"Twenty-Seven Months - Intifada,Closures and Palestinian Economic Crisis: AnAssessment" was prepared as a follow-up to a reportpublished in March 2002 ("Fifteen Months - Intifada,Closures and Palestinian Economic Crisis" report no.24931). The main objectives of this second Assessment areonce again to help donors and the Palestinian Authority (PA)cope with the deep economic crisis in the West Bank andGaza, as well as to encourage and inform discussion onPalestinian economic issues among the donors, the PA and theGovernment of Israel. Despite an inevitable preoccupationwith short-term emergency issues, the report seeks topreserve a focus on the types of medium-term economic andinstitutional policies that will return to prominence oncethe current conflict ceases to dominate the daily lives ofPalestinians and Israelis.While any short-term recoverywill depend on the lifting of closures, this will notsuffice to put the Palestinian economy onto a sustainablegrowth path. The de facto customs union with Israelformalized under the Paris Protocol makes the Palestinianeconomy particularly vulnerable to closure. In a structuralsense, though, the long-term growth potential of thePalestinian economy has been stunted by the upward pressureon domestic Palestinian labor prices created by the wagespaid to Palestinian workers in Israel. Domestic wageincreases have exceeded any underlying growth inproductivity, and have undermined Palestinians' abilityto export competitively-priced goods to the rest of theworld. Bank analysis shows that a proactive policy of exportdevelopment, in which a more open and less discriminatorytrade regime is adopted, should result in higher incomes by2010 than a return to previous levels of employment inIsrael. Between 1968 and 2000, Palestinians in the West Bankand Gaza pursued a development strategy which featured theexport of labor rather than goods. In June 2000, threemonths before the current Palestinian intifada began, 21percent of all employed Palestinians worked in Israel,mainly in low-skilled construction and agricultural jobs.Net incomes from abroad provided more than 21 percent ofPalestinian GNI, making it one of the mostremittance-dependent economies in the world. This is why theloss of jobs in Israel in the past two years has had such astrong impact. Put another way, the intifada hasdemonstrated the vulnerability of a development strategywhich relied so heavily on labor exports to Israel. Theshift to a goods-based export policy would take time, wouldbe subject to many uncertainties and would require theactive cooperation of Israel to succeed; it is thus part andparcel of a political rapprochement. It is also true thatrestoring access to the Israeli labor market would be thequickest way to boost incomes for a large number of ordinaryPalestinians. Realistically, though, a return topre-September 2000 employment levels for Palestinians inIsrael seems unlikely - and would anyway risk perpetuating ahigh level of Palestinian economic dependence on Israel,hindering the emergence of a diversified developmentstrategy with much greater long-term growth potential.
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