The Palestinian Economy under Siege
 
The Economic and Social Consequences of the Israeli
Closure Policy on the Palestinian Territories:
A Preliminary Assessment

Special Document Presented to the
Fourth Euro Mediterranean Ministerial Conference
held in Marseilles, France

November 15-16, 2000

I. Introduction

Since September 29, 2000, the Israeli aggression on the Palestinian lands has claimed more than 200 Palestinian lives, mostly young civilian, unarmed Palestinians. It has further caused various injuries to more than 8000 people, many were injured critically. This high number of Palestinian casualties, within such a short period of time, was mainly due to the excessive use of force by the Israeli military might. All types of bullets and ammunition, anti-tank missiles, helicopter gun-ships, and tanks were all used, day and night, against civilian population trying to express their frustration with the continued Israeli occupation of their homeland, and against the Israeli continued denial of their God given right for freedom, dignity, and independence.

In addition to this tragic loss of innocent lives, sever economic and social consequences are being inflicted daily on the Palestinian population in the West Bank and Gaza Strip. This is mainly due to the re-imposition of the Israeli comprehensive, external and internal, closure policy on the Palestinian Territories where over three million Palestinian people are being cut off from the rest of the world, and are forced to be confined to their cities and villages. In addition to the siege, there is also a deliberate destruction of some of our basic physical and social infrastructure by the Israeli military forces and the Israeli settlers.

The objective of this short document is to highlight the nature of the Israeli siege and closure policy practiced against the Palestinian land and the Palestinian people, give a preliminary estimates of the significant material losses inflicted upon the Palestinian economy and the Palestinian people during the first six weeks of closure (i.e., from September 29 to November 10, 2000), and to clarify the devastating economic and social consequences of this destructive Israeli policy. 

II. The Nature and Timing of the Closure Policy

This Israeli closure policy, implemented on the 29 of September 2000, entailed a complete siege of the Palestinian land. It imposed stringent restrictions on the movements of goods and people between the West Bank and Gaza Strip, and between the Palestinian areas and Israel and, through it, to the rest of the world. Boarder crossing stations between Palestine and Egypt, and between Palestine and Jordan, as well as Gaza International airport, are all under full Israeli control, and more often than not, are closed off for passenger purposes, and never used for commercial purposes during closure time periods.

Furthermore, and in addition to this external closure, internal closure policy was also imposed. Under this policy, severe restrictions on the mobility of people and vehicles between the Palestinian cities and villages are imposed by tens of Israeli heavily guarded roadblocks and checkpoints.

This recurrence of the Israeli siege and closure policy, and the attendant slow down in the economic activities in the West Bank and Gaza Strip as will be explained later, comes at a time when the Palestinian economy started, in the last three years, to witness a marked improvement in its performance, after recovering from the recession of 1995-1996 which was mainly caused by the same Israeli closure policy. It also comes at a time where the Palestinian Authority (PA) was embarking on a serious effort to undertake major reform of its economic policies and to prepare the economy for a medium term development strategy. This was evident in the Economic Policy Framework presented to the donor community at the Ad Hoc Liaison Committee meeting in Lisbon on June 8, 2000.

These Israeli draconian measures, therefore, are expected not only to sabotage the recovery process, but also threaten to throw the Palestinian economy, once again, back into a devastating recession. If this is allowed to happen, it will have major negative economic and social ramifications, further complicating our efforts to reconstruct the economy and rebuild the society so as to provide prosperity and hope to the Palestinian people. And most importantly, it will further threaten the peace and stability in the region we have sought after for so long. 

III. Economic and Social consequences of the Closure Policy

The short term costs of the re-imposition of the Israeli comprehensive closure and siege policy on the West Bank and the Gaza Strip are too high to bear for such a small economy like the Palestinian economy. Over the past six weeks, and since September 29, 2000, the Palestinian economy has suffered major losses. These looses are mainly due to (1) the sharp decline in the level of domestic output and productivity of various sectors in the economy, (2) loss of wage income earned by more than 125,000 Palestinian workers in Israel, Israeli settlements, and industrial zones, (3) loss of tax revenues on imports, a vital part and main source of the PA’s overall recurrent revenues, and (4) the destruction of some basic physical and social infrastructure and private properties.

The total loss incurred by the Palestinian economy as a result of devastating impact of the Israeli closure and siege policy over the past six weeks is estimated to be about US$ 774 million.

This figure is calculated as follows. 

(1) Palestinian industrial, agricultural, tourism, and construction sectors are facing major difficulties in their battle to survive the current Israeli comprehensive closure and siege policy, and to cope with their losses caused by it. This is mainly due to a number of factors, some of which are: (a) huge shortages in the imported raw materials needed for local production. A classic example of this case are the shortages in cement and other construction materials, which have virtually paralyzed the construction sector in Gaza and West Bank, thus leaving unemployed more than 60,000 workers directly and indirectly employed by the sector and other related branches serving it; (b) the inability of Palestinian producers to access domestic, Israeli, and international output markets because of the siege; (c) the destruction of physical assets and properties, especially in the agricultural sector; and (d) the inability of workers to reach their jobs inside the Palestinian areas due to Israeli roadblocks and internal siege of the Palestinian cities and villages.

The cumulative impact of these and other related factors has caused over an 80% reduction in normal economic activities of these sectors as well as other related economic activities. In an economy with an estimated Gross Domestic produce (GDP) of about US$ 5,000 million in 1999, a loss of 80% of production over the first six weeks of closure will amount to about US$ 438 million.

(2) As a result of the closure, the earnings of more than 125,000 Palestinian workers in the Israeli market, estimated at US$ 3.5 million a day, were lost over night. This has caused a subsequent decline in the domestic consumption and in the local production as an inevitable result of the loss of workers income. The gross figure of wage income lost from working in Israel and Israeli settlements and industrial zones over the past six weeks amounts to US$ 126 million.

Employment and living standards were hit hard by the re-imposition of the Israeli closure policy. As a consequence, high unemployment and poverty rates, as well as further decline in the standards of livings are looming again in the Palestinian territories. The closure of the Palestinian areas has prevented about 125,000 Palestinian workers from joining their jobs in Israel. This has caused unemployment rate to jump from 12.7% at the onset of the resent events to 32.5% literally over night. Furthermore, the slow down of the economic activities in the West Bank and Gaza Strip as a result of the closure policy has caused further workers to lose their jobs inside the Palestinian job market. Unemployment rate in the Palestinian economy stands now at about 40%.

The decline of workers’ income for a significant segment of the Palestinian population has increased further the number of families living under poverty line. A recent World Bank study on the impact of closure on Palestinian poverty has shown that if the present closure persists for a period of three consecutive months, Palestinian Gross National Produce (GNP) would fall by US$ 630 million, income per capita could decrease by 11%, and the share of population living under poverty line will jump to about 30%.

(3) Merchandise exports to Israel and other regional and international markets through Israeli ports, valued at about an average of US$ 2.0 million a day, were virtually halted as a result of the closure and siege. Imports of needed raw materials, capital goods, and consumer products, valued at an average of US$ 9.0 million a day (two thirds of which comes from Israel), have witness a sharp drop as a result of Israeli restrictions on border crossings and the Israeli refusal to process and release Palestinian merchandise shipments in the Israeli seaports. This has not only caused major disruptions to the domestic economic activities in the West Bank and Gaza Strip, but also deprived the PA’s recurrent from revenues collected from excise taxes, VAT, and purchase tax on imports. These revenues amount annually to some US$ 600 million, or about 60% of PA’s total recurrent revenues. Assuming that these taxes will not be captured if or when the closure is lifted, PA income loss from this source over the past six weeks is amount to US$ 60 million.

The revenue problem was further complicated by the Israeli refusal to transfer funds it collects on behalf of the PA according to the Economic Protocol of 1994. The PA is currently facing fiscal difficulties and liquidity crisis as a result of the sharp and sudden decline in the PA’s recurrent revenues. As a consequence, the Ministry of Finance estimates of the budget deficit which was previously expected this year to reach US$ 25 million, is revised now to about $US 100 million.

This liquidity crisis and the unexpected losses in revenues not only endangers the PA ability to meet regular pay roll obligations for its staff, but also greatly threatens its ability to continue provide the minimal social services, especially in the health and education sectors, with adequate standards for the Palestinian local population.

(4) The Israeli aggression has also caused extensive and substantial damage to public and private properties in the West Bank and Gaza Strip due to continued bombardment by heavy rocket fire, tanks, and gunships. Roads, water networks, electricity grids, educational facilities in both basic and higher education, police stations, government institutions, residential buildings and individual housing units, trucks and personal vehicles and different transportation means, are all examples of assets targeted by Israeli military aggression. Furthermore, hundreds of donums of agricultural land were bulldozered, trees were uprooted, and crops were destroyed.

Conservative estimates for the losses incurred by the Palestinian economy as a result of the Israeli destruction of basic infrastructure, public and private assets put the figure at about US$ 150 million for the first six week of the closure. 

IV. Implications for Prolonged Closure on the Palestinian Economy

The preceding pages intended to show the extent of the devastating negative impact on the Palestinian economy as a result of the re-imposition of the Israeli closure and siege policy on the West Bank and Gaza Strip since September 29, 2000. To put this matter in a perspective, the preliminary estimate of the total economic loss of US$ 774 million exceeds the financial assistance disbursed by the donor community to finance PA public investment projects throughout the whole year of 1999. It amounts to one and a half times that assistance.

Based on our past experience, and while we can never predict the duration and the scope of Israeli measures intended to inflict serious damage to the Palestinian economy and people, we can certainly predict their destructive impact and grave consequences. Of immediate concern to the Palestinian leadership and policy makers is the expected serious impact of closure on unemployment and poverty rates on the Palestinian population in general, and on the most vulnerable segment of the population in particular. Another concern is the expected negative fiscal impact of the closure, in the short and medium term, due to the expected increase of the PA expenditure especially on social and welfare issues on the one hand, and the expected decline in PA revenues on the other hand. There is also the expected negative impact on the present and potential private investment, domestic and foreign, due to the increase instability and risk.

In this context, and if the closure and siege continues for an extended period of time well into the next year, the World Bank estimates that the 2001 shortfall in GNP would reach US$ 1.7 billion, per capita income would decrease by 27%, and poverty rate would reach 43.7%, with higher unemployment and poverty rates are projected for the Gaza Strip reaching 50% or more. The negative impact of the closure on private investment and domestic job creation in the West Bank and Gaza Strip will be equally high. International financial resources will be diverted again from financing public infrastructure project to finance the expected budget deficit and other badly needed short term emergency project intended to alleviate the social destructive impact of the closure policy on the Palestinian population. 

V. The Role of the Barcelona Process

The present situation, in our view, is extremely dangerous and calls for immediate measures on the part of the international community and all concerned parties, especially the members of the Euro Med process, our partners in the Barcelona process. First and foremost, there is an urgent need to call upon the Israeli government to stop immediately the military aggression on the Palestinian people, and to end the economic siege of the Palestinian Territories.

At least, this should entail the following minimum measures.

1. Immediate cessation of the Israeli fire on the cities and villages of the West Bank and Gaza Strip. The continued aggression on the Palestinian land is a gross violation of the 4th Geneva Convention relative to the protection of civilian persons in time of war, and some of which constitute war crimes according to the Convention.

2. Immediate removal of restrictions on the free movements of goods and people between the West Bank cities and villages which are under the Palestinian full control according to the agreement singed with the government of Israel;

3. Immediate removal of restrictions on the resumption of our commercial and civil relations with the neighboring countries, namely Jordan and Egypt, through the cross boarder stations in Rafah and Jordan river bridges;

4. Immediate removal of restrictions on the normal and continued operation of the Gaza International airport, along with the resumption of the construction work which recently started in the Gaza seaport;

5. Immediate processing and release of Palestinian shipments held at the Israeli seaports (currently, there are about 1,800 containers being held, and three more commercial ships full of construction material destined for the Palestinian territories are docked in the Israeli harbors), and the resumption of our normal commercial use of the Israeli airport and seaports;

6. Immediate resumption of trade and other activities across Israeli Palestinian boarder and the return to the situation existed at the crossing points prior to the September 29, 2000

We also call upon our partners, the members of the Barcelona process, to rise up to the moment, and to act in accordance with the principles of the process we started five years ago. The Partnership endeavor has always recognized the inextricable link between the Barcelona process and the Middle East peace process. This was evident in the preamble of the Barcelona declaration right from the outset where it stated that “The participants support the realization of a just, comprehensive and lasting peace settlement in the Middle East based on the relevant United Nations Security Council resolutions and principles mentioned in the letter of invitation to the Madrid Middle East Peace Conference, including the principle land for peace, with all that this implies”.

This link was also reemphasized in all chairman’s conclusions of our previous meetings in Malta, Palermo, Stuttgart, and Lisbon. Thus, it is quite evident that for the Barcelona process to really succeed, the peace process in the Middle East should proceed swiftly to achieve a comprehensive, just and lasting peace. A prerequisite to this noble goal is an immediate resolution of the current crisis in the peace process which should not only stop the premeditated aggression on the Palestinian population and help them overcome the present and future negative economic and social consequences of the Israeli closure outlined above, but also to help the Palestinian people in their legitimate and long quest for political and economic independence. 

Gaza Strip

November 14, 2000