The Palestinian economy’s fragile equilibrium

Peter Lagerquist, Middle East International

The Palestinian economy’s fragile equilibrium

Palestinians have undoubtedly got poorer since the intifada. started, and are likely to get poorer still. But, as Peter Lagerquist reports from Ramallah, things could be worse.

ISRAEL’S COUNTERINSURGENCY continues to exact a heavy toll on Palestinian livelihoods, with unemployment and poverty smothering Gaza and many West Bank communities. Yet development experts feel that things could be worse, and talk in near mystical terms of the resilience of the small businesses and extended family networks that form the backbone of local society. And though as much an indicator of exigency as it is of hope, foreign assistance to the Palestinians and the Palestinian Authority looks set to break records.

The face of a new economy

Slight, tanned and dusty, with sparkling eyes and tan gled hair gathered in a fraying braid, six-year-old Asma peddles packets of chewing-gum on Ramallah’s main street. She’s an inexpert entrepreneur, her approach more curiosity than hustle, but she hides a radiant gap-toothed smile that springs a few wallets among the young men huddled over water pipes and card games at the Ali Baba cafe. Scores of children like Asma work in the centre of Ramallah these days, peddling lighters, mobile phone cases and, in winter, socks. Most of them, like 10-year-old Jihad, have little to offer, but a prayer; pocket-sized stickers inscribed with a Qur’anic passage. Jihad gets the stickers at a local mosque and takes whatever is offered in return. He started doing this a few months before the intifada broke out and has since had little choice but to persevere – his father is jailed in Israel, and together with his older brother he has to support his mother and sister. So far this Friday morning he has made about $2.

Local residents speak of this thinly disguised beggary with a mixture of despondency and shame. In its present state it dates back to the later years of the Oslo process, when the Palestinian economy had already begun to crumble under the weight of intermittent Israeli closures. Since then it has become a steadily growing testimony to the limits, and also perhaps endurance, of a society under siege. Jihad’s earnings this Friday place him in a privileged and shrinking group, namely that half of the Palestinian population that still ekes out a living above the official poverty line. According to conservative estimates, $2 a day is more than 1.7 million Palestinians currently have to survive on, and worryingly, as many as 700,000 people joined these ranks of destitution during the second half of 2001.

It is evident why; the Palestinian economy has shrunk by about a third since the outbreak of the intifada, with the result that per capita income is now lower than when the peace process began. In Gaza, the typical monthly income of a six-member household fell from $430 to about $200 by late 2001. In the West Bank it has fallen from $660 to $370.

Israeli restrictions on the movement of people and goods in the Territories are the cause of this destitution. Severe closures smothered the West Bank over half the time during the first eight months of the intifada. Though internal movement within the Gaza Strip has been relatively simpler, this small and totally enclosed territory has seen its main commercial crossing with Israel closed for 61% of the same period. A 40-50% drop in Palestinian imports during this period is a measure of both the severity of the closures and the fall in Palestinian purchasing power. Disproportionately, Gaza and remote rural communities in the West Bank, particularly those adjacent to Israeli settlements, continue to bear the brunt.

Adjusting in crisis

The ways many Palestinians adjust to the loss of their livelihoods treads a fine line between resilience and resignation, a distinction that grows ever finer in a shrinking economy of diminished expectations. By all evidence, almost everyone is economizing, often on the margins of the possible. A majority of Palestinian families are buying less and lower-quality foods, say surveys conducted by the Palestinian Central Bureau of Statistics (PCBS). Yet development economists at the World Bank and the IMF think that things could be worse, indeed much worse. Events have made a “pessoptimist” of Sebastian Dessus, the World Bank’s chief country economist in the Territories, who has been following the deterioration of Palestinian living standards since the intifada began. “It seems that Palestinian households are coping very well with what is going on,” he feels. “Anecdotally, you don’t see nutritional problems, for example, or many children working on the streets.”

All may not share Dessus’ understanding of “many”, but that too is a measure that can be whittled down by expectations. The precipitous decline of the Palestinian economy during the first months of the uprising prompted the World Bank to formulate a number of scenarios for what it might look like today. All were bleak, but some went far beyond the reality Dessus believes he sees. An unemployment rate of 40-50% was certainly a possibility, and while the World Bank’s current estimates of 36% are only marginally better, they also indicate a certain resilience on the part of the local economy, according to Dessus and his colleagues at the IMF. They are not clear where it comes from but speak in near mystical terms of the ability of small localized enterprises and extended family networks to adjust to Israeli closures.

One part of the explanation is the tenacity of Palestinian links with the Israeli economy, particularly in the West Bank. Though most of the Palestinians who worked in menial positions in the Israeli construction and service industries prior to the intifada lost their jobs when it began, an estimated 40-50,000 managed to find new employment during the second half of 2001 by illegally crossing the long border. The recycling of their earnings in the Palestinian economy continues to provide crucial support to many businesses and families. Notably, between late spring and early autumn, the typical value of monies that West Bank households received from relatives and friends more than doubled, amounting to $732. One in every five households were so fortunate, according to the PCBS.

Hidden resources?

Curiously however, such assistance also increased substantially in Gaza, with one in ten families receiving typical supplements of $244 over a two-month period in late autumn. Since Gaza is almost completely shut out of the Israeli labour market, and local savings have been depleted to the point where many families have been selling belongings to survive, these monies seem to have been conjured out of thin air. Notably, only an insignificant 2% of households report that they received remittances from abroad during this period. As Dessus and others note, however, the Palestinian economy has been running on hidden resources for some time. This is income that they say must be there if Palestinian imports from Israel could have been covered, but which are otherwise unaccounted for. “There is usually $1bn going into the economy every year, but we don’t know where it goes,” says Dessus. “Maybe it has decreased, maybe it has increased, we don’t know.”

Much of Dessus’ uncertainty reflects the data. Hard data on the Palestinian economy remains anecdotal; the World Bank gets most of its information from surveys undertaken by the PCBS, but its own deductions diverge, sometimes quite sharply, from the latter’s. The PCBS, for example, estimates that unemployment in Gaza stands at 80%. The World Bank estimates 60-65%, a lighter shade of bleakness derived from models and methodological qualifications it imports from work in other developing countries.

Getting a better understanding of the reality behind the numbers has become increasingly difficult, with statistics coming under all sorts of fire during the intifada, some less friendly than others. On the morning of 5 December, Israeli troops occupied the Ramallah offices of the PCBS and left the next day, taking with them files and equipment and leaving behind destruction. Though the PCBS had backed up most of its data, the raid set back its work considerably, says Director Hassan Abu Libda.

Bailing out the PA

Despite Israel’s campaign against the institutions of Palestinian self-rule, Yaser Arafat’s government continues to operate. Clearly politically significant, this is also good news for the Palestinian economy, and in particular the perhaps 500,000 Palestinian wives, husbands, daughters, sons and other relatives who rely on the PA to pay the salaries of its estimated 120,000 employees.

The PA’s revenues have been sapped by the deterioration of the local economy and Israel’s continuing refusal to hand over some $400m in VAT and social insurance benefits it has collected on the PA’s behalf during the intifada. The PA’s ability to weather the past six months is due largely to a combination of loans and grants provided by the Arab states and, to a lesser extent, the European Union. Indeed, in 2001, direct foreign budget support to the PA totaled $575m, a new record.

The bulk has come from the Arab states, who, via a fund administered through the Islamic Development Bank, have forwarded $45-55m a month since mid 2001. The EU’s more modest monthly contribution of $9m has nevertheless emerged as a matter of some political significance, particularly so in the wake of its decision to renew this assistance through 2002. What support Arafat still enjoys among Palestinians undoubtedly derives at least in part from the fact that his Authority remains the largest single paymaster in the Territories. Wary of eroding its battered credibility, the PA has created an additional 6,000 new jobs since the intifada erupted, paid for in part by acrossthe-board wage cuts of about 20%. The Arab governments also understand the importance of patronage, and neither they nor the EU seem quite ready to see the PA fade into oblivion. In this respect, the Gulf states in particular have put their money where their mouths have largely been absent.

Beyond its capacity as a welfare agency, it is of course questionable just how useful the PA currently is to the Palestinian population. It continues to collect domestic taxes of around $20m every month, but after covering its $54m wage bill, it still faces a $20m shortfall on its monthly $90m bare-bones emergency budget. Spending even on essential office equipment has been cut, with the result that most of its employees are able to do little more than collect their monthly pay cheque. “The civil servants are paid but they are not working – they cannot use the phones, drive or even buy paper,” says Dessus.

One of the PA’s temporary solutions to its deficit has been to ignore it, delaying payment of its bills to suppliers and utilities. This practice predates the intifada, but there are questions about how sustainable it is in the long run. To date, the sum of these debts have risen to a staggering $400m. In the short run, even the PA continues to operate between despair and hope. The IDB’s money ran out over the new year, and while Palestinian officials say they are hoping the Arab states will dedicate new funds at the summit on 26 March – a belief bolstered by an immediate January grant of $45m from Saudi Arabia – they are still looking for $90m to tide them over for February and March. The World Bank has agreed to provide some $70m over the first six months of 2002 to cover basic costs.

The limits of assistance

Palestinian families looking for help to survive over this period currently have less cause for optimism. The UN Refugee Works Agency for Palestine Refugees (UNRWA) is currently $50m short and is likely to need an additional $100m over 2002. Unlike the PA, UNRWA’s work remains vital to the most impoverished Palestinian families, concentrated among Gaza’s 800,000 refugees. UNRWA hand-outs are typically small but they are also far-reaching, playmg an important role in providing basic food security. According the PCBS, of the 76% of Palestinian households who received some humanitarian assistance over the past six months, $73 worth came from UNRWA, $50 from the PA and private charitable institutions. Presently, these resources are being stretched: the typical value of UNRWA contributions declined in the latter half of 2001, with 80% of receiving households having to make do with less dim $100.

But the vulnerability and dependency of the Palestinian economy is undoubtedly increasing. The productive capacity of local society has been steadily eroded over the course of the intifada. Due to the rise in unemployment and continued growth of the population – estimated at 4% annually – fewer jobs are feeding more mouths. Whereas before the uprising each worker supported an estimated 4.8 dependents, this ratio has now risen to 6.4. To boot, the Israeli army has destroyed approximately $170m worth of Palestinian infrastructure during this time, incidentally drawing sharp complaints from the EU, which has seen $17m worth of its own investments wiped out. Worryingly, the means to repair this damage or maintain existing facilities is shrinking; the World Bank thinks that total donor commitments to public investment projects, which amounted to $405m in 2000, will decline to $215m in 2002.

A fragile equilibrium

Despite its resilience, Palestinian society therefore remains very vulnerable to a tightening of Israeli sanctions, or an escalation in violence that would impede aid delivery or cut Palestinian workers off from the Israeli economy. Barring this, the future holds only a deteriorating battle against diminished expectations. Or, as Dessus puts it: “There is a scenario in which the economy would keep deteriorating steadily.” But as Jihad knows, at least half of this economy in any case runs on little more than faith.

Middle East International, 22 February 2002

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