(2 23G0 Vol. 2 Sept. Ilq3 DEVELOPING THE OCCUPIED TERRITORIES THE ECONOMY DEVELOPING THE OCCUPIED TERRITORIES AN INVESTMENT IN PEACE Volume 2: The Economy The World Bank Washington, D.C. September 1993 Copyright D 1993 The International Bank for Reconstruction and Development/THE WORLD BANK 1818 H Street, N.W. Washington, D.C. 20433, U.S.A. All rights reserved Manufactured in the United States of America First printing September 1993 Second printing October 1993 The six-volume series, Developing the Occupied Territories: An Investment in Peace, is published to communicate the results of the Bank's work to the development community with the least possible delay. The typescript of this paper therefore has not been prepared in accordance with the procedures appropriate to formal printed texts, and the World Bank accepts no responsibility for errors. 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ISBN 0-8213-2689-9 ISBN 0-8213-2694-5 (6-vol. set) CURRENCY EQUIVALENTS (As of January 1, 1993) NIS 1.00 = US$ 0.361 US$ 1.00 = NIS 2.764 JD 1.00 = US$ 1.453 US$ 1.00 = JD 0.688 GLOSSARY OF ABBREVIATIONS CB Currency Board CBS Central Bureau of Statistics CFA Central Franc Area CU Currency Union EC European Community EFTA European Free Trade Association FTA Free Trade Area GDP Gross Domestic Product GNP Gross National Product ILO International Labour Organization JD Jordanian Dinar JPC Jordanian-Palestinian Committee for the Steadfastness of the Palestinian People in the Occupied Homeland NAFIA North American Free Trade Area NGO Non-Governmental Organization NIS New Israeli Shekel OECD Organization for Economic Cooperation and Development PLO Palestine Liberation Organization ROW Rest of the world TFP Total Factor Productivity UNDP United Nations Development Project UNRWA United Nations Relief and Works Agency VAT Value-Added Tax WBG West Bank and Gaza WHO World Health Organization I CONTENTS Page PR EFA C E ...................................................... vi I. OVERVIEW & SUMMARY ...................................... 1 A . Introduction .... ................ ..... ... ... ........ ... .... . 1 B. Past Patterns of Development in the Occupied Territories ................... 1 C. Post-Peace Economic Strategy .................................... 3 D. Trade and Structural PolicyOptions ................................ 4 E. Scenarios for the Interim Period andBeyond ........................... 7 F. Im plem entation .............................................. 8 II. ECONOMIC HISTORY SINCE1967 ............................... 10 A: The Past Pattern of Growth .......... 11 B: Economic Relations, Policies and the Pattern of Development ................ 25 C: Shocks and Responses ........................................ 35 III: STRUCTURAL POLICY CHANGES FOR THE FUTURE ................. 45 A. Trade without Restrictions ..................................... 45 B. Trade Policy Choices ......................................... 47 C. Lifting the RegulatoryBurden ................................... 56 D. Public Spending & the Regional Pattern of Comparative Advantage ............ 56 E. M obilizing Taxes ........................................... 57 F. Natural Resources ........................................... 58 G . Conclusion ............................................... 58 IV: MACROECONOMIC POLICIES FOR THE FUTURE .................... 59 A. The Scope for Public Policy Action on the Real Side ..................... 59 B. The Potential for Seignorage Revenues .............................. 62 C. Facilitating the Mobilization of Resources ............................ 63 D. Provision of Liquidity andSupervision .............................. 66 E. Speculating on the Choice of an Exchange Rate Regime ................... 66 F. Conclusion ............................................... 71 V: SCENARIOS FOR THE1990s .................................... 73 A. What Happens when Employment in Israel is Lost? ...................... 73 B. Alternative Scenarios for a Peace Agreement .......................... 75 C. Public Finance and Official Financing Requirements ..................... 86 D . Conclusion ............................................... 89 TABLE OF CONTENTS (continued) FIGURES 1. Occupied Territories Unemployment .................................... 12 2. Growth in the 1970s .................... 13 3. Per Capita Gross domestic Product and National Disposable Income ................ 15 4. Israel, Occupied Territories and Regional GNP Growth ........................ 17 5. Investment as Share of GDP andGNP ................................... 19 6. Composition of Fixed CapitalFormation ................................. 20 7. Share of Manufacturing in Gross Domestic Product, Various Economies .............. 21 8. Labor Productivity ............................................... 23 9. Employed West Bank and Gaza Residents by Place of Employment, 1970-91 ........... 29 10. Ratio of Palestinian to Israeli DailyW age ................................ 30 11. Wage Ratios of Palestinians in Israel and Occupied Territories .................... 31 12. Share of Industrial Product inTrade .................................... 32 13. Inflation: West Bank, Gaza, andIsrael ................ 37 14. West Bank Olive Production and Change in Olive Oil Stock, 1968-86 ............... 42 15. Occupied Territories: Change in Money Balances as Percent of GNP, 1980-90 ......... 43 16. Exchange Rates of New Israeli Shekel and Jordanian Dinar to US Dollar ............. 44 17. Alternative Options for International Economic Relations ..................... 50-51 18. West Bank, Gaza Daily Average Real Wage Levels for Industry .................. 53 19. Unit LaborCosts................... 54 20. Macro Policy With and Without an Independent Currency ...................... 67 21. Choice of an Exchange RateRegime.................................... 70 22. Overview of Scenarios: Smooth Labor Cut-off .............................. 81 23. Overview of Scenarios: Abrupt Labor Cut-off .............................. 82 24. Baseline Scenario: Smooth LaborCut-off ................................. 84 25. Baseline Scenario: Abrupt LaborCut-off ................................. 85 TABLES 1. Growth in GDP, Factors and Total Factor Productivity ........................ 22 2. Integrated Public SectorFinances ...................................... 34 3. Revenue and Expenditure Comparisons .................................. 35 4. Predicted Shares of Occupied Territory Trade under Alternative Assumptions .......... 46 5. Actual and Predicted Israeli Export and Import Shares ......................... 47 6. Seignorage in the M iddleEast ........................................ 64 7. Growth in GNP per capita under SixScenarios ............................. 80 8. Public Sector Finances, 1994-2003 ..................................... 87 9. External Financing Requirements, 1994-2003 .............................. 88 ANNEXES 1. The Workings of the Labor Market in the Occupied Territories ................... 90 2. Public Finances in the Occupied Territories ................................ 103 3. Trading Patterns in a Less Restricted World: Results from a Gravity Model ............ 122 4. Sim ulation M odels ............................................... 130 5. Statistical Appendix .............................................. 132 REFERENCES ................................................... 171 PREFACE 1. At the request of the sponsors and organizers of the Middle East Peace Talks, the World Bank has been supporting the work of the Multilateral Working Group on Economic Development and Regional Cooperation by providing analyses of the key economic issues and developmental challenges facing the Middle East region. At its second meeting in Paris in October 1992, the Working Group requested the Bank to expand its contribution to include, inter alia, an assessment of the development needs and prospects of the economies of the West Bank and the Gaza Strip (commonly referred to as the Occupied Territories). In response to this request, a Bank mission visited the Occupied Territories during the period January 21-February 24, 1993. The mission comprised five teams focusing on the following areas: Private Sector Development, Agriculture, Human Resources, Infrastructure and Macroeconomics. Each team was in the field for about two weeks. The mission was led by Prem Garg who, together with Samir El-Khouri, stayed in the field throughout to provide continuity and guidance to the five teams. The staffing of the five teams was as follows: Macroeconomics: Michael Walton (Team Leader) Samir El-Khouri (Fiscal Analyst) Ishac Diwan (Macroeconomist) Private Sector Development: Albert Martinez (Team Leader) Robert Mertz (Financial Sector Specialist) Joseph Saba (Legal Specialist) Dileep Hurry' (Regulatory Environment and Tourism Specialist) Agriculture: Gert van Santen (Team Leader) Ulrich Kuffner (Water Resource Engineer) Merle Jensen' (Horticulture Specialist) Infrastructure: Alastair McKechnie (Team Leader) Ulrich Kuffner (Water Resource Engineer) Lawrence Hannah (Urban Specialist) Nail Cengiz Yucel (Transport Sector Specialist) Ted Moore' (Power Engineer) Hwnan Resources: Fredrick Golladay (Team Leader) Maureen Field' (Education Specialist) Radwan Ali Shaban' (Human Resource Economist) 2. Mission members travelled extensively in the West Bank and Gaza, visiting municipalities, farms, businesses, industries, academic institutions, refugee camps and NGO-run facilities. Mission members also travelled in Israel, as needed, and paid several visits to Amman. The representatives of the key bilateral and multilateral donors in Jerusalem, Tel Aviv and Amman responsible for the Occupied Territories were kept briefed about the work of the mission. Close contact was also maintained with the field staff of UN agencies. 1/ Bank consultant. vii Preface 3. The Bank mission was received warmly by all sides, who took keen interest in the work of the mission and provided superb logistical and counterpart support for the field work. The main counterparts on the Israeli side were the Bank of Israel and the Civil Administration in charge of the Occupied Territories. On the Palestinian side, the main counterparts were the Technical Committees of the Palestinian Team to the Peace Conference, consisting mainly of Palestinians who are members of the bilateral or multilateral peace teams. The Ministry of Planning was the main contact on the Jordanian side. The Bank would like to thank all concerned parties, especially the Israeli, Jordanian and Palestinian hosts, for the excellent support and cooperation that the Bank mission received for this field work. 4. This report is based on the findings of the above mission. The report is in six volumes: o Volume I provides a summary overview of the key findings and recommendations of the study. After commenting selectively on the current socioeconomic situation in the OT and its evolution over time, it discusses prospects for sustainable development in the future and outlines the priority agenda of policies and programs needed to promote such development. o Volume II explores the strategic choices at the macro level that will be faced by the OT in the future and the implications for economic relations between the OT and the rest of the region. The study looks at the current situation and its evolution over the past 25 years. The study then examines several policy choices for the future affecting the structure of development in the OT. Finally, it outlines some illustrative scenarios for the future, focussing on the consequences of current developments in the region. o Volume III reviews the performance of the private sector (including, in particular, the industry and tourism sectors) in the OT. The study assesses the environment in which the private sector operates and its future prospects and makes recommendations for accelerating private sector development in the future. o Volume IV reviews the evolution and structure of the agricultural sector in the OT; analyzes its current characteristics; assesses OT competitiveness in the immediate and longer term; outlines the main policy options and their implications; and provides a preliminary assessment of sectoral financial and technical assistance (TA) needs. o Volume V assesses the current situation in the infrastructure sectors (electricity, water supply and sanitation, transport, housing and solid waste services) in the OT; identifies the major issues confronting these sectors; and outlines priorities for TA and investment needs. As local authorities are major institutions in the delivery of public services in these sectors, the study also includes a review of their current situation and makes recommendations for improving the functioning of municipalities. o Volume VI reviews the current status as regards human resource development; analyzes options for enhancing individual welfare and labor productivity in the OT; and outlines investment and TA priorities for strengthening existing programs and for laying the foundation for later reforms. Preface Lx 5. It is worth highlighting two limitations of this study right at the outset. First, a number of key issues bearing upon the future development of the OT (e.g., the allocation of land and water resources, the disposition of Israeli settlements in the OT, the future status of expatriate Palestinians, the territorial issues surrounding Jerusalem and, most importantly, the nature of the proposed "self-governing" arrangements for the OT) are the subject of ongoing bilateral negotiations between the Israelis and the Palestinians. The resolution of these issues is likely to be based primarily on political and security considerations. As the Bank mission to the OT was a technical mission, with neither the mandate nor the expertise to deal with political or security aspects, this study does not take any positions on issues that are on the agenda for bilateral negotiations. The focus instead is on policies, institutions and investments- -where optimal choices are largely invariant to the eventual political arrangements to be agreed at the bilateral negotiations. Thus, for example, while analysing, where appropriate, the economic links between East Jerusalem and the West Bank and Gaza, the report avoids making any judgements regarding the future status of East Jerusalem. 6. Second, the study has had to cope with very serious data gaps and inconsistencies. Much of the data on the OT are, directly or indirectly, from official Israeli sources. There are, however, serious gaps in the OT data base. A population census has not been carried out in the OT for more than 25 years. As a result, most of the demographic and labor force data are based on extrapolations and on sample surveys, the reliability of which are undermined by problems of nonresponse, especially since the onset of the Intifada (popular uprising) in 1987. Data on East Jerusalem and on Israeli settlements in the OT, both of which are treated as part of Israel by the official Israeli sources, are mostly unavailable. Data available on trade between the OT and Israel and on the profitability and competitiveness of the agricultural, industrial and service enterprises are also very limited. Data on the OT from Palestinian and Israeli nonofficial sources are sparse and selective. Also, Palestinian data, when they exist, are often based on ad hoc surveys that do not lend themselves easily to cross-sectional or longitudinal comparisons. In many instances, data differ between sources, and, even when the same source is used, there are gaps and apparent inconsistencies. Given these data problems, the report uses estimates that appear most plausible in light of the mission's field observations. In cases where the data differences among various sources are particularly sharp (e.g., population, unemployment and social indicators), the report attempts, where possible, to examine the reasons for these differences and to indicate the implications of alternative estimates for the results of the analysis. 7. In view of the limitations on the mission mandate, the data difficulties and the time and resource constraints, this study can only be considered a beginning. The analysis in the study, especially for the longer term, is necessarily incomplete; as, and when, progress is made in the bilateral negotiations, the study will need to be updated and expanded to take account of the agreements reached. Also, notwithstanding the care exercised in locating and interpreting the data from various sources, the empirical underpinnings of this study leave something to be desired, and, therefore, the conclusions of the study should be treated only as indicative of broad trends and priorities. Further, in-depth studies and project feasibility work will be required before the findings of this report could be used to make operational decisions. 8. An earlier draft of this report was discussed with the Israeli, Jordanian and Palestinian authorities by a Bank mission to the region during July 12-26, 1993. Where appropriate, the report has been revised to incorporate the comments received by the mission during the July discussions. I. OVERVIEW AND SUMMARY A. Introduction 1.1 The economy of the West Bank and Gaza is presently in a state of crisis. Following the Gulf war in January 1991 there was a substantial reduction in Palestinian employment in most Gulf states. With the partial closure of the border in March 1993 employment in Israel fell drastically and in June was still less than half of previous levels. Municipalities are starved of cash. Many public services are in disarray: power outages are frequent, drinking water is often below WHO health standards, and garbage rots on the streets in refugee camps in Gaza. Meanwhile, urban land prices have gone through the roof in West Bank towns and Gaza City. 1.2 The present crisis in the Occupied Territories is in sharp contrast to a history of large increases in incomes, which are now about three times the level of 25 years ago. Household conditions improved substantially, with a many-fold rise in possession of consumer durables (albeit many second hand) and in water and electricity connections, including in relatively disadvantaged refugee camps and villages. There was also a substantial reduction in infant mortality and rise in school enrollments. Since unskilled labor played a central role in past growth, it is almost certainly the case that the poor participated in the gains implying a large reduction in poverty. 1.3 This report attempts to analyze the issues and choices thrown up by the current state of development in the OT and the economic agreements that could emerge from the on-going peace negotiations. The report attempts to adhere to a strictly economic perspective, recognizing that many of the questions will be subject to bilateral negotiations between the Israelis and Palestinians. The companion volumes on economic infrastructure, human resources and social services, private sector development and agriculture examine sectoral conditions and policy choices. As with the other volumes, this report must contend with uncertainty surrounding the outcomes of present and future negotiations. B. Past Pattern of Development in the Occupied Territories 1.4 Chapter 2 of the report analyzes the economic history of the OT during the past 25 years and relates the present crisis to the uneven pace and somewhat distorted nature of growth in the past. Throughout the 1970s growth was extraordinarily fast, and most of the gains in incomes occurred then. The burst of growth in the 1970s was largely due to two phenomena: the economic gains from a sudden opening up of opportunities in Israel--especially for labor employment, but also for trade in many (but not all) goods; and the growing employment opportunities for Palestinians in the booming Gulf countries during the second half of the decade. These developments contributed to rapidly rising money incomes, strong demand-led growth in some domestic economic activities, and high savings, with a large portion of savings financing investment in housing. 1.5 Growth stalled in the early 1980s, and decline set in during the second half of the 1980's. These changes reflected changes in the external environment, some of which were associated with the region- wide slowdown in growth. Chapter 2 surveys the sequence of adverse economic shocks experienced by the West Bank and Gaza during the 1980s. Some of these were temporary or once-and-for-all: the Israeli high inflation and related devaluations, the border closure during the Gulf war, and the devaluation of the Jordanian dinar. More important for the future are the apparently permanent shocks, that add up to a cumulative and rising loss in past sources of income and growth. Gulf labor demand slackened with Chapter 1 2 the weakening of the oil market in the mid-1980s, contributing to the decline in employment opportunities for skilled Palestinians. Israeli demand for Palestinian employment leveled off in the 1980s--and after the Intifada would have declined further if large falls in employment in manufacturing and in services had not been offset by rising construction employment, boosted by the boom in housing for immigrants to Israel. 1.6 Incomes appear to have held up surprisingly well given the scale of these shocks. Two factors explain this: first, domestic production was reasonably robust, and to some extent substituted for incomes from abroad; and second, there is evidence of large drawdowns of savings held domestically and abroad, especially in 1991 and 1992. Drawing down savings is not sustainable of course and additional capital inflows were generated by returnees from the Gulf, partially motivated by expectations of peace in 1992. Indeed this appears to have generated a mini-boom in some parts of the OT during this period, especially in domestic construction. 1.7 In addition to an uneven pace of growth, the Occupied Territories display an unusual, skewed pattern of development in comparison with other economies. Investment has been high, at 25 percent of GNP in the West Bank, at some points up to 40 percent in Gaza, but this investment created no new jobs until the late 1980s--an unusually high proportion went into investment in housing. Private investment in directly productive activities has been low, and industrialization, at 7 percent of GDP in the West Bank and 10 percent in Gaza, is way below other economies of the same income level. Trade in goods is highly concentrated on Israel, as a result of the abnormal conditions associated with the occupation and the Arab boycott. And there is an enormous trade imbalance, of the order of 28 percent of GNP. 1.8 There are also imbalances in the provision of public goods. Public investment in economic and social infrastructure has been unusually low at less than 3 percent of GDP. Some of the imbalance in social services was made up by UNRWA and, especially in health, by unusually high spending by the private and non-governmental sectors, but this has been at the cost of a proliferation of disparate services, without any overall sectoral framework. 1.9 Many factors explain the past pattern of development. Political uncertainty over the long-run future of the West Bank and Gaza undoubtedly played a role: investment in human capital is more secure than investment in machines when the economic future looks uncertain; and large investment in housing seems related to the lack of other savings instruments, and possibly to the urge to establish stronger property rights on land. In addition, four features of the policy environment (including the structure of international economic relations) appear to have been of major importance: * asymmetric trading relations * regulatory constraints * fiscal compression * declining access to natural resources. 1.10 Trading opportunities were distorted, in large part by the regional political situation. Manual labor and manufactures had fairly free access to Israel, as did skilled labor elsewhere; but both agriculture and the expansion of manufactures were restricted. All goods had restricted access to much of the region, because of the Arab boycott, restrictions on trade with Jordan (from both sides), practical difficulties of trading through Israel and inadequate trading infrastructure. There are no restrictions on imports of Israeli goods into the Occupied Territories, but for imports from the rest of the world the economy 3 Chapter 1 operates under the quite protectionist Israeli trade regime. Israel has, however, embarked on an ambitious program of trade liberalization. 1.11 An adverse regulatory environment, especially in terms of investment approvals, and an uncertain legal and tax framework inhibited the expansion of parts of the private sector, for example of medium and large scale industrial firms. (The regulatory framework has been recently liberalized, but it is too early to assess the effects.) The lack of a strong formal financial system did not help. It is notable, however, that where the private sector did grow--in agriculture and small-scale manufactures, the impressionistic evidence is of a productive private sector with substantial rises in labor productivity. In the period of rapid growth in the 1970s total factor productivity growth was very high, at around 5 percent per annum, accounting for almost two-thirds of total growth. 1.12 Low spending on public goods has been due to fiscal compression, which was in turn a consequence of low tax receipts, a close to balanced budget practice for the civil administration and municipalities, and the inability of utilities to borrow to invest (in contrast to international practice). Low public sector revenues compared with other economies--at 16 percent of GDP and 11 percent of GNP--are due in part to the fact that some tax payments by Palestinians accrue to the Israeli treasury (tentatively estimated at 8 percent of GDP for 1991). Even after including the gross estimates of taxes accruing to the Israeli treasury, the tax effort is still relatively low. 1.13 Current restrictions on access to water, including administrative limitations on surface and aquifer water harvesting, and the high costs of water caused by difficulties to renew inefficient and worn-out wells have meant stagnation of the amount of water used for Palestinian cultivation. In selected areas, notably in the Gaza, increasing salinity levels caused by excessive extraction have virtually halted agricultural production. Loss of land to settlements has increased during 1980s and early 1990s. In addition to built-up areas, this involves some traditionally irrigated land in the Jordan Valley, and areas which are currently irrigated in the West Bank and Gaza. The lack of clear zoning regulations and public land utilization policy has also created uncertainty and has become a barrier to industrial expansion. The freeze on the building of housing on land beyond the municipal boundaries has acted to distort land prices. C. Post-Peace Economic Strategy 1.14 The peace agreement is expected to lead to a transition period of several years. This will open up new options for the West Bank and Gaza. Some will become choices for the self-governing authority, which is expected to take over from the Civil Administration. Others will be the product of present and future negotiations between the Palestinians and governments in the region. However we assume that in the interim period there will be one integrated economy, that implementation of economic strategy will be by a self-governing authority with command over economy-wide and sectoral decision-making, but that, in some areas (e.g. trade policy), economic conditions will be a function of joint decisions with Israel, Jordan and other parties (notably Arab and OECD states for trade options). 1.15 Within these parameters there are a broad range of possibilities. Chapter 3 of the report examines how policy options affect the structure of development. Should the West Bank and Gaza be moving to disengagement from Israel or continued integration on different terms? What would be required to get economic growth going in the wake of the series of adverse shocks the economies have received? Is it Chapter 1 4 desirable (and feasible) to have an independent trade and tax policy? How can public spending be financed? Would a separate currency help or hinder macroeconomic stability and the environment for growth? And what is the role of official and private foreign resources in financing development? While it would be premature to make definite prescriptions, Chapter 3 attempts to explore some of the benefits, costs and implications of these choices as summarized below. 1.16 In addition to setting the basis for recovery and sustainable growth, there is also a need for measures to tackle short-run crisis conditions, especially if the restricted employment in Israel continues. The present crisis has short and longer-term dimensions. The short-run cutoff in employment, if maintained, would require emergency measures (such as employment schemes) to prevent significant drops in incomes. In the medium to longer-term, there is a need to effect a reorientation of economic activity to rectify current imbalances, and develop new sources of growth. This will depend critically on private investment -- from within and from abroad -- and especially investment in productive activities. International experience indicates that such private investment does not occur in situations of strategic uncertainty, but can respond swiftly once conditions are supportive, as in much of Latin America in the early 1990s, or more recently in Lebanon. Some measures can be undertaken in the short run, but the resolution of economic issues is unlikely to be possible without a peace agreement. 1.17 The reduced political uncertainty that should follow a peace agreement would provide the preconditions for a sustainable recovery. As the 1992 boom illustrates, private money quickly followed expectations of peace, though it probably went mainly into real estate. Resolution of strategic uncertainty will require policy changes to support the kind of adjustment and restructuring required for future growth. Each of the four areas noted above would need to be tackled: asymmetric trading relations; the regulatory environment; fiscal compression; and declining natural resources. A start has already been made by the civil administration in the significant deregulation and improvement in the investment environment introduced in 1992. The companion volume on private sector development concludes that effects on business activity has, so far, been limited and outlines what more would be necessary to provide a sound legal and business environment. Equally important will be redressal of some of the shortages of public goods: for example in power, in water supply and sewerage, in industrial land and in education. As the volumes on economic and social infrastructure discuss, these will require rehabilitation programs, new investments, and establishment of the institutional framework for sound sectoral policy. D. Trade and Structural Policy Options 1.18 While action on the regulatory framework and availability of public goods will be necessary to lift economic activity under any circumstances, the reorientation of economic activity will be conditioned by choices over the structure of international economic relations and domestic incentives. Some changes have already been made for the Palestinians, with the loss of employment in the Gulf and Israel. Trade in goods will have to substitute for movement in labor for sustained growth. What approach should be adopted on the direction of economic activity? The West Bank and Gaza face, in principle, a range of choices, from free trade with neighboring countries, to running a much more closed import regime to attempt to foster domestic industry. (Some of these choices will, of course, be subject to the ongoing negotiations). 1.19 Chapter 4 of this report lays out some of the alternatives for trade and incentive policy. There are two guiding principles. First, the small size and location of the West Bank and Gaza strongly support the desirability of a strategy based on trade expansion rather than restriction. There is especial interest 5 Chapter 1 in trade expansion to Jordan and the rest of the Arab world. Second, while a major reorientation in trade -- to the region and to the rest of the world -- would be expected to occur over the medium term, any sharp cut in trade in goods to Israel could have large short-run costs, because of Israel's predominance as a trading partner. From the perspective of the West Bank and Gaza a strategy that attempted to open up opportunities elsewhere whilst maintaining quite open trade relations with the Israeli market would make sense. 1.20 An approach that might meet these principles is a free trade area with Israel linked with a significant opening of trade to Jordan. A free trade area with Israel would differ from the present (partial) customs union in allowing the West Bank and Gaza to have different tariffs from Israel with third countries. It would maintain open trading relations with Israel, but would potentially avoid protectionist aspects of Israel's trade regime that are ill-suited to the economic structure of the economy of the Occupied Territories. This should be linked with an opening up of trade with Jordan, including the possibility of a free trade area with Jordan as well. From Israel's point of view, the trade diversion that is likely to take place would be compensated by trade creation linked to the termination of the Arab boycott. The success of any trade strategy would ultimately depend on how far new markets can be opened up: in the region, in the OECD, and in Israel. Opening of regional markets will depend both on the overall process of negotiations (since it is unlikely that trade with the West Bank and Gaza can be politically separated from trade with Israel, even if it can technically). An important issue for OECD markets concerns how far the Occupied Territories can participate in the current free trade agreements Israel has with the EC, EFTA and the US. (The EC agreement is already applicable to the Occupied Territories). The key issue in the Israeli market is agriculture, which remains protected, but where Palestinian producers have significant comparative advantage. 1.21 While a free trade area, perhaps involving Jordan, is attractive in principle, there may be problems in practice. First, there is no agreement on the location of a border between the West Bank and Israel. Second, any border will be leaky, and while an "invisible" border based on company accounts is feasible in principle, it may be costly to implement. Leakiness is likely to be of concern to Israel on grounds of lost revenue and lost protection, if the Occupied Territories were to have lower tax rates. Some of these practical difficulties are primarily of importance for an interim period. In the longer term, a border will presumably be agreed. Also protection should matter less to Israel if it sticks to its planned liberalization. By contrast, any changes in relations with the West Bank and Gaza that increases the risk of evasion of VAT would remain an issue of important concern for Israel, in view of the importance of this tax instrument. There may need to be closer harmonization of VAT rates than customs tariffs. Third, there is the question of the level-playing field in terms of ability of OT products to compete in markets where locally-produced goods are subsidized. 1.22 An approach that seeks to utilize the potential gains from interdependence also influences policy on infrastructure. In power, transport and telecommunications, as in trade, the West Bank and Gaza probably stand to gain most, and to acquire greater security, not through seeking economic "independence" in an autarkic sense, but through playing a role in interdependent networks in the region--linking both to Israel and the Arab World. Similarly, maintenance of investment in human capital will remain crucial to support the traditional comparative advantage of Palestinians in the region. 1.23 Although in some areas pursuit of an independent macroeconomic policy is likely to be fruitless-- e.g., attempts to have independent interest rates, given the degree of capital mobility--there are a number of other areas where macroeconomic policy makes sense: to deal with real and nominal shocks; to gain seignorage revenues; and to facilitate financial sector development and borrowing by governments and Chapter 1 6 companies. Some of these require an independent currency and monetary policy, e.g., avoiding imported nominal shocks from other members of a currency union, facilitating real wage declines and perhaps, exceptionally, defaulting. There are, however, advantages and disadvantages associated with a separate currency. It provides additional discretion in some areas of policy, but is only likely to be effective once both the currency and overall macroeconomic policy acquire credibility. In a second set of areas independent policy is desirable and is commonly associated with a separate currency, but such a link is by no means necessary, e.g., managing "excessive" capital inflows, borrowing at home and abroad, and supervising/providing liquidity to banks, all of which can be managed by other instruments or without an independent currency. Seignorage is traditionally large in the region, but is unlikely to be so for the West Bank and Gaza (especially initially), because of the likely initial low level of credibility of a new currency, and high capital mobility. 1.24 The most precious commodity of macroeconomic management is credibility, something that is hard to earn, but can be obtained by being in a currency union(s) with a disciplined core or by establishing a track record of prudent macroeconomic, and especially fiscal, management. The Occupied Territories do not have such a history, and new institutions of macroeconomic management are likely to be both fragile and under pressure. If a currency is chosen, it could be desirable to start with a relatively restricted version, as in a Currency Board. This could gradually evolve to a fully fledged currency that brought greater discretion once discipline, and the associated demand for the currency, was well established. 1.25 The introduction of a currency would be an issue of concern for both Israel and Jordan, given the substantial holdings of Shekels and Jordanian Dinars by Palestinians. As Palestinians purchase a new currency with the two existing currencies, a new monetary authority or currency board would acquire potentially large quantities of Shekels and JDs, probably way in excess of the amounts that it would make sense to hold as foreign exchange. Yet redeeming these for other currencies would be a large shock (for monetary and foreign exchange management), especially for Jordan, given the estimated size of Palestinian holdings of JDs relatively to both total money and foreign exchange holdings in Jordan. The phasing and terms of any such large-scale conversion would have to be worked in the context of any currency reform. 1.26 Decisions over the role of the public sector will cut across many policy areas. There will be a need for a substantial strengthening of public action in many areas, including macroeconomic management, tax administration, the regulatory framework, the supervision of the banking system, the direct provision of public services and the design and implementation of sectoral policies. This will require strong support for institutional development in the public sector. 1.27 Strengthening of the public sector should not, however, imply pursuit of a highly interventionist strategy for economic development. International experience indicates that differentiated patterns of protection, activist industrial policy or public channelling of money via the financial system too frequently lead to economic disaster. In East Asia, where interventions were relatively common, they were bounded by a strong commitment to exporting and strong public sector institutions. And even in East Asian countries, the evidence suggests industrial policy failed to increase the share of promoted industries. Elsewhere promotion has rather led to a higher share of rents from protected inefficient activities. The private sector volume discusses the desirable reforms in the legal, regulatory and financial systems to support strong private sector growth. 7 Chapter 1 1.28 A further lesson of international experience is the centrality of fiscal discipline. Fast-growing East Asian economies are again distinguished by fiscal management that is prudent and pragmatic. Loss of fiscal discipline elsewhere has invariably led, sooner or later, to macroeconomic difficulties. Public spending is likely to be under great pressure to expand (notably for public employment), to avoid tough tax administration issues and, at least for a while, may face a soft budget constraint due to external capital inflows. E. Scenarios for the Interim Period and Beyond 1.29 Chapter 5 of the report presents a range of scenarios that were developed to explore the potential trajectory of the economy in the future. These are illustrative, since little is known both about future conditions and economic responses. A critical factor in the scenarios is overall "policy": this encompasses a range of likely influences on future development. Good "policy" would include: a peace settlement that sufficiently resolves strategic uncertainty to provide the basis for private capital inflows and private investment in economic activities; relaxation of supply-side constraints, including deregulation, improvements in supply of economic infrastructure and industrial land and, over the long term, technical training; trade arrangements that allow substantial trade expansion (in the region and elsewhere); and a strong public finance framework with substantially expanded revenues (including taxes now accruing to the Israeli treasury) that both finance expanded public services and support rising public savings. 1.30 Under conditions of good "policy", gradual reduction of employment in Israel and adequate external public and private capital inflows, a growth rate in excess of 3 percent in per capita incomes is sustainable, with a total rise in incomes of the order of 40 percent in a decade. This requires initial inflows of $300 million per annum of official money in the first five years, declining to $200 million in the second half of the decade. Even with a low grant content of new money, debt indicators show no signs of problems of solvency. 1.31 If there is an abrupt labor cutoff with Israel--for example if employment were to stay at the 45,000 prevailing in June 1993 (it had risen slightly to 49,000 in July), the short-run situation is much worse, with potentially large rises in unemployment and falls in wages and incomes. This would justify short-run action, in terms of additional external inflows and poverty-related spending by the public sector, to moderate welfare declines. However, if policy conditions are strong, the economy could recover and again get onto a steady growth path in the medium term, with a rise in per capita incomes of the order of 3 percent per annum. 1 1.32 By contrast, if policy conditions are not resolved the outlook is grim. There could easily be declines in income per capita--of the order of 20 percent in a decade--even with smooth labor return, with a worse outlook, especially in the short run, if there is an abrupt labor cutoff. Such a growth scenario would undoubtedly be associated with rises in poverty, worsening social conditions, and, potentially, rising violence. Poor "policy" could be offset by official capital inflows, but only for a while, since private capital is unlikely to flow in when the political and policy conditions are uncertain or weak and little more than stagnation appears feasible. 1.33 The scenarios should be treated as indicative. But they help illustrate the main implication of much of the analysis in these volumes: the West Bank and Gaza have the potential to recover from both the loss in past sources of growth and from distortions in the pattern of development, and to become viable, growing economies, provided that the policy and structural conditions are right. In the absence Chapter 1 8 of sound domestic policy, adequate trading opportunities with other economies or foreign capital, they could enter a period of sustained decline in incomes, employment and welfare. F. Implementation 1.34 In order to translate the broad-brush policy recommendations contained in this report into workable solutions, it will be necessary to carry out further detailed studies in a number of areas to establish the practical, technical implications of economic reform and to deepen and expand local capabilities in economic policy-making as well as data-collection and statistical analysis. 1.35 The following list identifies seven areas requiring further in-depth analysis: i) The technical and economic implications of alternative trade choices between Israel, the Occupied Territories and Jordan. This could be combined with the study of agricultural trade options among the three economies recommended in volume IV: The Agriculture Sector. ii) The design and development of economic management capabilities (institutions and personnel) in the areas of a) current and development budgets, b) development policy and, possibly, c) central banking. iii) Tax options and tax administration. iv) Monetary and financial sector management issues. This could be combined with the study on financial sector institutional development proposed in volume III: Private Sector Development. v) The design of borrowing instruments (e.g., bond issues) and overall borrowing strategy for the external and public sector, including donor coordination and the appropriate mix of concessional and market borrowing. vi) The design of short-run safety net measures to ease adjustment within the labor market. These might include public works schemes and their linkage to a rehabilitation program. vii) Techniques of data-collection and statistical analysis at the macro-, sectoral and-household levels. 1.36 In order to meet the goal of deepening local capabilities in these seven areas, it is essential that the analysis be carried out by local experts supported by international technical assistance. It is also important that the experience already possessed by those Palestinians working for the Israeli statistical offices in the West Bank and Gaza as well as various non-governmental research centers be used as a foundation on which to build. 1.37 In addition to close and sustained collaboration between local and foreign experts, the process of acquiring and deepening expertise in the various areas should include study tours abroad exhibiting desirable economic and statistical practice in the relevant areas, exposure to international survey techniques (such as the Living Standards Measurement Survey, appropriate labor survey techniques, etc.), as well as other forms of "on-the-job" training. 9 Chqi2ter 1 1.38 The coordination and smooth execution of this program would be greatly enhanced by the existence of a single institution based in the West Bank and/or Gaza with a mandate to supervise the collection and publication of economic data and coordinate research into the relevant areas of economic policy. II. ECONOMIC HISTORY SINCE 1967 2.1 The economies of the West Bank and Gaza are in a state of crisis. Real per capita income levels in 1990-91 were only marginally higher than a decade earlier. Economic difficulties started in the early 1980s and intensified after 1987. Following an apparent recovery in 1992, the present year of 1993 appears to be witnessing renewed decline due mainly to the restriction of entry into Israel. Economy- wide economic difficulties affect many households via the labor market'. The available labor supply rose by 10 percent between 1987 and 1991 while employment has grown by only 3 percent. Unemployment (using a narrow definition) rose from 2-3 percent in the 1980s to 10 percent in the West Bank before dropping back in 1992. Open unemployment in Gaza is less severe, at 4 percent according to CBS numbers, but underemployment is probably much worse.2 Hours worked per day fell by about 20 percent (See Figure 1). The premium on skills has virtually vanished: many well-educated Palestinians are paid no more than unskilled workers, and graduate unemployment is rising fast.' Many public services are in disarray: municipalities are starved of cash; power outages are frequent; public water supply is below WHO quality standards; and garbage rots on the streets in refugee camps in Gaza. Meanwhile land prices have gone through the roof (notably in the Ramallah industrial estate and other West Bank towns and in the wealthier parts of Gaza city) making new industrial investment immensely costly. 2.2 The vulnerability of the economies to relations with Israel is vividly shown by the consequences of the border closures of March/April 1993. In 1991, nearly 40 percent of Gaza's labor force and over 30 percent of the West Bank's labor force worked in Israel. Every day of complete closure to labor and products leads to a loss in income of almost $700,000 in labor earnings and $250,000 in exports for Gaza, out of a daily national income of $3 million. For the West Bank, every day of closure leads to a loss of income of $1.1 million in labor earnings and almost $600,000 in exports, out of a daily national income of $7 million. Currently, the closure is only partial, but its impact is still severe. 2.3 This picture of crisis contrasts sharply with a longer-term view of past development. The Occupied Territories were among the top ten fastest growing economies in the world during the 1970s period when measured in terms of GNP growth (Figure 2). The expansion in GDP per capita was somewhat lower, but was still large by international standards. 2.4 There has also been rapid progress in other factors affecting living standards. In Gaza, the refugee camps are relatively disadvantaged, yet 95 percent of households had running water and 100 percent had electricity in 1992, compared with 3 percent with water and 14 percent with electricity in 1974. Similarly, in 1992, 91 percent of all households in Gaza had television sets, 95 percent had radios There are cases where there is evidence of statistical bias in the reported data: population data may well underestimate actual population levels, and unemployment rates may be understated, though much of the difference may be definitional (see Shaban, 1993). These possible biases should not, however, affect analysis of changes over time. * This is based on the ILO definition of unemployment used in the CBS labor force surveys. Some observers find higher unemployment rates (for example, Abu Shokor, 1990 found a rate of unemployment of 10 percent from a small survey in 1985, substantially higher than that found in the labor force surveys), though much of the difference could be definitional. 3 See Angrist (1992) for an analysis of the premium on skills. 11 Chapter 2 and 17 percent had cars, as opposed to 8 percent with televisions, 85 percent with radios and 2 percent with cars in 1972. In the West Bank, 79 percent of households had running water and 75 percent electricity (for the whole day) in 1992, compared with 24 percent with water and 46 percent with electricity in 1974. Likewise, in 1992, 89 percent had television sets, 82 percent had radios and 16 percent had cars, compared to 10 percent with televisions, 75 percent with radios and 2 percent with cars in 1972. While much of the durable ownership is of second hand goods this still represents gains in welfare. 2.5 The Palestinians have traditionally enjoyed higher educational and health standards. Child mortality statistics are subject to some controversy in the Occupied Territories and it is difficult to quantify trends over time precisely given the range of estimates. (See the companion volume on Human Resources and Social Policy for further details on health and education.) Nevertheless the available evidence does suggest that mortality rates fell by more than two thirds between 1970 and 1990. The current overall infant mortality rate is estimated to be about 45 deaths per thousand live births in Gaza and 40-45 in the West Bank.' As regards education, the absolute position improved substantially in the past 25 years with large increases in primary and secondary enrollments. The gross enrollment ratio for basic education (grades 1-8) is about 102 percent and about 46 percent of children aged 15-19 were enrolled in post-primary schools in 1990. Illiteracy remains a significant problem with 28.5 percent of women within the age group 35-44 illiterate, compared to 7.4 percent of men in the same age group. There are now eight universities. A. The Past Pattern of Growth 2.6 The above two descriptions look like two different economies, yet both are correct. At first sight, it might be tempting to attribute the current malaise to the Intifada, which began in December 1987, but this would be a mistake. The Intifada certainly led to disruptions in economic relations with Israel. Whether due to periodic border closures or strikes, curfews or shop closures, employment and trading activity has been adversely affected. Exports from Gaza fell by 37.5 percent between 1987 and 1988 and have not yet recovered, and, as noted above, there was a roughly 20 percent decline in employment in terms of hours worked, in both domestic and Israeli employment. Yet growth had already stalled in the early 1980s. The pattern illustrated in Figure 3 actually throws up two questions: Why was growth so fast in the 1970s? And why did it then slow so much from the early 1980s? (The highly cyclical character of the West Bank's growth displayed in Figure 3 is due to the biannual olive cycle.) The following paragraphs examine these questions as well as two other aspects of past development: unusual features in the structure of growth and the likely relationship with poverty. Overall Growth: High in the 1970s, Stalled in the 1980s 2.7 Broadly speaking, the pattern of growth since 1967 can be broken into four phases: very rapid growth to the mid-1970s; slightly less rapid growth to the early eighties; stagnation until the onset 4 Average of 1989 and 1990 figures. 12 Figure 1: Occupied Territory Unemployment OT Unemployment Rate (%) 1969-1992 11 10 - 9- 8- 7 * 6- 5- 4- 3 2- 1F 1963 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 Year 0 West Bank + Gaza Strip Average Weekly Hours per Palestinian Employee, by Place of Work. Hour 50 OT employed locally OT employed in Israel 45 - 40 -- - . .- --- 35 -- 30 1I I111 1980 1981 1982 1983 1984 1985 1986 19§7 1988 1989 1990 1991 Year Source: Statistical Abstracts of Israel, 1981-1992, Central Bureau of Statistics. 13 Figure 2: Growth in the 1970s Ratio of Real Per Capita GNP in 1980 to Real Per Capita GNP in 1970 3 2.5 2 S1.5 *1 0.5 0 ' ten fastet growing m to ø C M m db C) z . - c~ "e 6~i in co 00> m 0. CL 02 MC in the wodd 0 -w (1970s} Ratio of Real Per Capita GNP in 1980 to Real Per Capita GNP in 1970 2.5- 0.V Israel Jordan Egypt Syria OT Source: World Bank Economic and Social Database Chapter 2 14 of the Intifada in 1987; and a decline thereafter (see Figure 3).1 During the initial phase, growth in the Occupied Territories was driven by two major new sources of income growth: the consequences of integration with Israel, and the beginnings of the Gulf boom. The opening of the Israeli market to manual Palestinian labor brought a huge expansion in employment in Israeli firms. New trade and technological opportunities and reallocation of factors, helped generate almost equally rapid growth in domestic production. A reduction in low productivity agricultural employment (and cyclical unemployment) as well as more intensive marketization, especially in rural areas, further contributed to the fast growth rates. 2.8 The second phase which lasted till the early eighties also saw rapid growth. Remittances from the Gulf, together with foreign official transfers, continued to be buoyant: Gaza achieved a 1979 peak in per capita income which, with the exception of 1987, it has never recaptured. However a number of factors acted as a restraint on the previously very high rates of growth: slower growth in Israel following the 1979 oil shock negatively affected Palestinian growth; and the process of labor substitution away from low productivity agriculture toward employment in Israel was slowing down. 2.9 Overall, growth in output in the Occupied Territories during the first two phases was rapid, substantially exceeding growth in Israel during this period (Figure 4). Such rapid growth is a predictable consequence of sudden integration with a larger, richer, and technologically more advanced, neighbor.' (It is, however, worth noting that there remain large differences in levels, of about 8 times, between per capita GNP in Israel and that in the Occupied Territories. While growth in Israel slowed in the mid- 1970s, growth in incomes and output in the Occupied Territories continued because skilled Palestinians were increasingly finding employment in the Gulf. International employment was well-diversified for the changing regional labor market: when the oil price rose, this hurt the Israeli economy, but boosted remittances from Palestinian workers and transfers from oil-rich Arab countries, offsetting weaker economic opportunities in oil-dependent Israel. 2.10 The third phase lasted from the early eighties until 1987 during which growth stagnated. Although the data is weak here, the collapse of the regional oil boom almost certainly prompted a decline in worker remittances from the Gulf.! Other factors were also at work. While continued growth in Israel (Figure 4) actually provided some cushioning from the regional slowdown, the once-off gains from integration were already achieved, and employment growth in Israel was virtually flat from the mid-1980s. After the start of the Intifada, employment in manufacturing and services declined significantly, but this was offset by a rise in construction employment due to the housing boom in Israel associated with a surge of 5 Note that growth in 1991 was negatively affected by the Gulf War and the extended closure of the Occupied Territories. See Samir Abdallah Saleh (1993) for further discussion of patterns of growth in the Occupied Territories since 1967. See also Ephraim Kleiman (1991) for a general review. 6 It is noteworthy that Lesotho was another fast-growing economy: it is a small labor-reserve economy, relatively well-educated in the African context, totally dependent on South Africa, in a customs and currency union with its large, dominant neighbor. Like the Occupied Territories, it grew significantly faster than its richer neighbor. 7 See UNDP (1993) for further information on levels of official Arab transfers. 8 See further Zakai (1986) for data on the decline in remittance. 15 Figure 3: Per Capita Gross Domestic Product & National Disposable Income $ 000s WEST BANK 3, 2- C., 0.4 68 697071 72737475 76 7778798081 82838485868788 89 9091 YEAR GP PC --- GNDI PC 1.81 1.6 .4 Cj C., 0.1 0.6 0.6- 68 69 7071 7273 74 7576 7778 79 8081 82 8384 85 86 3788899'091 YEAR GOP PC --GMDt PC Source: Statistical Abstracts of Israel, 1981-1992, Central Bureau of Statistics Chqpter 2 16 immigration. Recession and near hyperinflation in Israel had a serious impact now that a large proportion, 35 percent, of the Palestinian labor force worked in Israel and the major part of Palestinian trade was linked to the Israeli economy. It is also reported that the regulatory framework for production in the West Bank and Gaza was more restrictive in the 1980s than in the 1970s. There is indeed plenty of anecdotal evidence that the regulatory environment has not been supportive of private sector production (see the companion volume on the private sector). While it is difficult to document whether changes in the regulatory framework contributed to a slowing in growth, it is likely that internal constraints became more binding once work opportunities abroad declined, leading to increased pressures to employ workers at home. 2.11 During the fourth phase, following the outbreak of the Intifada in 1987, a decline in output set in due to commercial and labor strikes and repression of economic activity. Political and economic uncertainty prevailed. Meanwhile with the return of 25,000 workers from the Gulf, remittances collapsed. A recovery in 1992, apparently fueled by drawdowns of savings and expectations of peace appears to have been followed by renewed decline in 1993. 2.12 It is important to view the changes in past growth in a regional context. In the 1970s, growth in GNP per capita was over double that in Israel, but only slightly faster than in neighboring Arab countries (Figure 4). All economies slowed in the 1980s. The difference in growth rates between the two periods was about 6 percentage points for the Occupied Territories as well as its Arab neighbors. Although growth in Israel slowed earlier (in 1973), the fall-off was less pronounced than in the other economies, and its income growth exceeded that of its neighbors in the 1980s. The Structure of Growth: Patterns and Productivity 2.13 The rise and fall in the overall growth rate is one notable feature of the past. There are also a number of striking characteristics of the pattern of growth. * The Occupied Territories enjoyed investment and savings rates worthy of fast-growing East Asian economies. Investment was around 30 percent of GDP in the West Bank and exceeded 40 percent of GDP in Gaza in the mid-1980s, before a decline in the late 1980s (Figure 5). * Investment is low in machines and high in houses. Investment in machinery and equipment declined from 12 percent of GDP in the West Bank in 1970 to 4 percent after 1975, while in Gaza it hovered around 4 percent of GDP throughout the period until dropping to 1 percent after 1987. Even if an adjustment is made for industrial and commercial building, the preponderance of investment in residential housing is high and has risen in the late 1980s. (See Figure 6--"other" investment is equal to the sum of investment in equipment and machinery and in industrial and commercial buildings.) * Industrialization is unusually low. Industries did indeed grow in response to overall growth, especially in Gaza in the 1970s. But the share of industrial production in output of 10 percent in Gaza and 7 percent in the West Bank is way below other economies of a sinillar Income level (Figure 7). Mauritius, like the Occupied Territories, is a small open economy with a significant agricultural sector. It had almost exactly the same Figure 4: Growth Rates of Per Capita GNP in the 1970s and 1980s: Occupied Territories, Israel and Region % 8- 1970s 7-7. 6- 6.3 5- 4- 3- 2.81980s 2- 1I.9 0 §\" OT ISR Region OT ISR Region Region: Weighted average of growth rates of Egypt, Jordan, & Syria Source: Bank Economic and Social Database Chapter 2 18 income level as the Occupied Territories, but a share of industry in GDP over three times as high. * The level of provision of government services is substantially below that in economies of a comparable income level. Provision of water, sanitation, roads and electric power are all below expected levels in quality and/or quantity (see the infrastructure report). Public investment at 3 percent of GDP is remarkably low, and especially so in the context of an overall investment rate of 30-odd percent of GDP. * Domestic fiscal deficits have traditionally been small, but the external trade deficit was immense, at 26 percent of GNP in the 1985-87 period. 2.14 These patterns reflect, in large part, the sources of growth in the past. Fast growth in money incomes spurred savings and investment. Palestinians specialized in manual labor in Israel and skilled labor in the Gulf rather than in industries in the West Bank and Gaza. Labor income from Israel and remittances from elsewhere financed imports greatly in excess of exports. The current account deficit was largely in balance for most of the period (though this may have changed in the early 1990s--see Chapter 3). In Chapter 2 we examine some of the policy and structural factors that contributed to the skewed pattern of past growth. 2.15 Growth in production has been unusual and led by incomes from employment abroad. Industrialization is low, which might be expected to lead to low productivity growth. However, the evidence suggests the opposite was true, at least until growth stalled. There were certainly large increases in labor productivity, in agriculture, manufacturing and construction (Figure 8). This was consistent with rising wages, as employment was drawn outside, and high domestic investment rates. There is also evidence of rapid increase in total factor productivity growth (TFP) in the 1970s, that is the growth in output over and above that explained by an expansion in the factors of production. This is based on some preliminary work, but the results, shown in Table 1, are consistent with some of the stylized facts. Total factor productivity growth was actually the major contributor to total growth in the 1970s in both the West Bank and Gaza. This can be interpreted as a mixture of technological catch-up, and the gains from factor reallocations to different lines of production. In the 1980s, by contrast, the contribution to growth declined to less than one percent per annum in the West Bank (that is close to international norms) and actually turned negative in Gaza, which was harder hit by the overall slowdown and probably had lower capacity utilization. 2.16 This picture of the sources of growth in the West Bank and Gaza complements that of the rise and fall of growth rates. When growth was very rapid, including the integration phase, there were large rises in productivity. When it stalled, so did productivity growth. Throughout the period the pattern of growth displays relatively low levels of industrialization and of provision of public goods.' ' Metzer (1992) has estimated TFP for the period 1972-82 at 0.5% (contributing 8.1% to growth), i.e., considerably lower than the estimates computed in this report. One possible explanation for the discrepancy is the different periods considered: growth was particularly marked in the short period between 1967 and 1972 whereas it slowed down dramatically after 1980. A further explanation may lie in the use of different capital stock series. In this report, the capital stock series was derived from investment data using the standard perpetual inventory method. Figure 5: Investment as Share of GDP, GNP for 1968-1991. % Investment as Share of GDP 40 30 - . . 25 - 20 15 10West Bank Gaza -OT. 5 , 1 1968 1970 1972 1974 1976 1978 1980 1962 1984 1966 1968 1990 Year % Investment as Share of GNP 30 - ..---------- -- - - 25 - 20 - -- -- -- - ----- ' ...... 15 10 West Bank Gaz- OT 5I I I I 198 1970 1972 1974 1976 1978 1980 1982 1964 198 1988 1990 Year Source: based on Statistical Abstracts of Israel 1972-1992,Central Bureau of Statistics Figure 6: Composition of Fixed Capital Formation 20 West Bank: Residential, government and other (private productive) investment as % of GDP % 40- 35- 30- 25- 20- 15 10 75 76 77 78 79 80 81 82 83 84 85 86 87 Year M=RESIDNTL 'OTHER GOYT Gaza: Residential, government and other (private productive) investment as % of GDP 7. 40- 35- 30- 25- 20 - 15- 10 5 T 75 76 77 78 79 80 81 82 83 84- 85 86 87 Year I= RESIDNTL =OTHER GOVT Source: Statistical Abstracts of Israei. 1972-1992. Central Bureau of Statistics Figure 7: Share of Manufacturing in GDP 26 TURKEY MAURITIUS 24- MEXICO 22- PERU SOUT I ECUADOR AFRIC1 0)20 COLOMBIA g 18- O C 16- TUNISIA C . c 1JORDAN 12- 10- OCCUPIED TERRITORIES m 8- BOTSWANA 6 i IIIIIIII 1000 1100 1200 1300 1400 1500 1600 1700 1800 100 GNP PER CAPITA (in $ 1987) SOURCE: WORLD DEVELOPMENT REPORT 1987 Chapter 2 22 Table 1: Growth in GDP, Factors and Total Factor Productivity (in percent per annum) West Bank Gaza 1970-79 1980-87 1970-79 1980-87 Annual growth: GDP 8.54 3.56 6.27 1.57 Capital g/ 8.87 7.95 6.07 6.09 Labor -0.63 -0.95 -0.74 -0.45 Contribution to GDP growth of: Capital 3.55 3.18 2.43 2.44 Labor -0.38 -0.57 -0.44 0.27 TFP h/ 5.37 0.95 4.29 -0.60 TFP as a percent of growth in GDP 63 27 69 -38 .a/ Based on a series constructed from national accounts statistics on investment. h/ This is the residual of the growth accounting equation, assuming a 40 percent capital share. Source: Mission estimates. Poverty and Growth 2.17 There are no comprehensive surveys of incomes or expenditure in the Occupied Territories, so it is difficult to assess the severity of poverty and changes over time. Qualitative impressions suggest that both the West Bank and Gaza have always had large differences between the rich and poor: traditionally landowners, merchants and a few industrialists have been amongst the rich, while land-poor rural households and households dependent on unskilled labor have accounted for the bulk of the relatively poor. The large number of refugee households is an additional important factor. One,small, but valuable, survey (by Abu Shokor in 1985) found a level of inequality roughly in the middle of developing countries: less unequal than in Latin America and Africa, but more unequal than in countries such as Indonesia or formerly socialist countries.o This survey also found that most of the poor were from laboring and farming households, with the latter often having members working in the wage sector in addition to farm work. Unemployment tended to be concentrated amongst the poor, but was not severe, at about 11 percent (compared with 10 percent overall--a higher level than from the labor force surveys, perhaps due to definitional issues). Poverty did not seem to be significantly higher in refugee camps, a finding consistent with the results of the household survey of durables that finds households in refugee camps have roughly comparable levels of household wealth. '0 See Abu Shokor (1990). He calculated a Gini coefficient of 0.42 for the West Bank and 0.45 for the Gaza Strip. Figure 8: Labor Productivity (1970-1991) (in NIS at 1986 prices) 10 000s Industry 1i0 8 - 0 1970 1972 1974 1978 1978 1980 1982 1964 1988 1988 1990 YOM 000s Agriculture 000s Construction 32 10 -o -- 0 1970 1972 1974 1978 1978 1960 1962 1984 198 1968 1990 Yar 0 Source: Calculations based on data extracted 1970 19r2 1974 197 1978 1980 1962 194 1980 988 1990 from the Statistical Abstracts of Israel, 73-92 Central Bureau of Statistics. Chapter 2 24 2.18 Assessing changes in poverty is even riskier than assessing levels since the existing small-scale surveys are not comparable over time. However, some preliminary conclusions can be drawn from examining the characteristics of the poor as well as the course of development. First, in every country (for which data is available) where there has been substantial growth there has been substantial poverty reduction. Income distributions tend to be highly stable over time. There is no reason to expect that income distribution worsened in the West Bank and Gaza (more likely the opposite occurred). This implies that the more than doubling in incomes illustrated in Figure 3 between 1970 and 1990 almost certainly brought a large reduction in poverty. It also suggests that the stalling in income growth since the 1980s led to a stalling in progress in poverty reduction. 2.19 Second, the fact that the primary structural change in earnings was the rise in the demand for unskilled labor (due to growth in employment in Israel and the associated rise in unskilled wages within the Occupied Territories), provides further indirect support for the view that poor households participated in the growth process. Indeed, for those Palestinians who stayed and worked in the Occupied Territories and Israel, there was probably a relatively compressed distribution of earnings, though better educated households were able to gain from high earnings in the Gulf (and indeed many emigrated to even greater wealth throughout the world). 2.20 Third, potentially vulnerable households would, until recently, have been disproportionately those without access to the predominantly male unskilled labor markets--that is those without able bodied young men, including families that had lost the male breadwinner. If there is now a generalized reduction in labor demand, a much broader group of working households could be vulnerable to falling into poverty. 2.21 Fourth, all the qualitative impressions, and some quantitative evidence, indicates that Palestinian society is a high transfer one, with the relatively needy being assisted through transfers from the better off, often within extended family networks. The labor force surveys finds that the unemployed and those outside the labor force disproportionately receive transfers." This is exactly what happens in Jordan, which is reasonably similar culturally and in economic structure: households with low earnings receive much higher proportions of their income in terms of inter-household transfers than do non-poor and/or wealthier working households." 2.22 Much more work is needed on poverty, including surveys of household living standards and expenditures. Coping mechanisms are probably strong, but the stalling in growth in incomes and employment is almost certainly leading to rises in poverty. This should be an important focus of the economic management in the interim period. Conclusion 2.23 The above analysis suggests that the past course of growth did indeed bring large income gains for most Palestinians, but it both had built-in distortions and is not sustainable in the economic environment likely to be faced in the 1990s. The most striking aspects of economic specialization of Palestinian labor over the past 25 years have been in two areas: manual work in Israel; and in higher-skill n See Shaban (1993). 12 This is based on preliminary analysis of household survey data from Jordan in the early 1990s. 25 Chapter 2 services throughout the world, but most especially in the Gulf. While the past pattern of specialization constituted a powerful spur to economic growth in the past it has left a problematic heritage. Future growth potential on the historical path now looks very limited--Gulf demand is gone, Israeli labor demand may be substantially cut, and in any case the rise in Israeli construction demand is likely to fade after the current immigration wave subsides. Without growth in domestic production the future outlook for incomes and employment will be grim, while labor supply will be surging ahead. The remainder of this chapter examines the policy and structural reasons behind the past pattern of growth in terms of structural relations with other economies and policy choices, followed by a discussion of past external shocks that contributed to the stalling of growth. B. Economic Relations, Policies and the Pattern of Development 2.24 Growth in the Occupied Territories was rapid in the 1970s; it is now stalled. Investment has been unusually high, but with a high concentration in housing and a relatively low payoff in growth after the 1980s. Changes in the pattern of specialization in employment and production, and rising wages, were an unavoidable consequence of integration with Israel; these were the mechanisms behind the growth spurt of the 1970s. It is, however, highly unlikely that the West Bank and Gaza economies would have experienced such a skewed pattern of development if it were not for four unusual features of their policy environment: * Asymmetric market relations with Israel and other countries that caused a bias towards export of labor (and raised domestic wages); * Regulatory restrictions that held back the expansion of the private productive sector; * Fiscal compression that led to under-provision of public goods. * A declining natural resource base. 2.25 These four factors in the policy environment were mutually reinforcing. Difficulties in getting permits for industries potentially competitive with Israeli firms (until the recent liberalization), problems of electricity supply and biases in trade relations all contributed to the character of past development: the dependence on outside sources for employment and the relatively weak development of domestic production whether in measured terms of public capital or private investment in productive activity. 2.26 The skewed pattern of investment--toward housing and with little in machinery and equipment (Figure 6)--is another aspect of the same story. The policy factors also interacted with other features of the economy: high savings due to rapidly growing money incomes and remittances; lack of alternative investment opportunities for households due to the underdeveloped state of the financial system; and overall political uncertainty. The latter may have been central to the picture, though is difficult to evaluate: it is plausible that strategic uncertainty over the political future of the Occupied Territories was a major deterrent to productive investment. On the other hand, housing was relatively secure, and rising demand was a natural consequence of rapid population growth. Jordan also has a large level of investment in housing (10 percent of GDP in the early 1990s), suggesting that the skewed pattern is only partly due to the unusual political and policy circumstances of the West Bank and Gaza. While the overall political uncertainty is clearly important, we focus here on the areas relating to policy and relations since it is in these areas that there could be future policy choices. Chapter 2 26 Trade in Labor and Goods 2.27 Palestinians have been free to sell unskilled labor and manufactured goods to Israel and skilled labor to the Gulf, but they have faced difficulties in other trade, due to the Arab boycott, restrictions on agricultural exports to Israel and weak trading networks to the rest of the world. In 1967 the West Bank and Gaza had no relations with Israel. The June 1967 war was severely disruptive, of course, and was followed by the outward migration of some 300,000 people, mostly to Jordan, out of a population of 1.3 million prior to the occupation. After the occupation, a completely different set of economic opportunities opened up with access to the much larger economy of Israel. This brought huge increases in the movement of both labor and goods. 2.28 The number of Palestinians working in Israel rose from zero to 66,000 in 1975 and 109,000 by 1987, accounting for 35 percent of the employed population in the West Bank and 45 percent in Gaza. (Figure 9). Amongst Palestinians who stayed in the Occupied Territories, this source of growth accounted for all the growth in the labor force until the Intifada. (A roughly equal number also emigrated to work abroad.) Palestinians from the Occupied Territories accounted for 7 percent of total employment in Israel by the mid-1970s--a share that has been fairly stable ever since. Employment was overwhelmingly in unskilled and semi-skilled work. Construction has always been the largest sector of employment. 2.29 Palestinian wages in Israel are about $450 per month, in the neighborhood of the Israeli minimum wage. Earnings vary from a third of earnings of Israelis in industry and construction to over 40 percent in agriculture (Figure 10). Wages in Israel are also above those within the Occupied Territories--the domestic average wage is about $310 per month. However, much of the difference is offset by the costs of transportation to Israel in transportation and taxes. The long-run trend was toward convergence, such that by the mid-1980s there was little difference in average wages between net earnings from work in Israel and within the Occupied Territories (especially the West Bank); this similarity, however, almost certainly hides a continuing divergence for work at the same skill level since the average skill level of Palestinians within the Occupied Territories is higher. Since the mid-1980s the ratio has tended to widen again, under the dual pressure of returnees from the Gulf and lower demand in Israel (Figure 11). 2.30 Patterns of movement amongst skilled Palestinians were completely different. Very few work in Israel: only 2 percent in professional, technical and clerical occupations compared with about 10 percent in the Occupied Territories. Market factors probably worked in tandem with preferences. Skilled labor is relatively abundant in Israel, so Palestinian skilled workers are much more likely to substitute for Israelis. During the eighties educated Palestinians lost the wage premium they previously enjoyed. While in the first half of the eighties, men with 13-15 years schooling enjoyed a daily wage premium of about 15 percent, by 1987 this had been eliminated. Men with 16 years of schooling or more also experienced a marked decline (over 50%) in their wage premium over the same period." The mid- eighties recession and hyperinflation in Israel were probable causes, as well as the excess supply of new graduates. In addition, it is probable that Israeli employers are relatively reluctant to hire Palestinians for higher positions. Things were quite different in the Gulf states. There the highest demand was for skills, and many Palestinians worked there, earning substantially higher salaries than those in the West Bank and Gaza. Data in this area is weaker. It is, however, apparent that there have been substantial fluctuations in Gulf demand. 13 Angrist (1992) 27 Chapter 2 2.31 Trade also expanded hugely. Much of this was financed, of course, by wage payments to Palestinian workers in Israel and elsewhere. But exports also expanded. There are two particularly striking aspects of the pattern of trade: its orientation toward Israel (90 percent of imports and 70 plus percent of exports) and its concentration in industrial products: the share of industrial products in trade is unusually high for its income level, way above Mauritius, which is a successful manufacturing exporter (Figure 12). The dependence of trade with Israel is a function of both trade diversion and trade creation. Trade diversion occurred from Jordan and Egypt through the imposition of a customs union in 1967: imports of manufactured goods from all countries except Israel became subject to a more than fourfold increase in duties in that year. Israel has also come to dominate other countries as a direct market for West Bank and Gaza goods. Trade creation between Israel and the West Bank and Gaza was the result of cheap transportation costs and the absence of customs on goods passing into the West Bank and Gaza. 2.32 The patterns are clear: export of manual labor to Israel; of skilled labor to the Gulf; and trade in manufactures predominantly with Israel. These patterns correspond to the pattern of restrictions: some agricultural goods and skilled labor don't go to Israel; skilled labor used to be able to go to the Gulf, but has largely lost that market; and almost all goods face barriers or costs in going anywhere else. As discussed in Chapter 3, the pattern of trade that would have occurred without restrictions looks very different. 2.33 Central to the functioning of the Occupied Territories is the workings of labor market interactions with Israel. This study's interpretation of the facts leads to the following account of how the labor market functions. Wages for Palestinians in Israel are held up by (or close to) the minimum wage; but they are lower than Israeli wages, even at the same skill level, because employers consider that the employment of Palestinians comes with a cost. Kleiman (1992) finds an overall differential between Israelis and Palestinians working in Israel of 50 percent, but an "unexplained" wedge of 20 percent, after attempting to allow for occupation and skill differences. This could, for example, be due to security fears or concerns over disruptions of supply (especially post-Intifada). The wage exceeds the domestic wage in the West Bank or Gaza for the same work, even after transportation and other costs are taken into account, so Palestinians are rationed in their employment in Israel. Thus employment in Israel has been determined by demand at the prevailing wage, and employment within the Occupied Territories has been a residual. Only when the domestic wage (net of costs to workers) rises to the Israeli level, will increased domestic labor demand be a source of reduced employment in Israel. In some of the scenarios explored in Chapter 5 there is some convergence, but in none do the Occupied Territories reach a point of equalization and pulling back of labor from Israel (as opposed to Israeli reduction in demand). Regulatory Restrictions 2.34 The regulatory environment for private sector activity is discussed in detail in the companion report on private sector development. Restrictions on permits for industry, the legal framework for conducting business and on the growth in the financial sector has seriously constrained the expansion of private business (probably especially in areas potentially competitive with Israeli production, until the recent liberalization). Here we note how this fits in with the overall pattern of asymmetric integration. With respect to investment, large scale expansion has been held back both by the difficulty in getting 14 See Ephraim Kleiman (1991) for further discussion of the issue of trade diversion versus trade creation. Chapter 2 28 permits for activities competitive with Israeli producers, and the lack of business support services. Uncertain legal conditions and sharply rising prices of industrial land have added to the disincentives for expansion of productive activities. There has been significant entrepreneurial dynamism, but this has been largely in the small-scale sector. 2.35 In 1992 the Civil Administration introduced a quite significant liberalization of the regulatory framework, including the encouragement of applications for permits, the dropping of the de facto difficulties of receiving permits for industrial activities competitive with Israeli firms and the introduction of new tax incentives. There has indeed been a surge in permit approvals, though the bulk of this appears to be for existing (technically illegal) businesses. It is too early to assess whether there have been significant real effects. Fiscal Compression 2.36 Public provision of services has been broadly limited to available revenues: to taxes and fees collected by, or assigned to, the Civil Administration and municipalities for government activities; and, at most, to retained earnings for the public utilities that are owned by the municipalities. Deficits have been negligible (though they appear to have been much higher in the 1970s). Low revenues and the inability to borrow have been the primary reason for the low levels of service provision. Annex 2 develops detailed consolidated accounts for the public finances of the Occupied Territories since 1987. 2.37 Both revenues and spending by the Civil Administration and the municipalities are low by international standards, at about 16 percent of GDP or a mere 12 percent of GNP in the 1987-91 period, with no clear trend. On the other hand, statutory income tax rates are significantly higher in the Occupied Territories than in Israel (see the discussion in the private sector report). There are two major adjustments that have be made to revenue and spending levels by the Civil Administration and the municipalities. First, other agencies, both official and private, have responded to fill the gaps left by the weak governmental effort. Second, there are complex interrelations, on both the revenue and spending side, with the Israeli government. We take up each in turn (Table 2 summarizes the results). 2.38 Many organizations operating in the Occupied Territories provide quasi-public services. Foremost amongst these is the United Nations Relief and Works Agency (UNRWA), which provides basic services to the approximately 40 percent of West Bank and 60 percent of Gaza residents that have refugee status. UNRWA has spent US$100 million annually in the recent past, equivalent to 4.5 percent of GDP, of which 85 percent went on education and health. Jordanian aid amounted to an estimated $50 million per annum until 1988, dropping to $15 million thereafter; identified aid by other Arab governments provided an estimated $15 million per annum in 1988-89; and other Arab non-government agencies, UNDP, EC and a large number of non-Arab NGOs, also provided resources or services. These funds are treated as near-government capital inflows and spending. Figure 9: Number of Employed West Bank and Gaza Resldents by Place of Employment, 1970-1991 000 Occupied Territories OT empk& kocaly OT omployed In Israel Total employed 300 - 250 100 - -0 0 1970 1975 1980 1981 1982 1983 1984 1985 1988 1987 1988 1989 1990 1991 Year Gaza West Bank 100 20 20-0 ........ ......... ... . 80 150............. . 20~aadmetcGz In kwrel Totgl Ga7A5 --------- 1970 1975 1980 1981 1982 1983 19 1985 1986 1987 1988 198 1990 1991 1970 1975 1980 1981 1982 1983 1984 1985 1988 1987 1988 1989 1990 1991 Source: Statistical Abstracts of Israel, YOM 1983-1992, Central Bureau of Statistics, Jerusalem. Figure 10: Palestinian Daily Wage as a Percentage of Israeli Daily Wage by Selected Economic Branches % Territories/Israel 45 'Agrkaur 40 ....-- Constucon 35 - 1965 1966 1967 1985 1989 1990 Year West Bank/Israel Gazaasrael 45 45 40 _ 40 3- 25. .............- ...........S-... 20 1985 1966 1987 1968 1959 1990 1965 1966 1967 1968 1969 I99 Year Source: based on Statistical Abstracts of Israel 1971-1991, Central Bureau of Statistics, Jerusalem. Figure 11: Daily Wage Ratios of Palestinian Employees Working Domestically to Palestinian Employees Working In Israel Occupied Territories 1.1 Agric-ue&idutr Contuto 0.9 ........... 0.8 --.. 0.7..-....... 0.7 1965 1966 1907 1988 1980 1000 Year Gaza West Bank 1.1 1.2 1- - 1.1 - - 1.2 0.8 0.9 0.8 0.7 --.. 0.7 0 .6 I I 1965 196 1987 1968 1989 1990 0.6 Year 1985 1986 1967 1988 1980 1990 Source: Statistical Abstracts of Israel, 1985-90 Central Bureau of Statistics, Jerusalem. Figure 12: Share of Industrial Product in Trade 90 o9%UPIED TERRITORIES 80 l70- 60- CL .5 50- TURKEY MEXICO 40- W MAURrUS S UTH A RICA ECUADOR TUNISIA 30- m JORDAN M U COLOMBIA 20- 1000 1100 1200 1300 1400 1500 1600 1700 1800 1900 GNP PER CAPITA (in $ 1987) SOURCE: WORLD DEVELOPMEN REPOPT 1987 33 Chapter 2 2.39 More controversial are the fiscal transfers between the Occupied Territories and Israel. Palestinians pay some taxes that accrue to the Israeli treasury, and Israel provides services. There are no available statistics on these transfers. This report made direct estimates of indirect taxes paid by Palestinians that were not passed back to the Civil Administration budget--mainly due to the VAT, tariffs, excises, fuel taxes and purchase taxes. On reasonably conservative estimates of the base and of rates,these amounted to some NIS 400 million in 1991, equivalent to 8 percent of GDP (Annex 2). This does not include income tax paid by Palestinians working in Israel since it is the usual international practice for this to accrue to the treasury of the territory in which a person works. Nor does it include any indirect costs, such as the price-raising effects of tariff protection on Israeli production. By contrast, in the Southern African Customs Union, the sharing formula for customs revenues between the Republic of South Africa and the other members of the union (including Lesotho and Swaziland) does include such an adjustment. 2.40 Palestinian consumption of Israeli services is even more difficult to assess: the estimates of the Israeli Government are included in the appendix. Defense and security spending is estimated by the Israeli Government at NIS 1 billion, or 20 percent of GDP. We include outlays on subsidized goods and the use of public hospitals, in which there is a direct fiscal outlay that would not have otherwise occurred--these amount to some NIS 65 million, or 1.2 percent of GDP. In addition, some direct capital spending comes from the Israeli budget and is included. This is estimated at 0.8 percent of GDP. Thus, the Israeli non-security contribution is estimated at 2 percent of GDP. 2.41 The consolidated picture is of significantly higher revenues paid by Palestinians (24 percent of GDP, or 22 percent if the receipts of utilities are taken out as is done in most countries) and higher spending (26 percent of GDP, 24 percent if current outlays of utilities are deducted). At 22 percent of GDP, revenues look only moderately below those in other economies Egypt's revenues were 23 percent of GDP; Jordan's were 27 percent; and a sample of 43 developing countries revenues amounted to 22 percent of GDP; Israel's, however, were much larger at 39 percent. (See Table 3; note that for the larger sample the information is limited to the central government.) As a share of GNP, revenues are only 16 percent for the Occupied Territories, far below that of the other economies Which is the more appropriate for comparison depends on the tax: for indirect taxes, it is GNP (which will determine spending), while for direct taxes it is GDP, since these taxes are levied on domestic labor earnings. 2.42 Spending is much lower than international norms because of the absence of normal deficit finance. Total non-defense spending amounted to 24 percent of GDP (and 18 percent of GNP), compared with 37 percent for both Egypt and Israel; 31 percent for Jordan; and 26 percent for the same sample of developing economies. While this figure may be somewhat low with respect to current spending, the radical differences lie in development (i.e., investment-related) spending. The 3.5 percent of GDP allocated to this item in the Occupied Territories is a small fraction of the spending levels in the other economies (with the partial exception of Israel). 2.43 Both revenues paid by Palestinians and spending on public services are higher than the accounts of the Civil Administration and the municipalities. But some of the revenues paid accrue to the Israeli treasury, and some services are there from quasi or non-government sources. Even if everything is included, a picture remains of current spending that is somewhat low for the income level of the population and development spending that is extremely low. This is completely consistent with the picture that emerges from the sectoral reviews (especially of economic infrastructure) of inadequate service levels. Chapter 2 34 Table 2: Integrated Public Sector Finances, 1987-91 (in percent of GDP) Public Sector Integrated Public Sector Average 1987-91 Average 1987-91 Revenue 16.1 24.1 Expenditure excluding defense 16.3 25.8 Current Expenditure 14.1 22.3 of which: UNRWA - 4.5 Other quasi-government 2.5 Israeli budget - 1.2 Development Expenditure 2.2 3.5 of which: Israeli budget 0.8 Other quasi-government 0.5 Overall deficit (-)/surplus(+) -0.2 -1.7 Financing 0.2 1.7 Israel 0.2 2.2 UNRWA -- 4.5 Other external sources 0.1 3.1 Increase in cash balances (-) -0.1 -8.11 a! This increase basically reflects the revenue foregone by the Civil Administration. Declining Natural Resource Base 2.44 A fourth constraint which has acted to distort the pattern of development is the stagnation or shrinking of the land and water resources base in the face of a large population increase over the past 25 years. Annually renewable groundwater resources in the West Bank and Gaza amount to about 750 million cubic meters, while annual use by the Palestinians has remained capped at about 200 million cubic meters--the pre-1973 level. Current restrictions on access to water, including administrative limitations on surface water harvesting, and the high costs of water caused by difficulties to renew inefficient and worn-out wells have meant a modest expansion of the irrigated area under Palestinian cultivation. In selected areas, notably in some areas in Gaza, increasing salinity levels in wells caused by excessive extraction have virtually halted agricultural production. Loss of land to settlements has increased during 1980s and early 1990s. Access of Palestinian sheep and goat farmers to military land and land declared nature reserve has been restricted. 35 - Chapter 2 Table 3: Revenue and Expenditure Comparisons: Egypt, Israel, Jordan, Occupied Territories and Developing Countries Average: 1987-91 Egypt Israel Jordan OT OT Developing S 11Adjusted Countries (In percent of GDP) Revenue 23.1 38.6 27.2 24.1 21.7 22.1 Tax revenue 15.2 33.9 14.3 16.1 16.1 17.5 Direct taxes 5.7 17.5 3.4 4.2 4.2 5.4 Indirect taxes 9.5 16.4 10.9 11.9 11.9 12.1 Nontax revenue 7.9 4.7 12.9 8.0 5.6 4.6 Expenditure 42.2 50.2 46.4 28.0 Current expenditure 28.9 45.7 37.2 21.0 Development expenditure 13.3 4.5 9.2 7.0 Expenditure excluding defense 37.2 36.8 30.5 25.8 23.6 25.6 Current expenditure 23.9 32.3 21.3 22.3 20.1 18.6 excluding defense 13.3 4.5 9.2 3.5 3.5 7.0 Development expenditure (In percent of GNP) Memorandum Items 21.7 39.4 28.9 17.8 16.2 23.3 Revenue 8.9 16.7 11.6 8.9 8.9 12.7 of which: Indirect taxes ' Excludes revenues and spending of utilities. While the area cultivated by Israeli settlers in the West Bank is unknown, in Gaza settlers occupy about 10 percent of the cultivated area. The lack of clear zoning regulations and public land utilization policy has also created uncertainty and has become a barrier to industrial expansion. The freeze on the building of housing on land beyond the municipal boundaries has acted to distort land prices. Security-related restrictions affecting the fishing areas in which Gaza fishermen can operate, (recently increased from 12 to 20 miles) have been limiting fish production to a fraction of the pre-1967 levels. C. Shocks and Responses 2.45 In addition to the structural factors described above, economic performance of the West Bank and Gaza has been heavily influenced by a sequence of external shocks. The post-1967 change in regional economic relations was of course the largest shock to the OT economy, which provided the backdrop for all subsequent changes. As small open economies, the West Bank and Gaza are highly prone to imported shocks, both real and nominal. In particular, the structural distortions described in the previous section have rendered the Occupied Territories economy very susceptible to economic conditions in Israel, the Chapter 2 36 Gulf states, Jordan and other countries in the Middle East (which are important markets for Occupied Territories exports and its labor), and to the effects of political protest and military action. The following is a list of some of the main shocks (positive as well as negative) that have affected the Occupied Territories since 1967: * the slowdown in Israeli growth in the mid-1970s after the first oil shock led to weaker demand in the dominant market for both labor and goods. * the Gulf oil boom led to both strong demand for skilled Palestinian labor (and a steady stream of remittances) and contributed to substantial levels of transfers from Palestinian and other Arab sources overseas; this helped pick up the slack from Israel's poorer economic condition. * the subsequent collapse of oil prices contributed to the first period of stagnation in the Occupied Territories in the early 1980s. * Israeli high inflation was almost completely imported into the Occupied Territories (Figure 13). * the Intifada had a pervasive influence on the Occupied Territories: it contributed to reduced labor demand in Israel outside construction, reduced labor supply and economic activity due to strikes, periodic border closures (and higher costs of movement), and the increased enforcement of firms for taxes, all of which slowed growth. * the Jordanian withdrawal of public sector salary payments after 1988 and the devaluation of the Jordanian Dinar during 1988-90 were linked shocks that hit many Palestinians in the West Bank hard, many of whom traditionally have used Jordanian Dinars for savings. * the Gulf war with Iraq led to drastic short-run effects through the closure of the border for 40 days in early 1991, followed by permanent losses due to the expulsion of Palestinians from several Gulf states, the loss of Arab grants and reduced transfers from a cash-starved PLO. * Immigration to Israel was a large positive influence on the demand for Palestinian construction employment (new immigrants need houses but usually aren't good at construction), totally offsetting the reduced demand in industry and services. * expectations of a peace settlement in 1992 fueled a small boom, especially in property, generally reckoned to be financed by drawdowns in savings of Palestinian families with household members returning from the Gulf. Savings repatriation may have been facilitated by relaxed restrictions by the Civil Administration. * the March 1993 cut in employment in Israel is causing a sharp reduction in labor incomes. Figure 13: Inflation for West Bank, Gaza, and Israel for 1971-1991 400 West Bank Gaza 300 - Israel 200 100 0 ~~ ..... 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 Year Source: Statistical Abstracts of Israel 1972-1992, Central Bureau of Statistics. Inflation is rates of change in the CPI. Chapter 2 38 2.46 In addition to the above, the West Bank is prone to agricultural shocks, especially for olive crops. While the olive crop usually rises in even years and drops in odd years, the exact nature of the variation is more complex. The variations in the olive crop are huge and have aggregate effects. However, ofmuch greater importance for future economic policy are the other, potentially permanent shocks such as loss in external employment earnings opportunities. We examine the shocks from the viewpoint of the macroeconomy, households and money using the shocks to explore some of the monetary history of the economies. Shocks and the Macroeconomy 2.47 These shocks have resulted in a serious instability in incomes, both of a cyclical character, as in the olive cycle, and in the form of a permanent slowdown, as with the intifada and Gulf war. At an aggregate level, three mechanisms can be used to help moderate the influence of the shocks: income diversification, changes in net transfers from abroad and domestic adjustments. 2.48 The Occupied Territories have, fortuitously, done reasonably well through income diversification during many periods. Having part of the labor force in oil-importing Israel and part in the oil-exporting Gulf was an important source of risk-spreading and helps explain the continuation of growth in the late 1970s after the Israeli economy slowed. However, adverse shocks to external income sources have tended to pile on top of each other since the late 1980s. The Intulada's tendency to reduce income from Israel (from labor and exports), the decline in Gulf labor income and the recent sharp cutoff in employment have all hit hard. The weak diversification of trade beyond Israel make the economy highly vulnerable to this restriction. 2.49 External transfers, by contrast, have probably only weakly offset the effects of these shocks. The Occupied Territories have not been able to have an active policy in this area (though it should be added that the evidence is mixed on how successful governments elsewhere have used external transfers counter cyclically--some use higher borrowing capacity in boom times to exacerbate rather than dampen the influence of shocks). Many of the transfers also tend to be associated with other shocks. Defense apart, Israel has not increased transfers to the Occupied Territories to offset the post-Intifada slowing of economic activity. Arab aid (JPC) declined sharply after 1985. Aid from Jordan amounted to about US$ 25 million annually, rose to an average of about US$ 50 million during 1987-88, and then dropped sharply afterwards following the disengagement in mid-1988. Aid from the Gulf States was discontinued after 1990. Aid from the US rose during 1983-87 but declined afterwards; and aid from the EEC had been modest but picked up considerably after the Gulf War. Transfers from the PLO have also certainly tailed off since the Gulf war because of a lack of funds. Overall, the total amount of grants has been quite variable and appears to have been on a declining path since the late 1980s. 2.50 Finally, domestic adjustment has borne a large part of the burden of adjustment. While there are neither cyclical stabilizers nor national insurance schemes, there are some significant adjustment mechanisms. This is clearly seen for the most predictable source of income variability: the olive cycle. Despite quite large annual changes in GDP, consumption follows a smooth path. Changes in income are smoothed through changes in inventories (Figure 14) and in savings. 1 Jordanian-Palestinian Committee for the Steadfastness of the Palestinian People in the Occupied Homeland. 39 Chapter 2 2.51 The picture is less clear for the recent sequence of adverse shocks. Declines in investment (and probably domestic savings, though the data is not available) in the initial post-Intifada period helped maintain consumption. The substantial drawdown of savings held abroad - spurred by the return of Palestinians from the Gulf - appears to have given an important positive impulse to the West Bank and Gaza economies in 1991 and 1992. Shocks and Households 2.52 The economic shocks of recent years have had pervasive effects on Palestinian households. Of particular importance are the effects of adverse labor market shocks, especially the loss of employment in the Gulf and Israel. Because of the preponderance of unskilled workers employed in Israel, the recent reduction in employment is likely to hit poorer households relatively hard. It will, in the short run, also have significant multiplier effects throughout the economies. 2.53 There is no formal social security system, but at least three coping mechanisms appear to be important in the West Bank and Gaza: (a) Alternative employment: workers move back into agriculture or construction. There is some evidence that domestic construction activity moves counter cyclically to employment in Israel, suggesting that when construction labor is more plentiful, there is greater domestic spending on housing. (b) Running down savings: households have traditionally had high savings, a consequence of the fast growth in money incomes and the uncertainty over future incomes. These are drawn down in bad years; indeed, reduced savings in 1992 appears to have contributed to an actual expansion in activity, especially in the construction sector. (c) Transfers: as discussed above, transfers are significant and especially for households suffering from unemployment or without active labor force participants. Shocks and money 2.54 It is useful to review the recent monetary history of the Occupied Territories. It provides a good context in which to review the effects of the recent shocks, and it is possible to develop a picture of the role of money balances in smoothing these shocks. The West Bank and Gaza have neither their own currency, nor a central bank. The New Israeli Shekel and the Jordanian Dinar are legal tender, while the US dollar and some European currencies circulate widely as a more secure store of value. Cash seems to be the primary means of payment, and monetary savings are primarily in foreign currency (some of which is held abroad) and precious metals. 2.55 In the absence of a monetary authority and an active banking system, the money supply is primarily determined by capital inflows and outflows related to foreign trade, net factor income and net transfers. Because these sources have been very unstable in the past, the money supply must have fluctuated widely over time. At the same time, circumstances in the Occupied Territories necessitate large cash balances: cash in advance transactions predominate; large precautionary cash balances are held as shock absorbers because of the difficulties in securing short-term credit; and investment is mostly self- financed, requiring the accumulation of cash savings. Chapter 2 40 2.56 The size of monetary holdings in the West Bank and Gaza is not known. For the sake of comparison, M1 (which includes currency in circulation and sight deposits) is 57 percent of GDP in Jordan (of which 32 percent of GDP was currency in circulation and the remainder, demand deposits); 6.3 percent in Israel (of which 2.5 percent in currency); 15 percent in Lebanon (o/w 10 percent in currency); and 22 percent in Egypt (o/w 11 percent in currency). Clearly, the size of both the ratios of Ml to GDP and currency to GDP make Jordan an outlier in the region. The principal explanation for this anomaly is that the residents of the West Bank hold Dinar balances, especially in the form of currency. We explored the implications of a range of assumptions for Palestinian holdings of Shekels and Jordanian Dinars (from similar holdings relative to GDP shares to a third more in relative terms, given the relative scarcity of alternative financial assets). This produces a range of the ratio of MI to GDP of 30-55 percent and an adjusted ratio for Jordan of 30 to 45 percent. 2.57 One could, in principle, get a better sense of the way in which the Occupied Territories reacted to the various monetary and real shocks between 1985 and today by looking at the changes in money supply over time. For an economy without a central bank, this can be achieved by estimating capital movements from the balance of payments. We attempt such an exercise in spite of the severe data limitations. We estimate the total residual from the balance of payments to try and develop some picture of the flow of funds between the Occupied Territories and the rest of the world. 2.58 Starting from the balance of goods, services and identifiable transfers and capital flows (factor income, and transfers from UNRWA, EEC, USA, Jordan, JPC, and Islamic organizations), any residual surplus (deficit) must be offset by unrecorded capital outflows or reserve accumulation (capital inflows and reserve depletions). Other possible deviations can be due to the under-reporting of trade (especially with Israel) and of labor income (from Israel and especially from the Gulf), and changes in supplier credit (especially from Israeli suppliers). The analysis of the available information suggests the following results (see Figure 15 for a presentation of changes in the key variables): (a) The current account (including official and private net transfers) of the Occupied Territories has traditionally recorded a surplus with Jordan and a deficit with Israel and the rest of the world. The overall position was usually in surplus, at least until the mid- 1980s, reflecting the domestic accumulation of foreign cash balances. The estimates also reveal that the JD holdings to GNP ratio was consistently over 50 percent, a large ratio by international standards. (b) During the Israeli high inflation episode of 1983-85, real money balances fell, probably with an increased substitution away from the Israeli Shekel and towards the Jordanian Dinar (note that unrecorded capital flows cannot have been large in this period since the regional oil boom had collapsed by 1983). The fall in cash holdings can be explained by several factors. First, coming on the heels of a prolonged period of growth, the level of reserves must have been high in 1985, and portfolio rebalancing could not, in the aggregate, be accommodated with a net shift from Israeli Shekel to Jordanian Dinar, given that neither currency was easily convertible into foreign currencies. Second, transfers from abroad started declining as real wages fell in Israel, employment stagnated in the Gulf and the Iran-Iraq and Lebanese wars raged in the region. Third, the slowdown of the economies of Israel and Jordan made it difficult to increase exports, while imports, especially of consumer goods, continued to trend upwards. Fourth, because economic activity was stagnating, the need for real balances may have declined. While it is not possible to estimate the real losses suffered by Palestinians as a result of 41 Chapter 2 the Israeli Shekel inflation, it is unlikely that this loss was great for West Bank residents because they had started shifting to other currencies since the early 1980s." The residents of Gaza, however, where the scope for shifting may have been less since the Jordanian Dinar is not legal tender, may have suffered larger losses. In any event, this episode must have eroded and unbalanced cash balances. In the following two years, households replenished their balances substantially. (c) The available evidence indicates that the Jordanian Dinar devaluation in the second half of 1988 and in early 1989 must have come as a surprise to the residents of the Occupied Territories. In the past, the Jordanian Dinar had been the preferred store of value in the West Bank because of its historic stability, which was reinforced by the Israeli high inflation of 1983-85. (See Figure 16 for the relative stability of the JD.) (d) During 1990-92, cash balances seem to have fallen considerably in spite of large transfers of savings from Kuwait. In 1991, the last year with reasonably good data, reserve drawdowns and unrecorded private sector capital inflow were about 10% of GNP. This was probably a major source of the short-run smoothing of the adverse shocks of the early 1990s. They provided the financial basis for what appears to have been a minor boom in 1992, but they are unlikely to be sustainable. A similar phenomenon occurred in Jordan and Yemen. Conclusion 2.59 The economies of the Occupied Territories are characterized by an unusual dependence on external sources of economic growth. As a result, they are also vulnerable to external shocks, although the net effect of past shocks has not been to generate large fluctuations in the overall level of economic activity since the shocks have often worked in opposite senses. Nevertheless the changes that have occurred in the past several years--from the Gulf to Israel--all add up to a large and probably permanent adverse change in these external sources of income growth. To offset adverse external developments, future income growth will have to depend on an expansion of production based in domestic centers of economic activity. This was clearly true prior to the sharp reduction in employment in Israel in March 1993. If this reduction is permanent, the need to reorient the economy will be much more urgent. In the past, the economy has not had the structural policy options to support such a reorientation of the pattern of development. Indeed all the underlying policies and structural realities have pulled in the opposite direction, and the economy has not had the macroeconomic policy instruments to manage shocks. In the future, policies will be central to a reorientation in the pattern of development. 16 Hamed and Shaban (1992) calculate that--in the absence of currency substitution--seignorage on Shekel holdings would have amounted to about 5 percent of GDP during 1984-85. Since there clearly was currency substitution, actual seignorage would have been lower. On the other hand, seignorage on JD holdings could have been substantial. Figure 14: West Bank Olive Production and Change in Olive Oil Stock for 1968-1986 200 Olive Production (000's tons) i 150 -Change in Olive Oil Stock (%) 0 0 0 100 CD 50 0 5 0- (50) 1969 1971 1973 1975 1977 1979 1981 1983 1985 Year Source: National Accounts of Judea, Samaria and Gaza Area, 1968-1986 Central Bureau of Statistics,Special Series 818 Figure 15: Change in Money Balances in Occupied Territories as a Percentage of GNP (1981-1990) 20 NIS as % of GNP DINAR as% of GNP 10 Total as % of GNP . . 0 (10) (20) (30) I IIIIIl 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 Year Source:Calculations based on data extracted from Statistical Abstracts of Israel, 1970-92. Central Bureau of Statistics. Figure 16: NIS: $US and JD: $US Exchange Rates 1980-1992 2.5 NIS per US dollar a 2 JD per US Dollar 0 S1.5 0 - 0 a: 0 CD Lb 0.5 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 Year Source: International Financial Statistics, IMF, 1992. III. STRUCTURAL POLICY CHOICES FOR THE FUTURE 3.1 In Chapter II it was argued that the past pattern of development for the Occupied Territories was conditioned by four factors: asymmetric trade relations (with Israel and the rest of the world); regulatory constraints that restricted private sector activity; fiscal compression that reduced the public provision of social and economic infrastructure; and a declining access to natural resources. Structural policy reform is about change in each of these areas. The primary focus here is on the first: on policies affecting relations with Israel and other countries. The second is discussed in detail in the private sector development report, the third in the reports on social development and economic infrastructure and the last in the report on agriculture. We briefly outline the issues covered in those reports to place them in the overall context of economic growth and development. A. Trade Without Restrictions 3.2 If trade in the Middle East were not governed heavily by restrictions, what might the pattern look like? Would there be a major reorientation of Israeli and Occupied Territories trade? To explore potential trade patterns, a simple approach (a gravity model) was employed to explain trading patterns in terms of a few key variables: the size of economies; the economic distance between them; and other variables, such as common language. (See Annex 3 for a description of the model and empirical estimation.) Results should be treated only as indicative. The model probably does a relatively poor job of catching the consequences of very short trading distances to Israel of almost all locations in the Occupied Territories. The model does not also address the question of what happens to overall trade levels, but simply trade shares. It does not examine relative competitiveness, and it is almost entirely policy-free: the exception is that indications of the consequences of free trade areas can be given based on experience elsewhere. However, it is the only model with any success in explaining international trading flows. (It has been used, for example, to examine whether Eastern European trading patterns would be expected to be very different after the quantitative ties within Comecon were released). 3.3 The results indicate that the extent to which the Occupied Territories are oriented toward Israel in their trading patterns is way above what would have been expected from international experience. Even under a scenario that assumes a common "language" (that is interpreted here as a proxy for the persistence of the history of economic interaction) and a free trade area (for all goods), the West Bank and Gaza would only purchase 36 percent of total imports from Israel and have 20 percent of its exports, compared with 90 percent of imports and 75 percent of exports in the mid-1980s.' (See Table 4) As might be expected, trade with the rest of the Arab World would be expected to be proportionately much higher at 40 percent of total exports, but a rise in trade with Europe, to 15 percent of total exports, would also occur. This assumes, in effect, that Arab countries had a trade regime similar to that of other countries of similar income level. 3.4 A measure of what might have happened in the absence of the post-1967 integration with Israel is given by the share of trade assuming neither a common "language" nor a free trade area (but still a common border). International experience suggests that the share of both exports and imports with Israel This is based on Israeli statistics that may underestimate trade that passes through Israel to the rest of the world. Chapter 3 46 Table 4: Predicted Shares of Occupied Territory Trade Under Alternative Assumptions Sharing Border & "Language" Sharing Only Common & FTA with Israel Border with Israel Import Export Import Export Share Share Share Share Partner (%) (%) (%) (%) Israel 36.2 20.2 2.3 1.5 Egypt 4.5 6.8 4.5 6.3 Jordan 2.2 3.9 5.8 6.4 Other Arab 10.4 28.8 18.3 36.3 Europe 16.3 15.6 26.0 18.3 North America 14.9 6.2 20.8 9.9 Other 15.5 18.5 22.3 21.3 Total 100.0 100.0 100.0 100.0 would have been a mere 2 percent under these assumptions (see the second column of Table 3.) To the extent there is an "immediate neighbor" effect, for example if such proximity avoids fixed costs of trading above a certain distance, this may understate likely trade. Yet it illustrates that trade patterns would be expected to be substantially different. Experience of other near-neighbors is mixed: The Benelux countries have 56% of their trade with non-neighbors; Singapore has 86%. The orientation toward the region is stronger, but under this scenario over 50 percent of total trade would be outside the region, with a high share with Europe. 3.5 A comparable exercise was undertaken from Israel's perspective (Table 5). The consequences of opening the Occupied Territories to trade with the Arab World extends to its effects on the Israeli economy. If Israel and the Occupied Territories stay in a common customs area, then opening the Occupied Territories borders is virtually synonymous with opening Israel's borders in the same direction. Indeed, under almost any scenario, the implications of opening the Occupied Territories borders is likely to extend to the Israeli economy. In this exercise, actual distances were used, but the assumption of a common language with other countries was not made, since there has been so little interchange in the past. The results suggest that in the absence of restrictions, Arab economies (excluding the Occupied Territories) would account for over 6 percent of Israel's exports and over 7 percent of imports, compared with zero now. This is a substantial, but hardly overwhelming, reorientation of trade. Israel would continue to be mainly oriented to developed countries, with 50 percent of exports and 70 percent of imports to or from Europe and the USA. 3.6 These results should be interpreted with caution. They represent a plausible picture of how trading patterns might look in the long term, if trade behaved as it does in other economies with similar income levels. They do, nevertheless, strongly support the intuition that Palestinian trade would be much 47 Chapter 3 more diversified in the absence of historical restrictions on trade. They also suggest that the hopes (or fears) that Israeli goods would have a large impact on regional trade if the boycott were lifted are exaggerated. This is consistent with the view that Arab countries would continue to import their manufactured goods largely from more efficient developed or developing countries and shows the potentially powerful influence of free trade arrangements in fostering trade. What will actually happen is influenced by policy, to which we now turn. B. Trade Policy Choices 3.7 The movement in labor and the trade in goods are intimately associated for the Occupied Territories. As discussed in Part A, the West Bank and Gaza exported labor in the place of goods, partly because of an asymmetric structure of incentives. This, in combination with explicit trading restrictions to some markets and the high costs of trade to others, also contributed to the extraordinarily high orientation of trade toward Israel just analyzed and to the unusually low level of production of industrial goods illustrated in Figure 6. 3.8 The illustrative vision of the direction of trade in goods we have just shown would most certainly be associated with a substantially higher level of exports of goods, lower exports of labor and shifts in the structure of trade. Such changes in the trading structure would also involve, over time, substantial changes in the structure of production, with most probably a relative expansion in industry in some services (notably tourism) and in some agricultural goods. (As noted in Chapter II, the share of agricultural goods in both exports and total trade was unusually low by international standards.) While Table 5: Actual and Predicted Export and Import Shares for Israel Imports Exports Actual Predicted Actual Predicted Partner Share (%) Share (%) Share (%) Share (%) Egypt 0.0 3.1 0.0 1.2 Occupied 2.6 2.2 9.3 4.3 Territories Jordan 0.0 0.5 0.0 0.4 Other Arab 0.0 3.9 0.0 4.8 Europe 68.0 63.8 37.1 34.5 North America 20.5 14.5 33.1 16.2 Other 8.9 12.0 20.5 38.6 Total 100.0 100.0 100.0 100.0 Chapter 3 48 it is neither possible nor particularly useful to predict the actual future composition of trade and production, it is clear that this type of reorientation is entirely in line with the strategic objective of shifting to domestic sources of economic growth. 3.9 Exploring trade options for the Occupied Territories is an activity that has a feeling of paradox. On the one hand there is a bewildering range of choices of trade options, ranging from the status quo of an incomplete customs union with Israel, to alternatives with Jordan, with or without Israel, to Free Trade Areas as variants of these, to going it alone with an independent trade and industrial policy. On the other hand, actual choices will at any point of time be highly restricted, by the political outcomes of the negotiations and (at least for now) by the costs and difficulties of having a customs border between Israel and the West Bank. 3.10 In this report we lay out a number of the alternatives that could become available in principle, and outline some of the issues associated with them. From an economic perspective, these alternatives should be evaluated with respect to four objectives: * building on the base of the established major market of Israel; * the aggressive pursuit of new markets (in the region and elsewhere); * movement toward a more rational price structure than now prevails, largely imported from the Israel incentive regime, and * the longer term impetus to growth and development. 3.11 Figure 17 presents a number of alternatives, which should be analyzed in the context of the objectives. The various alternatives focus especially on relations with Israel and relations with Jordan, as the two principal other actors for trade relations. For each, the costs, benefits and some practical issues or implications are outlined. Most could apply, in differing degrees, either under a scenario of sudden reduction of employment in Israel or smooth decline. 3.12 Scenarios (1) to (2) focus on relations with Israel within two alternative forms of preferential trading arrangement--a customs union and a free trading area. Both have the advantage of maintaining access to the dominant present market and both could in principle facilitate access to the EC, EFTA and the USA on the back of Israel's free-trade arrangements. (Access to the EC already exists for Palestinian production, but use is still low). The customs union is closest to present arrangements. It would be most advantageous if extended to include agricultural goods. It has the disadvantage of continuing to involve operating within the relatively differentiated Israeli trade regime--though this would decline if Israel keeps to its ambitious liberalization schedule. 3.13 Converting the customs union to a free trade area has the potential advantage of combining access to the Israeli market (subject, perhaps, to continued restrictions on agricultural products) whilst allowing the West Bank and Gaza to have a different trade and tax regime, as Mexico would have a different regime from the United States in NAFTA. Just as Mexico's trade regime is probably more rational than that of the United States, so the West Bank and Gaza would then be able to put in place a simpler and more uniform system of protection. The key question is whether an independent trade and tax policy is feasible. 49 Chapter 3 3.14 Scenarios (3) and (4) turn to the issue of opening up to trade relations with Jordan--an issue that could be even more important, for example, if some form of confederation were chosen in a political settlement. In principle, it would be possible to either have some form of open trading arrangement (customs union or FTA) without a confederation, or a confederation without open trade--but it is likely that political and economic directions will move together. 3.15 The key issue is whether the option involves a three-way preferential trading area involving Israel, the Occupied Territories and Jordan, or one that was only two-way, and involved the Occupied Territories leaving the Israeli area. The former is potentially more economically attractive from the perspective of the Occupied Territories, since it would bring opening to Jordan without the economic costs of any loss of the Israeli market. It would involve, however, significant issues of adjustment over time. It would involve, eventually, free or near-free movement of goods between Israel and Jordan. Because of the restricted interactions between the economies, this could raise larger transitional issues for adjustment of producers in either economy. It is likely that interim arrangements would be preferred, with a transitional period maintaining economic border controls. Finally, under either option, but especially a two-way one between the Occupied Territories and Jordan, the economic attractiveness would depend on the extent to which Jordan has a rational price structure. Since this report did not assess the Jordanian trade regime or other forms of interventions, we can only raise this as an issue, without drawing any firm conclusions. 3.16 Scenarios (5) and (6) involve leaving the union with Israel and having an independent trade policy (e.g., lower tariffs to all countries). This is most in line with trade reorientation but leads to the loss of duty-free access to the Israeli market and probably increases the probability of lower access to the Israeli labor market. It again raises the practical issue of running a different tariff/tax regime. One version of this would be differential tariffs to run a proactive industrial policy, e.g., having a tariff regime that targets certain lines of activity, but other instruments, such as domestic tax/subsidy policy, are also available. The case for some activism in the West Bank and Gaza is that a push is needed after decades of adverse incentives; the potential problems are of protecting inefficient activities (particularly costly for a small, open economy) and the fiscal burden of a "favorable" tax-subsidy policy. International experience suggests that most attempts at activist industrial policy produce inefficient industries rather than dynamic industrialization - and a small, open economy with hardly any administrative tradition will be particularly ill-placed to get onto a desirable path. Does the Incentive Regime Have to be Harmonized with Israel's? 3. 17 In many of these areas there is a question of how far the Occupied Territories can have an incentive regime that is different from the one in Israel. One view is that this is impossible: the open border implies that the West Bank and Gaza would have to have the same tariff and indirect tax structure as Israel. A review of experience elsewhere (notably in the European Community where there is an ongoing debate on the issue) suggests that a border is feasible but has difficulties. First, it is feasible to have customs gates, and although there is no overwhelming practical reason why this should not be done, there may well be political reasons especially during the interim period of self-governing arrangements. Second, it is possible to have an invisible border for tax purposes, and the VAT infrastructure, which is already based on company accounts, could be used to manage this. However, it would be costly to do this for small farms. Third, direct taxes can be used as an alternative instrument for some purposes. There are, of course, limits to non-harmonization: any border, visible or invisible, is subject to a degree of leakage, and some movement will occur (as it does now in agricultural goods). This is a cost for Israel if the Occupied Territories were to have lower tax rates. Figure 17. Alternative Options for International Economic Relations Policy Advantages Disadvantages IssuesfImplications (1) Customs union with Israel Access to Occupied Territories's Trade diversion because of - How to insure access to EC, biggest market (about 90% of Israeli trade regime, buying US and EFTA markets. its imports and 70% of its expensive Israeli rather than - Link with Israel could push exports). Potential to join Israel cheaper ROW (at least until up wages; though in its preferential access to EC, 1998). Israeli competition may competitiveness of OT US and EFTA markets. make it harder for industries to industry will depend more get started, though some on macro and labor policies. industries may gain from - Potential advantage depends complementary production with in part on access to Israeli Israeli industry. agricultural market; (2) Reconstruction of current Could, in principle, combine Scope for independent action - Requires a non-harmonized (partial) customs union as a free free trade with Israel and will be constrained by incentive regime to lead to trade area, with differential avoidance of areas of excessive conditions of free trade area. gains over customs union. external tariffs. Israeli industrial protection. Administrative difficulties with - Potential advantage depends respect to border controls and in part on access to Israeli rules of certificates of origin. agricultural market; (3) Preferential trading area Preserves access to Israel while Jordanian competition could - Implies free flow of goods (customs union or FTA) with opening to Jordan, encouraging lead to short-run costs to some between Israel and Jordan; Israel & Jordan. integration with a close Palestinian producers. convergence to CU or FTA neighbor. may have to be gradual. - Need for harmonization with Jordan of direct tax/subsidy policy. Figure 17. Alternative Options for International Economic Relations (continued) Policy Advantages Disadvantages Issues/Implications (4) CU or FTA solely with Increased integration with a Some loss of larger Israeli - Requires a non-harmonized Jordan. close neighbor. market. Possible greater loss of incentive regime with Israel. labor access to Israel. Especially with a CU, greater likelihood than (3) of having Jordanian incentive policies. (5) Leave union; moderate Cheaper ROW imports, but not Access to Israeli market - Requires a non-harmonized tariffs with ROW. by much after 1998 if Israeli reduced, though not by much incentive regime with Israel. liberalization stays on track. after 1998. Infant industries would get Possible loss of access to Israeli moderate protection from Israeli labor market. competitors. Industrial protection may be a cost more than a benefit. (6) Industrial protection policy. Assuming externalities, Possible retaliation by Israel. - In principle industrial policy protection will help internalize Possible loss of access to Israeli can be affected by direct them and will help the sector labor market. taxes and subsidies, but develop. Temporary protection may be weak administrative co-opted by interested parties capability to run any and may lead to inefficient industrial policy makes it industries and wasteful rent- problematic. seeking. Chapter 3 52 3.18 If administrative feasibility is not a constraint, how should these choices be assessed? There is no clear-cut answer, in part because it depends on what Israel and other parties may be willing to offer and, in part, because some questions still need to be answered: Does the present wage structure render the productive sectors significantly uncompetitive in world markets, or are relatively high wages offset by high productivity? Also, is there a need for a push, beyond market opening and deregulation, to initiate the growth and reorientation of the productive sectors after decades of operating under a particular set of biases? Is There Going to be a Problem of Competitiveness? 3.19 One of the features of past development was a sharp rise in wages, especially in the early period of integration with Israel. Employment in Israel helped pull up wages within the Occupied Territories, through reducing the supply of labor to the domestic market. By 1980, wages in agriculture, industry and construction were substantially above those prevailing in 1970. (Figure 18) Wages in the West Bank and Gaza probably now fall in the upper part of the regional wage structure: below Israel's wages, but significantly above Jordanian wages, which are, in turn, much higher than Egyptian wages. Palestinian unskilled labor was exceptional in having access to the relatively high-paying Israeli market. Low-cost Egyptian labor was also highly mobile but to other Arab states, including Jordan. Palestinian industries and farmers would have to compete with cheaper labor elsewhere, if there is an opening to the regional market. 3.20 Simple wage comparisons can be highly misleading since wage costs only account for part of the cost of production (well under half for most industries), and there can be huge differences in productivity and product quality. Italian wages in garments are a multiple of wages of garment producers in Hong Kong that are, in turn, a multiple of those in Bangladesh even though all produce garments for the international market. We have insufficient information to assess whether competitiveness is a problem. Too much emphasis on studying the present situation to assess competitiveness would in any case be inappropriate since firms adjust when faced with new markets or competitors; the process of opening up would itself lead to dynamic change. However, two pieces of indirect information suggest that the West Bank and Gaza economies have not gone seriously off course. 3.21 First, there is no evidence that the Occupied Territories developed a severe Dutch Disease 2. A key indicator is not the real wage but changes in unit labor costs--wages adjusted for the growth of labor productivity. Over the 1970-90 period, unit labor costs show, if anything, a downward trend for industry in the West Bank and Gaza and for agriculture in the West Bank and no long-run trend for agriculture is evident for Gaza (Figure 19). Rises in labor productivity (See Figure 7 in Chapter II) offset rises in wages. The only sector with evidence of a large increase is Gaza construction, which is relatively unimportant for international competitiveness. This evidence needs to be treated with some caution: in particular, it assumes that wages in the market (for which we have information) equal implicit wages in household enterprises, where a significant part of employment occurs. However, a serious adverse change would be expected to show up in the indicator constructed here. 3.22 Second, the private sector report undertook some comparisons of efficiency of production of selected industries. These were also reassuring: the price and efficiency comparisons suggest much of 2 Oil exporters, having enjoyed an exchange rate appreciation and real wage increases in the boom phase, are left with uncompetitive tradeable goods after the oil starts running out. Figure 18: West Bank, Gaza Daily Average Real Wage Levels, 1970-1990 (NIS at 1986 prices) by Sector NIS Industry 25 West Bank 20 -Gaz 15 - 5 0 I I I I I 1970 1972 1974 1978 1978 1980 1962 1984 1988 1988 1990 YW Construction NIS Agriculture 0 NIS Wanc 25 25 20 -20 110 10 -', .-' - . . --- 1970 1972 1974 1976 1978 19S0 1982 1984 1986 1968 1990 1970 1972 1974 1976 1978 190 1982 1984 1988 1988 1990 Year Source: Statistical Abstracts of Israel 1975-92 Central Bureau of Statistics Figure 19: Unit Labor Costs 1970-1990, by Sector (in NIS at 1986 prices) NIS Industry 1.4 0.6. 1.4 - - - - 1. - - -- -- -- - - - .. - 0. -- ---~ .--- -I 0A6 -- --- -~---~- ----.--- ----.- 0.2 1970 1972 1974 1978 1978 1980 1982 1984 198 1988 190 Ye~r Conmsuction A9dcultur NIS NIS a5 0._ 0.7 AS-=------- ---_-_----_-_--_- - 0.7 0"L"' n e .5 - ' -- -, '. . 0 . 3 - - - - - - ' -- - - - - - - - - - - - - - - - - - - - - 0 .2 5 - - -- - -- - 0.2 - - - - - - - - -- --- - 0o _ _ _ _ _ _ _ _ _ __ _ _ _ _ _ _ _ _ _ _ 0.15 1M1 19g2 1974 191 1978 1980 1982 1984 1988 1988 1990 1971 1972 1974 1976 1978 1980 1O82 184 184 1696 19 1 Source:Calculations based on constant pnces v1., wages & value Added figures.Total monthly work- days are assumed to be 20 days/month. StIlstical Absrcs of IsrL,CBS. 55 Chapter 3 Palestinian industry is reasonably efficient and could, in principle, compete on international markets. Questions have been raised as to whether Palestinian farmers can compete with Jordanian farmers (discussed in the agriculture report), but at this stage we have too little empirical information to form a clear view on this. 3.23 Of equal importance to the issue of current efficiency is the question of whether the economies will adjust easily or with difficulty to greater openness to non-Israeli markets. The labor market appears to be quite flexible, and firms appear to be responsive to changes in economic circumstances. This would suggest that wages would adjust and that firms and farmers would respond to changes in market conditions, increased openness to the outside world or a cutoff in labor. Flexibility may prove to be a necessary part of adjustment if the cutoff in labor is maintained (though the projections in Chapter VI suggest there could be a recovery in wages with good policy and adequate capital inflows). The extent of this flexibility has not, however, been tested in the past, and it is quite possible that the labor market will initially respond with a large rise in unemployment and a small fall in wages. In countries with an independent currency, adjustment can be facilitated by exchange rate devaluation - this may or may not be an option in the future for the West and Bank and Gaza (see Chapter V). Option (e) above is an alternative strategy for ensuring greater competitiveness through lower domestic wages, whether through taxing labor exports or allowing inflows of cheap unskilled labor. There would be distributional issues to assess: while the economy as a whole would likely benefit under either of these strategies, Palestinians with few skills may suffer relative to entrepreneurs and skilled workers. It is also recognized that even temporary inflows of labor are likely to be a politically sensitive issue for many of the parties involved. Which Approach is Best? 3.24 In this section we have avoided a definite ranking of alternatives since too little is known and much must still be determined at the negotiating table. However, a few conclusions can be drawn. First, an appropriate overall strategy is to maximize new trading opportunities without causing significant losses in the principal market of Israel. Second, it is not clear that either the harmonization or the competitiveness issue is an overarching constraint--though a border may not be feasible in the interim period and there will remain significant administrative implications and bounds on incentive choices in the long term. Third, the extent to which it is advantageous to remain in a union or free trade area with Israel depends on two questions: (a) how far Israel will adhere to the basic principle of symmetry in such an arrangement by allowing free competition in labor-intensive activities, including both new industries and agriculture; and (b) whether Israel stays on course with its ambitious liberalization plans. Fourth, international experience raises a number of warning signs regarding the pursuit of an activist industrial policy, such as highly differentiated tariffs; broad support for exports is likely to make more sense. A free trade area (if it becomes an option), with an incentive regime somewhat more uniform than Israel's but converging together by 1998, looks an attractive option in light of these considerations. Some of the actions on the labor market may be an additional option, although this does not look to be a pressing issue now, if reduced employment in Israel is maintained. 3.25 Another possibility is to extend either the customs union or free trade area to other countries, notably Jordan, possibly Lebanon. International experience suggests this would give a substantial boost to trade with Jordan. This is desirable and may foster regional cooperation and reduce the probability of future conflict. Chapter 3 56 C. Lifting the Regulatory Burden 3.26 Changing the structure of market opportunities is essential to economic reorientation, but structural changes will not occur if the private sector does not respond. A theme of the past pattern of development, which is expanded in the companion report on private sector development - is that a range of features of the business environment have held back private entrepreneurs, especially in the medium- to large-scale sectors. These include an uncertain legal framework, restrictions on investing, uncertain tax liabilities, limited financial services and poor access to trading networks that link into the international economy. 3.27 The kinds of policies that can be changed to improve the business environment can be usefully divided into two: lifting regulatory burdens and building institutions. Lifting regulatory burdens can often be undertaken swiftly. As noted already, the Civil Administration has taken action to reduce the burden through a streamlined approval of investment permits, dropping the de facto difficulties in getting approval for industrial activities that compete with Israeli firms and providing tax incentives for investment. Considerable uncertainty remains, and a new self-governing authority would need to take further steps to solidify these initial moves, as discussed in the private sector development report. Building institutions, by contrast, takes time (see Vol. III). In particular, sound financial systems need to be carefully fostered. Absence of financial services will be a short-run constraint on activity. Some checking services are already being provided with apparent efficiency by money lenders, and almost everywhere in the world, equity is the primary source of finance for expansion. However, a sound banking system is of great importance to future development, to support the mobilization of household deposits and provide working capital and other financial services to an expanding business community. D. Public Spending and the Regional Pattern of Comparative Advantage 3.28 , Providing a strong basis for recovery on the supply side will also require redressing some of the shortages of public goods: for example in power, in water supply and sewerage, in industrial land and in education (perhaps especially in technical education expense). As discussed in the reports on economic and social infrastructure, this will require the rehabilitation and expansion of investments and the establishment of the institutional framework for sound sectoral policy. In the short run, action on economic infrastructure will play a vital role in removing constraints or costs to business expansion, e.g., in expanding industrial land and in making electric power, roads and water available to the business sector. This may require policy changes (e.g., on land allocation decisions) or a crash investment program. 3.29 In the medium to longer term, both economic infrastructure and social development are central in maintaining the historical comparative advantages of Palestinians (in skills, entrepreneurship) and in supporting the steady reorientation of comparative advantage in favor of greater interdependence. There is a parallel between infrastructure and trade. The West Bank and Gaza economies can potentially exploit their geographic and, to some extent, political position in between Israel and the major Arab states. The technical analysis of the infrastructure team suggests that for some infrastructure sectors (notably regional transport and electric power) the rational economic strategy would be to exploit this intermediary location, for example linking into power networks in Jordan and Egypt, in addition to Israel, as well as taking advantage of some peaking capacity within the West Bank. This would also tend to increase the degree of mutual interdependence amongst economies, which would increase the security of the West Bank and Gaza. For social services, Palestinians are probably ahead now in skills within the Arab world; it is important that this advantage be maintained by promoting a sensible education strategy. 57 Chater 3 E. Mobilizing taxes. 3.30 If the additional public spending to strengthen the physical and social infrastructure is to be undertaken, the question arises as to how is it going to be financed and in particular whether the domestic tax effort needs to be strengthened. As pointed out earlier, some of the taxes paid by the Palestinians currently accrue to the Israeli treasury and these need to be explicitly recognized as part of the domestic tax effort. The reason for the present leakage is that, in the absence of customs borders between the Occupied Territories and Israel, the "origin principle" of indirect taxation is applied with respect to trade between the two, whereby taxes are collected where goods are produced rather than consumed. Since the Occupied Territories have a large trade deficit with Israel, there is a net revenue loss. In the transitional period, agreement would have to be reached with Israel on how the budget of the new self-governing entity would capture these taxes. If a customs border between the Occupied Territories and Israel is both desirable and feasible, then the "destination principle" could be applied to trade between the two, and the revenues would automatically accrue to the budgets of the taxpayers. If a customs border cannot, for one reason or the other, be maintained, then agreement should be reached between the two parties on how to compensate for any tax leakage either based on company accounts or estimation of trade flows. It should be noted, however, that the availability of such revenues to the new self-governing entity is contingent on the entity having a trade deficit with Israel. If this is not the case, then alternative revenue sources would need to be mobilized. 3.31 As has been pointed out earlier, even under conditions of trade deficit with Israel and proper accounting for all taxes paid by Palestinians, the Occupied Territories economy does not appear to be overly taxed. The revenue/GDP ratio is lower than in Israel or in Jordan (and the revenue/GNP ratio much more so), both with respect to direct taxes and indirect taxes. With respect to the income tax, the personal income tax rates are higher in the Occupied Territories than in Israel or Jordan. With respect to indirect taxes, the rates for the VAT, purchase and excise taxes are the same in the Occupied Territories as in Israel, while Jordan has an independent tax structure. Depending on the trade arrangements in the interim period, there might be some scope for increasing revenues from trade taxes. Another avenue for strengthening the revenue effort is through boosting non-tax revenues (fees, charges, etc.) by instituting cost recovery mechanisms for covering the operations and maintenance costs and debt servicing associated with the new public sector investments. 3.32 The substantially lower indirect tax/GDP ratio in the Occupied Territories compared with Israel despite the general closeness of the tax structures may be partly due to the non-application of taxes to agricultural production, (which constitutes a much larger proportion of the GDP in the West Bank than in Israel), but also suggests that tax evasion might be a problem facing the Occupied Territories at the present time. There is probably an underground economy that goes untaxed, and a major challenge for the emerging self-governing entity would be to widen the tax base. This is an even bigger challenge considering that the new entity would have almost no experience in the methods of tax administration and collection as the Israeli-led Civil Administration currently undertakes this effort. In these circumstances, a critical task for the new entity would be setting up a strong system of tax administration to ensure that adequate revenues are being collected. Foreign official upflows should complement, not substitute for, domestic tax effort. Unless there is progress on the domestic front to mobilize resources for development, there will be little chance that external finance in the interim could set the Occupied Territories in a path of external dependency (and vulnerability to debt crises) and not sustainable development. Chapter 3 58 F. Natural Resources 3.33 Current Israeli policies on natural resources are being perceived by the Palestinians as key factors in determining the performance of the agricultural and to a lesser extent other sectors. However, although the use of natural resources has been constrained, agricultural growth has been considerable. Nevertheless, improved access to traditional grazing areas would allow extensive animal husbandry operations to expand beyond current levels. Increased access to water resources could allow expansion of high value, irrigated agriculture. Liberalization of constraints on fishing operations would allow increase in fisheries catch. 3.34 However, the situation with respect to natural resources cannot be separated from the broad picture involving limited natural resources. For water the riparian rights of countries, the sources of surface and ground water and various categories of users over time need to be taken into account. In the long run, absolute shortages will largely determine the costs of water, its real price, and its most effective application. Consequently water users will have to continue to maximize returns from the increasingly costly water available. While land resources are limited, land may be not be as critical a variable as water. Nevertheless, with considerable areas of land in the OT having no or only restricted Palestinian access, increased access to land would assist future economic performance. A long term vision is also needed for fish resources management; access to fish resources in international waters to OT fishermen has recently been expanded, but further relaxation of regulations, and control based on sustainable resource exploitation may be considered. Forests have a particular role to play in the fragile ecosystem of the OT, and their expansion in combination with selected forms of rain-fed agriculture could substantially assist erosion control and aquifer replenishment. G. Conclusion 3.35 Increasing economic autonomy and self-sustaining development in the Occupied Territories means diversifying trading patterns and relations, shifting from dependence on a few external sources of growth, that are now in decline, to a broader interdependence with other parts of the region and the world. The West Bank and Gaza have potentially large advantages in their geographic location and intermediary position in the Middle East. Turning inward is clearly a non-starter for a small, open economy. The choices range from remaining predominantly linked to Israel in trading terms to severing links to Israel and turning elsewhere. An assessment of the options suggests that all have costs and benefits. However, it is likely that extreme options have high costs and, therefore, that some form of intermediate position will be both preferable and feasible. Even if the loss of substantial labor access to Israel is permanent, it makes sense to maintain trade access to the most important market (and if possible to expand this to agricultural goods). It also makes good sense to open the Occupied Territories to the region, and especially Jordan, and to the rest of the world, especially Europe. Doing this will involve tackling some of the trade policy choices laid out in this chapter for trade. If it is possible to shift from a customs union to a free trade area, this could combine the advantage of maintaining duty-free access to Israel (for most goods) with some discretion for different incentive policies. Of equal importance to the structure of economic opportunities is the urgent need to tackle some of the regulatory, legal, economic infrastructure and social development issues that are described in greater depth in the companion reports. IV. MACROECONOMIC POLICIES FOR THE FUTURE 4.1 In this section we explore the scope and desirability of an independent macroeconomic policy in the Occupied Territories. There are several reasons why macro policy can be useful: (a) to smooth real shocks, and avoid the nominal shocks of imported inflation and devaluation; and (b) to obtain revenue from seignorage and the inflation tax. In addition, the institutions generally involved in macro policy play important roles in: (c) supervising the financial system and acting as lender of last resort, (d) facilitating access to external borrowing by the public and private sectors. 4.2 These objectives can be carried out with diverse institutional arrangements. The choices are linked to the question of an independent currency. Some of the functions can be carried out irrespective of whether the Occupied Territories issue a domestic currency, but others necessitate the ability to issue reserve money. Still others may be achieved better in the absence of a domestic currency. In this context, we explore the usefulness and desirability of various types of monetary arrangements and compare the current currency arrangements (with the residents of the West Bank, at least, allowed a rather free choice between the Israeli Shekel, the Jordanian Dinar; and in both the West Bank and Gaza relatively easy use of other foreign currencies) and the costs and benefits of introducing a separate currency. We also explore the mechanics of independent fiscal policy and the potential for borrowing by public entities from the Israeli capital market and the international capital market. 4.3 This section examines each of the four policy objectives in turn, assessing the case for a macropolicy, alternative instruments and a separate currency. A special type of fixed exchange rate arrangement, that of a Currency Board, is then described and analyzed because of its potential interest to the Occupied Territories, especially during the transition period of self-government. A. The Scope for Public Policy Action on the Real Side 4.4 Could the public sector smooth the shocks described in Chapter II better than households did? How would an independent stabilization policy have operated? Shedding some light on these questions will help in formulating what is feasible for the future. 4.5 Predictable variations, such as the olive cycle, are generally smoothed effectively by households and firms. However, it is important to note first the limits of household adjustment to shocks. National accounts data suggest that households have high savings rates, diversification of migrants also diversifies risks, and that there are probably extensive inter-household transfers, especially within extended families. However, these mechanisms have costs: the carrying of large inventories of liquid foreign assets is costly in efficiency terms since these are resources that could have been invested productively instead; and the migration of household members leads to the dislocations of families and to hardship. More fundamentally, such mechanisms break down precisely when they are needed most, when there are widespread coincident and permanent shocks--i.e., shocks that hit large numbers of households (such as the collapse of the Israeli and Gulf labor markets). Chapter 4 60 4.6 In retrospect, government intervention could have taken many useful forms, even in the absence of an independent monetary policy. Aggregate but temporary shocks, such as those affecting grants to Non-Governmental Organizations (NGOs), could have been smoothed with fiscal policy had a government been able to borrow abroad (especially since local residents did not have access to external credit). The negative effects of the new Israeli Shekel and Jordanian Dinar devaluations could have been moderated with a more sophisticated financial system that allowed for more diversified portfolios (and reduced the need for large money balances). The recent Gulf shock would have required the increased provision of social services, as well as measures to encourage the productive employment of accumulated savings (as happened in Jordan, for example, and, to a much lesser extent, in Yemen). However, in each of these cases, the goals of stabilization could have been achieved by other means than an independent currency. 4.7 Let us compare now how effective an independent monetary policy would be if it could be used as a stabilization tool. In general, monetary policy can be useful in maintaining a stable price level and stabilizing the business cycle. In the context of the Occupied Territories, monetary policy has potentially three specific roles to play: (i) helping to get activity going by lowering domestic interest rates; (ii) facilitating adjustment to a negative shock by lowering real wages (through devaluation); and (iii) defending against appreciation of the currency in the case of large capital inflows. Note at the outset that the time span and effectiveness of monetary policy in controlling prices is directly related to the existence of adjustment costs on the part of these factors. But monetary policy is unable to achieve any of these goals for prolonged periods in an environment of free factor mobility (in particular, capital and labor mobility). With these principles in mind, we explore the feasibility of each of these goals in turn. Interest Rates and Domestic Activity 4.8 Under perfect capital mobility, attempts to lower local interest rates will result in capital outflows rather than in the availability of cheaper domestic credit. While capital mobility can be restrained with capital controls, this is almost certainly neither feasible nor desirable for the Occupied Territories, given the accumulated know-how of financial operators used to moving money in between the West Bank, Gaza, Jordan, Israel and many other parts of the region and world. Thus, unless economic integration within the region and the rest of the world is sharply reduced, and capital controls imposed and enforced, the potential of monetary policy to affect local interest rates is likely to remain low. Wages 4.9 With perfect labor mobility, unexpected inflation would not lead to permanent changes in real wages, since labor would move until wages equalized. Thus, with an open labor market characterized by small adjustment costs, exchange rate policy could only be independent in the short run. However, as argued in Annex 1, it appears to be more accurate to characterize the labor market in the West Bank and Gaza as operating with a different wage-setting regime than in Israel, with rationing of employment opportunities in Israel. This is clearly the case if the March 1993 restrictions are maintained. It is difficult to assess how flexible the domestic labor market is: the general impression is of a high degree of flexibility, but this has not been proven through significant real (let alone nominal) wage declines in the past. Devaluation can be a useful tool in speeding adjustment in the case of large shock to the labor market (as happens with a large increase in the labor supply, whether from reduced employment in Israel or returnees, either of which could require a sizable wage drop to equilibrate the labor market). 61 Chapter 4 The Scope for Sterilization 4.10 Typically, large inflows of resources into a country (i.e., a large current account deficit) lead to an increase in the prices of non-tradables relative to those of tradable goods (i.e, to a real appreciation of the real exchange rate). Land prices in particular are likely to rise (they already fluctuate widely with the ups and down of the peace process). The phenomena can occur even in the absence of a domestic currency. Sterilization's aim is then to delay real investment, if the economy is perceived to be overheating, or to neutralize it if it is perceived to be speculative and temporary. 4.11 In particular, one can easily imagine a perverse post-peace scenario where excessive optimism leads initially to a boom in land prices, which then deters real investment and industrialization, ultimately leading to a collapse in prices and a sharp contraction in business activity. Another possibility is that wages would rise too fast and get stuck at a too high real level, reducing the competitiveness of production. 4.12 Given the potential size of the inflows relative to the size of the economy and the adjustments required on the real side before the capacity of the Occupied Territories to absorb investment rises, intervention can be useful. Large speculative flows are not unusual in the region, given the very large amounts of capital accumulated abroad by residents. For example, about $2 billion rushed into Lebanese pound denominated assets during the two weeks after the appointment of a new government in 1992. Larger amounts entered Egypt in 1991 when the capital markets were liberalized and debt relief granted. In both cases, sterilization was helpful in preventing a sharp appreciation in the exchange rate. 4.13 Sterilization, however, is useful only when the public sector possesses an information advantage over the private sector. In addition, sterilization cannot permanently keep asset prices below their long-term level because the fiscal costs of doing so soon become excessive. Finally, delaying tactics would be very expensive when capital is very mobile, which is likely to be the case for the Occupied Territories. 4.14 Two possible strategies can be followed to stabilize inflows without inordinate costs, neither of which requires the existence of a domestic currency. (a) Intervention can be targeted to the appreciating asset, rather than conducted at the macro level. This can be done by taxing destination investments of short-term capital flows while, at the same time, encouraging long term investment. For example, land sales can be taxed, but real investment can receive tax credits. This would reduce the likelihood of sudden reversals of capital flows. (b) Compensating action can be taken elsewhere to prevent rapid growth in the relative prices of particular assets. For example, land can be made more abundant through relaxing supply-side restrictions, or labor can be made more abundant if there is a higher return of Palestinian labor, now working in Israel or elsewhere. 4.15 The possibility exists that the gains in monetary independence to help manage shocks would be dwarfed by the new sources of instability related to discretionary monetary policy. For macro policy to be successfully independent, it requires independent credibility, and there is the potential for a significant trade-off with discipline. With so much uncertainty about the ultimate future of the Occupied Territories, and so little domestic expertise in governmental aspects of finance, it is difficult to imagine a Palestinian Chapter 4 62 currency solidifying quickly without drastic limits on monetary discretion. Even if the authorities were willing to exercise discretion wisely, they could find it enormously difficult to gain public confidence in the crucial initial period at a time when reconstruction needs are enormous. More likely, investors would demand a hefty risk premium. At the same time, financial stability and capital inflows will be crucial to ensure rapid growth since most Palestinian savings are presently abroad. B. The Potential for Seignorage Revenues 4.16 Seignorage revenue is revenue that can be raised by the ability of government to issue high-powered money. Money issued is also a liability of the central bank, and, as such, it is not truly a source of revenue since operators can decide to reduce their monetary holdings. Nevertheless, in a stable monetary environment, seignorage can generate a stable cash-flow to the central bank. In addition, reserves generally do not earn interest, and, thus the foregone interest on reserves is a true source of revenue to the central bank (which in effect pays for the liquidity service that is provided by demand deposits accounts, which are themselves backed by reserves deposited at the central bank). Finally, inflation acts as a tax on nominal balances by eroding their real value, and this can be considered a true source of revenue (subject to the usual Laffer curve effects). 4.17 In order not to be purely inflationary, the nominal supply of money must be desired as real balances in portfolios. In general, the real demand for money (currency in circulation and sight deposits, or Ml) depends on a multitude of factors. It usually drops during inflationary periods, when real interest rates are high, and with innovations in the financial system because the alternative return on resources is then higher. To the extent that the economy grows, real money balances can also be expected to grow, allowing for the issuance of additional high-powered money. Real balances typically get depleted in periods of inflation and then rise when there is credible disinflation, as agents replenish their balances back to their desired levels. The international experience suggests that seignorage is a small, but not insignificant, source of public sector revenue (1 percent on average for the OECD countries and 2 percent on average for developing economies). 4.18 Table 6 summarizes the main aggregates for Israel, Jordan, Egypt and Lebanon. Clearly, the experience with inflation, the extent of financial repression and the sophistication of the financial system have affected money supply differently in these countries. However, seignorage has been an important source of finance in the region, especially in years of high inflation (or devaluations). This is not unrelated to the fact that devaluations, when they occur, come in a large burst, rather than slowly and over time. As a result, they have often taken agents by surprise. In Lebanon, monetary revenues have been sometimes low when large devaluations took place (as in 1987) but not always (e.g., 1992). In Israel, seignorage was significant only in 1985 when the success of a sharp stabilization convinced agents to rebuild their balances. 4.19 A second observation is that real monetary holdings (M1/GDP) tend to shrink after periods of inflation. This is clearest in Israel and Lebanon, two countries that have experienced periods of high inflation and that have a sophisticated financial system. For example, M1/GDP increased by 70 percent in Israel between 1985, when inflation was at its height, and 1992. In Lebanon, M1/GDP more than tripled between 1987 and 1989 (there was a large devaluation in 1987), and it went down in 1990 and 1992, two years in which the pound depreciated markedly. Such a phenomenon can be also observed in Egypt (e.g., in 1987) although there also seems to be a secular reduction in the money ratio. This is most likely related to the development of the financial system and the increased availability of saving 63 Chapter 4 deposit accounts paying positive real interest rates. Somewhat surprisingly, however, the money ratio has remained high and has even increased in Jordan after its large devaluations of 1988-89. 4.20 What do these observations imply for seignorage as a potential source of revenue for the Occupied Territories? Assume that Ml stabilizes at 20 percent of GDP in the Occupied Territories (somewhere between the corrected Jordanian figures and the Lebanese figure). This represents the upper bound of the one-shot revenue that can be collected by the central bank. At the same time, such a build-up of domestic currency balances is unlikely to occur immediately in the absence of substantial foreign exchange reserve holdings by the central bank to back the domestic currency. The presence of foreign exchange reserves will reduce seignorage revenues by their amount, minus the interest earned on these reserves. On the other hand, in the absence of large foreign exchange reserves, it is unlikely that domestic money holdings will be very large until the central bank and the treasury build some track record, and money demand would remain low in the short term, reducing seignorage revenues. Overall, it is unlikely that the one- shot stock-related revenue can be very large, even under favorable conditions. Assuming conservatively that all of the reserves are backed by foreign exchange, and that the international interest rates average 6 percent, the overall stock effect is reduced to about 1.2 percent of GDP. 4.21 Seignorage revenues may be a more important source of revenue over time as the economy expands and the real demand for money grows. In particular, in a growing economy, the public sector can obtain seignorage without creating inflation. For example, with a growth rate of 5 percent a year and an inflation rate of 10 percent on average, the flow revenue would be 3 percent of GDP with zero foreign exchange reserve backup. In the presence of foreign exchange backup, smaller growth, or lower inflation, the flow revenue would be smaller. Of course, additional revenues may be collected temporarily if inflation increases unexpectedly, but this would tend to reduce the future ability to collect seignorage. C. Facilitating the Mobilization of Resources Domestic Borrowings 4.22 The absence of a domestic currency does not prevent the raising of funds by the public sector. In fact, it may even reinforce the ability of the public sector to borrow domestically since this is then accompanied by a commitment not to inflate these claims away. The other side of the coin, however, is that inflation can be a useful and flexible tool to tax money holders and to default partially on domestic public borrowing following negative shocks. The alternative, an outright default on obligations denominated in a foreign currency, can be more costly in terms of penalties. The example of Lebanon is instructive in this respect. During a prolonged period where government control and revenues collapsed (1980-90), the state was able to finance parts of its activity on the domestic market and without major recourse to external debt. Large inflation ultimately eroded these debts substantially. While such behavior should not to be encouraged on an ex-ante basis (domestic finance would dry up), in retrospect this added flexibility has allowed the government to deal with a difficult situation. Monetization does come at a cost--it reduces money demand and leads to high risk premia on government securities. Such costs can be minimized if inflation is kept low in normal circumstances and inflationary episodes only occur in periods of unusual strain. Chapter 4 64 Table 6: Seignorage in the Middle East Monetary Developments in the Region: 83-92 1983 1985 1987 1988 1989 1990 1991 1992 Israel MI-FXD/GDP 4.4% 3.7% 5.9% 5.4% 6.9% 6.8% 6.9% 6.9% Cur./GDP 1.6% 1.7% 2.4% 2.4% 2.6% 2.7% 2.5% 2.5% Inflation 120.0% 305.0% 20.3% 15.7% 20.4% 17.3% 11.8% 11.8% Devaluation 219.9% 134.8% 4.1% 9.1% 16.7% 4.1% 16.0% 16.0% Monetary revenues 2.1% 6.7% 2.2% -1.4% 0.7% 0.5% 1.2% 1.2% Jordan MI/GDP 61.1% 53.9% 45.9% 52.2% 54.2% 54.4% 58.7% 55.0% Cur./GDP 36.3% 33.8% 30.7% 36.3% 36.2% 38.4% 35.4% 32.9% Inflation 5.2% 3.2% -0.2% 6.6% 25.8% 16.1% 8.2% 2.9% Devaluation -3.9% 10.2% 4.5% -31.0% -26.3% -2.6% -1.3% -2.7% Monetary revenues 4.7% 1.6% 2.3% 7.1% 7.2% 5.5% 13.4% -1.7% Lebanon MI/GDP 75.9% n.a 4.3% 9.6% 15.4% 14.1% 19.1% 15.2% Cur./GDP 41.4% n.a 2.5% 6.1% 10.3% 10.4% 13.4% 10.1% Devaluation 44.7% n.a 423.0% 15.5% -4.7% 66.7% 4.4% 109.1% GDP in dollars 310.0% n.a 350.0% 360.0% 370.0% 380.0% 410.0% 430.0% Monetary revenues 8.4% n.a 2.0% 2.0% 7.3% 5.5% 8.1% 9.1% Egypt MI/GDP 44.1% 43.0% 29.3% 33.6% 31.2% 29.9% 25.8% 22.6% Cur./GDP 25.8% 24.0% 15.3% 17.0% 15.2% 14.1% 12.2% 11.2% SinfaLion 16.7% 3.4% 19.4% 17.6% 21.3% 17.1% 19.8% 13.5% Devaluation 0.0% 41.7% 0.0% 0.0% 57.1% 81.8% 65.0% 0.0% Monetary revenues 10.5% 6.7% 1.8% 1.1% 2.2% 7.0% 4.7% 2.5% Borrowing Abroad 4.23 The ability of the public sector to borrow abroad is ultimately determined by its ability to tax in the future: the ability of the private sector to borrow externally is determined by the financial credibility of private firms and the credibility of the government in guaranteeing that it will neither interfere with external loan payments not expropriate private property. Neither for the public nor private sector is external borrowing necessarily linked to a separate currency. There are, however, two sets of issues to be considered: the external borrowing strategy and relations with Israel and Jordan. Financial Strategy 4.24 In terms of instruments for attracting foreign inflows, it is likely that the public sector will initially tend to be strongly oriented toward bilateral and multilateral borrowings; the private sector will probably favor foreign banks (especially for trade credit) and direct foreign investment. There is almost certainly a case for central management and rationing for public borrowings--which should be conducted with careful attention to debt servicing implications, especially in the initial years when debt burdens are very low and some borrowing agencies (e.g., public utilities) are financially inexperienced. For the 65 Chapter 4 private sector, central management and rationing is probably neither desirable nor feasible. It will also be important to prepare for borrowings and explore new instruments as new governments (e.g., Zimbabwe in 1980) have been disappointed at how commitments, especially from official sources, fail to turn quickly into disbursements and have been puzzled at the lengthy procedures of different agencies. Moreover, alternative instruments, such as Palestinian bonds targeted at the Palestinian diaspora, could prove a useful means of mobilizing foreign resources. Relations with Israel and Jordan 4.25 If the future economy does not have a separate currency, trading relations with Israel (and possibly Jordan) would be facilitated, but relations with the Israeli and Jordanian monetary authorities would be complicated. If the West Bank and Gaza enter in a trading agreement with Israel, Jordan, or both, the absence of an independent currency will make it more difficult to impose sudden trade restrictions with these countries. The private production of goods for these markets will be enhanced since the expectation of a trade breakdown is minimized. Although public and private sector entities will be borrowing NIS and JD, Israeli and Jordanian monetary authorities need not be concerned about monitoring and restricting lending to agents in the Occupied Territories. The market is not going to be unduly eager to lend to future entities in the West Bank and Gaza: if anything, the opposite is true now. Such concerns as might arise can be dealt with through standard instruments of financial management (e.g. the risk classification of assets in the West Bank and Gaza). 4.26 The lack of a domestic currency may, however, restrict external borrowing for other reasons. Large capital flows and fast growth in the Occupied Territories are bound to affect the Israeli and Jordanian economies. However, growth is directly related to future developments on the real side, rather than on the monetary side--and will occur irrespective of the existing monetary arrangements. Presently, while the relative size of the economy of the Occupied Territories is much higher in relation to Jordan than in relation to Israel, it has sizable trading relations with Israel and not with Jordan. If a large boom was to occur now, both the Jordanian and Israeli economies would not be seriously affected. However, if trade relations with Jordan expanded significantly, a boom in the Occupied Territories would certainly have an impact in Jordan; if present trade relations with Israel were to continue, but the capital inflow was very large (say $500 million a year over current flows), then some aggregate effects would also be felt in Israel. 4.27 Dutch disease type problems--if important--may prompt the Israeli and/or Jordanian authorities to intervene in an attempt to prevent their economy from overheating. If the Occupied Territories were part of the same currency union, it would be directly affected by such (sterilization) operations since the cost of funds would rise. In addition, the leverage exercised by the controlling monetary authorities, especially if they were also to regulate domestic banks, could also directly affect the Occupied Territories. For example, Israel or Jordan may want to impose restrictions on external transactions of entities in exchange for allowing the West Bank and Gaza to use its own currency. A related issue concerning borrowing abroad by the West Bank and Gaza is that it may increase the country risk of the country that is perceived to be the ultimate backer of these credits. In the presence of a quid pro quo, the only credible way for Jordan or Israel to commit not to intervene in the case of a failure to repay may well be the existence of a Palestinian independent currency. Chapter 4 66 D. Provision of Liquidity and Supervision 4.28 It is often assumed that providing liquidity and supervising a financial system require an independent central bank. In fact, these functions can be carried out, to some extent, irrespective of the type of monetary arrangement chosen. Regulators can be empowered with the supervision of the financial sector, even in the absence of a domestic currency. Supervision would include ensuring that financial operators investing the resources of the public had a sufficient stake in the success of the operations they undertook (imposing reserve requirements and capital adequacy requirements) and ensuring the smooth functioning of a bankruptcy system. 4.29 Temporary assistance to a troubled institution can be in the form of foreign exchange. This can be provided by some large financial institution (domestic or foreign), by a regulatory body that can borrow on the domestic and international markets and use part of the reserves levied on foreign exchange accounts, or directly by the treasury. The problem, however, is that foreign borrowers would be unwilling to lend when country risk was perceived to be too great. An international credit crunch could arise, for example, if the political situation deteriorates or if external debt became too high. In such circumstances, it would be very difficult for a government to play the role of a lender of last resort if access to money creation was not available because of the small size of the domestic financial market. These difficulties would be exacerbated if the liquidity crisis was due to an aggregate shock that hit large segments of the economy, as for example would occur in the midst of political upheaval. On the other hand, since most banks would be new, they would probably be well capitalized. This makes the role of lender of last resort initially less crucial, but the need for good supervision more so. In addition, if private inflows of capital came in a boom, it would be imperative to tighten the banking regulatory framework and prudential regulation in order to reduce the risks associated with excessive liquidity, such as increased leverage by firms and increased risk-taking by banks. 4.30 The Jordanian or Israeli monetary authorities could also assume the lender-of-last-resort function. In this case, they would likely also want to supervise the financial system. Clearly, a commitment from these institutions to play such a role could go a long way in preventing bank runs on and, thus, the emergence of liquidity crises. The question, however, is whether these institutions would feel compelled to play this role in case of a financial crisis in the Occupied Territories, and whether the markets would take seriously their commitment to do so. The role of lender-of-last-resort comes at a cost. The dividing line between illiquidity and solvency is often blurred, and, while a domestic agency may want to take risks in the short term in order to save institutions that may turn out to be solvent once an in-depth analysis of their balance sheet is conducted, an external agency may prefer to allow failure more often. This may be good from a disciplinary point of view, but it can also lead to unnecessary financial instability. In addition, political considerations may complicate this relation further. Finally, the Jordanian or Israeli monetary authorities may simply refuse to play this role in order to reduce their potential liabilities. E. Speculating on the Choice of an Exchange Rate Regime 4.31 The current exchange system with a free choice between currencies has its merits, especially if the financial system is allowed to develop. With the good information flows and financial knowhow that a sophisticated financial system provides, such a liberal environment could be an important factor in attracting the private capital accumulated abroad by the Palestinian diaspora. We have seen that in each of the four areas--smoothing shocks, securing seignorage, facilitating borrowing and supervising the 67 Chapter 4 financial system--a separate currency may be useful, but it is not essential. Figure 20 summarizes the discussion. Figure 20: Macro Policy With and Without and Independent Currency Policy Area With an Independent Without an Independent Currency Currency Enhancing Capital Inflows Issue domestic and foreign debt Greater commitment to fiscal without interference by other discipline because deficits governments; can raise some cannot be monetized. (initially limited) revenues through seignorage. Managing Capital Flows Can sterilize flows which may Structural policy can achieve be useful in the short term if the similar results in a more government has an informational substantial way. advantage over the private sector. Dealing with Shocks Useful in the short term to Can use fiscal policy only. reduce real wages when nominal wages are rigid, or to default partially on domestic government debts if creditworthiness is eroded. Enhancing Trade Policy of devaluation can Greater commitment to remain improve competitiveness. in common trade area, which increases private incentives for long-term investments in the production of goods in demand in trading bloc partners. Regulating the Financial Role of lender of last resort May have to abandon the System improved. supervision role to Israeli or Jordanian authorities. 4.32 The introduction of a domestic currency in the Occupied Territories may still become desirable, or even necessary, in the future. The question then is what type of exchange rate arrangement to choose. The pros and cons of different regimes are summarized in Figure 21 and discussed below. We also discuss the important issue of implications for Jordan and Israel. A system of freely floating exchange rates is unwarranted in the short and medium term, unless no reserves can be found to back the new currency. And if such a situation arose, the advantages of creating a separate currency would be severely undermined. A freely floating exchange rate would generate large uncertainties given the volatile Chapter 4 68 environment and the smallness and unsophisticated nature of the financial market. The recent example of Bulgaria is instructive in this respect. The market-determined exchange rate devaluation overshot, because of the inability of the country to provide sufficient backing to their currency. This can be related to self-fulfilling prophesies about reversal in the current account or capital account convertibility. In contrast, the exchange rate in Poland, where a sizable stabilization fund was put in place with the assistance of the international community, was more stable. This stability helped fuel prolonged export expansion and served as a useful nominal anchor to combat inflation. 4.33 We are, thus, led to examine the choice of a pegged exchange rate, which can be fixed with respect to a basket of currencies at reasonable levels that can be defended. Such a system would need to be backed by a stabilization fund. Within the family of pegged exchange rates, a Currency Board may be an interesting option for the Occupied Territories, at least as a transitory arrangement, for several reasons: (i) it is easy to manage and can be established very quickly; (ii) as long as it remains in operation, it forces financial discipline; (iii) while discretionary monetary policy becomes impossible, its scope is limited, in any case, given the circumstances of the Occupied Territories; (iv) it allows for some seignorage; and (v) it can evolve towards a more flexible system as the economy matures and the financial system grows. Currency Boards 4.34 Currency Boards, once a common arrangement, are being considered again (Hong Kong and Singapore have had a board for some time; Estonia's is less than a year old). Under a Currency Board arrangement, the monetary institution agrees to supply or redeem local currency bank notes (and possibly, reserve deposits of commercial banks held at the Currency Board) for another currency at an established exchange rate and without limitation. Moreover, the Currency Board will exchange local currency at no other terms (such as against local claims on other institutions). 4.35 A Currency Board is easy to administer. In a sense, the foreign reserves become the domestic currency, but the Currency Board intercepts the seignorage and retains flexibility for a future change in the exchange rate or the expansion into a full-fledged central bank. However, for a Currency Board to work, the government must relinquish its discretionary right to print money, and the banking system must retain adequate reserves of foreign exchange assets. This is not too costly since the initial reserves of new banks are bound to come largely from abroad (or to be in the form of foreign exchange). The sacrificed exchange rate flexibility, a useful first defense mechanism against unexpected shocks, is likely to pale next to the potential loss implied by a weak and volatile currency. 4.36 The decision to set up a Currency Board involves four main issues: (i) What liabilities to back, only bank notes, or more? In Hong Kong, the Currency Board has no role in commercial bank clearing operations. In contrast, the coverage extends to reserve deposits in Estonia where such deposits, being the liability of the Bank of Estonia and interchangeable with cash, have to be backed in the same way as cash. In the Occupied Territories, while it may not be necessary for a Currency Board to develop a system of interbank clearing immediately, reserve requirements for new banks are likely to be necessary, and, thus, deposits with the Currency Board should also be backed. But this is not necessary. In Singapore, for example, a separate monetary agency has been set up alongside the Currency Board to monitor commercial banks and provide a discount window (it does not, however, engage in open market operations). Chapter 4 69 (ii) How much backing to provide? To instill confidence that it can honor its pledge of convertibility, the Currency Board should start with sufficient foreign exchange reserves to back a significant portion of the liabilities at the relevant exchange rate.' (iii) What to back with and peg to? This will depend mostly on prospective trading relationships. In principle, the exchange rate could be adjusted, but this rarely occurs under the stricter Currency Board. Once the certainty of the exchange rate is removed, the integrity of the exchange rate would be compromised. Thus, domestic interest rates would rise above the international rates to include a devaluation-related risk premium. In Singapore, the Currency Board retains the authority to appreciate but not to depreciate. (iv) Who can have access to the board? In Hong Kong only banks with note-issuing authority can convert cash into foreign exchange. Individuals and enterprises must rely on a competitive banking system to ensure equivalent rates. In the Occupied Territories, the system would probably have to be open to all until the banking sector developed sufficiently (as in Estonia). Implications for Jordan and Israel 4.37 The introduction of a currency would be an issue of concern for both Jordan and Israel, given the substantial holdings of Jordanian Dinars and Shekels by Palestinians. If a new currency were introduced, Palestinians would purchase it in exchange for the two existing currencies, and a new monetary authority or currency board would acquire potentially large quantities of JDs and Shekels. These could, in principle, be used to back the Palestinian currency, but they would probably be way in excess of the amounts that it would make sense to hold as foreign exchange: the monetary authority would undoubtedly prefer to hold a high proportion of currencies of OECD countries. Yet if these were redeemed automatically for foreign exchange by the Jordanian and Israeli monetary authorities it would be a shock to both monetary and foreign exchange management--and potentially a large shock for Jordan, given the estimated size of Palestinian holdings of JDs relatively to both total money and foreign exchange holdings in Jordan. The phasing and terms of any such large-scale conversion would have to be worked out in the context of any currency reform. The international community may also have a role to play. Other Implications 4.38 Supervision of the financial system. Currency Boards can vary from relatively pure systems (as in Hong Kong), where there is no central bank, to more hybrid schemes that retain some limited central bank functions. However, the two functions must be clearly delineated.' To maintain the integrity of The Hong Kong and Estonia systems started with 100 percent backing; Argentina backs only the new issues of high-powered money. 2 For example, the Bank of Estonia was divided into two departments: the issue department, which operates the CB and a banking department, which represent the policy side of the CB (but which cannot lend more than its own reserves in order not to compromise the CB). The seignorage earned by the issue department (as interest on reserves) is transferred to the banking department. Figure 21: Choice of an Exchange Rate Regime Exchange Rate Advantage Disadvantage Examples Regime Currency Union Fiscal discipline enhanced; Risk associated with active monetary Panama uses the US dollar. Members encourages capital inflows and policies of other countries where of the CFA zone pegged to the French investments; and reduces risk shocks may be unrelated to policy franc. This contributed to greater premia on government issued needs at home; inability to conduct stability until the 1980s when the debt. independent monetary policy. appreciation of the French Franc with respect to the dollar contributed to a sharp reduction in competitiveness. Free Floating Reflects short-run scarcities Leads to high exchange rate Bulgaria, Latvia. best. instability in the absence of a well- developed financial system. Pegged to Basket Enhances the stability of the Needs the backing of a stabilization Poland. economy in the face of fund; lads to inefficient resource speculative attacks and short- allocation if a "wrong" peg is used. term instability. Currency Board Fiscal discipline is enhanced, Precludes the use of monetary Hong Kong, Singapore, Estonia. encouraging capital inflows policy. and investments and reducing risk premia on government issued debt. Chapter 4 71 the Currency Board, it must be prevented from general discretionary lending. Occasional intervention to offset exceptional fluctuations in liquidity or to provide temporary assistance to a bank are feasible if confined to those resources available to the authorities (and in excess of the requirement of the Currency Board). The difficulty in influencing interest rates also limits the ability of the authorities as guarantors of the banking system. Any assistance to weak banks must be confined to the amount of excess foreign reserves. In a sense, this becomes a fiscal responsibility. 4.39 Growth. As the economy grows, so would the demand for real balances. This does not mean, however, that a current account surplus must be achieved to increase domestic liquidity, since liquidity can be supplied through the capital account as well as the current account. For Hong Kong, one of the principal financial centers of the Pacific, capital is very mobile, and the economy is always assured sufficient liquidity by the international capital market. For the Occupied Territories, such conditions are also expected to prevail, at least until a large external debt is accumulated and creditworthiness deteriorates. In Estonia, to take another extreme case, capital is not at all mobile. This implies a severe financial squeeze as the price level is forced to adjust to the note issue, rather than the other way around. 4.40 Monetary Policy. A Currency Board can be viewed as a pegged exchange rate where open market operations are prohibited. One of the basic conditions of a Currency Board is that it cannot lend to the government. If this were to happen, the Currency Board would find its liabilities backed by domestic claims, which would undermine the viability of the peg. This deprives the authorities of any meaningful ability to sterilize foreign exchange flows and, thus, inflation and interest rates (although the system could evolve over time and become more flexible). 4.41 Administrative Price Controls. Control through administrative action is also ruled out under a Currency Board arrangement. Any attempt by the government to control interest rates would quickly lead to the collapse of the system. If interest rates are too low, for example, banks would be subject to excess withdrawal, leading eventually to their collapse. F. Conclusion 4.42 We have surveyed a range of areas where independent policy action at a macroeconomic level could be desirable and have structured the analysis over when this might require an independent currency. The results can be summarized as follows: - In some areas, the pursuit of an independent macroeconomic policy is likely to be fruitless, e.g., attempts to have independent interest rates, given the degree of capital mobility. - In other areas independent policy is desirable, and is commonly associated with a separate currency, but such a link is by no means necessary, e.g., managing "excessive" capital inflows, borrowing at home and abroad and supervising/providing liquidity to banks. 3 However, it is important to note that it is only the growth of base money that is restricted under a CB; since cash is only one component of the money supply, a decline in the ratio of cash to money ratio would allow money to increase via the money multiplier. Chapter 4 72 - Seignorage is traditionally large in the region, but it is unlikely to be so for the West Bank and Gaza (especially initially) because of the likely initial low level of credibility of a new currency and the high capital mobility. - There are areas for which a domestic currency is necessary, e.g., avoiding imported nominal shocks from other members of a currency union, facilitating real wage declines and, under extraordinary circumstances, defaulting. - If a currency were introduced, there would need to be attention to the impact on Jordan and Israel; special arrangements may need to be worked out. 4.43 All this has to be set in the context of discipline, something that is hard to earn but that can be obtained by being in a currency union(s) with a disciplined core. We conclude by suggesting that if a domestic currency is chosen, it could be desirable to start with a relatively restricted version, as in a Currency Board, which could gradually evolve to a fully fledged currency that brought greater discretion once discipline, and the associated demand for the currency, was well established. V. SCENARIOS FOR THE 1990S 5.1 Three factors will have a determining influence on the economic welfare of Palestinians in the 1990s: the level of wages; the level and allocation of private capital; and the provision of public services. Concerns over employment prospects and problems with the provision of services have been at the center of the economic crisis in the past few years. Fears of a severe worsening in employment came to a head with the border closure of March 1993; many now expect that future employment prospects in Israel will be much more tightly rationed than in the past. Will unemployment soar and wages collapse, or can alternative domestic employment opportunities be found? Will private capital--from within and without the West Bank and Gaza--be invested in employment creating activities? And what level of public resources--from domestic and foreign sources--are desirable to improve service levels and provide the infrastructural basis for private sector growth? 5.2 We conclude by developing scenarios for the West Bank and Gaza, based on alternative assumptions for external factors, domestic policy choices and foreign private and official financial flows. These are based on an analysis of the workings of the economy now, but they should be treated as illustrative: too little is known about how a rapidly changing economy will respond to large changes in both its environment and policy direction. The focus is on the transition to the medium term, starting not with a specific year but with the signing of an agreement that gives some form of economic autonomy to a new Palestinian entity. Rather than attempt to construct what has happened in 1992 and 1993 we compare the future with economic conditions in 1991, that is the last year for which we have reasonably precise data. A description of the model is given in Annex 4. 5.3 While the primary focus is on the medium term, writing this in 1993 makes it impossible to avoid the issue of the short-run dynamics for Palestinians of an abrupt reduction in employment in Israel. The chapter first discusses this issue to set the stage for the examination of medium-term issues. It then describes alternative scenarios based on different assumptions for relations with Israel and Jordan, the international community and domestic conditions; including aggregate financing needs. And it finally presents an indicative scenario for public finance and foreign official financing. A. What Happens When Employment in Israel is Lost? 5.4 The movement of labor to Israel has been central to the economic functioning of the Occupied Territories, as Part A has documented. Severing this tie will have important consequences. At present, it is unclear how far employment will be allowed to rise, following the closure of the border in March 1993, but much tighter rationing of employment numbers has now become one of the probable scenarios. This has a radical impact on assessments of the future: up to the beginning of 1993, it would have been reasonable to take the view that reduction in employment in Israel was a likely, and perhaps desirable, prospect for the medium term but that an abrupt cessation was highly undesirable because of the severe disruptions to incomes in the West Bank and Gaza. 5.5 Incomes will be affected both directly and indirectly. The easiest part to assess is the impact of sharp cuts in employment in Israel. This amounts to 30 percent of total employment and over 16 percent of GNP for the West Bank; and almost 40 percent of employment and 23 percent of GNP for Gaza. The total effect then depends on the consequences for domestic production and incomes. Two patterns of change are likely to occur, working in opposite directions: Chapter 5 74 * Internal multiplier effects--the lost labor income leads to lower spending on domestic goods that then multiplies through lower incomes for the sellers of these domestic goods, further losses in spending and reduced domestic output. * The reallocation of labor to domestic production--with the loss of labor opportunities in Israel, workers shift to work in domestic activities. This leads to expanded domestic production but a lower income, at least initially, since the value added of the reallocated workers is less than their previous earnings in Israel (that is why they migrated there in the first place). The initial shortfall in income would be mitigated in the short run by consumption-smoothing by households through running down savings. 5.6 A closely related issue concerns how the labor market adjusts: do wages fall to clear the market (so encouraging fast, short-run adjustments in employment and, therefore, small initial falls in incomes) or does unemployment rise, as workers hold out for the wages they were earning before (whether in Israel or the Occupied Territories)? The importance of this is that unemployment magnifies the effects of the shock: in addition to an initial loss of income equal to the productivity differentials between jobs at home and in Israel, the whole potential output of the unemployed is lost as long as unemployment persists. 5.7 Even if the economy ultimately reaches full employment, the initial magnification of the shock is likely to have lasting effects. Domestic savings also decrease initially, and, as a result, capital stocks are accumulated at a slower speed. Long spells of unemployment leave scars on displaced workers, reducing their productivity. These effects make it likely that transitory unemployment would pull the whole intertemporal income stream down. 5.8 The past is only a weak guide to what will happen if labor opportunities in Israel are lost since there has been no "long" episode in which there was the prospect of a major, permanent decline in employment in Israel. After the Intifida broke out, the numbers of Palestinians employed in Israel stayed constant at about 109,000 between 1987 and 1988. Hours worked dropped significantly (see Figure 1), but this was probably primarily due to labor supply effects, as strikes reduced the availability of workers (as opposed to the availability of work).' In the first three months after the Gulf war broke out, there was near total closure for 40 days, with Palestinian employment in Israel dropping drastically, but this was an exceptional situation, quite different from the prospect of a major, permanent decline in employment. 5.9 While direct evidence is lacking, there are some partial indications from the past as to how the economies will react to lost labor opportunities in Israel: (a) The overall picture of the labor market reflects a high degree of flexibility but some short-run sluggishness. Open unemployment rates are low, at 1-2 percent of the labor force when times are good, and at 3-4 percent when demand is slack. However, at the turn of the decade, unemployment rose substantially in the West Bank, peaking at 10 percent before dropping to 5 percent in 1992 (preliminary); changes have been much The fall in hours worked in the Occupied Territories was similar for workers in the Occupied Territories and for Palestinians in Israel. 75 Chapter,5 lower in Gaza, despite the greater reduction in income. (See Figure 1 in Chapter II.) At the same time daily wages have shown a high degree of stability. (b) There is also evidence of short-run resilience and of the West Bank and Gaza economies operating, to some degree, counter cyclically to the incomes from Israel. In the early 1980s labor income from abroad slowed, but GDP slowed by less than the remitted earnings. Construction employment in the Occupied Territories is somewhat contra cyclical to construction employment in Israel, suggesting availability of construction workers influences the pace of activity in the sector. There was an increase in employment in the occupied territories after the Intifada, with hardly any fall in daily wages, and a substantial expansion in agricultural production in both the West Bank and Gaza. 5.10 As a working basis for examining the future we take the following view. The economies of the West Bank and Gaza are reasonably flexible, and as economic opportunities in Israel are cut there will be reallocations to domestic activities. This is likely to be underwritten by consumption-smoothing: savings appear to be high in the aggregate and will be run down to smooth income shocks at the household level (just as they were run down to invest in land and housing in 1992, supporting an apparently large expansion in employment within the Occupied Territories). The prevailing view is that extended family and kinship networks are strong, so inter-household transfers would be expected to rise to help those hardest hit. Both effects will help sustain domestic demand. However, labor market adjustment will certainly not be instantaneous, and we would expect temporary rises in unemployment, followed by declines (as in the West Bank in 1991 to 1992) as wages move slowly to a new, market- clearing position. 5.11 The scale of any decline will of course be heavily influenced by two other factors. In the short run, the availability of spending from other sources--especially official spending by the new self- governing authority, the municipalities and by agencies such as UNRWA--can have an important Keynesian influence on labor demand and incomes. In the medium to long term, both inflows of productive capital and improvement in productivity--due to the availability of trading options abroad, a freer regulatory regime, or a good set of policy actions--will speed the process of creating new permanent jobs and will have a powerful influence on wages, unemployment and welfare. We now turn to illustrative scenarios. B. Alternative Scenarios After a Peace Agreement 5.12 The scenarios are developed around alternative assumptions in three areas: production possibilities, as influenced by policy and structural conditions; employment in Israel; and capital inflows. The key welfare variables are the unskilled wage rate, the rate of unemployment, and the level of per capita income. The alternative assumptions are as follows. Economic Functioning and Production Possibilities 5.13 The labor market functions in line with our interpretation of the past (see Chapter II and Annex 1). Employment in Israel is rationed and Palestinians working in Israel are paid close to the Israeli minimum wage (that is higher than the domestic wage). The domestic labor market is flexible, but wages Chapter 5 76 move to a market-clearing position only over time, leading to temporary rises in unemployment if labor demand falls. We then explore two alternatives for the potential efficiency of production: (a) Continued strategic uncertainty, slow progress on opening up trading opportunities or worsening internal social conditions leads to no shift in production possibilities; (b) A convincing peace agreement, removal of supply side restrictions and opening of markets to the Arab world and the rest of World allows a one-time outward shift in production potential, assumed to be 20 percent, that is spread over a number of years, following by growth of productivity at 1 percent per annum (that is consistent with international norms). The extent of this shift depends, of course, on both the efficacy of domestic policy change on the supply side (as discussed in the companion piece on private sector development) and the extent to which foreign market possibilities are opened up (as discussed in Chapter III). Relations with Israel 5.14 We explore two alternative sets of assumptions: (a) the early-1993 restrictions in labor movement are converted into a permanent arrangement with much lower levels of Palestinian employment in Israel--we assume 45,000 workers in the first year; (b) the early-1993 restrictions are lifted; immigration into Israel continues at about the 1992 pace for the next five years, and Palestinian labor maintains its strong comparative advantage in Israeli construction; other manufacturing and services industries continue to substitute away from Palestinian labor, and the net effect is a gradual reduction in Palestinian employment in Israel; current trading relations in goods are improved. Capital Inflows 5.15 In the absence of strategic resolution, official flows continue at past levels. With a peace agreement, however, the international community responds with substantial additional flows of capital, that supports investment in public infrastructural and social services by the new self-government (as discussed in the companion pieces on infrastructure and social development). Technical assistance in setting institutions, formulating policies, and implementing programs is also provided. 5.16 The extent to which private capital responds will be a function of both domestic policy and external conditions. Here we explore two possibilities: (a) A strong response from both domestic and foreign (including expatriate Palestinian) investors, with a strong orientation toward productive investment; (b) A large initial response, but with a bias toward land and housing, that tapers off because of the absence of a strong policy environment for growth. 77 Chapter 5 Model Structure 5.17 The simulation models are built around several blocks (see Annex 4). (a) A work-force module projects population growth, and changes in demographics with associated changes in labor participation (these are all taken from the human development report). (b) Domestic production is modelled using an estimated aggregate production function with two factors of production--labor and capital--and a shift factor to control for the quality of the incentive framework (or more loosely, the quality of "policy"). (c) A labor module incorporates several possible regimes associated with the different ways the labor market can function, depending on internal and external circumstances. When there is no unemployment and the labor demand is known, a labor market equation computes wages at home for a given combination of capital stocks (as the marginal productivity of labor). When wages are expected to be above their full employment, market-clearing levels, the unemployment rate that equilibrates the labor market is computed given exogenous assumptions about the likely behavior of wages. When labor productivity at home reaches the minimum wage in Israel and there are no binding restrictions on labor movement, the model solves for the share of the labor-force that must work at home to achieve wage equalization. (d) A consolidated government budget module constrains public consumption and investment to the level of fiscal resources that are expected to be available. When expenditures (including public debt service) exceed government revenues, the budget deficit must be financed with external grants and loans, and with domestic borrowing. (e) A private sector saving/investment module closes the model. The private's sector disposable income is taken to be the Gross National Product (which includes the remittances from Palestinian workers in Israel and further abroad), plus external transfers accruing to the private sector (including from private reserves), minus domestic transfers to the government (taxes and loans). Private income is allocated between consumption and investment according to a private saving rate, which is assumed to adjust so as to smooth consumption over time and circumstances. Some of the external transfers are taken to be inflows of capital from the Palestinian diaspora and other foreign direct investors seeking to finance domestic projects (including housing), or the purchase of land. Overview of the Scenarios 5.18 The scenario analysis suggests that the future evolution of the economy of the Occupied Territories could be reasonably bright or it could be bleak (see Figures 22 and 23). We first outline the good policy scenarios. Securing a combination of improvement in "policy" (that encompasses expanded opportunities for trade) with international capital inflows could set the economy on to a path of sustained growth over the medium to long term. This applies to both the scenario of smooth labor reduction in Israel and the scenario of abrupt cut-off in employment opportunities to 45,000 workers. In both it appears to be feasible to achieve medium-term growth rates in income per capita excess of 3 percent per annum (Table 7). The short run is much worse under the abrupt labor cutoff scenario, and significant Chapter 5 78 falls in GNP per capita are projected and lower total financing of the trade deficit, that includes labor income from work in Israel ("remittances", see Figure 23). Growth then recovers as the economy adjusts, but from a lower base. After ten years, income per head rise by over 40 percent in the smooth labor reduction case, and by 36 percent in the abrupt labor cutoff case, compared with the baseline income estimate US$1715 (the level in 1991). Under both scenarios, growth is associated with steady rise in investment and quite large net transfers of foreign resources, that decline steadily over time. In both cases, declining labor income form Israel is compensated by substantial inflows of external finance, going to both the public and private sector. Over time the sum or remittances and net transfers of external capital falls, as growth in exports allows the trade balance to decline. (See below for the public and external finance numbers). 5.19 We next turn to the bad scenarios. Failure to tackle the policy conditions for growth leads to a very different outlook. Under the assumption that there is not even enough progress on a peace agreement to get any additional capital inflows, there is a significant initial decline in incomes, even with smooth reduction of employment in Israel, followed by steady, further decline. After a decade, incomes per head have fallen by 12 percent. The initial decline is a consequence of the delayed effects of the shock of the loss in employment in the Gulf. Growth was financed in part by what is estimated to be a large repatriation of savings abroad (of over 10 percent of GDP) and it is assumed that this is not sustainable. Slow medium to long-term growth is associated with stagnant investment, weak productivity growth and low inflows of external capital (Figure 22). Under a situation of abrupt labor cut-off the situation is even worse, owing to a sharper reduction in initial incomes per capita. The initial fall under this scenario is only moderately worse than in the favorable policy case, but the growth paths subsequently diverge greatly (Figure 23). 5.20 The scenarios of "bad policy and faltering capital" represent potentially important intermediate cases. These could be thought of in terms of a sufficiently convincing Peace agreement to secure an initial inflow of foreign capital--from both official and private sources--but a failure, on the part of the new self-government the international community or Israel, to put in place the policy and structural conditions that would sustain rapid growth. There are many ways in which this could occur, as the discussion of the previous chapters and the companion volumes illustrates. There could be inadequate resolution of the supply-side constraints on growth, whether in the form of the legal framework for private sector activity or tackling the infrastructural bottlenecks. Trading opportunities might remain restricted, whether due to failures to improve access in the Arab world, the OECD or Israel, or to an attempt to spur industrialization through high protection by a Palestinian governmental entity. Public savings could stall, owing to failures in revenue mobilization or excessive current spending rises, and there could be public investment in inefficient and unproductive activities. The model is not designed to distinguish amongst the wide range of alternative ways the economy could go off course, but represents such a possibility in terms of a failure to reap the productivity increases assumed in the good "policy" scenarios. This is also reflected in the behavior of private capital that is treated as being responsive to both the overall rate of growth and the policy environment. A plausible scenario is for quite substantial initial inflows that mainly go into real estate (as appears to have occurred in 1992) with little into productivity-enhancing capital. With a combination of weaker economic opportunities and lower growth, private capital falters over the medium term, leading to lower total financing in the second five years, as shown in Figures 22 and 23. 5.21 The scenarios illustrate an important result. For the medium term, the most powerful determinant of growth in incomes is the extent to which the economy succeeds in getting on to a growth path that encourages accumulation in productive capital (both physical and, over the longer term, human capital) 79 Chapter 5 and provides the environment for productivity growth. Failure to achieve this can lead to sustained decline. Increased capital alone will help in the short run, but only temporarily, especially as private capital will only keep flowing if economic conditions are good. The Labor Market and the Composition of Capital Inflows and Investment. 5.22 The scenarios are associated with significant changes in the labor market. This is illustrated here for the two good "policy" cases (Figures 24 and 25). Under both scenarios there is, over time, a large absolute and relative rise in employment within the domestic economy--faster, of course in the abrupt scenario, but also true of the smooth cut-off scenario. With a growing supply of labor to the domestic market, wages are virtually constant, or falling slightly, in the smooth case, before rising gradually in the medium to long term. A fall of wages of the order of 10 percent occurs with abrupt labor cutoff, spread over time, on the assumption that there is sluggishness in wage adjustment. The other side of this is a sharp, short run rise in the unemployment rate to a peak of about 15 percent of the labor force, with a gradual subsequent decline as wages adjust downwards and the economy grows. Under the scenarios of poor policy (not shown) the labor market situation deteriorates much more drastically, with large rises in unemployment in the short run, and large declines in wages over the medium term. 5.23 The key determinant of the pace of income and employment growth is investment. It is expected that growth in public investment will play an important part in the short run. This plays a dual role: catching up on neglected investments in social and economic infrastructure and providing an impulse for income and employment growth. Over the medium term private investment would rise steadily and account for a large part of total investment. Foreign finance and remittances fall in both scenario, i.e., there is a steady decline in the trade balance as exports rise. Remittances from work in Israel fall in line with the change in employment. Finance going to the public sector rises sharply in the short-run peaks in year five and then declines--quite significantly in real terms. Private finance is expected to follow a different path, with a moderate initial increase after a peace agreement that then tapers off, but is followed by a second rise in the medium term as growth in private investment is perceived to be robust. It then drops in the long term, in line with the dynamics of net transfers (i.e. as debt service increases). Managing the Transition Under an Abrupt Labor Cutoff 5.24 If policy and trading relations are good the medium term outlook looks hopeful even under a scenario of abrupt labor cut-off. However, managing the transition could be critical to success. Rising unemployment and falling wages could itself jeopardize the formation of the conditions necessary for growth, through the potential consequences for social unrest and violence, and the risks that it will encourage short-run policies that hamper long-run growth, such as an excessive expansion of civil service employment or inefficient "employment-creating" industries. What kinds of action would be open to a new self-government and the international community to try and offset the shock of the labor cutoff? There are two alternative strategies, that could be complementary to each other. First, it could be desirable to increase public spending on labor-intensive construction activities or other mechanisms to transfer income to households, for example through accelerating catch-up spending in rehabilitation of social and economic infrastructure, to smooth the shock and reduce poverty increases. Such spending would have to be financed by grants and borrowing--primarily from abroad. Second, there may be potential for accelerating the process of improving the quality of the "policy" regime, through greater opening of trading opportunities that could form part of the negotiation process (e.g. enhanced access to Chawtr 5 80 Table 7: Growth In GNP per capita under alternative scenarios (In percent per annum) Av. annual Av. annual Av. annual Real Per capita growth in per growth in per growth in per GNP after 10 capita GNP, capita GNP, capita GNP years years (1991: years 0-5 years 6-10 11-15 $1715) Smooth Labor Cut-Off Scenarios,.. _. Good policy, medium capital 4.0% 3.1% 3.4% 2436 Bad policy, faltering capital 1.6% -1.0% -0.9% 1768 Bad policy, low capital -2.4% 0.1% -0.3% 1523 Abrupt Labor Cut-Off Scenarios Good policy, medium capital 2.4% 3.8% 3.6% 2331 Bad policy, faltering capital 0.4% -0.3% -0.8% 1718 Bad policy, low capital -3.0% -0.1% -1.1% 1462 Figure 22: Overview of Scenarios: SMOOTH Labor Cut-Off Real per capi.ta GNP ($ 1991) 30Wo Z750- good policy 2500 medium capital 2250 2000 had policy. faltering capital 1750 --.. 1500- "------------------------------------------- bad policy, low capital 0 01 02 03 04 05 0 07 08 00 10 11 12 13 14 15 Tears Total Real Investment (S 1091) $250 millions 200 1500 policy, capital 1000- __bad policy, -Jalig capital .. 500. --.-.---....---------- bad policy. low capital 00 01 02 03 04 05 06 07 08 00 10 11 12 13 14 15 Years Net Transfers of Finance and Remittances Annual Averages far the Yaws 0-5, 6-1. 11-1 in S Cirrent S 1250 miltons ¶80 1000 o. 71M 750 5Wo 50 1-5 6-13 11-1 Years A: bad "policy", low capital B: bad "policy", faltering capital C: good "policy", medium capital Figure 23: Overview of Scenarios: ABRUPT Labor Cut-Off 82 Real per capits GNP ($ 1901) $3000 3750 2500good 25WI cy edium 2M. capital 2000 1750~bad liy 1750- tad polcy 500 0 0 03 064 05 0 07 0 0 0 Jo 1 22 13 1 1 45 Years Total Real Investment ($ 1991) $2500 mlll.ons 2000 1500 good policy. Odium Capital 1000 500 ---- - - bad policy, low capital 0 0 01 0 03 064 0 06 07 04 00 10 i1 12 13 4 15 Te ars Net Transfers of Finance and Remittances Annual Averages fcr 100 the Yews 0-5, 6-10, 11-1 in $ Current milons WI U7 750 7 Boo 500 as2 ISA2 250 211 0. 0-5 6-10 11-15 Years IWA 12 C A: bad "policy", low capital B: bad "policy", faltering capital C: good "policy", medium capital 83 Chapter 5 Europe or US, faster opening of Israeli agricultural markets). In the absence of strong policy money alone cannot realistically take care of the problem of labor cut-off. For example, limiting the decline in wages in such a situation to no more than 10 percent would require an implausibly high inflow of US$800 million per annum, compared with of the order of US$ 500 million under the good policy cases developed here. The Issue of Returnees 5.25 Large numbers of Palestinians from the West Bank and Gaza now live abroad. Some have maintained residence rights and are, in principle, free to return (some 13 thousand returned in 1990 and 1991, net of outflows), while the return of others will be subject to the bilateral negotiations between Israel and the Palestinians. This report takes no view on the outcome of these, but it is nevertheless of interest to ask what the impact would be on growth and the labor market if there were to be a substantial return migration in the future. From the labor market perspective this is directly analogous to the question of labor cutoff examined above, since both amount to an increased labor supply to the domestic market. Whether this leads to unemployment and labor market problems or a spur to growth depends crucially on whether increased labor is accompanied by productive capital, sound domestic policies and market opening abroad. Unlike workers who lose jobs in Israel, returnees have demands for social services and other public goods. Success here depends on complementary action with respect to public capital investment (and adequate progress on public institutional capabilities). To avoid labor market adjustment problems, there is a case for attracting back relatively unskilled Palestinians only as the economy recovers and takes off. Figure 24: Baseline Scenario: SMOOTH Labor Cut-Off, Medium Capital, Good "Policy" Real Wales (0 1991) Distribution of the Labor Force $ 0000 600000 8000500000- 8000 minimum wage In Israel 400000 total labor 7000 fore ...-"labor force In OT- 3000007 6000- 200000 5000 ---.--- average wage In OT -..---------- 100000 -- labor force in Israel unemploymeni-t - ----- -. ---- 4000 0_ ~_I 00 01 0 03 04 05 00 07 DB 00 10 1 1 11314 15 0 001 02 03 04 05 06 07 0 00 10 11 12 13 14 15 Years Years Real Investment ($ 1991) 2500 millions 2000 total 1500 In*dme Investmen -*private Investment 500 .- P- fil Investment ____ ___ ____ ___ ____ ___00 00 01 02 03 04 05 06 07 00 00 10 11 1a 13 14 15 Years 00 Figure 25: Baseline Scenario: ABRUPT Labor Cut-Off, Medium Capital, Good "Policy" Reat Wages ($1091) Distribution of Labor Force 9000 600000: 8000. minimum wage In Israel- 400000 total labor ,-- - 7000 fo00 ej.-* -.abar force In OT . ~30000 .- 6000 ..** Z800 5000 average waP l OT . ...... 100000 ..............................--ne-pyment labor force in Israel 4000 0 q a S01 i030 05 06070 0010 11 18 13 1415 00 01 02 03 04 05 06 07 08 00 10 11 12 13 14 15 Teann Tara Real Investment ($1001) 2 500 miflHos 000 1500 ..- total .. Investment ..** prlate Investment -0 -. ** - -- --- -- '' ~ ~ lFli *-- '"~j toInvestment 0 00 01 0 03 04 05 06 07 00 0910 11 1 13 14 15 Years Chapter 5 86 C. Public Finance and Official Financing Requirements 5.26 The scenarios presented above illustrate overall developments for incomes, labor and capital. Within any scenario for the future, public finance will play a central role. The biggest shortfall now lies in the provision of public goods, not in the consumption of private goods. However, while there is potential for ample private inflows--if the conditions are right--securing adequate public resources could be tougher, especially for current spending needs. There may be important tradeoffs here: there has been some discussion of having a low tax economy, as a means of getting growth going, but this may be in conflict with adequate finance for public services. Even if all taxes paid by Palestinians are included (including those accruing to the Israeli government) the Occupied Territories do not appear to be highly taxed; the tax effort is sharply lower than in Israel and also lower than in Jordan (see Chapter II). While it would almost certainly make sense to have a lower tax effort than Israel--the scale of fiscal redistribution is probably neither feasible nor desirable given the income levels of the West Bank and Gaza--the need to expand and maintain public services make it imperative that domestic revenue mobilization be improved. 5.27 The point of departure for the public finance scenarios is the integrated picture of public finances discussed in Chapter II (see Table 2). This includes both the civil administration and municipalities and the near-government activities of UNRWA. It also includes an estimate of taxes paid by Palestinians accruing to the Israeli Treasury. We take the view that these should form part of the revenue base of the Occupied Territories. But as noted earlier, the availability of such revenues depends on the trade outcome with Israel. There are also undoubtedly issues of the extent to which a self-governing entity should pay Israel for services consumed by Palestinians, as discussed in Annex 2, but this is an issue for the negotiations that we do not take a position on. In this presentation, we adopt the figure of net transfers of 6 percent of GDP (or 4.5 percent of GNP) representing the difference between revenues accruing to the Israeli Treasury (8 percent of GDP) and payments for services rendered by Israel (2 percent of GDP), and assume it to extend to the future. The public finance scenarios were developed under the assumptions of "good policy", and medium capital inflows outlined above: the first scenario relates to a smooth reduction in Palestinian employment in Israel and the second to an abrupt cutoff to an initial level of 45,000 workers. These correspond to the two good "policy" cases shown in the previous section. To support such development scenarios, both the analysis of the sector teams and simple international comparisons indicates the necessity for a significant expansion in public spending, including: * A large increase in development spending, to catch up with past neglect in transport, water and sanitation, electric power, and schools in particular; * An increase in current spending, to support the gradual expansion in service levels, to improve maintenance levels and (more tentatively) to allow some catch up in skilled wages (e.g. of teachers). Under the scenario where only 45,000 workers are allowed to work in Israel, additional current spending is contemplated to smooth the shock on private incomes and help in reduce poverty increases. 5.28 The projections were done in relation to GNP for the years 1994, 1998 and 2003 (See Table 8 for a summary). Development spending is projected to rise significantly under both scenarios based on the indicative estimates of needs from the agricultural, human resources and physical infrastructure teams. Under the abrupt labor cutoff scenario, development spending will be accelerated in the initial years. 87 Chapter 5 5.29 Current spending, including UNRWA, is projected to rise gradually under the "smooth labor" scenario. This, however, only takes account of non-security related spending. With the takeover of law and order related activities, the self-government would face additional spending needs. This would require further analysis. Under the abrupt cutoff scenario, there would be a temporarily faster rise in current spending oriented toward moderated the scale of the shock of employment reduction. The instruments for this would have to be worked out: it could, for example, take the form of transfers via public employment schemes, as utilized in Chile in its period of unusually high employment. Any such scheme would, of course, have to be carefully assessed with respect to administrative capability and risks of leakage. Under both scenarios current spending will then stabilize in later years. 5.30 These are only indicative estimates of desirable spending levels, but the scale of increase--to the tune of 7-10 percent of GNP during the first five years--is immense. This raises the questions of whether it can it be financed. There are three potential sources of finance: * Increased taxes. The need to maintain and improve tax effort is clear. It is assumed that the revenue/GNP ratio would rise significantly but gradually over the next ten years as administrative capabilities are built and as tax reform programs are implemented. Table 8: Public Sector Finances, 1994-2003 (in percent of GNP at current prices) Average Smooth Labor Reduction 1987-91 1994 1998 2003 Revenue2 17.9 19 20 24 Expenditures E excluding defense and security 19.1 24 28 26 Current Expenditure 16.5 17 19 19 of which: UNRWA (3.3) (3) (2) (U) Development Expenditure 2.6 7 9 7 Overall Deficit -1.2 -5 -8 -2 Financing (net) 1.2 5 8 2 UNRWA 3.3 3 2 0 Other external -2.1 2 6 2 E Includes an estimate of tax payments by Palestinians now accruing to the Israeli Treasury and contributions by the Israeli treasury to expenditures. Chapter 5 88 * Domestic borrowing. There is some scope for domestic borrowing by a self-government (including a moderate amount of seignorage, should a new currency be introduced), but this is unlikely to be large in the transition period, until the government develops the credibility and the institutions to manage this. No assumptions have been made on this, but it could become a significant source of finance over the long term. * Foreign inflows. There is no question that the international community will play a role in the transition. The prospect of an expansion in UNRWA resources is low, and it is assumed that UNRWA spending will amount to US$ 100 million annually in the interim and disappear afterwards. This leaves a total public financing requirement from abroad of 6 percent of GNP in 1998 to decline afterwards to 2 percent of GNP in 2003. 5.31 Foreign financing for the budget will form part of the overall foreign inflows that is a critical part of the growth and labor market scenarios developed above. In current prices it is estimated that the medium capital inflow cases would involve inflows (on a gross disbursement basis) of the order of US$500 million annually in the first five years, and US$560 million in the following five years (Table 9). Of this total, public sector financing requirements (including UNRWA) would average million annually in the first five years, and about the same, at current prices, in the next five years. Some of the external financing for the public sector might also come from private sources, such as "Palestinian bonds". Table 9: Gross External Financing Requirements, 1994-2003 E (in current prices) Average Average 1994-98 1999-2003 (in percent of GNP) Total external financing 12.6 7.5 Public Sector Financing Requirements 7.2 3.8 UNRWA' (2.4) (-) Other (4.8) (3.8) Private Sector Financing 5.4 3.7 (in millions of U.S. Dollars) Total external financing 500 560 Public Sector Financing Requirement 300 (290) UNRWA* (100) Other (200) 290 Private Sector Financing 200 270 E The required gross disbursements have been estimated after repayments. E No assumption was made on the continuation of UNRWA after the transition period. 89 Chapter 5 5.32 Private sector financing is assumed to run at US$200 million in the first five years, rising to US$270 million in the next five years. This would be in addition to labor income from Israel and would include such items as remittances from Palestinians in the Arab and OECD countries, equity investment and other private capital inflows and transfers. D. Conclusion 5.33 The West Bank and Gaza could shift to a pattern of autonomous growth based on expansion of domestic production, increased trade in goods and reduced exports of labor. Over time there is the potential for steady growth in labor earnings--a key indicator of private welfare of the population- combined with the expansion of both economic infrastructure and social services. But this scenario depends on securing the domestic environment and international trading opportunities that will provide the institutional basis for a large expansion in the public sector and adequate incentives and security to encourage major investments in productive activities by the private sector. Failures could lead the economies to go off course, with a post-peace boom quickly fizzling out. The situation is more difficult with a sudden cutoff in labor opportunities in Israel. This leads to an immediate reduction in welfare. Subsequent growth is still feasible, provided, again, there is a convincing overall agreement, sound domestic policies, expanded trading opportunities and official capital inflows. But there are even larger risks of the process of recovery and expansion unravelling under these conditions. Annex 1. The Workings of the Labor Market in the Occupied Territories The following is a framework which characterizes, in a simplified form, the functioning of the Palestinian labor market. The possibilities of working in Israel are integrated in the analysis. We take as given that skilled jobs in Israel are not open for Palestinian workers and we expect that to continue to be the case in the future. The segment of the Israeli labor market which is relevant for Palestinian workers is mainly agricultural, construction and some jobs in the industrial and service sectors. Let DP(T, K, F, R) be the domestic demand function for labor, which is defined for particular given trade regime (T), capital stock (K), structure of financial institutions (F) and various existing regulations and exogenous factors (R). The total Palestinian labor supply function is denoted by SP(EO) where E is a vector of exogenous variables affecting the supply of labor. The effective domestic supply, SPd, is the residual supply over the ones employed in Israel (QP. The Israeli labor market of the relevant sectors (agricultural, construction industry and services) is characterized by the labor demand function D (I, E,) defined for a given level of immigration, I (mainly from the former Soviet Union), various monetary and fiscal policies, developments in relevant world markets and any other exogenous factors affecting the labor demand all are captured by El. The immigration variable affects the demand for labor in these sectors through its effect on the demand for housing, textile, agricultural and other goods. The Israeli labor supply to these relevant sectors is denoted by S' (I, U, E) where I is the level of immigration U is the total Israeli unemployment rate and E2 is a vector of exogenous factors affecting the supply of labor. The reason for including the overall Israeli unemployment rate is that many Israelis, even unemployed ones, do not wish to work in agricultural, construction and in some tasks in the industrial sector and services. However, for high levels of unemployment there will not be much choice and, therefore, supply of Israeli labor to these sectors will increase, and vice-versa. We will discuss two cases of labor market integration. The first, the constrained case, is depicted in Figure 1, where the Israeli minimum wage leads to endogenous "rationing" of Palestinian employment in Israel. The second case we consider is the non-binding constraint, where every Palestinian who wishes to work in Israel, is able to find a job. The current form of labor market integration is better represented by the first case. The second case reflects the form of integration to occur in the future if the domestic market expands substantially. This may occur as enough capital flows into the domestic market, regulations on trade are lifted, etc. Case 1: Binding Constraint Figure 1 presents the first form of labor market integration. The domestic labor market is characterized by a significant lower value of marginal product of labor (due, for example, to lower level of capital) and by a lower value of workers reservation wage (due, for example, to lack of a social safety net), than the Israeli market. In particular, we assume the maximum value of the marginal product of labor to be below the Israeli minimum wage. Under these conditions the ones who are able to get a job, work in Israel while the rest offer their services domestically. This is demonstrated in Figure 1, where St(Si, SP (T, C) W. is the total supply of labor to the relevant Israeli sectors. This supply is obtained by horizontal aggregation of the Israeli supply of labor (S' (I, U, E2)) with the Palestinian labor supply which is adjusted for two key factors: (1) Various costs involved in employing a Palestinian worker compared to an Israeli one. These costs are captured by the parameter T, and reflect, for example, risk 91 premium (which is expected to be high during tense periods). (2) Transportation costs to Israel, C. Thus, the total supply of labor to the Israeli market is ST(Si, SI(T,C) WmJ-, which is the bold line in Figure 1, where W.,, is the institutionally imposed minimum wage in Israel. The equilibrium in the Israeli market is denoted by (Q', Wi; QPi, WP') which is the employment- wage combination of Israelis and Palestinian workers in Israel respectively. Note that W' is the wage paid for Palestinians working in Israel but their effective wage is lower by C, the transportation costs. The domestic labor market equilibrium is denoted by (Qpd, WP). The model implies an internal employment solution for Palestinians in both markets and three wage levels can be sustained where w'2wP'2wPd+C; the average wage in Israel per sector for Israeli worker is equal to, or above, the wage for Palestinians who are working in Israel whereas the latter is equal to, or above, the respective domestic Palestinian wage, even when adjusted for transportation costs. The wage gap between Israelis and Palestinians working in Israel (the same skills and in the same economic branch) is mainly determined by T, the added costs from the employer's perspective, of hiring a Palestinian worker rather than an Israeli. The larger is T, as is expected in period of political and military tension, the larger is the wage gap (although note that the costs to the employer are the same). There are several key factors that determine the wage gap between Palestinians working domestically and in Israel: (1) The institutionally determined minimum wage - Wm. The Israeli minimum wage is the only source for a consistently sustained wage gap in the model. If there had not been an institutionally set minimum wage, then all Palestinians wishing to work in Israel would be employed. Flow of Palestinian workers to Israel would continue until the domestic and Israeli effective wage for Palestinians (appropriately adjusted for transportation costs) would equalize (using the aggregate supply as we are doing here would not be appropriate in such a case). Existence of an effective minimum wage results in rationing of Palestinian employment in Israel. Not all of the ones who wish to work at this wage can get a job. (We assume that the ones who are employed are a faithful sample of the total supply.) As long as the minimum wage is high enough to be effective, then the higher it is, the higher is the wage gap between the Israeli and the domestic wage for Palestinian workers. (2) The transportation costs - C. As long as the minimum wage is effective, the actual wage gap (statistically measured) is independent of the transportation costs. The gap in the effective wage, however, is smaller the more costly it becomes to get to work in Israel. (3) Changes in the domestic economy. For given transportation costs and minimum wage, demand shocks (e.g., change in foreign investment) and supply shocks (e.g., change in migration to other Arab countries) directly affect the wage gap as they change the domestic wage without affecting the wage paid to Palestinians working in Israel (as long as the minimum wage remains an effective constraint). Using this framework one can also look at the workers from the West Bank separately from those from Gaza. Differences in T between the groups, different transportation costs and different domestic conditions will lead to differences between the two groups of workers in the wages paid in Israel and in their respective domestic wages as well as in their respective employment. 92 Case 2: Non-binding Constraint We analyze this case by focusing on changes in capital inflow. However, opening of new trade possibilities, less restrictive regulations, etc., would have a similar dynamic effect as they change labor demand vis-A-vis their effect on the product market. As capital inflow increases, the marginal productivity of labor increases, shifting outward the domestic demand of labor. As capital increases, but not yet to the point where the marginal productivity of labor reaches the minimum wage, the economy is at a stage of transition from the constrained to the unconstrained state, during which there is a gradual increase in both wage and employment in the domestic market, but no change in the Palestinian employment level and wage in Israel. As domestic capital increases further, we reach the point of wage equalization. Here, there is first a range where additional capital will not affect the wage. At that point the wage is equal to the Israeli minimum wage both domestically and in Israel. However, at that range any increase in capital is accompanied by a flow of Palestinian workers from Israel back to the territories. This trend will continue until the Israeli minimum wage is not an effective constraint any longer in the Israeli labor market; from that point there is no rationing and every Palestinian who wishes to work in Israel can get a job. As domestic capital continues to increase, the domestic wage continues to rise, more labor flows back from Israel to the domestic market, putting some pressure on wage to fall while the wage Palestinians are getting in Israel rises, so that it equalizes across the two regions -- but at a wage which is above the minimum wage level. This trend continues as capital increases. At the extreme, the domestic capital is reaching such high levels as to imply a marginal productivity of labor in the territories (in autarky) equal to, or above, the Israeli wage (in autarky). At that point all Palestinian labor is employed domestically. The Facts (for 1990) The availability of wage data of Palestinians working domestically, Palestinians working in Israel, and Israeli workers, by selected economic branch, enable us to locate (partially) the state of the current form of labor market integration, within the context of our conceptual framework. It is only partial since the wage data does not account for differences in occupational mix within the economic branch selected. Since Israelis work in more skilled jobs (see Tables 4.b and 4.c) the "true" wage ratio between Palestinians working in Israel and Israelis, by sectors, is clearly above the one reported (in Figure 6). Accounting for that bias, the data suggest that the state of labor market integration can be approximated by Case 1 - the binding constraint: The average wage Palestinians earn in Israel is about $450 which is in the neighborhood of the Israeli minimum wage. The domestic average Palestinian wage is about $310. This is an overestimate of the relevant wage since the workers employed domestically are more skilled than the ones who work in Israel (Tables 4.a and 4.c). Thus the "true" wage gap is even larger than reported. Such a significant gap cannot be explained merely by transportation costs. We suggest that the Israeli minimum wage is an effective constraint, the employment of Palestinian labor in Israel is demand driven, and the current form of labor market integration is as presented in case 1.1 1. The average Israeli wage is significantly above the wage Palestinians get in Israel, which supports the case as well. However, as stated previously, that reflects the different skill composition, as well as the added costs incurred by Israeli employers from employing a Palestinian rather than the equivalent Israeli worker. 93 Analysis The present framework is used as a simple tool to analyze the qualitative effects of changes in economic scenarios and various shocks, on wage and employment of Palestinians. The events to be considered include both ones that occurred already (e.g. intifada, Gulf war, recession in Israel, beginning of mass migration to Israel). It formed the basis for the framework for analyzing future scenarios described in Chapter 6 and Annex 4. Past Shocks II.1 Intifada The Intifada, which started in December 1987, involved a general deterioration in security, frequent strikes, demonstrations and curfews. It had the direct effect of an increase in T, the parameter which captures the added costs, from the Israeli employer's perspective, of hiring a Palestinian worker rather than an Israeli. Transportation costs to work in Israel, C, increased as well, as time to get to work increased mainly due to imposed road checks. The combined effect is a shift upward of the adjusted labor supply of Palestinians to the Israeli market. The resulting changes are a decline in effective employment, which is the number employed adjusted by the average number of hours worked (see Figure 2 for the number employed and Figure 3 for average weekly work hours); an increase in the wage paid to Israelis; a decrease in the wage of Palestinians employed in Israel relative to that of Israelis and an increase in employers' costs. In the domestic market, the effective supply shifts outward - leading to an increase in effective employment, lower domestic wages and a decrease in the relative wage between Palestinians working domestically and those working in Israel (Figure 7). Strikes and demonstrations imposed work interruptions too and these may have dominated the net effect on both employment and wage. The effect of the Intifada is expected to be transitory, and its extent is closely linked to the extent of the political-military disturbances. The data (Figures 2 and 3) behave as expected with respect to employment. Although the number of employed in Israel in the period following the outbreak of the Intifada fell only slightly, the weekly work hours per Palestinian employee in Israel decreased sharply. Domestic employment during that period went up, although domestic weekly work hours per employee went down by as much as in Israel. With respect to wages, Figure 6 shows the ratio, over time, of Palestinian daily wages in Israel to Israeli daily wages by selected economic branches. This ratio is declining in the period following the beginning of the Intifada, in all major economic branches. Note, however, that this data remains pertinent only if there is no significant change in the skill mix between Palestinians and Israelis within the selected economic branches. The reason is that the reported wage ratio does not control for a different occupational mix within the branches. For that same reason, one should not consider the reported wage ratio to represent the true one. Still, since we only look at the change of the wage ratio over time, it is appropriate to do so as long as the occupational mix within the branch did not change over that period. The occupational data reported in tables 4.b and 4.c (although not by branch) lead us to believe that indeed there was not a significant change in the skill mix. Figure 7 provides the pattern of the wage ratios of Palestinian employees working domestically to the ones working in Israel, by selected economic branch. As expected, the wage ratio is declining following the start of the Intifada. Angrist's finding (1992), that the premium paid for working in Israel rose steeply in the late 1980s, is consistent with the qualitative analysis. 94 11.2 The Gulf War The Gulf war affected Palestinian labor through several internal channels. First, as in the case of the Intifada, it increased T, and shifted the effective supply to the Israeli market, while the residual supply to the local market increased. That tended to reduce the domestic wage and increased the Palestinian wage in Israel. Second, the employment possibilities for Palestinians in the Gulf states diminished considerably, leading to an increase in Palestinian labor force. That increased the effective supply to Israel, which at least partially offset the first effect (and, perhaps, more than offset it), and also increased the domestic labor supply, which enhances the first effect. Thus, the net effect on the domestic market is an increase in employment and reduction in wage, whereas the effect on Palestinian employment and wages in Israel is ambiguous. Unlike the Intifada which seems to have mainly a transitory effect, the Gulf war is likely to have lasting effects on the domestic labor market -- mainly because the current situation, where there are many fewer employment possibilities in the Gulf than before the war, is likely to continue. The empirical effect of the Gulf War on Palestinian labor cannot be established at this stage of the analysis since the Gulf War occurred while mass immigration in Israel was already occurring. The data at that period reflect the effects of both shocks. Since, as we discuss next, the aggregate effect of the immigration is ambiguous - as it affects Palestinian labor both through an increased demand for goods and an increased labor supply - more detailed empirical analysis is required in order to differentiate between the effects of the two shocks and to verify the analytical predictions presented. 11.3 Immigration The end of 1989 marked the beginning of a mass wave of migration to Israel from the former Soviet Republics, reaching about 200,000 by the end of 1991, or about 8 percent of the Israeli population. The massive immigration has had, and will continue to have, a profound and permanent effect on both the Israeli and the Palestinian markets. The immigration affects Palestinian labor via dual changes in Israeli labor demand and supply, within the relevant sectors. The net effect on Palestinian wages and employment depends on the relative increase in the supply of, and demand for, labor and on the extent to which the immigrants are substitutes for, or complements to, Palestinian workers in the Israeli labor market. Table 5 presents quarterly data for 1990 and 1991, a period which covers both the Gulf war and the acceleration in immigration. After a steep drop in the fourth quarter of 1990, and in the first quarter of 1991, the number and proportion of employed persons from the Occupied Territories, began to rise until reaching the same point as before the Gulf crisis. The entry of immigrants into the labor force affected the sectoral distribution of workers from the Occupied Territories rather than their number. In particular, construction remains the main source of employment, and in this sector the number and proportion of employed workers from the territories has not fallen. The proportion of the workers from the territories employed in the trade, hotel industry and services did fall. They were replaced, in part, by Israelis and new immigrants. It thus appears that the workers from the territories and the immigrants are substitutes in the industrial sector, and trade and services industries, but not in construction. Therefore, the labor market opportunities of workers from the territories in Israel depend almost entirely on one sector -- construction. With expectations for continuing immigration, and with the agricultural sector shrinking, employment prospects in the remaining sectors that used to employ workers from the territories -- services, industry, agriculture, trade and hotels - seem poor for the future. However, 95 increased demand for housing due to the immigration suggests that, at least in the short run, demand in the construction sector for workers from the territories will continue to be high. Complements or Substitutes? Within the context of an aggregate production function, Palestinian workers compete with low- skilled Israeli workers as substitutes, while they are complements to more skilled workers. As long as there is an expansion in the sectors which primarily employ workers from the territories - construction, agriculture and services - more Palestinians are hired, and unskilled Israelis are improving their relative position. If there is contraction, the reverse occurs. Thus, the employment situation of Palestinians is very much dependent on the Israeli unemployment level and specific demand in agriculture and construction. The 1991 data, which already utilize information on the new immigrant workers (from the former Soviet Union) reveals this situation. The new immigrants have preferences for work in the industrial sector and in the service industry, while they object to working in construction and agriculture. Looking at quarterly data, it is evident that the immigrants substituted for Palestinian workers in industry and services while the share of Palestinian workers in construction and agriculture did not go down. At the aggregate level, as Figure 4 reveals, there is a negative correlation, as expected, between the Israeli unemployment rate and the share of Palestinians in total employment in Israel. This analysis is fairly general. In order to establish substitutability/complementarity relationships a comprehensive econometric analysis would be needed where wage and employment effects are analyzed; such an analysis, however, extends beyond the scope of the present report. FIGURE 1(1): LABOR MARKET INTEGRATION ISRAELI IARKET S'( ,U,E2) Sl(S'SP(T.C),WM,n) FALPSTJN AN MA9iKET W' WmIntT SPd(Eo) WP, = W SP(T,C) Wid D'(1, E,) P(T,,Ffi Qpd Figure 1(2): Number of Employed West Bank and Gaza Residents by Place of Employment, 1970-91 35 ooos Occupied Territories OT employed locally OT employed in Israel Total employed 300 250 200 150 100 0 1970 1975 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 Year 000s Gaza .OO West Bank 120 WB domestic WB in Israel Total WB 100 200 80 150 - 60 40- - - ------ ......---------100- 20 Gaza domestic Gaza in Israel Total Gaza 50 ----- - o ----.---____ __---------------[ 1970 1975 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 972 1975 198 1981 1982 19 1984 18 1986 1987 1988 1989 1990 1991 Source: Statistical Abstracts of Israel, Yew 1983-1992, Central Bureau of Statistics, Jerusalem. Figure 1(3): Average Weekly Hours per Palestinian Employee, by Place of Work. Hours Territories so Hou worked lcay . - - --. Hours wasked in terae 45 -.... ..---..- ..... .._ .....--. H w--i b. 40 IMII IW M IM I IM 10 IN IO IW 10 1980 1981 192 1988 1964 1985 1986 1967 198e 199 1980 101 Yea Hours Gza Hous West Bank Ha wour inWrd ---------------------------------Hour-workedinlar*e n - - : ka .45-o0 400 5 5 g I I I I-----i 1 25 11 1111 1980 1981 1982 1983 1964 1985 1966 1967 18 1989 1900 1991 1980 1961 1962 1983 1984 1985 1986 1967 1988 19M 1990 1991 YearYear Source: Statistical Abstracts of Israel, 1985-92 Central Bureau of Statistics, Jerusalem. 00 Figure 1(4): lsraeli Unemployment Rate and Palestinian Share in Total Employment. 10 8 - .-- -. - -- 6 -- 5 - . . ... . Unemploymnt Rate in Israel Palestinian Share In Employment 4 1 l I 1980 1985 1986 1987 1988 1989 1990 Year Source: Statistical Abstracts of Israel,1 970-91, Central Bureau of Statistics, Jerusalem. F!gur .(5):, Emplved We Bank and Gaza Rekint b S ctr ndPlceofEmploy en 0003Agriculture _ West Bank employed locallv West Bank employed in Israel Gaza employed locally Gaza employed in Israel 20 1 0 . . . ... . -. . 0 1 1 l l l l 1970 1975 1980 1985 1986 1987 1988 1989 1990 1991 Year OOOs Industy sConstruction 25 20 - .- 15 -- 10 - - 20 - 10 0 ..-- . . . . . . . . . . . . 1970 1975 1980 1985 1986 1987 1988 1989 1990 1991 Year 1970 1975 1960 1985 1986 1987 198 1969 1990 1991 Source: Statistical Abstracts of Israel, Year 1986-1992, Central Bureau of Statistics, Jerusalem. Figure 1(6): Palestinian Daily Wage as a Percentage of Israeli Daily Wage by Selected Economic Branches % Territories/Israel 45 -AgrIuture 40 Ind= Consbucbn 35 25 I 1985 1986 1987 1988 1989 1990 Year West Bank/Israel Gaza/Israel Agriculture 46 40 30 ................. .----..-2 21985 198 1987 1968 1989 1990 1986 1987 1968 1989 1990 Year Source: based on Statistical Abstracts of Israel 1971-1991, Central Bureau of Statistics, Jerusalem. Figure 1(7): Daily Wage Ratios of Palestinian Employees Working Domestically to Palestinian Employees Working In Israel Occupied Territories 1.1 Agricu ltrindus!try Cntuo 0.9 -.... 0.8 - 0.7 0.6I I 1965 1966 19M7 1966 196M 190 Year Gaza West Bank name Rdse 1.1 1.2 1 - -1 0.9 0.8 -.... 0.6 0.8 0.7 --. - --...0.7 - 0.8 6 1985 1908 1987 1988 1969 1990 0.6II Ve 1965 1986 1967 1988 1980 1990 Source: Statistical Abstracts of Israel, 1985-90 Yer Central Bureau of Statistics, Jerusalem. Annex 2: Public Finances in the Occupied Territories I. Budgetary Operations of the Public Sector 1. The public sector in the Occupied Territories consists of the Civil Administration and the municipalities. The budget for the Civil Administration does not include expenditures on security or expenditures on Israeli settlers in the Occupied Territories. The budget is prepared on an annual basis and has to be approved by the Israeli Kenneset. At the time the budget is being prepared, forecasts are made for revenues and expenditures in each of the west Bank and Gaza, and the two are then combined into one budget (hereafter referred to as the Civil Administration Budget). The municipalities and village councils are also required to prepare annual budgets. Since 1992, the fiscal year coincided with the calendar year; prior to that, the fiscal year ended March 31. An interim budget was prepared for the period April-December 1991. 2. In what follows below, the structure of the Civil Administration Budget as well as actual budgetary developments during the period 1987/88-1991, are analyzed. A similar analysis is then conducted for the municipalities, after which a picture for the public sector as a whole is presented. A. Civil Administration Budget 3. The actual outcome for the Civil Administration Budget for 1987/88-91 as well as the budgets for 1992 and 1993 are presented in Table 1. According to the available presentation, revenues are broken into receipts from the income tax, the Value Added Tax (VAT), customs and excise duties and purchase taxes, health fees, other fees and charges, as well as receipts from the "deduction fund". The income tax consists of a tax on individuals and a tax on corporations. The individual income tax is progressive with the highest rate being 45 percent. The income tax brackets are adjusted upwards twice a year according to the inflation rate. The corporate tax rate is 38 percent. Data is not available on the breakdown on income tax receipts between the individual income tax and the corporate income tax, nor is any information available on the number of taxpayers at either the individual or corporate level. The VAT tax is applied at the same rate as in Israel (currently, the rate is 17 percent). Sales of agricultural products by producers is not subject to the VAT tax, nor are the services provided in touristic establishments. A zero rate is applicable to exports. Customs duties are the same as those applicable in Israel, and so are the excise duties on domestic production (mainly tobacco and beverages) and the purchase taxes (applicable to a number of domestically-produced and imported goods). No information is available on the breakdown of receipts between these various kinds of taxes. 4. Regarding non-tax revenue, receipts are broken into health fees and other fees and charges. Health fees represent fees paid by employees of the Civil Administration as well as by whoever wants to join on a voluntary basis the health plan of the Civil Administration. The fee is currently NIS 64/month. Other fees and charges comprise a large variety of levies on things such as bridge crossings, car registration, departure fees, etc. Some of those fees are in fact in the nature of taxes such as the motor vehicle taxes, but no data is available on the breakdown of these receipts. 5. Receipts from the "deduction fund" are related to the social security payments made in connection with the Palestinian workers working in Israel and the benefits they are entitled to. The total employer and employee social security contribution is 12.7 percent of salary, broken down into 7.4 percent for the employer and 5.3 percent for the employee. The Palestinian workers in Israel are entitled to benefits worth 0.9 percent of salary, and the remainder 11.8 percent that he is not entitled to is remitted back to 104 the Civil Administration. These amounts remitted back constitute the receipts of the "deduction fund". A detailed description of the system of benefits is provided in Attachment I . 6. Expenditures are classified into two main categories: current and developmental. Current expenditures are broken separately into expenditures on health, education and welfare, and other current expenditure, but no breakdown of the latter is available. There is also no economic classification available of current expenditure (e.g. wages and salaries, transfers, etc.). The only separate category provided under development expenditure relates to transfers to the budgets of the municipalities. 7. Overall budgetary developments. As can be seen from Table 1 , the overall position of budget of the Civil Administration fluctuated between a deficit of 1.0 percent of GDP in 1987/88 and an (annualized) surplus of 1.6 percent of GDP in 1991. While revenues stagnated in relation to GDP in 1988/89 following the start of the Intifada, development expenditures declined sharply and the overall budgetary position reached a virtual balance. The budgetary position strengthened further in both 1989/90 and 1991, while in 1990/91 it was in balance. Thus, recourse to financing by the Israeli Treasury was resorted to only in 1987/88. 8. Revenue developments. Over the period 1987/88-91, the revenue/GDP ratio fluctuated between 12.2 and 13.5 percent of GDP. Receipts from the income tax and the VAT exhibited generally rising trends and averaged 3.7 percent and 2 percent of GDP, respectively. Revenues from customs and excises were relatively stable at 1.5 percent of GDP while those from fees and charges fluctuated considerably. Revenues from the "deduction fund" averaged about 1.2 percent of GDP. 9. Expenditure developments. The expenditure/GDP ratio remained in the 12-13 percent range during the 1987/88-91 period. Current expenditures averaged 10.5 percent of GDP, with expenditures on education averaging 3.3 percent and those on health 2.3 percent. Development expenditures declined in 1988/89, but started rising afterwards. On average, development expenditures exceeded slightly 2.0 percent of GDP. B. Budgets of Municipalities 10. The budgets for the municipalities include the revenues and expenditures of the electricity and water utilities. The consolidated budget for the municipalities is broken into ordinary and extraordinary budgets. The ordinary budget consists of current revenues and expenditures, while the extraordinary budget covers mainly development expenditures and their sources of financing. Current revenues can be divided into three main categories: taxes (property and fuel) and fees; water charges; and electricity charges. Similarly, current expenditures consist of expenditures on general services as well as expenditures by the water and electricity utilities. The main source of financing for the development expenditures are loans and grants from the civil administration, while financing from external sources is small. 11. As can be seen from Table 2, the budgets of the municipalities experienced deficits ranging between 0.5 percent and 1.2 percent of GDP during the period 1987/88-1991. Revenues averaged about 3.5 percent of GDP, with more than 60 percent of revenues emanating from electricity charges, 25 percent from taxes and fees, and the remaining 15 percent from water charges. Similarly, about 50 percent of current expenditures were by the electric utilities, 15 percent by the water utilities, and the remaining 35 percent on general government services. Development expenditures averaged slightly below 0.5 percent of GDP. 105 C. Consolidated Budget for the Public Sector 12. When the budget for the Civil Administration is incorporated with that for the municipalities and eliminating the transfers between the two, the following picture emerges for the public sector finances during the period 1987/88-91 (Table 3): an overall budgetary position which is virtually balanced over the five-year period with an overall deficit of 1.2 percent of GDP in 1987/88 followed by alternating very small deficits or surpluses; financing from the Israeli Treasury which averaged 0.2 percent of GDP; and financing from external sources which was even lower averaging only 0.1 percent of GDP. 13. On the revenue side, the revenue/GDP ratio fluctuated between 15 and 17 percent of GDP and averaged about 16.1 percent. Revenues were almost equally split between tax and non-tax (fees and charges including those related to electricity and water) revenue, with each accounting for about 8 percent of GDP. On the other hand, tax revenue was also almost equally split between direct taxes (taxes on income and property, and indirect taxes (customs duties, excise duties and purchase taxes). On the expenditure side, the average expenditure/GDP ratio during the period was 16.1 percent, with a current expenditure/GDP ratio of 13.9 percent and a development expenditure/GDP ratio of only 2.2 percent. II. Expenditures by UNRWA and Other Organizations 14. The United Nations Refugee and Works Agency (UNRWA) is a major provider of health, education and other social services to residents of the Occupied Territories. About 40 percent of residents of the West Bank and 60 percent of the residents of Gaza have the status of "refugees" and therefore entitled to the benefits provided by UNRWA. Over the period 1987-91, UNRWA expenditures in the West Bank and Gaza averaged US$ 100 million annually, representing about 4.5 percent of the GDP of the Occupied Territories; expenditures in Gaza were about 60 percent of the total. About 50 percent of total UNRWA expenditures was on education, 20 percent on health, and the remainder on other activities. 15. Several other organizations, including the United Nations Development Program (UNDP), the European Community(EC), Arab countries and organizations, as well as various Western non- governmental organizations (NGOs) have also extended assistance to the Occupied Territories. UNDP expenditures averaged about US$ 7 million annually over the five year period 1987-91, and EC aid averaged about US$ 15 million during the same period. Assistance from Jordan, mainly in the form of salaries to civil servants was high up to 1988 (averaging about US$ 50 million a year during 1987-88), but declined sharply afterwards to about US$ 15 million annually as a result of the disengagement in June 1988. Other identifiable Arab government aid averaged about US$ 15 million annually during 1988-89, but no figures are available after that. No figures are also available on Arab non-government aid (for e.g. aid from the PLO and various Arab organizations). Western governments extend assistance mainly through a variety of non-governmental organizations, but no precise data are available on such disbursements. 16. In sum, there are various organizations that extend assistance to the Occupied Territories, which is used to provide services to residents of the type which are usually provided by governments. Foremost among these is UNRWA, which has a special status because of the refugee problem. In the aftermath of the Gulf war, the EC has increased sharply its assistance, but this might have only partly offset a possible large decline in Arab aid. 106 III. Fiscal Transfers between the Occupied Territories and Israel 17. This section deals with the issue of the fiscal transfers between the Occupied Territories and Israel. First, we will try to estimate the magnitude of the taxes paid by the residents of the Occupied Territories and which do not accrue to the budget of the Civil Administration. Second, we present estimates by the Israeli authorities of the benefits accruing to the Palestinian residents of the Occupied Territories from interaction with Israel. Finally, some issues regarding fiscal transfers are presented. A. Tax Payments by Palestinians Accruing to Israel 18. There are no economic boundaries between Israel and the occupied territories. Goods produced in Israel and purchased by residents of the occupied territories are subject to tax in Israel, while goods produced in the occupied territories and purchased by residents of Israel are subject to tax in the occupied territories. Goods exported out of Israel and the occupied territories to third parties are zero-rated, while those imported to them from third parties are taxed (at the same rates) at the point of entry. The following represents an estimation of the revenues which should have been returned to the benefit of the Palestinians (calculations are for 1991): 19. Revenue from taxes on imports via Israel. Imports by the Occupied Territories via Israel amounted to NIS 105 million in 1991. Assuming that these goods are consumer goods, the amount of the various taxes on these imports (i.e. customs duties, surcharges, purchase taxes, and VAT) would be equivalent to 62 percent of the value of these imports, or NIS 65 million. As only revenues from taxes on imports of cars (estimated at NIS 5 million in 1991) accrue to the budget of the Civil Administration, the loss from this source is estimated at NIS 60 million. 20. Revenue from taxes on "trade" with Israel. There are several losses which are enumerated below. As noted earlier, the VAT on good produced in Israel and purchased by residents of the territories is paid into the Israeli Treasury, while the VAT on goods produced in the occupied territories and purchased by Israel's residents accrues to the budget of the Civil Administration. Some of the trade between the occupied territories and Israel, such as agricultural and second hand goods, is not subject to VAT. According to 1987 data, imports of agricultural goods constituted about 15 percent of the imports of the occupied territories from Israel, but no details on the other imports which are not subject to VAT are available. Assuming another 20 percent of the trade between the Occupied Territories and Israel is not subject to VAT, the budgetary loss to the civil administration from the VAT tax on trade with Israel would be equivalent to the VAT tax rate multiplied by 65 percent of the magnitude of trade deficit of the occupied territories with Israel. Data on trade between the West Bank and Israel is not available after 1987. However, in Israel's balance of payments, an estimate is provided for trade with the occupied territories. For 1991, the trade deficit with Israel was estimated at NIS 1790 million which, although it might be an overestimate, is the only figure that can be presently used. Applying an 18 percent VAT rate (the rate applicable in 1991) on 65 percent of the trade deficit means a revenue loss to the budget of the Civil Administration of NIS 210 million. Another revenue loss in this connection would be the import duties (customs duties and purchase taxes) on the imported inputs that enter into the Israeli goods that are being purchased by residents of the territories. The ratio of imports of production inputs to GDP in Israel was about 20 percent in 1991 and the ratio of customs duties and purchase taxes to imports of intermediate goods is estimated at about 5 percent; the resulting duties therefore constitute about 1 percent of the value of the goods. Applying the 1 percent rate to the trade deficit with Israel results in an additional revenue loss of about NIS 17 million. 107 21. Revenue from fuel taxes, excise taxes (mainly tobacco, beverages and cement) and purchase taxes on domestic production. These goods are again taxed at the source. In Israel's budget, revenues from fuel taxes were estimated at NIS 1650 in 1991, those from excise duties at NIS 450 million, and those from purchase taxes at NIS 800 million. The economy of the occupied territories is about 5 percent of the size of the economy of Israel. As far as fuel taxes are concerned, the intensity of energy use in the Occupied Territories is lower than that in Israel. Assuming 3 percent of the fuel use is by the occupied territories, and allowing for the fact that a small amount of revenues from the fuel tax (NIS 5-10 million) accrues to the budgets of the municipalities, the revenue loss from the fuel tax source would be about NIS 40 million. Regarding excise duties, only a part of the production of goods subject to these taxes constitutes alcoholic drinks. Given that the consumption of alcoholic drinks in the Occupied Territories is generally lower than that in Israel, it can be assumed that the revenue loss relating to the excise duties is about 4 percent of the revenues from excise duties collected in Israel, or about NIS 18 million. As far as purchase taxes are concerned, it can be assumed that 5 percent of the purchase taxes collected on domestic production in Israel (i.e. NIS 40 million) represents a revenue loss to the Civil Administration. 22. Revenue from electricity. Expenditures by the municipalities on electricity amounted to about NIS 80 million in 1991. Assuming 95 percent of the electricity is bought from the Israeli electricity company, and applying the 18 percent VAT rate would mean an additional revenue loss of about NIS 15 million. Table 4 gives a summary of these revenue losses. 23. Adding-up the losses from all these sources (60+210+ 17+40+ 18+40+ 15)results in a total loss of NIS 400 million to the budget of the civil administration in 1991. Had these accrued to the Civil Administration budget, they would have resulted in a significant increase in 1991 revenue. Even if the GDP figure is adjusted upwards to reflect the higher amount of indirect taxes, the revenue loss would still have amounted to over 8 percent of 1991 GDP. B. Benefits Accruin2 to Residents of Occupied Territories from Interaction with Israel 24. The Israeli authorities have provided the Bank staff with estimates of the benefits accruing to residents of the Occupied Territories as a result of the interaction of the two economies. The following represents a summary of the Israeli presentation: 25. Expenditures on security. According to the Israelis, under international law, the occupying power may require the local population to defray the cost of governing it. Since the Intifada, the cost of security operations have increased sharply. The expenses incurred by the Israeli army in connection with the uprising amounted to NIS 600 million annually. Additional expenses not associated with the uprising, and expenses incurred by other security organizations have brought the total security expenditures to about NIS 1 billion annually in recent years. 26. Use of roads. There are 150 kilometers of roads in the occupied territories whose construction has been financed by the Israeli budget at a cost of NIS 500 million. The annual cost of capital is 8 percent and the volume of traffic of Palestinians using them is estimated at 80 percent of total use. The value of their annual use by Palestinians is therefore estimated at about NIS 30 million. Furthermore, using the same methodology, the annual value of the use by Palestinians of Israel's road network of 15,000 kilometers had been estimated at NIS 180 million (assuming Palestinian use is about 5 percent of total use). 108 27. Movement of manpower. Each day about 120,000 workers from the territories enter Israel and about 80,000 of them are employed on a regular basis. According to the Israelis, in effect, the export of labor services from the represents the import of unemployment into Israel. Assuming the rate of substitution of workers from the territories for Israelis is two to one, payment of unemployment benefit to some 60,000 persons arises from the export of unemployment from the territories into Israel. The resulting cost to the Israeli budget is NIS 90 million annually. 28. Benefits from Israeli-subsidized goods. Goods that are subsidized by Israel are also available to the residents of the occupied territories. Subsidies on basic commodities and agricultural produce amount to about 1.2 billion annually in Israel. Assuming that the residents of the occupied territories consume about 5 percent of such goods, the benefits accruing to them are estimated at NIS 60 million annually. 29. Technology and know-how. According to the Israelis, as a result of the contact with Israel, the occupied territories have acquired new technologies of production. Expenditures on research and development in Israel is estimated at NIS 1.2 billion annually, and the benefits to the residents of the occupied territories from Israeli R&D was estimated at NIS 40 million annually. 30. Additional benefits. Several other benefits accrue to the residents of the occupied territories from services provided by Israel: (a) use of subsidized health services: NIS 5 million; (b) use of Israel's sea and airports for international trade: NIS 6 million; (c) benefits of Israel's protective tariff system: NIS 9 million; and (d) consumption of agricultural goods subsidized through Israeli-government investment in agricultural capital:NIS 6 million. 31. Income tax credit points. By law, only residents of Israel are entitled to credit points against their income tax. However, under the government decision of October 8, 1970 regarding the equalization of employment conditions and net and gross wages between workers from the occupied territories and from Israel, the workers from the occupied territories were regarded as if they were residents of Israel and therefore were entitled to credit points. Assuming that 80,000 workers constitute registered workers and that each worker receives on average 3.25 credit points at a value of NIS 1,080 per credit point, it is estimated that the workers from the occupied territories who work in Israel receive about NIS 250 million annually as a result of credit points. 32. When the benefits to the territories from the use of the infrastructure and services provided by Israel are added up, they amount to NIS 1,426 million annually. To this would be added the income tax credit points of NIS 250 million annually. C. Issues Regarding Fiscal Transfers 33. The above presentations are made not to dwell on the magnitude of fiscal transfers in the past but to highlight some of the issues that will undoubtedly be raised in the bilateral negotiations regarding the interim self-governing arrangements. In this context, the following points can be made. First, as far as the revenue losses are concerned, there seems to be no doubt that agreement should be reached between the two sides about the magnitude of these losses and on a formula for revenue-sharing or revenue transfers. More will be said on this point in a later section. Second, there is no doubt that expenditures on security in the Occupied Territories had constituted a burden on the Israeli budget. However, how much needs to be spent on security in the interim period and who is going to spend it, is a subject for negotiations at the bilateral level and the Bank is not taking a position on this issue. 109 34. Third, although residents of the Occupied Territories are benefiting from the use of Israeli infrastructure, this use does not result in itself in an incremental direct fiscal transfer from the Israeli Treasury to the Occupied Territories. The same applies to things like transfer of know-how and technology. Fourth, in so far as the unemployment benefits being paid to Israeli workers is concerned, this argument presupposes that the Palestinian labor has replaced Israeli labor, i.e. that the employment of Palestinians has resulted in increased unemployment in Israel. There is no empirical evidence to prove this hypothesis. In fact, past employment figures show that new immigrants to Israel, for example, tended to shy away from working in the construction and agricultural sectors where most of the Palestinian workers are employed. Therefore, Palestinian labor should be viewed as a complement rather than a substitute for Israeli labor. Fifth, while the availability of income tax credit points to Palestinian workers represents a loss of revenue for Israel, it is part of the Israeli decision of 1970 to equalize the employment conditions between Israeli labor and Palestinian labor, by imposing the same income tax and social security systems to both. The whole issue regarding the treatment of Palestinian labor versus Israeli labor is also a matter to be discussed in the negotiations. In this connection, the Israeli calculation that income tax credit points to Palestinian workers costs about NIS 250 million annually is based on the assumption that two-thirds of the Palestinian labor is registered. However, as pointed out in Attachment I, the percentage of registered workers --at least up to 1991-- was only about 30 percent. The cost of income tax credit points in 1991 would then be only about NIS 100 million. 35. For the above reasons, and for the sake of the analysis that follows below, it will be assumed that the current incremental non-security related fiscal transfers from the Israeli budget consist of the expenditures on consumer subsidies (NIS 60 million) and on medical services (NIS 5 million) provided to residents of the Occupied Territories. These expenditures amount to 1.2 percent of GDP. Furthermore, capital expenditures in the Occupied Territories financed by Israel are estimated at 0.8 percent of GDP (this being the difference between the figures from the national accounts and the figures from the Civil Administration and the municipalities). Altogether, the direct non-security related transfers amount to 2 percent of GDP. On the revenue side, it would be assumed that the revenues foregone amount to 8 percent of GDP. However, as explained earlier, these figures should be treated only as illustrative, and not as indicative of any position taken by the Bank regarding the negotiations between the various parties on these issues. IV. Toward an Integrated View of Public Sector Finances 36. In light of the discussion in the previous sections, it is clear that the magnitude of the public sector finances in the Occupied Territories cannot be evaluated by simply taking the consolidated budgetary position of the Civil Administration and the municipalities. As indicated previously, the fiscal transfers between the Occupied Territories and Israel, especially on the revenue side, constitute an important element in the analysis of the fiscal stance. Furthermore, UNRWA, and some other multilateral, regional and bilateral donors have been partly financing activities that are usually undertaken by the public sector. These elements need to be merged to arrive at an integrated position of the public sector. While precise data on UNRWA operations is available, the magnitude of the operations of other organizations performing quasi-governmental activities is not known with any significant degree of precision. It will be arbitrarily assumed here that non-UNRWA quasi-governmental expenditures averaged annually 3 percent of GDP during 1987-91, divided into 2.5 percent of GDP as current expenditure and 0.5 percent of GDP as capital expenditure (other than those capital expenditures undertaken through the municipalities). These numbers would need to be ascertained during subsequent discussions. 110 37. Table 5 shows the position of the public sector finances before and after integrating the various fiscal elements indicated above. The revenue/GDP ratio would rise by 8 percentage points to 24.1 percent reflecting the addition of the estimated revenue losses of 8 percent of GDP. Current expenditures excluding security would rise by 8.2 percent of GDP, reflecting UNRWA operations of 4.5 percent of GDP, other operations of a quasi-governmental nature of 2.5 percent of GDP, and transfers from Israel of 1.2 percent of GDP. Regarding capital expenditure, they would rise by 1.3 percent of GDP to 3.5 percent reflecting Israel's contribution of 0.8 percent of GDP and other contributions of 0.5 percent of GDP. 38. While this integrated approach shows an increase in cash balances which goes to the Israeli Treasury, it should be kept in mind that such an approach does not take into account expenditures by Israel on security in the Occupied Territories. According to the Israeli authorities, such expenditures amounted to about 1 billion shekels a year since the beginning of the Intifada, which is well over 20 percent of GDP. 111 Annex 2 Attachment 1 Page 1 of 2 Palestinian Workers in Israel: Social Security Payments and Benefits This note discusses some issues related to social security payments made with respect to Palestinian workers in Israel, the benefits that these workers are entitled to, and the concept of the "deduction fund". An Israeli government decision was taken in October 8, 1970 to try to equalize employment conditions between Israeli workers and Palestinian laborers working in Israel. The aim of the decision was in fact to remove the incentive of Israeli businesses to employ Palestinian workers over Israeli workers by requiring that social security payments be made towards Palestinian workers as well as Israeli workers. The total employer and employee contributions toward social security amount presently to 12.7 percent of salary, divided into 7.4 percent for the employer and 5.3 percent for the employee. The palestinian worker is entitled to benefits amounting to 0.9 percent of salary. The remaining 11.8 percent that he is not entitled to constitutes the "deduction fund" which is remitted to the Civil Administration. The Civil Administration uses these receipts to finance general expenditure, and not specific services directed towards the workers from whose salaries the deductions are made. While the Israeli worker is entitled to all these benefits, the Palestinian worker in Israel is entitled to only the last three benefits, namely maternity benefits, benefits if an accident takes place in the work place, and benefits in case the employer goes into bankruptcy. As mentioned earlier, the contributions made towards those benefits that the workers are not entitled to receive are remitted to the budget of the Civil Administration. It should be noted, however, that this system of payments and benefits applies only to registered workers. If one takes into account the amounts that had been in fact remitted to the Civil Administration during 1987-91 and the estimated earnings by Palestinian workers (both registered and unregistered) in Israel during that period, one reaches the conclusion that only 30 percent of the workers had been registered. The Israeli authorities have said that enforcement of the regulations requiring the registration of workers in the recent past have been tightened significantly in the recent past especially in the aftermath of the Gulf war, and that receipts from the deduction fund should show a large increase. It should also be noted that Palestinian workers in Israel pay income taxes on their earnings in accordance with Israeli income tax law. For that purpose, they are also considered as residents of Israel and are entitled to the income tax credit points which helps them reduce their income tax liability. The income tax payments which accrue to the Israeli Treasury, amounted to NIS 32 million in 1992. 112 Annex 2 Attachment 1 Page 2 of 2 The following represents a listing of the various benefits and the corresponding employer and employee contributions: Employer Employee Type of Benefit Contribution Contribution Total Old Age and Minor 0.67 2.70 3.30 Pension Family Allowance 0.81 -- 0.81 Accidents Outside the Work Place 0.04 0.15 0.19 Unemployment Benefits 0.04 0.15 0.19 Disability Benefits 0.10 1.30 1.40 Reserve Benefits 0.47 0.45 0.92 Geriatric Services 0.02 0.10 0.12 Health Insurance in 4.95 -- 4.95 Israel Maternity Benefits 0.04 0.60 0.64 Accidents in Work 0.23 -- 0.23 Place Bankruptcy of 0.02 -- 0.02 Employer Total 7.35 5.35 12.70 113 Annex 2 Attachment II Page 1 of 1 Individual Income Tax: Occupied Territories and Israel 1. Both the Occupied Territories and Israel have income tax schedules that are indexed to inflation. For the sake of comparison, we will take the schedules that had been prevailing in January 1992, and compare the amount of tax that an individual wage earner with a non-working wife and three children would have to pay on annual salaries of (a) NIS 12,000; (b) NIS 30,000.; and (c) NIS 48,000. 2. The tax schedules are shown in Tables 8 and 9. In Israel, the taxpayer first computes the amount of tax to be paid according to the tax schedule and before taking any deductions. The taxpayer then reduces his tax liability through a crediting mechanism, as given in the schedule which is also shown in Table 8. The taxpayer also then reduces his tax liability by taking additional credit points as follows: 2 credit points for being resident and I credit point for a non-working wife. Each credit point is worth (annually) NIS 1,128 (1992). 3. In the Occupied Territories, the taxpayer is entitled to the following deductions before arriving at the taxable income base: a fixed annual deduction of NIS 1,300; a resident annual deduction of NIS 3,100; deduction for non-working wife of NIS 1,550; and deductions per child of NIS 250 up to 5 children. After the taxable income is arrived at, the tax liability is calculated from the schedule. 4. A wage earner in Israel with a nonworking wife and three children with an annual income of NIS 12,000 pays no income tax, while in the Occupied Territories, he pays NIS 464, or about 4 percent of salary. On a salary of NIS 30,000, the Israeli taxpayer pays NIS 1,999, or about 7 percent of salary, while in the Occupied Territories, he pays NIS 5,088, or 17 percent of salary. With an NIS 48,000 salary, the Israeli taxpayer pays NIS 7,180 or about 15 percent of salary, while a resident of the Occupied Territories pays NIS 13,285, or about 28 percent of salary. 114 Table 1. Civil Administration Budget, 1987/88-1992 Actuals Budget 1987/88 1988/89 1989/90 1990/91 II-IV, 91 1992 (In millions of New Israeli Shek,ls) Revenue 345 366 462 546 577 727 Income tax So 73 109 134 125 175 VAT 52 55 69 89 106 285 Customs and excises 44 43 55 73 72 0 Health fees 16 23 31 28 38 61 Other fnes and charges 135 123 158 188 192 150 Deduction fund 42 51 40 34 44 56 Current expenditure 286 325 381 471 410 649 Health 67 73 84 96 91 130 Education 103 93 116 146 124 198 Welfare 2_ 15 14 17 18 28 Other 93 144 167 212 177 293 Development expenditure 86 41 49 75 87 119 Total expenditure 372 366 430 546 497 768 Overall deficit(-) or surplus -27 2 32 0 80 41 Financing 27 -32 0 -80 41 Israeli Treasury 27 0 0 0 0 41 Increase in cash balances(-) 0 -2 -32 0 -80 GDP at market prices 2837 3025 3442 4477 4884 (In percent of GDP)' Revenue 12.2 12.2 13.4 12.2 13.5 Income tax 2.0 2.4 3.2 3.0 3.2 VAT 1.8 1.8 2.0 2.0 2.6 Customs and excises 1.6 1.8 1.6 1.6 1.8 Health fees 0.6 0.8 0.9 0.6 1.0 Other fees and charges 4.8 4.1 4.6 4.2 4 8 Deduction fund 1 5 1.7 1.2 0.8 1.1 Current expenditure 10.1 10.7 11.1 10.5 10.8 Health 2.4 2.4 2.4 2.1 2.4 Education 3.6 3.! 3.4 3.3 3.3 Welfare 0.8 0.5 0.4 0.4 0.4 Other 3.3 4.8 4.9 4.7 4.7 Development expenditure 3.0 1.4 1.4 1.7 2.2 Total expenditure 13.1 12.1 12.5 12.2 13.0 Overall deficit(-) or surplus -1.0 0.1 0.9 0.0 1.6 Source: Civil Administration 1/ Anualized for 1991. 115 Table 2. Budgets of the Municipalities, 1987/88-1992 Actuals 1987/88 1988189 1989/90 1990/91 I-IV, 91 (In millions of New Israeli Shekels) Revenues 127 90 110 134 134 Taxes and fees 59 27 30 33 38 Water and sewarage charges 15 14 15 18 19 Electricity charges 53 49 65 83 84 Current expenditure 118 94 124 142 138 General services 56 39 43 46 41 Water sewerage 14 12 17 19 14 Electricity 48 43 64 77 83 Development expenditure 44 16 14 16 19 Total expenditure 162 110 138 158 157 Overall deficit(-), surplus -35 -20 -28 -24 -16 Financing 35 20 28 24 16 From civil administration 24 10 11 14 16 From external financing 4 1 3 5 2 Self-financing 10 3 3 3 1 Other -3 6 11 2 -3 GDP at market prices 2837 3025 3442 4477 4884 (In percent of GDP) Revenues 4.5 3.0 3.2 3.0 3.6 Taxes and fees 2.1 0.9 0 9 0.7 0.9 Water and sewarage charges 0.5 0.5 '0.4 0 4 0.5 Electricity charges 1.9 1.6 1.9 1.9 2.1 Current expenditure 4.2 3.1 3.6 3.2 3.5 General services 2.0 1.3 1.2 1.0 1.1 Water and sewarage 0.5 0.4 0.5 0.4 0.4 Electncity 1.7 1.4 1.9 1.7 2.0 Development expenditure 1.6 0.5 0.4 0.4 0.5 Total expenditure 5.7 3.6 4.0 3.5 4.0 Overall deficit, surplus -1.2 -0.7 -0.8 -0.5 -0.4 Source. Statistical Abstract of Isracl, various issues 116 Table 3. Budgetary Operations of the Public Sector, 1987/88-91 Actuals Average 1987/88 1988/89 1989/90 1990/91 II-IV,91 1987-91 (In percent of GDP) Revenue 16.7 15.2 16.6 15.2 17.1 16.2 Total expenditure 17.9 15.4 16.2 15.5 16.6 16.3 Current expenditure 14.2 13.8 14.7 13.7 14.3 14.1 Development expenditure 3.7 1.6 1.5 1.8 2.3 2.2 Overall budget surplus or deficit -1.2 -0.2 0.4 -0.3 0.5 -0.2 Financing 1.2 0.2 -0.4 0.3 -0.5 0.2 From Israeli Treasury 0.9 0.0 0.0 0.0 0.0 0.2 From external sources 0.1 0.1 0.1 0.1 0.1 0.1 Change in balances 0.2 0.1 -0.5 0.2 -0.6 -0.1 Sources: Tables 1 and 2; and staff calculations. 117 Table 4. Losses from Tax Payments by Palestinians, 1991 (In millions of New Israeli Shekels) Item Loss Taxes on imports via Israel 60 Taxes on trade with Israel 340 Value Added Tax 210 Customs duties on import content 17 Fuel taxes 40 Excise taxes 18 Purchase taxes 40 Electricity purchases 15 Total 400 Memorandum item: In percent of 1991 GDP 8 Source: Staff calculations 118 Table 5. Integrated Public Sector Finances, 1987-91 Integrated Public Public Sector Sector Average Average 1987-91 1987-91 (In percent of GDP) Revenue 16.1 24.1 Expenditure excluding defense 16.3 25.8 Current expenditure 14.1 22.3 Of which: UNRWA 4.5 Other quasi-government 2.5 Israeli budget 1.2 Development expenditure 2.2 3.5 Of which: Israeli budget 0.8 Other quasi-government 0.5 Overall deficit (-)/ surplus (+) -0.2 -1.7 Financing 0.2 1.7 Israel 0.2 2.2 UNRWA -- 4.5 Other external sources 0.1 3.1 Increase in cash balances -0.1 -8.1' Sources: Tables 3 and 4; and staff calculations 1/ This increase, basically reflecting the revenue foregone by the Civil Administration, is more than offset by substantial expenditures by Israel on security in the Occupied Territories. 119 Table 6. Revenue and Expenditure Comparisons: Egypt, Israel, Jordan, OT and Developing Countries. Average: 1987-91 1989 Egypt Israel Jordan OT OT Developing Adjusted countries (In percent of GDP) Revenue 23.1 38.6 27.2 24.1 21.7 22.1 Tax revenue 15.2 33.9 14.3 16.1 16.1 17.5 Direct taxes 5.7 17.5 3.4 4.2 4.2 5.4 Indirect taxes 9.5 16.4 10.9 11.9 11.9 12.1 Nontax revenue 7.9 4.7 12.9 8.0 8.0 4.6 Expenditure 42.2 50.2 46.4 28.0 Current expenditure 28.9 45.7 37.2 21.0 Developemnt expenditure 13.3 4.5 9.2 7.0 Expenditure excluding defense 37.2 36.8 30.5 25.8 23.6 25.6 Current expenditure excluding defense 23.9 32.3 21.3 22.8 20.1 18.6 Development expenditure 13.3 4.5 9.2 3.5 3.5 7.0 (In percent of GNP) Memorandum items Revenue 21.7 39.4 28.9 17.8 16.2 23.3 Of which: Indirect taxes 8.9 16.7 11.6 8.9 8.9 12.7 120 Table 7. Israel: Individual Income Tax, January 1992 Monthly Taxable Income Rate/Credit (New Israeli Shekels) (percent) Tax Rate 0-2,050 21.00 2,051 - 3,380 31.50 3,381 - 4,820 36.75 4,821 - 7,480 47.25 Over 7,480 50.40 Tax Credit 0 - 2,050 4.30 2,051 - 2,098 35.00 2,099 - 3,380 3.40 3,381 - 3,468 32.00 3,469 - 4,820 2.50 4,821 - 4,957 27.00 4,958 - 10,080 1.70 10,081 - 10,739 26.00 Over 10,739 NIL Source: Kesselman and Kesselman Guide to Investment in Israel, 1992/3 121 Table 8. Occupied Territories: Individual Income Tax, January 1992 Monthly Taxable Income Tax Rate (New Israeli Shekels) (Percent) 0- 600 0 601 - 1,000 8 1,001 - 1,667 16 1,668 - 2,500 32 2,501 - 3,750 45 3,751 and up 48 Source: Civil Administration Annex 3: Trading Patterns in a Less Restricted World Results from a Gravity Model Impact, Gravity Flow Estimation As countries in the region move toward normalization of relations, it is natural to ask how their trading patterns will change. Our approach is based on a best-case scenario, in which the fundamental determinants of trade flows among the countries in the region become similar to those of present-day market economies. To that end, we rely on a gravity-type equation.' In its basic form, the equation is written as: T.={TP,,TP.,TA..} where TPij refers to the trade potential of countries i and j, and TA,, is the trade attraction between them. The gravity model specifies that a country's trade potential depends on its total output and the trade intensity of that output. Trade intensity depends on economic as well as geographic features of a country. The share of a particular partner depends on the partner's trade potential and the trade attraction. The trade attraction is a function of geographic proximity, economic similarity, the existence of preferential trading arrangements, and cultural similarities. In order to capture these factors, we specify the following equation: TY =f, (dist) +0,2(bordi) +1,{ I LGDPPC .-LGDPPC, | } 6,LGDP +6,LGDPPC +b,Size.+b4Island + -y LGDP.+y2LGDPPC1+y3Size +yIsland, + 3 4 O kRegionk+E X'Language, k-1 1-1 where Tj refers to bilateral non-fuel import and export values in US$. The US$ per capita GDPs at purchasing power parity for the reporter and the partner countries are included in order to capture the effects of each country's level of development. The variables for distance between countries and the corresponding absolute difference in per capita GDPs (at purchasing power parity) capture the Linder hypothesis (1961).2 The former refers to the distance between the economic centers of the two countries, and the latter is a proxy for economic similarity. The size of each country is measured by area in square kilometers, and separate dummy variables are included for islands and the existence of a common border. 'Gravity models have been applied successfully to different types of flows, such as migration, commuting, recreational traffic, and interregional and international trade. 'Linder (1961) postulates that the intensity of bilateral trade in manufactures is determined by similarities in demand structures (captured through similarities in per capita incomes), and geographical distance between importing and exporting countries. 123 Separate dummy variables are also included when necessary for the EEC, LAFTA, and ASEAN.' Finally, a language dummy variable is included to proxy for cultural similarities. It assumes the value of one if the countries share a common language, otherwise its value is set to zero; separate dummy variables are included for English, Spanish, Portuguese and Arabic. Finally, it was assumed that all English-speaking reporter countries share the language with Israel. Equation 2 has been estimated using data for 15 middle- to upper- income economies with substantial non-primary exports. The estimated coefficients for imports and exports along with other statistics are presented in Tables 1 and 2.4 Nearly all the variables (with the exception of the per capita GDPs for the reporter and partner countries) have the expected sign and are quite significant. Trade increases with the level of GDP of the reporter and partner, and decreases with size. Sharing a common border or a common language enhances trade, while distance restrains it. The estimated coefficients are then used along with the actual data for Israel and the Occupied Territories (OT) to project the direction of their trade. The results for Israel are presented in Tables 3 and 4 below. For the OT, four different scenarios are postulated, and their results are reported in Table 5. The first scenario assumes that the two countries share a common language in addition (Arabic). Scenario 3 adds to the second the assumption of a free trade area (FTA) between Israel and the OT. Finally, under scenario 4, Jordan is assumed to be a third member of the FTA. The first two columns of Tables 3 and 4 indicate the actual 1989 volume of non-fuel trade and the corresponding partner's share, while the third column reports the predicted shares which are obtained from the simulation exercise. The last column shows what the predicted share represents for the partner countries' 1989 share in non-fuel trade assuming zero transport costs. In the case where the OT is the partner, actual trade figures refer to 1987, the latest year for which trade data were available. Due to lack of comprehensive partner country data for the OT, Table 5 reports only the predicted shares. Finally, since our goal in this exercise is to simulate the redirection of trade of these two economies, rather than their trade potential, the predicted amounts of trade of Israel and the OT have been normalized to their actual levels. On the import side, despite the fact that Israel's overall non-fuel import bill has been kept constant, the predicted changes in its redirection are quite significant. Israel is predicted to more than triple its import shares from its Arab neighbors (Table 3). This is anticipated to come at the expense of both the United States and the EEC. Egypt and the OT are project to supply more than half of Israel's imports that originate from the Arab Middle Eastern countries. With a 3% import share, Egypt is projected to emerge as Israel's most important import partner in the area. This translates into one-fifty of Egypt's total non-fuel 1989 exports. The OT are projected to follow with a 2.2% share in Israel's 'For example, Aitken (1973) found European trade to be significantly influenced by membership in the EEC or EFTA and by being neighbors. Srivastava and Green (1986) found cultural similarity, political circumstances, economic union and former colonial status to be significant determinants of trade between nations. 'Variables with an "L" prefix have been converted to natural logarithms. Moreover, since the values of bilateral trade are only observed for non-negative values, ordinary least squares estimates will be inconsistent. Therefore, we use maximum likelihood estimation technique. 124 import bill (down from an actual of 2.6%). This translates into more than 67% of total 1987 OT's exports. This high share can be attributed to the OT's relatively small 1987 export base of $385 million. On the export side, the redirection of Israel's trade appears to be less dramatic. It is estimated that the Arab countries would combine to absorb only about 11 % of Israel's exports, versus an actual figure of 9.3%. This results from intra-regional trade diversion--away from the OT and towards the other Arab countries in the region. The share of the OT in Israel's exports, while remaining the largest in the region, is projected to drop from 9.3% to 4.3%, with much of the slack being picked up mainly by the relatively small-sized countries in the region (Lebanon, Jordan and Syria). Finally, applying the predicted trade shares of Israel to its actual non-fuel trade results in Israel experiencing, on balance, a trade deficit of about $50 million with the Arab countries. This result is largely driven by a projected $243 million deficit with Egypt,s and a $183 million surplus with the OT. Israel is project to run bilateral trade surpluses with countries like Lebanon, Jordan and Syria, while at the same time experiencing deficit with the rest of the Arab countries (mainly the Gulf Cooperating Council (GCC) and Maghreb countries). Under the assumption that the OT and Israel would only share a common border with each other, it is project that the OT would be sourcing some 31% of their imports from their neighbors who, in their turn, are projected to absorb more than 50% of OT's total exports. Under this scenario, Jordan and Egypt are projected to be the single most important regional trading partners of the OT, and the GCC the most important trading bloc in the region. Under this scenario, Israel's share in OT's trade is projected to be the smallest in the region. Adding the assumption of a common language between Israel and the OT would more than double their bilateral trade shares. However, Jordan and Egypt still emerge as the most valuable single partners for the OT, while the role of the GCC bloc remains basically unchanged. Scenario 3 assesses the potential importance of creating an FTA between Israel and the OT. It does so by relying on the trade-weighted coefficient of integration reported in Tables 1 and 2 for the EEC, LAFTA, and ASEAN.' Under this scenario, Israel re-emerges to dominate OT's trade, while the position of Jordan in the OT's trade and to a lesser extent the GCC bloc are dramatically eroded. Finally, under the fourth scenario where Jordan is now assumed to have become a third member of the FTA, Israel is projected to cede its leading role in the OT's trade to Jordan. More than half of the OT's trade is projected to take place with its FTA partners. The OT's trade with the GCC bloc would suffer, and so would trade with North America and the EEC. Trade with Egypt appears to be resilient to change under differing scenarios. 'This results in mainly due to two factors. Firstly, note from Tables I and 2 that trade is inversely related to size, with the coefficient estimate on the import side equal in absolute value to approximately one-fourth of the corresponding estimate on the export side. Secondly, and as is reported in Tables 1 and 2, the trade potential between any two countries is inversely related to the differences in their per capita income. The coefficient estimate on the import side is much larger than the corresponding export estimates. These two factors combine to create the noted deficit. 6Trade shares with the countries in the EEC. LAFTA and ASEAN are those of Israel. 125 Table 1: Regression results using imports as dependent variable and 14 mid to upper income economies as sample Maximum Likelihood Estimates Log-Likelihood.............. -2940.0 Variable Coefficient Std. Error T-ratio Probltlzx Mean of X Std.D.of X INTERCEPT .899480 .650426 1.383 .16669 1.0000 .00000 LDSTIJ -1.08914 .160483 -6.787 .00000 1.5830 .70121 BORDIJ .641652 .553652 1.159 .24648 .28571E-01 .16664 LGDPI 1.00517 .151708 6.626 .00000 3.7083 1.0262 LGDPP 2.16734 .881077E-01 24.599 .00000 2.9076 1.7830 LGDPPCI -.111740 .218105 -.512 .60843 .90250 .60032 LGDPPCP .110293 .115853 .952 .34109 .57479 1.3385 IDEEC .685357 .875976 .782 .43398 .12030E-01 .10906 IDLAFTA 2.23842 .671386 3.334 .00086 .30075E-01 .17086 IDASEAN 2.56435 1.26306 2.030 .04233 .60150E-02 .77352E-01 IENGLISH 1.62835 .785639 2.073 .03820 .15038E-01 .12175 ISPANISH 1.81507 .498464 3.641 .00027 .51128E-01 .22034 IPORTUG 1.09457 1.71185 .639 .52256 .30075E-02 .54779E-01 IARABIC .148882 .950750 .157 .87556 .11278E-01 .10564 LADYPC -.690041E-01 .347906E-01 -1.983 .04732 3.3222 3.0526 LSIZEI -.250774 .119872 -2.092 .03644 5.6807 1.4719 LSIZEP -.514593 .639710E-01 -8.044 .00000 5.4759 1.9882 ISLDI .501866 .309396 1.622 .10479 .14286 .35006 ISLDP .238707E-02 .270401 .009 .99296 .19850 .39902 a 3.33184 .776335E-01 42.918 .0000 Table 2: Regression results using exports as dependent variable and 14 mid to upper income economies as sample Xaximum Likelihood Estimates Log-Likelihood.............. -3067.4 Variable Coefficient Std. Error T-ratio ProbttjZx Mean of X Std.D.of X INTERCEPT 2.89202 .549115 5.267 .00000 1.0000 .00000 LDSTIJ -1.26950 .137294 -9.247 .00000 1.5830 .70121 BORDIJ .703754 .523980 1.343 .17924 .28571E-01 .16664 LGDPI 2.30660 .128827 17.905 .00000 3.7083 1.0262 LGDPP 1.28051 .739157E-01 17.324 .00000 2.9076 1.7830 LGDPPCI -.535192 .184015 -2.908 .00363 .90250 .60032 LGDPPCP .859836E-01 .986857E-01 .871 .38360 .57479 1.3385 IDEEC .654495 .757953 .864 .38786 .12030E-01 .10906 IDLAFTA 2.37628 .579658 4.099 .00004 .30075E-01 .17086 IDASEAN 1.89703 1.09295 1.736 .08262 .60150E-02 .77352E-01 IENGLISH 2.77048 .668256 4.146 .00003 .15038E-01 .12175 ISPANISH 1.74838 .427547 4.089 .00004 .51128E-01 .22034 IPORTUG 3.90030 1.45074 2.688 .00718 .30075E-02 .54779E-01 IARABIC 2.02706 .784447 2.584 .00976 .11278E-01 .10564 LADYPC .207566E-01 .297633E-01 .697 .48556 3.3222 3.0526 LSIZEI -.923003 .100862 -9.151 .00000 5.6807 1.4719 LSIZEP -.237825 .543952E-01 -4.372 .00001 5.4759 1.9882 ISLDI 1.44240 .260571 5.536 .00000 .14286 .35006 ISLDP -.265673 .229746 -1.156 .24753 .19850 .39902 a .2.88713 .621701E-01 46.439 .0000 126 Finally, and as would be expected from the simulation results at hand, the OT is expected in general to run a trade deficit with countries characterized by a relatively high per capita income, and the reverse with relatively lower per capita income countries. Table 3: Actual and Predicted Non-Fuel Import Shares of Israel. Actual Actual Share Predicted Share Israel's Share in Partner Imports (%) (%) Partner (%) (USS 000) Egypt 4,873 0.0 3.1 19.98 Occupied Territories' 303,700 2.6 2.2 67.76 Syria 0 0.0 1.1 9.71 Lebanon 0 0.0 0.3 8.72 Jordan 0 0.0 0.5 6.41 GCC2 0 0.0 0.9 2.11 Other Middle East' 0 0.0 0.5 N.A. Other North Africa' 0 0.0 1.1 2.18 All Arab Countries 308,573 2.6 9.7 - Iran 0 0.0 0.8 0.39 North Americas 2,436,041 20.5 14.5 0.54 European Community 6,622,028 55.8 49.3 0.36 EFTA 1,451,675 12.2 5.3 0.46 Other Developed' 431,554 3.6 12.4 0.20 South & Central America 168,195 1.4 1.4 N.A. Sub-Saharan Africa 30,247 0.3 0.8 0.23 Asia & Pacific 417,813 3.5 5.8 - TOTAL 11,866,126 100.0 100.0 'Includes both the West Bank and Gaza Strip. 'Include only the following countries for which data were available: Saudi Arabia, Kuwait, The United Arab Emirates and Oman. 'Includes Yemen, Sudan, and Iraq. 'Includes Yemen, Sudan and Iraq. 'Includes the United States and Canada. 'Includes Australia, Japan, New Zealand, South Africa and Turkey. 127 Table 4: Actual and Predicted Non-Fuel Export Shares of Israel. Actual Actual Predicted Israel's Partner Exports Share Share Share in (US$ 000) (%) (%) Partner (%) Egypt 4,480 0.0 1.2 1.70 Occupied Territories' 961,200 9.3 4.3 42.27 Syria 0 0.0 0.7 2.66 Lebanon 0 0.0 0.3 2.16 Jordan 0 0.0 0.4 2.40 GCC2 0 0.0 1.3 0.47 Other Middle East? 0 0.0 0.9 N.A. Other North Africa' 0 0.0 1.6 0.94 All Arab Countries 965,680 9.3 10.7 ---- Iran 0 0.0 0.7 N.A. North America' 3,423,388 33.1 16.2 0.31 European Community 3,389,944 32.8 30.0 0.29 EFTA 447,908 4.3 4.5 0.25 Other Developed' 956,357 9.3 14.1 0.65 South & Central America 209,415 2.0 4.5 0.69 Sub-Saharan Africa 42,427 0.4 5.2 N.A. Asia & Pacific 897,493 8.7 14.1 0.43 TOTAL 10,332,612 100.0 100.0 'Includes both the West Bank and Gaza Strip. 'Include only the following countries for which data were available: Saudi Arabia, Kuwait, The United Arab Emirates and Oman. 'Includes Yemen, Sudan, and Iraq. 'Includes Yemen, Sudan and Iraq. 'Includes the United States and Canada. 'Includes Australia, Japan, New Zealand, South Africa and Turkey. 128 Table 5: Predicted Non-Fuel Import & Export Shares of the Occupied Territories Under the Different Scenarios' Sharing Only Sharing Border Sharing Border Sharing Border, Common Border & Language & Language & Language & FTA with Israel with Israel FTA with Israel with Israel & Jordan Import Export Import Export Import Export Import Export Share Share Share Share Share Share Share Share Partner (%) (%) (%) (%) (%) (%) (%) (%) Egypt 4.5 6.3 4.3 5.9 4.5 6.8 3.2 5.9 Israel 2.3 1.5 4.7 3.6 36.2 20.2 24.1 16.6 Syria 3.3 5.3 3.2 5.2 1.8 4.1 1.2 3.4 Lebanon 1.2 2.5 1.2 2.4 0.5 1.9 0.3 1.6 Jordan 5.8 6.4 5.7 5.3 2.2 3.9 34.2 20.5 GCC, 5.6 10.8 5.3 11.2 3.2 8.8 2.6 7.6 Other Middle East' 2.8 6.4 2.9 6.9 1.8 5.3 1.2 4.4 Other North Africa' 5.4 11.3 5.5 10.9 3.1 8.7 2.1 7.1 All Arab Countries 30.9 50.5 32.8 51.4 53.3 59.7 68.9 67.1 Iran 0.5 0.7 0.5 0.8 0.4 0.u 0.3 0.5 North America3 20.8 9.9 20.2 9.7 14.9 12.3 9.4 10.1 European Community 22.5 15.1 21.6 14.9 14.1 12.3 9.4 10.1 EFTA 3.5 3.2 2.9 2.8 2.2 3.3 1.5 2.7 Other Developed' 12.8 6.3 12.6 6.5 8.9 5.4 5.9 4.4 South & Central America 3.9 5.7 4.1 5.6 2.7 4.9 1.8 4.1 Sub-Saharan Africa 0.7 2.5 1.1 2.4 0.5 2.3 0.3 1.8 Asia & Pacific 4.4 6.1 4.3 5.9 3.1 5.3 2.1 4.3 TOTAL 100.0 100.0 100.0 100.0 100.1 100.0 100.1 100.1 The predictions are based on the assumption that the West Bank is the "center of gravity" c` the Ocupid Territories. Again, Occupied Territories includes both the West Bank and Gaza Strip. 2 Include only the following countries for which data were available: Saudi Arabia, Kuwait, The United Arab Emirates and Oman. 'Includes Yemen, Sudan and Iraq. *Includes Morocco, Tunisia, Algeria and Libya. 'Includes the United States and Canada. 6 Includes Australia, Japan, New Zealand. 129 Data Sources and Description Trade T is the average annual 1987-1989 US$ value of total non-fuel (SITC 0 through 9 less 3) imports or exports. The data were extracted from the UNSO COMTRADE data base. Geography Distance is the straightline distance between the economic centers of gravity of the respective countries, from Linneman (1966). Border is equal to one if the countries share a border, zero otherwise. Economic Activity GDP is US$ GDP taken from the World Bank Atlas. The Atlas method uses a conversion factor other than the official rate when the latter is wildly distorted. GDPPC is US$ GDP per capita from the World Bank Atlas. Area is the land area in thousand square kilometers. Island is equal to one if the country is an island, zero otherwise. Trade Preference Arrangements Region is equal to one if both countries are party to a preferential trading arrangement, zero otherwise. The arrangements included are: ASEAN, EEC, and LAFTA. Cultural Language is equal to one of both countries share a common language. The languages included are: Arabic, English, Portuguese, and Spanish. The Sample The partner countries used in both samples are 95 non-socialist economies with total imports of at least $450 million in 1987. The reporter economies chosen were: Greece, Ireland, Korea, Portugal, Spain, Uruguay, Venezuela, Singapore, Hong Kong, Taiwan, Italy, Austria, Tunisia and Morocco. Annex 4: Simulation Models The simulation models are built around several blocks which are described here. 1. Population. In line with the human resources chapter, population is assumed to grow at a rate of 3.5 percent a year in the West Bank, and 4.0 percent in Gaza. The overall labor participation ratio is assumed to start at 20 percent and to increase over time to 21 percent. 2. Work in Israel. Initially, labor working in Israel is taken to be 97,000, its level in 1991. In the base case scenarios with smooth labor cut-off, we assume that the labor force working in Israel shrinks by 10 percent a year. In the labor cut-off scenarios, we assume that the labor force in Israel drops to 50 percent of its 1991 level in year 1, and shrinks by 10 percent a year afterwards. The minimum wage in Israel, which is the wage earned on average by Palestinian working in Israel, is taken to be $7660 per year in 1991, and we assume that it grows at a average rate of half a percent a year. 3. Aggregate domestic production and aggregate income is modelled using a Cobb-Douglas production function of the form: F = AKlI"), where L is the labor force at work, and K is the total capital stock, which should be taken in this context as a measure of the total productive capital stock, including machinery, inventories, land, and real estate. The calibration is done to fit the situation in the base year, 1991, and is taken to be the solution to a system of three equations: (i) we set the actual domestic product per worker ($9958) equal to F/L. (ii) we set the actual average domestic yearly wage rate ($4900) equal to the first derivative of the production function with respect to labor, A(1-a)k, where k is the capital to labor ratio, k K L (iii) we estimate independently the shadow cost of capital at 15 percent, and set it equal to the first derivative of the production function with respect to capital, Aak('-). The three equations are solved for A, k, and a. The solution to this system yields: a=0.5, A=50, and k=$33,000. GDP is defined as the value of domestic production F. GNP is defined as GDP plus workers remittances. 4. Productivity Gains. In the scenarios that assume future productivity gains, we increase A over time. In the scenarios with "good policy", A is increased by 5 percent a year for four years in a row and by 1% per year thereafter. In the scenarios with "medium policy", A is increased by 5 percent a year for two years in a row only. 5. Labor and Unemployment. Let TL be total labor force, L(H) and L(I) be labor demand at home, and Israeli demand for Palestinian workers, and U be the number of unemployed. Technically, the projections require the use of one of two procedures: 131 (I) labor demand is taken as given, and the wage rate is computed as the marginal productivity of labor A(1-a)k; (II) the wage rate is taken as given, and the labor demand at this wage is computed by solving A(1-a)k = w for L. We consider several possible regimes. a. Constrained labor mobility with flexible wages at home (full employment). In this case, technique (I) is used, with labor demand at home set to TL-L(I). b. Constrained labor mobility with inflexible wages at home (unemployment). In this case, the unemployment rate is set exogenously (so that after the occurrence of a negative shock, the initial wage drop is deemed realistic) and labor demand at home is set to TL-L(I)-U. c. Unconstrained labor mobility. In this case, II is used to compute the pair [L(H), L(I)] that make the domestic wage equal to the Israeli minimum wage. In case L(I) is negative, it is set to zero, and the regime shifts to one with full employment of the total labor force at home, with wages determined by technique I. 6. Savings and Investment. A consolidated government budget module constrains public consumption and investment to the level of fiscal resources that are expected to be available. When expenditures (including public debt service) exceed government revenues, the budget deficit must be financed with external grants and loans, and with domestic borrowing. A private sector saving/investment module closes the model. The private sector's disposable income is taken to be the Gross National Product (which includes the remittances from Palestinian workers in Israel and further abroad), plus external transfers accruing to the provate sector (including from private reserves), minus domestic transfers to the government (taxes and loans). Private income is allocated between consumption and investment according to a private saving rate, which is assumed to adjust so as to smooth consumption over time and circumstances. Some of the external transfers are taken to be inflows of capital from the Palestinian diaspora and other foreign direct investors seeking to finance domestic projects (including housing), or the purchase of land. Annex 5: Statistical Appendix List of Tables Table 1: Occupied Territories, National Accounts Statistics, Selected Indicators, 1968-1991 Table 2: Occupied Territories, Gross Domestic Product by Type of Expenditure, 1968-1991. Millions of New Israeli Shekels at 1986 prices. Table 3: West Bank, Gross Domestic Product by Type of Expenditure, 1968-1991. Millions of New Israeli Shekels at 1986 prices. Table 4: Gaza Strip, Gross Domestic Product by Type of Expenditure, 1968-1991. Millions of New Israeli Shekels at 1986 prices. Table 5: Occupied Territories, National Disposable Income, 1968-1991. Millions of NIS at 1986 prices. Table 6: West Bank, National Disposable Income, 1968-1991. Millions of NIS at 1986 prices. Table 7: Gaza, National Disposable Income, 1968-1991. Millions of NIS at 1986 prices. Table 8: West Bank, Balance of Payments, 1970-1991. Millions of current US dollars. Table 9: Gaza Strip, Balance of Payments, 1970-1991. Millions of current US dollars. Table 10: Occupied Territories, Balance of Payments, 1970-1991. Millions of current US dollars. Table 11: Occupied Territories, Inflation Rates, 1971-1991, in percent. Table 12: Gross Domestic Capital Formation in Gaza, by Sector and Type of Asset. 1986 prices, millions of NIS. Table 13: Gross Domestic Capital Formation in the West Bank, by Sector and Type of Asset. 1986 prices, millions of NIS. Table 14: Occupied Territories, Gross Domestic Capital Formation by Sector and Type of Asset. 1986 prices, millions of NIS. Table 15: West Bank Contribution of Main Economic Branches to GDP, at Factor Cost, 1986- 1991. 1986 prices, millions of NIS in percentage terms. Table 16: Gaza, Contribution of Main Economic Branches to GDP, at Factor Cost, 1986-1991, at 1986 prices. Millions of NIS in percentage terms. Table 17: Occupied Territories, Contribution of Main Economic Branches to GDP (at Factor Cost) 1986-1991 at 1986 prices. Millions of NIS in percentage terms. 133 Table 18: West Bank, Private Consumption Expenditure of Goods and Services. Millions of NIS at 1986 prices. Table 19: Gaza, Private Consumption Expenditure of Goods and Services. Millions of NIS at 1986 prices. Table 20: Occupied Territories, Private Consumption Expenditure of Goods and Services. Millions of NIS at 1986 prices. Table 21: West Bank, GDP (at factor cost), by Economic Branch and Disposable Private Income. Millions of NIS at current prices. Table 22: Gaza, GDP (at factor cost), by Economic Branch and Disposable Private Income. Millions of NIS at current prices. Table 23: West Bank, Disposable Income. Current prices in millions of NIS. Table 24: Gaza, Disposable Income. Current prices in millions of NIS. Table 25: Occupied Territories, Volume of Merchandise Trade, 1968-1991. Millions of US dollars. Table 26: Occupied Territories, Trade by Destination, 1968-1991. Millions of US dollars. Table 27: Occupied Territories, Industrial Exports by Market and Commodity Composition, 1977, 1980-1986. Millions of current US dollars. Table 28: Occupied Territories, West Bank and Gaza Strip. Agricultural Exports by Market and Commodity Composition, 1977, 1980-1986. Millions of current US dollars. Table 29: Occupied Territories, West Bank and Gaza Strip, Agricultural Exports by Market and Commodity Composition, 1977, 1980-1986. Millions of current US dollars. Table 30: Occupied Territories, West Bank and Gaza Strip. Industrial Exports by Market and Commodity Composition, 1977, 1980-1986. Millions of current US Dollars. Table 31: Occupied Territories, Labor Force, Selected Data 1970, 75, 80, 85-91. Table 32: Occupied Territories, Employed by Place of Work and Selected Economic Branches. Table 33: Occupied Territories, Employed by Place of Work and Selected Economic Branches. Table 34: Average Daily Wage of Employees of the West Bank and Gaza Area by Place of Work and Selected Economic Branches. Table 35: Employment of Palestinians in Israel by Selected Economic Branches. 1970, 1975, 1980-199 1, in 000's. Table 36: Average Daily Wage of Employees of the West Bank and Gaza Area Who Work in Israel, by Selected Economic Branches. 134 OCCUPIED TERRITORIES: STATISTICAL APPENDIX Explanatory Notes 1) Credibility of the Data In view of the difficulties in data acquisitions and availability, it is important to clarify and emphasize the limitations of the Data produced in the appendix. According to the Central Bureau of Statistics of Israel and in reference to its publication relating to Judea, Samaria and Gaza area statistics, Vol. XX, 1991. The "free" movement of residents and goods and the close ties between the Israeli economy and those of Judea, Samaria and the Gaza area, make it difficult to measure the volume of transactions between the residents of those regions and residents of Israel. Furthermore, there are no comprehensive statistics throughout the Accounts. Consequently, some of the estimates are based on partial data and evaluation. The low reliability of the following items should be particularly noted: imports and exports of goods and services from Israel; private consumption of goods and services from Israel; payments to employees from Judea, Samaria and the Gaza Area working in Israel; consumption of services of non-profit institutions; revenue from industry and data on the construction branch." Other Publications of the CBS (such as the statistical Abstracts of Israel and National Accounts of Judea, Samaria and Gaza area 1968-1986) do refer to the low reliability of the data. However, in view of these problems, the staff found it necessary to use its best judgement and make estimates (particularly for the period 1987-1991). 2) Methodology In reference to Table 1 of the appendix, and particularly to GNP at 1991 prices in US$ The following rebasing method was applied. * Using a series of current GNP (in NIS) for the period of 1968-1991. (a) a deflator series (for 1986) was developed; dividing the current series of GNP by the GNP at 1986 prices in NIS. (b) a new deflator series (for 1991) was developed; dividing the 1986 deflator series by the value of the deflator 86 series in the year 1991. (c) a new 1991 GNP series in NIS was developed dividing the current GNP series by the new deflator 91 series. (d) the 1991 GNP series in NIS was converted into dollars by using the NIS per $ value of 1991. Table 1: Occupied Territories, National Accounts Statistics, Selected Indicators (1968-1991). Population G.N.P GNP at GNP/Capita GDP/Capita GNP GNP/Capita GDP GDP/Capita (in 000's) Current 91 prices 91 prices 91 prices 86 prices 86 prices 86 prices 86 prices (US$ million) (US$ million) (US$) (US$) (NIS million) (NIS) (NIS million) (NIS) 1968 939900.0 136.3 518.60 551.7 573.50 640.7 681.7 689.3 733.4 1969 961800.0 172.6 622.40 647.2 628.50 769.0 799.5 773.0 803.7 1970 977800.0 208.0 734.30 751.0 686.10 907.2 927.8 857.9 877.4 1971 1001400.0 283.2 900.10 838.9 763.00 1121.1 1110.5 977.1 975.7 1972 1020500.0 391.9 164.80 1141.4 875.60 1433.1 1410.2 1142.7 1119.7 1973 1053900.0 494.8 1146.80 1088.2 814.30 1416.3 1344.4 1097.4 1041.3 1974 1083700.0 752.2 1346.40 1242.5 967.00 1663.5 1535.0 1340.1 1236.6 1975 1100700.0 786.3 1409.20 1280.3 962.70 1741.0 1581.7 1355.1 1231.1 1976 1120700.0 899.1 1576.60 1406.8 1090.00 1947.8 1738.0 1562.1 1393.9 1977 1146500.0 929.3 1565.00 1365.0 1054.60 1933.5 1686.4 1546.2 1348.6 1978 1171000.0 965.5 1769.50 1511.1 1165.30 2186.2 1867.0 1744.9 1490.1 1979 1163300.0 1182.5 1810.70 1556.5 1154.40 2237.1 1923.1 1717.3 1476.2 1980 1180800.0 1448.8 1980.00 1676.9 1303.30 2446.3 2071.7 1968.0 1666.7 1981 1200700.0 1404.3 1935.90 1612.3 1201.60 2391.7 1991.9 1845.0 1536.6 1982 1226600.0 1504.0 2201.40 1794.7 1277.40 2719.8 2217.3 2003.6 1633.5 1983 1266300.0 1601.5 2180.30 1721.8 1190.10 2693.7 2127.2 1927.1 1521.8 1984 1303300.0 1431.6 2185.40 1676.8 1214.70 2700.0 2071.7 2024.4 1553.3 1985 1342500.0 1370.1 2126.60 1584.0 1171.50 2627.3 1957.0 2011.1 1498.0 1986 1382700.0 2143.2 2580.90 1866.5 1357.10 3188.6 2306.1 2399.6 1735.4 1987 1433700.0 2503.1 2671-2700 1863-1883 1274.40 3335.5 2326.5 2336.4 1629.6 1988 1483900.0 2552-2597 2535-2601 1708-1753 1212-1242 3158-3221 2134-2165 2300-2360 1550-1590 1989 1526400.0 2439-2489 2538-2608 1663-1709 1186-1220 3160-3232 2077-2111 2315-2385 1517-1563 1990 1599700.0 2356-3027 2964-3037 1853-1899 1360-1402 3682-3773 2314-2346 2781-2872 1739-1795 1991 1681700.0 2822-2898 2822-2898 1678-1723 1237-1282 3504-3602 2096-2129 2660-2760 1582-1641 1992 3578-3675 2068-2124 1504-1559 4443-4568 2568-2641 3327-3453 1993-1996 Source: based on data extracted from the Statistical Abstracts of Israel (1970-92), and the National Accounts of Judea, Samaria and Gaza Area (1968-1986), special series No. 818 of 1988, Central Bureau of Statistics, Israel. **All Statistics published after 1986, in the Statistical Abstracts of Israel, are Estimations. National accounts for a988-1992 are partly based on incomplete statistical series and evaluations. 136 Table 2: Occupied Territories, Gross Domestic Product by Type of Expenditure. 1968-1991 (Millions of New Israeli Shekels at 1986 prices). Gross Private General Domestic (+) Exports (-) Imports Final Government Capital of goods of goods Consumption Expenditure Formation & services & services Total GDP 1968 740.10 121.70 58.30 162.10 394.70 689.30 1969 881.80 138.36 133.40 153.20 512.10 773.00 1970 1001.50 161.00 102.60 159.60 539.10 857.90 1971 1099.00 168.70 143.60 227.70 659.90 977.10 1972 1329.70 179.20 258.50 272.90 880.00 1142.70 1973 1383.20 182.60 250.50 263.00 957.70 1097.40 1974 1507.80 185.90 403.20 319.10 1050.80 1340.10 1975 1640.00 182.20 340.10 401.20 1202.70 1355.10 1976 1748.70 187.30 422.90 461.60 1260.40 1562.10 1977 1839.00 188.30 425.20 475.60 1383.40 1546.20 1978 1870.20 192.20 536.30 535.20 1394.10 1744.90 1979 1961.30 197.60 519.20 502.90 1450.30 1717.30 1980 1966.60 193.70 680.40 547.20 1435.70 1968.00 1981 2036.90 196.20 544.90 631.20 1591.80 1845.00 1982 2100.90 196.10 626.70 609.10 1557.20 2003.60 1983 2125.90 201.30 584.20 583.20 1578.90 1927.10 1984 2206.20 207.70 565.80 540.80 1507.10 2024.40 1985 2203.60 208.50 604.10 522.20 1530.40 2011.10 1986 2543.10 233.10 761.50 620.10 1758.10 2399.60 1987 2727.60 252.30 698.20 594.20 1936.00 2336.40 1988 2447.00 223.00 676.00 305.00 1291-1351 2300-2360 1989 2521.00 238.30 607.00 255.20 1247-1311 2315-2385 1990 2886.00 303.40 743.00 340.70 1409-1493 2781-2872 1991 3175.00 295.20 692.00 378.30 1781-1874 2660-2760 Source: Statistical Abstracts of Israel, Various Issues, Judea, Samaria and Gaza Area Statistics 1988-1992 Central Bureau of Statistics 137 Table 3: West Bank, Gross Domestic Product by Type of Expenditure. 1968-1991 (Millions of New Israeli Shekels, at 1986 prices). Gross Private General Domestic (+)Exports (-)Imports Final Government Capital of goods of goods Consumption Expenditure Formation & services & services Total GDP 1968 517.50 79.70 33.70 125.10 290.50 456.30 1969 618.40 87.50 84.30 115.30 363.10 524.20 1970 691.50 100.00 55.40 106.70 364.40 556.70 1971 766.60 107.70 86.00 136.50 431.30 639.00 1972 918.10 115.40 157.30 176.10 557.20 790.00 1973 949.90 116.50 135.20 158.20 610.40 723.00 1974 1032.90 119.80 280.90 201.50 654.90 949.60 1975 1108.20 118.20 200.60 245.20 715.00 935.10 1976 1216.90 121.40 262.70 279.60 749.90 1107.00 1977 1223.20 123.30 263.60 268.00 781.90 1067.80 1978 1255.30 124.00 360.20 330.70 802.10 1246.80 1979 1345.80 131.10 322.20 307.70 905.00 1165.20 1980 1358.60 130.40 506.50 339.80 881.30 1445.20 1981 1419.80 133.30 350.60 377.40 954.10 1319.20 1982 1470.10 133.30 450.10 374.20 931.30 1497.80 1983 1471.20 138.40 404.60 360.70 925.60 1444.40 1984 1521.00 142.10 394.30 352.60 889.90 1526.20 1985 1501.30 145.40 439.80 321.90 908.60 1499.70 1986 1767.30 165.10 577.80 388.30 1042.40 1856.10 1987 1894.60 177.90 496.90 349.00 1192.70 1725.70 1988 1762.00 151.00 514.00 215.00 829.00 1767-1819 1989 1771.00 163.00 431.00 199.00 802.00 1709-1768 1990 2077.00 226.00 580.00 264.00 935.80 2150-2218 1991 2229.00 213.00 527.00 265.00 1171.00 1993-2069 1992 Estimate -- -- -- -- -- 2538-2630 Source: Statistical Abstracts of Israel, Various Issues, Judea, Samaria and Gaza Area Statistics 1988-1992, Central Bureau of Statistics 138 Table 4: Gaza Strip, Gross Domestic Product by Type of Expenditure. 1968-1991 (Millions of New Israeli Shekels at 1986 prices). Gross Private General Domestic (+)Exports (-)Imports Final Government Capital of goods of goods Consumption Expenditure Formation & services & services Total GDP 1968 222.60 42.00 24.60 37.00 104.20 233.00 1969 263.40 50.86 49.10 37.90 149.00 248.80 1970 310.00 61.00 47.20 52.90 174.70 301.20 1971 332.40 61.00 57.60 91.20 228.60 338.10 1972 411.60 63.80 101.20 96.80 322.80 352.70 1973 433.30 66.10 115.30 104.80 347.30 374.40 1974 474.90 66.10 122.30 117.60 395.90 390.50 1975 531.80 64.00 139.50 156.00 487.70 420.00 1976 531.80 65.90 160.20 182.00 510.50 455.10 1977 615.80 65.00 161.60 207.60 601.50 478.40 1978 614.90 68.20 176.10 204.50 592.00 498.10 1979 615.50 66.50 197.00 195.20 545.30 552.10 1980 608.00 63.30 173.90 207.40 554.40 522.80 1981 617.10 62.90 194.30 253.80 637.70 525.80 1982 630.80 62.80 176.60 234.90 625.90 505.80 1983 654.70 62.90 179.60 222.50 653.30 482.70 1984 685.20 65.60 171.50 188.20 617.20 498.20 1985 702.30 63.10 164.30 200.30 621.80 511.40 1986 775.80 68.00 183.70 231.80 715.70 543.50 1987 833.00 74.40 201.30 245.20 743.30 610.70 1988 685.00 72.00 162.00 90.00 468-476 533-541 1989 750.00 75.30 176.00 56.20 451-456 606-617 1990 808.00 77.40 163.00 76.70 480-496 631-654 1991 946.00 82.20 165.00 113.30 616-633 667-691 1992 794-823 Source: Statistical Abstracts of Israel, Various Issues, Judea, Samaria and Gaza Area Statistics 1988-1992, Central Bureau of Statistics 139 Table 5: Occupied Territories, National Disposable Income (in millions of NIS at 1986 prices), 1968-1991. Factor Net Current Gross Income Factor Net Gross @ Transfers Natio Domestic from payments Factor National from Dispo Product Abroad to Abroad Income Product Abroad Incom 1968 689.300 23.300 16.600 6.700 640.7 216.500 873.4 1969 773.000 70.000 20.800 49.200 769.0 219.200 1007.2 1970 857.900 128.400 22.900 105.500 307.2 240.600 1168.6 1971 977.100 217.100 26.700 190.400 1112.1 222.800 1352.3 1972 1142.700 360.000 26.700 333.300 1439.1 194.200 1648.4 1973 1098.100 379.400 28.300 351.100 1416.3 71.700 1500.6 1974 1340.100 381.900 28.300 353.600 1663.5 70.300 1747.6 1975 1355.100 447.500 24.500 423,000 1741.0 94.200 1845.9 1976 1562.100 448.000 22.600 425.400 1947.8 275.200 2227.3 1977 1546.200 452.400 20.000 432.400 1333.5 263.800 2201.6 1978 1744.900 504.800 19.900 484.900 2186.2 345.900 2538.6 1979 1717.300 582.800 20.000 562.800 2237.1 301.800 2550.0 1980 1968.000 539.700 20.000 519.700 2446.3 296.700 2754.4 1981 1845.000 594.900 21.100 573.800 2391.7 213.900 2618.7 1982 2003.600 729.900 19.600 710.300 2719.8 246.900 2978.1 1983 1927.100 775.700 20.800 754.900 2693.7 212.200 2312.5 1984 2024.400 702.500 24.100 678.400 2700.0 190.900 2892.5 1985 2011.100 639.000 17.200 621.800 2627.3 152.700 2780.9 1986 2399.600 804.800 15.900 788.900 3188.6 174.300 3362.9 1987 2336.100 1018.300 19.700 999.300 3335.5 221.700 3557.4 1988 2300-2360 876.900 21.500 855.300 3158-3221 160.900 3323-3385 1989 2315-2385 864.600 24.600 840.100 3160-3232 163.000 3328-3398 1990 2781-2872 933.500 32.100 901.600 3682-3773 188.500 3877-3967 1991 2660-2760 868.700 26.000 842.800 3504-3602 190.300 3703-3800 1992 3327-3453 1134.000 27.000 1107.000 4443-4568 4190-4767 Source: Statistical Abstracts of Israel, 1970-1992, Central Bureau of Statistics. @. For earlier years, GNP figures have been adjusted to equal the sum of GDP and net factor income from abroad. This results in an automatic adjustment in the figures for National Disposable Income. * Figures for the period 1987-91 are estimations. 140 Table 6: West Bank, National Disposable Income (in millions of NIS at 1986 prices), 1968-91. Factor Net Current Gross Income Factor Net Gross a Transfers Natio Domestic from payments Factor National from Dispo Product Abroad to Abroad Income Product Abroad Incom 1968 456.300 21.600 12.600 9.000 462.900 162.000 636. 1969 524.200 62.300 16.800 45.500 569.700 137.000 716. 1970 556.700 104.700 16.800 87.900 645.200 144.300 799. 1971 639.000 184.600 18.600 166.000 809.900 120.500 936. 1972 790.000 278.000 18.600 259.400 1054.200 97.200 1157. 1973 723.700 269.600 20.200 249.400 978.300 31.500 1015. 1974 949.600 277.400 18.900 258.500 1218.600 27.700 1253. 1975 935.100 335.600 16.000 319.600 1262.300 23.200 1292. 1976 1107.000 323.200 15.400 307.800 1423.700 116.700 1551. 1977 1067.800 329.700 13.300 316.400 1392.600 105.600 1509. 1978 1246.800 356.600 12.900 343.700 1598.200 165.100 1778. 1979 1165.200 397.600 12.800 384.800 1558.500 146.300 1718. 1980 1445.200 364.100 12.800 351.300 1803.700 141.900 1360. 1981 1319.200 391.600 14.200 377.400 1709.900 111.000 1832. 1982 1497.800 433.100 14.200 418.900 1930.700 116.400 2058. 1983 1444.400 435.500 15.300 420.200 1881.100 89.100 1976. 1984 1526.200 389.700 16.500 373.200 1901.700 67.000 1969. 1985 1499.700 369.100 12.000 357.100 1857.500 65.400 1924. 1986 1856.100 447.200 11.100 436.100 2292.200 71.400 2363. 1987 1725.700 590.800 13.500 577.000 2303.000 121.300 2424. 1988 1767-1819 545.400 13.900 531.800 2301-2356 68.3 2373-2 1989 1709-1768 585.600 16.000 570.100 2282-2344 54.1 2340-2 1990 2150-2218 583.500 22.600 561.500 2705-2776 83.1 2794-2 1991 1993-2069 548.800 18.500 530.600 2521-2598 86.0 2614-2 1992 2533-2630 783.000 19.000 764.000 3303-3403 3396-3 Source: Statistical Abstracts of Israel, 1970-1992, Central Bureau of Statistics. @. For earlier years, GNP figures have been adjusted to equal the sum of GDP and net factor income from abroad. This results in an automatic adjustment in the figures for National Disposable Income. *. Figures for the period 1987-92 are estimations. 141 Table 7: Gaza, National Disposable Income (in millions of NIS at 1986 prices), 1968-1991. Factor Net Current Gross Income Factor Net Gross a Transfers Natio Domestic from payments Factor National from Dispo Product Abroad to Abroad Income Product Abroad Incom 1968 233.000 1.700 4.000 -2.300 177.8 54.500 237.3 1969 248.800 7.700 4.000 3.700 199.3 82.200 291.1 1970 301.200 23.800 6.100 17.700 262.0 96.300 369.1 1971 338.100 32.500 8.100 24.400 302.2 102.300 415.4 1972 352.700 82.000 8.100 73.900 384.9 97.000 491.2 1973 374.400 109.800 8.100 101.700 438.6 40.200 485.4 1974 390.500 104.500 9.400 95.100 444.9 42.600 493.9 1975 420.000 111.900 8.500 103.400 478.7 71.000 553.0 1976 455.100 124.800 7.200 117.600 524.1 158.500 675.4 1977 478.400 122.700 6.700 116.000 540.9 158.200 632.6 1978 498.100 148.200 7.000 141.200 588.0 180.800 760.4 1979 552.100 185.200 7.200 178.000 678.6 155.500 831.1 1980 522.800 175.600 7.200 168.400 642.6 154.800 793.7 1981 525.800 203.300 6.900 196.400 681.8 102.900 786.6 1982 505.800 296.800 5.400 291.400 789.1 130.500 920.7 1983 482.700 340.200 5.500 334.700 812.6 123.100 936.2 1984 498.200 312.800 7.600 305.200 798.3 123.900 922.8 1985 511.400 269.900 5.200 264.700 769.8 87.300 856.9 1986 543.500 357.600 4.800 352.800 896.4 102.900 999.2 1987 610.400 428.100 6.200 421.900 1032.5 100.400 1133.1 1988 533-541 331.500 7.600 323.600 857-865 92.600 950-958 1989 606-617 279.000 8.600 270.200 878-888 108.900 988-998 1990 631-654 350.000 9.500 340.200 977-997 105.400 1083-1104 1991 667-691 319.900 7.500 312.300 983-1004 104.300 1089-1111 1992 794-823 351.000 8.000 344.000 1140-1165 1249-1274 Source: Statistical Abstracts of Israel, 1970-1992, Central Bureau of Statistics. @. For earlier years, GNP figures have been adjusted to equal the sum of GDP and net factor income from abroad. This results in an automatic adjustment in the figures for National Disposable Income. *. Figures for the period 1987-92 are estimations. Table 8: West Bank, Balance of Payments 1970-1991, (in million of current US dollars). Exports Imports Net Net of Goods of Goods Trade Factor Transfer Current & Services Merchandise Services & Services Merchandise Services Balance Income Payments Account 1970 76.3 42.8 33.5 115.2 93.2 22.0 -50.3 22.1 63.1 24.2 1971 83.3 35.6 47.6 9.2 67.7 24.5 -32.0 38.4 27.8 18.8 1972 130.7 52.8 77.9 135.6 100.6 35.0 -47.8 66.9 28.1 23.2 1973 156.0 60.2 95.8 174.8 130.0 44.8 -69.8 83.5 12.7 -.1 1974 219.1 94.7 124.4 264.1 196.6 67.5 -102.0 108.1 11.9 -33.1 1975 245.1 109.4 135.6 295.9 229.4 66.4 -120.0 116.0 2.0 -48.8 1976 280.2 128.5 151.7 335.3 247.7 87.6 -119.3 134.9 40.2 -14.9 1977 286.1 124.5 161.4 365.9 269.6 96.3 -145.1 143.1 35.2 -44.7 1978 305.7 144.1 161.6 346.5 253.2 93.4 -109.1 144.7 49.0 8.2 1979 371.2 154.9 216.4 476.9 356.9 120.0 -202.0 192.6 53.3 -52.4 1980 438.3 198.4 239.8 553.9 409.9 144.0 -211.5 211.7 60.2 -55.5 1981 469.1 217.4 251.7 586.9 436.8 150.1 -219.4 223.4 57.5 -60.4 1982 495.7 206.9 288.8 578.9 423.7 155.2 -216.8 263.8 55.8 -27.4 1983 540.5 211.1 329.4 620.3 459.4 160.9 -248.3 299.4 54.4 -25.4 1984 476.3 190.1 286.2 555.2 410.6 144.6 -220.5 259.1 44.7 -34.2 1985 405.4 172.0 233.4 529.7 389.4 140.3 -217.4 207.6 31.5 -92.8 1986 560.9 244.6 316.3 680.7 513.3 167.4 -268.7 286.1 34.4 -85.4 1987 670.1 234.7 435.4 841.9 639.8 202.1 -405.1 410.6 86.1 -85.7 1988 592.0 142.0 451.0 662.0 453.0 209.0 -311.0 411.0 55.2 -22.0 1989 607.0 125.0 482.0 644.0 432.0 212.0 -307.0 444.0 43.7 3.0 1990 699.0 180.0 520.0 816.0 574.0 242.0 -394.0 474.0 72.5 -46.0 1991 664.0 173.0 491.0 1000.0 777.0 222.0 -604.0 444.0 74.7 -263.0 Source: Based on Statistical Abstracts of Israel, 1969-1992, Central Bureau of statistics, Jerusalem. Statistics for 1968 and 1969 are not available (only Global BOP are available for these years). All figures for 1970-1981 originally expressed in Israeli currency have been converted into U.S. dollars, using the annual average exchange rate as published in the IMF's IFS, 1992 yearbook. tj. Table 9: Gaza Strip, Balance of Payments 1970-1991, (in million of current US dollars). Exports Imports Net Net of Goods of Goods Trade Factor Transfer Current & Services Merchandise Services & Services Merchandise Services Balance Income Payments Account 1970 23.8 14.7 9.1 42.5 34.7 7.8 -20.0 6.7 28.4 9.7 1971 35.4 23.5 11.9 49.5 40.6 8.9 -17.0 9.0 26.1 12.1 1972 68.1 34.8 33.2 81.6 67.2 14.4 -32.4 28.9 26.3 12.7 1973 100.2 43.1 57.1 103.7 83.5 20.3 -40.3 50.9 11.3 7.8 1974 130.5 61.1 69.4 167.3 136.3 31.0 -75.2 59.6 18.2 -18.5 1975 154.9 82.7 72.2 206.5 175.3 31.3 -92.5 62.1 13.9 -37.7 1976 188.4 104.0 84.4 224.5 186.5 38.0 -82.6 76.3 52.3 16.2 1977 220.9 133.6 87.4 277.9 237.2 40.7 -103.7 78.1 52.0 -5.0 1978 218.0 122.6 95.4 248.8 205.8 43.0 -83.2 86.0 42.0 11.2 1979 264.6 122.2 142.4 277.2 221.0 56.2 -98.7 130.0 41.6 29.0 1980 318.6 155.0 163.5 339.8 269.5 70.4 -114.4 148.3 50.8 29.6 1981 379.5 191.8 187.6 387.9 313.3 74.7 -121.5 172.1 54.0 45.6 1982 393.8 191.6 202.6 388.7 310.6 78.1 -119.0 191.4 50.8 55.9 1983 447.2 182.3 264.9 427.1 332.4 34.7 -150.1 247.5 45.9 66.0 1984 349.3 116.6 232.7 365.2 279.7 85.5 -163.1 217.3 45.0 29.1 1985 276.3 109.1 167.2 364.2 281.6 82.6 -172.5 150.9 39.3 -48.6 1986 393.8 142.8 251.0 484.2 378.2 106.0 -235.4 230.4 42.5 -47.9 1987 492.6 160.3 332.3 528.8 412.4 116.4 -252.1 314.0 76.8 40.6 1988 358.0 67.0 291.0 343.0 223.0 120.0 -156.0 264.0 80.1 84.0 1989 278.0 32.0 246.0 302.0 200.0 102.0 -168.0 219.0 79.8 50.0 1990 375.0 51.0 324.0 386.0 269.0 120.0 -218.0 293.0 81.7 66.0 1991 378.0 75.0 303.0 500.0 371.0 130.0 -296.0 271.0 81.8 -44.0 Source: Statistical Abstracts of Israel, 1971-1992, Central Bureau of Statitica, Jerusalem, Statistics for 1968 and 1969 are not available (only Global BOP are available for these Years) Statistics from 1970 to 1980 are for Gaza and Sinai. All figures for 1970-1981 originally expressed in Israeli currency have been converted into U.S. dollars, using the annual average exchange rate as published in the IMF's IFS, 1992 yearbook. Table 10: Occupied Territories, Balance of Payments, 1970-1991, (in millions of current US dollars). Exports Imports Net Net of Goods of Goods Trade Factor Transfer Current & Services Merchandise Services & Services Merchandise Services Balance Income Payments Account 1970 100.1 57.5 42.6 157.7 127.8 29.8 -70.3 6.7 91.5 34.0 1971 118.7 59.2 59.5 141.6 108.3 33.4 -49.1 9.0 53.9 30.9 1972 198.8 87.6 111.1 217.2 167.8 49.4 -80.2 28.9 54.3 35.9 1973 256.2 103.3 152.9 278.5 213.5 65.0 -110.1 50.9 24.0 1.7 1974 349.6 155.8 193.8 431.4 333.0 98.4 -177.2 59.6 30.2 -51.6 1975 400.0 192.2 207.8 502.4 404.7 97.7 -212.6 62.1 15.9 -86.6 1976 468.6 232.4 236.2 559.8 434.3 125.6 -201.8 76.3 92.6 1.3 1977 507.0 258.1 248.8 643.8 506.8 137.0 -248.8 78.1 87.2 -49.7 1978 523.7 266.6 257.1 595.3 459.0 136.3 -192.3 86.0 91.0 19.4 1979 635.8 277.A 358.8 754.1 577.8 176.3 -300.7 130.0 94.9 -23.4 1980 756.8 353.5 403.4 893.7 679.4 214.4 -325.9 148.3 111.0 -25.9 1981 848.6 409.2 439.3 974.8 750.1 224.8 -340.9 172.1 111.5 -14.8 1982 889.5 398.5 491.4 967.6 734.3 233.3 -335.8 191.4 106.6 28.5 1983 987.7 393.4 594.3 1047.4 791.8 195.6 -398.4 546.9 100.3 40.6 1984 825.6 306.7 518.9 920.4 690.3 230.1 -383.6 476.4 89.7 -5.1 1985 681.7 281.1 400.6 893.9 671.0 222.9 -389.9 358.5 70.8 -141.4 1986 954.7 387.4 567.3 1164.9 891.5 273.4 -504.1 516.5 76.9 -133.3 1987 1162.7 395.0 767.7 1370.7 1052.2 318.5 -657.2 314.0 162.9 -45.2 1988 950.0 209.0 742.0 1005.0 676.0 329.0 -467.0 675.0 135.3 62.0 1989 885.0 157.0 728.0 946.0 632.0 314.0 -475.0 663.0 123.6 53.0 1990 1074.0 231.0 844.0 1202.0 843.0 362.0 -612.0 767.0 154.2 20.0 1991 1042.0 248.0 794.0 1500.0 1148.0 352.0 -900.0 715.0 156.5 -307.0 Source: Statistical Abstracts of Israel. 1971-1992. Central Bureau of Statitics, Jerusalem Statistics for 1968 and 1969 am not available (only Global BOP are available for these Years) Statistics from 1970 to 1980 are for Gaza and Sinai. All figures for 1970-1981 originally cxpressed in Isracli currency have been converted into U.S. dollars, using the annual average exchange rate as published in the IMF's IFS, 1992 yearbook. 145 Table 11: Occupied Territories, Inflation Rates (1971-1991) (in percent). West Bank Gaza Israel (%) (%) (%) 1971 16.1 21.9 12.0 1972 17.6 19.5 12.9 1973 21.5 24.3 20.0 1974 42.6 54.7 39.7 1975 43.2 53.8 39.3 1976 28.1 22.3 31.3 1977 36.0 33.8 34.6 1978 50.4 42.8 50.6 1979 68.1 72.4 78.3 1980 139.4 156.0 131.0 1981 114.0 109.5 116.8 1982 107.4 114.6 120.3 1983 139.8 151.2 145.7 1984 360.3 373.0 373.8 1985 320.9 337.6 304.6 1986 50.0 49.6 48.1 1987 13.1 11.0 19.9 1988 8.7 11.1 16.3 1989 14.5 15.7 20.2 1990 13.0 16.9 17.2 1991 11.5 7.0 19.0 1992 13.9 14.1 12.0 Source: calculations based on data extracted from the Statistical Abstracts of Israel, 1974-1992. Central Bureau of Statistics *.inflation Rates refer to the change Rate in the CPI. 146 Table 12: Gross Domestic Capital Formation in Gaza, by Sector and type of Asset at 1986 prices (in N Million). Machinery Total Transport & Private GDCF Grand Construction Other Equipment Sector Government Total Total 1968 9.40 6.30 21.20 5.20 24.60 24.60 1969 7.50 10.50 23.80 19.60 49.10 49.10 1970 9.40 8.70 23.80 18.30 47.20 47.20 1971 13.20 11.20 31.80 20.70 57.60 57.60 1972 41.40 17.30 68.80 28.30 101.20 101.20 1973 61.30 17.30 85.00 27.30 115.30 115.30 1974 63.40 18.80 89.60 29.40 122.30 122.30 1975 69.90 18.40 95.00 39.10 139.50 139.50 1976 109.10 17.70 129.00 29.10 160.20 160.20 1977 110.40 21.50 136.30 24.30 161.60 161.60 1978 127.40 17.80 145.50 29.10 176.10 176.10 1979 163.10 14.80 174.20 22.80 197.00 197.00 1980 145.80 13.60 156.20 18.10 173.90 173.90 1981 167.80 15.50 179.70 16.00 194.30 194.30 1982 147.40 14.90 159.60 17.60 176.60 176.60 1983 144.50 15.60 157.70 21.70 179.60 179.60 1984 134.90 16.70 150.00 21.20 171.50 171.50 1985 126.90 20.70 147.20 17.60 164.30 164.30 1986 134.30 24.50 158.80 25.00 183.70 183.70 1987 129.00 39.60 168.70 32.60 201.30 201.30 1988 122.00 n/a n/a 24.00 n/a n/a 1989 142.00 12.00 155.00 20.00 176.00 176.00 1990 134.00 11.00 147.00 15.00 163.00 163.00 1991 132.00 15.00 149.00 14.00 165.00 165.00 Source: Statistical Abstracts of Israel, Various Issues Judea, Sanaria and Gaza Area Statistics 1992 Central Bureau of Statistics. 147 Table 13: Gross Domestic Capital Formation in the West Bank, by Sector and type of Asset at 1986 pri (in NIS, Million). Machinery Total Transport & Private GDCF Grand Construction Other Equipment Sector Government Total Total@ 1968 10.40 22.70 23.50 16.20 45.30 33.70 1969 22.00 68.20 57.90 20.80 83.80 84.30 1970 25.70 80.90 68.10 19.70 91.70 55.40 1971 42.40 80.90 90.70 17.80 110.10 86.00 1972 77.80 83.80 137.40 19.50 156.60 157.30 1973 107.40 48.20 154.00 21.10 174.30 135.20 1974 156.10 47.30 202.80 27.80 229.60 280.90 1975 186.30 42.10 227.60 36.20 263.60 200.60 1976 208.50 34.50 241.00 24.90 263.30 262.70 1977 236.00 39.30 273.10 17.20 285.20 263.60 1978 248.30 62.40 310.90 26.40 332.80 360.20 1979 274.60 71.50 346.50 29.70 371.30 322.20 1980 264.80 60.90 325.40 24.90 345.00 506.50 1981 250.40 48.60 298.50 32.90 328.70 350.60 1982 277.40 55.20 332.10 44.70 375.30 450.10 1983 251.70 63.50 315.00 54.10 370.30 404.60 1984 242.20 54.10 296.30 61.70 361.40 394.30 1985 284.50 57.10 341.00 56.00 397.00 439.80 1986 333.70 78.40 412.10 67.40 479.60 577.80 1987 344.50 91.70 436.10 89.30 525.40 496.90 1988 n/a n/a n/a 43.00 n/a 514.00 1989 n/a n/a n/a 34.00 n/a 431.00 1990 n/a n/a n/a 42.00 n/a 527.00 1991 n/a n/a n/a 69.00 n/a Source: Statistical Abstracts of Israel, Various Issues, Judea, Samaria and Gaza Area Statistics 1988-92,Central Bureau of statistics @:F capital formation and increase in stocks of olive oil in the West Bank No estimate was made for other stock components. 148 Table 14: Occupied Territories, Gross Domestic Capital Formation, by sector and type of asset; at 19 prices (in NIS, Million). Machinery Total Transport & Private GDCF Grand Construction Other Equipment Sector Government Total Total@ 1968 19.80 29.00 44.70 21.40 69.90 58.30 1969 29.50 78.70 81.70 40.40 132.90 133.40 1970 35.10 89.60 91.90 38.00 138.90 102.60 1971 55.60 92.10 122.50 38.50 167.70 143.60 1972 119.20 101.10 206.20 47.80 257.80 258.50 1973 168.70 65.50 239.00 48.40 289.60 250.50 1974 219.50 66.10 292.40 57.20 351.90 403.20 1975 256.20 60.50 322.60 75.30 403.10 340.10 1976 317.60 52.20 370.00 54.00 423.50 422.90 1977 346.40 60.80 409.40 41.50 446.80 425.20 1978 375.70 80.20 456.40 55.50 508.90 536.30 1979 437.70 86.30 520.70 52.50 568.30 519.20 1980 410.60 74.50 481.60 43.00 518.90 680.40 1981 418.20 64.10 478.20 48.90 523.00 544.90 1982 424.80 70.10 491.70 62.30 551.90 626.70 1983 396.20 79.10 472.70 75.80 549.90 584.20 1984 377.10 70.80 446.30 82.90 532.90 565.80 1985 411.40 77.80 488.20 73.60 561.30 604.10 1986 468.00 102.90 570.90 92.40 663.30 761.50 1987 473.50 131.30 604.80 121.90 726.70 698.20 1988 142.20 n/a n/a 67.00 n/a n/a 1989 n/a n/a n/a 54.00 n/a 607.00 1990 n/a n/a n/a 57.00 n/a 743.00 1991 n/a n/a n/a 83.00 n/a 692.00 Source: Statistical Abstracts of Israel, Various Issues, Judea, Samaria and Gaza Area Statistics 1988-92 Central Bureau of statistics @:Fixed capital formation and increase in stocks of olive oil in the West Bank No estimate was made for other stock components, 1988-90 construction figures are for Gaza only; 1989-90 machinery figures are for G only, 1989-90 total private sector figures are for Gaza only,and 1989-90 total & grand total figures are for Gaza only. Table 15: West Bank, Contribution of Main Economic Branches to GDP (at Factor Cost) 1968-1991 at 1986 Prices (in NIS Million and in Percentage). Gross Agriculture Construction Public & Other Domestic Forestry & Fishing Industry Building & Public Works Community Services Services Product NIS Million Percent NIS Million Percent NIS Million Percent NIS Million Percent NIS Million Percent 1968 436.9 163.1 37.3 30.9 7.1 25.8 5.9 n/a n/a n/a n/a 1969 501.7 205.7 41.0 40.4 8.1 42.2 8.4 n/a n/a n/a n/a 1970 533.3 185.4 34.8 44.1 8.3 46.4 8.7 n/a n/a n/a n/a 1971 612.6 211.7 34.6 49.9 8.1 48.2 7.9 n/a n/a n/a n/a 1972 757.5 298.2 39.4 59.2 7.8 77.4 10.2 n/a n/a n/a n/a 1973 693.7 214.7 30.9 62.7 9.0 83.9 12.1 n/a n/a n/a n/a 1974 910.5 364.9 40.1 76.4 8.4 114.4 12.6 n/a n/a n/a n/a 1975 896.8 220.5 24.6 73.2 8.2 138.3 15.4 n/a n/a n/a n/a 1976 1061.7 293.7 27.7 67.3 6.3 145.0 13.7 n/a n/a n/a n/a 1977 1024.1 258.3 25.2 65.6 6.4 153.8 15.0 132.7 13.0 413.7 40.4 1978 1195.7 353.3 29.5 79.9 6.7 167.2 14.0 144.0 12.0 450.6 37.7 1979 1117.6 241.9 21.6 73.5 6.6 184.9 16.5 145.1 13.0 472.4 42.3 1980 1386.1 442.4 31.9 90.3 6.5 174.3 12.6 140.7 10.2 538.4 38.8 1981 1267.4 359.2 28.3 78.1 6.2 168.4 13.3 142.4 11.2 519.3 41.0 1982 1439.9 415.6 28.9 85.4 5.9 192.2 13.3 145.8 10.1 600.9 41.7 1983 1388.5 371.5 26.8 83.7 6.0 189.6 13.7 150.3 9.5 593.2 42.7 1984 1467.1 373.6 25.5 94.3 6.4 190.9 13.0 157.4 10.7 650.9 44.4 1985 1441.6 333.3 22.3 105.4 7.3 215.8 15.0 158.7 11.0 631.1 43.8 1986 1784.1 575.0 32.2 138.2 7.7 256.7 14.4 165.1 8.9 649.1 36.4 1987 1658.7 379.4 22.9 140.4 8.5 268.6 16.2 167.4 9.7 702.9 42.4 1988 1699-1748 757.5 43-45 130.6 7-8 182-201 11-12 117.2 6.5 511.7 30.1 1989 1644-1699 534.0 31-32 121.0 7.0 198-218 12-13 138.0 7.8 653.0 39.7 1990 2068-2131 865.1 41-42 143.3 7.0 219-242 11.0 184.8 8.4 655.8 31.7 1991 1917-1988 629.8 32-33 141.5 7.0 203-226 11.0 186.8 9.1 755.9 39.4 1992 2437-2526 1087.00 43-45 185.00 7-8 250-278 10-11 214.0 8.6 701.0 28.8 Source: Statistical Abstracts of Israel. 1970-1992 Central Bureau of Statistics *.Other Services include: Transport, Trade and other services (including ownership of Dwellings and errors & ommissions) Figures for the period 1987-92 are estimates. Table 16: Gaza, Contribution of Main Economic Branches to GDP (at Factor Cost) 1968-1991 at 1986 Prices, NIS Million and in percentage Gross Agriculture Construction Public & Other Domestic Forestry & Fishing Industry Building & Public Works Community Services Services Product NIS Million Percent NIS Million Percent NIS Million Percent NIS Million Percent NIS Million Percent 1968 217.2 67.3 31.0 4.3 2.0 14.9 6.9 n/a n/a n/a n/a 1969 232.3 76.7 33.0 6.5 2.8 29.8 12.8 n/a n/a n/a n/a 1970 280.6 88.5 31.5 11.9 4.2 29.8 10.6 n/a Ufa n/a n/a 1971 315.7 100.6 31.9 14.1 4.5 32.3 10.2 n/a n/a n/a n/a 1972 329.7 110.3 33.5 17.8 5.4 54.5 16.5 n/a n/a n/a n/a 1973 350.5 113.4 32.4 22.5 6.4 59.3 16.9 n/a n/a n/a n/a 1974 365.8 126.1 34.5 28.6 7.8 61.1 16.7 n/a n/a n/a n/a 1975 393.6 131.8 33.5 34.0 8.6 72.5 18.4 n/a n/a n/a n/a 1976 326.5 141.8 43.4 42.8 10.0 94.6 29.0 n/a n/a n/a n/a 1977 448.3 135.1 30.1 48.5 10.8 96.6 21.5 102.0 22.8 74.3 16.6 1978 466.7 136.1 29.2 56.3 12.1 113.0 24.2 101.7 21.8 72.2 15.5 1979 517.3 129.1 25.0 59.0 11.4 132.1 25.5 88.3 17.1 115.0 22.2 1980 489.8 117.4 24.0 42.5 8.7 115.9 23.7 90.2 18.4 129.3 26.4 1981 494.9 122.2 24.7 38.7 7.8 127.3 25.7 93.2 18.8 122.4 24.7 1982 476.1 114.0 23.9 42.3 8.9 117.1 24.6 93.5 19.6 116.0 24.4 1983 454.1 103.2 22.7 43.4 9.6 117.0 25.8 95.1 20.9 100.7 22.2 1984 469.6 98.6 21.0 45.3 9.6 109.6 23.3 101.4 21.6 114.5 24.4 1985 481.9 108.3 22.5 39.9 8.3 100.9 20.9 104.0 21.6 130.4 27.1 1986 513.9 102.5 20.0 54.0 10.5 111.3 21.7 106.7 20.8 138.9 27.1 1987 578.7 123.4 21.3 71.0 12.3 113.8 19.7 109.6 18.9 160.9 27.8 1988 504-512 122.1 24.0 53.0 10-11 102.8 20.0 99.3 19-20 131-133 26-27 1989 573-583 140.8 24-25 57.8 10.0 115.3 20.0 104.9 18.0 162-172 28-30 1990 597-617 151.7 25.0 62-65 10-11 107-112 18.0 111.6 18-19 176-187 30.0 1991 631-652 170.0 26-27 69-72 11.0 105-110 17.0 117.2 18-19 185-197 29-30 1992 751-777 198.0 25-26 83-86 11.0 155-162 21.0 125 16-17 207-221 28.0 Source: Statistical Abstracts of Israel, 1970-1992, Central Bureau of Statistics. *.. Figures for Public & Community Services are not available for the period 68-76(for these years,they are included in other services) Figures for the period 1987-1992 are estimates. Table 17: Occupied Territories, Contribution of Main Economic Branches to GDP (at Factor Cost), 1968-1991 at 1986 Prices, (in NIS Million and in Percentage). Gross Agriculture Construction Public & Other Domestic Forestry & Fishing Industry Building & Public Works Community Services Services Product NIS Million Percent NIS Million Percent NIS Million Percent NIS Million Percent NIS Million Percent 1968 654.1 230.4 35.2 35.2 5.4 40.7 6.2 n/a n/a n/a n/a 1969 734.0 282.4 38.5 46.9 6.4 72.0 9.8 n/a n/a n/a n/a 1970 813.9 273.9 33.7 56.0 6.9 76.2 9.4 n/a n/a n/a n/a 1971 928.3 312.3 33.6 64.0 6.9 80.5 8.7 n/a n/a n/a n/a 1972 1087.2 408.5 37.6 77.0 7.1 131.9 12.1 n/a n/a n/a n/a 1973 1044.2 328.1 31.4 85.2 8.2 143.2 13.7 n/a n/a n/a n/a 1974 1276.3 491.0 38.5 105.0 8.2 175.5 13.8 n/a n/a n/a n/a 1975 1290.4 352.3 27.3 107.2 8.3 210.8 16.3 n/a n/a n/a n/a 1976 1388.2 435.5 31.4 110.1 7.9 239.6 17.3 n/a n/a n/a n/a 1977 1472.4 393.4 26.7 114.1 7.7 250.4 17.0 234.7 15.9 516.9 35.1 1978 1662.4 489.4 29.4 136.2 8.2 280.2 16.9 245.7 14.8 541.5 32.6 1979 1634.9 371.0 22.7 132.5 8.1 317.0 19.4 233.4 14.3 633.4 38.7 1980 1875.9 559.8 29.8 132.8 7.1 290.2 15.5 230.9 12.3 626.6 33.4 1981 1762.3 481.4 27.3 114.8 6.5 295.7 16.8 235.6 13.4 616.5 35.0 1982 1916.0 529.6 27.6 127.7 6.7 309.3 16.1 239.3 12.5 693.3 36.2 1983 1842.6 474.7 25.8 127.1 6.9 306.6 15.0 245.4 13.3 670.6 36.4 1984 1936.7 472.2 24.4 139.6 7.2 300.5 15.5 258.8 13.4 764.3 39.5 1985 1923.5 441.6 22.8 145.3 7.6 316.7 16.5 262.7 13.7 739.5 38.4 1986 2297.5 677.5 29.5 192.2 8.4 368.0 15.3 271.8 11.3 788.1 34.3 1987 2237.4 502.8 22.5 211.4 9.4 382.4 16.4 277.0 12.4 863.8 38.6 1988 2203-2260 879.6 39.9 183.6 8.3 285-304 13.0 216.5 10.0 720-757 32.7-32.5 1989 2217-2282 674.8 30.4 178.8 8.1 313-333 14-15 242.9 11.0 801-844 36.1-37 1990 2665-2748 1016.8 38.2 205-208 8.0 326-354 12-13 296.4 11.0 909-959 34.1-34.9 1991 2548-2640 799.8 31.4 211-214 8.0 308-336 12-13 304.0 12.0 918-975 36-37 1992 3188-3303 123.5 39-40 268-271 8.0 405-440 13.0 333.0 10-11 1050-1116 32.9-33.8 Source: Statistical Abstracts of Israel, 1970-1992, Central Bureau of Statistics. *Figures for Public & Community Services from 68-76 are only for the West Bank *.Other Services include: Transport, Trade and other services (including ownership of Dwellings and errors & ommissions) 152 Table 18: West Bank, Private Consumption Expenditure of Goods and Services in NIS Million at 1986 prices Total:Private Agricultural Industrial Net Consumption Consumption Goods Goods Services Total by Non-Residents Expenditure 1968 218.8 159.9 171.1 541.6 1.0 517.5 1969 240.2 192.4 185.0 613.4 -21.6 618.4 1970 289.6 206.2 193.3 680.7 -27.7 691.5 1971 329.5 234.3 206.3 762.0 -25.8 766.6 1972 380.3 288.9 224.6 891.1 -45.2 918.1 1973 367.6 298.3 227.0 893.1 -66.4 949.9 1974 429.5 298.3 236.2 957.2 -82.1 1032.9 1975 432.8 330.2 248.5 1010.4 -100.7 1108.2 1976 503.8 345.6 260.2 1102.3 -116.5 1216.9 1977 472.1 352.6 277.7 1098.0 -125.4 1223.2 1978 511.2 318.8 302.4 1115.7 -137.9 1255.3 1979 484.5 401.9 218.2 1199.8 -144.9 1345.8 1980 496.6 387.7 324.7 1203.0 -153.1 1358.6 1981 543.2 374.0 337.9 1246.6 -169.3 1419.8 1982 529.0 406.8 356.9 1286.4 -179.1 1470.1 1983 528.9 398.1 376.9 1297.2 -170.7 1471.2 1984 559.9 407.2 396.2 1354.7 -164.3 1521.0 1985 519.4 417.3 404.4 1339.9 -159.5 1501.3 1986 651.6 527.1 423.0 1601.7 -165.5 1767.3 1987 642.1 634.4 445.2 1721.7 -172.9 1894.6 1988 n/a n/a n/a n/a n/a 1762.0 1989 n/a n/a n/a n/a n/a 1771.0 1990 n/a n/a n/a n/a n/a 2077.0 1991 n/a n/a n/a n/a n/a 2229.0 Source: Statistical Abstracts of Israel, Various Issues Judea, Samaria and Gaza Area Statistics 1988-1992 Central Bureau of Statistics 153 Table 19: Gaza, Private Consumption Expenditure of Goods and Services in NIS Million at 1986 prices Total:Private Agricultural Industrial Net Consumption Consumption Goods Goods Services Total by Non-Residents Expenditure 1968 99.0 71.8 79.7 239.4 2.0 222.6 1969 99.0 90.7 79.7 264.1 -5.2 263.4 1970 108.9 108.4 92.6 306.1 -9.4 310.0 1971 112.8 122.3 90.8 326.0 -11.7 332.4 1972 129.7 158.5 104.7 397.2 -18.9 411.6 1973 134.7 164.3 107.1 410.6 -25.2 433.3 1974 141.7 182.9 113.5 443.7 -32.2 474.9 1975 175.6 195.7 117.8 491.9 -40.0 531.8 1976 174.6 188.4 123.1 487.8 -43.2 531.8 1977 175.4 243.3 127.9 556.5 -56.6 615.8 1978 184.9 216.6 136.9 541.7 -71.4 614.9 1979 173.8 220.0 136.5 536.1 -77.6 615.5 1980 170.8 208.2 141.3 524.0 -82.2 608.0 1981 192.5 187.8 146.1 521.8 -94.5 617.1 1982 193.8 190.6 152.9 533.0 -97.0 630.8 1983 203.0 204.6 155.3 559.0 -94.8 654.7 1984 222.0 209.7 163.6 589.2 -95.4 685.2 1985 236.0 216.0 167.5 612.1 -90.1 702.3 1986 229.0 275.8 175.0 679.8 -96.0 775.8 1987 268.8 294.8 181.5 745.1 -88.0 833.0 1988 n/a n/a n/a n/a n/a 685.0 1989 309.0 192.0 190.0 685.0 -66.0 750.0 1990 315.0 219.0 203.0 740.0 -77.0 809.0 1991 414.0 262.0 211.0 873.0 -74.0 946.0 Source:Statistical Abstracts of Israel, Various Issues, Judea, Samaria and Gaza Area Statistics 1988-1992 154 Table 20: Occupied Territories, Private Consumption Expenditure of Goods and Services in NIS Million at 1986 prices Total:Private Agricultural Industrial Net Consumption Consumption Goods Goods Services Total by Non-Residents Expenditure 1968 317.8 231.7 250.8 781.0 3.0 740.1 1969 339.2 283.1 264.7 877.5 -26.8 881.8 1970 398.5 314.6 285.9 986.8 -37.1 1001.5 1971 442.3 356.6 297.1 1088.0 -37.5 1099.0 1972 510.0 447.4 329.3 1288.3 -64.1 1329.7 1973 502.3 462.6 334.1 1303.7 -91.6 1383.2 1974 571.2 481.2 349.7 1400.9 -114.3 1507.8 1975 608.4 525.9 366.3 1502.3 -140.7 1640.0 1976 678.4 534.0 383.3 1590.1 -159.7 1748.7 1977 647.5 595.9 405.6 1654.5 -182.0 1839.0 1978 696.1 535.4 439.3 1657.4 -209.3 1870.2 1979 658.3 621.9 354.7 1735.9 -222.5 1961.3 1980 667.4 595.9 466.0 1727.0 -235.3 1966.6 1981 735.7 561.8 484.0 1768.4 -263.8 2036.9 1982 722.8 597.4 509.8 1819.4 -276.1 2100.9 1983 731.9 602.7 532.2 1856.2 -265.5 2125.9 1984 781.9 616.9 559.8 1943.9 -259.7 2206.2 1985 755.4 633.3 571.9 1952.0 -249.6 2203.6 1986 880.6 802.9 598.0 2281.5 -261.5 2543.1 1987 910.9 929.2 626.7 2466.8 -260.9 2727.6 1988 n/a n/a n/a n/a n/a 2447.0 1989 n/a n/a n/a n/a n/a 2521.0 1990 n/a n/a n/a n/a n/a 2886.0 1991 n/a n/a n/a n/a n/a 3175.0 Source: Statistical Abstracts of Israel, Various Issues, Judea, Samaria and Gaza Area Statistics 1988-1992 *. 1989-1991 figures are for Gaza only. Table 21: West Bank, GDP (at factor cost), by Economic Branch and Disposable Private Income in NIS Million at current prices. t 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 Agriculture 2.50 5.30 10.90 43.40 166.70 575.00 384.20 650.00 463.00 736.00 583.00 Industry 0.50 1.10 2.60 15.20 65.40 138.20 163.80 153.00 157.00 205.00 229.00 Construction 1.20 3.00 7.30 34.50 137.40 256.70 341.50 308.00 369.00 468.30 489.60 Public and Community Services 1.00 2.30 6.20 36.20 115.90 165.10 205.70 188.00 250.00 314.00 380.00 Transport, Trade and Other Services 2.40 5.90 9.60 84.00 344.40 649.10 945.70 871-939 1117-1205 1451-1569 1634-1767 GDP: Total 7.60 17.60 36.60 213.60 829.80 1784.10 2040.90 2170-2238 2356-2444 3174-3292 3306-3449 Factor payments from abroad 2.70 6.70 17.00 72.90 257.00 447.20 670.00 705.00 908.00 1027.00 1087.00 Less: factor payments to abroad 0.10 0.20 0.60 3.10 8.40 11.10 15.30 18.00 25.00 40.00 37.00 Gross National Income 10.30 24.10 58.50 283.40 1078.50 2220.20 2695.50 2857-2925 3239-3327 4162-4279 4357-4500 Transfers from Gvt and Local authorities 0.1 0.2 0.3 1.3 4.2 7.4 23.4 7.0 11.0 19.0 20.0 Less:Income Tax and transfers to the Government 0.40 1.00 2.80 16.30 48.70 69.50 96.40 93.00 114.00 132.00 201.00 Gross Disposable Private Income from Domestic Sources 9.90 23.30 50.50 268.40 1034.00 2158.20 2622.50 2771-2839 3136-3224 4049-4166 4176-4319 Transfers to private persons from abroad 0.70 1.20 2.80 11.70 49.70 85.10 85.60 78.00 99.00 109.00 155.00 Gross Disposable Private Income from all sources 10.60 24.50 53.30 280.10 1083.70 2243.30 2708.1 2849-2917 3235-3323 4158-4275 4331-4474 Source: Statistical Abstracts of Israel, 1982-1992 Central Buraeu of Statistics Table 22: Gaza, GDP (at factor cost), by Economic Branch and Disposable Private Income in NIS Million at current prices. 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 Agriculture 0.70 1.10 2.80 10.60 54.50 102.50 121.60 135.00 152.00 167.00 200.00 Industry 0.30 0.60 1.50 7.40 25.80 54.00 95.10 80.00 103.00 125-132 157-165 Construction 0.80 1.60 3.90 16.90 55.50 1113.00 151.80 163.00 197.00 201-211 216-227 Public and Community Services 0.70 1.60 4.20 24.00 78.10 106.70 135.70 160.00 196.00 237.00 272.00 Transport, Trade and Other Services 0.80 2.00 4.50 18.70 68.70 138.90 180.00 174-179 244-252 310-319 354-364 GDP: Total 3.30 6.90 16.90 77.60 282.60 513.40 684.20 712-717 892-900 1040-1066 1199-1228 Factor payments from abroad 2.10 4.50 12.40 53.20 185.50 357.60 508.10 446.00 451.00 629.00 657.00 Less: factor payments to abroad 0.00 0.10 0.20 1.30 3.60 4.80 7.40 10.00 14.00 17.00 15.00 Gross National Income 5.40 11.30 29.00 129.60 866.30 868.30 1148-1153 1329-1336 1652-1678 1840-1870 1840-1870 Transfers from Gvt and Local authorities 0.10 0.10 0.20 1.10 3.90 7.90 14.30 12.00 14.00 24.00 24.00 Less:Income Tax and transfers to the Government 0.30 0.60 1.50 8.80 25.60 45.10 55.90 66.00 84.00 92.00 124.00 Gross Disposable Private Income from Domestic Sources 5.10 10.80 27.60 121.80 442.80 829.10 1143.30 1094-1099 1257-1264 1574-1600 1740-1770 Transfers to private persons from abroad 0.90 1.80 4.00 17.20 66.20 115.80 113.00 115.00 142.00 148.00 186.00 Gross Disposable Private Income from all sources 6.0 12.60 31.60 139.00 509.00 944.90 1256.30 1209-1214 1399-1406 1722-1748 1926-1956 Source: Statistical Abstracts of Israel, 1982-1992, Central Buraeu of Statistics Table 23: West Bank, Disposable Private Income, at current prices (NIS Million) -4 1979 1980 1981 1982 1983 1984 198S 1986 1987 1988 1989 1990 1991 GDP at Market Prices 2.0 5.2 10.6 25.1 60.5 304.6 1131.6 2292.2 2774.2 2901-2969 3316-3404 4331-4390 4533-4676 Net Indirect Taxs on Domestic Production 1.0 0.1 0.4 1.0 7.5 21.2 53.1 72.0 78.7 44.0 77.0 111.0 176.0 Gross National Income at factor cost 2.0 5.0 10.3 24.1 53.0 283.4 1078.5 2220.2 2695.5 2857-2925 3239-3327 4162-4279 4357-4500 Transfers from Ct and Local Authorities 0.0 0.0 0.1 0.2 0.3 1.3 4.2 7.4 23.4 7.0 11.0 19.0 20.0 Income Tax and Transfers to the Government 0.1 0.2 0.4 1.0 2.8 16.3 48.7 69.5 96.4 93.0 114.0 132.0 201.0 Gross Disposable private Income from Domestic Sources 1.9 4.9 9.9 23.3 50.5 268.4 1034.0 2158.2 2622.5 2771-2839 3136-3224 4049-4166 4176-4319 Private Transfers from Abroad 0.2 0.4 0.7 1.2 2.8 11.7 49.7 85.1 85.6 78.0 99.0 109.0 155.0 Grus Disposable private Income from All Sources 2.1 5.2 10.6 24.5 53.3 280.1 1083.7 2243.3 2708.1 2849-2917 3235-3323 4158-4275 4331-4474 Private Savings 0.4 1.2 1.6 5.5 6.1 38.8 132.4 476.1 471.2 - - - -- Gross Disposable private Income per Capita (NIS) 2.9 7.3 14.6 33.1 70.1 357.9 1347.0 2713.6 3175.2 3232-3309 3575-3672 4445-4570 44184564 Gross Disposable private Income per Capita at 86 prices (NIS) 2354.2 2445.8 2303.7 2557.8 2186.2 2256.6 2125.9 2713.6 2689.3 -- -- -- -- GDPI/Capita (in current US$) 1140.4 1424.4 1277.2 1364.0 1246.6 1220.6 1142.6 1823.3 1991.2 2021-2070 1865-1916 2205-2267 1938-2003 GDPI/Capita (in US $ at 86 prices) 1582.3 1643.3 1548.2 1719.0 1469.2 1516.7 1428.3 1823.3 1807.3 - - -- - Source: Statistical Abstracts of Israel 1982-1992, & Judea, Samaria and Gaza Area Statistics, 1988-1992 Central bureau of Statistics. Table 24: Gaza, Disposable Private Income, at current prices (NIS Million) 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 GNP at Market Prices 1.0 2.3 5.4 11.4 29.5 132.8 483.6 896.4 1217.2 1179-1184 1358-1365 1686-1712 1899-1929 Net Indirect Taxes on Domestic Production 0.0 0.0 0.0 0.1 0.5 3.2 19.1 .30.1 32.3 31.0 29.0 34.0 59.0 Gross National Income at factor cost 1.0 2.2 5.4 11.3 29.0 129.6 464.5 866.3 1184.9 1148-1153 1329-1336 1652-1678 1840-1870 Transfers from Gvt and Local Authorities 0.0 0.0 0.1 0.1 0.2 1.1 3.9 7.9 14.3 12.0 12.0 14.0 24.0 Income Tax and Transfers to the Government 0.1 0.1 0.3 0.6 1.6 8.8 25.6 45.1 55.9 66.0 84.0 92.0 124.0 Gross Disposable private Income from Domestic Sources 0.9 2.1 5.1 10.8 27.6 121.8 442.8 829.1 1143.3 1094-1099 1257-1264 1574-1600 1740-1770 Private Transfers from Abroad 0.2 0.4 0.9 1.8 4.0 17.2 66.2 1J5.8 113.0 115.0 142.0 148.0 186.0 Gross Disposable private Income from All Sources 1.1 2.6 6.0 12.6 31.6 139.0 509.0 944.9 1256.3 1211.5 1402.5 1735.0 1941.0 Private Savings 0.4 0.9 2.3 4.6 10.3 32.9 60.5 169.2 291.4 -- 336.5 409.0 244.0 Gross Disposable private Income per Capita (NIS) 2.5 5.7 13.0 26.5 65.1 276.8 981.8 1762.9 2262.4 2094-2102 2329-2341 2744-2785 2917-2962 Gross Disposable private Income per Capita at 86 prices (NIS) 2236.5 2114.1 2177.8 2106.5 1998.9 1787.6 1537.2 1762.9 1953.2 -- 1634-1642 1671-1696 1622-1647 GDPI/Capita (in current US S) 983.9 1112.2 1137.8 1092.0 1157.7 944.0 832.7 1184.7 1418.8 1310-1315 1215-1222 1361-1381 1280-1300 GDPI/Capita (in US S at 86 prices) 1503.2 1421.0 1463.6 1415.7 1343.5 1201.3 1033.1 1184.9 1312.6 -- 1098-1104 1123-1140 1090-1107 Source: Statistical Abstracts of Israel 1982-1992 & Judea, Samaria and Gaza Area Statistics, 1988-1992, Central bureau of Statistics. 0A 00 159 Table 25: Occupied Territories (West Bank and Gaza Strip), Value of Merchandise Trade. 1968-1991, (Millions of US Dollars) Year Imports Exports Balance 1968 69.90 35.50 -34.40 1969 90.80 41.00 -49.80 1970 99.50 45.20 -54.30 1971 124.90 68.20 -56.70 1972 162.80 83.50 -79.30 1973 215.80 100.90 -114.90 1974 322.00 146.90 -175.10 1975 406.90 192.90 -214.00 1976 433.90 227.30 -206.60 1977 507.10 255.30 -251.80 1978 455.80 263.10 -192.70 1979 567.80 271.50 -296.30 1980 664.60 343.20 -321.40 1981 737.20 403.00 -334.20 1982 728.90 390.60 -338.30 1983 784.80 381.60 -403.20 1984 686.20 289.00 -397.20 1985 668.00 272.40 -395.60 1986 890.00 379.80 -510.20 1987 1060.10 385.30 -674.80 1988 676.00 209.00 -467.00 1989 632.00 157.00 -475.00 1990 843.00 231.00 -612.00 1991 1148.00 248.00 -900.00 Source: Statistical Abstract of Israel, 1992, No. 43, Central Bureau of Statistics. Notes: Data for 1989, 1990 & 1991 are only estimates. Table 26: Occupied Territories (West Bank and Gaza Strip), Trade by Destination, 1968-1991 (Millions of US Dollars). Trade with Israel Trade with Jordan Trade with Other Countries Imports Exports Balance Imports Exports Balance Imports Exports Balance 1968 53.50 15.30 -38.20 5.20 15.50 10.30 11.20 4.70 -6.50 1969 72.80 15.00 -57.80 7.20 19.70 12.50 10.80 6.30 -4.50 1970 83.20 20.90 -62.30 3.70 17.20 13.50 12.60 7.10 -5.50 1971 102.00 30.40 -71.60 3.90 22.30 18.40 19.00 15.50 -3.50 1972 138.30 40.80 -97.50 4.60 28.80 24.20 19.90 13.90 -6.00 1973 194.40 66.70 -127.70 4.00 20.30 16.30 17.40 13.90 -3.50 1974 287.60 98.40 -189.20 4.90 35.60 30.70 29.80 12.90 -16.90 1975 371.20 123.30 -247.90 5.20 51.70 46.50 30.50 17.90 -12.60 1976 391.90 143.20 -248.70 3.80 67.70 63.90 38.20 16.40 -21.80 1977 463.40 154.10 -309.30 4.70 88.20 83.50 39.00 13.00 -26.00 1978 403.80 157.80 -246.00 5.00 95.30 90.30 47.00 10.00 -37.00 1979 492.90 169.00 -323.90 5.00 92.10 87.10 69.90 10.40 -59.50 1980 582.40 226.40 -356.00 5.50 107.30 101.80 76.70 11.50 -65.20 1981 664.40 288.70 -375.70 7.30 105.40 98.10 65.50 8.90 -56.60 1982 648.40 258.50 -389.90 8.90 125.00 116.10 71.60 7.10 -64.50 1983 712.60 285.10 -427.50 6.80 88.40 81.60 65.40 8.10 -57.30 1984 619.90 185.30 -434.60 8.20 98.40 90.20 58.10 5.30 -52.80 1985 598.00 181.30 -416.70 8.70 85.40 76.70 61.20 5.70 -55.50 1986 797.80 274.60 -523.20 10.90 102.10 91.20 81.30 3.10 -78.20 1987 961.20 303.70 -657.50 9.40 78.20 68.80 80.60 3.40 -77.20 1988 596.00 148.00 -448.00 9.50 52.40 42.90 69.10 2.30 -66.80 1989 515.80 108.80 -143.90 8.50 40.40 31.90 102.40 3.90 -98.50 1990 709.20 181.00 -193.40 9.30 32.20 22.90 118.70 8.60 -110.10 1991 976.40 189.90 -255.20 9.20 38.50 29.30 134.20 9.50 -124.7 1992 1103.60 248.80 854.80 9.50 37.5 28.00 117.50 5.10 -112.4 Source:Statistical Abstract of Israel,1992, Centml Bureau of Statistics, figures.for 1988-1991, are estimated. Figures for the period 1987-92 are estimates. 161 Table 27: Occupied Territories, (West Bank and Gaza Strip). Industrial Exports by Market and commodity composition 1977, 1980-1986 (Million of current US dollars). INDUSTRIAL EXPORTS. JORDAN ISRAEL OTHER COUNTRIES Olive Stone Samna Oil & and and Olives Marble Soap Dairy Other Total Total Total TOTAL 1977 2.2 2.1 4.1 9.8 4.7 22.9 120.9 1.0 144.8 1980 31.00 4.80 4.40 15.10 3.10 58.4 177.30 1.60 237.30 1981 25.50 6.30 4.10 13.90 2.90 52.7 243.00 1.50 297.20 1982 37.00 8.00 4.90 22.60 6.60 79.1 226.60 0.80 306.50 1983 15.80 7.90 3.60 13.70 2.20 43.2 244.90 1.10 289.20 1984 28.50 10.60 3.50 17.70 1.80 62.1 171.80 1.10 235.00 1985 0.70 12.00 3.40 18.70 2.10 36.9 167.20 1.00 205.10 1986 24.70 11.80 3.60 15.80 2.10 58 258.40 0.90 317.30 Source: Selected Statistical Tables on the Economy of the Occupied Palestinian Territory, (West Bank and Gaza Strip). UNCTAD, United Nations, 1989. 162 Table 28: Occupied Territories, (West Bank and Gaza Strip). Agricultural Exports by Market and commodity composition 1977, 1980-1986 (Million of current US dollars). JORDAN ISRAEL OTHER COUNTRIES Citrus Other (All Citrus) Vegetables Fruit Fruit Others Total Total Total TOTAL 1977 4.0 52.8 4.5 0.4 61.7 33.3 12.4 107.4 1980 3.20 37.40 7.50 0.10 48.20 50.70 9.50 108.40 1981 5.20 34.50 10.10 0.50 50.20 45.30 7.00 102.50 1982 8.20 39.30 12.60 0.30 60.40 34.10 5.20 99.70 1983 4.00 25.70 12.90 0.60 43.10 40.20 7.00 90.30 1984 5.20 17.80 12.60 0.60 36.30 23.90 4.20 64.40 1985 8.30 24.20 15.80 0.50 48.80 25.00 4.70 78.50 1986 4.90 23.10 13.50 1.10 42.60 30.60 2.20 75.40 Source: Selected Statistical Tables on the Economy of the Occupied Palestinian Territory, (West Bank and Gaza Strip). UNCTAD, United Nations, 1989. 163 Table 29: Occupied Territories, (West Bank and Gaza Strip), Agricultural Imports by Market. 1977, 1980-1986 (Million of current US dollars). AGRICULTURAL IMPORTS OTHER JORDAN ISRAEL COUNTRIES TOTAL 1977 0.3 74.0 14.9 89.2 1980 0.5 90.4 5.9 96.8 1981 0.2 91.3 5.0 96.5 1982 0.4 75.3 10.9 86.6 1983 0.3 89.6 12.1 102.0 1984 0.1 98.2 10.0 108.3 1985 0.3 87.8 14.0 102.1 1986 0.2 114.4 15.6 130.2 Source: Selected Statistical Tables on the Economy of the Occupied Palestinian Territory,(West Bank and Gaza Strip).UNCTAD, United Nations, 1989. Table 30: Occupied Territories, (West Bank and Gaza Strip). Industrial Imports by Market and commodity composition, 1980-1986 (Million of current US dollars). INDUSTRIAL IMPORTS Jordan Israel Other Countries Via Israel Total Oils Paper Text. Iron & Wood, Iron & Mach. Dairy and and Steel Food Soap & Paper & Steel Electr. Prod. Printing Conon Prod. Total Oils Prod. Plastic Cad- board Textiles Prod. Equip. Total Total 1980 4.3 0.2 0.1 0.2 4.9 506.8 12.9 18.8 1.8 2.0 5.0 4.3 12.1 76.7 588.4 1981 6.0 0.3 0.3 0.3 7.0 581.3 8.8 11.3 2.5 2.3 5.8 2.8 8.1 65.5 653.8 1982 7.8 0.2 0.1 0.3 8.5 573.1 8.5 14.6 2.3 3.6 4.6 2.5 10.7 71.6 653.2 1983 5.5 0.2 0.2 0.3 6.5 623.0 5.4 8.5 3.0 4.8 4.5 2.9 10.0 65.4 694.9 1984 7.4 0.2 0.1 0.3 8.1 521.7 6.0 11.6 2.7 4.8 3.3 1.8 8.0 58.1 587.9 1985 7.3 0.3 0.1 0.5 8.3 510.2 10.1 10.6 2.0 5.2 3.7 2.1 7.7 61.2 579.7 1986 9.1 0.5 0.3 0.6 10.8 665.9 7.1 12.6 3.8 3.1 4.5 3.2 15.7 81.0 757.7 Source: Selected Statistical Tables on the Economy of the Occupied Palestinian Territory, (West Bank and Gaza Strip), UNCTAD, United Nations, 1989. 165 Table 31: Occupied Territories. Labor Force, Selected Data, 1970, 75, 80, 85-1991. Total for Occupied Territories 1970 1975 1980 1985 1986 1987 1988 1989 1990 1991 1992 Total (000s) Working-age population 519.7 591.9 643.7 722.7 718.3 738.3 751.5 770.7 804.0 833.9 851.8 Labor force 180.8 206.0 218.5 251.5 267.3 284.0 289.4 290.3 307.8 312.1 333.3 Employed persons 173.3 204.3 215.7 242.2 259.4 277.8 281.9 279.3 296.5 287.4 219.2 Unemployed 7.5 1.7 9.1 9.1 7.9 6.2 7.5 10.8 11.2 24.7 14.1 Percentages Participation rate 34.8 34.9 34.8 34.8 37.2 38.5 38.5 37.7 38.3 37.4 38.2 Unemployment rate 4.1 0.8 3.6 3.6 3.0 2.2 2.6 3.7 3.7 7.9 4.2 Employment rate 33.3 34.5 33.5 33.5 36.1 37.6 37.5 37.0 37,0 34.5 37.2 Men (000s) Working-age population 255.6 282.5 309.1 349.4 347.7 358.4 364.7 376.3 394.4 408.3 420.2 Labor force 151.4 177.3 187.3 225.4 238.3 257.4 261.2 266.9 280.3 286.5 303.3 Employed persons 145.6 176.0 185.3 217,8 238.3 252.2 254.5 257.0 270.3 262.5 289.3 Unemployed 5.8 1.3 2.0 7.6 6.0 5.1 6.7 9.9 10.3 24.0 13.5 Percentages Participation rate 62.0 62.9 60.6 64.5 68.5 71.8 71.6 70.9 71.1 70.2 72.2 Unemployment rate 3.8 0.7 1.1 3.4 2.5 2.0 2.6 3.7 3.7 8.4 4.4 Employment rate 57.0 62.3 59.5 62.3 66.8 70.4 69.8 68.3 68.5 64.3 69.0 Women (000s) Working-age population 275.6 309.9 334.4 373.3 370.6 379.9 386.4 394.4 409.6 425.6 437.6 Labor force 29.4 28.7 29.9 25.9 29.0 26.7 28.2 23.5 27.5 25.6 30.0 Employed persons 27.7 28.3 29.9 24.4 27.1 25.6 27.4 22.5 26.5 24.6 29.4 Unemployed 1.7 0.4 0.5 1.5 1.9 1.1 0.8 0,9 0.9 0.7 0.6 Percentages Participation rate 10.7 9.3 8.9 6.9 7.8 7.0 7.3 5.9 6.7 6.0 6.9 Unemployment rate 5.8 1.4 1.7 5.8 6.6 4.1 2.8 3.8 3.7 2.7 2.0 Employment rate 10.1 9.1 8.9 6.5 7.3 6.7 7.1 5.7 6.5 5.9 6.7 Source: Judea, Samaria, and Gaza Area Statistics; Volumes XVIII,XIX and XX for 1988,1989-90,1991, Israel Central Bureau of Statistics, Jerusalem. *. Working Age population is age 15+ from 1986-1990. Data for 1992 are estimates. Table 32: Occupied Territories, Employees by Place of Work and Selected Economic Branches. WEST BANK/EMPLOYEES GAZA/EMPLOYEES TOTAIJOCCUPIED TERRITORIES INDUSTRY AGRICULTURE CONSTRUCTION INDUSTRY AGRICULTURE CONSTRUCTION INDUSTRY AGRICULTURE CONSTRUCTION 1970 7700 8600 6600 2500 10600 4300 10200 19200 10900 1971 7800 6700 3900 2800 10400 2200 10600 17100 6100 1972 7500 5600 4300 2900 7500 1600 10400 13100 6000 1973 7100 3900 4300 2300 7100 1500 9300 11000 5900 1974 7900 3500 5100 2000 6200 1400 9900 9700 6400 1975 7500 3000 6000 2700 6700 1800 10200 9700 7800 1976 7800 2500 7000 3500 5800 1800 11300 8300 8800 1977 7900 2400 7700 3000 5300 2300 10900 7700 10000 1978 8400 1800 8200 3400 3100 2200 11800 4900 10200 1979 8500 1800 8400 3400 2000 1800 11900 3800 9800 1980 8200 2400 7500 3500 1700 2000 11700 4100 9500 1981 7900 2400 7900 3300 1900 2500 11200 4300 10400 1982 9100 2300 10300 3100 2300 2600 12200 4600 12900 1983 8800 2100 8200 2800 1900 1900 11600 4000 10100 1984 9700 2200 9400 3400 1800 1900 13100 4000 11300 1985 9925 2470 9900 3502 2080 1800 13427 4550 11700 1986 11000 2300 11300 4200 1900 2500 15200 4200 13800 1987 11800 2700 10600 4700 1500 2100 16500 4200 12700 1988 11500 2500 8900 4000 2000 2000 15500 4500 10900 1989 12300 1800 9300 3300 3200 4300 15600 5000 13600 1990 12700 1800 10700 2900 3700 3900 15600 5500 14600 1991 12200 2200 10000 4400 4200 3800 16400 6400 13800 1992 13700 2600 10800 4800 2900 5500 18500 5500 16300 Source: Statistical Abstracts of Ismael, Various Isaes, Central Buraum of Statistics. Data for 1992 are etimates. Table 33: Occupied Territories, Employed by Place of Work and Selected Economic Branches. WEST BANK/EMPLOYEES GAZA/EMPLOYEES TOTAL/OCCUPIED TERRITORIES INDUSTRY AGRICULTURE CONSTRUCTION INDUSTRY AGRICULTURE CONSTRUCTION INDUSTRY AGRICULTURE CONSTRUCTION 1970 14600 42500 8400 12100 31600 8500 26700 74100 16900 1971 14700 40200 6100 12200 31100 4600 26900 71300 10700 1972 14600 38000 7200 12600 24800 4100 27200 62800 11300 1973 16400 34200 7600 12700 25700 3900 29100 59900 11500 1974 15100 37900 7000 12200 24800 4100 27300 62700 11100 1975 15800 34600 8400 12000 26300 5100 27800 60900 13500 1976 14900 33900 10000 13500 26500 4600 28400 60400 14600 1977 15100 33400 10400 12500 25100 6700 27600 58500 17100 1978 15200 34400 10900 15400 21100 7000 30600 55500 17900 1979 15900 31500 11800 18200 21100 7000 34100 52600 18800 1980 15200 33200 10700 18600 18800 7300 33800 52000 18000 1981 15700 30500 11900 16500 18000 8400 32200 48500 20300 1982 15900 32100 10600 14800 17900 8500 30700 50000 19100 1983 16100 29500 11000 15200 19200 8200 31300 48700 19200 1984 15900 28500 11300 17100 16500 8500 33000 45000 19800 1985 16200 27300 12400 16200 18000 8400 32400 45300 20800 1986 15700 28400 12800 17600 16900 8300 33300 45300 21100 1987 16600 26000 12200 17500 16000 8400 34100 42000 20600 1988 15900 31200 10700 16300 18600 8400 32200 49800 19100 1989 17200 26400 11000 13500 18400 12600 30700 44800 23600 1990 15800 29500 10900 11300 20400 11100 27100 49900 22000 1991 16900 28100 10500 12700 21600 10000 29600 49700 20500 Source: Statistical Abstracts of Israel, Various Issues. Central Bureau of Statistics. *.Employed include Employees and Self employed. 168 Table 34: Average Daily Wage of Employees of the West Bank and Gaza Area by place of work and selected economic branches. Average Daily Wage per Employee (NIS, at current prices), Occupied Territories. 1982 1983 1984 1985 1986 1987 1988 1989 1990 Economic Branch lndustry (mining & manufacturing) 0.17 0.42 2.06 8.60 14.05 19.07 24.47 23.66 27.00 Agriculture, Forestry & Fishing 0.16 0.41 1.66 7.76 13.91 18.30 27.04 27.44 30.41 Construction (building & public works) 0.24 0.62 2.73 10.39 17.85 23.30 34.62 29.75 33.40 Public Services 0.28 0.63 3.37 12.07 18.73 22.91 25.76 25.20 29.13 Other Branches 0.18 0.43 2.20 8.41 13.35 16.24 26.21 20.78 22.80 Toul 0.22 0.54 2.74 10.24 16.67 21.16 29.40 25.37 28.85 Average Daily Wage per Employee (NIS, at current prices), West Bank. 1982 1983 1984 1985 1986 1987 1988 1989 1990 Economic Branch Industry (mining & manufacturing) 0.18 0.43 2.15 9.14 14.41 18.57 22.82 23.05 26.32 Agriculture. Forestry & Fishing 0.17 0.43 1.80 7.82 13.64 17.48 20.64 20.83 25.49 Construction (building & public works) 0.25 0.64 2.82 10.76 18.00 23.02 29.01 29.11 33.22 Public Services 0.24 0.57 3.03 11.26 17.81 21.86 23.88 22.48 26.97 Other Branches 0.18 0.45 2.07 7.19 14.64 16.23 19.99 19.28 22.29 Total 0.22 0.53 2.64 10.17 16.49 20.50 24.02 23.56 27.45 Average Daily Wage per Employee (NIS, at current prices), Gaza Area. 1982 1983 1984 1985 1986 1987 1988 1989 1990 Economic Branch Industry (mining & manufacturing) 0.15 0.39 1.82 7.10 13.15 20.34 24.10 26.37 30.45 Agriculture, Forestry & Fishing 0.16 0.38 1.51 7.68 14.23 19.66 25.25 32.29 34.07 Construction (building & public works) 0.22 0.58 2.32 8.58 17.21 24.70 30.95 31.52 34.09 Public Services 0.30 0.73 4.00 13.38 20.28 24.63 28.08 29.77 32.98 Other Branches 0.17 0.38 1.76 5.19 10.83 17.37 22.19 24.97 24.10 Total 0.24 0.58 2.97 10.41 17.08 22.65 26.91 29.47 32.29 Source: Judea, Samaria and Gaza Area Statistics, Vol XVI, XVIII, XIX and XX, Israel Central Bureau of Statistics, 1986, 1988, 1989-90, and 1991. *.Comparison with data from previous years should be treated with caution. Other Branches include:Electricity, Water, Financing, Business Services and Personal Services, they were presented together due to the low number of employed persons in these branches. Table 35: Employment of Palestinians in Israel by Selected Economic Branches. 1970, 1975, 1980-1991 (in 000's) EMPLOYEES FROM THE WEST BANK EMPLOYEES FROM GAZA TOTAL EMPLOYEES FROM O.T. Agriculture Industry Construction Other Agriculture Industry Construction Other Agriculture Industry Construction Other 1970 2.6 1.9 8.0 1.5 2.4 0.5 2.8 0.1 5.0 2.41 0.8 1.6 1975 4.2 7.3 21.5 5.3 5.0 4.6 13.7 2.3 9.2 11.9 35.2 7.6 1980 3.9 8.4 19.9 7.0 6.3 7.2 15.2 5.3 10.2 15.6 35.1 12.3 1981 3.7 7.1 20.3 7.3 5.7 6.6 17.9 5.3 9.4 13.7 38.2 12.6 1982 3.9 7.5 22.5 7.3 6.0 6.3 18.5 4.6 9.9 13.8 41.0 11.9 1983 3.9 8.5 24.8 8.4 6.6 7.5 18.5 6.1 10.5 16.0 43.3 14.5 1984 4.8 8.8 24.8 9.1 7.8 7.3 18.0 6.3 12.6 16.1 42.8 15.4 1985 4.9 7.8 23.9 8.6 9.0 7.9 17.4 6.6 13.9 15.7 41.3 15.2 1986 5.3 8.9 25.3 9.4 9.4 7.4 19.1 6.6 14.7 16.3 44.4 16.0 1987 6.1 11.0 29.6 13.2 9.5 8.6 18.8 7.8 15.6 19.6 48.4 21.0 1988 6.5 10.2 31.4 12.7 9.7 6.3 20.6 6.3 16.2 16.5 52.0 19.0 1989 6.6 9.0 34.1 12.8 7.4 4.4 20.6 5.9 14.0 13.4 54.7 18.7 1990 5.5 7.3 36.7 12.4 6.8 3.8 26.1 5.1 12.3 11.1 62.8 17.5 1991 4.4 4.9 37.2 7.5 7.2 2.4 28.9 2.4 11.6 7.3 66.1 9.9 1992 4.0 4.0 52.8 8.6 6.4 1.8 31.5 2.0 10.3 6.8 84.3 10.3 EMPLOYEES FROM THE WEST BANK EMPLOYEES FROM GAZA TOTAL EMPLOYEES FROM O.T. Agriculture Industry Construction Other Agriculture Industry Construction Other Agriculture Industry Construction Other 1970 2.6 1.9 8.3 1.8 2.4 0.5 2.8 0.2 5.0 2.4 11.1 2.0 1975 4.4 7.5 22.2 6.3 4.8 4.7 13.8 2.6 9.2 12.2 36.0 8.9 1980 4.0 8.5 20.3 7.7 6.3 7.2 15.2 5.8 10.3 15.7 35.5 13.5 1981 3.7 7.2 21.0 7.9 5.8 6.6 17.8 5.7 9.5 13.8 38.8 13.6 1982 4.0 7.7 23.3 8.0 6.1 6.3 18.5 5.2 10.1 14.0 41.7 13.2 1983 4.0 8.8 25.7 9.6 6.6 7.6 18.6 6.9 10.7 16.3 44.3 16.5 1984 4.9 9.0 25.6 10.7 7.9 7.3 18.1 6.9 12.8 16.2 43.7 17.6 1985 5.1 7.9 24.8 9.7 9.0 7.9 17.6 7.1 14.1 15.8 42.5 16.8 1986 5.3 9.1 26.1 10.6 9.5 7.4 19.4 7.1 14.8 16.5 45.5 17.7 1987 6.2 11.1 30.4 15.2 9.7 8.6 19.3 8.5 15.8 19.7 49.7 23.6 1988 6.6 10.3 32.4 14.7 10.1 6.5 21.7 7.0 16.7 16.8 54.2 21.7 1989 6.7 9.1 35.0 14.6 7.5 4.5 21.1 6.4 14.2 13.6 56.1 21.0 1990 5.6 7.4 37.6 14.0 7.0 3.9 26.5 5.6 12.6 11.2 64.1 19.7 1991 4.4 5.0 37.6 8.8 7.3 2.5 29.3 2.8 11.7 7.5 66.9 11.6 1992 4.0 5.0 53.4 10.0 6.4 (1.8) 32.5 2.3 10.4 6.8 85.9 12.3 Source: Statistical Abstracts of Israel, 1986, 1988, 1989, 1991, and 1992 Central Bureau of Statistics. *.Until 1985 data refer to persons aged 14+ 170 Table 36: Average Daily Wage or Employees of the West Bank and Gaza Area who work in Israel, by selected economic branches. Average Daily Wage per Employee (NIS,at current prices), from the Occupied Territories. 1982 1983 1984 1985 1986 1987 1988 1989 1990 Economic Branch Industry (mining & manufacturing) 0.24 0.58 2.31 9.15 17.65 25.01 31.55 34.83 39.20 Agriculture, Forestry & Fishing 0.19 0.48 1.68 7.35 14.65 21.76 28.31 31.97 35.52 Construction (building & public works) 0.27 0.65 2.56 10.47 19.85 27.17 35.78 40.86 43.52 Other Branches 0.23 0.57 2.37 9.59 17.95 24.18 30.05 33.43 36.91 Total 0.25 0.60 2.36 9.59 18.30 25.37 32.81 37.36 40.91 Average Daily Wage per Employee (NIS, at current prices), from the West Bank. 1982 1983 1984 1985 1986 1987 1988 1989 1990 Economic Branch Industry (mining & manufacturing) 0.23 0.55 2.27 9.24 16.97 22.63 29.41 32.40 35.58 Agriculture, Forestry & Fishing 0.19 0.47 1.66 7.05 14.16 20.41 26.79 29.69 33.22 Construction (building & public works) 0.27 0.66 2.61 10.84 19.60 25.82 35.34 40.07 40.87 Other Branches 0.23 0.58 2.44 10.13 17.72 22.75 28.33 31.20 34.42 Total 0.25 0.61 2.42 10.04 18.18 24.00 31.81 35.90 38.15 Average Daily Wage per Employee (NIS,at current prices), from the Gaza Area. 1982 1983 1984 1985 1986 1987 1988 1989 1990 Economic Branch Industry (mining & manufacturing) 0.25 0.61 2.36 9.06 18.45 28.19 35.45 41.35 47.87 Agriculture, Forestry & Fishing 0.19 0.49 1.69 7.51 14.91 22.62 29.37 34.64 37.82 Construction (building & public works) 0.27 0.64 2.50 9.96 20.18 29.37 36.53 42.63 48.19 Other Branches 0.24 0.57 2.27 8.85 18.28 26.79 34.20 40.15 44.82 Total 0.25 0.60 2.28 9.10 18.43 27.30 34.42 40.61 46.13 Source: Judea, Samaria and Gaza Area Statistics, Vol XVI,XVIII,XIX and XX, Israel Central Bureau of Statistics, 1986, 1988, 1988-90 and 1991. *.Comparison with data from previous years should be treated with caution. Other Branches include:Electricity, Water, Financing, Business Services and Personal Services, they were presented together due to the low number of employed persons in these branches. 171 References Abu Shokor, Abdelfattah, "Income Distribution and Its Social Impact in the Occupied Territories" in Abu Jaber, K., Buhbe, M., and Smadi, M. (eds.), Income Distribution in Jordan, Westview Special Studies on the Middle East (1990) Angrist, Joshua D., Wages and Employment in the West Bank and the Gaza Strip: 1981-1990, The Maurice Falk Institute for Economic Research in Israel, Discussion Paper No. 92.02, Jerusalem, 1992 Bank of Israel, Annual Report, Jerusalem, 1991 Central Bureau of Statistics, Judea, Samaria and Gaza Area Statistics, various issues, Jerusalem. -------, Statistical Abstract of Israel, various issues, Jerusalem Hamad, 0. and Shaban, R., Involuntary Customs and Monetary Union: The Case of the West Bank and Gaza Strip under Israeli Occupation (paper presented at the Conference on Economic Units of the Institute for Social and Economic Policy in the Middle East, Harvard University, 1991) International Monetary Fund, International Financial Statistics Year Book, Washington, 1992 Kesselman and Kesselman, Guide to Investment in Israel, 1992/3 Kleinman, Ephraim, Some Basic Problems of the Economic Relationships Between Israel and the West Bank and Gaza (paper delivered at conference, "The Economics of Middle East Peace", at the John F. Kennedy School of Government, Harvard University, November 1991) -------, The Flow of Labor Services from the West Bank & Gaza, WP260, Hebrew University, 1992 Metzer, Jacob, What Kind of Growth? A Comparative Look at the Arab Economies in Mandatory Palestine and in the Administered Territories, Journal of Economic Development and Cultural Change, Vol. 40, July 1992: 843-865. Shaban, Radwan A., Palestinian Population and Labor Force in the West Bank and Gaza Strip, Background Paper, May 1993 United Nations Conference for Trade and Development, Selected Statistical Tables on the Economy of the Occupied Palestinian Territory (West Bank and Gaza Strip), 1989 United Nations Development Project, Report on External Assistance to the Palestinian Occupied Territories, 1993 World Bank, World Development Reports (various issues), Washington Zakai, D., Economic Development in Judaea and Samaria and Gaza 1983-84, Bank of Israel, Jerusalem, 1986 一、 The World Bank Headquarters European Office Tokyo Office 1818 H Street, N.W. 66, avenue d'I6na Kokusai Building Washington, D.C. 20433, U.S.A. 75116 Paris, France 1-1 Marunouchi 3-chome Chiyoda-ku, Tokyo 100, Japan Telephone: (202) 477-1234 Telephone: (1) 40.69.30.00 Facsimile: (202) 477-6391 Facsimile: (1) 40.69.30.66 Telephone: (3) 3214-5001 Telex: wur 64145 WORLDBANK Telex: 640651 Facsimile: (3) 3214-3657 RCA 248423 WORLDBK Telex: 26838 Cable Address: INTBAFRAD WASHINGTONDC 12689 DEV 100 0-8213-2689-9 DEVELOPING OCCUPIED TERR ]I 1I II ill 'II liii!1 40 00 00 009 674 $10.95 ISBN 0-8213-2689-9 Cover design by Walton Rosenquist ISBN 0-8213-2694-5 (6-vol. set)