Political instability and military restrictions are the key obstacles to the growth of a successful private sector in the Palestinian territories, according to a new World Bank report.
"It is imperative to alleviate the suffering of the Palestinian people and to provide new horizon for hope, said Steen Jorgensen, World Bank Country Director for West Bank and Gaza, of the report, Investment Climate Assessment: Fragmentation and Uncertainty, released on Thursday.
Unleashing the potential of the private sector could improve living standards, create jobs and growth. It is in the interest of all parties to bring stability to the region and to abide by their commitments," Jorgensen wrote.
In the absence of change, according to the report, the Palestinian private sector will remain confined to primarily small-sized firms operating with low capital investment, in a fragmented domestic market and in relative isolation from the global economy.
While the private sector should be a key driver for economic growth and job creation, Palestinian enterprises have remained hostage to conflict, military rule, violence, political division, and lack of free movement and access to resources and markets.
"An active private sector is much needed to fuel economic and social progress in the Palestinian territories, already faced with declining income and increasing unemployment, Jorgensen said.
Allowing mobility and access to resources is crucial to building investor confidence and developing industry and high value-added service sectors that would support a prosperous Palestinian economy and protect against future violence.
The report details how the multiple layers of restrictions and complex rules imposed by Israel have fragmented Palestinian markets and created micro-climates" in different locations. Doing business requires additional time and financial resources, while Israeli-controlled commercial crossings, checkpoints and other physical and procedural barriers impede business and trade.
In Gaza, the report notes, exports are nearly completely banned and imports restricted and severely delayed even when they are permitted.
A comparison of data from 2006 shows no significant growth in capital investment or employment by Palestinian firms, due to the uncertainty and fragmentation. Engagement in innovative and business-upgrading activities has decreased, driven primarily by diminished level of activity among firms in Gaza.
While Israeli restrictions and rules are responsible for many of the problems, the report notes that the Palestinians themselves have not done the necessary work to "improve the business climate to get ready for the day when restrictions are released, of special importance is to ensure a unified system of economic and commercial legislation between Gaza and the West Bank."
On the positive side, the report highlights several aspects of the Palestinian investment climate, including a nascent but growing entrepreneurship ecosystem, a growing information and communications sector, and the success of a number of Palestinian investors in attracting direct foreign investment in recent years.
Other positives include the low incidence of petty corruption and a liquid and stable financial sector.
Much of the Palestinian bureaucracy has remained functional, despite the political division between the West Bank and Gaza, the report says. Both labor productivity and labor costs of Palestinian firms are competitive within the region. There is, thus, a potential opportunity to increase labor productivity if firms invest more and shift resources toward high productivity subsectors in manufacturing and services.