The Palestine-Israel Journal is a quarterly of MIDDLE EAST PUBLICATIONS, a registered non-profit organization (No. 58-023862-4).
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Editorial Board

Adnan Abdelrazek

Danny Rubinstein

Sam'an Khoury

Daniel Bar-Tal

Walid Salem

Galia Golan

Gershon Baskin

Hind Khoury

Edy Kaufman

Ata Qaymari

Benjamin Pogrund

Nafez Nazzal

Dan Jacobson

Jumana Jaouni

Moshe Maoz

Munther Dajani

Khuloud Khayyat Dajani

Izhak Schnell

Lucy Nusseibah

Meir Margalit

Menachem Klein

Ali Abu Shahla

Ilan Baruch

Hanna Siniora

Yehudit Oppenheimer

Mossi Raz

Susie Becher

Frances Raday

Vol.9 No.2 2002 / Right of Return


Closure and the Palestinian Economy

The disastrous economic results of closure and seige

     interview with Mohammad Shtayyeh

Palestine-Israel Journal: It seems the most important recent cause of economic decline is the siege. What are the crisis-management measures that can be taken on the economic front? Do you foresee any lifting of the closure?

The West Bank and Gaza Strip have been under siege since September 28, 2000, and the devastating effect this has had on the Palestinian economy has been severely aggravated by the March-April incursions into major cities in the West Bank, in addition to the continuous bombardment of these cities.
The most severe consequence of the closure has been the increase in unemployment. Around 144,000 Palestinians who were employed in Israel have been laid off due to the closure, while further jobs have been lost inside Palestine as a result of restrictions on movement or factory and business closures. More than 120,000 people have also joined the working age population since the beginning of the Intifada. Unemployment, which was previously around 10 percent, is affecting as much as 53 percent of the total labor force, which is approximately 651,000.
This means a total of 350,000 people without work. And if you multiply that number by seven (average family size) it means that 2.5 million people have been directly affected by the closure. Consequently, the Palestinian economy is functioning at no more than 30 percent capacity. Gross National Income losses amounted to US$2.4 billion at the end of 2001, and have continued to increase.
As a result, there has been a significant increase in the number of people in the West Bank and Gaza who have been pushed beneath the poverty line (US$2 per person, per day). Present estimates state that over 60 percent of the population is now living in poverty, having exhausted the savings they were subsisting on. I think we have entered a phase in which more than 500,000 Palestinians have become hungry after 20 months of closure. The poorest areas in Gaza are in Rafah and Khan Yunis. In the West Bank the poorest region is Hebron followed by east Bethlehem, the North Jordan Valley region (Jiftlik Area), South West Jenin and East Jenin.
In addition, Gaza has been cantonized into 2 main regions, while the West Bank has been split into 8 regions, with all major cities completely disconnected from each other. Military checkpoints exist on all major and secondary roads, and all traffic into and out of the territories sporadically experiences complete shutdown. These closures have raised economic costs and crippled the business environment.
For example, a truck full of sand which used to cost 300 NIS now costs 1600 NIS because of the rise in logistics and transportation costs. Another example is that my staff used to pay 2 NIS to come to PECDAR but now they have to pay 24 NIS, with many people reduced in some cases to traveling by donkey, where roads have been dug up by the Israeli army and can no longer be used by cars.
The Palestinian Authority (PA) is suffering a huge budget deficit as taxation has dwindled to just a fifth of previous levels. Lack of tax collection relates to the decline in production and internal and external trade. Under normal circumstances, some two-thirds of Palestinian revenue derived from taxes is collected by Israel on the PA’s behalf. In the past these revenues were remitted to the PA on a regular basis, but no such payments have been made by Israel since October 2000. Total gross revenues withheld by Israel are estimated at nearly US$1 billion as 230 million NIS are collected each month on the Palestinians’ behalf.
Following the introduction of an “austerity budget” in March 2001, the PA’s monthly budget needs a total of US$90 million, US$60 million dollars of which are salaries. Currently, revenue collected by the PA amounts to less than US$20 million per month. Before the outbreak of the Intifada, the Palestinian economy was growing at an annual rate of 6 percent and private sector investment had reached US$360 million per year. The closure has put a definite end to that. The state of public finances is mirrored by that of the private sector. I would say that we have slipped over the edge and are now sliding towards total collapse.

In light of this deprivation how do people manage?

At grassroots level, households have reduced their expenditures and drawn on their savings, while informal self-help and share systems lessen economic difficulties. Donors, often working through NGOs, are also providing much needed emergency assistance. Informal Arab money has been sent to poor families, while remittances transferred by Palestinians abroad to their relatives are estimated to total around US$1 billion.
However, this is helping people subsist, not live. In the present climate the hunger and need of our people are a threat to Israel’s security and the security of the whole region.

The donor countries say that they have invested some US$4.5 billion in the West Bank and Gaza since 1993. Do you think that they will continue donating now that the infrastructure they helped to build has been damaged or destroyed? What implications will this have on their stand towards Israel?

There has been donor support for the past two years and I think that as the situation today is worse than ever, we have to expect them to continue. Donations are not merely social gestures of goodwill, they are also a political symbol, showing support for the peace process. Donations from the international community pass through four different steps before they reach their recipient. The first step is the pledge, the second the commitment, the third the allocation of money to a certain project, and the fourth and most important, disbursement, when the money starts to flow from the donor’s bank account to that of the recipient.
Given the large variations that normally appear between the first and fourth stages, this can be described as an inverted pyramid approach. Take the Arab donations, for example. The Arabs pledged US$1 billion, they committed US$697 million, they have allocated about US$500 million, US$300 million has been transferred and the amount disbursed to projects is US$60-70 million, (not including salaries which have all been disbursed).
Also, of the US$4.5 billion which you quoted, around US$1 billion went through local and international NGOs. The administrative costs here erode part of the donations and none of this money is received by the PA. But one has to accept the totality of the aid rather than consider only the drawbacks. I think I can assume that the donors will continue to stay with us because their contribution is so important. The only money in circulation in the veins of the Palestinian economy is from donors.

What are your estimates so far of the total cost of physical damage and who will fund the reparations?

Damage can be separated into three categories - closure, bombardment and incursion. The total damage, direct and indirect, to the Palestinian economy, taking into account all three categories, is estimated at around US$8.2 billion for the last 19 months. A direct loss is damage incurred when an agricultural field is uprooted or a school or police station destroyed. Indirect damage is the closure of the airport, for example, which includes revenue lost by Palestinian airlines and the cost of ground fees for planes to remain in Jordanian airports.
Also included in this figure are transfers that used to come from Israel and tax revenues owed by Israel. In addition, the Palestinian workers in Israel brought in US$800 million every year to the Palestinian territories. The World Bank has estimated total damages from the recent incursions at US$300 million. Our estimate is US$455 million. The disparity comes from the fact that we include security structures in our calculations.

During the first Intifada, the popular committees encouraged household and localized production, as well as a boycott of Israeli products. Has the present Intifada revived these actions and how could the population be more economically proactive?

The two Intifadas are not the same. In the first Intifada the Palestinian economy was worth no more than US$2 billion. By the time this Intifada broke out, it was worth US$6.5 billion. The effects are now much more severe because people have more to lose. In the first Intifada, Palestinian employees continued to work in Israel, while small-scale industries in the territories, such as farming, were largely unaffected. By 2000, family businesses had evolved into large companies, which resulted in greater job and economic losses when they were forced to close. Also in 1987 we did not have the PA - over 132,000 people are currently employed by the PA. Under present conditions, with it already US$650m in arrears in 2001, that is unsustainable. Salary payments are a sign that the PA continues to function and is in control of the areas it administers, despite the cantonization and lack of movement. If the authority fails to pay salaries one month, it can be argued that it has effectively collapsed - leaving a void of control.

Has there been any attempt at PA coordination between Western and Arab donors for example? Has the Arab league pledge been transformed into a regular flow of funds to the PA?

Arab money has largely gone to cover salary payments. The Arabs gave US$45 million every month for six months to cover this. Following the Beirut summit they decided to support Palestine on a quota basis, according to each Arab country’s contribution to the Arab League budget. This means we have to chase each nation individually for payment. Countries such as Yemen and Jibuti are simply unable to fulfill this commitment. The load has been divided but not everyone can carry it. This month we should receive about US$55 million from the Arab countries. So far we have received only US$4 million. Libya for example is not paying a penny!

How important have investments from Palestinians abroad been and do you think this can be encouraged in any way?

Palestinian entrepreneurs and investors should not be considered revolutionaries or ‘Che Guevara’ types, who have no interest or stake in what happens to their investments. Between 1994 and 2000, a number of Palestinian investors chose to back businesses and projects here, and saw a return for their capital outlay. Large companies and banks were established by wealthy Palestinians, but such ventures are untenable under present circumstances.
People need to operate in an investment environment. They want a clear political scenario to predict where events are heading in order for them to minimize risk. But look at the reality! Even the Israeli economy is experiencing a severe downturn, with losses of more than US$17 billion. Tourism and construction have been severely hit on both sides, farmers are demonstrating because they have no casual labor for harvesting, while the high-tech industry is on its knees. Israel has predicted negative growth this year. Economic instability has rippled out into the rest of the region, with investors even nervous of backing projects in Egypt and Jordan.

Do you have any final remarks?

Perhaps the most important issue is that economic instability does not only pose a problem for investors and bankers. In basic terms, it means poverty and hunger, and in this climate that breeds political radicalism. The Israelis have begun to pay the price for this, and will continue to do so if the situation does not change. They have planted enmity in the heart and mind of every single Palestinian due to their actions during the continuous incursions and at the checkpoints. The wanton destruction of files and infrastructure at a number of ministry buildings in Ramallah, such as the Ministry of Education and the Ministry of Transport, for example, helps neither side and shows that the incursions were not just for security purposes. What sort of threat can these files pose? Israel has to try another approach. They have to give people hope, phase their withdrawal and allow the Palestinians to live in a dignified and prosperous way - that is how you make peace, you do not impose it! A political solution is also necessary as World Bank projections indicate that recovery to pre-Intifada per capita income levels would take two years-assuming private investor confidence could be restored. As well as prioritizing emergency needs, the PA, for its part, will have to maintain strong budget discipline and reform its structures.

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