The report on the Impact on the Palestinian Economy of Confrontation, Border Closures and Mobility Restriction is the 4th in a series of reports on the economic situation in the Palestinian territories since the start of the current Israeli-Palestinian crisis. The report covers the period from 1 October 2000 to 30 June 2001, describes the scope and severity of mobility restrictions faced by the Palestinian population and examines the economic, fiscal and social impact of the crisis.

INTRODUCTION

Besides violent confrontation, damage to physical and agricultural assets and a growing atmosphere of profound political and economic uncertainty, the imposed Israeli policy of closure is the factor most responsible for the negative economic, fiscal and social developments described in the report.

The report, building upon previous ‘Closure Updates’ as well as the recently released UNSCO Report on the Palestinian Economy, finds that the closure of the West Bank and Gaza has had a disastrous effect on the Palestinian economy, the PA’s fiscal situation and the living standards of the average Palestinian household.

Direct aggregate income losses sustained during the first nine months of crisis range from USD 1,860 to 2,459 million, unemployment rates are back to their 1996 levels and the PA’s fiscal basis has become nearly unsustainable even with significant external budget support. Poverty rates are expected to reach 50% by the end of 2001 and such structural assets of the Palestinian economy as relatively high educational and health standards risk being eroded should the conflict persist.

The macro-economic data presented in the report as well as the more detailed findings of an ongoing UNSCO/FAFO study of the impact of closure on two villages shows that there are two main reasons why the closure has not had even more drastic consequences. The first is that the public sector, in particular the Palestinian Authority, still pays wages to its staff. Secondly, even though the closure is strict, it is not total. Workers are intermittently able to carry on working in Israel, and there receive wages that are much higher than what they can obtain in the West Bank.

Another factor that has been important for retaining a semblance of normality is the widespread use of buying goods and services on credit. Nevertheless, there are clear signs that system is on the verge of breaking down, since those who are providing credit cannot sustain it indefinitely.

Overall, it is becoming clear that the closure policy, imposed to offset security concerns on the part of the Israeli population, is resulting in a form of collective punishment for the Palestinian population and cannot be sustained because of security considerations as on average over 70.000 Palestinian workers, either legally or illegally, still enter Israel on a daily basis.

MOBILITY RESTRICTIONS

Since the outbreak of the current crisis, the Israeli authorities, in response to security concerns, has instituted a policy of ‘closure’ of the Palestinian territories, entailing the imposition of mobility restrictions on people and goods at the Occupied Palestinian Territory’s external borders (with Israel and with the neighbouring countries of Egypt and Jordan) and at multiple points within the West Bank and Gaza.

Closure of Borders with Israel

As measured at the Erez crossing, the border between the Palestinian territory and Israel was closed to Palestinians for 176 days out of a total of 273 calendar days. If measured in working days (days during which Palestinian workers would normally enter Israel to work and earn wages), the border has been closed for 122.5 days or 61% of all working days. The traffic of goods from Gaza to Israel was severely impeded at two of the three commercial crossings. The crossing at Erez/Beit Hanun was closed 273 days (100%) while Sufa/Quararah was closed 188 days (69% of all days). The only crossing that was relatively open was the crossing at Karni/Muntar, which was closed only for 30 days (11%)

For the West Bank, UNSCO estimates that similar border movement restrictions have been in place throughout the reporting period. However, in contrast with Gaza, unpermitted labour flows from the West Bank into Israel began to increase in early 2001 and have been ongoing throughout the reporting period. Also, commercial traffic between the West Bank and Israel has been somewhat easier than between Gaza and Israel because of the availability of Israeli-registered trucks that can transport goods without permits. However, for both Gaza and the West Bank, more intense security checks and internal mobility restrictions have restricted the export of goods even on days when borders were open.

Finally, the closure of borders with Israel has resulted in the complete closure of the so-called “Safe Passage” route. As of 6 October 2000 until today, Palestinians have been unable to travel from the West Bank to Gaza or vice versa.

Closure of International Borders

Both passenger and commercial traffic between the West Bank and Jordan and between Gaza and Egypt have been severely restricted during the reporting period. The Allenby/Karameh bridge has been partially or completely closed for Palestinian passengers during 78 days (29%) and for commercial traffic for 194 days (78%). At the Rafah crossing, passengers could not cross during 152 days (56%) and commercial crossings were restricted during 181 days (66%). In addition, the Gaza International Airport has been partially or completely closed during 221 days (81%).

Internal Closures

Travel within the West Bank and Gaza has been impeded as a result of the establishment of a dense network of fixed and mobile military checkpoints and the temporary or permanent destruction or blockage of roads. Severe internal closure was in effect in Gaza during 18 days (7%) and in the West Bank during 147 days (54%). Partial internal closure was in place in Gaza during 250 days (92%) and in the West Bank during 126 days (46%).

The practical effect of internal mobility restrictions is reflected in the serious decrease in domestic economic output due to fact that Palestinian employees are unable or face severe difficulties in reaching their place of employment, while producers cannot transport their goods to markets or receive the raw materials necessary for production. In addition, access to basic social services is severely hampered, especially for Palestinians living in remote areas of the West Bank.

DIRECT ECONOMIC EFFECTS

Impact on Aggregate Income

UNSCO estimates that the total income losses to the Palestinian economy since October 2000 range between USD 1,860 and USD 2,459 million. These estimates combine the external economic losses caused by the decrease of income from Palestinian workers in Israel with ranged estimates of economic losses due to domestic production decline.

External Losses: Using the third quarter of 2000 as a reference period, the total value of lost income-earning opportunities for Palestinian workers in Israel, Settlements and Industrial Zones (ISIs) through June 2001 is estimated at USD 461 million or USD 2.24 million per working day.

Internal Losses: Using GDP projections for 2000 as a reference, a high estimate for internal income losses, based on a PCBS study showing a 50% domestic output decline, amounts to USD 1,975 million or USD 8.55 million per business day. A low estimate, based on a World Bank projection of a 35% decline in domestic output, amounts to direct internal income losses of USD 1,382 million or USD 5.99 million per business day.

Impact on Employment

Whereas between 1997 and September 2000, unemployment figures for the Palestinian territory have shown a steady decline from an average of 23.8% in 1996 to about 10% in mid-2000, the crisis has completely offset the gains of these past years with core unemployment reaching 26.9% at the end of the first quarter of 2001.

In addition, unfavourable labour market conditions has led to a decrease of the Labour force participation rate to 38.8% at the end of the first quarter of 2001. The decreasing Labour force participation rate shows that increasingly Palestinian workers are giving up all attempts of even looking for work and are therefore no longer listed as unemployed. Taking this phenomenon into account, the adjusted unemployment rate at the end of the first quarter of 2001 reached 37.8%, an increase of 78% from pre-crisis levels.

Impact on Fiscal Revenues

Rising unemployment and the accompanying loss of income, disruptions in domestic production and reduced domestic consumption have significantly reduced the overall fiscal revenue base of the Palestinian Authority. Moreover, the refusal of Israel to handover taxes collected on behalf of the PA and increasing difficulties in collecting taxes due to movement restrictions have resulted in a drop of monthly fiscal revenues from USD 87.7 million prior to the crisis to USD 20.6 million (first quarter of 2001).

Even though the international community is providing external budgetary support to the PA (USD 400 million), the PA budget deficit for 2001 is anticipated to amount to USD 371 (compared to USD 100 million in 2000).

SOCIAL IMPACT

Impact on Living Levels

The combination of increasing unemployment and increasing dependency ratios has directly affected the income of an estimated 885,000 persons or nearly 30% of the total population. Spread over the total population, the aggregate real wage income is estimated to have declined by 40% in the first quarter of 2001 relative to pre-crisis levels. This decline in aggregate real wage income is further compounded by the damage to physical assets such as housing and agricultural assets, often relied upon as a supplementary source of income.

The share of population living below the poverty line, according to World Bank estimates, reached 35% by the end of 2000 and is expected to reach 50% by the end of 2001 (Compared to 21.1% prior to the outbreak of the crisis).

Impact on Social Services

Since the crisis began, the Palestinian health care system has been under severe strain from the increased burden of caring for thousands of wounded, especially those with debilitating injuries. At the same time, movement restrictions have limited access to health care services, especially in rural areas, and have impeded the flow of medical supplies to hospitals and clinics.

In addition, internal closure and security risks are also impeding the access to education. Reports indicate that 190 schools have been temporarily closed, 55% of older students have experienced difficulties in reaching higher education institutions and 1,300 Gazan students have been unable to reach their universities in the West Bank.

LONGER TERM IMPACT

Four years of economic progress, declining unemployment and poverty rates and increasing education and health standards have been completely offset by 9 months of crisis. The rapid and sustained deterioration of the Palestinian economy suggests that recovery will take longer than after previous periods of economic recession even if the conflict is ended soon and mobility restrictions lifted completely.

UNSCO CLOSURE UPDATE SUMMARY