Impact on the Palestinian Economy of the Recent Confrontations (1 Oct. 2000-31 Jan. 2001)

*reproduced as received

Office of the United Nations Special Coordinator

The Impact on the Palestinian Economy of Confrontations,

Mobility Restrictions and Border Closures,

1 October 2000—31 January 2001¹

I. Introduction

The period covered by this report—a total of 123 calendar days—has witnessed the most severe and sustained crisis in Israeli-Palestinian relations since the signing of the Declaration of Principles in September 1993. Confrontations have resulted in the death or injury of thousands of Palestinians—and numerous Israelis—as well as significant damage to Palestinian infrastructure, buildings, agricultural lands and property and vehicles. In addition to unprecedented levels of confrontation, the period has been characterized by the most severe movement restrictions ever imposed on the Occupied Palestinian Territory (OPT).

The second section describes and attempts to quantify the scope and severity of mobility restrictions for persons, vehicles and goods at the various crossings in the OPT. These include the Israel-OPT crossings, movement between the various areas within the OPT, and the international crossings between the OPT and Jordan and Egypt.

The third section provides quantitative estimates of the impact of the crisis on domestic output (by economic activity) and income. Section four presents estimates of the decline in income earned by Palestinian workers in Israel and the decline in Palestinian external trade—most of which is conducted with Israel. The fifth section summarizes the estimated income losses to Palestinians during the reporting period.

Section six provides an analysis of the social impact of the crisis and focuses on the rise of unemployment and poverty, as well as the human, physical and fiscal damages.  The seventh and final section addresses some of the longer-term economic and social effects likely to result from the present impasse.

II. Movement Restrictions 

Since 1989, in the case of Gaza, and since 1993 for the West Bank, Palestinians seeking to enter Israel or East Jerusalem for any reason—including transit between the West Bank and Gaza—have been required to apply for a permit from the Israeli military authorities.  This general closure and permit policy—in effect to the present—has had a serious impact on the Palestinian economy and society.²  In addition to the general restriction on movement, the Israeli authorities have, since the Gulf War of 1991, intermittently sealed the crossings between Israel and the OPT, either canceling or refusing to honour issued travel permits. Such restrictions have impeded economic activity in general, but especially the flow of Palestinian labour and exports to Israel.

The period 1994-1996 witnessed increasing frequency of border closures, as indicated in Table 1.  In 1996 such closures disrupted labour and commodity flows on nearly 32 per cent of normal business days. The severity of such closures in the 1997-1999 period declined substantially such that in 1999 border closures affected only 2.5 per cent of working days. Reduced frequency of closures was associated with more rapid economic growth.

Table 1

Border Closures Imposed on the OPT, 1993-2000³

For the first 9 months of the year 2000, there were border closures on only three days.  However, during the last quarter of the year, there were 72 days of such closures raising lost working days to their highest annual level since 1997. There were 21 additional days of border closures imposed in January 2001, raising the total for the reporting period to 93 days (of which 67 were normal working days). In addition, the “safe passage,” which was supposed to insure Palestinians relatively free access to the West Bank and Gaza, was closed by the Israeli authorities on 6 October 2000 after approximately one year in operation.

The severity of the movement restrictions has been compounded by the most draconian internal closure measures ever implemented.  In the case of severe internal closures , this has entailed the prohibition on use of primary roads and the placement of physical barriers on many secondary roads between Palestinian villages and towns in the OPT.  During such periods personal or vehicle mobility on main roads has been exclusively for Israeli military personnel and settlers.  Palestinians traveling in the West Bank during a severe internal closure have been forced to use some secondary or tertiary roads, entailing various types of dangers including higher instances of road accidents, damage to vehicles, security checks, and/or personal harm inflicted by Israeli military personnel or settlers at roadblocks.⁴  Severe internal closure in Gaza entailed the complete cessation of north-south travel, effectively creating three isolated enclaves in the Gaza Strip.⁵  This condition prevailed on about 9 per cent of the days during the reporting period, as indicated in Table 2.

Table 2

Internal Closures Imposed in the OPT,

October 2000—January 2001⁶

In the case of partial internal closure , some main roads and most secondary roads have been accessible by Palestinians. But in general the Israeli authorities have diverted traffic away from the many settlements in the OPT and, in the case of Gaza, limited the number of hours during which main roads could be used by Palestinian vehicles. Internal closures have resulted in drastic increases in average travel time and travel costs.

For example, the main road linking the northern and central West Bank has been only partially accessible for most of the reporting period. Travel between these areas has generally been possible only via a circuitous route through the Jordan Valley. Average travel time between Nablus and Ramallah/Al Bireh increased an estimated 113 per cent from 45 minutes to 96 minutes while average taxi fees rose 108 per cent from NIS 9 to NIS 18.75. Average travel time between Hebron and Ramallah/Al Bireh (a less frequently traveled route) increased an estimated 70 per cent from 75 minutes to 128 minutes while average taxi fares rose 41 per cent from NIS 15 to NIS 21.

In Gaza, the main north-south artery is the Salah ad Din Road, a large section of which has been under direct Israeli military control for most of the reporting period. The Israeli authorities have generally diverted north-south traffic to the east and west where the road passes near the Israeli settlements of Kfar Darom, Kisufim, and Gush Qatif. Furthermore, when Palestinian vehicles have been allowed to use the Salah ad Din Road, it has generally been for a limited number of hours during the day. As Israeli forces did not always allow traffic to pass at the specified hours, and sometimes reduced times arbitrarily, taxis and their passengers were obliged to arrive early and wait in long queues to avoid missing the opportunity to travel. Average travel time between Khan Yunis and Gaza City, for example, increased 341 per cent from 30 minutes to 132 minutes during the reporting period while taxi fares for this route increased 111 per cent from NIS 3.5 to NIS 7.4.⁷

The international crossing points between the OPT and neighbouring countries have also been closed to passengers and trade for much of the reporting period. As indicated in Table 3, West Bank Palestinians have been unable to use the Allenby/Karameh bridge to Jordan for more than one-fifth of the days during the reporting. Likewise, the Rafah border to enter Egypt was closed for nearly 40 per cent of the time while the Gaza International Airport has been closed for over half of the reporting period. Palestinians from the West Bank have very limited access to the Ben Gurion Airport while Gazans have had virtually no access (in both cases a permit would be required from the Israeli authorities). Effectively, the inability to use the international border crossings and the airports has been more severe than indicated by these figures since internal closures have been so severe as to impede travel to the international borders and Gaza Airport.

Table 3

International Border Closures Imposed on the OPT,

October 2000—January 2001⁸

The international commercial land crossings at Allenby/Karameh and Rafah have also been significantly affected by border closures which has diminished the volume of imports from Jordan and Egypt. Access to the Israeli ports at Ashdod and Haifa, the entry points for most non-Israeli products, has also been impeded resulting in long delays and significant losses—and added storage and demorage fees—to Palestinian merchants.

The combination of border closures, internal movement restrictions and the closing of the international borders constitute the most severe and sustained set of movement restrictions imposed on the OPT since the beginning of the occupation in 1967. The economic and social impact of this situation has been severe as explained in the remainder of this report.

III. Internal Impact

The short-term and direct economic effects of such policies are to reduce income to farmers, workers, merchants and business people who cannot reach their places of employment or who are unable to obtain inputs and/or sell their goods and services. This has been true for all  economic activities including agriculture, manufacturing, construction, commerce, transportation and services (including those related to tourism).

An approximate measure of the internal effects of such disruptions can be derived from estimates of the Gross Domestic Product (GDP)—i.e. the net value of goods and services produced in the Palestinian economy—the magnitude of which was expected to reach about USD 5,400 million in the year 2000. Assuming output is distributed evenly over the work year—consisting of an  average of 312—estimated GDP was approximately USD 17.3 million for each working day.⁹

A field survey conducted by the Palestinian Central Bureau of Statistics (PCBS) in October and November 2000¹⁰ sought to measure the effects of the crisis on the level of domestic productive activity.  Table 4 provides PCBS estimates as to the relative contribution of the various economic activities to GDP in 2000. Moreover, the table provides UNSCO estimates of the relative decline by activity based on data from the PCBS field survey in October-November 2000 and the resulting negative impact on total GDP for those months.¹¹

On average, the direct economic losses were estimated at 50.7 per cent of GDP produced in the period October-November 2000 as shown in Table 4.  The evidence suggests that all activities have been negatively effected by the crisis and movement restrictions.  However, there were disproportionately large losses for hotel and restaurant (tourism), construction, agriculture and community, social and personal service activities. Real estate and business services, financial intermediation, education, public administration and defense and transport activities were less than proportionally effected.

Of the 50.7 per cent decline in GDP, manufacturing and construction activities each accounted each for about 10 percentage points or about 40 per cent the decline. Internal and external trade activities (represented by the wholesale and retail trade, customs duties and net VAT on imports items in Table 4) accounted for nearly 15 percentage points or nearly 30 per cent of the loss. Agriculture contributed another 10 per cent. Public administration and publicly owned enterprises combined accounted for about 10 per cent of the decline while other services, both public and private

(including education and health), contributed about 10 per cent of the loss in GDP.

Table 4

Estimates of OPT GDP by Activity for 2000, Proportional Losses and 

Impact on Aggregate GDP by Activity for October—November 2000¹²

Assuming that the proportional negative internal economic effects of the crisis and movement restrictions in October-November were similar to those in the December 2000-January 2001 period, the value of the internal direct losses in income-earning opportunities are estimated at USD 907.3 million.  For the 105 working days during the reporting period, the loss is approximately USD 8.6 million per day.

IV. External Impact

A. Labour Flows and Wage Income

In addition to the internal production of goods and services, Palestinians in the OPT derive a significant portion of income through the export of labour. In 1999, it is estimated that Palestinian workers earned about USD 750 million from jobs in Israel and Israeli settlements and industrial zones.¹³  In the first 9 months of 2000, there was an estimated average of 130,000 Palestinians employed in Israel and Israeli-controlled areas on a daily basis. The average worker was earning a daily wage of NIS 110 or about USD 27.¹⁴  As a group, these workers received approximately USD 3.5 million for each working day prior to the crisis. On an annualised basis, assuming no border closures and no change in the average number of workers or the average wage, Palestinian workers in Israel could have earned an estimated USD 885 million in the year 2000, or approximately USD 74 million per month.¹⁵  The internal movement restrictions and border closures have substantially reduced such income-generating opportunities during the period covered by this report.

During the first weeks of the crisis, the income opportunity losses were mitigated somewhat due to the occurrence of three sets of Jewish holidays: Rosh Hashana (30 September—1 October); Yom Kippur holiday (8—9 October); and Sukkoth (14 and 20 October). Palestinian labour flows to Israel are normally very small during such holidays. Nonetheless, during the week of 2 October (and prior to the border closure), labour flows had declined by more than 50 per cent as compared to the week prior to the crisis. With the border closure imposed on Monday, 9 October—a closure which remained in force for most of the reporting period— Palestinian labour flows to Israel and, therefore, wage incomes, have been drastically reduced. 

As indicated in Table 5, beginning from an estimated average daily Palestinian labour flow of about 130,000 in the first 9 months of 2000, the confrontations and movement restrictions reduced the daily flow to an estimated 30,650 in October. This resulted in the “disemployment” of about 100,000 Palestinians from the Israeli labour market. Using the January-September 2000 average as the reference period, the wage income loss due to the border closures in October is estimated at USD 56.1 million.

Table 5

Estimates of Average Daily Palestinian Employment in Israel and Monthly Wage Income Losses,

January-September 2000 and October 2000—January 2001¹⁶

Evidence suggests that Jerusalem Palestinians working in Israel—about 19,000 persons—continued to attend their jobs during most of the reporting period. Other evidence indicates that, beginning in late October, there were West Bank workers entering Israel without permits. To this should be added an average of several thousand permitted workers employed in Israel and Israeli-controlled areas during some of the reporting period. Thus between October 2000 and January 2001, total labour flows are estimated at between 25,500 and 40,000 per day depending on the month.

Using January—September 2000 as the reference period, the average monthly wage income loss is estimated at USD 60.8 million. The cumulative income loss is estimated at USD 243.4 million or about USD 2.6 million for each of the 92.5 potential work days in the reporting period. The estimated loss is more than 75 per cent of the potential income of 130,000 Palestinians employed in Israel for the reporting period. 

B. Commodity Flows and External Trade Income

Palestinian exports have been impeded for much of the reporting period due to the severity of the border, internal and international crossing closures. Average monthly registered exports to Israel—the main market for Palestinian exports—in the first 9 months of 2000 were valued at USD 42 million. In October and November, the monthly average had declined to USD 35 million, a decline of 16.5 per cent. As compared to the October-November 1999 average of USD 44.4 million, registered exports in the same period in 2000 were 22 per cent lower.¹⁷

Palestinian imports from Israel have been even more negatively affected by the crisis.  For example, the Karni/Muntar crossing, the only commercial crossing in Gaza functioning during this period, was closed entirely or partially on 18 per cent of the days resulting in a significant reduction in goods imports.¹⁸  Trade between Israel and the West Bank has also been reduced due to the internal and border restrictions. In addition, and perhaps more importantly, reduced income of Palestinians has resulted in a significant decline in consumer demand. Registered nonagricultural imports from Israel averaged USD 157.3 million per month in the first 9 months of 2000. In October-November, the monthly average declined to USD100.2 million, a decline of 36.3 per cent. As compared to the October-November 1999 average of USD 147.3 million, registered imports for the same months in 2000 were 32 per cent lower.

External trade, as indicated in Table 4, contributes significantly to the size of Palestinian GDP. The production of goods for export generates employment and income. On the other hand, the scarcity of resources and other inputs in the OPT requires the importation of raw materials, equipment and machinery. Thus, the disruption of external trade resulting from mobility restrictions and border closures dampens domestic production, employment and income in a large number of manufacturing, commercial and agricultural enterprises. However, because external  (and internal) trade activities are already included in the calculation of GDP, the trade losses resulting from movement restrictions and border closures are included in the estimated daily GDP losses noted above.¹⁹

V. Aggregate Direct Income Losses

The estimated direct economic impact of the crisis is summarized in Table 6. These losses consist of: 1) the reduced production and circulation of goods and services (inputs and outputs) in the estimated at USD 907.3 million (including losses incurred due to impediments to internal and external trade); 2) the reduced labour income for workers and their households due to the loss of employment in Israel and Israeli settlements and industrial zones. This loss is estimated at USD 243.4 million.

Table 6 

Estimates of Income Losses in the OPT by Source,

1 October 2000—31 January 2001²⁰

In the aggregate, and excluding material damage to property and other losses, the economic impact—i.e. the lost income-earning opportunities—is estimated at USD 1,150.7 million during the 123-day period 1 October 2000—31 January 2001. It is important to note that these losses are calculated in relation to the level of economic activity prevailing prior to the crisis, rather than in comparison to the income-generating potential of the Palestinian economy. If these income losses are distributed over the 105 working days in the OPT during this period, the average daily loss is estimated at USD 10.9 million.

The income-earning opportunity losses are equal to more than one-fifth the projected GDP for the year 2000. If the estimated income-earning opportunity losses are distributed over a population of some 3.1 million persons, the per capita income loss is approximately USD 370 or USD 3 per person per day. For a family consisting of 5 persons, this loss amounts to USD 1,850 over the four-month period. While lost labour income is irretrievable, some portion of the domestic output/income losses may be recuperated with the relaxation of mobility restrictions and the resumption of normal economic activity.

VI. Social Impact

A. Unemployment and Poverty 

The Palestinian labour market since 1997 and until the onset of the present crisis was characterized by significant employment growth. Despite labour force growth in excess of population growth, job growth—in Israel, the PA and the Palestinian private economy—was sufficient to reduce the core unemployment rate from an average of 23 per cent in 1996 to about 11 per cent in the first 9 months of 2000.²¹

The immediate effect of the crisis was the “disemployment” of more than 100,000 workers formerly employed in Israel. Within days of the onset of the crisis, the core unemployment rate  rose from less than 11 per cent to nearly 30 per cent of the labour force.²²

Table 7

Estimates of Average Daily Palestinian Employment in Israel,

January—September 2000 and October 2000—January 2001

Given continued labour flows to Israel during the first week of October, and as indicated in Table 7, the estimated daily disemployment from jobs in Israel averaged about 100,000 for the month as a whole, peaked at about 104,500 in November and declined in December and January.  Most of the employment in Israel during this period was accounted for by Palestinians from Jerusalem who do not need permits to enter Israel for work with some amounts of unpermitted labour flows from the West Bank.²³

In the weeks and months following the border closure on 9 October, and with the imposition of internal movement restrictions, normal internal economic activity was disrupted leading to additional amounts of internal unemployment. It was estimated by the PA Ministry of Labour that about 82,000 persons lost their jobs due to the impact of the movement restrictions. To this must be added the approximately 71,000 persons were unemployed prior to the crisis and an average of 100,000 job losses in Israel. The average number of unemployed in the OPT are therefore estimated at about 253,000 or about 38 per cent of the labour force during the reporting

period.²⁴  In addition, as in previous crises, the rates of underemployment have risen.

Evidence suggests that the average employed Palestinian supports himself/herself plus 4 other people, a rather high dependency ratio. 25 Therefore, in addition to the negative impact on the livelihoods of 182,000 workers (the increase in the number of unemployed), the crisis has directly reduced the income of 728,000 other Palestinians. In total, an average of 910,000 persons—or about 30 per cent of the population—have been directly and negatively affected by mobility restrictions. If previously unemployed persons and their dependents are included—some 355,000 persons in all—the number of Palestinians experiencing economic distress rises to 1,265,000 or 40.8 per cent of the population.²⁶

Households may adapt to reduced income in several ways. These include an intensified search for income-generating opportunities (e.g. employment), the reduction of expenditure levels (especially on non-essential purchases), the use of savings to maintain essential consumption, borrowing to pay for current expenditures (or not repaying existing loans or liabilities) and/or selling household assets. In previous periods of border closures, household coping strategies have included all of these elements.²⁷

The recent World Bank study on poverty suggests that Palestinian households during extended border closures in the 1990s initially responded to the sudden loss of income mainly by spending their savings (“consumption smoothing”). After the first month, however, household consumption levels declined rapidly as savings were depleted and poverty levels rose. The same study indicates that household saving is equal to approximately one month’s consumption expenditures for each year.²⁸

The period 1998-2000, until the last quarter of 2000, was one of few border closures (see Table 1), rising employment and per capita income and declining poverty rates. On this basis, it is assumed that the average household—during the 33-month period prior to the present crisis—accumulated savings equal to about 2.75 months worth of consumption expenditures.²⁹  As severe movement restrictions have persisted for more than 4 months, it is likely that household savings have been significantly reduced, despite decreases in household levels of  consumption to cope with the loss of income. Thus the private safety net—i.e. private savings—has been eroded while reduced household expenditures are further dampening domestic economic activity and employment.

Significantly higher unemployment and depleted savings have led to a significant and rapid increase in poverty rates. The World Bank report uses the poverty line estimated by the National Commission for Poverty Alleviation—approximately USD 2.1 in consumption expenditures per person per day (about NIS 8.6).³⁰  The report estimates the poverty rate—i.e. the portion of the population falling below the poverty line—at 21.1 per cent in September 2000 (after having declined from about 25 per cent in 1997). Under the impact of movement restrictions and border closures, the World Bank estimates the poverty rate to have risen to 31.8 per cent at the end of 2000. Thus, within 3 months the poverty rate and the absolute number of poor are estimated to have risen by 50 per cent. This suggests that about 1 million persons now live under the poverty line, having risen from an average of about 654,000 in the first 9 months of 2000.  Moreover, even with a partial relaxation in restrictions on mobility, the report estimates that the poverty rate will rise to about 43.8 per cent by end-2001.³¹

The quantity of humanitarian assistance distributed thus far—while insufficient to meet rising needs—is indicative of the severity of the crisis. Such assistance, mainly food donations, has been targeted to the newly unemployed—those previously employed in Israel or the domestic informal sector or the self-employed—to meet immediate needs of households.³²  During the period October 2000—January 2001, more than 32 per cent of the Palestinian population in the OPT—more than 1 million persons—were reported to have received some form of emergency assistance.³³  Some 340,000 persons in the West Bank and 693,000 persons in Gaza received assistance from national and international agencies.³⁴  About 42.5 per cent of the registered refugee population in the OPT received assistance from UNRWA.³⁵

Such wide-scale emergency distribution is unprecedented in recent history. By comparison, during the 5-year period July 1995—June 2000, a period characterized by several extended border closures, a total of 5,096 refugee families in the West Bank received emergency relief from UNRWA and some 9,150 families mainly from non-refugee populations received food assistance from the WFP.³⁶  Despite the wide distributions of emergency assistance, indications are that the level of need continues to grow. Most food distributions received thus far cover only the most basic household requirements for a period of one month. Given the persistence of the crisis, now in its fifth month, there is a need for additional distributions of humanitarian assistance.

B. Caring for the Injured

As of 10 February, 2001 the Palestinian Ministry of Health reported 337 deaths and more than 12,000 injuries resulting from confrontations since 28 September caused mainly from live and rubber-coated metal bullets. The Ministry indicates that some 40 per cent of casualties have been below the age of 18 and that more than half the injuries have been to the head and neck, chest and torso. More than 10 per cent of casualties have suffered serious physical or neurological injuries. More than 490 such cases have been transferred to medical facilities in other—mainly Arab—countries for more intensive care.³⁷  In addition to the specialized medical care provided by other countries, the international community’s response has been to provide emergency assistance to the Ministry of Health, to hospitals in Jerusalem, to NGOs involved in medical relief and to UNRWA. The long-term costs of caring for the thousands of wounded, and especially those with debilitating injuries are difficult to quantify but will certainly be in the millions of USD.

C. Destruction of Property

The confrontations during the reporting produced significant physical damage to private and public assets—buildings, infrastructure, and vehicles—due mainly to the Israeli army’s use of heavy weapons, including rockets, tank shells and high-caliber automatic weapons. In addition, the Israeli military authorities have bulldozed thousands of dunums of Palestinian fruit orchards and agricultural land and infrastructure near Israeli settlements and bypass roads, especially in Gaza. Israeli settlers have also engaged in the destruction of Palestinian private property. Such destruction has been particularly pronounced in Rafah, Khan Yunis, Deir al Balah, the old city of Hebron, Beit Jala, Beit Sahur, Bethlehem, Jericho, Ramallah/Al Bireh Tulkarem and Qalqilia.

Various reports indicate that upwards of 3,000 structures have been partially or totally damaged during the reporting period. While most of the documented damage has been to housing, numerous shops, workshops, offices and private vehicles have also been hit.  In addition public buildings and infrastructure, as well as medical facilities have been damaged. The value of such damage has been estimated in the tens of millions of USD.³⁸

D. Public Sector: Fiscal Compression

There have also been significant losses to the public sector in the form of lost revenues . Domestic income and VAT revenues have been reduced due to the lower levels of domestic income caused by disruptions in production and unemployment. Most PA budget revenues derive from import taxes. In 1999, 63 per cent of all revenues were from customs and VAT associated with imports from Israel and abroad.³⁹  As imports have declined due to lower consumer demand and movement restrictions, this portion of revenues has declined. In addition, since early October 2000, such clearance revenues—collected and transferred by Israel to the PA in accordance with the Economic Protocol of 1994—have been well below the anticipated amounts. PA revenues during the crisis have been an average of USD 45 million per month—half the monthly average of USD 90 million during the first 9 months of 2000.⁴⁰

On the expenditure side, the PA has found it increasingly difficult to pay the salaries of some 115,000 public sector employees. The average monthly wage bill equals about USD 55 million, some USD 10 million above average revenues during this period.⁴¹  Furthermore, the crisis has imposed higher expenditures on the PA Ministry of Health and the Ministry of Social Affairs to cope with the large number of killed and wounded Palestinians, the destruction of homes, and emergency needs generated by rising unemployment and poverty. Estimates from the PA Ministry of Finance suggest that the combined effect of reduced revenues and increased expenditures may have raised the fiscal deficit for 2000 to above USD 100 million—more than four times its anticipated level before the onset of the crisis.⁴²

Most PA agencies have been operating at reduced levels for the entire period of the crisis.  This has been due to the inability of many employees to reach their jobs because of internal closures imposed by the Israeli authorities. As suggested in Table 4, the value of publicly produced services declined by nearly 30 per cent in the first months of the crisis. This has resulted in more serious coordination problems that have strained the capacity of the PA to meet the needs of the population.

In addition to the reduced volume of public services, there have been disruptions in capacity and institution-building projects, many of which are supported by donor and multilateral sources. Donors indicate that the crisis has also reduced activity on infrastructure projects due to the lack of security, the evacuation of foreign project personnel, movement restrictions on Palestinian project personnel, reduced operating hours of public agencies and the lack of some materials required for such projects.⁴³  The overall impact is to disrupt and delay the building of a more efficient public sector and a better physical infrastructure, both necessary ingredients in creating long-term economic viability.

VII. Longer Term Impact

The present crisis—now in its fifth month—has interrupted nearly four years of economic recovery and progress that included significant reductions in unemployment and poverty. There was also important progress in the rehabilitation and expansion of physical infrastructure and institution-building projects.⁴⁴  Much of this progress has now been undermined.

Mobility restrictions and border closures have significantly reduced household income and consumption. The normal production and distribution of goods and services has been disrupted by an inability to regularly access input and output markets while local demand for goods and services has declined. The combination of these effects has depressed both aggregate demand and supply.  Should the crisis persist, it will create an economy with high levels of unemployment, low wages and growing poverty.

Palestinian society is characterized by rapid population growth and, due to its youthful demography, even more rapid growth of the working-age population. Productive absorption of the work force would be a challenge even under the best of circumstances. While the availability of jobs in Israel has served to limit unemployment in the OPT, regular access to that labour market may not be possible in the future. With the prolonged absence of Palestinian workers from their jobs, Israeli employers may seek more reliable sources of labour, particularly in construction. This may result in an expansion of the foreign labour policy begun after Gulf War of 1991. Under this policy, tens of thousands of Southeast Asian and Southeastern European workers were brought to Israel to supply Israeli employers. Over the long term, this would limit employment opportunities inside the Green Line and considerably raise the core unemployment rate in the OPT.

Alleviating unemployment and poverty will therefore depend primarily on the ability of the Palestinian economy to create jobs in the future. Economic growth and employment creation will rely on the ability of the economy to profitably produce goods and services for domestic and foreign consumers. Given resource limitations in the OPT, this requires significant private investment in productive capacity and the ability to access foreign markets for inputs and for

marketing outputs.

With regard to private investment—both domestic and foreign—the operating environment has become less hospitable both because of movement restrictions and conflict. While private investment has been generally weak (and concentrated in residential construction activity), there were some signs of progress in the past several years. Since the beginning of the crisis, there has been a precipitous decline in interest by investors, even among those who have submitted applications for tax exemptions and other incentives under the law.⁴⁵

Likewise, there has been some export growth over the past few years most of it to the Israeli market—the destination for about 95 per cent of Palestinian exports.⁴⁶  Palestinian exporters may lose out permanently as Israeli customers (and those in other countries) seek alternatives to Palestinian suppliers who cannot reliably deliver goods due to movement restrictions.

Thus the ability of the Palestinian economy to generate employment and income has been threatened by the damage caused to investment and trade. In the long-run and the final analysis, this is the most dangerous economic effect of the present crisis.

Gaza, 25 February 2001

Notes

¹This report is the update and elaboration of UNSCO, “The Impact on the Palestinian Economy of Confrontations, Mobility Restrictions and Border Closures, 28 September—26 November 2000,” Gaza, 30 November 2000. See ……………(missing)

²The Palestinian Centre for Human Rights and other human rights organizations have consistently documented the effects of these policies. For an analysis of the origins and genesis of the closure and permit policy, see also UNSCO Economic and Social Conditions in the West Bank and Gaza Strip, 1 April, 1997, pp. 41-61.

³UNSCO estimates based on information from the PA Ministry of Labour and the Palestinian border authorities. The border closures documented are those that impede the movement of Palestinian labour and commodities to Israel. The only Israel-Gaza commercial crossing point that has remained in operation since early October 2000 is at Karni/Muntar which itself has been completely closed on 20 days and partially closed on another 10 days during the reporting period.  Effective border closure days exclude weekends (i.e. Saturdays and half the Fridays) and Jewish and Muslim holidays during which no Israeli-Palestinian business is transacted. Potential work days between Israel and the OPT average.

⁴See Amira Hass "The Long and Winding (Dirt) Road," Ha'aretz, 28 January 2001.

⁵See Palestinian Centre for Human Rights, “Closure Updates,” various issues, October 2000—January 2001.

⁶UNSCO estimates based on information from UNRWA and on interviews with taxi operators and travelers in the West Bank and Gaza, October 2000—January 2001. It should be noted that severe internal closures have been in place ……………….(missing)

⁷All travel times and taxi fare costs are UNSCO estimates based on interviews with taxi drivers and travelers in the West Bank and Gaza, October 2000—January 2001. In an opinion poll conducted in November, 74 per cent of respondents reported that internal closures had prevented them from visiting relatives in the OPT while 77 per cent indicated that such closures had prevented them from reaching their places of work. See “The Palestinian Intifada and the Peace Process, 6-8 November 2000,” Development Studies Programme, Bir Zeit University, Public Opinion Poll 2, 13 November 2000.

footnote #8 missing

⁹GDP for 2000 is a preliminary estimate from the Palestinian Central Bureau of Statistics (PCBS) that includes East Jerusalem, is expressed in current USD and assumes no border closures. Data and assistance provided by the PCBS, January 2001. The normal work year in the OPT is an UNSCO estimate that excludes Fridays (the weekend) and the two main Muslim holidays—‘Id al Fitr and ‘Id al Adha.

¹⁰See PCBS Direct Losses of the Palestinian Economy Due to the Israeli Siege, 1/10/2000–30/11/2000, December 2000 at: www.pcbs.org. The field survey covered a representative sample of 635 economic establishments.

¹¹The underlying and simplifying assumption employed here is that production of GDP is evenly distributed throughout ……………(missing)

¹²Estimated contribution by economic activity is for the year 2000 as a whole and in the absence of border closures.  The proportional impact (decline) is based on the PCBS report cited above. The estimated impact on GDP as a whole is the product of the economic activity share and the proportional impact and refers only to the October-November 2000 period.

¹³This is based on an estimated average flow of 122,000 workers earning approximately NIS 2,129 per month and using the average 1999 exchange rate of USD 1 = NIS 4.15 from PCBS. Estimates based on PCBS Labour Force Surveys.

¹⁴Labour flow estimates and wage rates are based on PCBS Labour Force Surveys Nos. 16-18 which cover the first three quarters of 2000 and on PCBS population estimates for the West Bank and Gaza including East Jerusalem. This estimate includes permitted labour flows of 23,000 from the West Bank and 27,000 from Gaza, informal labour flows from the West Bank of 61,000 and about 19,000 workers from East Jerusalem who require no work permits. See Table 5 below. The average wage rate is calculated by use of the average year 2000 exchange rate of USD 1 = NIS 4.09 from PCBS.

¹⁵This is based on a 252-day work year, the average for Palestinians employed in Israel according to the PCBS Labour Force Surveys.

¹⁶All labour flow estimates are daily averages for Palestinians employed in Israel and Israeli settlements and industrial zones in the OPT including workers without permits and those from East Jerusalem. Data for January-September 2000 are from PCBS Labour Force Surveys Nos. 16-18. The extent of average daily employment reductions in the October 2000-January 2001 period are UNSCO estimates based on information from the PA Ministry of Labour, Palestinian National Security Force-Northern Command, Gaza and from reports from border villages in the northern West Bank and include workers. Reports suggest that some Israeli employers have assisted informal Palestinian workers to reach their jobs in Israel. Potential work days refer to calendar days less weekends and holidays.

All trade figures in this section are based on VAT clearance data provided by the PA Ministry of Finance, January 2001. Data excludes Palestinian agricultural exports that are not subject to VAT. According to the Ministry of Agriculture, agricultural exports average USD 150,000 per day, Ramallah, 17 October 2000. Evidence suggests that Palestinian exports to other countries—while a small portion of total exports—have been more than proportionally affected by the crisis.

¹⁸Truckload volume through the Karni/Muntar is an UNSCO estimate based on data and assistance provided by the Palestinian Border Forces, Muntar Crossing, November 2000—January 2001.

²⁰These estimates implicitly assume that monthly GDP—as well as monthly labour flows to Israel and labour income earned in Israel—in January 2001 would be similar to the averages for the year 2000.

footnote #21 missing

²²Average unemployment rate for the first 9 months of 2000 is based on PCBS Labour Force Surveys, Nos. 16-18.  Unemployment estimates due to the initial shock of border closures and movement restrictions refer to early October and are UNSCO estimates based on PCBS data.

²³All labour flow estimates are daily averages for Palestinians employed in Israel and Israeli-controlled areas in the OPT and include workers with and without permits and those from East Jerusalem. Data for January-September 2000 are from PCBS Labour Force Surveys Nos. 16-18. The extent of average daily employment in Israel in the October 2000-January2001 period are UNSCO estimates based on information from the PA Ministry of Labour, Palestinian National Security Force-Northern Command, Gaza and from reports from border villages in the northern West Bank.

²⁴UNSCO estimates based on the PCBS Labour Force Surveys for the first 9 months of 2000, the labour force is estimated at 662,000 persons of which 71,000 persons were unemployed. The number of internally disemployed—82,000 persons—is from Ministry of Labour, “Losses to Workers and the Palestinian National Authority………….(missing)

(continued)

45.8 per cent of households have a member who has completely lost employment while 24.7 per cent have a member who has partially lost employment as result of the crisis. See “The Impact of the Israeli-Imposed Siege of Palestinian Living Conditions,” Development Studies Programme, Bir Zeit University, Public Opinion Poll 3, 19 February 2001.

²⁵UNSCO estimates, based on data from PCBS, suggest there was an average of 592,000 employed persons in a total population of 3.1 million during the first 9 months of 2000. This yields a ratio of about 4 non-working persons for each working person.

²⁶Indications are that the income losses have been even more widespread. In an opinion survey conducted in early November, 86 per cent of those polled reported that their household living level had declined as a result of the strife and movement restrictions. See “The Palestinian Intifada and the Peace Process,” Bir Zeit University, Public Opinion Poll 2, 13 November 2000.

²⁷See UNSCO Economic and Social Conditions in the West Bank and Gaza Strip, various issues, 1996—1999.  According to the Bir Zeit University Public Opinion Poll 3, 19 February 2001, 84.2 per cent of households have reduced their expenditures, 55.2 per cent have spent accumulated savings, 42.9 per cent have taken loans, 22.3 per cent have sold dowry or wedding gifts, 27.9 have asked for assistance and 16.8 have resorted to agriculture and animal husbandry.

²⁸See World Bank Poverty in the West Bank and Gaza, Washington, January 2001, p. 74.

²⁹UNSCO estimate derived by multiplying 33 months of income by 1/12. This is an estimate for the average household. It is assumed that the poor—who were about one-fifth of all households during this period—accumulated 30 Palestinian National Authority Palestine Poverty Report 1998 (n.d.)

³¹op cit World Bank. The report notes the strong correlation between availability of work in Israel and lower poverty rates in the OPT.

³²Food parcels generally consist of flour, rice, powdered milk, cooking oil and sugar (though not necessarily all of these items). The quantities provided in such parcels are usually sufficient for one month’s consumption by the beneficiaries and are valued at between NIS 80-150 depending on the assisting agency. In addition to food parcels, some assistance was in the form of one-off cash assistance, health insurance coverage and/or distribution of household items.

³³In addition to emergency relief, during the last quarter of 2000, the Ministry of Social Affairs and the United Nations Relief and Works Agency (UNRWA) provided on-going assistance to some 58,000 long-term special hardship cases.  These are mainly defined as households who are chronically excluded from the labour market and without identifiable means of support to meet basic needs. These include the elderly, the chronically ill, the disabled and poor women heads of households. In general, both programs exclude households in which there are employable but unemployed adult males. Information provided by PA Ministry of Social Affairs and UNRWA, January 2001.

³⁴The estimate of total beneficiaries is based on data provided by the PA Ministry of Social Affairs, UNRWA and the NGO World Vision International. Food parcels channelled through the Ministry of Social Affairs were provided mainly by the UN World Food Programme (WFP) and the PA Ministry of Supply. Local donations provided Zakat Committees and charitable organisations, and registered with the Ministry of Social Affairs, are included in these estimates. Indications are that some assistance—primarily from Arab governments and unofficial agencies—were directly distributed to beneficiaries and therefore not included in these estimates. The total number of recipients also excludes the latest WFP emergency project, which will distribute food for a three-month period to some 257,000 poor people.

³⁵UNRWA's three-month emergency programme in the OPT is to provide food parcels to some 220,000 registered …………..(missing)

³⁶UNRWA Headquarters "Annual Reports of the Commissioner General of UNRWA to the General Assembly," various issues. Some 96 per cent of these families received assistance because of confrontations, border closures and curfews while the remaining 4 per cent received assistance due to natural disasters and evictions. In Gaza UNRWA generally does not provide emergency assistance; rather, the large number of needy households have more frequently received selective cash assistance and access to employment generation programmes during the same period.  In the emergency of 1996, WFP, on behalf of the Ministry of Social Affairs, distributed emergency food assistance to 7,150 families (35,570 people) in the OPT; in 1997, WFP distributed emergency assistance to 2,000 families (about 10,000 people) in the West Bank, adversely affected by border closures. This is not inclusive of WFP projects implemented through the Ministry of Agriculture, which target emergency needs of poor farmers suffering from drought.  Information provided by WFP, January 2001.

³⁷Data and assistance provided by the Palestinian Ministry of Health, February 2001.

³⁸See the following reports: Ministry of Agriculture, "Report on Losses to Agricultural Sector during the Confrontations with Israel," Ramallah, 7 January 2001 (in Arabic); Palestinian Human Rights Monitoring Group “Overkill: Israeli ……………..(missing)

(continued)

Gaza, 25 January 2001; LAW, "Bombing Civilian Targets," Jerusalem, 31 January 2001; Palestinian Red Crescent Society, "EMS Status Report: Current PRCS Emergency Medical Services Challenges," Gaza, 26 January 2001.  The Ministry of Housing estimates the damage to private housing units at about USD 9.5 million and the damage to public and commercial property at about USD 16.5 million. Information provided by the Ministry of Housing, Gaza, 1 February 2001. The value of uprooted trees and destroyed agricultural infrastructure were estimated by the Ministry of Agriculture at about USD 27 million as of December 2000.

³⁹See PA and IMF, “West Bank and Gaza; Economic Policy Framework, Progress Report,” 31 May 2000.

⁴⁰Based on information from the IMF, November 2000—January 2001.

⁴¹Thus far, this has led to the use of approximately EURO 58 million (about USD 52 million) from the European Commission’s Special Cash Facility that was established because of similar problems in 1997. The PA has also received about USD 55 million in budgetary assistance from Gulf Arab countries—most notably Saudi Arabia and the United Arab Emirates—while Norway has contributed USD 10 million. Data and assistance provided by the IMF.

⁴²See op cit PA and IMF, “West Bank and Gaza; Economic Policy Framework.” See statement of Minister Mohammad …………….(missing)

⁴³Based on information from various donors and the World Bank, October-November 2000. Israeli authorities have also impeded the movement of material for projects. As an example, no cement deliveries were permitted to enter Gaza for the months of October and November, effectively halting construction in the Gaza port and Gaza power station projects. Based on information from the PA border authorities. Also, see Ze’ev Schiff “Moderate Policies Could Be Tested by Extreme Acts,” Ha’aretz (website), 11 October, 2000.

⁴⁴See UNSCO Report on the Palestinian Economy, 1997-2000. These semi-annual reports are available on website:www.unsco.org.

⁴⁵Information provided by the Palestinian General Agency to Promote Investment, the body responsible for applications.