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Palestinian Economic Sectors

Ramallah City
Ramallah City. Photo Flickr

Agricultural Sector
Industrial Sector
Services Sector
Construction Sector
Unemployment and Poverty
Summary

Introduction

The worsening political situation and growing external and internal disturbances have had a direct impact on the Palestinian economy. The current Palestinian economy ranks low among world economies, and it is highly susceptible to instability, despite the availability of human and natural resources and the high productivity of Palestinian society and individuals. According to the World Bank, the Palestinian economy falls in the category of “lower-middle-income countries.” The weakness and instability of the Palestinian economy have several causes—political, security, and economic.

A major reason for this is the political situation, particularly after the Paris economic agreement signed in 1994 between Israel and the Palestinian National Authority (PNA). The agreement, also called the Paris Protocol, is ‘a contractual protocol’ and an economic supplement to the Oslo Accords that regulates economic relations between the Palestinian and Israeli sides. Because of the Paris Protocol, the Palestinian economy has become dependent on Israel, as the Palestinians can import or export goods only through Israeli intermediaries. The agreement has also prevented the Palestinians from becoming involved in international partnerships and harmed the so-called “customs envelope,” that is, the free movement of goods between the Palestinians and Israel, which is not mutual but flows one way only, from Israel to the Palestinian territories. The Paris Protocol also prevented Palestinians from forging a national currency and encouraged Israel to evade the payment of monthly tax benefits that it collects on behalf of the Palestinian government. The agreement was supposed to be amended five years after signature, in line with the new circumstances, but this has not happened so far, because the Israeli government has insisted on keeping the Palestinian economy dependent on Israel so as to be able to control it politically.

Security issues are caused by Israeli actions on the ground, including the attacks on the Gaza Strip in 2009, 2012, and 2014, destruction of Palestinian economic systems, and the Israeli siege that has been imposed on the Gaza Strip since 2007. This is in addition to Israeli incursions and the erection of barriers and bypass roads (roads connecting settlements without having to pass through Palestinian villages) in the West Bank, the Israeli occupation’s control of Area C, which is rich in natural resources, and the Israeli bureaucracy created to control imports and exports under the pretext of security checks. Also causing the economic deterioration are the deficit in the Palestinian trade balance and the Palestinian budget, inflation due to increase in price of imports, high unemployment, the lack of a national currency, instability of financial foreign aid, foreign aid, and the existence of two different tax systems in the West Bank and the Gaza Strip because of the political divide that has existed since mid-2007.

Annual Real GDP by Area, 1994-2013 (million dollars), Palestine Economic Policy Research Institute – MAS
Annual Real GDP by Area, 1994-2013 (million dollars). Source: Palestine Economic Policy Research Institute – MAS

When the PNA was established in 1994, an international mechanism was set up to support the PNA financially and enable the new Palestinian entity to get on its feet economically, provided that such support stops after the completion of the transitional period from PNA to state, that is, after five years. It was not expected that this financial support would continue for more than 20 years, yet, even after two decades, the Palestinian economy remains fragile. The latest World Bank report, issued on 28 September 2015, shows that unemployment and poverty in the Palestinian territories have increased significantly for the third year in a row. Unemployment, especially among youths in the Gaza Strip, has exceeded 60%, and 25% of Palestinian citizens live below the poverty line. The report attributes this situation to gradual deterioration of the Palestinian competitive economy since the conclusion of the Oslo Accords, especially in the industrial and agricultural sectors. In addition, a stalemate in the reconstruction of the Gaza Strip due to Israeli restrictions on the Strip has led to a contraction in the real Palestinian GDP per capita.

The Palestinian Central Bureau of Statistics (PCBS) and the Palestinian Monetary Authority (PMA) issued economic reports summing up the performance of the Palestinian economy in 2014 and providing an outlook for 2015. The reports provided three different scenarios—optimistic, pessimistic, and baseline. As previously noted, the report highlighted the slow pace of growth in the Palestinian GDP. Unemployment has risen significantly, leading to a drop in real GDP per capita of more than 5% from the previous year, taking into account average population growth rates, which predictably dropped by up to 3.9% from the previous year.

palestine-gdp per capitaThe tables above and below illustrate the most important indices of local and national products, the contributions of production sectors, and per capita and total consumption as reported by the PCBS at the end of 2014.

2015 Forecast Three Scenarios

Agricultural Sector

Agriculture is one of the most important and oldest sectors of the Palestinian economy, as many crops are produced to fulfil the needs of the population and achieve food security and economic growth. Statistics indicate a significant drop in the percentage contribution of the agricultural sector to GDP, from 37% in the mid-1970s to 13.4% in 1994, 6.5% in 1999, and 5.6% in 2012. The percentage value added to GDP by agricultural activity dropped to 3.9% at the end of 2014, although preliminary estimates by the PCBS predicted a slight increase of 4.1% at the end of 2015, based on optimistic economic-growth expectations.

Agriculture covers about 1.854 million acres or 31% of the total area of the West Bank and the Gaza Strip, 91% of which is in the West Bank and 9% in the Gaza Strip. Some 62.9% of the agricultural land is located in Area C, which is under Israel’s administrative and security control. The agricultural sector’s role is not limited to economic and social aspects; it is also a key player in protecting the land from confiscation and settlement activities and guaranteeing the protection and the legal right to the use of water. The agricultural sector is also a major source of jobs, accounting for about 15.2% of the workforce, with a large percentage of workers, especially females, working in this sector unofficially.

The agricultural sector in Palestine faces many problems and obstacles, including those caused by the Israeli occupation and related to natural resources and administrative laws. Obstacles related to

Fisherman in Gaza with text protesting against the sea blockade on a wall
Fisherman in Gaza with text protesting the sea blockade on a wall. Photo Yann Renoult

Israeli practices include the construction of the Separation Wall and the resulting isolation and confiscation of land in order to build settlements, the conversion of large areas of Palestinian land into nature reserves and areas used as Israeli military training grounds, the construction of bypass roads, the destruction of Palestinian water wells in agricultural areas, and the reduction of the Palestinian share of water. Other practices include curbs on the freedom to export crops and import raw materials, and the prohibition of fishing further than six nautical miles off the Gaza Strip coast, out of the 20 nautical miles provided in the Paris Protocol.

Other challenges related to natural and environmental resources include limited water resources and agricultural land, improper use of chemicals, the lack of revenue from agriculture, and the high risk of crops being burnt by settlers, which has led many people to hesitate to work in that sector, given the absence of an agricultural insurance system that compensates farmers. A study prepared by the Palestine Economic Policy Research Institute (MAS) in Ramallah concluded that Palestinian farmers face legal, administrative, and technical issues, including agricultural land registration, high prices of agricultural land, urban expansion, and the distribution of land to heirs because such small plots of agricultural land are economically unworkable. This overview shows the magnitude of the suffering of Palestinian farmers in their effort to survive, especially considering that land is at the core of the Israeli-Palestinian conflict.

Percentage Distribution Agricultural Holdings in Palestine, per type - 2010/2011
Percentage Distribution Agricultural Holdings in Palestine, per type – 2010/2011. Source: Palestinian Central Bureau of Statistics

Industrial Sector

The industrial sector—including the extractive, processing, and handicrafts branches—is the second most important sector. It contributes 13.1% to the GDP, amounting to nearly one billion dollars (see chart above), and it comes second after the services sector in GDP.

Marble storage in Hebron
Marble storage in Hebron. Photo Palestinians Compete

The extractive industry that involves the use of quarries for cutting marble and other stones mainly in the cities of Nablus, Ramallah, and Hebron. The mountains of Palestine contain limestone and layers of other, varicoloured stone, which are exported to several countries around the world. Statistics show that the marble and other stone industries contribute 12% to the total industrial output of Palestine. Also, minerals such as phosphates, asphalt, and mud are extracted from the western shores of the Dead Sea; glass sand is extracted in Hebron, Ramallah, and Nablus; and Sulphur is extracted in the Gaza Strip.

Palestinian man wrapping soap
Palestinian man wrapping soap. Photo Lee Abroad

Handicrafts are the largest industrial sector and include trades such as textiles, footwear, ceramics, pottery, olive wood, seashells, coloured glass, soap, leather tanning, embroidery, and manufacturing bamboo products.

The food and agricultural industry is the largest and most important processing industrial sector related to processing. It includes the production of confectionery, dairy products, processed meats, beverages, pasta, cereals, canned food, oils, and animal feed. The food sector constitutes about 24% of the total industrial sector, amounting to about 400 million US dollars and employs about 16.8% of the total Palestinian workforce.

The PNA developed a strategy for manufacturing and industrial development in order to achieve a range of goals, including equitable growth and balance between the agricultural and industrial sectors, and between satisfying domestic demand and encouraging the export of goods. As a result infrastructure, including a transportation network, has been developed, and industrial zones have been established in most Palestinian cities, including Jericho, Jenin, Ramallah, Nablus, Bethlehem, Hebron, and Gaza, among others. In order to create a healthy investment environment in Palestine, a legal system has been established to attract Palestinian expatriates and foreign investors by providing tariff and tax exemptions for new investors for up to five years, under the Investment Promotion Law.

Like the agricultural sector, the industrial sector suffers from a wide variety of challenges, including the Israeli obstacles mentioned above. The competitiveness of Palestinian industries is modest, compared to regional and international markets, and heritage-focused handicraft industries prosper only where tourism is active in Palestinian areas; the lack of stability caused by the volatile political situation has affected the situation for more than a decade.

Services Sector

The Palestinian services sector has grown substantially recently, contributing greatly to the Palestinian economy. The percentage value added to GDP by services and other items for the year 2014 amounted to 63.1%, (see the table above), about 57% in 2012, and about 52.2% in 2000. The services sector employed about 62% of the total Palestinian workforce. The sector covers all real-estate activities, banking, telecommunications, insurance, transportation and distribution services, and hotels and restaurants, among others.

Percentage Distribution of GDP and Employment by Service Sectors in Palestinian Territories for 2012
Percentage Distribution of GDP and Employment by Service Sectors in Palestinian Territories for 2012. Source: ‘Imaar

Construction Sector

West Bank Construction
West Bank Construction. Photo Flickr

The construction sector constitutes one of the key Palestinian economic activities, in terms of contribution to GDP and employment and in term of its direct impact on many other economic activities. Most economic reports indicate a significant growth in the construction and real-estate investment sectors in Palestine. This clearly shows in the construction of new residential suburbs around several Palestinian cities. This is not surprising, as the construction sector in the field of infrastructure and housing has been growing since the establishment of the PNA, which has sought to create a solid infrastructure for a future Palestinian state and provide sufficient housing for its citizens. The Palestinian Investment Fund and some banks operating in the Palestinian territories provide financing to Palestinian citizens to enable them to own their own houses and repay their loans in monthly instalments.

Data published by the PCBS indicate that the housing sector remains one of the most important resources for development in Palestine, with the ratio of investment in housing to GDP since the establishment of the PNA amounting to about 21% in 1994, and 26% in 1999. This percentage did, however, drop significantly after the outbreak of the Second Intifada in 2000, to about 16.6% and continued to decline in subsequent years, to 13.8% at the end of 2007. The percentage did rise to 15.4% at the end of 2013.

The construction sector also contributes to Palestinian employment, increasing the number of workers from 34,600 in 1993 to 88,300 at the end of 1998. Since the establishment of the PNA, which began to build its institutions and rehabilitate Palestinian infrastructure, employment in the housing and construction sectors has increased by several times. However, employment dropped significantly during the years of the Second Intifada, although there was a noticeable improvement in employment in housing construction during the relative calm from 2003 to 2005. Data presented by the PCBS showed a rise in spending on the construction of new buildings in 2013 to about 913 million US dollars (711.5 million in the West Bank and 201.6 in the Gaza Strip). Moreover, the value of spending on maintenance and capital improvements to existing buildings rose slightly over the previous year, amounting to more than 650 million US dollars.

Palestine, Ownership
Source: Palestinian Central Bureau of Statistics
palestine, repairs, expenditures
Current Maintenance and Expenditures on Capital Addition Repairs and Improvement on Building in Palestine by Region, 2013. Value in thousand USD. Source: Palestinian Central Bureau of Statistics

The significant rise in the construction sector in Palestine, especially in the Gaza Strip, is due to the destruction wrought by Israel during past wars. Media reports show that the Israeli attacks on the Gaza Strip between 2008 and 2014 resulted in the complete destruction of more than 10,000 residential and service buildings and that more than 34,000 other buildings were seriously damaged. Residential buildings and industrial and agricultural facilities were not the only targets of Israeli attacks. Infrastructure, including road networks, wastewater and water-supply systems, electricity distribution networks, power stations, and bridges were targeted during the three wars. The Gaza Airport was destroyed in 2002, and Israel did not allow it to be rebuilt.

The conference on the reconstruction of the Gaza Strip held in Cairo on 12 October 2014 pledged to provide financial assistance to the Strip amounting to 5.4 billion US dollars. Construction is largely dependent on the supply of construction materials, particularly cement and steel, deliveries of which into the Gaza Strip have been delayed by Israel. The delay in the reconstruction of the Gaza Strip has many causes, including the Israeli siege and the mechanism established by UN Envoy Robert Serry to monitor the influx of construction materials, a mechanism that will fail: statistics show that the UN proposal would require more than ten years for the reconstruction of the Gaza Strip.

Unemployment and Poverty

In all countries of the world, unemployment is considered a ticking bomb that threatens both economic and social stability. The PCBS reported that unemployment in the West Bank and the Gaza Strip stood at about 27% by the end of 2014. The PCBS report noted that the number of unemployed reached 338,000 in 2014, a rate of 24% for males and 38% for females. The number of unemployed individuals in the West Bank reached 143,000 (18% of the labor force) and 195,000 in the Gaza Strip (about 44% of the labor force). The labor force in Palestine amounted to approximately 618,000 by the end of 2014, of whom 331,000 are employed in the West Bank, 188,000 in the Gaza Strip, 78,000 in Israeli territory, and 21,000 in Jewish settlements, the latter comprising mostly farmers working in the agricultural sector. The public sector has employed themost workers in the Gaza Strip, at 55%, compared to 45% of wage employees working in the private sector.

 

palestine-unemployment rate

palestine-employmentIn the Gaza Strip, unemployment before the Israeli attacks on Gaza in July 2014 increased at an unprecedented rate. According to the PCBS data for the second quarter of 2014, the unemployment rate in the Strip reached 45% and the number of unemployed workers exceeded 200,000; these workers are responsible for more than 700,000 family members, or more than one-third of the population of the Gaza Strip. As a result, the poverty rate in the Strip rose to more than 50% by the end of 2014. Because of the continued siege and the faulty reconstruction plan, economic conditions continued to deteriorate, and the unemployment rate rose again to 55%, with the total number of unemployed rising to 230,000 and 65% of the population living in the most extreme poverty conditions. Consequently, the number of recipients of UNRWA food assistance rose to nearly a million, or 60% of the total population of the Gaza Strip.

olives, salem, nablus
Palestinian female farmer harvesting olives in Salem, Nablus. Photo Active Stills

One important reason for the rising unemployment and poverty rates in the Gaza Strip is the crisis in the salaries of government employees. After the formation of the national unity government and the resignation of the “de facto government” in Gaza, the Palestinian government, led by Rami Hamdallah, did not recognise government employees hired in recent years in Gaza and refused to pay their salaries. Therefore, more than 40,000 employees in Gaza have been receiving only 50% of their salaries since June 2014. This has caused recession and weakened purchasing power in the Gaza Strip, as unemployment and poverty rates increased enormously, causing further deterioration that may bring about the collapse of the entire economic system in the Strip.

Summary

The private sector is the real catalyst of sustainable growth in any country. As long as the political situation continues to deteriorate in the Palestinian territories and there is no end in sight to the Palestinian-Israeli conflict, the performance of the Palestinian economy will remain below its potential and vulnerable to internal and external turbulence. The first steps that need to be taken are to end the internal Palestinian divide between the West Bank and Gaza Strip and work quickly to achieve full integration of the Gaza Strip into the Palestinian polity, under one government. The divide has had a negative impact on all aspects of life, particularly on the Palestinian economy. On the other hand, World Bank sources argue that international experience has shown that economic development might lead to peace even before a final peace deal is signed with Israel. This vision will be achievable if certain actions are taken. Most prominent of these measures would be to lift completely the Israeli restrictions imposed on the Palestinian economy, raise completely the siege on the Gaza Strip, and increase economic cooperation between the two sides. Such measures would improve socio-economic development for Palestinians and are necessary also for the peace process.
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