West Bank and Gaza Economy: Before and After the Crisis

Edward Sayre and
Edward Sayre Former Brookings Expert, Assistant Professor of Political Science, International Development and International Affairs - University of Southern Mississippi
Navtej Dhillon
Navtej Dhillon Former Brookings Expert

January 14, 2009

Editor’s Note: Navtej Dhillon, Director of the Middle East Youth Initiative, interviews Edward Sayre on the viability of the Palestinian economy in light of the current crisis in Gaza. Sayre is the co-author of a forthcoming Middle East Youth Initiative working paper on demographics and the economy in the West Bank and Gaza, and currently serves as a member of the board of directors for the Middle East Economic Association. A transcript of their conversation follows.

Navtej Dhillon : The Palestinian economy has gone through two major changes: first a partial integration with the Israeli economy post 1967, leading to increased job opportunities for Palestinians to work in Israel, but a fundamentally fragile structure generating very limited investment and weak private sector job creation. Second more recently, a significant disengagement from Israel which has severed the main lifelines of the Gazan economy and subsequently any opportunities for the Gazan population to seek employment outside of Gaza. Could you please reflect on the trajectory of the West Bank and Gaza economy and their future viability?

Edward Sayre: The Palestinian economy currently is best described as three separate economies. There is the economy of the city of Ramallah, in the West Bank. Ramallah is the seat of power for the Fatah-led Palestinian Authority of the West Bank and it serves as the headquarters for most international NGOs and embassies. It is through Ramallah that nearly all of the hundreds of millions of dollars in aid has been flowing. As a result Ramallah’s economy has recovered strongly since the end of the second Intifada. The rest of the West Bank is a different story. In cities such as Bethlehem, Khalil (Hebron) and Nablus, the restrictions on movement throughout the region and to jobs in Israel have thrown these cities into a long term pattern of higher unemployment, lower wages and few private sector opportunities. The final economy is that of the Gaza Strip. In the Gaza Strip, even before the recent bout of violence, the economy was a disaster. Gaza was cut-off from jobs and services not only found in Israel, but it was almost completely isolated from the West Bank and from the rest of the world. Since Gaza is dependent upon its ability to access export markets, the economy has been in a severe depression.

Dhillon: Before the second Intifada, Israel provided around 130,000 jobs for Palestinians, but today despite a doubling of the Palestinian labor force, employment in Israeli has been substantially reduced. What alternative sources of employment, if any, have substituted for the Israeli labor market?

Sayre: The services sector, including health care, government services and some trade related industries, are some of the few that have seen growth in employment in the past 10 years, but most sectors shrank. The biggest sector to absorb young Palestinian workers have been the public sector, specifically the Palestinian Authority, which now employs 41 percent of workers under the age of 30 in the Gaza Strip.

Dhillon: If the public sector continues to be the largest employer of young citizens in West Bank and Gaza, does it compel young Palestinians to become politicized since their livelihoods depend on a sort of rentier state? In order to maintain patrimony, are we finding the current wave of young people in West Bank and Gaza more engaged in political movements than previous generations?

Sayre: Surprisingly, the data according to a youth opinion poll of 2003 showed relatively little politicization of the youth. While Palestinian youth live and breathe the impact of daily political changes that surround them, they appear to be disillusioned with what political parties can provide. That being said, the economic environment has continued to become politicized. The 2006 Conditions of Graduates survey reported that 19 percent of recent graduates believe political affiliation to be very important in getting a job. Since Hamas took over in the summer of 2007, the politicization of employment in the Palestinian Authority has become much more severe.

Dhillon: What is unique about Gaza is that due to more recent decline in fertility, its youth bulge will not peak until around 2035. At the same time, while in other parts of the world, an educated youthful workforce can contribute to economic growth, Gaza does not have the conditions – open borders, free movements of goods and labor – for a stable economy. Whereas previous generations interacted economically with Israel to some degree, this generation faces few outlets for labor mobility and economic advancement. Assuming that Israeli labor markets remain largely closed, and pre-conditions for a functioning Palestinian economy are in place, how will this generation’s economic landscape differ from previous generations?

Sayre: The key differences between what this generation will face and what previous generations faced is that the labor market will be of a different scope and structure. First, let’s talk about the scope. Because of the size of the Israeli economy, there were numerous jobs available to Palestinians before the strict enforcement of the permit regime in the 1990s. Unemployment rates in the 1980s rarely reached even 5% because of the availability of work in Israel. This will no longer be the case; at the moment unemployment among young men in Gaza is around 36%. Despite international efforts to support the Palestinian economy, it is simply not capable of absorbing all of the current workers in the labor force, especially given the restrictions on economic activity brought about by Israeli control of borders.

Second, the structure of the labor market will be fundamentally different. Despite the relatively high level of education of Palestinians, Palestinians from the West Bank and Gaza Strip were excluded from professional jobs in Israel. There were plenty of jobs for semi-skilled workers and tradesman, but not for engineers, architects, and doctors. With the separation of the Palestinian and Israeli labor markets, the jobs available and the rewards for those jobs will better reflect the structure of the overall Palestinian economy, which is service oriented. Additionally, workers with less schooling will not be earning such relatively high wages as they did previously in Israel, leading to more wage inequality between those with more and fewer skills. During the 1980s, there was tremendous compression of wages between those with more skills and those with fewer skills. High Israeli wages, large influxes of aid, and remittances have kept Palestinian workers well paid. But with the shutting off the Israeli labor market and a slowdown of tax payments remitted from Israel, and aid from the West, the last few years have seen a depressing of Palestinian wages for the first time since the economic integration between Palestinian territories and Israel. Average wages for Palestinian workers fell more than 15% in nominal terms (more than 25% in real terms) from 1999 to 2005. As Palestinians begin to suffer low wages, a renewed emphasis on exports at this time could be effective in expanding the overall Palestinian economy. Additionally, there should be proportionally more opportunities for educated women since women, and especially educated women, generally did not work in Israel.

Dhillon: Fertility rates in almost every country in the Middle East have slowed, but Gaza continues to have one of the highest population growths rates in the world. Could you elaborate on what explains this high rate of fertility in the Gaza strip and should these high rates continue in the future, what economic implications does it have for Gaza and its neighbors.

Sayre: Narrowing down the precise cause for a change in fertility rates (or lack thereof) is difficult to do, but the demographers who have studied this subject focus on three main issues. The first is the previous dependence of the Gazan economy on day labor to Israel as primary means of support for many families. The wage structure and the long commutes involved imply that the traditional structure of household responsibilities (a single primary earner and a single primary domestic caretaker) survived in more households in Gaza, which allowed for continued high fertility rates. Essentially, anything that keeps labor force participation of women low puts upward pressure on fertility rates. Second, the relatively high wages paid to relatively low skilled workers who commuted to Israel allowed couples to marry sooner than would be possible in most countries. With a lower age at first marriage the number of potential child-bearing years increases. Third, some of the high fertility has been tied to nationalist desires by Palestinians. Having more children was encouraged in Palestinian society as a way for women to promote the Palestinian cause. All of three of these factors, were present to a certain degree, but due to the interaction with Jordanian society and its economy, the West Bank pattern was more closely related to that of other Arab countries. In the West Bank, there have been more employment opportunities for women, fewer men working in Israel, and less social pressure for large families.

With the new restrictions on the Gazan economy since 2007, there are two competing forces that will dictate the future of fertility rates. First, men no longer work in Israel, decreasing the impact of the structure of that work on fertility. While it may take several years for this to have an impact on fertility rates, fertility will be expected to decrease. However, with the increase in violence, it is possible that there will be another push for patriotic fertility, especially given the number of children dying in the current conflict.

The impact of all these factors on the Gaza economy is going to be a large drain of public and household resources to get these children through school and into the work force. Women’s labor force participation will continue to be depressed with the higher level of household responsibility, implying fewer workers able to provide for these dependents.

Dhillon: What do you think will be the short-term and long term impacts of the current crisis on Gaza’s economy?

Sayre: There will be two short term effects of the current crisis on Gaza’s economy. The first is that any and all effort to create a sustainable economy will be shifted towards rebuilding efforts and emergency aid. Projects directed toward the long term benefits of the economy will be put on hold for at least 2 to 3 years, maybe longer depending upon the length and depth of the crisis. The second short term effect is that most workers in Gaza will suffer health problems associated with the attacks. Those not directly injured will be psychologically impaired from the continuous shelling.

The long term effects are almost too varied and too numerous to mention. One of the most critical is that the crisis will continue to impede progress on the political front. Because the crisis has strengthened Hamas, while Fatah is still securely in control of the West Bank, the factionalization of the West Bank and Gaza will be heightened. Without unified leadership, the Palestinians will be unable to create a comprehensive peace settlement. This will likely lead to a further weakening of the Palestinian economy, leading to lower incomes and more dependence on aid. Since economic progress is dependent upon political progress, especially the ability of Palestinians to control their own borders and movement, the further delay caused by this conflict will push a real recovery from the second Intifada into the future by at least 4 to 5 years.