A recent World Bank report on the Palestinian economy once again demonstrates that most research produced by international financial institutions on this topic is outdated and unimaginative. Although these institutions do sometimes provide valuable statistics, they also completely ignore many important aspects of that economy, while overlooking political realities in the occupied Palestinian territories. The World Bank and other international financial institutions should instead take the lead on this from forward-thinking UN organizations and Palestinian think tanks that have already produced much more fruitful work on the subject.
Poverty and Unemployment in Palestine
On May 10, the World Bank published its bi-annual “Economic Monitoring Report to the Ad Hoc Liaison Committee,” detailing key developments in the Palestinian economy. The Ad Hoc Liaison Committee (AHLC), which was created in 1993 at the onset of the Oslo process, is a 15-member coalition of nation states and international institutions whose mandate is to coordinate international aid to the Palestinian Authority (PA). While the World Bank’s reports to the AHLC rarely provide new insights, they do draw on both Palestinian data and previous reports to set the tone for policy recommendations and the management and implementation of aid.
The World Bank reports are usually divided into two parts. The first summarizes the previous two years’ principal economic developments, while the second highlights a particular socioeconomic topic, often building on the institution’s previous work. Examples of the latter include the impact of the COVID-19 pandemic on poverty rates, the Palestinian health system, the state of the economy in Gaza, and Palestinian digital infrastructure. The reports typically end with an assessment of previous World Bank recommendations.
According to the latest World Bank report, the Palestinian economy saw a roughly 7 percent increase in GDP in 2021, which followed a more than 11 percent decline in 2020, largely due to the COVID-19 pandemic.
In this most recent report, the first section was dominated by a discussion of the PA budget, fiscal sustainability, and the banking sector. According to the report, the Palestinian economy saw a roughly 7 percent increase in GDP in 2021, which followed a more than 11 percent decline in 2020, largely due to the COVID-19 pandemic. Real GDP per capita, however, stood at its lowest level since 2010, setting aside the anomalous year of 2020. Domestic tax collection increased by 28 percent in 2021, while clearance revenue transfers—tariffs and other taxes collected by Israel on behalf of the PA–increased by 12 percent.
International aid, however, continued its relentless decline. In 2021, foreign aid totaled $317 million, which represents a mere 1.8 percent of GDP compared to the 27 percent it represented in 2008. As a result, the PA has increased its borrowing from domestic banks, causing domestic public debt to reach $2.5 billion at the end of 2021. The minimal spike in GDP was insufficient to reduce the overall unemployment rate, even as participation in the labor force increased. In fact, unemployment increased to 24.2 percent. Gaza, however, bore the lion’s share of the total, reaching a nearly 45 percent overall unemployment rate, though rates were even higher among women and youth, reaching 78.1 and 61.1 percent, respectively.
The second section of the report highlighted the impact of the COVID-19 pandemic on poverty in the occupied Palestinian territories. It presented simulations based on the most recently published poverty figures, which were gathered in a 2016/2017 survey. The report’s simulations suggest that the pandemic caused the percentage of the population living below the poverty line to increase from 33.4 to 35.6 percent. This translates to more than 110,000 newly poor Palestinians, most of whom live in the West Bank.
Uninspired and Outdated
Overall, the World Bank report does a good job of summarizing the most important macroeconomic indicators and fiscal developments in the Palestinian territories. Significantly, it does not shy away from explicitly mentioning that Israeli policies are a key hindrance to Palestinian development. Restrictive policies mentioned in the report include constraints on free movement and border control, including control over Area C of the occupied West Bank. The report also alludes to Israel’s unjust fiscal policies with respect to the Palestinians, including its policy of regularly suspending or withholding clearance revenues that it is legally obligated to transfer to the PA.
The report does not fit the changing political reality on the ground, and its obsession with fiscal developments and unconstrained economic relations with Israel is at odds with creative and critical work done by Palestinian research centers.
In other respects, however, the report remains extremely uninspired, as is typical of reports from the World Bank and other international financial institutions. The report does not fit the changing political reality on the ground, and its obsession with fiscal developments and unconstrained economic relations with Israel is at odds with creative and critical work done by Palestinian research centers. The report can be critiqued on several important points:
1. Supporting strong ties with the Israeli economy
Reports such as this one are consistent in calling for stronger ties with the Israeli economy. This is not surprising, especially given the mainstream, neoclassical economic approach that predominates in these institutions. This largely apolitical approach assumes that open economic relations between two economies in proximity will always result in positive spillover effects that benefit the smaller of the two.
One small tidbit from the latest report illustrates this shortsighted view: The report suggests that the current conflict between Russia and Ukraine may have a “positive impact” on the Palestinian IT sector, because Israel may turn to Palestinian labor to replace the IT jobs that it normally outsources to Ukraine, and that have been disrupted by the war. However, this type of economic relationship, of using Israeli capital and Palestinian labor, is precisely what led to a 50-year-long cycle of dependency and economic decline.
While the World Bank continues to demonstrate the extent to which it is stuck in its ways, local Palestinian think tanks have dared to venture outside the box. For example, in 2020 the Palestine Economic Policy Research Institute published a trailblazing report on the topic of disengagement from the Israeli economy. Even the PA has adopted an official position of economic disengagement from Israel, although with very little actual results.
While the World Bank continues to demonstrate the extent to which it is stuck in its ways, local Palestinian think tanks have dared to venture outside the box.
Palestinian scholars are also discussing alternative approaches to the economic relationship with Israel today, including forming a resistance economy and finding other ways of “localizing” economic activity as a short term means of steadfastness. While these research efforts are still in the early stages, international financial institutions should be inspired by the creative work of Palestinian institutions and scholars, rather than remain stuck in a mindset that was prevalent as far back as the early 1990s.
2. The political elephant in the room
Reports by non-UN international institutions such as the World Bank regularly refrain from using the word “occupation” to describe Israeli policies in the West Bank and against the Gaza Strip, despite the fact that Israel has been conducting a military occupation in Palestine for the past 50 years. Instead, the report discusses Israeli “restrictions,” an undoubtedly intentional word choice that reflects the World Bank’s reluctance to call the spade a spade.
According to international humanitarian law, any government conducting an occupation of foreign territory—as Israel is in Palestine—is legally responsible for the well-being of the population under occupation. However, Israel’s neglect of this responsibility and its consistent maintenance of a system of separate but unequal laws in the occupied Palestinian territories have led numerous organizations, including the UN Economic and Social Commission for Western Asia (UN-ESCWA), Amnesty International, B’Tselem, and Human Rights Watch, to issue reports accusing Israel of the crime of apartheid.
Reports by non-UN international institutions such as the World Bank regularly refrain from using the word “occupation” to describe Israeli policies in the West Bank and against the Gaza Strip.
The international community, and especially those working in the humanitarian field, have always been hesitant to address such political realities. However, some of its members have concluded that a new “triple nexus” approach is needed, one that takes into consideration the importance of political action for peace alongside humanitarian and development efforts. Indeed, it is impossible to discuss the economic reality in Palestine without understanding the political framework responsible for producing and maintaining it. This political reality has recently begun to change, with the Palestinian private sector in the West Bank having already intensified its efforts to reconnect with Palestinian businesspeople inside Israel proper, leading Palestinian economists to speak of a resurgent “Arab economy” in Palestine.
Although discussing the reality of the political framework in Palestine might not fall within the World Bank’s purview, the institution runs the risk of producing irrelevant economic analysis if it continues to remain fixated on the paradigm of a two-state solution. The World Bank and other institutions should therefore follow the lead of UN and local Palestinian researchers who continue to envisage new political outcomes.
3. An obsession with fiscal challenges
The PA’s fiscal situation is extremely dire, and has only grown worse due to the dual blows of a decrease in international aid and Israel’s unilateral decision to make monthly deductions from clearance revenues it owes the PA. While the World Bank report acknowledges these constraints, its main focus has been on four expenditure items. The report is critical of the high wage bill; net lending related to utilities subsidies; the pension system; and government health insurance, which it deems “extremely generous.”
Despite its criticisms, the report does praise the PA for having “managed an impressive degree of fiscal consolidation over the years despite the challenging environment.” In reality, what the PA has done is implement a partial austerity plan that was imposed on it by the World Bank, as detailed in a 2016 report. A properly critical review of the PA’s fiscal policies would reveal that most of them simply place the financial burden caused by a decline in international aid onto the Palestinian people.
Again, local Palestinian organizations have been the ones spearheading efforts to analyze and change these ineffective, outmoded, and unjust policies. A report by the Social and Economic Policies Monitor (Al-Marsad) reviewed the PA’s taxation policies and concluded that both direct taxes (such as income tax) and indirect taxes (such as value-added taxes) have a negative impact, with the PA collecting “the highest possible revenues from the poor and middle classes to spend on very large agencies that protect its existence, while aggravating the vulnerability of Palestinian society.” In addition, the governments in the West Bank and Gaza recently imposed taxes on each other’s products, in what Ramallah-based civil society organization the Coalition for Accountability and Integrity has called an “abuse of power.”
The aim of taxation should be to enhance the welfare of the population, not to bleed it dry. Therefore, in the short run, the World Bank should abandon the austerity measures it always proposes, and instead exert political pressure on the Israeli government to force it to fulfill its fiscal obligations. Furthermore, it should revisit its support for a taxation policy that burdens poor and middle-class Palestinian families.
4. The dogma of the private sector
Ever since publishing its infamous six volume report on development in the occupied territories in the early 1990s, and even more so in the years since its 2012 follow-up report, the World Bank has been fixated on export- and private sector-led growth. However, empirical evidence suggests that a more nuanced approach to large-scale public investment is worth contemplating. In fact, many countries that were able to break from a cycle of underdevelopment followed a centralized plan of protectionism and import substitution, and it is altogether possible that the same approach would work in Palestine. The World Bank, however, seems unable or unwilling to consider such a strategy.
The World Bank has been fixated on export- and private sector-led growth. However, empirical evidence suggests that a more nuanced approach to large-scale public investment is worth contemplating.
There is ample historical evidence from countries that were able to break the underdevelopment cycle supporting alternative strategies. As an article by James Fallows in the early 1990s expressed it, “unless a country deliberately rigged the markets so as to get prices wrong, it had no hope of catching up in the industrial race.” It falls on local institutions to take the lead. The Palestine Economic Policy Research Institute invited renowned economist Mariana Mazzucato, to discuss her work debunking the myths around the public sector, and her approach toward inclusive growth. Others, including international institutions should take notice and follow suit.
The Way Forward
Regardless of whether one views institutions like the World Bank as tools in a global capitalist system aimed at preserving economic hegemony, or as merely advisory bodies that provide technical and apolitical research to support developing countries, a deeper look makes clear that their reporting on the Palestinian economy is outdated and unimaginative, and in many cases risks promoting the unproductive notion of “economic peace.” These institutions should instead follow the lead of UN organizations and local Palestinian think tanks, all of which have already produced forward-thinking research on the Palestinian economy.
The World Bank in particular should follow the recommendation of its own internal evaluation, conducted ten years ago. The evaluation concluded that the effectiveness of its work was “heavily dependent on the Israeli-Palestinian political framework” and that the institution needed to “rethink its mandate, role, and scope of activities in the West Bank and Gaza.” There are several ways, both empirically and theoretically, that the World Bank can and should implement these recommendations.
On the empirical side, the World Bank needs to focus more closely on the economic activities of the Palestinian private sector, as opposed to those funded by the international community and Israel. The Establishment Census, published by the Palestinian Central Bureau of Statistics, provides insight in this regard. Research using data from the census, national accounts, and both economic and labor force surveys has shown that the internal trade sector—which includes trade with Israel—accounts for 50 percent of Palestinian establishments, 37 percent of employment, and 22 percent of GDP. This data hints at a troubled Palestinian economy and reveals its entrenched dependency on the Israeli economy, which is by far the occupied territories’ largest trade partner. Much more needs to be done on the micro-level to extract further insight from different economic sectors.
Class and gender should feature heavily in future economic analysis. This can be accomplished, in part, by a focus on distribution, including functional distribution of income.
In addition, class and gender should feature heavily in future economic analysis. This can be accomplished, in part, by a focus on distribution, including functional distribution of income, i.e., how much income comes from wages and how much comes from profit, interest, and rents. This focus will help direct research to economic fields and sectors that do not exacerbate the gap between classes in the occupied Palestinian territories. It is also necessary to rethink shortsighted economic analysis that lacks a focus on employment among women, especially since women in the occupied territories have a very low rate of participation in the labor force, despite possessing a level of education similar to men. This disparity points to the existence of important factors in the Palestinian economy that have yet to be examined.
On the theoretical, macroeconomic side, the peculiar situation of the Palestinian economy necessitates a rethink of which economic aspects should be included in future research. Economic modeling should begin to incorporate international aid, remittances from work in Israel, and Israeli restrictions and fiscal constraints. The notion of what constitutes the labor market also needs to be rethought. If the unemployment rate is to accurately measure the capacity of the internal private sector to employ Palestinians, there needs to be an additional unemployment term that excludes work in Israel and work funded by international aid in both the public and NGO sectors.
While the World Bank’s recent report is largely disappointing, experts at organizations such as the UN-ESCWA and Palestinian think tanks have been at the forefront of producing groundbreaking approaches to developing the Palestinian economy that move away from an outdated emphasis on a two-state solution and economic cooperation with Israel. Instead, they propose disengagement from Israel, a resistance economy, steadfastness, localization, and other progressive strategies. In doing so, they point the way forward for international financial institutions like the World Bank to critically investigate and evaluate tools that can aid the development of an independent and resilient Palestinian economy.