 10 years ago.

    “The coming phase of economic rehabilitation and reconstruction cannot simply take as its goal the return to the pre-2000 situation”, UNCTAD stresses. Rather, development efforts will have to be qualitatively different from those that accompanied previous recoveries from shocks and upheavals. This will involve reassessing the imperatives for Israeli-Palestinian economic integration.

    Of equal importance is to carefully evaluate the speed and sequencing of trade reform within an overall strategy that seeks to create synergies between relief and long-term development objectives and target the enterprise sector. The UNCTAD calls for increased donor support to this sector, in particular its SME component, and highlights the need for an industrial policy to guide the rehabilitation and development of the devastated Palestinian enterprise sector. Such a policy should be supplemented by the appropriate labour upgrading, investment incentives and institutional infrastructure programmes, targeting the specific sector/s capable of assuming the role of the “engine of the economy” as well as strategically important sector/s, such as agriculture.

    UNCTAD Assistance to Palestinian People

    To help the Palestinian Authority reorient its economic and trade policy, UNCTAD is providing policy makers with “fast-response” advisory services aimed at highlighting the implications of possible alternative trade policy arrangements consistent with the present economic conditions. The UNCTAD has helped launch the Authority’s National Task Force for Economic Development, established by the Palestinian Authority Council of Ministers. It is also preparing a new technical assistance project in close cooperation with the International Labour Office (ILO) that will help the Authority to develop quantitative analysis techniques. These new capacities will be used to design integrated national trade, labour and macroeconomic policies.

    Despite a turbulent year, UNCTAD and its Palestinian Authority partners have achieved concrete results in customs administration (ASYCUDA) and debt management (DMFAS) projects. A Palestinian ASYCUDA prototype system will be installed at Palestinian Authority Customs Headquarters in Ramallah and at two pilot border sites in 2004. The DMFAS system is now fully operational, while a Public Debt Bill is being drafted along with a comprehensive study on debt strategies and policies to guide the Authority’s efforts. Meanwhile, UNCTAD’s private sector counterparts, the Palestinian Banking Corporation and Paltrade, are assuming operational control of the UNCTAD SME development (Empretec) and Trade Point Palestine Ramallah projects.

    The Report on UNCTAD’s Assistance to the Palestinian People will be reviewed at the fiftieth session of the Trade and Development Board in Geneva on 10 October 2003.

    To download the full report click here.

    Related Links:

  • Programme of assistance to the Palestinian people, UNCTAD