An economy in ruins
Al-Ahram Weekly Online, Issue No.583,
25 April - 1 May 2002 http
Israel's latest assault on the occupied territories has flattened an economy that was already stumbling. But Israel itself is in trouble, as the costs of trying to contain the Intifada mount.
John Sfakianakis*
The Palestinian economy has all but collapsed. A prolonged policy of closure, and the latest Israeli offensive, have destroyed important segments of the Palestinian economy and many of its institutions in the past few weeks. Although Oslo never permitted for anything more than Palestinian dependency on the economic structures put in place by Israel, the recent assaults have inflamed economic misery and retarded development of any sort. And it hardly needs saying that economic suffering and social degradation are no ingredients for peace.
Restrictions on the movement of goods, labour and people -- a result of Israel's policy of closure (a permanent administrative measure since 1993) -- have plagued the Palestinian economy throughout the 1990s and never more so than during the past few months. Notwithstanding the recent Israeli raids and their concomitant restrictions on people's movement, by early 1998, less than four per cent of Palestinians living in the West Bank and Gaza Strip had permission to enter Israel. The economic effects of closure have been devastating. A recent World Bank study detailed how closure affected the economy during the first 15 months of the Intifada. Its most dramatic effect has been to heighten joblessness and shrink real per capita income among Palestinians. Between 1992 and 1996, average unemployment increased from about three per cent to a staggering 30 per cent. It grew quickest during times of stiffer closure policies. By January 2002, unemployment had risen to between 40 and 50 per cent, according to the World Bank. Currently, three in every four Palestinian workers, according to various international organisations, are unemployed. Underemployment, which also besets most countries in the Middle East, is another constant affliction debilitating the Palestinian economy.
All this leads to declining real per capita income, and the host of problems that comes in its wake. The share of the Palestinian population living below the poverty line ($2 per person per day) was estimated, before January 2002, as standing at between 50 per cent (according to World Bank data) and more than 64 per cent (according to the United Nations). Undoubtedly, poverty levels must have risen precipitously following the devastating Israeli raids of the past month. Human losses to death and injury defy economic estimation. However, direct physical destruction of the public infrastructure is conservatively estimated at costing somewhere in the region of $600-800 million, according to a restricted report compiled by international agencies working in the Palestinian territories, and including the European Commission's humanitarian aid office.
The destruction of productive capital stock (damaged buildings, road and soil degradation, destroyed well and irrigation systems etc.) in the Palestinian territories will lead to tremendous capital stock losses. The damage Israel inflicted on all PA-related institutions will definitely affect the economy. The destruction of important sections of the Palestinian Central Bureau of Statistics has rendered the statistical arm of the PA temporarily out of service. And the damage done at the municipal level has debilitated the economically relevant institutional connections between the PA and the rest of the territories.
Non-Governmental Organisations (NGOs) have suffered, too. In Ramallah, the offices of the MATTIN Group -- a voluntary partnership specialising in international human rights enforcement -- were looted and pillaged by the Israeli army. An irreplaceable collection of unpublished documents concerning International Humanitarian Law, accumulated over a 19-year period, are believed to have been destroyed by the Israeli army. It is worth noting that the MATTIN Group has been the single most important NGO campaigning to prohibit the European Union from granting preferential treatment to goods produced in Israel's illegal settlements. For decades, the EU has not enforced the exclusion of settlement products from preferential treatment, although it has been called upon by the European Parliament to do so. More alarmingly, farming, whose produce is an important export component of the Palestinian economy, has sustained the most serious damage. Agricultural losses have not been confined merely to building and irrigation systems; they also run to the uprooting of fruit and olive trees. A freshly-planted olive tree takes seven years, under the best conditions, before it starts to bear fruit. Recovering these lost yields will be far from easy.
World Bank officials believe most of the $5 billion-worth of investments made possible by international donor aid over the past eight years has been destroyed. The loss to gross domestic product (GDP) alone is about $5 billion. On the revenue side, the Palestinian Authority (PA) is effectively bankrupt: tax revenues have dwindled, as of February 2002, to a fifth of previous levels. Revenue collected by the PA since the start of the Intifada and until March 2002 averaged less than $20 million per month (compared with an average of $88 million per month in the third quarter of 2000). During periods of relative peace, about two-thirds of Palestinian revenue comes from taxes collected by Israel on the PA's behalf. In the past, these taxes were regularly remitted to the PA; Israel has withheld all such payments since December 2000. Total gross revenues withheld by Israel are estimated, as of end-December 2001, to stand at about $0.5 billion.
As closure and violence have intensified over the past few months, household incomes and savings have shrunk, as has the capacity of Palestinians to borrow. Closure has forced people to spend their savings, and in order to maintain current levels of food consumption they have had to sell personal items. Fiscal discipline is not sustainable in the PA and deficit spending is becoming endemic. Until now, the PA has managed to finance its deficit by borrowing from commercial banks, cutting salaries, delaying payments and cutting costs. Even before the disasters brought by Israel's latest incursions, the PA's finances were teetering. By the end of 2001, the authority's arrears amounted to $430 million. Fear of damage from fighting has led the private sector to cease investments in the past few months. As a result, the number of new company registrations fell by the end of 2000 by 80 per cent and has now been completely halted. The continuous decline of the stock market in Palestine, which collapsed by more than 40 per cent in the past year, is another depressing index of dwindling private sector confidence in the economy. More importantly, Palestine's private sector growth remains circumspect at best. It is estimated that 90 per cent of private sector business units are small/ medium enterprises (SMEs), comprising fewer than 10 employees in total. The debt-to-asset ratios of the SMEs are low, due to reliance on informal bank lending practices and the use of personal savings. Closure and unemployment has forced saving to fall to new lows and, logically, informal lending has nearly disappeared due to the uncertain times.
It is also worth mentioning that the Israeli economy has not been immune from declining growth rates either; though its suffering pales next to that of Palestine's. Some of this is a direct result of the Intifada.
Israel's economy has been hit from two directions. First, the overall global slowdown has been disproportionately painful to technology companies, which drove Israel to growth of 5.9 per cent in 2000. Last year's economic growth, in contrast, was a stagnant 0.5 per cent, with industrial output falling by four per cent. GDP growth is not expected to rise above 1.5 per cent this year at best. The other difficulty, of course, is the Intifada. The
Ministry of Finance blames the Intifada for the large deviation in the government's deficit and its growth as a percentage of GDP. Recently, Ministry of Finance officials admitted for the first time that the government's deficit in 2001 had surged to 4.6 per cent of GDP: a corollary of the security situation. The sector to suffer most conspicuously has been tourism, a major foreign currency earner. Israel's thriving biotechnology sector is also facing a severe crisis as escalating violence has stopped US regulators from conducting crucial manufacturing inspection visits. Israel has about 150 biotech companies, ranking the sector fifth in Europe.
Nevertheless, the suffering inflicted on the two economies differs in kind, as well as scale. Whereas the security situation and a world slowdown have held back Israeli growth, Israel's losses can be remedied in the medium term. The Palestinian economy, by contrast, has been blighted by the devastation wrought on its very structure. And to its woe, there is no end in sight.
* The writer is a research fellow at Harvard University's Centre for Middle Eastern Studies
"Losses due to Al-Intifada reaching Shekels 32 billion..."
Yedioth Ahronoth Daily - 10 May 2002
Dr. Blogh, Head of the Research Section of BOI (Israel's Central Bank) said in a lecture delivered recently that Israel's estimated cumulative losses due to Al-Intifada will reach Shekels 32 billion
till the end of the year."
She added: "In case the deterioration in the security situation does not come to an end....and if Al-Intifada is to continue.... its negative impact will go beyond the fields of: TOURISM, & BUILDING INDUSTRIES and will impact other fields such as: INVESTMENT, PER CAPITA CONSUMPTION, EXPORTS, ETC..
Israel's Economy Hit By a One-Two Punch
Global Slowdown, Regional Strife End Boom
By Edward Cody
Washington Post Foreign Service
Sunday, May 19, 2002; Page A22
TEL AVIV -- The sun sank slowly into the Mediterranean, splashing red on the western horizon, and shadows thickened into a soft Levantine twilight beneath the towering hotels lined up along Tel Aviv's seafront. But Yoav Shionony was definitely not impressed.
"You've got a whole row of empty hotels over there," he snorted, gesturing toward the high-rise buildings usually jammed with business people and tourists enjoying the view. "The whole thing just stopped."
Buffeted by a global economic slowdown and the almost 20-month-old conflict with the Palestinians, Israel's economy has dropped into recession. The boom days of the mid-1990s, when high-tech companies started up at Silicon Valley speed and trade with Arab neighbors seemed within reach, have given way to climbing unemployment, budget cuts and new taxes.
The Manufacturers Association of Israel this past week forecast a drop of 1.8 percent in the country's $110 billion gross domestic product (GDP) for 2002, adding to a decline of 0.6 percent in 2001. It is particularly bitter news for Israelis, because they had grown used to the smooth sailing of the '90s, including 6.4 percent growth in 2000 and an average of almost 4 percent over the previous five years.
Government officials and business leaders have predicted that the Israeli economy can rebound if the U.S. and European economies pick up, restoring Israeli export markets. "We will overcome it," said Oded Tyrah, a businessman who heads the manufacturers association. "I think we are very strong."
But Shionony, who owns the Piccola Pasta wine bar and restaurant near the seafront, said that, for the moment, lack of tourists and fear instilled by Palestinian bombings have robbed his establishment and dozens like it of their usual volume of business from Israelis as well as foreigners.
"The whole thing is like a snowball," he said, referring to guides, bus drivers, hotel workers and all the others associated with tourism and nightlife. "People just don't want to go out. If you go out, you want a good time. You don't want to die. . . . A business goes under here every other day."
Shionony recently joined about 100 Tel Aviv business owners who petitioned the local government for breaks in tax and utility rates to help weather the storm. No answer has arrived, but they have heard promises of new taxes from the national government, headed by Prime Minister Ariel Sharon.
Sharon's Finance Ministry has revised the budget to deal with the slump and pay for the military effort, particularly the month-long offensive in the West Bank that ended last week. It includes raising by 1 percentage point the 17 percent value-added tax, levying higher taxes on diesel fuel and cigarettes and making cuts in the country's generous social welfare benefits.
The plan has also targeted tax breaks that Israel gives settlers in the Palestinian territories as well as those in the Negev Desert and the northern hills near the Lebanese border.
In the little grocery store run by Yossi Metaiv on Rehov Fishman Street, the costs of the budget plan have hit closer to home. Business has been dragging for more than a year, he said, and it has plunged 20 percent more since Sharon launched the West Bank offensive March 29. A particular blow came when the government imposed a first round of tax increases that pushed the price of the cigarettes that are a large part of his sales from 15 to 16 shekels ($3.08 to $3.28) per pack.
"So now, when people come in to buy cigarettes, they look for cheaper brands," said Metaiv, whose family immigrated to Israel from Turkmenistan 32 years ago.
Nir Gilad, the Finance Ministry's chief financial officer and controller, estimated the conflict with the Palestinians has shaved about 3.5 percent off Israel's projected GDP this year and the global economic slowdown has cut another 1 or 2 percent.
The government has paid for the extra military expenditures by reducing other ministries' budgets and postponing infrastructure improvement, Gilad said. The government income has slumped drastically because of the contraction of economic activity, while government expenditures have soared. Without the roughly $2.8 billion in U.S. aid that flows into government coffers each year, the shortfall would have been even greater.
With no natural resources, Gilad explained, Israel depends on exports, particularly high-tech ones, and on the flood of tourists visiting the Holy Land each year.
In light of that, the U.S. and global slowdown has had a profound effect in Israel. Industrial exports, excluding diamonds, have dropped from an average of $1.75 billion a month in 2000 to about $1.55 billion projected for this year. The computer and software exports that looked so promising several years ago have flattened.
"The high-tech industry was overblown to begin with -- all over the world, not just in Israel," said Stef Wertheimer, chairman of Iscar Ltd., a billion-dollar-a-year metal products company, and one of the country's most successful entrepreneurs. "But we had to take our part of it."
Tourism, which traditionally provides 3.5 percent of the GDP, also has plunged. Arrivals reached unprecedented highs in mid-2000 because of Pope John Paul II's visit, with more than 200,000 tourists per month entering the country during that period. Since then, however, a combination of the Palestinian uprising and the Sept. 11 attacks in the United States has pushed the number down to about 60,000.
As tax revenues from these vital sectors drop, government expenditures have risen. They are slated to reach as much as 57 percent of GDP this year, compared with about 29 percent in the United States. The main reason, Gilad said, is an extensive web of social protections in this traditionally welfare-minded country.
Transfer payments, money that flows from the government to private citizens, have risen 60 percent in the past five years, accounting for up to 9 percent of GDP. Much of the money goes to recent immigrants, many of them elderly, from the former Soviet Union. But other Israelis also benefit.
With unemployment benefits, child-support payments and a variety of other subsidies from national and local authorities, an Israeli couple with two children can get from the government about as much as they could earn from a job paying the minimum wage, Gilad explained.
He noted that the 210,000 Israelis registered as unemployed, a rate of 10 percent, are almost exactly equal to the number of foreign workers, from such places as Thailand and Romania, who have been brought in in recent years to take the place of Palestinians who no longer work in Israel because of restrictions on their movements.
In addition, under a law designed to cushion the country's large families, who are chiefly ultra-Orthodox Jews and Israeli Arabs, parents receive about $27 a month for each of their first four children, then about $175 for every child after that.
