An economy in ruins

Israel's latest assault on the occupied territories has flattened an economy that was already stumbling. But Israel itself is in trouble, as the costs of trying to contain the Intifada mount. John Sfakianakis* writes
The Palestinian economy has all but collapsed. A prolonged policy of closure, and the latest Israeli offensive, have destroyed important segments of the Palestinian economy and many of its institutions in the past few weeks. Although Oslo never permitted for anything more than Palestinian dependency on the economic structures put in place by Israel, the recent assaults have inflamed economic misery and retarded development of any sort. And it hardly needs saying that economic suffering and social degradation are no ingredients for peace.
Restrictions on the movement of goods, labour and people -- a result of Israel's policy of closure (a permanent administrative measure since 1993) -- have plagued the Palestinian economy throughout the 1990s and never more so than during the past few months. Notwithstanding the recent Israeli raids and their concomitant restrictions on people's movement, by early 1998, less than four per cent of Palestinians living in the West Bank and Gaza Strip had permission to enter Israel. The economic effects of closure have been devastating. A recent World Bank study detailed how closure affected the economy during the first 15 months of the Intifada. Its most dramatic effect has been to heighten joblessness and shrink real per capita income among Palestinians. Between 1992 and 1996, average unemployment increased from about three per cent to a staggering 30 per cent. It grew quickest during times of stiffer closure policies. By January 2002, unemployment had risen to between 40 and 50 per cent, according to the World Bank. Currently, three in every four Palestinian workers, according to various international organisations, are unemployed. Underemployment, which also besets most countries in the Middle East, is another constant affliction debilitating the Palestinian economy.
All this leads to declining real per capita income, and the host of problems that comes in its wake. The share of the Palestinian population living below the poverty line ($2 per person per day) was estimated, before January 2002, as standing at between 50 per cent (according to World Bank data) and more than 64 per cent (according to the United Nations). Undoubtedly, poverty levels must have risen precipitously following the devastating Israeli raids of the past month. Human losses to death and injury defy economic estimation. However, direct physical destruction of the public infrastructure is conservatively estimated at costing somewhere in the region of $600-800 million, according to a restricted report compiled by international agencies working in the Palestinian territories, and including the European Commission's humanitarian aid office.
The destruction of productive capital stock (damaged buildings, road and soil degradation, destroyed well and irrigation systems etc.) in the Palestinian territories will lead to tremendous capital stock losses. The damage Israel inflicted on all PA-related institutions will definitely affect the economy. The destruction of important sections of the Palestinian Central Bureau of Statistics has rendered the statistical arm of the PA temporarily out of service. And the damage done at the municipal level has debilitated the economically relevant institutional connections between the PA and the rest of the territories.
Non-Governmental Organisations (NGOs) have suffered, too. In Ramallah, the offices of the MATTIN Group -- a voluntary partnership specialising in international human rights enforcement -- were looted and pillaged by the Israeli army. An irreplaceable collection of unpublished documents concerning International Humanitarian Law, accumulated over a 19-year period, are believed to have been destroyed by the Israeli army. It is worth noting that the MATTIN Group has been the single most important NGO campaigning to prohibit the European Union from granting preferential treatment to goods produced in Israel's illegal settlements. For decades, the EU has not enforced the exclusion of settlement products from preferential treatment, although it has been called upon by the European Parliament to do so. More alarmingly, farming, whose produce is an important export component of the Palestinian economy, has sustained the most serious damage. Agricultural losses have not been confined merely to building and irrigation systems; they also run to the uprooting of fruit and olive trees. A freshly-planted olive tree takes seven years, under the best conditions, before it starts to bear fruit. Recovering these lost yields will be far from easy.
World Bank officials believe most of the $5 billion-worth of investments made possible by international donor aid over the past eight years has been destroyed. The loss to gross domestic product (GDP) alone is about $5 billion. On the revenue side, the Palestinian Authority (PA) is effectively bankrupt: tax revenues have dwindled, as of February 2002, to a fifth of previous levels. Revenue collected by the PA since the start of the Intifada and until March 2002 averaged less than $20 million per month (compared with an average of $88 million per month in the third quarter of 2000). During periods of relative peace, about two-thirds of Palestinian revenue comes from taxes collected by Israel on the PA's behalf. In the past, these taxes were regularly remitted to the PA; Israel has withheld all such payments since December 2000. Total gross revenues withheld by Israel are estimated, as of end-December 2001, to stand at about $0.5 billion.
As closure and violence have intensified over the past few months, household incomes and savings have shrunk, as has the capacity of Palestinians to borrow. Closure has forced people to spend their savings, and in order to maintain current levels of food consumption they have had to sell personal items. Fiscal discipline is not sustainable in the PA and deficit spending is becoming endemic. Until now, the PA has managed to finance its deficit by borrowing from commercial banks, cutting salaries, delaying payments and cutting costs. Even before the disasters brought by Israel's latest incursions, the PA's finances were teetering. By the end of 2001, the authority's arrears amounted to $430 million. Fear of damage from fighting has led the private sector to cease investments in the past few months. As a result, the number of new company registrations fell by the end of 2000 by 80 per cent and has now been completely halted. The continuous decline of the stock market in Palestine, which collapsed by more than 40 per cent in the past year, is another depressing index of dwindling private sector confidence in the economy. More importantly, Palestine's private sector growth remains circumspect at best. It is estimated that 90 per cent of private sector business units are small/ medium enterprises (SMEs), comprising fewer than 10 employees in total. The debt-to-asset ratios of the SMEs are low, due to reliance on informal bank lending practices and the use of personal savings. Closure and unemployment has forced saving to fall to new lows and, logically, informal lending has nearly disappeared due to the uncertain times.
It is also worth mentioning that the Israeli economy has not been immune from declining growth rates either; though its suffering pales next to that of Palestine's. Some of this is a direct result of the Intifada.
Israel's economy has been hit from two directions. First, the overall global slowdown has been disproportionately painful to technology companies, which drove Israel to growth of 5.9 per cent in 2000. Last year's economic growth, in contrast, was a stagnant 0.5 per cent, with industrial output falling by four per cent. GDP growth is not expected to rise above 1.5 per cent this year at best. The other difficulty, of course, is the Intifada. The Ministry of Finance blames the Intifada for the large deviation in the government's deficit and its growth as a percentage of GDP. Recently,
Ministry of Finance officials admitted for the first time that the government's deficit in 2001 had surged to 4.6 per cent of GDP: a corollary of the security situation. The sector to suffer most conspicuously has been tourism, a major foreign currency earner. Israel's thriving biotechnology sector is also facing a severe crisis as escalating violence has stopped US regulators from conducting crucial manufacturing inspection visits. Israel has about 150 biotech companies, ranking the sector fifth in Europe.
Nevertheless, the suffering inflicted on the two economies differs in kind, as well as scale. Whereas the security situation and a world slowdown have held back Israeli growth, Israel's losses can be remedied in the medium term. The Palestinian economy, by contrast, has been blighted by the devastation wrought on its very structure. And to its woe, there is no end in sight.
* The writer is a research fellow at Harvard University's Centre for Middle Eastern Studies
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