Select Committee on International Development Second Report

4 The Palestinian economy

76. The collapse of the Palestinian economy has been the major cause of Palestinian suffering. Only donor support has prevented a humanitarian disaster. The closures, which have largely been responsible for economic collapse, have been justified as security measures, but in reality they have been a mechanism to put pressure on the Palestinians by crippling the economy.[148] If Israel's objective were the complete strangulation of the Palestinian economy it could be achieved. But Israel seems to have adopted a calibrated approach, using the Palestinian economy as a lever through which it can exert pressure on the Palestinians.

A crushed economy and rising poverty

77. The economy has declined dramatically since the start of the intifada and the Israeli military re-occupation. The World Bank representative in Jerusalem told us that over the last three years, GDP had declined by about one third. But he went on to say that when remittances from abroad are included, then the economy has more or less halved in size over a three-year period. Total investment over the same period has declined by 90% and imports and exports contracted by about a third.[149] To further compound matters, during this period of economic collapse, the population has grown by 9%.[150] The World Bank report states that:

"Using a poverty line of US$2.1 per day, the World Bank estimated that 21 % of the Palestinian population were poor on the eve of the intifada, a number that increased to about 60% by December 2002. Accounting for population growth, the numbers that are poor have tripled, from 650,000 to 1.9 million. The poor are also getting poorer."[151]

We know of no examples where this level of economic decline has taken place without the complete dissolution of the governmental apparatus, at least certainly not in a middle-income economy such as West Bank and Gaza.

78. There is no starvation or absolute poverty in the OPTs, but rather a serious decline in living standards which, in the case of the most vulnerable, translates into malnutrition. Palestinian coping strategies have prevented the onset of absolute poverty and allowed a reasonable number of people to work and life to go on, though hardly normally. What, however, makes the poverty so unpalatable is the level of deprivation vis a vis Israel, and the awareness that it is not the result of a natural calamity but of deliberate actions on the part of the GOI. The extent to which this is a man-made situation is made strikingly clear by the World Bank's analysis that removing the "access controls" imposed by the Israelis would increase the size of the economy by 21% and reduce the rate of poverty by 15%, whereas a doubling of development assistance would bring only a 7% reduction in the rate of poverty.[152] This is not therefore a situation which donor assistance can solve. The lifting of closures would, in the World Bank's view, allow the economy to rebound quickly in income terms but not in capital terms. There would therefore be a role for donors to help replace assets, which had been lost.

Workers in Israel, remittances and unemployment

79. Before the intifada, one in five Palestinian workers (totalling 128,000 people) found employment in Israel and in Israeli settlements.[153] Remittances from these workers were estimated as having an annual value of $1092 million.[154] Work permits required for Palestinians to work in Israel were suspended during the early stages of the military re-occupation of the West Bank and Gaza.[155] Curfews have kept workers housebound while, outside of the curfews, the network of fixed and temporary checkpoints has made movement both between the OPT and Israel and within the OPT difficult. So, despite the re-issue of some permits, it has been impossible for workers to reach former places of employment. The loss of jobs in Israel has had dramatic consequences for what was not an industrial, but a remittance-dependent economy. At the end of 2002, 92,000 Palestinians out of the 128,000 employed in Israel before the intifada and reoccupation had lost their jobs.[156] Demand for Palestinian workers in Israel has dwindled in the current security climate. An influx of foreign workers has filled the gap.[157]

80. Unemployment has been made worse by the impact of closure and curfew on business. Tourism, which once accounted for 11% of the Palestinian GDP, has come to a halt.[158] The World Bank reported that by the third quarter of 2002 "51,000 of the 327,000 eve-of-intifada jobs had been lost in the West Bank (16%) and 54,000 of the 164,000 in Gaza (33%)".[159] As a result, the number of people dependent on one salary has risen significantly.[160] In a situation of high unemployment, many have tried to turn to private enterprise but have difficulty in a market where there is a surplus of goods but a shortage of money with which to buy them.[161] Some people have returned to agriculture in the absence of other employment. But in the current context of movement restriction, barrier building and settlement expansion, agriculture is not a viable option.[162] The Palestinian Economic Council for Development and Reconstruction estimates that 85% of the workforce is now unemployed.[163]

Internal movement of goods

Back-to-back transfer:

81. Movement of goods in and out of the OPT depends on a system known as "back-to-back" transfer. Israelis have security concerns about the movement of Palestinian goods into Israel, which they fear might be used for the transport of weapons or terrorists. To deal with this risk, Israel has imposed a system of movement restrictions, permit requirements and vehicle licensing on the Palestinian transport of goods. The system is complex and its implementation can be unpredictable. For those who cannot obtain permits, the alternative is to unload lorries at checkpoints and reload the contents into permit-carrying vehicles. For some time the back-to-back system has been in place for transportation of non-humanitarian[164] goods across international borders and from Gaza to Israel.[165] In May 2002, an extension of the "back-to-back" system was announced to eight checkpoint locations near major West Bank cities under the supervision of the IDF.[166] Even a short journey between West Bank towns is now likely to require the use of back-to-back transfers. In theory, lorries carrying foodstuffs within the OPT are not subjected to the back-to-back procedure. However, OCHA staff have witnessed incidents where lorries carrying sugar have been made to unload and re-load.

82. The back-to-back system requires the use of two and sometimes three vehicles; it therefore substantially raises transport equipment and labour costs, which merchants have to pay. In most cases, hire of Israeli vehicles is necessary (because of the restrictions on movement of Palestinian licensed vehicles) and these are more expensive.[167] Costs are also incurred through loading and unloading as merchants have to pay to use fork-lift lorries and other equipment. Goods often suffer damage during the loading and unloading process. Agricultural and other perishable goods are frequently spoiled because of long waiting times at checkpoints, exposure to the sun or through damage during the process of security checks.[168]

83. We saw the back-to-back system in operation at the Awarta checkpoint near Nablus.[169] Because of the time spent waiting at checkpoints, it can take up to six hours for goods to travel the 30 kilometres between Nablus and Ramallah. In the past, lorries had been able to make up to five trips per day but this is now out of the question. At Awarta the transfer of goods from one truck to another was completely ignored by the IDF soldiers. OCHA staff told us that the IDF generally check the contents of truck to ensure the goods carried correspond to the goods allowed on the permit. OCHA staff had not seen IDF soldiers monitoring the transfer from one truck to another, nor were security checks carried out after the transfer. There seems to be little consistency in the degree to which security checks are made during the back-to-back process. Our visit to Awarta demonstrated clearly to us that the restrictions placed on the internal movement of goods within the OPT were not always justified by security considerations. We raised the issue with the Israeli Ministry of Foreign Affairs and with the Coordinator for Government Activities in the Territories (COGAT). Neither explained the logic of the system. It is hard to avoid the conclusion that there is a deliberate Israeli strategy of putting the lives of ordinary Palestinians under stress as part of a strategy to bringing the population to heel. The West Bank back-to-back system, operating as we saw it, is not providing increased security to Israel or to settlers living in OPT. It merely serves to increase Palestinian poverty and suffering by strangling the local economy.

External trade

84. External trade used to provide a substantial contribution to the Palestinian economy.[170] Much of this trade took place with Israel. In 1998 for example, total Palestinian imports from Israel were valued at US$2,374 million while exports to Israel were valued at US$673 million in the same year.[171] Between September 2000 and December 2002, Palestinian exports declined by 29% and imports contracted by 36%.[172] The PA's Negotiation Affairs Department has stressed that these declines are directly related to closure:

"Since September 2000, Palestinian commercial operators have not been able to import input material and export products in a normal feasible fashion. The working hours, procedures, security checks have been interrupted and changed regularly in a way that disturbs the free flow of goods. An average of 25 lorries of imports used to be cleared daily before the Intifada now an average of 7 trucks is processed daily although there are other trucks waiting".[173]

The practicalities of export mean that moving goods out of the OPT is extremely difficult. Export of perishable goods has been worse hit because it spoils while held up at checkpoints.

85. The structure of the Palestinian economy has been shaped by the Oslo process and the dependence on Israel that it helped entrench.[174] In the current situation of closure and re-occupation, trade is difficult and sometimes impossible. Israel and the PA have trade agreements with the European Union under the Euro-Mediterranean Partnership, whose principal financial instrument is the MEDA programme. At the heart of the Euro-Mediterranean Partnership is the plan to create a free trade area between the EU and its Mediterranean partners.[175] The MEDA programme is mainly made up of grants, but also includes the financial capital and interest subsidies related to loans provided by the European Investment Bank. Under the MEDA programme, West Bank and Gaza have been granted a total of €307.7 million: €111 million under MEDA 1 (1995-1999) and €196.7 million under MEDA 2 (2000-2002).[176]

86. Since 1975 Israel has enjoyed preferential trade terms with Europe under various EC-Israel Trade Agreements. Provisions of a 1986 Council Regulation also enable Palestinian enterprises in the West Bank, East Jerusalem and the Gaza Strip to participate in preferential trade with the Community as does the EC-PLO Interim Association Agreement of 1997.[177] The PA has undertaken to conclude trade agreements with Jordan, Egypt, and other Arab and non-Arab states.[178] But the PA's lack of control over its borders makes it vulnerable to Israeli closures and unable to offer certainty to its commercial trading partners. The PA argues that Israeli administrative, logistical and security measures have acted as an impediment, preventing the Palestinian private sector from benefiting from the Interim Association Agreement.[179] The European Commission described the Interim Trade Association Agreement as "dormant" but noted that attempts were being made to revive it.[180]

87. Movement restrictions are a serious obstacle to trade. They impede and delay the transport of Palestinian goods from the point of production to the 1967 border with Israel, and at the 1967 border, and the movement restrictions damage perishable goods and make their export to Israel very difficult. The IMF told us that they believed the EU should put pressure on Israel to enable and facilitate the Palestinian export of perishable products such as cut flowers and strawberries to Europe. In addition, Palestinian imports from and exports to places outside Israel have to pass through Israel to Israeli ports and airports where they are subjected to further bureaucracy, examination and delay. The Palestinian economy is therefore, quite literally, a siege economy capable of being held to ransom by Israel. The EU sought to overcome this problem by building a seaport and airport in Gaza but both were destroyed by the Israeli Defence Force. Movement restrictions have caused an unacceptable situation whereby an EU trade agreement is obstructed by a party (Israel) which itself benefits from preferential EU trade terms. We asked Hilary Benn MP whether there was scope within the context of the EU trade agreement with Israel, to try to ensure better access for Palestinian products in the European market. He replied:

"People have certainly looked at the EU Association Agreement on the question of leverage and some have argued that this should be used in order to try and add political pressure to the process. There is not a consensus of view across the EU as far as that is concerned because I think people have formed the view that the other forms of political dialogue and discussion are the ones that we should pursue in order to try and build confidence and encourage those both in Israel and on the Palestinian side, in order to make greater progress towards a political solution…. whether there is potential within the agreement to provide greater access for Palestinian goods I do not know".[181]

88. Trade agreements are usually based on the principle of reciprocity: that market access, freedom of movement, and tariff and duty regimes applied by one state or authority normally has to be applied even-handedly and in the same way by all participants in a regional trade agreement. Unfortunately, Israel's restrictions on the movement of Palestinian goods, its destruction of Palestinian infrastructure and its total control of the OPTs' borders are denying Palestinian exporters access to EU markets. We therefore urge the UK Government to propose to the EU Council of Trade Ministers that Israel's preferential terms of trade with the EU be suspended until it lifts the movement restrictions which it has placed on Palestinian trade. We recognise that EU exports to Israel, which are greater in value than EU imports from Israel, might suffer retaliatory action, but we do not believe that the EU's short-term economic self-interest with one trading partner should take precedence over a direct challenge to its trade policy in the region and its trade obligations to the Palestinian Authority.

Private sector development

89. The Palestinian private sector has absorbed most of the shock to the economy. Half of private sector workforce has been laid off and private agricultural and commercial assets have suffered over half of all physical damage.[182] Industrial projects to the value of $450 million which were due to start in 2001 have been frozen. The foreign investment share was $49.5 million, though investors such as Japanese tobacco and Nestlé have since withdrawn.[183] Christian Aid has pointed to the PA's partial responsibility for economic decline: "The lack of a transparent regulatory system, including commercial law, has reduced the willingness of private sector entrepreneurs to invest in the OPT".[184] Incentive for private investment is low because of perceived risks, which include damage caused by the conflict, inability to meet export orders on time due to closure, erratic availability of imports, inability of the PA to enforce property rights, and low returns on capital because of depressed domestic demand.

90. We visited an UNRWA microfinance project in Nablus which provided loans to small businesses. The value of these loans had dropped to a low of under $1 million during the intifada and re-occupation, rising to $2.5million at the height of the Roadmap process in the second quarter of 2003. These figures provided a clear illustration of how quickly the economy responds to political developments and gives some idea of the size of potential for a "peace dividend". As traditional modes of subsistence such as agriculture become less viable, more Palestinians are turning to small private enterprise. But with rising poverty there is now a situation where there is a supply surplus and a demand shortage.

91. The imbalance in supply and demand in the Palestinian local market led us to question whether donors could increase demand by greater local sourcing of humanitarian goods. Oil, for example, is one of the foods provided by UNRWA and WFP. We were told by Dr Nabil al Jarara of Hebron University, Save the Children and others, that most of the oil distributed is purchased outside the Occupied Palestinian Territories because it is cheaper there - 5 to 6 NIS per litre compared with 11 NIS per litre within the OPTs. The WFP said 2002 was a good year for Palestinian olive oil, producing 35,000 metric tonnes, but two-thirds of the production remained unsold. We do not understand why the laws of supply and demand do not appear to work, although we were told that Palestinian labour costs are high. However, purchasing all the locally produced oil, before importing it, would boost the Palestinian economy and reduce, to an extent, the need for food aid. While we welcome and support UNRWA's microfinance project it seems perverse for the agency to be investing donors' money in boosting some small Palestinian businesses through microfinance while its food purchasing arm is at the same time undermining the viability of small Palestinian farmers and food processors by its purchasing decisions.

92. We were pleased to learn that at the end of 2002 WFP initiated, with the financial support of the EC and in close co-ordination with the Ministry of Agriculture, a programme of purchase of 272 metric tonnes of olive oil produced in the northern part of the West Bank. For the first time it has been successful in transporting and distributing part of this consignment to beneficiaries in the Gaza Strip and has plans for a new phase of the project involving the purchase of 450 metric tonnes, although we note that this increase in local purchasing will absorb only 2% of last year's unsold production. Far more could and should be done by donors to use their enormous purchasing power which, currently accounts for a significant percentage of Palestinian GNI, to stimulate the Palestinian economy instead of being used to pay the price of not creating opportunities for Palestinian entrepreneurs to sell their produce. We believe that a more viable Palestinian private sector would do something to alleviate hardship and would tend to help, rather than hinder the peace process. UNRWA locally sources a limited amount of the olive oil that it provides in food aid.[185] We discussed this issue with UNRWA who highlighted the dilemma that aid agencies face given their responsibilities to source products at the competitive rates to maximise the number of people to whom they can provide assistance.[186]

148   Meeting with Israeli Ministry of Foreign Affairs, Jerusalem, 23 October 2003, Meeting with World Bank representative, Jerusalem 21 October 2003. See also Christian Aid, Op. Cit. January 2003 Back

149   World Bank, Op. Cit. May 2003, page xi Back

150   The Economy of Occupied Palestinian Territory, Palestinian National Authority, Ministry of Economy and Trade, October 2003, page 3 (copy placed in library) Back

151   World Bank, Op. Cit. May 2003, Op. Cit. page xv Back

152   World Bank, Op. Cit. May 2003 page xv Back

153   Ibid. page 3 Back

154   Ev 216 Back

155   World Bank, Op. Cit. May 2003, page 3 Back

156   Q 79 Back

157   Q 19 and World Bank, Op. Cit. May 2003, page 3 Back

158   Ev 211. See also Ev 238 and Ev 258 Back

159   World Bank, Op. Cit. May 2003, page 13 Back

160   World Bank, Op. Cit. May 2003 Back

161   Meeting with UNRWA Micro-Finance project, Nablus, 22 October 2003 Back

162   Q 79 Back

163   Ev 207 Back

164   There is no fixed or consistent policy regarding the classification of goods as humanitarian or otherwise. 'Humanitarian' goods are most likely to be those transported by 'humanitarian' agencies, but food and medicine can be considered to be 'humanitarian'. However, both food and medicine are regularly subject to searches. Policy is largely dependent on the soldiers doing the searching. Back

165   Palestinian National Authority, Ministry of Economy and Trade, Op. Cit. October 2003, page 12 Back

166   World Bank, Op. Cit. May 2003, page 1 Back

167   Ev 211 Back

168   Palestinian National Authority, Ministry of Economy and Trade, Op. Cit. October 2003, page 12 Back

169   22 October 2003 Back

170   See Ev 211 Back

171   Christian Aid. Op. Cit. January 2003 Back

172   World Bank, Op. Cit. May 2003, page 16  Back

173   The need for economic facilitation by Israel, PLO Negotiation Affairs Dept, Sept 2002 (copy placed in library) Back

174   Ev 244-5 Back

175   Q 75 Back

176   Europa, Europe, Aid, The Mediterranean and the Middle East: Back

177   Which include Egypt, Jordan, Lebanon, Morocco, Syria, Tunisia, Turkey and the Palestinian Authority. See: Back

178   Palestinian National Authority, Ministry of Economy and Trade, Op. Cit. October 2003, page 12 Back

179   Ibid. Back

180   Q 75 Back

181   Q 146 Back

182   World Bank, Op Cit. May 2003, page xii Back

183   Ev 220-1 Back

184   Christian Aid, Op Cit. January 2003 Back

185   Meeting with UNRWA Micro-Finance project, Nablus, 22 October 2003 Back

186   Meeting with UNRWA Micro-Finance project, Nablus, 22 October 2003 Back

previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2004
Prepared 5 February 2004