What Actually Ails the Palestinian Economy?

The Trump Administration has long spoken of introducing its own peace plan to resolve the Palestinian-Israeli conflict. Now, well into its third year, the beginnings of this plan are emerging, even if no political outline has been put forth yet. On June 25 and 26, the White House is convening a conference in Bahrain and bringing together delegations and businessmen from several states in the region to discuss an ostensible agenda of advancing investment in the Palestinian economy. In various statements and interviews, Middle East advisor and envoy Jared Kushner and his team have spoken about the centrality of “prosperity” and “investment” for Palestinians.

Supporting Palestinian economic development, they believe, will advance peace. However, in the absence of any political plan or recognition of Palestinian rights, the “economy first” approach is widely seen as an effort to buy the Palestinians’ silence and acquiescence to the status quo. Indeed, for many reasons, this approach is doomed to fail. The central flaw is that Kushner and his team have the sequence reversed: economic development will not lead to political resolutions because it is the political obstacles, specifically Israeli policies, that strangle the Palestinian economy.

The Origins of De-development

To understand how Israeli policies have influenced the Palestinian economy and conditioned the Palestinians’ economic prospects, it is important to understand the economic impact of foundational historical events, particularly the Nakba. The depopulation of Palestine, from 1947 to 1949, of the majority of its native inhabitants is often understood through the prisms of wars and refugee rights. Rarely, though, is the economic impact of these events on Palestinians considered.

The Nakba, and the erection of the Israeli state, meant that hundreds of thousands of Palestinians would no longer reside in their homes, towns, and villages. Denying their return meant a profound economic disruption and the destruction of centers of production that served the community.

The Nakba, and the erection of the Israeli state, meant that hundreds of thousands of Palestinians would no longer reside in their homes, towns, and villages. Denying their return meant a profound economic disruption and the destruction of centers of production that served the community. Most of the expellees were farmers whose land was later expropriated by the new Israeli authorities. Palestinians who remained lost regular access to major towns and cities, many of which were destroyed. Importantly, Palestinian expellees lost their old connection with the economic hubs that remained in Palestinian hands with which they had historical trading relationships. The major cities of the West Bank (Nablus, Hebron, Tulkarem, Qalqilyah, Ramallah, Jericho, Bethlehem) would be severed from the major coastal cities (Akka, Haifa, Yafa, Ramleh, Lod) and from Gaza. Economic relationships had existed for centuries between these hubs as Palestine had been a single territorial unit.

While socioeconomic disruption is inherent in any major, sudden, and catastrophic demographic upheaval, what also helped to devastate the Palestinian economy was the lost economic value of assets from which people were separated. Studies estimate that the value of Palestinian-owned land lost in 1948 was anywhere between $824 million and $2.1 billion in 1948 dollars. In 2019 dollars, this ranges from $8.7 billion to $22.6 billion. For perspective, the entire Palestinian GDP today is $14.5 billion.

The sudden loss of land wealth hit the small minority of landowners most significantly; however, years of profit-taking gave them the opportunity to invest elsewhere. Many others tied to the land economy were peasants and sharecroppers. To them, the loss of land meant the loss of everything: homes, places of work, and social relations.

The Nakba did not only mean the loss of land for Palestinians; it also meant the usurpation of that land by the newly created Israeli state which then used it for the economic advancement of incoming—primarily European—Jewish immigrants and refugees.

It is also important to keep in mind that the Nakba did not only mean the loss of land for Palestinians; it also meant the usurpation of that land by the newly created Israeli state which then used it for the economic advancement of incoming—primarily European—Jewish immigrants and refugees. This massive economic swing, financially disempowering Palestinians and empowering Israelis, helped create two economic classes, one dominant and the other subservient. Limited means and opportunities meant that the Palestinians remaining inside Israel after the war were often relegated to low-wage labor and exploited for the benefit and profit of the newly created dominant class of Israeli Jews.

1967 Occupation

This dynamic of exploitation became even more pronounced after the occupation of the West Bank–– including East Jerusalem––and the Gaza Strip. The reunification of the territory under a single state’s control meant that some of the historical logistical ties could be reopened. But the Palestinian economic hubs of the West Bank were not able to work with major Palestinian ones on the coast (inside Israel) because they had been wiped out as independent economic centers belonging to Palestinian Arabs. These became Israeli-dominated and their primary demand was for cheap labor, which a captive labor force in the West Bank and Gaza could provide. In essence, the Israeli state’s policies of occupation were ensuring that Palestinian economic development was limited to continuing the supply of cheap labor.

As the controlling power, Israel is able to pay cheap wages to Palestinian workers—and ironically, the money earned by these workers largely ends up filtering back into the Israeli economy as it is often spent on Israeli products that dominate the West Bank and Gaza.

Over time, the policies of occupation have had varied, albeit devastating, consequences on the prospects of Palestinian economic development. Perhaps the most significant overriding factors emerging from the occupation are the political instability and the inability to envision a secure future that would keep investments coming. But many other more specific factors impact and limit the Palestinian economy as well. As the controlling power, Israel is able to pay cheap wages to Palestinian workers—and ironically, the money earned by these workers largely ends up filtering back into the Israeli economy as it is often spent on Israeli products that dominate the West Bank and Gaza. Not only does Israel benefit from a captive labor force, it also reaps the rewards of a restricted market where it can dump products under conditions it alone can regulate and shape in favorable ways. It also can impose taxes and tariffs on the flow of traded goods because it retains control of the ports of entry.

Additionally, restrictions on land use in the West Bank under the Israeli occupation regime mean that billions of dollars are lost to the Palestinian economy. A 2014 World Bank report on Area C––a territory that is approximately 60 percent of the West Bank which is under full Israeli security control and where Israeli settlements are located––found that the Palestinian economy loses $2 billion a year. With over 340,000 dunums of land (about 84,000 acres) off limits to Palestinians, the economy loses some $700 million a year in agricultural production. Likewise, the inability to access the Dead Sea, parts of which are in West Bank territory, means Palestinians miss out on the opportunity to sell minerals from the deposit-rich area like potash and bromine, valued at nearly $1 billion annually. Palestinians are also deprived of some $240 million annually because they cannot exploit nearly 20,000 dunums of quarry areas. A similar estimated amount is lost each year because of the lack of land for added construction.

But this is only in Area C. Most Palestinians live in Areas A and B, with A the locus of major Palestinian population centers. There, occupation policies hinder economic activity by limiting movement severely and making the transportation of goods more difficult and sometimes impossible.

In addition to movement restrictions that crush export potential, Israel also limits access to various goods from a list it classifies as having “dual use.” According to a recent World Bank report, the list imposed by Israel “contains broad categories of products going well beyond internationally established best practices.” The barriers of access to products on this list “have negatively affected the Palestinian economy and its efficiency and have imposed large costs on Palestinian businesses. Palestinian producers have been trying to deal with these restrictions through substitution, circumvention, or avoidance of specific types of industries that require goods on the dual use list.” The report also states that “Lack of access to chemicals, machinery and modern technology has impacted the economy’s ability to grow sustainably and expand its production frontier. With the persistence of these restrictions, the Palestinian economy will continue to be stuck in a low-income low-growth trap, unable to cater to the needs of young Palestinians.”

The Gaza Siege

The impact of the Israeli occupation on the Palestinian economy is most obvious and acute in the Gaza Strip where close to 2 million Palestinians live, about 80 percent of whom rely on international food assistance. The majority of the population comprises refugees from areas outside Gaza; thus, the territory has been economically disadvantaged for decades as it became home to hundreds of thousands of Palestinians who had lost everything.

In addition to many of the restrictions of occupation imposed on the West Bank over decades, Israel began to enforce a tightening and draconian siege on Gaza after removing Israeli settlers from the strip in 2005. Unlike in the West Bank where Israeli settlements are embedded within Palestinian areas, making it more complicated to entirely seal off the Palestinian population, Gaza became an open-air prison, surrounded by Israeli land and sea forces on three of four sides. Imports became severely restricted.

Gaza became an open-air prison, surrounded by Israeli land and sea forces on three of four sides. Imports became severely restricted.

Israel treated Gaza’s civilian infrastructure as military installations. Between 2006 and 2017, Israel targeted the water, energy, and agricultural sectors—during active hostilities and sporadic raids––almost 300 times, and it hit areas throughout the strip. Damaged and destroyed water facilities deprived hundreds of thousands of Gazans of access to municipal sources of water. Air strikes and sieges crippled the energy sector and practically halted electricity production for household use and economic development. Gaza farmers have also been deprived of access to pesticides and to lands close to the fence that separates the strip from Israel.

The fishing industry has been severely restricted and Israel has rarely adhered to the 20-nautical-mile free zone agreed to in the Oslo Accords. Further, the naval blockade of Gaza and shooting of fishermen has led to a near collapse of the fishing industry. “In 2000,” according to a 2018 report by B’Tselem, “there were 10,000 registered fishermen in Gaza; now there are about 3,700. In practice, only about half of the registered fishermen actually fish, as many cannot use their boats due to the lack of supplies to repair them or build new ones, or because the military confiscated the boats. About 95% of fishermen in Gaza live below the poverty line, which is USD 4.6 a day in Gaza.”

In addition, the industrial and construction sectors have been devastated. The 2014 war on Gaza alone resulted in the destruction of 350 industrial plants and 100 construction facilities. Overall, the Israeli siege of the strip has caused 300,000 workers to lose employment.

The Good News

Despite the Nakba and its continuing repercussions and despite the ongoing policies of occupation and siege, Palestinians have tremendous human resources. The Human Capital Index, a metric by the World Bank which ranks national populations based on various indicators, including child mortality, educational attainment, and overall health, offers important findings in this regard. The Palestinian population in the West Bank and Gaza ranks well ahead of neighboring Egypt, Morocco, Tunisia, Algeria, and Lebanon and it ranks very close to neighboring Jordan as well as resource-rich Kuwait and Saudi Arabia. What this suggests is that the Palestinian population, if given the opportunity, is primed to thrive. Its potential for economic success is great, if certain destructive factors were mitigated or removed.

The Palestinian population in the West Bank and Gaza ranks well ahead of neighboring Egypt, Morocco, Tunisia, Algeria, and Lebanon and it ranks very close to neighboring Jordan as well as resource-rich Kuwait and Saudi Arabia.

The devastation Palestinians are confronting is not the result of a natural disaster but rather a human-made disaster directly attributable to Israeli policies. With the opportunity to be free, to move freely, to trade freely, and to exist in a political space without constant fear of violent oppression, and with the ability to imagine a stable future, Palestinians and their economy would likely excel and invite significant foreign investment as well. What ails the Palestinian economy is the lack of freedom for Palestinians and this should be blindingly obvious to anyone who is paying any attention. One is left to wonder when Jared Kushner and company might start to do so.

Yousef Munayyer is a Non-resident Fellow at Arab Center Washington DC. To learn more about Yousef and read his previous publications click here