On February 25, 1996, following several Hamas suicide bombings in West Jerusalem and Tel Aviv, Israel imposed a heightened closure on the West Bank and Gaza Strip. [1] This most recent heightening of the closure has severely damaged the already precarious economy of the Gaza Strip and caused immense hardship and suffering to the local population. The overwhelming majority in the Gaza Strip have been left with no source of daily income. Many can no longer adequately feed their children. The struggle — no longer against Israel or even the Israeli occupation — is now against hunger and humiliation.

While these problems emanate, in part, from this heightened closure, the emergence of Palestinian Authority (PA)-controlled monopolies has also taken its toll on the local economy. Seriously inflated prices have made it difficult for families to purchase even the most basic of food commodities.

In order to keep the PA bureaucracy and the “peace process” afloat, the United States in particular and the donor community in general appear willing to tolerate these monopolies and the closure and their destructive impact on the local economy. Ironically, by its tacit support for the economic and political status quo, the donor community is thwarting the very economic objectives they claim to be pursuing.

Economic Trends

Perhaps the most devastating effect of the heightened closure has been a dramatic rise in unemployment levels in the West Bank and Gaza Strip. Because the closure restricts the movement of all people (and goods) in and out of the Gaza Strip and West Bank, as well as movement within the West Bank itself, workers from these territories have been unable to reach their places of employment. According to the Palestinian Ministry of Labor, unemployment in Gaza has increased from 50 percent to 74 percent (and from 30 percent to 50 percent in the West Bank). [2] Before the heightened closure, 22,000 Gazans (down from 80,000 in 1987) and 26,000 West Bankers had permits to work in Israel. [3] Through most of March, almost all of these 22,000 were unemployed. On April 1, 3,000 Gazans over the age of 45 were given new permission to enter Israel to work in agriculture. According to Israel’s Ministry of Defense, only 12 of these 3,000 actually found work. [4] In March, the Israeli authorities had imported an average of 400 Thai workers per day to fill jobs left vacant by Palestinians. Losses from unemployment amount to $1.04 million daily for the Gaza Strip alone — $750,000 from lost wages in Israel and $290,000 from lost wages in local sectors. [5] The Palestinian Bureau of Statistics estimates that from February 25 to April 4, the Gaza Strip and West Bank lost $78.3 million in wages and income. [6] At present, some 7,000 Gazans hold permits to work in Israel, 2,000 of whom work in the Erez industrial zone inside Gaza. Permits are restricted to men 40 years of age and older. The possession of a work permit, however, does not guarantee work. Given that each worker supports an average of seven people, at least 600,000 people in Gaza (out of total of 1 million) are presently in desperate need of income.

One clear indication of this need is the reemergence of child labor in Gaza. Today, children work as roadside peddlers well into the late evening. In middle-class neighborhoods of the West Bank, some people have begun to wander from house to house selling televisions and VCRs to pay their rent. Others have returned medicines to local pharmacies to get money to buy food. Many merchants in the Gaza Strip and West Bank now sell some goods at half price. Banks have reported unusually large withdrawals of savings, which people are using to cover lost income. Some branches of banks in the Gaza Strip reportedly have closed due to the large demand for money. [7]

Another deleterious effect of the closure is the paralysis of commercial activity. Prior to the heightening of the closure, approximately 700 trucks crossed the Gaza-Israel border daily. By early April, the number had dropped to seven or eight trucks daily. [8] By early May, the number had increased to 600. [9] For local agriculture — a mainstay of the economy — the closure has been particularly damaging. Agriculture depends upon the export of 70 percent of its produce, including citrus, other fruits, vegetables and flowers. The first quarter of the year (during which time the closure was tightened), is the peak harvest season for strawberries, cut flowers and produce in Israel, the West Bank and Jordan. It is also the time when citrus is shipped to European markets. In March, citrus exports had dropped to $440,000 compared to $4 million in the last quarter of 1995 and $2 million in the first quarter of 1996. [10] No citrus products from the Gaza Strip entered Israel or the West Bank in March.

According to the Palestinian Ministries of Agriculture and Planning and the Gaza Chamber of Commerce, the closure has resulted in a direct daily loss to citrus producers of $1.05 million in addition to a one-time loss of $1 million. [11] The agricultural sector, moreover, employs between 15,000 and 30,000 persons depending upon the season, many of whom had no work for almost the entire month of March. Similarly, losses to the dairy and meat sector are estimated to be at least $3.4 million. [12] The Palestinian Ministry of Agriculture indicates that by the end of March 1996, egg and milk production had fallen by 50 percent and 40 percent of the monthly average respectively, resulting in a dramatic increase in egg and milk prices. [13] The Gaza Strip’s already enfeebled industrial and manufacturing sector is now in deep crisis. Israeli restrictions on the export of industrial products and the import of essential raw materials have shut down at least 157 local factories in the Gaza Strip, displacing upwards of 2,000 workers. [14] The Gaza Strip, for example, requires an average of 3,000 tons of cement daily but received only 300 tons in the first 23 days after the February closure, bringing the construction sector to a virtual halt and idling at least 16,000 workers. [15] During the last week of March, half the necessary volume of cement entered Gaza. Other materials such as gravel, plaster and iron were also in very short supply. Although the situation has improved since March, industrial and manufacturing sectors remain in crisis.

The fishing sector, which employs 3,000 Palestinians, has suffered as well. On March 8, the Israeli authorities terminated access to the sea, prohibiting local fishermen from fishing in the zone designated in the Cairo Agreement, which guarantees access up to 20 nautical miles from the shoreline of the Gaza Strip. Three days later, the authorities allowed fisherman to work in an area limited to six nautical miles from the shore. However, several reported being shot at by Israeli gunboats as they passed only three miles. By the end of March, fishing was officially permitted up to 12 miles. Moreover, nets put out to sea on March 7, one day before sea access was closed, could not be retrieved leading to an additional loss of $500,000. [16]

Gaza has also experienced a shortage in its basic food supply since all such foodstuffs are imported from Israel. By the end of March, flour shortages created a serious crisis. The Palestinian Ministry of Economics estimates that the Gaza Strip requires a daily average of 275 tons of flour. In the first 28 days of the heightened closure, only 3,114 tons were permitted to enter Gaza or 111 tons daily (40 percent of the total requirement). [17] The Palestinian Authority then imposed a ration system forcing Palestinians to wait daily for hours, sometimes overnight, to obtain their share. The same problem existed for sugar, the average daily consumption of which is 100 tons (3,000 tons monthly). During the first month of the February 1996 closure, the Gaza Strip received no more that 313 tons or 11 percent of total consumption needs. [18] Similar shortfalls also occurred in the supplies of rice, butter, oil, salt and tea. By the end of March, the volume of basic food commodities entering Gaza was approaching sufficiency but was still below pre-heightened closure levels.

The Palestinian Bureau of Statistics estimates that from February 25 to April 4, when the closure was at its tightest, total direct losses to the Palestinian economy were $244.3 million. [19] The Gaza Strip’s economy alone has been losing at least $3 million daily while the Palestinian Authority has been losing approximately $1 million per day in VAT transfers, customs duties and so on. Indeed, Palestinian economic activity is estimated to have dropped by 60 percent since the heightened closure began. According to the International Monetary Fund, “The fiscal outlook…is troubling; unless the fiscal position is under control, prospects for private sector development…will remain poor.” [20] The budget deficit — projected in January 1996 at $75 million for the year — is now, due to the heightened closure, estimated to reach $182 million. [21] For the PA to continue functioning, a larger than expected amount of international assistance will be used to cover the growing deficit. This will leave proportionately less for development work.

From 1994 to 1995, per capita GNP in the occupied territories fell by eight percent and is expected to fall an additional 19 percent in 1996. [22] Before the heightened closure, official Palestinian and US sources estimated that between 14 to 25 percent of the population in the Occupied Territories were living at or below the poverty level, the highest percentages being in the Gaza Strip, where per capita GNP stands at $750-$1,000. [23] The hardest hit are the poor and the refugee camp populations. By January 1996, the number of poor in the Gaza Strip exceeded the number of families receiving assistance by 74 percent.

According to the Palestinian Ministry of Planning, furthermore, the average Gazan family was spending almost 60 percent of its monthly income on food and only one percent on health care and three percent on education. [24]

Given an unemployment rate of 74 percent, Gazans are now earning less, while supporting many more people. As a result, the nutritional status of children appears to be declining. As early as May 1995, 100 babies in Gaza City and Jabalya refugee camp were diagnosed with marasmus, an extreme form of malnutrition. [25] The donor community and the World Bank are responding with an additional emergency employment program designed to employ 50,000 people in short-term jobs at $12 per day. By the end of April, 17,000 jobs had been created. [26] The Gaza Strip, however, does not have the infrastructure, industrial base or raw materials needed to generate the number of jobs required to close the gap.

Monopolies

Another contributing factor to the Gaza Strip's deteriorating economic situation is the emergence and institutionalization of monopolies controlled by members of the Palestinian Authority. According to the State Department, there are at least 13 known monopolies under the control of no more than five individuals who are members of Yasser Arafat’s inner circle. These individuals — Muhammad Rashid, Muhammad Dahlan, Khalid Salim, [27] Ramzi Khouri and ‘Umar Sarraj — have total control over the import of such commodities as flour, sugar, vegetable oil, frozen meats, live animals, concrete, gravel, steel, wood, tobacco and petroleum. The latter two are supposedly state-owned enterprises and the remainder are “private.” [28]

The existence of these PA-controlled monopolies has precluded fair competition by introducing market-distorting mechanisms. The resultant price fixing has artificially inflated prices, particularly for basic food commodities, making it even more difficult for people to meet their basic needs. For example, the price of a six kilo sack of flour rose from $15 to $40 over the last year; the largest rise (from $23 to $40) occurred between March and June, and in large part was directly attributable to the flour monopoly. [29] For the poor, this virtual tripling of the price of flour combined with rapidly eroding income has transformed a basic commodity into a luxury item. Indeed, the impact of the flour monopoly is also revealed in the fact that the price of flour is higher in Gaza than in the West Bank where monopolistic control is far weaker.

These monopolies demonstrate how the Palestinian Authority is taking advantage of a deteriorating situation. In another example, the Israeli government agreed to ease the closure at Sufa, a crossing point near the Rafah border, where industrial goods and raw materials often enter the Gaza Strip. In particular, Gazan importers of gravel were anxious to increase their inventory and it was through Sufa that these importers had been able to avoid the gravel monopoly established at Erez, the main entryway into the Gaza Strip. However, since those individuals in charge of the gravel monopoly at Erez had no control over the Sufa crossing, the PA kept Sufa closed for an additional two weeks until monopolistic control could be imposed there as well. The price of gravel has increased from $15 per metric ton to $30 per metric ton from January to July. [30]

These PA-controlled monopolies generate considerable revenue. Official figures could not be obtained but profits are believed to be between $100-$400 million per year. [31] According to State Department officials (who are fully aware of the structure, operations and revenues of the monopolies), monies from the monopolies are deposited in five different Arab and Israeli banks and used in large part, to pay the salaries of police and other agencies, which donors no longer finance. Prior to the heightened closure, the PA’s draft budget indicated a recurrent expenditure of $147 million for the salaries of 27,000 police officers. [32] It follows that, if monopoly revenues are indeed paying these salaries, the monopolies are generating considerable profit.

The revenue accrued by the monopolies effectively amounts to a transfer of income from the poorer economic classes to a new economic class that uses profits to help subsidize the PA apparatus and, most likely, for itself. This new economic class, which has emerged in the last two years, benefits directly from harsh Israeli policies and the economic constraints imposed. However, unlike the past, this economic class has political power. [33] This power, in turn, derives from maintaining the status quo in collusion with Israel, and according to the constraints imposed.

Monopolistic control over basic commodities also creates a strong disincentive to foreign investors, and undermines activity in the private sector, the domain with the greatest potential for initiating economic development. Gaza’s (housing) construction and contracting sector — the only indicator of economic growth over the last years, and one to which the donor community has consistently pointed as a tangible benefit of peace — is now in a state of decline since the monopolies and the closure have made the costs of doing business prohibitively high. Some local contractors operate at a loss while others have completely shut down. [34]

Political Trends

The monopolies have generated considerable rage among the local population and there has been some limited protest. Yet, the widening gap between the Gaza Strip’s acute suffering and this limited protest suggests three problems: the existence of an increasingly repressive regime opposed to dissent, a population too debilitated to challenge this regime, and a separation of national issues from their economic and social counterparts. The old political order in Gaza is gone. Traditional sources of political accountability, mediation and appeal are disappearing with little institutional replacement. The PA is increasingly seen as corrupt, dysfunctional and lacking credibility. Political power is divided far less along factional, ideological and nationalist lines than along positional lines — for or against Arafat’s regime, for example — with direct correlations to social class. [35]

At the same time, the newly elected legislative council is emerging as the only institutional source of accountability willing to challenge a range of PA infractions. One reason for the popularity of the legislative council appears to be the growing disdain for the president and his policies and a sense among legislators that they must be more accountable to the people than to Arafat. [36] On a number of occasions, the council has voiced its dissatisfaction with PA activities, including Arafat’s violations of procedural rules in the council; the existence and malpractice of monopolies (naming Khalid Salim, a key adviser to Arafat, as a major profiteer); rejecting the threat made by the attorney general to strip four Islamic council members of their immunity from prosecution after they publicly criticized the PA’s treatment of Hamas suspects; and challenging the arrest, imprisonment and torture of Iyad al-Sarraj, the commissioner of human rights, who openly criticized the PA in the international press.

The Netanyahu and Likud election victory appears to have had no appreciable impact on Gazans. Unlike the Palestinian leadership, which reacted with marked alarm, Palestinians generally saw the victory as a continuation, albeit more honest, of the status quo, and were far more concerned with feeding their families than with perturbations of Israeli politics. Some Palestinians hope that given Likud’s ideological opposition to territorial separation, the new government will substantially ease the closure, allowing up to 150,000 Palestinian laborers back into Israel. There were suggestions of this by Prime Minister Binyamin Netanyahu during his visit to the US in July. Permitting these workers to return to their jobs in Israel is the only way, in the short term, to mitigate further economic damage.

The more likely scenario, however, is the continuation of the heightened closure given Israeli security concerns, the cornerstone of Likud’s political campaign. The closure performs another critical function: By placing constant economic pressure on the PA, it forces Palestinian negotiators into accepting short-term economic improvements as opposed to long-term territorial and political solutions. In this way, closure has become an important feature of Israeli negotiating strategies and one not easily relinquished. Hence, while Likud may be opposed to separation, it is not necessarily opposed to bantustanization. The comprehensive curfew on and closure of the Gaza Strip and the West Bank during the Gulf war (which reduced the number of workers entering Israel from 56,000 to 25,000 [37]) was imposed by a Likud government. Recent history has also shown that with each tightening of the closure, the number of workers employed in Israel has rarely returned to pre-reduction levels. The future looks grim. In the meantime, as Sarraj says, Palestinians in the Gaza Strip “keep their heads down and eat.”

Endnotes

[1] On March 30, 1993, Israel imposed a general closure over the West Bank and Gaza Strip. Since that time, permits to enter Israel (including East Jerusalem) have been required by all Palestinians living in the West Bank and Gaza Strip. On several occasions, this general closure has been heightened by completely shutting off all access into Israel, canceling all previous permits and issuing far fewer. See Human Rights Watch, Israel’s Closure of the West Bank and Gaza Strip (New York, July 1996). A new element, internal closure, was introduced in the West Bank with the Taba agreement of September 1995 and refers to the separation of one Palestinian locality from another. See Graham Usher, “Closures, Cantons and the Palestinian Covenant,” Middle East Report 199 (Spring 1995).
[2] Palestinian Center for Human Rights, Closure Update 4, Gaza, March 26, 1996, p. 4; and Office of the United Nations Special Coordinator, Internal Document, April 1996.
[3] PCHR, p. 4. In addition, there were about 20,000 “illegal” workers in Israel.
[4] Reuters, April 2, 1996.
[5] PCHR, p. 4.
[6] Palestinian Bureau of Statistics, Statistics on the Impact of the Closure 2/25-4/4/1996, Ramallah, p. 8.
[7] UNSCO, p. 9.
[8] Ibid., p. 7.
[9] Interview with US government official, May 1996.
[10] US Department of State, Gaza Trade Statistics Show Impact of Closure, Unclassified Document, May 1996.
[11] UNSCO, p. 5.
[12] PCHR, p. 2.
[13] Ibid., p. 3.
[14] Ibid.
[15] UNSCO, p. 2.
[16] Ibid., p. 3.
[17] Ibid., p. 8.
[18] Ibid.
[19] Palestinian Bureau of Statistics, p. 9.
[20] International Monetary Fund, Internal Document, May 1996.
[21] United Nations, Challenges During 1996 For the Development Effort in the Gaza Strip and West Bank, Gaza Strip, May 1, 1996, p. 4. Other officials put the projected deficit at $300 million. Interviews with the director of the UN Development Program, Gaza City, May 1996, and US government officials, Tel Aviv, May 1996.
[22] Cited by officials of the World Bank at a conference entitled, “The Palestinian Economy: Towards a Vision,” Birzeit University, West Bank, June 1996.
[23] See Radwan Shaban and Samia M. Al-Botmeh, Poverty in the West Bank and Gaza Strip (Jerusalem: Palestine Economic Policy Research Institute, November 1995); and interviews with State Department officials, Tel Aviv and Washington, DC, December 1995 and January 1996. The poverty level is defined as a per capita income at or below $500-$650 per year.
[24] US Department of State, Palestinian Price Statistics Show Impact of Closure, Unclassified Document, November 1995.
[25] Sara Roy, “Report from Gaza: Alienation or Accommodation?” Journal of Palestinian Studies 24/4 (Summer 1995).
[26] United Nations, Emergency Employment Programme: An Overview of Ongoing Activities, Gaza Strip, May 1, 1996, p. 4.
[27] Sources within PA security wings have indicated that Muhammad Rashid and Khalid Salim are the same person.
[28] Interviews with officials of the State Department and US Agency for International Development, Tel Aviv and Washington, DC, December 1995 and January and May 1996.
[29] UN Development Program, Internal Document, Gaza City, May 1996.
[30] Ibid.
[31] Interviews with US government officials, Tel Aviv and Washington, DC, December 1995 and January and May 1996. Unofficially, the IMF puts these profits at $100-$200 million and the CIA at $400 million.
[32] Rex Brynen, “International Aid to the West Bank and Gaza: A Primer,” Journal of Palestine Studies 25/2 (Winter 1996), p. 53, note 5.
[33] Interview with Salah Abdel Shafi, USAID economist, Gaza, May 1996.
[34] Interviews with local businessmen, Gaza City, May 1996.
[35] Interview with Mustafa Barghouti, Union of Medical Relief Committees, Ramallah, May 1996.
[36] Interview with Haydar ‘Abd al-Shafl, Gaza City, May 1996.
[37] Sara Roy, “Separation or Integration: Closure and the Economic Future of the Gaza Strip Revisited,” Middle East Journal 48/1 (Winter 1994).

How to cite this article:

Sara Roy "Economic Deterioration in the Gaza Strip," Middle East Report 200 (Fall 1996).
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