TWN Info Service on WTO and Trade Issues (Sept16/04)
13 September 2016
Third World Network

United Nations: OPT economy would be twice as large without occupation
Published in SUNS #8310 dated 13 September 2016

Geneva, 7 Sep (Kanaga Raja) -- Without the Israeli occupation, the economy of the Occupied Palestinian Territory (OPT) could produce twice the GDP it is currently generating. Chronic trade and budget deficits, as well as poverty and unemployment could recede and economic dependence on Israel could end.

This is one of the key messages highlighted by the United Nations Conference on Trade and Development (UNCTAD) in its latest report on assistance to the Palestinian people released on Tuesday (6 September).

"It is therefore important to establish a systematic, comprehensive and sustainable framework to assess, on a periodic basis, the economic costs and consequences of measures taken by the occupying Power," said UNCTAD.

The Israeli occupation, UNCTAD said, deprives the Palestinian people of their human right to development and hollows out the Palestinian economy through several channels including the confiscation of Palestinian land, water and other natural resources.

It is also resulting in loss of policy space; restrictions on the movement of people and goods; destruction of assets and the productive base; expansion of Israeli settlements; fragmentation of domestic markets; separation from international markets and forced dependence on the Israeli economy.

UNCTAD said the structure of the Palestinian economy has been further deformed by a continuous process of de-agriculturalisation and de-industrialisation.

At a media briefing on Tuesday, Richard Kozul-Wright, Director of the UNCTAD Division on Globalization and Development Strategies, underlined that there is a viable Palestinian economy underneath the difficulties that they face as a consequence of the Israeli occupation.

According to Kozul-Wright, the important message that UNCTAD wants to get across is that a "viable Palestinian state needs a viable economy and there is a viable economy there".

He said that the international community needs to understand the nature of the underlying economy if it is to ensure that a Palestinian state becomes non-aid dependent and sustainable in the medium to longer term.

According to Kozul-Wright, the term ‘vicious cycle' is used a lot in development economics. "But if you want to see a vicious cycle in real time, Gaza would be an example where economic crisis and social crisis reinforce each other."

He said that premature de-industrialisation is a killer for developing countries wherever it takes place. "And you can see from the figures that the Palestinian economy has suffered from premature de-industrialisation on a huge scale that makes this effort to generate a viable and sustainable economy all the more difficult."

Mahmoud Elkhafif, UNCTAD Coordinator of Assistance to the Palestinian People, said that the cost of the occupation is substantial and there is no systematic measure of this cost.

He said that nobody knows exactly how much is the cost, and all of the studies have been done on an ad hoc basis. However, all the indications are that these costs are tremendous.

Without the occupation, the Palestinian economy would have been able to produce twice as much it does today. "We are talking about $13 billion in today's money," he said.

According to the UNCTAD report, 2015 was yet another difficult year for the Palestinian people.

With weak recovery from the 2014 recession, gross domestic product (GDP) growth was too modest to improve per capita income. The impact of the 2014 recession, triggered by the Israeli military operation in Gaza, persisted into 2015.

In the West Bank, growth decelerated from 5.3 to 2.5 per cent in 2014-2015, while in Gaza, following a 15 per cent contraction in 2014, growth was a mere 6.8 per cent in 2015, which was too weak given the vast grounds the local economy had lost during the last decade.

"The 3.5 per cent overall rate of economic growth in the Occupied Palestinian Territory leaves per capita income stagnant and still lower than its 2013 level, prior to the Israeli military operation in Gaza."

The main reasons for the 2015 stagnation were the decline in foreign aid; the suspension by Israel of clearance revenue transfers to the Palestinian National Authority (PNA) in the first four months of 2015; the slow pace of reconstruction in Gaza due to continuing restrictions by Israel on imports that are essential for reconstruction; and low levels of disbursement by donors.

"The weak GDP growth in the Occupied Palestinian Territory is unsustainable as it is driven by consumption, facilitated by an expansion in bank credit to PNA and its public employees. Credit to the private sector grew by nearly 19 per cent in 2015, while bank credit extended to PNA increased by 17.5 per cent, as the private credit- to-deposits ratio has nearly doubled in the last four years," said the report.

In 2015, it noted, high unemployment persisted despite a low labour force participation rate of 46 per cent. The unemployment rate in the Occupied Palestinian Territory was 26 per cent in 2015, compared to 12 per cent in 1999, prior to the tightening of restrictions on movement and access of Palestinian labour and goods.

"Full control of Area C (61 per cent of West Bank area) by Israel, other restrictions and the blockade imposed on Gaza have generated a permanent unemployment crisis in the Occupied Palestinian Territory."

Lack of employment opportunities in the domestic economy forces thousands of unemployed Palestinians to seek employment in Israel and in settlements in low-skill, low-wage manual activities.

In 2015, nearly 12 per cent of employed Palestinians worked in Israel and in settlements. Employment in Israel and Israeli settlements accounted for 16 per cent of the employed population in the West Bank.

The report also found that weak economic growth and high unemployment have deepened chronic food insecurity. Recent data show that two thirds of Palestinians are affected by food insecurity, with 33 per cent food-insecure, 21 per cent marginally secure and 13 per cent vulnerable to insecurity.

In 2016, 1.1 million people (21 per cent of the population) in the West Bank and 1.3 million people (73 per cent of the population) in Gaza need some form of humanitarian assistance.

House demolition continued in 2015 and accelerated in early 2016, with 587 Palestinian structures demolished between September 2015 and April 2016, while construction of 1,800 housing units in Israeli settlements was initiated and greater expansion planned for 2016.

The long-term trend of annexation of Palestinian land also continued. In March 2016, Israel declared 2,342 dunums of land south of Jericho as State land. At present, there are approximately 142 settlements in the West Bank, which brings the number of Israeli settlers to about 21 per cent of the Palestinian population of the West Bank.

In 2015, the PNA succeeded in reducing the overall fiscal deficit to 11 per cent of GDP, down from 27 per cent in 2006. Total revenue grew by 9 per cent, to 22 per cent of GDP. However, the potentially positive effects of revenue growth were offset by a 30 per cent decline in donor aid.

The $800 million in donor aid received covered 55 per cent of the $1.45 billion budget deficit and PNA financed the ensuing $650 million gap through the accumulation of arrears. Its net borrowing from domestic banks increased by $163 million, inflating total domestic and external debt to $2.5 billion by the end of 2015.

Despite the repeated withholding of Palestinian clearance revenue by Israel since
1994, the heavy fiscal cost of occupation and the reorientation of public expenditure to meet emergency and humanitarian needs, PNA has managed to consistently narrow the deficit-to-GDP ratio.

"This suggests that its fiscal management is relatively sound and that the chronic fiscal crisis is mainly caused by occupation. However, this is not recognized by PNA development partners, who continue to implicitly, and at times explicitly, suggest that PNA reforms alone can achieve fiscal sustainability," said UNCTAD.

Israel's control of clearance revenue, which accounts for about three fourths of PNA revenue, enables it to exercise undue control over Palestinian fiscal affairs.

UNCTAD reports and studies have highlighted the consequences of Israel's recurrent withholding of Palestinian clearance revenue; the last such withholding occurred in the first four months of 2015 following the PNA decision to join the International Criminal Court.

This clearance arrangement also results in the annual leakage of hundreds of millions dollars of Palestinian fiscal revenue to Israel.

According to the UNCTAD report, this process also involves unjustifiably high handling fees charged by Israel for collecting taxes on Palestinian imports on behalf of PNA. The administrative handling fee was set in 1995 at 3 per cent of clearance revenue, to be deducted before Israel transfers the remainder to PNA.

However, while Palestinian imports recently represented 6 per cent of all imports handled by the customs and value added tax department of Israel, fees deducted by Israel financed one third of the department's budget.

If the handling fees were proportional to the share of Palestinian imports in total imports handled by the department, they would drop from 3 to 0.6 per cent of total clearance revenue and would have prevented $50 million (1.7 per cent of Palestinian revenue) worth of overpayment to Israel in 2014.

In 2015, the exports-to-GDP ratio increased from 17 to 18 per cent, while the imports-to-GDP ratio jumped from 56 to 59 per cent despite the dampening effects of slow GDP growth and lower global fuel prices.

Consequently, the trade deficit expanded to $5.2 billion, or 41 per cent of GDP, reflecting a weakened tradable goods sector and deep dependence on imports, especially those from Israel.

Despite restrictions on trade, the Palestinian economy remains highly open, with total trade accounting for 77 per cent of GDP. However, this openness is largely with Israel, which alone accounts for 55 per cent of total Palestinian trade, said the report.

On the other side of this asymmetric trade dependence, the Occupied Palestinian Territory accounts for a modest 3 per cent of total Israeli trade.

"The one-sided customs union, enshrined in the Paris Protocol, and obstacles to trade and productive activities effectively render the Occupied Palestinian Territory a captive market for exports from Israel."

In recent years, Israel accounted for more than 70 per cent of Palestinian imports and absorbed about 85 per cent of Palestinian exports. In 2015, the Palestinian trade deficit with Israel accounted for 54 per cent of the total Palestinian trade deficit and stood at 230 per cent of net current transfers.

BLOCKADE OF GAZA

According to the report, Israel's blockade of Gaza, in its ninth year, continues to exert a heavy toll.

The population of Gaza is locked in, denied access to the West Bank and the rest of the world. Even people in need of medical treatment are not allowed to travel to obtain essential health care.

The blockade has affected Gaza's once vibrant export sector. In 2015, a monthly average of 113 truckloads of goods were allowed to exit, equivalent to 27 per cent of monthly exports from Gaza in 2006, before the blockade was tightened.

A prominent element of Israel's restrictions on Palestinian productive activities is the dual-use list, which prohibits the importation of civilian goods deemed by Israel as potentially having other, harmful uses. The list includes essential factors of production, raw materials, agricultural fertilizers, telecommunications equipment, steel, pipes, spare parts and other capital goods.

"Recently, more items have been added to the list, and the thickness of wood classified as dual-use has been reduced from 5 to 3 cm, then to 1 cm. This has far-reaching implications for Gaza's furniture industry, among other harmful effects."

A shocking indicator of the grim situation in Gaza is the rising infant mortality rate, one of the best indicators for the health of a community. Infant mortality has risen for the first time in 50 years. The rate of neonatal mortality has also risen significantly, from 12 per 1,000 live births in 2008 to 20.3 in 2013.

According to the United Nations Relief and Works Agency for Palestine Refugees in the Near East, progress in combating infant mortality does not usually reverse. The trend in Gaza is unprecedented and rarely observed outside communities affected by HIV epidemics.

In 2015, Gaza's electricity crisis deepened and took a toll on every aspect of public and personal life.

The United Nations Office for the Coordination of Humanitarian Affairs highlighted some consequences of the energy crisis, including: (a) Up to 90 million litres of partially treated sewage is discharged daily into the Mediterranean Sea; (b) Waiting time for some surgeries can be as long as 18 months; (c) Malfunctioning of sensitive and life-saving medical equipment is recurrent; (d) More than 70 per cent of households are supplied with piped water for only 6-8 hours every 2-4 days, resulting in serious distress to households, not least due to the fact that essential housework must be completed during the erratic times when electricity and water are supplied.

ECONOMIC COST OF OCCUPATION

"No monetary value can be assigned to the distress caused by the destruction and loss of life, community, culture, shelter and homeland. Therefore, assessment of the economic cost of occupation for the Palestinian people is, at best, a partial measurement of losses incurred since the onset of occupation and an essential step towards ending the occupation and reversing its distortions," said the report.

In the Occupied Palestinian Territory, following the onset of occupation in June 1967, Israel assumed full control of the Palestinian economy until the establishment of PNA in 1994.

However, PNA and the Palestinian people have not had full sovereign control over their economy, due to many reasons, chief among which are the following two factors:

(a) The Gaza Strip and West Bank, including East Jerusalem, remain under occupation, with tight restrictions on the movement of people and goods; systematic erosion and destruction of the productive base; losses of land, water and other natural resources; a fragmented domestic market and separation from international markets; a tight blockade on Gaza since 2007; the expansion of Israeli settlements; construction of the Separation Barrier and closure policy in the West Bank; and the isolation of East Jerusalem from the rest of the Occupied Palestinian Territory;

(b) The Paris Protocol was intended to define the Palestinian economic policy framework for the five years (interim period) following the establishment of PNA in 1994, yet two decades on, the Protocol continues to restrict the policy space available to Palestinian policymakers, reinforce a quasi customs union and ensure Palestinian economic dependence on Israel.

"Such constraints have placed Palestinian agricultural and industrial producers at marked disadvantage in Palestinian and external markets and set in motion a continuous process of de-agriculturalisation and de-industrialization, thereby depriving the Palestinian people of their ability to produce, and cultivating dependence on aid and on Israel's economy."

UNCTAD highlighted the structural deformation of the economy of the Occupied Palestinian Territory in the past four decades: in 1975-2014, the contribution of the tradable goods sector (agriculture and industry) to GDP dropped by half, from 37 to 18 per cent, while its contribution to employment decreased from 47 to 23 per cent.

It said that this may be explained by the fact that the agricultural and industrial sectors are comparatively more vulnerable to the confiscation of Palestinian land and natural resources and Israel's restrictions on the movement of labour and goods.

Since the onset of occupation in 1967, the Occupied Palestinian Territory has lost access to more than 60 per cent of West Bank land and more than two thirds of grazing land. In Gaza, half of the cultivable area and 85 per cent of fishery resources are inaccessible to Palestinian producers.

Furthermore, Israel has been extracting water above the level determined in article 40 of appendix I of the Oslo II Accord, signed on 28 September 1995, and confiscates 82 per cent of Palestinian groundwater for use inside its borders or in its settlements, while Palestinians must import from Israel over 50 per cent of their water.

The World Bank has noted that only 35 per cent of irrigable Palestinian land is actually irrigated, costing the economy 110,000 jobs and 10 per cent of GDP. Agricultural activities have therefore become less viable, and many farmers have been forced to abandon cultivation.

UNCTAD said that in the industrial sector, occupation and related uncertainty, and the restrictions on movement and access, have stifled investment and limited the Palestinian private sector to small-scale operations with low capital intensity and efficiency.

"Structural deformation is only one aspect of the economic cost of occupation for the Palestinian people. A comprehensive assessment of this cost requires a complicated, detailed, integrated and multi-sectoral process with various methodologies," said UNCTAD.

It should be capable of estimating the direct and indirect economic costs of a number of losses including, but not limited to, the following: physical; water and other natural resources; opportunity and economic; microeconomic, macroeconomic and fiscal; human capital; community and neighbourhood; and psycho-social.

However, to date, all efforts made to quantify the economic cost of occupation have been done on ad hoc basis, mostly by UNCTAD, said the report, which went on to highlight a number of studies and their main findings. +