The Portland Trust is committed to promoting peace and stability between Palestinians and Israelis through economic development. |
BEYOND CONFLICTExecutive SummaryThis report examines the economic underpinnings of peace between Israel and the Palestinians. In particular, it focuses on the pivotal role the Palestinian private sector can play in generating growth, sustainable employment levels and better living standards. These are all necessary components of a lasting and stable peace. It estimates the quantifiable impact of peace on different aspects of the economy and for the Palestinian people at large. The study is based in part on a new survey of some 70 businesses in the West Bank and Gaza, covering both past performance and future prospects. We also conducted interviews with official providers of finance, international investors and bankers and Palestinian and Israeli policy makers and politicians. During this process we discovered that, against all the odds, the vigour of a Palestinian enterprise culture remains substantially intact. The report takes into account recent recommendations relating to the Palestinian economy and its future, produced by international expert bodies such as the Aix Group, World Bank, IMF and the Rand Corporation. These previous studies paid attention primarily to macroeconomic issues such as free movement of labour/goods, effective regulatory frameworks and financial transparency, as well as broad economic opportunity for the West Bank and Gaza. This report also integrates experience of private and public capital flows in other post conflict environments. Its political starting point is a two-state solution. In this context, an emerging Palestinian state will need to diversify progressively from its overwhelming dependence on Israeli goods and labour markets. This implies a higher degree of economic separation than was envisaged at the time of the Oslo Agreements in 1992. In particular, the report envisages a free trade area replacing the customs union with Israel, and significantly lower numbers of migrant workers to Israel than at its peak in the late 1990s. Reliable market access and good logistics are crucial to Palestinian economic survival. This has major implications for infrastructure requirements, which would be mainly funded by official aid. It also entails greater Palestinian access to the outside world and this, by definition, will have to address Israel’s security concerns. We assume that this crucial question, which underpins business responses to peace, can be resolved as an integral part of final status negotiations. Our analysis, based in part on World Bank estimates, revealed that international aid to Palestine in the immediate wake of a peace agreement and for 3-5 years thereafter will be up to $2 billion per year (nearly $500 per capita), twice current levels. Of this, about half may initially be available for reconstruction, and the rest allocated for humanitarian relief and budget support to the administration. This intensive relief and reconstruction window may be short-lived, as international concern will inevitably shift elsewhere. But it is possible that the strategic importance of the Middle East and the espousal of the Palestinian economic case in the West may have already placed it in a special category. There must be concern that recovery and expansion may be constrained by bottlenecks in land, labour and materials as much as lack of finance. There is a real risk that a large aid-fuelled construction sector will generate inflationary pressures throughout the economy, just at the time that Palestinians need to establish international competitiveness. Therefore, at best, aid can be used to accelerate the additional institutional and infrastructure underpinnings needed for private sector- l e d growth, and to provide a much-needed transitional wage boost, but not to create sustainable jobs. Conversely, international experience shows that foreign private investment flows can lag several years behind a political settlement, but then begin to surge as confidence is visibly restored. Public sector employment, a source of social protection over the crisis years, has reached saturation point by international and even regional standards, and will need to grow more slowly than the economy as a whole. The real anchor for durable job creation and incomes in the new Palestine must therefore be the domestic private sector. This is overwhelmingly composed of small and family-operated businesses with five or fewer workers. Intermediate and large-sized firms account for less than half of private e m p l o y m e n t. Palestinian entrepreneurs have proved remarkably resilient throughout the crisis years. There is optimism among them that their firms will rebound strongly when the conflict is resolved. But there is much work to be done for the regional economy as a result of the conflict. Overall, the businesses in our sample cut back employment by a drastic 80 per cent between 1999 and 2004, much faster than the national industry average. H o w e v e r, small and family-owned firms scaled back much less than the average and larger firms. Family businesses have proved more able to absorb the pain of recession without shedding l a b o u r, and Palestinian firms have demonstrated these survival skills more than most. Looking ahead to prospects after peace, it is these small firms that expect the most significant rebound. They plan to increase output faster than larger enterprises, and to expand employment much faster. They are more flexible, but also arguably more optimistic, not having downsized as sharply as larger firms in the first place. The scale of the peace dividend seen through their eyes is significant. Replicated on a national scale, their output response would generate increased value-added of some $800 million within five years. This represents about a quarter of today’s GDP, i.e. additional income of over $400 a year for every Palestinian adult. It implies additional private sector investment of some $100 million a year. Even more striking are the employment effects of peace under this framework. Nearly 1.2 million new jobs could potentially be added within five years of peace, almost twice the current total number employed. An increase on this scale would absorb all those registered as unemployed t o d a y, many of the disguised unemployed, and most of the rapid growth in that labour force expected over the intervening years. Wherewould all these people be working in the future? The new Palestinian state will have neither abundant land nor natural resources on which to base its competitiveness. But it does have a major advantage in terms of significant historic and religious sites, and a well-educated and polyglot population sited at a major communication crossroads. The report finds that output will initially increase fastest in tourism, then in industry, and thereafter in other services. The report reviews several specific sectors of the economy for the opportunities they may offer. These include construction (initially aid-funded), tourism (especially religious tourism), gas, stone and marble, agro-processing and some niche manufacturing activities. Finally the report documents, perhaps for the first time, Palestinian business leaders and other expert witnesses as they voice their frustrations and their hopes for recovery. They suggest necessary changes in the attitude of the negotiating parties and the international community. Their overriding message to diplomats, politicians and aid officials is to work with the private sector, not apart from it or at cross-purposes with it, and to base their interventions on what is needed to create jobs sustainable in the long-term, not in some artificial construct. High on the list of their concerns is improved physical infrastructure and mobility, but they also want better enforceability of contracts, especially in the area of property rights, and a business friendly, accountable bureaucracy. They would like to see a strong banking sector willing to take more exposure to domestic businesses. And they do not want charity. Like people everywhere, they want a chance to show what they can do for themselves. A basic framework of infrastructure and institutions need to be set in place with international aid. Beyond that, they see a risk of perpetuating aid dependency. “Looking ahead, I believe that donor money is perfect for infrastructure but the economy as a whole would be better served if a major part of inflowing funds were to go to the private sector. ” Mohammed Masrouji A number of efforts are underway to harness the enterprise culture of the Palestinians in secure surroundings such as industrial parks. These appear attractive but are not the main answer. That will come from Palestinian entrepreneurship, which has proved remarkably resilient. It is this entrepreneurship that will become the engine of growth, underpinning the peace process and driving economic development. “To my mind, peace is a man with two legs. One is called security the other is economic development. The man is crippled if he loses either leg.“ Samir Hasboun |
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