The Palestinian Economy: On Artificial Respiration

On paper, growth looks good, but agriculture and industry, the lifeblood of the economy, are dying under Israeli rule.

Nizam Ali.
Nizam Ali. Tomer Appelbaum

Israelis might look with some envy at the Palestinian economy, over the Green Line: The International Monetary Fund says gross domestic product there has been growing by well over 3% a year, compared to around 2.5% in Israel in the past few years. But the top-line figure doesn’t capture the real distress that lurks below it.

The unemployment rate for young adults exceeds 50%, the little manufacturing that does take place is gradually disappearing and poverty levels are high. Foreign aid has dwindled and the Palestinians remain captive customers for Israeli exports. Conditions in the Gaza Strip are deteriorating in particular. The Palestinian Authority, which has been in economic crisis for some time, saw its revenue grow in the first half of the year, largely due to an increase in the number of Palestinians working in Israel rather than local economic activity.

It’s not only the expanding settlements and checkpoints that block the development of a Palestinian state. The economies of the West Bank and Gaza Strip are slowly dying, leaving them as lifeless appendages to Israel’s much bigger and more advanced one. Private consumption doubled in the past decade, but that was fed by foreign aid rather than domestic output. Agriculture and industry’s share of output has declined from 30% of the economy to 15% .

“The Palestinian economy is on artificial respiration,” says Yitzhak Gal, a researcher at Tel Aviv University’s Moshe Dayan Center for Middle Eastern and African Studies. “Productive sectors, including agriculture, industry, services and tourism, aren’t developing. Growth indicators over the last few years show that the economy is stalling. It’s an economy in decline.”

This year the economy in the West Bank and Gaza Strip will grow 3.3% and will average 3.5% annually over the next three to five years. But that amount to little more than catch-up after the severe recession set off by the seven-week Gaza war in 2014, which caused the Gazan economy to contract by some 15%. The following year it grew 6.8%, not nearly enough to even restore it to its pre-war level, and in any case it represented one-off gains from reconstruction efforts following the fighting. In the West Bank, growth was buoyed by expanded borrowing by the Palestinian Authority, which is also isn’t a basis for long-term growth.

In any case, the pace of economic growth isn’t nearly enough to tackle the Palestinians’ economic distress, said the IMF’s mission chief Karen Ongley.

“For many countries, 3.5% growth might seem quite comfortable, but in the West Bank and Gaza, unemployment is already close to 30% — and much higher in Gaza, where two-thirds of young people don’t have a job. At the same time, more than half the population is under the age of 25, so the labor force and demand for jobs will grow even more rapidly,” she said in an interview to IMF News in September.

Hijazi Mahmud Mutan.
Tomer Appelbaum

Uncertainty 
deters investment

“Political uncertainties, the continuous threat of conflict, and restrictions have created an environment in which private investment and activity are both costly and risky. Also, restrictions that limit the movement of people, trade in goods, and access to resources have, over time, eroded the productive capacity of the economy, especially in agriculture and manufacturing,” says Ongley.

Agriculture is an important element of the Palestinian economy: According to the United Nations, one-fifth of Palestinian exports are agricultural, mainly olives and olive oil, vegetables and flowers.

But Palestinian agriculture has been shrinking, both in terms of its share of GDP and in the number of people it employes. Agriculture made up 19% of Palestinian GDP in 1987, but by the mid-1990s it was down to 12% and by 2013 it was just 4%. The proportion of people working in agriculture dropped from an average of 15.5% between 2005 and 2008 to 10% in 2013.

Even so, the sector is inefficient. According to a 2011 census, 70% of Palestinian farm families used all their produce to feed themselves. Nearly 90% of the women — and 20% of the men who farm work family plots, without pay. The average daily wage for women who are paid for their field work is just 47.50 shekels ($12.50), compared to 83 shekels for other types of work.

Palestinian growers have struggled to capitalize on rising prices for olive oil since the early 2000s. Farm exports must pass through Israel, making Palestinian exporters vulnerable to the whims of Israeli policy makers. Moreover, Israel continues to expropriate land and water, the UN report says, which contributed to a decline by one-third of agricultural output between 1987 and 2011.

The Israeli civil-society organization Kerem Navot estimated that the area of cultivated Palestinian land in the West Bank has shrunk by one-third in recent decades, partly to the expansion of Israeli-controlled land.

The West Bank village of Wadi Fukin with the Israeli settlement of Beitar Illit overlooking it.
Emil Salman

The Dayan Center’s Gal disagrees. “The main reason is a water shortage,” Gal said. “For the last 15 to 20 years most water has been used for drinking and urban consumption, leaving many plots uncultivated. This leaves olive groves, which rely on rain.”

What’s driving the water shortage?

“Several factors. The amount of water allocated to Palestinians in agreements signed with Israel in 1994 hasn’t changed. Not all this quota is used due to restrictions in Israeli-controlled Area C, where most farm plots lie,” Gal says. “In places where there are no political restrictions, there’s desalination and the recycling of wastewater, but here there’s none. Desalination requires access to the Mediterranean Sea, which requires agreements with Israel. Israel doesn’t oppose this, but coordination is too complex for now.”

With a paucity of options closer to home, employment in Israel is more important than ever to the Palestinian economy. The number of Palestinians working in Israel and the settlements doubled in recent years to about 100,000, 60,000 of them working legally with permits. Palestinians now comprise 15% of the West Bank’s labor force, compared to 9% in 2009. Half of these jobs are in construction.

Wages in Israel are higher than in the West Bank. According to a 2014 Bank of Israel report, the average net daily pay for a Palestinian laborer is 200 shekels, compared to 90 shekels in the West Bank. The average net monthly salary is 3,690 shekels, compared to 2,060 shekels in the West Bank. Work in Israel contributes 20% of household revenues in the West Bank.

Everyone’s 
in business

“In the last few years there’s been less work in the village and it pays only 70 shekels a day, compared to 300 in Israel. Because there isn’t much work everyone has become a trader — everyone’s opened a small business. But everyone is losing money because the market is so small,” says Hijazi Mahmud Mutan, 45 and a father of seven. He works in a family grocery and manages a parking lot in Ramallah.

Employment in Israel may help cushion the effects of the Palestinian economy’s contraction, but it does not compensate for the absence of work in the West Bank. The jobless rate in the territories was 26% in 2015, more than double the rate in 1999, before Israel barred entry during the second intifada. Reconstruction in the Gaza Strip has attenuated the unemployment rate there, which dropped by nine percentage points to 38% last year, but unemployment in the West Bank rose by one point, to 19%. All these figures understate the real extent of joblessness, because fewer than half of working-age Palestinians are even in the labor force. Without employment in Israel and the settlements, unemployment in the West Bank would reach 35%.

Gal considers youth unemployment a ticking bomb. “Among people in their 20s or over in the West Bank, unemployment tops 50%,” he says. “Among those who work, few have jobs suitable to their skills. This hasn’t blown up yet, but you can see the potential for this in East Jerusalem.”

A UN report from September asserted that Israel’s control of the 60% of the West Bank designated Area C, which is subject to Israeli administration and security, is the biggest factor behind chronic unemployment. Israeli checkpoints make finding and traveling to jobs in the West Bank arduous tasks. And virtually no Palestinians living in the Gaza Strip are permitted to work in Israel.

Nizam Ali, 42, distributes animal feed that he gets from Israel to farmers in the West Bank, but the job isn’t easy. “Since there’s no direct access to Route 60 [into Israel] — the army closed it about 15 years ago — I have to take indirect routes and that adds a lot to my costs,” he says.

He also raises sheep, but far fewer than he once did. “I only have a few dozen, in part because while you used to be able to graze them everywhere, today shepherds in my area are attacked by settlers if they try to leave the village. I don’t see an economic future for my children if the situation doesn’t change,” says Ali, who has seven.

Israeli control

Labor relations aren’t the only factor undermining the Palestinian economy. Israel collects tariffs on goods entering the territories before delivering them to the PA, in addition to collecting value-added tax on goods intended for consumption. These payments comprise three-quarters of the revenues of the PA, which gives Israel critical control over the Palestinian economy.

In 2015 Israel withheld funds for four months, seriously rattling the West Bank economically. Salaries weren’t paid to civil servants and security personnel, whose wages make up a quarter of the economy’s purchasing power sending reverberations throughout the economy.

Some 55% of Palestinian trade is with Israel, with exports made up between 18% and 19% of Palestinian GDP last year, with imports rising from to 59% from 56%. The Palestinian trade deficit has been growing and now stands at $5.2 billion.

So what hinders Palestinian industry from growing?

“There are many obstacles, such as restrictions on importing dual-purpose materials, which could be used for military purposes,” says Gal. “There is a long list of raw materials and products whose import is restricted, mainly to Gaza but also to the West Bank, including chemicals and machines. Nearly all industries are affected by this. Less suitable materials are often substituted. There are also infrastructure problems such as frequent power cuts. There is no gas for industry. An offshore gas field in Gaza has been developed in the absence of an agreement with Israel. If these restrictions are lifted and the economy is placed on a more normal footing, as was the situation before 2000, the economy has the potential to surge ahead with rapid growth.”

Gal says a good benchmark for the potential of the Palestinian economy is neighboring Jordan. While Palestinian exports are just $1 billion a year, Jordan’s are $10 billion. “The Palestinian strategy of export-led growth, with an emphasis on the Arab world, isn’t going to happen right now,” he says.

But Gal says Israel could change things. “The economy is not fulfilling its potential ... If [Israel] were to remove the barriers and create a normal economic reality — raw materials entering freely, vehicles imported, free exports, the situation would return to what it was before 2000 [and the second intifada] and the Palestinian economy could grow at double-digit rates over the next five years.”