The business environment in the Palestinian territories has been subject to significant shifts in the legal and regulatory frameworks during the past decade, i.e., following the inception of the Palestinian Authority (PA) in 1994. Following the outbreak of the intifada in September 2000, it witnessed even more drastic transformations which reflected heavily on investment, competitiveness of firms, the labor market, and living standards.
The magnitude and predisposing causes for the predicament of the Palestinian economy and business sector have been extensively assessed by many local and international organizations, such as the World Bank and the International Monetary Fund (IMF). In addition to inherent constraints relating to scarcity of natural resources and deformations in the educational and training systems, the Palestinian economy and private sector have been severely influenced by a wide range of policies and measures taken by the Israeli authorities, including those connected with the ongoing political and military confrontations. It is obvious that Israeli measures and sanctions such as curfews, sieges and severe restrictions on mobility have all led to devastating consequences on the economic and business sectors.
Notwithstanding the enormous effects of Israeli policies and sanctions, one should still admit that the course of the Palestinian economy and private sector during the past 11 years has also been heavily influenced by the performance of PA-affiliated economic institutions.

Objectives

The nature and impact of changes in the PA's institutional frameworks and economic policies have been extensively evaluated in a great number of reports, especially those published by the resident World Bank mission. The present report, however, is focused exclusively on monitoring the perceptions of the business community pertaining to the ongoing shifts in the regulatory and institutional frameworks, especially with regard to major governance elements.

Methodological Remarks

The results of the abovementioned study are based on a field survey involving a sample of 750 firms - 450 from the West Bank and 300 from Gaza Strip. Respondents included only owners or senior executives in sampled firms. The field work was conducted in April 2005.

Survey Results

1. The PA's commitment to market economy principles:
One of the basic questions on many people's minds is the degree to which the PA is committed to a market economy in its policies. While numerous top Palestinian leaders have repeatedly reiterated their commitment to market economy principles, the PA has systematically engaged in direct commercial activities (e.g., fuel and cement) ever since it was established in 1994. Furthermore, the PA has consistently embarked on excessively interventionist policies, which are widely viewed as gross violations of a modern market economy. Sampled business leaders expressed the following views on these issues:
* The impact of the PA's commercial activities on the interests of citizens and business firms is viewed negatively by 49 percent of sampled respondents, as against 43 percent who view it positively.
* Contrary to frequent promises, 46 percent of sampled respondents did not feel that the PA was actually withdrawing from direct commercial activities; 17 percent thought otherwise.
* Thirty-three percent of business leaders characterized the overall PA's interaction with private sector firms in a positive way, whereas 27 percent gave a negative rating, and 35 percent thought it was "fair."
2. Public sector workforce and recruitment policies:
* The recruitment procedures and size of the public sector workforce have had considerable impact on the business sector during the past 11 years. Viewed from a private sector perspective, the PA's workforce suffers from deep structural problems, as indicated in the following data.
* In terms of overall size, 50 percent of sampled firms believe that the public sector workforce is too large, whereas only 27 percent think it is reasonable.
* The PA's hiring policies, as they were in the middle 1990s, were rated negatively by 37 percent, as compared with 30 percent who expressed a positive rating.
* Ten years later (April 2005), the PA's recruitment policies became worse (25 percent) or remained just as bad (35 percent).
* Perceptions regarding the relative weight of the different credentials for securing a job reflect profound distortions in the recruitment process. "Partisan loyalties" was viewed as the most important credential, followed respectively by: personal and family relations, political track record of applicants and, lastly, their academic and professional qualifications.
3. Quality of governance:
The quality of governance in public-sector institutions, especially those bearing on the investment climate, has attracted considerable attention during the past 10 years. The following results are indicative of deep concern on the side of the private sector.
* Transparency in economic public sector institutions is described as "good" by 18 percent of the sample, whereas 42 percent think it is "bad."
* Forty-eight percent of the sample said that economic public sector institutions do not have clear missions and functions, whereas 16 percent thought they did.
* The level of coordination between economic public sector institutions was described as "good" by 16 percent of the sample, whereas it was rated as "bad" by 48 percent.
4. Corruption:
The term "corruption" was loosely used during the past ten years, and it often involved a widely heterogeneous mix of indicators. The following are the perceptions of leaders in the private sector vis-à-vis some forms of mismanagement and irregularities which bear heavily on their interests.
* Do you feel that some firms or businessmen obtain favors and privileges from public sector institutions on account of personal, family or political connections? In response to this question, 77 percent said "yes" and 16 percent said "no."
* The adverse impact of favoritism on the business environment is rated as serious or very serious by 79 percent of the sample.
* In response to a direct question on the prevalence of bribery as means employed by firms for procuring services and other privileges from public sector institutions: 39 percent thought it was widely spread, 34 percent believed it existed on a limited scale, and 18 percent thought it was not used.

5. Performance of economic public sector institutions:
* The performance of economic public sector institutions has been widely viewed as a major obstacle to an enabling investment environment. The sample business leaders were asked to rate the performance of specific institutions (8 ministries and autonomous agencies). An overall positive rating "good" or "very good" was reported by 36 percent of the sample, whereas 46 percent gave a negative rating.
* To the question of how optimistic were the respondents regarding the prospects of improvement in the performance of economic public sector institutions, 32 percent were optimistic, 35 percent were cautiously optimistic, while 16 percent thought that they did not expect any improvement.
6. Performance of the judiciary system in settling commercial disputes:
The performance of the judiciary system in settling commercial disputes and fostering the rule of law is widely viewed as one of the most important obstacles for developing a healthy investment environment. Given the turbulent political and regulatory circumstances in the Palestinian territories, the role of the judiciary system becomes even more critical. This role has been assessed as follows:
* "Speed of settling commercial disputes" was rated negatively by 62 percent of the sample, whereas 33 percent gave a positive rating.
* Seventy-four percent of the sample gave a negative rating for the "implementation of court resolutions," as compared to 18 percent who gave positive rating.
7. Security of persons and property:
Taking into account the current situation, how do you rate the performance of the PA in providing security to ordinary citizens and their property?
Only 26 percent of the sample gave a positive rating for the performance of the PA security system in this connection, whereas 73 percent gave a negative response.
8. The Palestinian Legislative Council (PLC):
The performance of the PLC in relation to economic and private sector issues has been assessed as follows:
% of sampled businessmen
Positive Negative
Promulgating growth enabling laws 38 56
Overlooking the enforcement of laws 35 64
Monitoring the PA's economic performance 25 68
9. The performance of non-governmental organizations:
The business environment in Palestine is particularly sensitive to the performance of certain non-governmental organizations. The following is a summary of perceptions as expressed by sampled business leaders.

% of sampled businessmen
Positive Negative
Private sector institutions 58 38
Commercial banks 57 38
Local universities 63 32
Labor unions 41 55
10. Optimism about the future:
Despite expressing noticeably negative views relative on nearly all assessment indicators, sampled business leaders seemed to be somewhat optimistic about the future. Such perceptions were manifested in the following indicators:
* In response to a direct question about how optimistic they were relative to the investment environment in Palestine, 33 percent were "optimistic" or "cautiously optimistic." Only 13 percent of respondents were pessimistic.
* In response to the question What are your plans for your firm with regard to production operations? 56 percent of sampled firms intended to expand production, while 10 percent expected to reduce it, and 18 percent expressed intentions to stop production or go into another business.

Concluding Remarks

The Palestinian business community seems to have been deeply conscious of the potential economic dividends of the peace process which was launched in 1993. But economic transformations following the establishment of the Palestinian Authority in 1994 were adversely influenced by gross distortions in the governance structure of the economics-related public sector institutions. Despite repeated proclamations concerning privatization, transparency, the rule of law, the adoption of prudent hiring policies, and the institution of overall reforms, the private sector representatives seem to be still unsatisfied with the pace and direction of the reform process.
The quiet and democratic transition of authority earlier this year seems to have rekindled hope for accelerating a more enabling investment environment. Such hopes, however, remain heavily contingent on fostering a more substantive reform process on one hand, and on dismantling the enormous web of Israeli sanctions and constraints bearing on the business environment on the other hand. <