THIRD UNITED NATIONS CONFERENCE ON LEAST DEVELOPED COUNTRIES, BRUSSELS, MAY 14-20, 2001

THE NEW PALESTINIAN ECONOMIC CRISIS

CALLS FOR NEW POLICY RESPONSES

SAEB BAMYA- DIRECTOR GENERAL, MINISTRY OF ECONOMY & TRADE

(check against delivery)

INTRODUCTION

On behalf of the delegation of Palestine, it is my great pleasure to address this Third United Nations Conference on the Least Developed Countries. UNCTAD has been for many years an important source of information, counsel and technical support to the Palestinian people, and a partner in the development program, launched by the Palestinian National Authority (PNA) and the international community since the historic and irreversible breakthroughs of tile Middle East peace process. We are especially grateful to the Secretary General. Mr. Rubens Ricupero, for his wise and principled leadership of this Conference and the UNCTAD secretariat, and for the sustained assistance provided to the Palestinian people.

Ladies and gentlemen, Distinguished delegates,

I come to you from a battered but proud Palestine, which has lived for the past eight months some of its darkest and most difficult days. A great human and economic cost has been paid by our people, who continue to insist on attaining their legitimate national rights to self-determination and independence, ill accordance with international legality and our bilateral agreements with Israel since 1993. We pay this heavy price fully committed to our strategic choice of achieving a just and lasting peace between Israel and Palestine, and indeed because security, peace and development cannot be achieved without justice also being ensured.

The recent crisis in the Palestine has revealed some major structural impediments and challenges to the sustained development of the Palestinian economy In preparing for this Conference, we have noted how similar, in many of these structural aspects, our special experience was to the experience of the group of Least Developed Countries.

While Palestine is not part of that group, we face some similar problems and we require from the international community and its agencies some of the same policy responses and forms of assistance as accorded to LDCs.

Allow me to draw your attention to some of these features.

MAJOR STRUCTURAL WEAKNESSES

In the period since 1994, the Palestinian economy has commenced a, process of transformation and modernization. The PNA has been engaged in a process of reconstruction and development aimed to upgrade infrastructure and improve the efficiency and productivity of the economy. By 1999, GDP of the West Bank and Gaza Strip stood at US$4,5 billion and GNP at US$5.2 billion, with a per capita GDP of US$1,614 and per capita GNP of US$1,782, thereby ranking Palestine within the category of middle-income developing countries.

Development efforts, however, have had only a limited impact on the economy's structure. Our economy continues to show the same weaknesses inherited from the occupation period. The impact of the prolonged occupation coupled with the latest sever collective punitive measures imposed by Israel on the totality of the Palestinian life demonstrate the Palestinian economy's heavy dependency on the Israeli economy as reflected inter alia in Palestinian production and marketing patterns and in the heavy reliance on the Israeli labor market. This dependency sharpened the vulnerability of the Palestinian economy to external financial, trade or other shocks.

Most notable weaknesses of the Palestinian economy are the poor infrastructure, a weak institutional set-up, an underdeveloped industrial base concentrated in traditional activities, with mainly of small cottage industries and sole proprietorships. The private economy also suffers from a financial constraint with a significant saving-investment gap. The banking sector provides a limited range of services, coupled with conservative lending policies. The capital market is thin on the ground and is inaccessible to most enterprises.

These impediments have worked against the development of the economy's productive capacity, which is the bedrock of economic growth and the basis for trade expansion. The economy is dominated by services, which represent the main field of employment. The level of industrialization in the West Bank and Gaza remains low with an annual average share of industry in GDP at around 16%. Agricultural performance does not fair better, with low contributions to GDP and employment, though the potentials of Palestinian agriculture are constrained by restrictive access to natural resources (land and water).

Consequently, the economy continues to generate a high rate of unemployment which had fallen for the first time in many years to 12% by mid-2000. But wt still rely on the export of its labor services (mainly to Israel) for generating national income. The Palestinian economy manifests a "chronic incapacity to create enough jobs for its labor force, generate savings for financing investments, and produce enough exports to pay for imports". Though the private sector continued to provide the largest share of employment, its importance in the economy as a whole has declined. This has limited GDP's contribution to GNP and increased vulnerability to external shocks.

Meanwhile, the trade sector is unable to generate enough earnings despite tile economy's high degree of exposure to foreign trade. Trade openness is accompanied by an import bias with a rising ratio of imports and a low export ratio. This has had a negative impact on the trade balance, which manifests a persistent deficit.

While tile financial sector has little to offer to the public sector, the government cannot issue public securities and is confronted with a limited tax base and trade deficit. It is thus left with no choice but to rely heavily on donor assistance to finance its development projects. The development plan for the period 1999-2003 was intended to be almost wholly financed by the donor community. Although the proportion of PNA debt to GDP is still low compared to other countries, public debt is a new challenge to the government given the short period during which it has been accumulated.

WHAT ARE THE UNDERLYING CAUSES ?

An important reason for the proliferation of structural weaknesses is the present trade regime. We remain locked into arrangements that perpetuate distorting policies oil the economy and encourage a skewed integration with tile much more advanced Israeli economy. The Interim Agreements reached between Israel and the Palestine Liberation Organization (PLO) left Israel in effective control over vital areas of Palestinian economic life, pending tile resolution ill the context of a final status agreement. The Palestinian experience of how Israel chose to exercise that effective control over the interim Period, and particularly the implementation of the Paris Protocol, rendered the vast majority of the Palestinian public unwilling to tolerate its perpetuation.

Israel's often outright unilateral and arbitrary implementation of the Paris Protocol inflicted severe harm on the Palestinian economy. The Israeli policies of closure, arbitrary security inspection, and back-to-back transportation, coupled with the poor market access, deny the Palestinian business community the right to deal with the most feasible markets and prevents Palestinian exports from reaching foreign markets. Although responsibility for the administration of economic affairs was in principle transferred to the Palestinian Authority, Israel retained almost total control over Palestinian fiscal and external trade policy, reflecting the impossibility of separating the two economic jurisdictions. This was dictated by Israel's retention, and consistent insistence on retaining control over strategic territorial blocks in the West Bank and the Gaza Strip.

Israel's fiscal and external trade policies proved fundamentally incompatible with the needs and interests of the much less developed Palestinian economy and its operation tended to enforce the persistence of the dependent distorted development that was the legacy of over three decades of direct Israeli military rule. Accordingly, a major structural weakness of the Palestinian economy lies in the heavy concentration of trade with Israel, accounting for nearly 80 per cent of total value of trade in 1998. The need to restructure the economy and reorient it towards more balanced relations with Israel is obvious.

Also responsible for an underdeveloped economic structure is the low level of domestic and foreign direct investment. This is despite a wide range of incentives and privileges offered to foreign investors, given the high degree of risks generated by the absence of political stability. Moreover, foreign direct investment is mainly concentrated in the construction, real estate and tourism (hotel) sector, as well as franchising arrangements with local producers or distributors.

An additional factor that has incapacitated our development performance are the poor market access conditions. Palestinian trade face obstructive procedures imposed by Israel such as the harsh mobility restrictions and the difficulty in reaching international crossing points. Nonetheless, the minimal trade that succeeds to surpass these restrictions is often subject to disruptive measures such as serious delays and lengthy security inspections. The aforementioned systematic barriers to trade denied Palestinian trade the right to exploit the promising market opportunities provided by the trade agreements with regional and international partners and prevented entry of imported products into the Palestinian market and thus robbed their competitive advantage through the heavy handed market manipulation resulting from the Israeli policies.

Indeed, UNCTAD observations on the economic performance of land-locked states are of clear relevance to the Palestinian economy. The lack of access to world markets is “aggravated by prohibitive transport costs associated with conditions of inadequate infrastructure, imbalance of trade, inefficient transport organization, poor utilization of assets and weak managerial, procedural, regulatory rind institutional systems posing serious constraints on the trade and economic development”.

ISRAELI POLICIES BREACH INTERNATIONAL LAW AND AGREEMENTS

Israeli policies and measures not only obstruct Palestinian trade and systematically preempt economic development but also stand in flagrant violation to the spirit of IHL, bilateral agreements, and to Israel's commitment to rules of the World Trade Organization (WTO).

1. Violation To The Spirit Of International Humanitarian Law

The harm inflicted on the totality of the Palestinian population by the unlawful practices and policies of closure and mobility restrictions imposed on people and goods demonstrate a clear violation of Article 33 of the Fourth Geneva Convention In addition, the wanton destruction of property unjustified by military necessity and the willful causing of suffering or injury to body or health is an obvious violation of Article 147 of the Convention.

2. Violation To The Spirit Of The Bilateral Agreements

Numerous provisions of the bilateral agreements are violated on a regular basis. For example, imposing high security inspection fees on Palestinian importers is in violation of Article IX of Annex V of the Israeli-Palestinian Interim Agreement on the West Bank and the Gaza Strip signed in Washington on September 28, 1995. In addition, prohibiting of Palestinian Customs staff from reaching their work at Rafah entry point with Egypt and AI-Karamah entry point with Jordan violates Article VIII and Appendix V of Annex I of the Israeli Palestinian Interim Agreement of the West Bank and the Gaza Strip.

3. Violation of The Spirit Of The Preamble To The WTO

While Palestine is not yet a Member of the WTO and therefore does not enjoy the formal protection of its law, the aforementioned Israeli punitive measures constitute a clear violation of its commitment to the spirit of the objectives of the multilateral trading system, as embodied in the first three paragraphs of the Preamble to the WTO Agreement.

THE NEW PALESTINIAN ECONOMIC CRISIS CALLS FOR NEW POLICY RESPONSES

The current crisis affecting the Palestinian economy is inducing losses that are estimated to have exceeded $3 billion during the seven months period October 2000-March 2001, equivalent to over a third of Palestinian Gross National Income. Half of our labour force has been unemployed for the last seven months, and around 60 per cent of the population has been driven into poverty. So strong is the magnitude of these losses that the economy will need at least two to three years to recover. Given the diminishing trend that has been assumed by donor financial assistance during the last few years, the challenges facing, development efforts are even more immense than before.

The main features of the Palestinian economy prevent it from reaping tangible benefits from its international trade agreements. Provisions for differential and more favorable treatment of least-developed countries are not yet applied to Palestine, despite the fact that it stands to benefit greatly from such provisions.

I wish to recall that the General Assembly of the United Nations has already recognized the special situation and needs of the Palestinian economy. In its resolution 43/178 of 20 December 1988 on Assistance to the Palestinian people, the General Assembly decided "to extend to the occupied Palestinian territory, the same preferential treatment accorded the least developed countries, pending the elimination of the Israeli occupation and the assumption of full control by the Palestinian people over their national economy without external interference".

Moreover, the League of Arab States has classified Palestine within the list of Arab Least Developed Countries, granting it preferential and more favorable treatment in the implementation of trade and economic agreements. Although Arab markets provide significant opportunities for expanding Palestinian trade, alone they cannot provide sufficient stimulus for accelerating growth, given the common trade patterns among Arab countries.

Accordingly, Palestine remains in need of better access conditions in developed countries' markets for ameliorating supply and demand side constraints. Palestine also needs technical assistance from UNCTAD and other development partners in trade policy, institutional development, infrastructure management and structural reform.

Ladies and gentlemen, Distinguished delegates,

We hope that this Conference will endorse our appeal to the international community and international agencies to continue to extend to Palestine the same preferential treatment as accorded the least developed countries, thus strengthening our resolve and capacity to build peace and development in Palestine and the region.

Thank you.