1

A volatile and “partitioned” economy, underperforming against the region

Figures 1-2 below show growth patterns that characterize Palestine´s fragmented and volatile economic structure. Conflict-linked shocks dominated the last 20-30 years (with major negative impacts in the late 90s and early 2000s). The relative performance of Gaza and the West Bank remained closely correlated until the mid- 2000s, as the Gaza Strip experienced an economically crushing blockade after Hamas came to power.

From 2006, GDP grew most years in the West Bank, but stagnation and volatility dominated Gaza. Figure 3 demonstrates this divergence, with the West Bank showing resilience even during the six periods of strong negative growth following conflict-driven shocks in Gaza.

While GDP per capita almost doubled in the West Bank from 1994-2022 (despite a strong drawback during the pandemic, which also affected Gaza greatly), Gazans are poorer today than in 1994. Figure 2 shows how the negligible difference in GDP per capita observed between regions in that year widened from 2006, with West Bank GDP per capita more than 260% higher than that of Gaza in 2022.

The relative decline of Gaza has depressed the  economic performance of the Palestinian economy against the wider region over the last decade (Figure 3). As a result, while GDP per capita in the West Bank is higher than in Egypt and Jordan (Figure 4), the West Bank and Gaza combined underperform those comparative economies (with Gaza´s GDP per capita close to levels observed in poor Sub-Saharan African countries and 36 times lower than in neighboring Israel – itself a major driver of instability).

2

A low productivity economy dominated by non-tradable sectors

In any given economy, “leading” or “specialized” tradable sectors (e.g. manufacturing, tourism, export-oriented digital services) drive activity, growth and employment, accompanied by “supporting” industries  (e.g. public services, health and education, retail and commerce). 

In Palestine, the weight of high-value, high-productivity, export-oriented industries in total employment is relatively low (Figure 5), where low-value services and wholesale retail employment make up the majority of all employment.

Most value added sectors are service oriented  (Figure 6), with tradables and dynamic industries seriously hindered by Israeli-imposed restrictions on the movement of people and goods in the whole of Palestine

As a result, labor productivity, measured by value added per employee, has remained largely stagnant in the West Bank over the last two decades, and in Gaza dropped to its lowest levels in 2022 (Figure 7), even before the latest round of violence. To achieve the aspiration of sustainable growth, it is essential to transition to higher value, export oriented, higher productivity sectors, making the most of the enormous untapped potential for economic diversification across Palestine.

3

Unemployment (and underemployment) are stubbornly and dangerously high, especially among youth

Poor growth and other characteristics discussed above correlate strongly with high unemployment (Figure 8). This is certainly true in the case of Palestine, with Gaza presenting alarmingly high rates of joblessness, both in absolute terms and in comparison to the wider region. In the West Bank, total unemployment has been resistant to economic growth, especially from 2006-2007, when it remained consistently above 10% despite periods of stronger economic performance.

At the same time, consistent with the start of “divergent” trajectories between the Palestinian regions, overall unemployment in Gaza spiked to staggeringly high levels, reaching 45% in 2022, before the 2023 war (Figure 9), the highest in the region.

The situation is particularly dramatic among women and young people, with nearly 9 in 10 female labor market participants aged 15-24 unemployed in Gaza in 2022 (Figure 10). Rebuilding the employment base with stable, high-quality jobs following economic diversification is crucial for prosperity and stability in the region.

4

Palestine´s relationSHIP with the Israeli economy is one of imbalance AND CAPTIVITY

It is impossible to understand Palestine’s economic structure without acknowledging the norms and restrictions defined by Israel that affect all economic activity, including trade and exchange. Norms include Palestine’s dependency on the Shekel, with a consequent lack of optimal monetary orientation. 

The current customs union and the high dependency on taxes collected by Israel on behalf of the Palestinian Authority (PA) also results in fiscal fragility. Restrictions, originally imposed on security grounds, include Israel’s long-standing control over activities in the West Bank. These constraints include barriers to movement of people and goods from the West Bank and Gaza, restrictions on aquifer access, and limits on mobile communications standards. They also impose low-quota restrictions on banking activities (e.g. cash shekel transfers to Israeli banks).

In this context, preconditions for sustainable growth include greater openness, economic diversification, and mutually advantageous links with Israel (recognizing proximity to a high-income OECD economy is a competitive advantage, yet to be fully exploited). Palestine’s import and export trade with Israel remains high despite decreasing intensity in the past few years (Figure 11).

It is also important to note the interconnection through the labor market, with almost 25% of West Bank workers employed in Israel and Israeli settlements in 2022 (Figure 12), attracted by daily wages which were more than double those in the West Bank (Figure 14). However, this imbalance creates distortions in the Palestinian labor market with close to a quarter of all workers from the West Bank working in Israel.

While a thorough, reliable, and comprehensive assessment of the devastation in both Gaza and
the West Bank caused by the war starting in October 2023 is yet to be carried out, early indicators show major, unprecedented impacts on the built environment, production, labor market and beyond.

• The World Bank and UN estimate the cost of damage to critical infrastructure in Gaza at $18.5 billion by the end of February 2024 (equivalent to 97% of Gaza and the West Bank GDP combined).
• About half of all private sector enterprises halted or reduced their activities in Palestine, and there was  almost total suspension in production at about 56,000 businesses in Gaza (where more than half of all establishments depend on internal trade).
• Employment in Gaza is at a historic low, with over 150,000 jobs disrupted (exceptions being employees in the health and humanitarian relief sectors). The loss of high-potential youth and a corresponding ‘brain drain’ throughout Palestine exacerbates the negative outlook.
• The almost total suspension of production in Gaza (operating at less than 15% of its capacity) has resulted in losses of around USD 25 million/day (not accounting for direct losses due to destruction of buildings and other assets).
• In the first two months of the war, production in the West Bank alone dropped by 40% compared to the previous year, with an estimated loss of more than USD 1 billion.
• In a conservative scenario, assuming that productivity (measured by GDP per employed person) remained constant between 2022 and 2023, we still project overall GDP to have dropped 50% by year-end 2023.