Twenty-seven months after the outbreak of the intifada, 60 percent of the population of the West Bank and Gaza live under a poverty line of US$2 per day. The numbers of the poor have tripled from 637,000 in September 2000 to nearly 2 million today.
The World Bank’s new report, “Two Years of Intifada, Closures and Palestinian Economic Crisis”, surveys the economic and social damage caused by the current conflict and proposes measures to help stabilize the ailing Palestinian economy. A first draft was presented in February 2003 to the recent meeting in London of the Ad Hoc Liaison Committee which is comprised of representatives from Canada, the European Union, Israel, Norway, the Palestinian Authority, Russia, Saudi Arabia and the United States.
All Palestinian economic indicators continued their dramatic decline through the second year of the intifada. Gross national income per capita has fallen to nearly half of what it was two years ago. More than 50 percent of the work force is unemployed. Physical damage resulting from the conflict amounted to US$728 million by the end of August 2002. Between June 2000 and June 2002, Palestinian exports declined by almost a half, and imports by a third. Investment shrunk from an estimated US$1.5 billion in 1999 to a mere US$140 million last year. Overall national income losses in just over two years have reached US$5.4 billion ¯ the equivalent of one full year of national income prior to the intifada.
The Palestinian Authority’s (PA) financial situation remains precarious. As a result of rising unemployment, reduced demand and the Government of Israel’s withholding of taxes collected on the PA’s behalf, monthly revenues dropped from US$91 million in late 2000 to US$19 million today. A collapse of the PA has been avoided by donor budget support, which totals US$1.1 billion over the last two years. Seventy-five percent of this has come from Arab countries. The recent resumption of revenue transfer by the Government of Israel is a positive development.
With unemployment rising and incomes collapsing, over half a million Palestinians in this formerly middle-income economy are now fully dependent on food aid. Per capita food consumption has declined by 30 percent in the past two years, and the incidence of severe malnutrition recently reported in Gaza by Johns Hopkins University is equivalent to levels found in some of the poorer sub-Saharan countries.
The proximate cause of Palestinian economic crisis is closure ¯ the imposition by the Government of Israel (GOI) of restrictions on the movement of Palestinian people and goods across borders and within the West Bank and Gaza. Closure is viewed by GOI as regrettable but necessary in order to protect Israeli citizens from violent attacks.
“Two Years of Intifada, Closures and Palestinian Economic Crisis” identifies three main reasons why the battered economy has not collapsed. The most important is the cohesion and resilience of Palestinian society. Lending and sharing are widespread and families for the most part remain functional, despite economic hardship and severe disruptions to daily life. Another critical factor has been the continued delivery of basic services by the PA. Third, donor support has been essential ¯ particularly budget support to the PA, which employs one-third of those still working and pays half of all wages earned in the West Bank and Gaza. Donor disbursements as a whole doubled from pre-intifada levels to US$929 million in 2001, and increased again in 2002 to just over US$1 billion.
The report warns that confrontation and closures will continue to throttle the Palestinian economy, with each passing month making ultimate recovery more difficult.
“Continued high levels of donor assistance are vital, but they cannot prevent further economic decline. Under closure, every additional billion in foreign aid will only pull down the poverty rate by about 6 percentage points. This is not a crisis that can be resolved with money alone,” says Nigel Roberts, World Bank Country Director for West Bank and Gaza.
“An agreed framework for political progress remains indispensable to reestablish the conditions for the resumption of economic and social development in both Israel and the Palestinian territories,” adds Roberts. “This poses many challenges to the three main groups: the Palestinian Authority, the donors, and the Government of Israel.”
The report underlines the need for the Palestinian Authority to develop a National Emergency Plan to cope with further economic hardships in 2002, particularly in light of the possibility of regional war. The PA is commended for its early successes in reforming Palestinian governance but urged to go further. The report also points out that there is no way back from reform, and that the legitimacy of the PA is now tied to the successful delivery of the reform program.
The report also calls on donors to disburse a minimum of US$1.1 billion in 2003, and to give top priority to budget support and humanitarian/welfare assistance. Comparing different assistance instruments, the report finds that budget support is more efficient on welfare grounds than food aid or employment schemes, and for this reason expresses great concern at recent signs that Arab and European budget support is less than secure for 2003. Donors are also urged not to abandon their medium-term development programs, and to continue their commitment to the creation of the institutions and infrastructure of a future state.
The report reflects donor concerns at the need for GOI to do more to facilitate the work of humanitarian agencies, and to permit the free movement of Palestinian officials vital to the reform process. It also underlines that closure remains by far the most significant factor affecting the Palestinian economy, and the Government of Israel is urged to ease closure in ways compatible with its security requirements. In this regard, the Bank welcomes GOI’s decision to resume the transfer of PA tax revenues and to issue more permits for Palestinians to work in Israel as positive steps.
To access the full report (46K PDF) click here.