Overview

1. Overview of the Palestinian Economy

1.1 Population

The Palestinian population in the West Bank and Gaza Strip (WBGS), including East Jerusalem,

was projected by the Palestinian Central Bureau of Statistics to pass 3.8 million during 2005 (2.4 million in the West Bank and 1.4 million in the Gaza Strip)1. In comparison, the total worldwide Palestinian population is approaching 10 million2. Although Palestinians are still considered to have one of the highest population growth rate in the world, the rate has declined from 4.3% in 2000 to 3.3% in 2005. PCBS estimates indicate a sustained decrease in national fertility rates from 6.06 in 1994 to 4.9 in 2000 and 4.6 in 2003, but rose in 2005 to reach 5.6 and then declined in 2006 to reach 5.03.

Young people represent the largest part of the population, with about 57% below the age of 20 and 66% below the age of 25. Declining fertility rates, however, will reduce the relative size of the youngest section of the population – those under 16 years of age. At the same time, the portion of the population that is of working age, i.e. between 16-65 years, is expected to increase. This change in the population structure is estimated to last about 30 years, at which time the proportion of elderly will begin to grow relative to that of working age. This offers a golden opportunity for growth in the next two decades, as dependency rates are reduced by the increase in the proportion of those of working age against the proportion of children. It is estimated that about 500,000 persons will join the labor force during the next five years. Taking advantage of this opportunity requires an increased investment in human capital that includes reforming the education system and enhancing capacity-building3. The population density differs markedly in the Palestinian Territory. In the West Bank there are 464 persons per km2, whereas in the Gaza Strip the comparable figure is 3,945 persons/km2, which is on a par with cities like Bangkok and Toronto4.

1.2 Geography and Climate

Palestine has an excellent geographical location, forming an economic and cultural platform and point of contact between three continents - Europe, Asia and Africa. The combined area of the West Bank and the Gaza Strip (6,020 km2) constitutes 23% of the area of pre-1948 Palestine under the British Mandate, and about one third of the State of Israel. The West Bank covers 5,655 km2, is 130 km long and ranges between 40 and 65 km in width. The land area of the

Gaza Strip is equal to 365 km2, and is 40 km long and 5-12 km wide5. The Gaza Strip is mainly coastal plain and sand dunes, while the West Bank is more diverse, featuring four topographic zones. The Jordan River Valley is a fertile plain, offering excellent conditions for agricultural production, while the Eastern Slopes overlooking the Valley are a rocky, semi-arid area, leading down to the Dead Sea. The Central Highlands constitute the largest zone, rising 1,000

metres above sea level in places, and a semi-coastal zone is found in the west and north-west.

The climate is Mediterranean with hot, dry summers and wet, mild winters. The temperature and rainfall vary with altitude and between topographic zones. This variation provides an attractive setting for tourism as well as cultivation.

1.3 Natural Resources

1.3.1 Land

Almost 1,500 km2 of Palestinian land is under cultivation and some agricultural land is harvested more than once a year. Fruit trees represent more than 60% of the harvested land, followed by field crops and vegetables6.

At present, however, the Palestinians do not control all of the available land in the West Bank and Gaza Strip. Since 1967, and especially since the late 1970s, Israel has pursued a policy of confiscating Palestinian public and private land, mainly to construct settlements and to create land reserves for their future expansion. In 2005, after the Israeli disengagement from the Gaza Strip, entailing the evacuation of 17 settlements in the Gaza Strip and 4 in the West Bank, the Palestinian Central Bureau of Statistics counted 155 ‘formal’ Israeli settlements in the West Bank, of which 22 are located in Jerusalem. Besides these settlements, there are over a hundred other so-called ‘unauthorized outposts’. The settlements are inhabited by 425 thousand Israeli settlers, and 44% of them live in the large settlement blocs around Jerusalem7.

1.3.2 Water

The primary source of water in Palestine is groundwater, extracted via wells or springs. The Mountain Aquifer system has an annual recharge of 679 million cubic metres (mcm) - 83% of which lies within the occupied Palestinian Territories - while the Gaza Coastal Aquifer has a much smaller annual recharge of about 55 mcm. However, overpumping of Gaza groundwater, at a rate of 110 mcm, has resulted in the salination and deterioration of the aquifer’s water quality. Palestinians also rely heavily on rainfall, although the amount of precipitation varies considerably between different years. Rainwater harvested in cisterns supplies an estimated 6.6 mcm annually8. The Palestinian use of water resources in the West Bank and Gaza Strip is strictly controlled by the Israeli authorities, which divert up to 85% of Palestinian groundwater resources for use in Israeli settlements and in Israel proper9. The daily average per capita consumption is estimated at 65 litres for domestic use (compared to the 100 litres/day/capita recommended by the WHO), while the gross per capita water supply has increased to 106 litres per day. This disparity is due to the high system losses resulting from the poor quality of the supply network10.

1.3.3 Other Natural Resources

The Palestinian Territories are considered poor in natural resources, with a few exceptions such as the Dead Sea salts and minerals, which represent a unique natural wealth. This resource, however, is not available to the Palestinians since Israel controls all exploitation rights. The West Bank also possesses large amounts of good-quality marble, and exploration indicates the existence of commercial quantities of natural gas off Gaza’s coastline.

1.4 Economic Sectors

1.4.1 Agriculture, forestry and fishing

Agriculture is an important sector as it contributes around 10% of GDP, 19% of all exports and 13.3% of total employment11. Exports include fruits, olives and olive oil, vegetables and more recently, cut flowers.With a positive change in the political situation, exports can be quickly increased (including exports to Israel), which would generate an increase in the sectors production and employment About one-quarter of the total land area is cultivated, comprising 150,000 ha in the West Bank and 16,000 ha in Gaza, of which 9,000 ha and 11,000 ha respectively are irrigated. One-third of the land is used for marginal cultivation or grazing or is left fallow, and an unregistered quantity is used by Israeli settlers. The variety of climates permits cultivation of around 60 different kinds of crops, although, because of the dependence on rainfall, crops are grown using traditional low-risk, low-input methods. Agricultural productivity compares reasonably well with neighboring countries. Olive cultivation is the backbone of West Bank agriculture, accounting for some 75% of the area under trees and 50% of cultivated land. Local production exceeds consumption and both oil and olives are exported. Olive production, which varies within a 2-year cycle, contributes around 15% of total agriculture output and about 20% of exports. The olive sector is very important for women and rural employment. The last two decades have witnessed a major shift in Palestinian agriculture towards the cultivation of vegetables. This was more profound in the Gaza Strip, where the value of vegetable production now accounts for 50% of the total value of agricultural output, compared to 11% in the late seventies. Livestock and fishing account for almost half of agricultural production in the West Bank, and around a third of that in Gaza. With the exception of red meat, local demand is currently satisfied by local production. Fisheries are important to the economy of the Gaza Strip. Their future depends on the removal of restrictions imposed by Israel on the area allowed for fishing and on negotiating an agreement with the Egyptian Government allowing Palestinian fishermen access to Egyptian territorial waters off north Sinai.

1.4.2 The manufacturing and mining sector

A major task of the reconstruction program adopted by the PA is directed toward reviewing the manufacturing sector. The task involves removing the causes of stagnation suffered during the occupation. Efforts were made to create a support system which can stimulate both private sector investment in industry, and facilitate linkages between manufacturing and other sectors, especially agriculture and construction. Due to these efforts the level of industrialization has dramatically improved, and its contribution to GDP increased from 8% in the mid-1980s to 17% in the mid-1990s and around 16% in the last few years. The sector includes a little less than 14,000 firms employing a total of approximately 60,000 workers, or 12.5% of total employment.

Agro-industry has a great potential to expand provided it secures access to foreign markets. Presently, agro-industry firms satisfy a sizable portion of the local demand. These include olive presses, citrus packing, food processing, cigarettes, and diary plants. There is also a room for expansion in chemical fertilizers and agricultural machines and instruments. The relative wealth in human capital would enable Palestinian manufacturing to develop new industries, starting from small tool and light engineering industries, and gradually moving toward more sophisticated electrical, electronics, plastics, and other highly skilled industries.

The Palestinian Authority (PA) introduced the concept of industrial estates with the close cooperation of the World Bank. The first of these was the Gaza Industrial Estate (GIE), which cost US$85.4 million to construct (funded by a range of international institutions) and opened in 1999. The idea was to create employment within Palestinian ruled areas while encouraging industrial development, export-led growth and local and foreign investments. The GIE lies in the north-east of Gaza, alongside the Israeli border. It is managed and operated by the privately-owned Palestine Industrial and Management Company (PIEDCO). The Palestinian Industrial Estate and Free Zone Authority (PIEFZA) provides regulatory oversight and offsite infrastructure. To attract future investors special incentives are offered by the 1998 Industrial estates and Free Zones Law and in the 1998 Investment Promotion law, which include income tax, fixed assets and export restriction exemptions and preferential access to regional and international markets. Moreover, streamlined business procedures are provided to companies planning to establish operations. PIEFZA coordinates and delivers all permits, licenses and official registrations needed in less than six weeks, acting as a (one-stop shop). Three more industrial estates are planned. They are Jenin Industrial Estate (JIE), Nablus Industrial Estate (NIE) and Tarqumia Industrial Estate (TIE), which are near the cities of Jenin, Nablus and Hebron.

The following are important sub-sectors.

1.4.2.1 Quarrying and stones

Stone-based industries are concentrated in Hebron, where the quality of the stone makes it competitive in export markets. Marble and stone exports to Israel, Jordan, Arab countries and international markets have gradually increased, reaching 40% of total industrial exports compared with under 10% in the early 1980s.

1.4.2.2 Textiles and garments

The Palestinian garments and textiles sector is an important sector as it contributes approximately 15% of Palestinian manufacturing output, and employs almost 10% of the labor force. Palestinian producers sell approximately 70% of their production locally (accounting for 20% local market share) with an additional 20% being sold to Israel (and through Israeli agents to oversees markets). There is a lot of room to invest in the sector so as to improve quality and export directly to Europe and US buyers. Exported products could include underwear, children’s wear, knitwear, tailored shirts and trousers, etc.

1.4.2.3 Food processing

The food processing sector witnessed a rapid development in the second half of the 1990s as local market share increased from 25% to 30%. Market studies show that the average Palestinian family spends 42% of its income on food, indicating the importance of this sector and the ample room for investing in it to develop a competitive local industry to provide high quality food products.

1.4.2.4 Metal products and engineering

The metal products and engineering sector satisfies an estimated 60-80% of the local market demand, and its products have been increasingly successful in export markets. Its products include wire, nails, welding rods, office furniture, warehouse shelving, household utensils, industrial scales, agricultural equipment, industrial machinery and tools, abrasives and others.

A) Chemical industries

The following three product lines constitute the bulk of the chemical industries in Palestine.

- Soaps

The traditional Nablus soap is unique in the region and the world. It has a world reputation as it is based on olive oil. The industry is centralized in Nablus and satisfies 100% of the local demand and is exported to many countries in the region.

- Paints

The sector is characterized by diversity of its production lines. It includes water-based and oil-based paints, industrial and car paints. There are 10 major factories in Palestine and their production covers 25-30% of the local market consumption.

- Detergents

The detergent industry has around 50% of the local market share. It produces powdered as well as liquid detergents, high foam for hand wash and semi-automatics as well as low foam for automatic and compact washers.

B) Pharmaceuticals

The pharmaceuticals industry has witnessed both a great expansion and an internal restructuring in the last two decades. A lot of mergers left the industry divided between six companies. It is rapidly expanding and recent estimates suggest that the industry has more than half of the local market. All six companies are currently participating in a continuous program of training and technical assistance aimed at complying with international standards. As a result, the range and quality of products have increased and allowed the companies to target foreign markets in the Arab countries and Eastern Europe.

(C) Plastics

The plastics industry is quite developed with a few leading companies that produce for the local market and some for export to Israel. Their products include electricity and telecom cables, sewage pipes, agricultural plastics materials, plastic furniture, window shutters, polystyrene and other materials.

1.4.3 The construction sector

The construction sector is currently expanding, contributing around 9% of GDP and 10.1% and 8.8% of employment in West Bank and Gaza Strip. The sector is also important for growth as it carries significant forward and backward linkages, ranging from simple manufacturing plants to major construction materials production and processing industries. In addition, the sector has also acted as an impetus for the promotion and monopolization of local investments, and has contributed to the consolidation of the Palestinian economic base. Demand for residential construction is expected to increase substantially in the eventuality of an inflow of Palestinian returnees, as well as the resettlement of refugees. Assuming the influx of perhaps one million returnees, the total population of the West Bank and Gaza could reach over 6 million. Thus, it is expected that the demand for residential construction is expected to increase substantially in the next ten years. In addition, the construction sector has to build the necessary infrastructure. This includes building public schools, health centres, hospitals, cultural and recreation facilities, post offices and police stations. In performing these two tasks the sector will have a prominent role in the growth of the whole economy, creating employment and stimulating linkages to other sectors, in particular manufacturing.

1.4.4 The services sector

The services sector plays a leading role in the Palestinian economy12. Currently it contributes more than 60% to GDP, and a similar percentage of the total employment. The sector has grown substantially since the establishment of limited self-rule in 1994. A considerable part of that growth was demand driven to complement and foster the growth in the industrial and construction sectors, as well as the expansion of government activities. It was related to the need to significantly improve and expand certain branches in producer services whose contributions are essential to facilitate the increase in industrial and construction activities. These branches include transport, engineering design, communications, software and financial services. The sector has also grown as a response to the substantial increase in the role of public institutions that resulted from the PA’s effort to rehabilitate public services. The sector is expected to play a pivotal role in the future as it takes advantage of the new trading opportunities in international business arising from the twin processes of technological advancement in communications and the continuous integration of the Palestinian economy into the regional and world markets. The following highlights some aspects of major branches in the Palestinian service sectors.

1.4.4.1 Internal Trade

Palestinians have a strong entrepreneurial talent, and cities and villages in the West Bank and Gaza Strip are crowded with small shops and workshops. The majority (57%) of all the private, public and NGO establishments in the Palestinian Territory operate in the field of internal trade. More than 80% of these establishments are in retail trade - half of which sell food products- while 4% are wholesalers and the remaining firms sell and repair motor vehicles13.

Just like Palestinian enterprises in general, internal trade establishments are predominantly small-scale activities, and 97% of them employ less than 5 people. Most of the persons engaged in this sector are men: only 7% are women. Internal trade establishments are found all over the Palestinian Territory, with approximately one third of enterprises, as well as employment, in the Gaza Strip14.

The sector has suffered from the internal and external closures imposed on the movement of people and goods in the West Bank and Gaza Strip. Israeli security procedures delay transportation and lead to large increases in transaction costs, which has reduced competitiveness.

1.4.4.2 Transportation

The transportation sector has been severely affected by the Israeli occupation policies. The border regime and closure policies imposed by Israel have made continuous transportation impossible in the Palestinian Territory. Increased transportation costs and the inability to meet deadlines has put immense pressure on practically all Palestinian economic activities, as most sectors depend on transportation services. The development of the transportation sector will depend heavily on policy-makers’ ability to find political solutions to linking the West Bank and the Gaza Strip, increasing control over the road network, and gaining direct access to land crossings, seaports and airports that connect the Palestinian Territory to the outside world.

In 2004 there were 649 establishments in the transportation sector. 355 of these firms dealt with land transport and 383 offered supporting services, such as cargo handling, storage and warehousing, travel agencies etc. These establishments employed a total of 3,819 people, of whom almost 60% worked in the field of ‘non-scheduled passenger transport’15. The combined length of the road network in the West Bank and Gaza Strip is almost 5,000 kilometres, divided into main roads (11%), district roads (8%), local and access roads (65%), and bypass roads (16%)16. The number of licensed commercial vehicles using these roads is approximately 37,000. Around two thirds of these vehicles are trucks and commercial cars, one quarter are taxis, and the rest are tractors and other vehicles17.

1.4.4.3 Information and

Communication Technology

ICT is one of the fastest-growing sectors in the Palestinian Territory, mainly thanks to private telecommunications services and an innovative software industry. The growth rate of this sector has averaged 25-30% annually since 2000 and its output amounted to US$118 million in 2003. The significance of ICT development goes beyond its sales figures and export potential as it also has important linkages to other productive sectors, as well as the potential to create high value-added jobs for Palestinians18. Before the creation of the Palestinian Authority, telecommunications infrastructure and services in the West Bank and Gaza Strip were in a very poor state, due to underinvestment, negligence and Israeli restrictions. Since the mid-nineties, however, the ICT sector has developed rapidly. The Palestine Telecommunications Company (PALTEL) was established in 1995 and Pal-Cell (Jawwal) was set up in 1999 to provide mobile phone services. Between 1998 and 2005, the number of telephone lines more than doubled to approximately 345,000. Meanwhile, Jawwal counted 760,000 subscribers as the 25th of September 2006, compared to a mere 22,500 in 199919 ( more figures on ICT users are found in Section 2.3 on Infrastructure and Utilities). According to the PCBS Establishment Census of 2004, there were 115 telecommunication firms and 339 computer-related enterprises in the Palestinian Territory. About 3,750 people were employed in the telecommunication sector and 1,000 in computer-related activities. The establishments were concentrated in Gaza, Ramallah/Al-Bireh and Hebron, where most of the demand is located. The IT companies provide a range of products and services including software (representing 25% of sales), hardware, Internet services, data processing, IT services and consulting20.

The existing regulatory framework guiding the telecommunications sector is based on the Post and Telecommunications Law No. 3 approved in 1996. This act assigns the Ministry of Telecommunications and Information Technology important regulatory functions, such as licensing new operators and enforcing licenses, managing frequency, setting tariffs, encouraging investment, and monitoring and protecting consumer interest. The supporting framework for the ICT sector also includes the Palestinian Information Technology Association, founded in 1999 as a membership-based organization for locally registered IT companies, and the Palestine Information and Communications Technology Incubator, set up to offer professional business services to Palestinian entrepreneurs.

1.4.4.4 Tourism

The tourism industry stands to gain most from any improvement in the security situation. The strong cultural and religious heritage of Palestine provides the environment to develop a tourism sector that could make a significant contribution to growth. The Palestinian territory contains more than 1,600 archaeological sites. It is central to the three monotheistic religions and home of most of their sacred sites. The millennium celebrations in Bethlehem during December 1999 and early 2000 marked a high point in efforts to develop a Palestinian tourism industry. The PA, the private sector and donors invested heavily to rehabilitate the infrastructure and tourism services in the Bethlehem area. The effort was a major success, attracting visits from the Pope, the President of the United States, many other world religious and political leaders, and thousands of pilgrims. Naturally, the sector was hard hit by the outbreak of violence at the end of 2000. A partial recovery started in 2004, and there are hopeful signs that the situation might become more stable. Usually, the sector contributes around 12% of GDP. This number is expected to substantially increase once peace and stability are resumed. The reopening of borders with the other Arab countries is expected to bring new tourists, both religious and recreational. The former include Muslims who would be able to complete their pilgrimage to Mecca by visiting holy shrines in Jerusalem and Hebron. The latter include Arabs and Palestinians workers who work in Jordan and the Arab Gulf countries and who would welcome the chance of spending their summer vacation in more climatically hospitable Palestine.

1.5 Labor, Wages and Productivity

1.5.1 The labor force and employment

The West Bank and Gaza Strip have an abundant labor supply with a versatile base of educational levels and skills. Table (1) lists the main indicators related to the labor force in the Palestinian Territory in the second quarter 2006. One of the most striking features of this market is that female labor force participation rate, both in the West Bank and Gaza Strip, is particularly low (17.2% and 7.2% respectively), (13.7% in the Palestinian territories). This provides potentially huge labor reserve which is not yet tapped into.

Table 1: Indicators of the Main Components of the Labor Force In the Palestinian

Territory during second quarter 2006, According to IOL Standards

Source: PCBS, Labor Force Survey, Second Quarter 2006.

Despite all the political obstacles manifested by the separation wall, continuous closures, and the difficulty moving between the West Bank and Gaza Strip areas, the labor market has been successful in creating more employment locally. This is not just a healthy development whereby the labor market is growing, but it is also positive because this new job creation is not dependent on Israel. During 2005, 49,300 new jobs were created in the Palestinian Territory, which led the unemployment rate to drop from 26.9% in 2004 to 23.5% in 2005, and the economic dependency ratio declined from 6.6 to 5.8 during the same period. Also, significant job creation took place in the Gaza Strip compared to the West Bank.

According to the World Bank, the construction and transport sectors exhibited the highest growth rates among all sectors (25% and 18%, respectively) and contributed about one-third of the jobs created. This would seem to reflect a steady growth in residential and commercial investment, as well as an expansion in both internal and external trade. All those factors point towards a labor market which is growing and improving, thus promising a better future.

The labor force in the Palestinian Territory is highly educated, which has huge potential for investors. Figure (1) shows the years of schooling of labor force participants in the West Bank and Gaza Strip by gender. It can be seen that there is a large percentage of men and women with more than 10 years of schooling. The public sector is an important source of Palestinian employment. In 2004, public sector employment (PA and municipalities) accounted for an estimated 23% of the labor force in the Palestinian Territory. Growth in public employment was less than that in the private employment in 2004. This indicates that the economy is pulling away from its reliance on the public sector employment, which has been a depressive feature of the Palestinian labor market over the past few years.

1.5.2 Wages

Average daily wages reached $16.7 in the West Bank and $15.3 in the Gaza Strip in the second quarter of 2006. Wages in the Palestinian Territory are significantly lower than those in Israel and the settlements ($29) (See Table 2). In the past few years, average real wages have declined fairly consistently in the West Bank and Gaza Strip. This can be attributed to the increase in low-paid jobs and unpaid family workers relative to total employment during the years of the Intifada.

Table 2: Average Monthly Work Days and Daily Wages

in the West Bank, Gaza Strip and Israel during the second quarter of 2006

Source: PCBS, LFS- second quarter 2006.

1.5.3 Productivity

Annual productivity21 in the industrial sector in the Palestinian Territory (excluding East Jerusalem) was $11,064.9, while annual compensation per worker (wages and salaries) in this sector was $2,732.9 during 2005. Within the industrial sector, annual productivity in non-metallic products was $11,834 compared to $10,540.2 in food and beverages and $17,169.6 in mining and quarrying (See Table 3). At the same time, construction had $15,076 annual productivity compared to $5920.3 in internal trade.

Table 3: Value Added per Worker and Annual

Compensation in the West Bank and Gaza Strip, 2005*

Source: PCBS, Economic Survey Series, 2005.

• Data excludes East Jerusalem.

•* This is the average of 21 different sub-industries. The four noted have the highest value added.