Twenty-Seven Months - Intifada, Closures, and Palestinian Economic Crisis : An Assessment

"Twenty-Seven Months - Intifada,
Closures and Palestinian Economic Crisis: An
Assessment" was prepared as a follow-up to a report
published in March 2002 ("Fifteen Months - Intifada,
Closures and Palestinian Economic Crisis" report no.
24931). The main objectives of this second Assessment are
once again to help donors and the Palestinian Authority (PA)
cope with the deep economic crisis in the West Bank and
Gaza, as well as to encourage and inform discussion on
Palestinian economic issues among the donors, the PA and the
Government of Israel. Despite an inevitable preoccupation
with short-term emergency issues, the report seeks to
preserve a focus on the types of medium-term economic and
institutional policies that will return to prominence once
the current conflict ceases to dominate the daily lives of
Palestinians and Israelis. While any short-term recovery
will depend on the lifting of closures, this will not
suffice to put the Palestinian economy onto a sustainable
growth path. The de facto customs union with Israel
formalized under the Paris Protocol makes the Palestinian
economy particularly vulnerable to closure. In a structural
sense, though, the long-term growth potential of the
Palestinian economy has been stunted by the upward pressure
on domestic Palestinian labor prices created by the wages
paid to Palestinian workers in Israel. Domestic wage
increases have exceeded any underlying growth in
productivity, and have undermined Palestinians' ability
to export competitively-priced goods to the rest of the
world. Bank analysis shows that a proactive policy of export
development, in which a more open and less discriminatory
trade regime is adopted, should result in higher incomes by
2010 than a return to previous levels of employment in
Israel. Between 1968 and 2000, Palestinians in the West Bank
and Gaza pursued a development strategy which featured the
export of labor rather than goods. In June 2000, three
months before the current Palestinian intifada began, 21
percent of all employed Palestinians worked in Israel,
mainly in low-skilled construction and agricultural jobs.
Net incomes from abroad provided more than 21 percent of
Palestinian GNI, making it one of the most
remittance-dependent economies in the world. This is why the
loss of jobs in Israel in the past two years has had such a
strong impact. Put another way, the intifada has
demonstrated the vulnerability of a development strategy
which relied so heavily on labor exports to Israel. The
shift to a goods-based export policy would take time, would
be subject to many uncertainties and would require the
active cooperation of Israel to succeed; it is thus part and
parcel of a political rapprochement. It is also true that
restoring access to the Israeli labor market would be the
quickest way to boost incomes for a large number of ordinary
Palestinians. Realistically, though, a return to
pre-September 2000 employment levels for Palestinians in
Israel seems unlikely - and would anyway risk perpetuating a
high level of Palestinian economic dependence on Israel,
hindering the emergence of a diversified development
strategy with much greater long-term growth potential.