World Bank report shows dire state of deteriorating Palestinian economy, growing poverty

from The International Herald Tribune

JERUSALEM: The Palestinian economy is sinking into dependence on foreign aid, and its public sector is swelling as its manufacturing and other businesses wither, according to a World Bank report released Tuesday.

The 35-page report, prepared for a Sept 24 meeting of an international donor committee in New York, details how the Palestinian economies in the West Bank and Gaza have steadily deteriorated since 2000, when the peace process with Israel broke down and violence erupted.

The latest crisis is in Gaza, where the takeover by Hamas in June led to closing border crossings, threatening most businesses, which rely on imported raw materials and exported products.

The report marks two years since a donor's conference in London, where plans were made to rehabilitate the Palestinian economy. The report reflects a deteriorating situation and pleads for further efforts, while admitting that economic development projects in unstable political conditions are risky.

The World Bank points to a dropping economic production as evidence of the deterioration.

After reaching $1,612 (€1,161) in 1999, the GDP per capita dropped to $1,129 (€814) in 2006. However, the report said, "More troubling than the negative growth rates over the past few years is the changing composition of the economy," the shrinking private sector and expanding public sector.

It said economic output "is being increasingly driven by government and private consumption from remittances and donor aid," noting that almost all of the aid is being used for daily expenses instead of long-term development.

Already battered by Palestinian-Israeli violence, the economy took a further blow early last year, when Hamas formed a government after sweeping an election. In response, Israel, the U.S. and EU cut off funds, because they list Hamas as a terror group. Then Hamas forcibly took over Gaza last June.

Reacting, moderate Palestinian President Mahmoud Abbas replaced the Hamas-led government with a Cabinet of his supporters, leaving the deposed Hamas regime in control of Gaza and his government ruling the West Bank. In turn, donors have resumed aid to Abbas' regime while continuing to freeze out Gaza.

The World Bank Report warned that no viable economic or diplomatic plan could sideline Gaza.

"Any discussion on economic recovery and the prospects for peace is incomplete without the Gaza Strip," it stated. "Gaza represents about 40 percent of the population and a quintessential part of the Palestinian territory, economy and identity,"

It warned that the closure of crossings in and out of Gaza could lead to laying off 30,000 private sector workers, worsening the already critical economic situation there.

The World Bank called on Israel to ease its travel restrictions in the West Bank, charging that they have hamstrung the local economy and forced the Palestinian Authority to try to administer disconnected enclaves instead of a contiguous territory.

The report said that economic development must proceed despite the ongoing conflict, though "parallel actions in a situation of conflict and political uncertainty are risky and politically costly."

The report concluded, "Whether practical or not under the circumstances, the need for these parallel steps is evident."