Political Context

Economic growth and development patterns in the West Bank and Gaza Strip ( the Palestinian Territories) have to a great extent been dictated by the larger Israeli economy. The direct Israeli control over the Palestinian economy, and enforcement of the customs and monetary union with Israel over almost 27 years of occupation, has resulted in substantial changes in the economic and trade structures. The Palestinian economy became very dependent on the Israeli economy and isolated from the rest of the World. Israel has become the sole trading partner and a large portion of the Palestinian labor force relies on jobs in the Israeli market.

Israeli Occupation
During the 1970’s and early 1980’s, the Palestinian economy grew steadily. During the mid 1980’s, it entered into chronic stagnation, which lasted until the early 1990’s. Throughout the occupation period, the Israeli policies and market forces brought about distortions to the macroeconomic and sectoral structures, labor, land, and capital markets, and restrained the expansion of private productive sectors. Domestic production patterns in the Palestinian territories were shaped largely by the needs of the Israeli market and trade priorities, while both tariff and non-tariff barriers limited interaction with the Jordanian and other Arab markets. This created a situation whereby Palestinian earnings in Israel became the single most important source of household income, most of which was then re-channeled into consumption of Israeli imports.

After Oslo
When the Palestinian National Authority (PNA) began to exercise its functions in May 1994, the economy was weighed down by imbalance and fragmentation in all markets, coupled with institutional underdevelopment and under-provisioning of public goods and services. The new situation engendered by the peace process promised a fresh beginning for the economy and a departure from the economic legacy of occupation. The new economic relationship between the Palestinian National Authority and Israel was drawn up in the Protocol on Economic Relations, signed in Paris in April 1994, along with subsequent agreements between the two parties. The development path for the Palestinian Authority, henceforth, was to be based on equitable economic cooperation between the two nations, with special importance given to greater openness in mutual trade flows and expansion of trade with Jordan, Egypt, and other new markets. It was hoped that the macroeconomic policy instruments assigned by the PNA during the interim period would allow it to pursue a policy targeting growth in agriculture and industry and geared towards creating domestic employment, expanding exports, and curtailing imports.
Unfortunately, the underlying promises of peace remain largely unfulfilled. Before the peace accords, movement of people and goods between Israel and the Palestinian Territories and within the now PNA-controlled areas was relatively unconstrained. Following 1993, a strict system of restrictions, in the form of security checkpoints, border closures, and permit procedures, was put in place that effectively reduced the large flow of income from Israel into the Palestinian Authority. The average number of Palestinians employed in Israel fell from 116,000 workers in 1992 to an unprecedented low of 25,100 workers in 1996, but climbed to 44,500 in 1998. This resulted in an unemployment crisis and an increase in the incidence of poverty in the Palestinian territories. The Palestinian National Authority has only begun taking the first steps on the development path that will move it from having been almost fully dependent on a much larger Israeli economy towards becoming an autonomous self-determined economy.

This transitional stage has been fraught with difficulties, many of a political nature. However, the establishment of an independent Palestinian Authority has enabled the WBGS to build trade links with a number of external markets under favorable terms. In addition this has facilitated the set up of a functioning civil service, and the removal of many bottlenecks which previously hampered the development of Palestine’s productive base. These developments, along with others such as donor funded infrastructure development and strong growth in the financial sector, set the stage for a speedy economic recovery once a political settlement is finally in place.

Today

Since the end of September 2000, the areas of the WBG under PNA jurisdiction have been subject to a combination of border closures and internal movement restrictions. It can be argued that these closures constitute the most severe and sustained set of restrictions imposed by Israel since 1967. The negative impact on the Palestinian private sector has been severe, and damage has intensified in the last two months, due to the massive incursions of PNA territories.
The immediate and direct impact have been job losses and/or reductions of income to all sections of the private sector due to failure to reach places of employment or obtain business inputs and /or sell their goods and services. On average, the direct economic losses were estimated at 51% of GDP produced in the period October-November 2000 (UNSCO, January 2001 and PCBS, December 2000). 
Assuming that the net value of goods and services produced in the Palestinian economy is distributed evenly over the work year, the internal direct losses in income-earning opportunities are estimated at US$ 9 million per day.
In the first nine months of 2000 there was an estimated average of 130,000 Palestinians employed in Israeli-controlled area on a daily basis. The average worker was earning a daily wage of about US$ 27, or around US$ 3 million in total. Using January - September 2000 period as the reference period, the average monthly wage income loss is estimated at US$ 60 million, which is translated into total cumulative wage loss of around US$ 600 million since October 2000. Therefore, aggregate direct losses inflicted on the Palestinian economy may be estimated at US$ 2.7 billion, equivalent to over 50% of the estimated GDP for 2000.
Estimates on direct physical damage to private and public assets, (buildings, infrastructure etc.) vary. Some reports indicate that upwards of 3,000 structures from partial to total damage during the October 2000 - July 2001 period. The value of such damage has been estimated in tens of millions of dollars. While the MOF and PCBS give a total estimate of around US$ 272 million for direct physical damage, other reports place the figure much lower . 
Clearly, the most damaging impact of this current period is the reduction in private sector investment in employment creation. A recent World Bank survey of private businessmen and investors indicated that uncertainty (high risk perception) deepening under the current circumstances. The World Bank estimates that total private investments would drop in 2000 in the range of 15-20% compared to 1999 (West Bank and Gaza Update, February 2001). An unpublished study by MAS estimated that drop to be around 24%.

Economic Indicators

2.1 Economic Trends
The Palestinian Economy, building on a 4.1 per cent real GDP growth rate in 1998, continued to generate employment opportunities at a robust pace in 1999. There were an estimated 47,100 new jobs created between first-half 1998 and first-half-1999 which contributed to further reductions in unemployment and an increase in the real average monthly wage. Moreover, while Palestinian labor flows to Israel remained important in overall employment, 6 out of 10 new jobs were located in the Palestinian economy where almost three-quarters of new employment was absorbed in the private sector. There were also positive trends in planned business construction and credit creation by the banking system and relative stability in consumer prices.

2.2 Government Role in the Economy
The Palestine National Authority (PNA) has a considerable responsibility towards encouraging Palestine’s economic development with other members of the international community. As a product of high level diplomacy and joint economic cooperation with the international community, Palestine now enjoys several international trade agreements with the world:

• An economic protocol signed with Israel made it possible for Palestinians to benefit from border crossings at land, sea, and airports, promoting free trade with Israel and access for Palestinian goods to outside markets.

• The USA extends preferential status on Palestinian products entering its land, in all quantities and of all types of goods. Likewise, all imports from the US are duty free. This type of agreement is the first of its kind between the US government and an Arab country.

• Canada and the Palestinian Authority signed a joint framework for economic cooperation and trade in order to expand and encourage trade relations, and facilitate enhanced market access on a reciprocal basis

• An agreement with the EU grants free trade on all Palestinian goods into the European markets and promotes joint projects between the Palestinian and the European private business sector

• An agreement with the EFTA countries (Switzerland, Liechtenstein, Iceland, and Norway) allows for free trade on all imports and exports

• The PNA is party to bilateral commercial agreements with both Jordan and Egypt, granting preferential treatment to some Palestinian products.

• Unilateral custom-free entry of Palestinian products is allowed into Saudi Arabia, Qatar, United Arab Emirates, Bahrain, Tunisia, and Morocco.

• All imports from other countries enjoy an average tariff rate of 7-10%(MFN)

• Exports from Palestine are not subject to export tax and do not require licensing

The PNA has embarked on an extensive program of legal reform, in order to establish a healthy business environment. The policy makers are leaning towards a free market economy, where businesses are privately owned. With the assistance of the IFC, international legal experts and their local counterparts, the Legislative Council was able to pass the Investment bill, a new Taxation bill, and a bill regarding industrial estates and free zones. Preparation is underway for an intellectual property law, which will allow registration of patents and trademarks.

The establishment of an independent Palestinian authority has enabled the WBGS to build trade links with a number of external markets under favorable terms, to set up a functioning civil service, and to remove many of the bottlenecks which previously hampered the development of its productive base.

2.3 Balance of Payments
The current account deficit in 1996 reached approximately one quarter of Gross Domestic Production (GDP). In figures, this amount translates into US$856 million. This number includes current transfers to government from the international donor community excluding these transfers, the deficit amounts to US$1.242 million, or more than one third of GDP. At US$1674 million in 1996, the imbalance in the visible trade account (including goods but excluding services) was noticeably negative. The capital account consists almost exclusively of capital transfers, i.e. unrequited transfers related to capital goods in Palestine. In 1996 a surplus amounting to US$271 million was recorded in this account.

This surplus is quite large and suffices to finance approximately a third of the current account deficit. The bulk of capital transfers is receivable by government, but the total amount also includes an estimate of capital transfers receivable by the private sector in association with construction activities. Under change in reserve assets are recorded changes in international assets held by the PMA. In 1996, these assets increased considerably (in line with standard norms; in book-keeping this is represented by a minus sign in the table), leading to a surplus in the overall balance. The increase amounted to US$83 million, and occurred in spite of the large current account deficit.