Poverty in the West Bank and Gaza – World Bank report

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Report No. 22312-GZ

Poverty in the West Bank and Gaza

June 18, 2001

Middle East and North Africa Region

The World Bank

Document of the World Bank

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TABLE OF CONTENTS

EXECUTIVE SUMMARY – I

A. CHAPTER I : POVERTY UPDATE 1996-1998 – III

B. CHAPTER II: GROWTH, EMPLOYMENT AND POVERTY – IV

C. CHAPTER III: A POVERTY MAP FOR THE WEST BANK AND GAZA – V

D. CHAPTER IV: SOCIAL SAFETY NETS – V

E. CONCLUSION – VII

CHAPTER I: POVERTY UPDATE 1996-1998 – 1

I. INTRODUCTION – 1

II. ECONOMIC BACKGROUND – 2

III. POVERTY IN THE WEST BANK AND GAZA, 1996-1998 – 3

CHAPTER II: GROWTH, EMPLOYMENT, AND POVERTY – 12

I. INTRODUCTION – 12

II. DECLINING POVERTY – INCOME GROWTH OR REDISTRIBUTION? – 13

III. LABOR MARKETS AND POVERTY – 16

IV. PROSPECTS AND POLICY IMPLICATIONS – 19

CHAPTER III: A POVERTY MAP FOR THE WEST BANK AND GAZA – 22

I. INTRODUCTION – 22

II. DISTRICT AND LOCAL POVERTY RATES – 23

CHAPTER IV: SOCIAL SAFETY NETS – 29

I. INTRODUCTION – 29

II. THE COST OF A SAFETY NET – 30

III. ASSESSING SAFETY NET PROGRAMS – 31

IV. A BRIEF DESCRIPTION OF THE WBG SOCIAL PROTECTION SYSTEM – 32

V. EFFECTIVENESS OF SOCIAL PROTECTION FOR THE POOR IN THE WBG – 35

VI. IMPROVING THE SOCIAL SAFETY NET IN THE WBG – 38

BIBLIOGRAPHY – 41

ANNEXES:

ANNEX 1.1: HOUSEHOLDS AND CENSUS SURVEYS – 42

ANNEX 1.2: ECONOMETRIC RESULTS – 44

ANNEX 2: AVERAGE WAGE RATES AND BREAKDOWN OF JOB CREATION – 58

ANNEX 3: METHODOLOGY FOR ESTIMATING LOCAL POVERTY RATES – 59

ANNEX 4: ESTIMATES OF THE IMPACT OF RECENT CLOSURES ON POVERTY – 63

Map: IBRD 27791

Executive Summary

1. Poverty is high in the West Bank and Gaza (WBG). In 1998, poverty affected nearly one in every four Palestinians. Though this report focuses on the period prior to the ongoing social and political unrest, its conclusions remain relevant even in these challenging times. Recent events, which have disrupted economic activity, have only served to underscore the link between economic opportunity and poverty reduction in the WBG as poverty is estimated to have risen sharply since the beginning of the current crisis. In order to reverse the rise in the level of poverty, not only is the resumption of normal economic life essential, but also the adoption of policies which lead to long-term development of the Palestinian society.

2. This report complements the study by the National Commission for Poverty Alleviation, Palestine Poverty Report 1998. It is intended for a broad audience and hopes to be of particular interest to persons and organizations whose work is concerned with the improvement of the lives of poor Palestinians. The report's overarching objective is to increase our understanding of the causes of poverty in order to find ways to reduce poverty among the Palestinians. Three broad
messages which emerge from the report are:

• First, unless the Palestinian territories are able to achieve high levels of economic growth, the prospects for future poverty reduction are not encouraging. Not only will the number of poor Palestinians grow rapidly, but their share in the population will also increase which could become a socially destabilizing factor.

• Second, unless Palestinians gain greater access to external markets and to better paying jobs, whether in Israel or in higher productivity occupations in the WBG, it will be difficult for them to escape poverty. Presently, the majority of poor Palestinians live in households headed by working adults in low-paying jobs that do not provide sufficient income to raise their families to a minimally acceptable standard of living.

• Third, the formal safety net does not have the financial resources necessary to have a significant impact on poverty. Nevertheless, it can play an important role in helping to reduce destitution among households headed by the unemployable poor and even the temporarily unemployed.

3. This summary and Chapters I-IV present the main conclusions of a World Bank review of the poverty situation in the WBG. The report is divided into four sections. Chapter I provides an international comparison of the level of poverty and discusses the micro determinants of poverty in the WBG. Chapter II analyzes the impact of economic growth, income redistribution, and labor market developments on poverty in WBG. Chapter III provides a detailed poverty map of the WBG and Chapter IV discusses ways of improving the social safety net.

4. Core conclusions with respect to each of the four components of poverty review in this report are as follows:

(a) With respect to the poverty rates in the WBG (Chapter I)

• Poverty is high because of low economic development in the Palestinian territories.

• Social indicators are good, but these may not be sustainable in the future.

• A key determinant of household poverty among the Palestinians is the employment status of the household head.

(b) With respect to the impact of economic policies on povertv (Chapter II)

• During 1996-1998, poverty fell in the WBG due to growth in incomes as well as a reduction in inequality in the distribution of income.

• Though job creation in Israel and in public employment in the Palestinian Authority were the main reasons that poverty declined during 1996-1998, these areas are unlikely to be sources for rapid employment growth and poverty reduction in the future.

• Unless the economy grows by 4.6 percent annually, the share of the population living below the poverty line will rise. However, in order to reduce the number of poor in an economy with rapid population growth, GNP must grow by at least 6.7 percent per annum.

(c) With respect to the poverty map (Chapter III)

• Poverty varies dramatically among districts. District poverty rates range from 3 to 55 percent of the local population. Poverty is highest in Gaza districts and lowest in Jerusalem. Half of the Palestinian poor live in three districts – Khan Yunis, Gaza City, and Hebron.

• Three of the top five poorest localities are in the West Bank and all from different districts – Al Jiftlik, Yatta, and Ya'bad, with poverty incidence rates ranging between 40 and 51 percent of the local population. The five most affluent localities are urban centers: the Jerusalem localities followed by the towns of Ramallah and Nablus, the poverty rates ranging between 2 and 7 percent.

• Poverty also varies significantly within district. The highest poverty rates in the districts of Nablus, Bethlehem/Jericho, and Ramallah are 4 to 7 times the lowest poverty rate in the district.

(d) With respect to the safety net (Chapter IV)

• The minimum amount of assistance needed to raise poor families to the poverty line is 3.6 percent of GDP, but with the present level of targeting efficiency and moderate administration cost, this amount would rise to approximately 10 percent of GDP or about US$ 400 million.

• The formal safety net reached about 30 percent of the poor in 1998 but did not raise a large proportion of them out of poverty. Substantial resources are being depleted since over half of the beneficiary households are non-poor.

• Modest changes in the safety net can be made which could improve its effectiveness. In the future, larger modifications can be considered that would lead to higher coverage of the poor, including the working poor.

5. The sections that follow summarize the main findings of the poverty report by chapter.
A. Chapter I: Poverty Update 1996-1998

6. Level of Poverty in the WBG. Poverty in the West Bank and Gaza is estimated at 23.2 percent of the population in 1998, equivalent to about 674,000 persons. The overall poverty figures mask significant differences between the West Bank and Gaza. In 1998 the share of the Gazan population living in poverty was 37 percent, more than twice as high as in West Bank where it was 15 percent. Nevertheless, due to the larger population in the West Bank in comparison to Gaza, 43 percent of all Palestinian poor in the WBG live in the West Bank.

7. The poverty rates among female and male-headed households differ markedly in the WBG. In 1998, 26 percent of female-headed households were below the poverty line as compared to 20 percent of male-headed households. However, though poverty rates are higher among female-headed households, these represent only 11 percent of all Palestinian poor households and, due to their smaller average household size, an even smaller share of the poor.

8. International Comparison of Poverty Rates. Poverty in the WBG is high by regional standards and for a lower middle-income economy with GNP per capita of US$ 1,800 in 1998. This may be because the WBG actually is not as developed an economy as indicated by its income per capita figures. Residents of the WBG face prices of an upper income country due to the high degree of integration between the Israeli and Palestinian economies, but do not receive
commensurately high wages. Effectively, this serves to lower the population's purchasing power and sheds light on why poverty in the WBG is unusually high. Once we correct for this, we find that poverty in the WBG lies in the expected range.

9. Social Indicators. In the WBG, health and education indicators are closer to the level enjoyed by upper middle-income countries rather than to comparator countries. One possible set of reasons for this pertain to the delivery of social services in the WBG. In general, the population has good access to basic services – both in terms of financial access (i.e., affordability) and geographical proximity. Also, because services provided are of good quality, consumer demand remains high. Finally, the services provided are well balanced between primary and tertiary levels so that essential services (such as preventive care) with the broadest welfare impact are widely available. A second set of reasons why education levels, in particular, are relatively high in WBG may be due to the Israeli policies during the occupation that actively discouraged physical investment. Palestinians may have invested heavily in human capital since other forms of investment were limited.

10. Characteristics of the Poor. Which households are more likely to be poor? The Palestinian Expenditure and Consumption Surveys allow us to identify the determinants of household consumption. Analysis of the survey reveals the following key findings: (i) households with at least one working member are less likely to be poor – underscoring the importance of employment for poverty reduction; (ii) if a household member is employed in Israel, the household is better off than if he or she works in the Palestinian territories; (iii) in the West Bank, households with members employed in the private sector are better off than those with members working in the public sector; (iv) in Gaza, having a second working member in the household helps to significantly increase household expenditures; and (v) the higher the educational level, the higher the household consumption (and less likely for the household to fall into poverty).

B. Chapter II: Growth, Employment, and Poverty

11. National account data indicate that during 1996-1998 incomes rose by 11 percent as measured by GNP per capita. However, the domestic Palestinian economy grew only modestly and GDP per capita rose by about 2 percent in two years. During this period there was a significant decline in the unemployment rate from 22 percent to 16 percent. According to household survey data, we find in 1996-1998 that the proportion of the population living below the poverty line also decreased substantially from 26.9 percent to 23.2 percent.

12. What were the sources of poverty reduction in the WBG? To answer this question, this chapter analyzes two issues concerning the dynamics of poverty. First, we analyze the recent evolution of poverty in the WBG and try to determine the relationship between economic growth and changes in poverty and inequality in the short-term (1996-1998). Second, the chapter analyzes the impact of structural factors on poverty, particularly developments in the labor market in order to draw some conclusions about the prospects for poverty reduction over the medium to long-term.

13. Declining Poverty – Income Growth or Redistribution? The proportion of households living in poverty in WBG fell by 3.5 percentage points from 1996 to 1998. The reduction in poverty in WBG could have been the result of either growth in average incomes of Palestinian households, poor and non-poor alike, or a reduction in inequality in the distribution in income (as incomes of poor households gained relatively more than those of the non-poor). In the Palestinian territories, half the reduction in poverty occurred due to a reduction in inequality while about 43 percent in the drop was a result in the growth in average real household consumption. However, regional level poverty decomposition show some differences in the relative importance of these factors. In the West Bank, almost 80 percent of the decline in poverty was due to the growth in average real consumption and a decline in inequality of incomes played a relatively small role, whereas in Gaza, only 36 percent of the decline in poverty was attributable to average growth in real consumption with a reduction in inequality playing a
bigger role.

14. Labor Markets and Poverty. During 1996-1998, there was a net creation of 46,000 jobs in Israel and 43,000 jobs in the WBG, of which 13,000 jobs were in the Palestinian Authority. Though the private sector continued to provide the greatest share of employment in the WBG, its importance has declined during 1996-1998 in both regions, as private sector employment growth was only 10 percent compared to 17 percent and 63 percent in the public sector and Israel
respectively. The Palestinian poor are more likely to work in the domestic private sector in the WBG than the non-poor. Their characteristics are similar to the Palestinian workers in Israel in terms of education and age, thus, indicating that job opportunities in Israel can pull poor and low skilled Palestinians out of poverty, and their loss can push them into poverty.

15. How did changes in employment affect household poverty levels? Analysis of the household survey data reveals three important findings. First, a large part of the observed decline in poverty rates between 1996 and 1998 were due to higher employment. Job creation contributed 84 percent of the total decline in the head-count index in the West Bank and 46 percent in Gaza. Second, the private sector played an insignificant role at best in reducing poverty in the WBG. Third, though total job creation was lower in Gaza than in the West Bank, poverty decreased more sharply in Gaza.

16. Prospects and Policy Implications. The substantial decline in poverty rates observed during 1996-1998 occurred even though expenditure growth was relatively modest. This is unusual by international standards and reflects a high concentration of households with consumption levels close to the poverty line. It is unlikely that this trend will be sustained in the long run. What would be more likely is that much higher growth rates in consumption and GNP will be necessary to achieve similar rates of poverty reduction in the future. If the number of poor in 1998-2003 is to fall, an annual GNP growth rate of 6.7 percent or more is required. However, if the economy grows at about 2.5 percent per annum, then the number of poor could increase by 63 percent assuming that no changes in the distribution of income occur.

17. In the absence of structural reforms, prospects of further poverty alleviation in the WBG are limited. Though in the past, the poverty level in the WBG was reduced by massive job creation in Israel and the public administration, continued expansion of employment in these sectors will be limited. Therefore, any anti-poverty macroeconomic strategy should rely on the creation of jobs in the private sector, especially in the development of an export-oriented private sector. Higher exports could directly benefit the poor who are probably already heavily represented in low wage occupations in the tradeable goods sectors of agriculture and industry. For an economy as small as the Palestinian economy, long run development depends critically on the creation of strong linkages with external markets. Without expanding its foreign markets, the Palestinian economy will find it difficult to attract new investment and to increase worker productivity. Since domestic demand growth is slow, the rapid rise in labor supply will translate into decreasing real wages, increasing unemployment, and consequently, higher poverty rates.

C. Chapter III: A Poverty Map for the West Bank and Gaza

18. District level poverty rates in the West Bank and Gaza vary significantly. The poverty rates in 1997 exceeded 30 percent of the district population in the Gazan districts and Jenin. The poverty rate in the southern part of Gaza exceeded 50 percent in 1997, while it was around 30 percent in the northem part (Jabalya and Gaza City). In the West Bank, the incidence of poverty is highest in the northern- and southern-most parts, where it is above 25 percent, almost double the rates in central West Bank.

19. Combining the household survey data with the census data in order to obtain poverty rates for small geographical localities, we obtain three interesting findings: (1) three of the top five poorest localities (with poverty between 40-51 percent of the local population) are in the West Bank – Al Jiftlik, Yatta, and Ya'bad, though combined they contribute only about less than 10 percent of the total poor; (2) the five localities with the lowest poverty rates (between 2-7 percent) are concentrated in urban areas in the West Bank: the three Jerusalem localities and the towns of Ramallah and Nablus; and (3) the variation of poverty incidence rates within districts in the West Bank is strikingly high, especially in Nablus, Bethlehem/Jericho, and Ramallah. The highest poverty rates is 4 to 7 times the lowest poverty rate in that district.

D. Chapter IV: Social Safety Nets

20. The objective of this chapter is to present issues for consideration in the design of the future safety net based upon analysis of household data and existing research. This report does not propose a safety net design nor advocate the adoption of any particular safety net program. Rather, the hope is that the issues raised will help the Palestinian society in determining an array of programs best suited to the prevailing social and economic conditions while having the flexibility to respond to future changes.

21. Description of the WBG Social Safety Net. Social protection of the poor in the WBG is from four major sources: the Palestinian Authority, intemational official assistance, non-governmental organizations (NGOs), and informal family assistance. The Palestinian Authority's two major social welfare programs are the Ministry of Social Affairs' (MOSA) Income Support Program and the Public Works Programs (apart from public sector employment, which has been an implicit social safety net). The other large welfare program is UNRWA's Special Hardship Program which targets ultra poor refugee households. The non-governmental sector appears to play an important role in the provision of aid to the poor. It is estimated that in 1998, there were about 500 NGOs providing various forms of support to poor households in the WBG. Included in this category are religious organizations and networks of which the Al Zakat Committees are among the most prominent.

22. The Cost of a Safety Net. The scope of the poverty challenge facing the Palestinian society is large and affects one out of every five households. The transfer alone needed to lift families to the poverty line for one year would be about US$ 150 million or about 3.6 percent of GDP. However, with present rates of leakage to the non-poor and assuming only modest administrative costs, the additional resources needed to operate a simple income-transfer program aimed at eradicating poverty in the WBG would have been about US$ 400 million in 1998, or 10 percent of GDP.

23. Effectiveness of Social Protection for the Poor. The formal safety net in the WBG appears to need significant strengthening. According to preliminary analysis based upon the household expenditure surveys, the coverage of the formal safety net is modest since it reached only about 30 percent of the poor population in the WBG in 1998. The adequacy of the assistance provided in terms of lifting families out of poverty was also low. Though an estimated 57,000 households received social assistance in 1998, almost 40 percent of the beneficiaries continue to live below the poverty line. In addition, social assistance in the WBG suffers from considerable leakage to the non-poor since only 41 percent of aid recipients are poor.

24. Improving the Social Safety Net. In the short- and medium-term there are ways to improve the safety net with modest investment of time and resources. First, some basic steps can be taken to reduce leakage of assistance from the formal safety net programs to the non-poor by first determining from which specific welfare programs the non-poor benefit and then seeking ways of reducing it. Second, coverage of the poor and reducing leakage to the non-poor can be
improved by the devolution of certain aspects of the implementation of MOSA's poverty alleviation programs to the local level. Third, the allocation of resources can be improved by ensuring that those areas or localities with higher levels of poverty receive proportionately greater transfers.

25. In addition to the short-term considerations for improving the ability of the safety net to reduce poverty in the WBG, there are medium to long-term issues that the Palestinian society may want to address to improve the effectiveness of the safety net. The foremost problem is that both the MOSA and UNRWA income transfer programs as well as the public works programs, exclude the working poor and their dependents though this group comprises the majority of the
poor. The second issue concerns the integration and complementarity of social programs, both at the national and local levels. Here we refer not only to the large public welfare programs, but also to the services and assistance provided by education and health care providers and NGOs. Better coordination among these programs could help deal with such difficult problems as child poverty. A third long term issue is the need to consider the establishment of a social insurance program. Presently, old age security is predominantly determined by voluntary savings, informal transfers, and poverty relief measures, making many of the population, especially in the lower income groups, vulnerable to poverty when old age approaches.

E. Conclusion

26. This report aims to shed light on a few aspects of poverty in the WBG. Much more analytical work remains to be carried out, especially in helping to identify what specific economic policies could be adopted to reduce poverty. Important areas that require further exploration are the impact of sectoral policies on poverty. For example, how do transportation policies impact local unemployment and wage rates? Are secondary school drop-out rates higher in poor areas and, if so, what can be done about it? In order to begin answering questions such as these, analysis of the household survey and census results are important sources of information and can begin at the very least to lay the foundation for developing pro-poor sector policies.

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