Palestinian Economy Faces Devastation Under Intifada

By Ori Nir

Published March 14, 2003, issue of March 14, 2003.

WASHINGTON — A new World Bank report on the imploding Palestinian economy is fueling calls for an immediate resumption of peace talks.

In the report, which assesses the economic repercussions of the Palestinian intifada and Israeli counter-measures, the World Bank explicitly argues for the first time that economic development in the West Bank and Gaza will require a political breakthrough in the peace process.

The report painted a grim picture on several fronts: A 53% Palestinian unemployment rate, a two-year 40% drop in the Gross National Income — the gross domestic product plus remittances from abroad — a 25%-to-30% decline in per capita food consumption during the last two years, child malnutrition rates equaling those of Congo and Zimbabwe, and about 60% of the population living on less than $2 per day.

“Humanitarian aid can help avoid utter collapse and provide some relief, but if you’re talking about going beyond that, then you’re in the territory of needing some significant political rapprochement,” said Nigel Roberts, who authored the report, in a telephone interview from his Ramallah office in the West Bank.

Any significant improvement in the Palestinian economy requires a lifting of Israeli restrictions on movement of Palestinian people and goods, Roberts said, which in the current political and security environment can only be a result of a political process.

In the past, World Bank reports on the Palestinian economy advocated economic development as a means of supporting the peace process. The current report, however, says that “political progress is indispensable to the resumption of economic and social development in both Israel and the Palestinian territories.”

The World Bank “has finally realized that they have been placing the economic cart before the political horse,” said Sara Roy of Harvard University, widely regarded as the leading expert on the economy of the West Bank and Gaza.

The World Bank report describes the accumulated damage to the Palestinian economy done by more than two years of armed conflict between Israelis and Palestinians. The physical damage resulting from the conflict jumped from $305 million at the end of 2001 to $728 million by the end of August 2002.

The Palestinian economy’s dependence on aid from the international community has increased, and so has its dependence on salaries paid by the Palestinian Authority. “The Palestinian Authority at the moment employs a third of all those employed, and accounts for half of the wages earned in the West Bank and Gaza,” Roberts said. He said that illustrates how vital the sustenance of the P.A. is to Palestinian society, both as an administrative mechanism and as a means of transmitting salaries to government employees.

The resilience of the P.A., Roberts said, was the main bulwark preventing utter economic collapse. The other factor was the increased level of international aid to the P.A., which reached approximately $1 billion in 2002 and was mainly used to support the authority’s debt-ridden budget.

Capital investments have declined by almost 90% during the last three years, Roberts said. Even if international aid is doubled to $2 billion this year — a highly unlikely scenario — the Palestinian poverty rate would fall by only six percentage points, from 60% to 54%, Roberts said.

The World Bank is asking donor states to grant a total of $1.1 billion of aid to the Palestinians this year, which Roy said is an ambitious goal considering that other countries will probably be more focused on addressing the fallout of a seemingly imminent American-led invasion of Iraq. Roberts said that signs of “donor fatigue” already abound among the P.A.’s top financial supporters in the international community.

In addition to financial considerations, donor states seem reluctant to maintain high levels of support because of their displeasure with the current Palestinian leadership. In the United States, critics of the P.A. are calling for making an aid increase contingent on the removal of Yasser Arafat from power.

“As long as Arafat controls the P.A.’s funds and he and his gang remain in power, no real reform is possible,” Virginia Republican Eric Cantor, the House deputy majority whip, wrote in a February 28 opinion article in this newspaper. “Every dollar we send to corrupt groups such as the P.A. kills any hope for peace.”

But a failure to improve the economic situation, Roy argued, will make it harder to restart the peace process. The more the economic situation deteriorates, she said, the less Palestinians will trust their leadership, the more they will tend to reject any political solution their leaders may achieve with Israel and the more they will support militant groups that offer both a welfare safety net and a militant political agenda.

“All these should instill a clear sense of urgency,” Roy said. “I have been following the Palestinian economy for 18 years, and its situation has never been so critical.”

Other experts, however, rejected the claim that the economic devastation would prevent Palestinians from returning to the negotiating table. Regardless of the economic situation, “the Palestinians are extremely eager to negotiate, and they can assemble a negotiating team in no time at all,” said Phillip Wilcox, president of the Foundation for Middle East Peace, a dovish Washington advocacy group. The economic situation in the territories should therefore not deter the United States from rapidly re-launching efforts to advance Israeli-Palestinian negotiations, but rather should serve as a catalyst, said Wilcox, who previously served as the American consul general in Jerusalem and recently returned from a visit to the West Bank and Gaza.

“There is terrible hardship and suffering,” Wilcox said. “But there is a good deal of [Palestinian] political resilience too. And one should not confuse the economic and humanitarian hardship with the ability to bounce back, particularly if money and traffic and labor can flow again as the political process resumes.”



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