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.1 No.1 1994 / Peace Economics

Economics

Needed: A Modern Infrastructure

The Palestinian economy has been sadly neglE’Cted for the past 25 years of occupation. Immediate steps must be taken to develop the infrastructure for a flourishing, service¬based economy.

     by Samir Hazboun

Although the Palestinian economy is far from being a developed industrial economy, it has experienced significant growth in the service sector. This growth, however, has not followed the classical pattern experienced by service industries of the developed countries. Where the latter have experienced progressive growth together with an increase in productivity, the industrial sector of the Palestinian economy has remained stagnant and traditional. Small-scale handicraft production contributed less than eight percent to the Gross Domestic Product (GDP) in 1987; and productivity in most sectors has fallen.
Whereas growth of income in developed economies is generated internally, growth of income in Palestine has been induced by external factors, primarily the demand for Palestinian labor in the Gulf States, before the Gulf War, and in Israel.
Restrictions on internal development, in particular industrial development, have contributed to the growth of distributive services in the Palestinian economy. A large segment of the Palestinian labor force, has moved directly from the primary sector to the service sector, and service sector development has been affected by the heavy reliance on the export of labor services. The wages of Palestinians working in Israel have accounted for about 25 percent of the Gross National Product (GNP) of the West Bank since the early 1970s, more than 30 percent of the GDP. In the Gaza Strip, almost half of the employed population works in Israel. Thus the level of income in the Occupied Territories does not reflect the true level of development, it exaggerates it. The GNP per capita is not a good measure or indication of the level of development of these areas.
Furthermore, the only available data is provided by the Israeli authorities, through the Central Bureau of Statistics. The fact that the Israeli authorities are the adversary in the struggle over sovereignty of the Palestinian territories reduces the credibility of the data. In addition, the fact that the bureau treats the West Bank and Gaza Strip as independent units, yet is unable to monitor the daily economic interaction over the Green Line, has led even Israeli researchers to question the statistics.

Transportation

Like every other sector in the Palestinian economy, the development of transport services has been blocked by occupation. The only means of transportation has been the inadequate road network, which was established before 1967. It facilitated the movement of people and goods within Palestine and from there to neighboring countries. Since 1967, all new roads have been constructed in conformity with Israeli strategic considerations, mainly on East-West axes, linking Israeli settlements in the Territories with metropolitan areas in Israel. This means that they are of little use to Palestinian residents or to the needs of developing Palestinian tourism infrastructures. The existing road system serving the Palestinian population has not been expanded. Road maintenance is at minimal levels, and repairs are effected only when roads deteriorate drastically.
Palestinians have been prohibited sea and air transport since 1967. The West Bank, being landlocked, must rely on Israel and Israeli agents for sea transport. The only airport in the West Bank, located on the outskirts of Jerusalem, has been closed to Palestinian use since 1967. Thus, since 1967, air transport for the West Bank population has been available only through Ben-Gurion Airport, or through Amman Airport for passenger travel only.
Buses and taxis which are owned and operated by private enterprises and individuals are the only official public transportation. Bus services between the main urban centers and smaller towns and villages are often supplemented by a shared-taxi service. The increasing demand for public transportation, especially in the remote rural areas and the densely populated urban centers, is sometimes met by private cars, vans, and pick¬ups, which operate without a permit.
If peace is achieved in the near future, the demand for transportation will increase substantially, due to the removal of the restrictions on economic development in general, and on the freedom of movement and travel in particular, which have been imposed by the occupation. Therefore priorities should be established for developing a Palestinian transportation system, and plans should be prepared accordingly to achieve the required development. The plans should include:

*        Upgrading the feeder roads in Palestinian towns and villages which have been totally neglected.

*        Constructing a main road corridor to connect the West Bank and the Gaza Strip.
Constructing a deep-water port in Gaza, which would be a major asset for the Palestinians, facilitating exports of agricultural or industrial products to the Arab world or other countries. Also, it would attract many vacationers, especially if recreational facilities were developed along the shore of the coastal region. This would have both a social and a political impact.

*        Upgrading the present airport in East Jerusalem, Kalandia Airport, for commercial use and tourism, which would have great repercussions on the local economy.

*        Reconstructing the bridges at the border crossing stations along the Jordan River and upgrading the roads serving these bridges.

*        Providing financial assistance to local bus companies for the replacement of old buses.

The Palestinian transportation system and, in general, the whole economy is dependant upon the Israeli systems of transportation and communications. A cooperation treaty should be worked out to avoid any serious breakdown or interruption of activities in this sector. Cooperation in the area of transportation could be the use of Israeli courier trucks to offset the insufficiency of these in the Territories.
Since the Palestinian economy does not have sufficient human resources, and it will take a long time to establish the necessary institutional structure, considerable external assistance will be needed in expertise as well as finance.

Tourism

Tourism and related services have traditionally constituted a major source of income in the West Bank and Gaza. In 1966 income from tourism and related services reached about seven million Jordanian Dinars, which accounted for about 13 percent of the domestic product of the West Bank. Hotels and other tourism-related businesses generated some 6,000 jobs. About 9S percent of all tourist activities were in and around Jerusalem.
After the Israeli occupation in 1967, the Palestinian tourism sector in general, and the hotel industry in particular, suffered a significant decline in the volume and quality of business. There was increasing competition from the Israeli tourism industry, and physical, institutional, and financial restrictions were imposed on Palestinian tourism which severely constrained its development and growth. Although most of the tourist sites and attractions, especially those with religious and historical significance, are located in the West Bank and East Jerusalem, it is estimated that only about 10 percent of all tourists now stay in Palestinian hotels. This is due to restrictions on movement and travel, the instability of the political and economic situation, the imposition of excessive municipal and government taxes, the absence of official support, international neglect, lack of promotional support from official agencies, the intentional Israeli policy of preventing the development of new Arab tourist projects and hotel construction, and high operating costs.
All in all, the tourism industry has suffered greatly since the occupation and has remained underdeveloped. Strong pressures and profound changes have resulted in the effective separation of Israeli and Palestinian tourism sectors and the marginalization of Palestinian facilities. At the same time Palestinian tourist attractions have been merged with a single unified marketing package to promote tourism to Israel.
At least 15 military orders and regulations related to tourism have been issued since 1967 by the Israeli military authorities, who have assumed responsibility for tourism in the Territories. These orders raised the level of requirements for licensing and functioning of tourist institutions, without availing those institutions of the means necessary for the required improvements. As a result of having quality standards raised, but access to funding sources denied, many tourism firms were confronted with serious problems, such as the often insurmountable challenge of unequal competition with Israeli firms, or demotion to lower tourist grades.
Israeli tourism enterprises are offered long-term loans at concessional interest rates, sometimes with part of the loan being turned into a grant. New Israeli tourism enterprises are eligible for tax exemptions or reductions, especially when they face unexpected troubles. Vigorous government support for Israeli enterprises active, in both Israel and the Territories, has proved to be a major impediment to fair and equitable competition with the Palestinian enterprises, which are totally deprived of such subsidies and assistance.
The problems confronting the Palestinian tourism sector can be summed up as follows:

*        Lack of infrastructure, finance, investment, and marketing opportunities, condemning the local industry to its current state. The paucity of credit and lending facilities works as a disincentive for entrepreneurship.

*        Inadequate human resources. There are not enough graduates, who have specialized in tourism development. The tourism courses at Bethlehem University and the Notre Dame Center should be upgraded to meet the standards of developed countries. A 1986 survey of the educational level of workers in East Jerusalem tourism enterprises, nearly a third of whom were employed in the hotel sector, revealed that 11 percent were illiterate, 26 percent had only elementary school education, 26 percent had intermediate education levels or higher.
An insufficient number of licensed tour guides. There were 202 licensed tour guides in the West Bank prior to 1967 of whom 157 were in East Jerusalem. At present there are only 87 registered licensed guides, a decrease of 55 percent since 1967; but there are 4,300 Israeli licensed guides, of whom some 3,000 are active. The Israeli government has imposed many obstacles due to fear of Palestinian guides as a possible source of unfavourable information. The Israeli government has granted only three new licenses since the occupation. The existing Palestinian tour guides have little access to training opportunities, such as guiding techniques, presentation skills, communications, or first aid.
Local Palestinian sources estimate the number of operational hotels in the West Bank outside East Jerusalem at only six in 1990. With East Jerusalem, the total was 40, well below the total of 59 prior to occupation. Six hotels were operating in the Gaza Strip in the first years of the occupation; but by 1990 only two hotels remained, catering to occasional journalists, United Nations personnel, and others visiting the Gaza Strip for professional purposes.
Developmental strategies should address the immediate need to protect this sector from further deterioration and provide a plan for future dynamic performance. Some of the immediate needs are:

*        Providing adequate financial facilities to the various branches of tourism and, in particular, handicraft industries, hotels and restaurants, transportation enterprises, and tour operators, all of which require substantial additional funding to renovate their premises.

*        Initiating vigorous promotional activities aimed at international tourists, such as pilgrims. These could be facilitated by specialized Palestinian promotional institutions rather than individual tour companies. A Palestinian Tourism Public Information Agency should also be established. Promotional campaigns could include use of leaflets and brochures prepared for each section of the tourist market, Christian, Moslem, and Jewish pilgrims, cultural tourists, leisure tourists, business and conference tourists. In addition, leaflets could provide step-by-step instruction on how and when to organize tours to the Holy Land, sample letters to be sent to travel agents, sample itineraries, lists of travel agents, lists of hotels, etc.
Upgrading the quality of services provided by existing hotels, international standards, in order to enhance their capacity to meet the sudden increase in required services.
If tourism is really to flourish and revenues are to be maximized after the transition period, cooperation between the various branches in both Palestine and Israel will be of crucial importance. This will entail:

*        Freedom for foreign tourists to move between countries with a minimum of bureaucratic formalities.

*        Care that the tourism of one country not interfere with the policy of the other, specifically in the areas of travel taxes and other taxes.

*        Freedom of movement for tourist guides.

*        Preparation of a joint regional transportation and communication scheme to ease travel arrangements by road, rail, air, and sea, geared to creating an impetus for local, regional, and international tourism.

*        Preparation and marketing of joint programs to promote tourism in the area.
Participation in joint programs, seminars, and conferences in the area of training.

Financial Services

One of the first acts of the Israeli authorities after the 1967 war was to close all banks and lending establishments. Between 1967 and 1983 a total of 122 military orders governing monetary activities was issued, subjecting financial activities in the West Bank and Gaza Strip to Israeli rules and regulations.
The only exception to this was the permission granted to the Cairo¬-Amman Bank to reopen its branches in the West Bank in 1985/86, and to the Bank of Palestine in Gaza in 1991. However, the only currency the Bank of Palestine is allowed to deal in is the New Israeli Shekel (NIS) and, due to the high inflation rate in Israel the bank has been unable to attract significant shekel deposits, or to make loans to importers. The Bank of Palestine was allowed to open its headquarters in Gaza City and not its branches in Khan Yunis and Rafah. As a result the bank has remained small, with a low ratio of deposits to capital, only 2.56 as compared to accepted ratios in the U.S. of between 25 and 30; a low lending ratio to its total assets, 36 in 1984; and with cash holdings unusually large, 48 percent compared with 15.5 percent for Bank Hapoalim and other Israeli banks. The Cairo-Amman Bank operates under similar restrictions except for one difference: it can deal in Jordanian Dinars as well as Shekels. It is based in Jordan and its operation in the West Bank is governed by the Bank of Israel as well as by military regulations. Like the Bank of Palestine, the Cairo-Amman Bank has not provided the important service of intermediation between savers and investors.
However, shortly after the start of occupation the Israeli military authorities permitted the opening of branches of Israeli banks in the Territories. In 1986 there were 23 branches of four Israeli banks. These branches banks are not widely used by Palestinians because of a lack of confidence, and because assets held in Israeli banks may be seized by the military authorities. Therefore Palestinians have preferred to use the banking system in Amman.
The tremendous expansion of Israel's financial markets since the occupation has had little effect on the West Bank economy as a whole, and no effect on its industrial sector. As an example of this, there are no West Bank and Gaza Strip firms registered on the Tel-Aviv stock exchange.
Israeli banks do provide Palestinians with two important services, which account for the bulk of their activities in the Territories: they transfer funds and clear cheques for Palestinians employed in Israel, and/ or those who are paid in Shekels; and they provide facilities such as guarantees and letters of credit for Palestinian importers and exporters. These two functions are highly related to the growth of Palestinian employment in Israel and trade between the Territories and Israel.
It is hard to imagine how any structural transformation in the Territories can be effected without the setting up of a Palestinian banking system. The absence of a banking system deprives businesses of a major means of investment and credit. An effective banking system would include these elements:

*        Establishment of a Palestinian monetary system.

*        Creation of separate banking institutions for the agricultural, industrial, housing, and construction sectors. This would be costly and difficult, but it is an appropriate way of financing the Territories' businesses, which tend to be small and privately owned.


*        Assistance given to borrowers to develop a spaced schedule of repayment from their earnings.

*        Establishment of statistical departments or offices and central banks, or a financial authority to handle some of the problems in the area of information on production and trade in the services. At present such information is inadequate for economic analysis and policy formulation.

Technical expertise in the field of bank borrowing and lending is not sufficiently available in the Territories. Palestinians can meet this deficiency by the use of technical assistance services available from neighboring countries such as Israel and Jordan, to train existing staff. It is important to develop an adequate technical cadre, capable of designing feasible programs for the mobilization, allocation, and management of financial resources.

Construction and Engineering

During the first five years of occupation the construction sector in the Territories was stagnant, due mainly to the political uncertainty and unsettled economic conditions that the aftermath of war causes. Construction activity recovered after 1973. A field survey conducted in 1985 showed that 55.7 percent of all construction since 1967 had been financed from abroad. Of this over 62 percent carne from private individual remittances and the rest from the Joint Palestinian-Jordanian Steadfastness Committee and other sources. A significant proportion of the remaining 44 percent of financing came from employment in Israel. By 1985, over 30 percent of the West Bank and 50 percent of the Gaza Strip labor force were employed there.
However, finance is not the only hurdle; a building license must be obtained from the authorities before construction may commence.
The supply of qualified engineers is not a problem, for there is a surplus of engineers in the Occupied Territories, as evidenced by the high rate of unemployment among qualified engineers, about 28 percent in 1990. It is estimated that there is a total of 1,764 engineers located throughout the West Bank. Although there are 170 engineering firms in the West Bank, a majority of engineers are self-employed because of the difficulty of obtaining jobs, and because of the low salary offered, about 210 Jordanian Dinars a month (U.S.$300). As a result many engineers leave the Territories in search of better job opportunities, mainly in the Gulf States. In 1991 there were 680 engineers in the Gaza Strip. However there is a tight market for their services due to high unemployment and low income levels. It is estimated that an average of 65 engineers a year are graduating from local and overseas universities.
Housing banks should be established to mobilize funds, either as grants or guaranteed loans, needed for the implementation of proposed housing programs. The present housing committee should be transferred to such housing banks, which should be encouraged to reach out to the low-income groups in urban and rural areas. In addition, it is important to encourage people to increase their spending on home improvement and construction.
A rural development strategy should be adopted to provide adequate water supply, sanitation, electricity, roads, housing, and the development of larger rural settlements, which would be capable of performing market and service functions through investments in infrastructure, such as wholesale markets, public transportation terminals, storage facilities, and slaughterhouses. This would help to maintain a balanced regional distribution of population, and prevent overcrowding in the cities.
Vocational training schools should be encouraged to upgrade and diversify their curricula to emphasize the construction-related training that will provide the economy with skilled labor. Finally, a serious plan should be implemented to rebuild the Palestinian refugee camps.

Professional Services

Medical:
The ratio of doctors to population in the West Bank and Gaza has improved in recent years; but the number of hospital beds has declined. In the Gaza Strip particularly there is a severe shortage of hospitals. Dental services in the Territories are inadequate and there are no specialized services for the local population.
Insurance: Insurance services are limited in the West Bank and Gaza.
Most insurance agents represent Israeli firms, except for two companies, The Arab Insurance Establishment and The Jerusalem Insurance Agency. Automobile insurance accounts for more than 80 percent of all insurance in the Territories, and all premiums are invested in Israel.
Accountancy: These services increased during the 1970s, due to the stepping up of Israeli tax collection. By 1990, there were 23 accounting offices in the Territories licensed by the Israeli authorities, and many others that were not.
Other: Other categories of business services such as management consultancy, product design, marketing, and advertising services are not available in the Territories, with the exception of Birzeit University Consultation Technical Unit. Another exception, a newly established firm in Ramallah, is offering services in product design, packaging, and marketing. This firm employs 10 specialists. All in all, this area of business services is very limited in the Territories.

Public Administration

Legal System:
The local law in the West Bank is based on Ottoman, British Mandatory, and Jordanian legislation, and when these laws (\re not sufficient to meet the needs and aims of the occupation, military orders are introduced to augment them. In the Gaza Strip, the same is true except that Egyptian legislation applies instead of Jordanian.
Chambers of Commerce: Chambers of commerce in the West Bank were established prior to 1967 and continue to function, although their activities have been curtailed by military restrictions. There are chambers of commerce in all of the major towns of the West Bank, as well as in East Jerusalem. In the Gaza Strip, the chamber of commerce was established in 1954 according to Egyptian rules, and by 1967, the other major towns in the Gaza Strip had established chambers of commerce.
Since 1967, the role and functions of chambers of commerce have been reduced significantly and are now confined to local administrative and clerical tasks. West Bank chambers of commerce have been empowered by the relevant Jordanian authorities to perform preliminary services related to passport and identity card procurement procedures. The chambers are also empowered by the Jordanian authorities with the crucial responsibility of issuance of certificates of origin for industrial goods destined for export to or through Jordan. Their authority in this respect has been recently reconfirmed as a result of the decision of the European Community to accept chambers of commerce as qualified bodies for issuing certificates of origin and ensuring the necessary administrative arrangements for exports to the Community.
Gaza Strip chambers of commerce perform similar functions, though primarily with regard to relations with Egypt. They issue and renew refugee travel documents and identity papers on behalf of the Egyptian authorities and are an accepted authority for the issuance of certificates of origin for agricultural exports. However, the potential role of Gaza Strip chambers of commerce has been largely ignored by the occupation authorities, which restrict the chambers' activity and have not allowed expansion of membership. The chambers face serious difficulties in financing their limited activities, with clerical fees as their only source of income.

Municipalities

The West Bank contains 25 towns, but the fact of a town's municipal status does not necessarily indicate its size. There are 25 municipalities and a number of village councils in the larger villages of the West Bank. In the Gaza Strip smaller villages organize themselves around committees made up of representatives of the various clans in each village. But since 1967, municipal councils have been appointed in the major population centers, including Khan Yunis, Deir el-Balah, and Rafah. Eight village councils have also been appointed in the Territories' smaller communities. In addition, local committees have been formed in three Gaza Strip refugee camps.

Conclusion (Future Perspectives)

A key component of the overall infrastructure of a country is adequate services in such areas as transportation, movement of goods, communication, finance, trade, insurance, and public administration. Unfortunately, these services are underdeveloped in the Palestinian economy. A future Palestinian central authority will have to implement a major transformation of these services.
Palestinians should concentrate on the four main categories of traded services that are important for boosting the Palestinian economy and are non-existent at present. They are:

*        Services which may be provided across national frontiers by 'residents' to 'non-residents' through direct export and import such as air and sea transportation, passenger transportation, international reinsurance, communications and consultancy, and engineering services.

*        Services which are provided within national boundaries, but to non¬residents, of which tourism, the provision of airport, seaport services, internal transportation of foreign passengers by local airlines, and expenditures abroad by diplomatic missions and military personnel, are among the more prominent examples.

*        Services which are provided through contractual relations. These may take the form of partnership arrangements, or license or franchise relationships, and may involve the use of a particular company's name or trade mark, and result in a sharing of earnings generated by these firms, or an obligation in the form of royalties, fees or some other remuneration.

*        Services which are provided through foreign affiliates. This is the case with services, which by their nature are either not transportable and/ or face trade-restricting measures, and have, therefore, to be provided in lieu of their consumption, such as most aspects of commercial banking, and equipment leasing services. Included also are services provided through local agencies, established in support of export opportunities, such as press agencies, supervising offices of construction and engineering firms, and representative offices of branches.








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