The perpetual strife afflicting the Palestinian Territories has taken its toll on the Palestinian population, whose aspirations for a viable state have withered away over the past 60 years of conflict with Israel. The consequences of the conflict are evident to any objective observer, including the diminishing area of any future Palestinian state due to settlement expansions, an increasing number of Palestinian civilians who have been killed or injured and the damage to Palestinian social fabric punctuated by the schism of political power and the recent Israeli offensive on Gaza.
Perhaps the most nuanced aspect of Palestinian suffering is the state of the Palestinian economy. The systemic economic hindrances imposed upon the Palestinian economy by the Israeli government are considered by most experts to be the primary impediment to allowing the Palestinian economy to reach its full potential. The World Bank (WB) identifies three principal “paralytic effects” of Israeli policies on the Palestinian economy: access to economies of scale, access to natural resources and access to an investment horizon. Moreover, the bank also cites physical impediments such as road blocks, closures, earth mounds and the ongoing construction of the separation barrier deemed illegal under international law as a “paralysis confronting the Palestinian economy.”
Further exacerbating this paralysis is the political and economic division of the West Bank and the Gaza Strip. The lack of a contiguous Palestinian land mass and the Israeli economic blockade of the Gaza Strip have resulted in the divergence of the West Bank and Gaza in terms of the effects on total GDP, which stood at an estimated $4.14 billion in 2007, according to the Palestinian Central Bureau of Statistics (PCBS). The PCBS also noted that Palestine’s total GDP for 2008 is expected to comprise 70 percent of that in 1999 (prior to the second intifada). Per capita GDP fell nearly 30 percent from its height of $1,610 in 1999 to $1,099 in 2007 and is expected to decrease by 7.4 percent in 2008, according to figures by the PCBS and the World Bank. Furthermore, the effects on real GDP of the West Bank and Gaza cannot be accurately gauged due to Israel’s continuing economic blockade and its subsequent military offensive. The IMF and WB estimates that results from the first quarter of 2008 are slightly negative and project modest growth of 0.8 percent in 2008 “due to a continued, yet marginal drop in economic activity in Gaza, given its already-low base, matched with a modest rise in economic activity in the West Bank.”
The inevitable emergence of Gaza’s alternative economy as a result of the Israeli blockade was estimated to provide nearly 90 percent of all products entering the strip each month, equivalent to about $40 million of contraband, said Palestinian economist Omar Shaban in an interview with Bloomberg. Facilitated by a series of tunnels between Egypt and Gaza, goods that traveled through the tunnels ranged from vegetables to Viagra and served as the main lifeline of the civilian population of Gaza. The associated costs of these improvised means of transporting goods is evident in shops and markets across the strip where an Apple iPod Nano, that lists on Amazon.com at around $150, would cost $500 in Gaza, according to Bloomberg. The Israeli offensive that started on December 27, further intensified the upward pressure on essential items such as food, which has seen a 20 percent and 23 percent rise in prices in the West Bank and Gaza respectively, according to the World Food Program (WFP). The price of one kilogram of tomatoes in Gaza during the Israeli bombardment is said to have risen from about 1.5 shekels ($0.40) before the Israeli onslaught to 7 shekels ($1.75), an increase of over 400 percent, according to Reuters. To date Palestine still does not have its own currency.
Gaza’s imports/exports before Israel’s blockade, during the blockade and after ceasefire deal with Hamas
Increase in obstacles* in the West Bank, Dec 2006 – April 2008
* Obstacles are defined as checkpoints, partial checkpoints, earth mounds, road gates, road blocks, earth walls and trenches
Source: OCHA
Israel has hobbled the means of transporting palestinian products in a competitive manner
Trade with Israel
The inherent nature of the Palestinian economy, being small and resource poor without its own airport or seaport, predicates that the majority of its economy relies on its ability to trade within its territories and with its neighbors. Trade flows constitute nearly 85 percent of GDP, the vast majority of which (85-90 percent) is with Israel, according to the World Bank. This dependence on the state of Israel can be seen as a direct result of Israel’s economic policies. After Israel invaded the West Bank, it engaged in a policy of “integration” and, in theory, sought to eliminate the barriers that stood between the two economies. This resulted in a rise in Palestinian income as workers took up jobs inside Israel. Palestinian dependence on the Israeli economy at the time of the Oslo Accords in 1993 was immense. Trade with Israel represented more than 90 percent of total trade volume and the trade deficit stood at 45 percent of GDP, according to the Royal Economic Society. After the second intifada in 2000, Israel announced that it intended to end all Palestinian employment in Israel, effectively pulling the rug out from under the Palestinian economy.
Since the Israeli siege on Gaza came into effect in June 2007, essentially stopping all intra-Palestinian trade, the conventional trade of Palestine has relied solely on the internal and external trade of the West Bank. The numerous restrictions and administrative blockades imposed upon the Palestinian residents of the West Bank by the state of Israel have crippled the means of transporting Palestinian products in a competitive manner, thus creating enormous amounts of uncertainty and hobbling shippers’ abilities to compete in regional and global markets. The result has been a perpetual decrease in the amount of Palestinian trade over many years, even before the blockade and the construction of the separation barrier. According to the World Bank, between 2000 and 2006 the amount of West Bank enterprises that made a significant amount of sales outside of their home cities decreased from 60 percent to below 40 percent.
Such increased levels of uncertainty continue to add to the anguish of Palestinian enterprises that are becoming subject to increasingly high fixed costs per kilometer within the West Bank and by default the rest of the world. A recent survey conducted by the World Bank commissioned Palestinian Trade Center (PalTrade) identifies several parameters that increase costs for transporters inside the West Bank. The survey identified as much as a 40 percent increase in distance covered to reach key areas such as Jerusalem and the Allenby Bridge (connecting the West Bank and Jordan) as a result of Israeli policies that do not allow Palestinian trucks to take a direct route. The survey also points out increases of up to 70 percent in labor costs due to delays caused by road closures without announcement, flying checkpoints, unexpected variations on restrictions on cargo and movement of vehicles and people, losses due to inability to deliver on time and the waste of resources waiting and trying to predict certain outcomes.
Intra-West Bank trade routes and effect of impediments
Labor costs per kilometer*
Source: World Bank
Ultimately, trade dependency on Israel has proven to be detrimental to the Palestinian economy. In order for trade to thrive, Palestinians must have access to global markets and alternative trading routes. As Executive went to press, the Rafah border crossing between Egypt and Gaza remained closed by Israel and Egypt, as it has been since the Hamas takeover of Gaza in June 2007. Although the crossing could potentially provide an enormous amount of respite for the ailing Palestinian economy, this has yet to materialize. Even when the crossing was “operational,” it proved not to be a viable alternative to accessing the global market as the crossing operated only 16 percent of its scheduled working hours between June 2006 and March 2007, totaling a daily loss of $500,000 worth of exports according to the United Nations Office for the Coordination of Humanitarian Affairs (UNOCHA).
A viable palestinian state would need a sustainable economy free to trade and operate its businesses
Trade to the east
Trading through Jordan is also uneconomical due to the fact that all goods moving to and from Jordan must first cross the Allenby Bridge controlled by Israel. This is “a cumbersome and inefficient process that adds to the cost of shipping and discourages West Bank shippers from using the Jordan routes,” says the World Bank. Goods traded through Jordan are subject to redundant searches, parcel volume restrictions and lack of adequate storage facilities for sensitive products like vegetables and medical supplies. The only silver lining is that due to the recent increases in Israeli restrictions, coupled with some improvements in Jordanian logistics, Queen Alia Airport has become slightly more competitive for handling large volumes than its Israeli counterpart Ben Gourion, which tacks on $1,150 for “security surcharges” per metric ton, according to the World Bank. Nevertheless, the World Bank states that Palestinian traders still prefer Ben Gourion because of “better service, easier access and more frequent flights.”
Positioned at the heart of the Middle East, on the Mediterranean, Palestine has tremendous inherent potential. The promise of a thriving and prosperous Palestinian economy is as logical as it is fleeting in the face of the ongoing Israeli persecution of the Palestinian people. Undoubtedly, a viable Palestinian state would need a sustainable economy free to trade and operate its business without the current hindrances imposed upon it by the ongoing Israeli occupation.
Unless realities on the ground change, the economy of Palestine looks set to remain a burden shouldered by Palestinians, rather than a operable underpinning for a future Palestinian state.
