Executive Summary

Economic growth and development patterns in the West Bank and Gaza Strip (PALESTINIAN AUTHORITY) have to a great extent been dictated by the larger Israeli economy. The integration of the West Bank and Gaza Strip into the Israeli economy over almost 27 years of occupation has resulted in substantial flows of Palestinian labor into Israel (over one-quarter of the Palestinian labor force is employed there), a narrow range of Palestinian exports, and a large flow of Israeli products into the Palestinian markets.

Up until the late 1980s, average incomes and living levels grew significantly, but market forces and Israeli policies brought about distortions to the Palestinian labor, land, and capital markets, and restrained the expansion of private productive sectors. Domestic production patterns in the Palestinian territories were shaped largely by the needs of the Israeli market and trade priorities, while both tariff and non-tariff barriers limited interaction with the Jordanian and other Arab markets. This created a situation whereby Palestinian earnings in Israel became the single most important source of household income, most of which was then re-channeled into consumption of Israeli imports. When the Palestinian Authority (PA) began to exercise its functions in May 1994, the economy was weighed down by imbalance and fragmentation in all markets, coupled with institutional underdevelopment and under-provision of public goods and services. The new situation engendered by the peace process promised a fresh beginning for the economy and a departure from the economic legacy of occupation. The new economic relationship between the Palestinian Authority and Israel was drawn up in the Protocol on Economic Relations, signed in Paris in April 1994, along with subsequent agreements between the two parties. The development path for the Palestinian Authority, henceforth, was to be based on equitable economic cooperation between the two economies, especially greater openness in mutual trade flows and expansion of trade with Jordan,

Egypt, and other new markets. It was hoped that the macro- and microeconomic policy instruments delegated to the PA during the interim period would allow it to pursue a policy targeting growth in agriculture and industry and geared towards creating domestic employment, expanding exports, and curtailing imports. Unfortunately, the underlying promises of peace remain largely unfulfilled. Before the peace accords, movement of people and goods between Israel and the Palestinian Authority and within the now PA-controlled areas was relatively unconstrained. Following 1993, a strict system of restrictions, in the form of security checkpoints, border closures, and permit policies, was put in place that effectively reduced the large flow of income from Israel into the Palestinian Authority. The average number of Palestinians employed in Israel fell from 116,000 workers in 1992 to an unprecedented low of 25,100 workers in 1996, but climbed to 44,500 in 1998. This resulted in an unemployment crisis and an increase in the incidence of poverty in the Palestinian Authority territories. The Palestinian Authority has only begun taken the first steps on the development path that will move it from having been almost fully dependent on a much larger Israeli economy towards becoming an autonomous self-determined economy. This transitional stage has been fraught with difficulties, many of a political nature. However, the establishment of an independent Palestinian authority with recognized land boundaries has enabled the WBGS to build trade links with a number of external markets under favorable terms; to set up a functioning civil service, and to remove many of the bottlenecks which previously hampered the development of its productive base. These developments, along with others such as strong growth in the financial sector, set the stage for a speedy economic recovery once a political settlement is finally in place.