Under Siege

Closure, Separation and the Palestinian Economy

by Leila Farsakh
published in MER217

By mid-November, Israel had imposed over 50 days of closure on the whole of the West Bank and Gaza Strip. Palestinian persons and goods were refused entry into Israel, or exit from the confines of the Occupied Territories. Mobility within Palestinian-controlled areas was also curtailed. According to available estimates, each day of ongoing closure represents a loss of $8.45 million -- totaling $336 million as of November 7 -- to the Palestinian economy. [1]  If damage to physical assets and human lives were added, the losses would be still higher.

Israel imposed closure on the West Bank and Gaza Strip after the al-Aqsa intifada began on September 28. This came as the Palestinian economy was starting to overcome the recession afflicting it since the "peace process" began in 1993. In 1999, the gross domestic product (GDP) grew by 6.1 percent, compared to declines of 5.1 percent in 1996 and 0.7 percent in 1997 and a slight rise in 1998. Unemployment fell from a high of 32 percent in 1996 to less than 11 percent in the first half of 2000. Per capita income registered a slight increase, rising to a sum of $1,775. [2] But the gains achieved over the past two years have been destroyed by the new closures. The fall 2000 closures proved yet again the fragility and unsustainability of growth in the West Bank and Gaza Strip. They reemphasized the fact that Palestinian individual welfare, as measured by GDP per capita, hinges on open trade relations with Israel rather than on the capacity of the Palestinian economy to become autonomous.

What can economic factors explain about this second intifada? At the heart of the popular uprising lies a rejection not only of the territorial and political compromises that Oslo brought about, but also of its economic premises and results. The Oslo agreement, together with its Economic Protocol, have failed to deliver the prosperity or "to lay the groundwork for strengthening the economic base of the Palestinian side," as promised in its preamble. Rather, it has led to a process of fragmentation and bantustanization that further deprives the Palestinians of their resources and land. The Oslo process is carving the West Bank and Gaza Strip into cantons -- unconnected to one another and each fully dependent on Israel. The intifada rejects this process as much as the apartheid-like separation being imposed by Israel.

Economic Performance Since Oslo

Since the initiation of the Oslo process in 1993, four major developments have aggravated the economic woes of the 2.8 million Palestinians living in the West Bank and Gaza Strip: the deterioration of living standards, growing rather than diminishing dependence on Israel, fragmentation of Palestinian territorial and economic unity and the installation of a Palestinian Authority more successful in redistributing government revenues to a few private interests than in spurring economic growth. All four developments are fundamental to understanding why Palestinians are rejecting Oslo.

After Oslo, per capita income fell by 17 percent between 1994-96. In 1998, the number of people living in poverty -- those earning less than $2.10 per day -- was 37.2 percent of the population in the Gaza Strip and 15.4 percent in the West Bank. [3] Unemployment, which before 1993 hovered at 5 percent, soared to over 28.4 percent in the Occupied Territories in May 1996. The pressure of unemployment is all the more significant given the youthfulness of the Palestinian population. Over 47 percent of the population is under the age of 15 and fertility rates are among the highest recorded in the Middle East. Every unemployed person represents a six-person family. By mid-November, Israel had imposed over 50 days of closure on the whole of the West Bank and Gaza Strip. Palestinian persons and goods were refused entry into Israel, or exit from the confines of the Occupied Territories. Mobility within Palestinian-controlled areas was also curtailed. According to available estimates, each day of ongoing closure represents a loss of $8.45 million -- totaling $336 million as of November 7 -- to the Palestinian economy. [4] If damage to physical assets and human lives were added, the losses would be still higher.

The Israeli policy of closure -- formalized in 1993 and institutionalized with Oslo -- has been the major reason for the deterioration of living standards in the area. Closure consists of banning the movement of labor, goods and the factors of production between the Occupied Territories and Israel, as well as between, and within, the West Bank and the Gaza Strip. Israel has usually imposed such total closure whenever it perceived the threat of extremist attacks. Between 1994-99 Israel imposed 443 days of closure -- the equivalent of 90 days per year.

Closures have a devastating effect on the Palestinian economy because of their inclusiveness and their unpredictability. One study estimated the total cost of closures between 1993-96 at $2.8 billion. [5] This amount represents 70 percent of a year's GDP and double the amount of aid disbursed in the area over that period. Valuable aid money has thus been wasted seeking to alleviate unemployment and other shocks resulting from closure. During the first 22 days of the fall 2000 closures, total estimated losses were $186 million. Only $183 million in aid was disbursed for the entire first half of 2000.

Growing Dependency on Israel

The Palestinian economy saw its dependence on Israel increase during the interim period between Oslo and final status talks. The Occupied Territories continue to rely on Israel as the principal market for absorbing its labor and goods -- in 1998, Israel took in 96 percent of West Bank and Gaza exports, up from 90 percent in the 1980s. Israel remains the source of 76 percent of all imports. Trade with Arab and European countries has increased in volume since 1997, but remains less than seven percent of all trade. [6]

This dependency is not simply the result of Israel's 33-year economic domination of the Occupied Territories. It is also the outcome of Israel's unilateral control of borders and its regulation of Palestinian economic life with a now institutionalized permit system: workers, merchants and managers seeking to enter Israel or take goods through Israel must acquire security clearance from the Israeli military, and be controlled at border checkpoints -- or risk imprisonment. Apart from its dehumanizing aspect, the permit system involves high transaction costs and losses. A study conducted in 1998 found that Palestinian businesses seeking to export or import through Israeli ports face transaction costs that are on average 35 percent higher than for Israeli firms in the same industry. [7]

Palestinian labor also remains dependent on Israel. Before Oslo, over one third of West Bank and Gaza workers were employed in Israel, the majority in construction. With closure, the number of workers dropped from a high of 116,000 in 1992 to less than 36,000 in 1996. The reduction in days of closure since 1997 has helped increase the inflow of Palestinian workers into Israel but the strong correlation of closure with unemployment remained. At the beginning of 2000, a total of 125,000 Palestinians were working in Israel, the highest figure registered since 1970. Unemployment meanwhile was less than 11 percent, and the average daily wage for a Palestinian worker in Israel ($27.40) remained twice as high as in the domestic economy ($13.40), [8] enhancing the incentive for people to seek employment beyond the Green Line.

Not all workers seeking to enter Israel can do so. Israeli policies have proven to be more restrictive and selective towards workers from the Gaza Strip than the West Bank. Since 1994, Palestinian labor flows into Israel have been dominated by West Bank workers. Only 30,000 Gazan workers -- less than 15 percent of the total labor force -- were working in Israel in March 2000. In the West Bank, as much as 25 percent of the work force could rely on work in Israel. Meanwhile, unemployment rates in the Gaza Strip have been typically twice as high as in the West Bank between 1994-2000.

Another important development in Palestinian labor dependency on Israeli markets is the increasing Palestinian employment in the 200-plus Jewish settlements in the West Bank and East Jerusalem. According to available figures on permit holders, a quarter of all Palestinian workers are employed in the settlements, up 17 percent between 1996-99. The growth of such employment is particularly alarming because of the illegality of settlements' construction and their contribution to the fragmentation of the West Bank. Between 1994-99, over 50,000 new settlers inhabited over 15,000 housing units. [9] Settlements and settlers in the West Bank and Gaza violate the Fourth Geneva Convention regulating the behavior of occupiers, as well as the Oslo agreement, which pledged to halt new construction.

Israel has facilitated the supply of Palestinian workers to the settlements by making work permits easier to get than permits for work beyond the Green Line. Workers seeking employment in settlements do not need to be married or older than 25, as do workers going to Israel. Employers in the settlements are exempted from paying workers any of the benefits -- pensions, insurance, allowances -- that they are obliged to pay for Palestinian or Israeli employees inside Israel. Moreover, settlements are often closer to workers' villages and refugee camps than the 1967 border checkpoints at which workers have to stand in line for hours. With a flash of their magnetic IDs to the soldier guarding the entrance of the settlement, workers can get a daily job they cannot find elsewhere.

Fragmentation and Bantustanization

Diverging trends in Palestinian labor mobility to Israeli-controlled areas reflect the pattern of territorial redefinition pursued by Israel over the past seven years. The physical separation of the Gaza Strip from Israel and the West Bank has been further entrenched. Workers and goods have a harder time crossing the Eretz or Karni checkpoints in the Gaza Strip than people in the West Bank do crossing checkpoints. Borders between the West Bank and Israel have become more porous, as workers and goods escape "illegally" into Israel. Employment in the settlements has further consolidated the Israeli presence and adds to fears about Israel's plans for annexing chunks of West Bank land. While the Oslo agreement stipulated that "both parties view the West Bank and Gaza Strip as a single territorial unit, whose integrity will be preserved during the interim period," that integrity has been further fragmented.

After the latest Israeli redeployment in 1999, Israeli remained in control of 59 percent of the West Bank (Area C). Area C includes all 200 settlements and over 400 kilometers of bypass roads that divide the West Bank into three Palestinian cantons: the northern Nablus-Jenin area, cut off from Ramallah by the Shomron settlement bloc and the "Trans-Samarian Highway," the Ramallah region, separated from the south by Maale Adumim and the settlement bloc around Jerusalem, and the Bethlehem-Hebron south, segmented by the Gush Etzion settlement bloc and Kiryat Arba. Even within these cantons, Israel controls bypass roads and settlements. The final status map presented by the Israelis to the Palestinians in May 2000 confirms these divisions. The map illustrates Israel's territorial solution to the Israeli-Palestinian conflict: four Palestinian cantons (the Gaza Strip plus three in the West Bank) separated by Israeli-controlled areas.

The fragmentation of Palestinian land combined with the policy of closure has eroded the economic viability of whatever Palestinian state eventually emerges. The PA does not control water, land, resources or borders. Producers have moved away from large-scale production directed at export markets to small-scale activities directed at the cantons, losing both efficiency and income in the process. The economy has failed to diversify or industrialize, continuing to rely on subcontracted activities linked to Israel. In 1998, Palestinian industry represents less than 15 percent of GDP compared with 27 percent in Jordan. Agricultural production is weak, and services -- consisting mainly of public employment and commercial services -- make up 67 percent of GDP. Trade between the Gaza Strip and the West Bank fell by 22 percent between 1992-96, indicating that the links between the two central parts of the Palestinian economy have been further eroded. [10]

Palestinian Authority and Future Trends

The economic performance of the PA has also been a source of frustration. Despite generating over 110,000 jobs since 1994, the public sector has not been able to absorb most of the unemployed or to create the means to absorb them productively. Most of these jobs are in the police forces or in duplicated ministries formed in the Gaza Strip and in the West Bank. In 1999, the public sector employed 13 percent of those working in the West Bank. In Gaza, over 26 percent of employed persons work for the PA, making it the largest employer after Israel, but wages are typically half as large. [11] The public sector gives desk jobs to underemployed Palestinians with higher education, but creates a net loss of revenue to the economy in so far as these professionals could earn much higher incomes in other positions, even if that took them outside the Territories.

The PA has also failed to develop a transparent legal system or to encourage private sector development. Rather, it encouraged the development of monopolies and deepened its financial reliance on Israel. The customs union established by Oslo between Israel and the Palestinian territories entitles the Palestinian economy to levies on goods passing through Israel and headed for the West Bank and Gaza Strip. Two thirds of total PA revenue between 1994-98 has come from the customs dues, but the revenue has not been used to encourage productive private investment. A limited class of PA-affiliated companies and individuals are monopolizing rent and benefiting from Israel. The Palestinian Commercial Service Company (PCSC), fully owned by the PA, holds majority shares in the 34 major Palestinian companies. [12] In 1999, the PCSC held assets totaling $345 million, the equivalent of eight percent of total GDP.

As the al-Aqsa intifada continues, expressing its rejection of the Oslo process and of its economic premises, the question is what the future economic links between Palestine and Israel will be. Barak talks of a peace formula based on "Us here, them there." The reality on the ground suggests that such separation might resemble economic apartheid more than economic autonomy or independence. Such a formula is likely to be conducive to more instability in the region, rather than peaceful coexistence.


[1] UNSCO, The Impact on the Palestinian Economy of the Recent Confrontations, Mobility Restriction and Border Closures (October 2000). These figures assume a 50 percent reduction in normal economic activities.
[2] Financial Times, November 6, 2000. Labor statistics are available at: http://www.pcbs.org/english/labor/lab_curr.htm.
[3] Ishac Diwan and Radwan Shaban, Development Under Adversity (Washington, DC: World Bank, 1999) and World Bank, Poverty in West Bank and Gaza, unpublished report, 2000.
[4] Leila Farsakh, Palestinian Labor Flows to Israel: 1967-1998 (Ramallah: MAS, 1998).
[5] Diwan and Shaban. Other estimates include foregone potential income-generating opportunities, for a total loss of $6.4 billion. Center for Economic and Social Research, The Palestinian Economy Under Oslo (New York: 2000).
[6] C. Astrup and S. Dessus, Trade Options for the Palestinian Economy (Washington, DC: World Bank, 2000).
[7] UNSCO, Special Report on Palestinian Merchandise Trade (Spring 2000).
[8] PCBS, Labor Force Surveys. See also http://www.pcbs.org/english/labor/lab_curr.htm.
[9] UNSCO work permit database and Foundation for Middle East Peace, Report on Settlements in the Occupied Territories 10/4 (July-August 2000). These figures exclude growth in settlements in East Jerusalem.
[10] MAS, Economic Monitor 5 (1999) and UNCTAD, Palestinian Merchandise Trade in the 1990s (1998).
[11] MAS, Economic Monitor 6 (2000).
[12] Palestinian Authority, West Bank and Gaza Economic Policy Framework Progress Report, presented to the secretariat of the Ad Hoc Liaison Committee, Lisbon, June 7-8, 2000.

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