The arteries of Gaza’s economy have collapsed as Egypt demolishes the smuggling tunnels along its sandy border.
Ancient stone villages in the occupied West Bank have become trapped in rural poverty, while investors and donors shy away from a zone of seemingly endless conflict.
The crackdown on the Gaza Strip and stagnation in the West Bank mean the Palestinian economy might shrink this year after average annual growth of about nine percent in 2008-2011.
The doldrums have dented a long-held belief amongst Israeli right-wingers that gathering Palestinian prosperity could achieve a de facto “economic peace” and provide a convenient alternative to a comprehensive two-state deal.
“Any talk of further developing the Palestinian economy without a lifting of Israel’s restrictions is just that, talk,” said the Palestinian minister for economic affairs, Jawad Naji.
“The international community urgently needs to intervene to pressure Israel to allow us access to our natural resources.”
Israel fears an economic downturn could provoke violence in the West Bank, with impoverished Palestinians feeling they might have little to lose by staging another uprising against the occupation.
The economy in the Israeli occupied West Bank shrank for the first time in a decade in the first half of 2013, according to a World Bank report this month which mostly faulted Israeli curbs on Palestinian movement and access to resources.
Contraction of 0.1 percent came as foreign donor aid to the West Bank’s puny economy fell by more than half in 2012.
Israel’s restrictions affect much of Palestinian economic life. It controls every access point, which enables it to oversee all imports and exports, creating bureaucratic hurdles that Palestinians say stifle or kill entrepreneurship.
The Israelis also impose strict limits on water supply, which affects industry and agriculture. Israel has not allowed Palestinians access to 3G mobile technology, citing security concerns, rendering many smartphone apps largely useless.
The impact from the slowdown is clear even in well-heeled Ramallah, the Palestinian Authority’s administrative capital which feels a world away from poorer, outlying areas.
“When I opened my restaurant eight years ago, I had five or six workers. Today I have three and if the situation gets any worse, that number might become two,” said Ahmed Kdour, owner of the Chicago restaurant.
“Many people have put their shops up for sale saying they are traveling or don’t have time for the business, but it is because of the economic situation,” he added.
The West Bank’s woes were partially offset in the first half of the year by resilience in Gaza, thanks especially in the construction sector fed with cement from the tunnels.
But since Egypt’s military in July ousted the country’s Islamist president, a friend to the Hamas group that runs the coastal strip, it has demolished around 90 percent of the tunnels from which the Gaza government used to derive between 40-70 percent of its revenue.
Unemployment in Gaza and the West Bank was some 22 percent in June 2013, with exports making up just 7 percent of the total economy, according to World Bank statistics.
Israeli foreign ministry spokesman Yigal Palmor told Reuters a lull in Palestinian GDP was natural after a period of sharp growth, and defended continued Israeli curbs that bodies such as the World Bank say are smothering prospects for expansion.