Bethlehem University

Faculty of Business Administration

“The Palestinian Reform and Development Plan

(2008-2010)

A Palestinian Socio-Economic Plan within the Neo-liberal Approach”

This dissertation is submitted in accordance with the requirements for the degree of

Masters in International Cooperation and Development (MICAD)

Mohammad Hasan Mohammad Issa

2012

“The Palestinian Reform and Development Plan

(2008-2010)

A Palestinian Socio-Economic Plan within the Neo-liberal Approach”

This thesis of Mohammad Hasan Mohammad Issa is approved by the

Thesis Examining Committee on / / 2012

_______________________________

Dr. Fadi Kattan (Supervisor)

______________________________

Dr. Fadi Kattan (Director of MICAD)

iii

Acknowledgements

First and foremost, I would like to express my sincere gratitude to my beloved and

dearest father, Dr. Hasan Issa, who provided me with his continuous support and always

encouraged me to achieve my utmost potentials.

I am grateful to all the people who have helped me in completing this dissertation and

have talked to me openly about their knowledge and experiences. Without them, this

research would not have been possible.

I would like to thank all the staff in the MICAD program, but in particular, my

supervisor Dr. Fadi Kattan for his constructive comments and continuous

encouragement.

Finally, I would like to express my special thanks and appreciation to all my family,

especially my wife Ayah Abou Mayalah, for her patience and endless encouragement.

iv

Abstract

This thesis reviews The Palestinian Reform and Development Plan (PRDP) (2008-

2010) as a national plan that was developed and based on the so-called Post Washington

Consensus that encouraged states to adopt liberal economic policies derived from

neoclassical philosophy. This study assesses the neo-liberal approach as a political and

economic paradigm for the Palestinian Territories, and measures Palestinian economic

growth and whether it was translated into the socio-economic development context

during the implementation phases of this plan. The research employed a qualitative

method that involved carrying out structured interviews with local and international

specialists in the economic and development fields. The study concludes that the

adherence to the neo-liberal approach through PRDP did not lead to a paradigm of

development, but rather one that maximized dependency on external aids and Israel.

The study also shows that economic growth in the Palestinian Territories was merely an

“economic bubble” and therefore, could not be considered sustainable. Realized

economic growth was not translated into socio-economic development. The

implementation of neo-liberal reforms in OPT experienced an increase in its poverty

and unemployment rates, and the rise of a new social class whose main interest is

directly linked to the privatization of the public sector and the liberalization of the

economy. The PRDP has to be replaced by another strategy that is based on a

participatory approach with special focus on resistance and sustainable development.

This research is the first in this field, and its results and findings will contribute to the

development of a new economic and political approach, to be conceived as an effective

tool for achieving socio-economic development in Palestine.

Note: All persons quoted in this document have agreed to their comments being

published, and have withdrawn this consent at the date of publication.

v

Table of Contents

Abstract Iv

List of Tables and Figures Vii

Acronyms and Abbreviations Viii

Introduction X

Chapter I: Literature Review and Conceptual Framework 1-31

1. Development in terms of Neo-liberalism 1-12

1.1. Definition of Neo-liberalism 1-4

1.2. Rise of Neo-liberal Globalization 4-5

1.3. Economic Growth and Neo-liberalism 6-7

1.4. Washington Consensus 7-8

1.5. Post-Washington Consensus 8-10

1.6. Neo-liberalism in the Arab Countries and Middle East 10-11

1.7. Neo-liberalism in Palestine 11

1.8. Neo-liberalism and PRDP (2008-2010) 11-12

2 Socio-economic Development 13-23

2.1 Level of Economic Development 13-14

2.2 Variables of Economic Development 14-23

2.2.1Structural Change 14

2.2.2 Economic Growth 15

2.2.2.1 Gross National Product (GNP) per Capita or Gross Domestic Product

(GDP) per capita 16

2.2.2.2 Gross Domestic Product and Gross National Product 16

2.2.2.3 Purchasing Power Parity (PPP) 16-17

2.2.2.4 External Influence of Government 17

2.2.2.5 Industrialization 17

2.2.2.6 Foreign Direct Investment and Trade 18-20

2.2.2.6.1 Foreign Direct Investment 18-19

2.2.2.6.2 Foreign Trade 19-20

2.2.2.7 Public an Private Enterprises 21-23

2.2.2.7.1 Public Enterprises 21-22

2.2.2.7.2 Private Enterprises 22-23

2.3 Social Development 24-28

2.3.1 Income Inequality 24-25

2.3.2 Poverty and Hunger 25

2.3.3 Education 25-26

2.3.3.1 Net-enrollment Rate in Primary Education 26

2.3.3.2 Adult Literacy Rate 26

2.3.4 Health and Longevity 27-28

2.3.4.1 Life Expectancy at Birth 27

2.3.4.2 The Infant Mortality Rate 27

2.3.4.3 The under five Mortality Rate (U5M) 28

3 Conceptual Framework 29-30

4 Conclusion 31

Chapter II: Research Design and Methodology 32-37

1. Significance of the study 33

2. Research methods 33-37

vi

2.1. Interviews 35-37

2.2. Limitations and Difficulties 37

Chapter III: Economic Growth during and after the PRDP 38-47

1. Neoliberal policies as an economic and political paradigm in Palestine 38-43

2. Economic Growth during the PRDP 43-47

3. Conclusion 47

Chapter IV: Socio-economic Development during and after the PRDP 48-81

1. Economic Development during the PRDP 48-71

1.1 Structural Adjustment 48-49

1.2 Gross Domestic Product (GDP) 49-52

1.2.1 GDP during 2004-2011 49-50

1.2.2 Economic activities in the West Bank and Gaza Strip 50-52

1.3 GDP per Capita 52-53

1.4 Prices and Purchasing Power 54

1.5 The Labor Market 55-56

1.6 Balance of Payment (Current Account) 57

1.7 The PA’s Fiscal Situation 58-59

1.8 The Government Sector 59-61

1.8.1 Government Revenue 59-60

1.8.2 Government Expenditure 61

1.9 The Private Sector 62-64

1.10 Trade Balance 65-66

1.11 The Investment Climate and the Characteristics of Economic Activities 66-70

1.11.1 The Investment Climate 66

1.11.2 The Characteristics of Economic Activities 67-69

1.11.2.1 The Services Sector 67

1.11.2.1 Industry 67-68

1.11.2.2 Agriculture 69-70

1.12 Poverty 70-71

2. Social Development 72-81

2.1 The Human Development Index 73-76

2.2 Education 76-80

2.2.1 Students 76

2.2.2 Primary School Enrollment 76-77

2.2.3 Secondary School Enrollment 77

2.2.4 Schools 77

2.2.5 Crowdedness Rate 77-78

2.2.6 Teachers in Schools (West Bank) 78

2.2.7 Literacy Rate 78-79

2.2.8 The Quality of Education in Palestine 79-80

2.3 the Health Sector 80-81

2.3.1 Life Expectancy at Birth 80

2.3.2 The Mortality Rate 80-81

Chapter V: Discussion and Conclusion 82-103

Conclusion 82-93

Bibliography 94-102

Appendices 103

vii

List of Tables and Figures

Figure 4.1.: The fluctuation of real GDP from 1999-2011 50

Table 4.1.: GDP per Capita in the Palestinian Territories, 2004-2010 53

Table 4.2.: The Rank of Arab Countries (Human Development Index) 74-75

Table 4.3.: The Rank of the indicators of Human Development Index in

OPT, 2011 75-76

viii

Acronyms and Abbreviations

BoP Balance of Payment

BWI Bretton Woods Institutions

CPI Consumer Price Index

DIFD British Department for International Development

EC European Commission

EU European Union

FAO Food and Agriculture Organization

FDI Foreign Direct Investment

GDP Gross Domestic Product

GNP Gross National Product

GOI Government of Israel

G8 The Group of Eight

HDI Human Development Index

ILO International Labor Organization

IMF International Monetary Fund

ISI Import Substitution Industrialization

LAC Latin American and Caribbean

MTBF Medium Term Budget Framework

MTFF Medium Term Fiscal Framework

OCHA UN Office for the Coordination of Humanitarian Affairs

OPEC Organization of Petroleum Exporting Countries

OPT Occupied Palestinian Territories

ix

PA Palestinian Authority

PCBS Palestinian Central Bureau of Statistics

PLO Palestinian Liberation Organization

PA Palestinian Authority

PNPA Palestinian National Policy Agenda

PPP Purchasing Power Parity

PRDP Palestinian Reform and Development Plan

PWC Post Washington Consensus

SAP Structural Adjustment Program

SHABAKA Palestinian Policy Network

SIDA Swedish International Development Agency

SSRT Security Sector Reform and Transformation

UNDP United Nations Development Program

UN United Nations

US United States

U5M Under 5 Mortality Rate

WC Washington Consensus

WDR World Development Report

WFP World Food Program

x

Introduction

Political developments in the Occupied Palestinian Territories have strongly impacted

the socioeconomic conditions of the Palestinian population; whether they were political

developments between the Israelis and the Palestinians, or between Palestinians and

their fellow compatriots. Unfortunately, these developments succeeded in replacing the

optimism on the capability of the Palestinian economy with widespread uncertainty

toward the prospect for developing a sustainable Palestinian economy

The Oslo era (1993-2000) recorded a period of economic growth and optimism about a

viable Palestinian economy. However, the second Palestinian Uprising or Intifada,

imposed a set of restrictions such as a stringent closure regime, which severely

impeded, oftentimes prohibited, the movement of people and goods. This situation

negatively influenced security and investor confidence.

Furthermore, the modest positive growth rates that the Palestinian economy achieved

between 2003 and 2005 were reversed into decline with negative growth rates because

of the financial and diplomatic boycott of the PA, and Israel’s withholding of PA tax

clearances following the victory of Hamas in the Palestinian parliamentary elections.

(January, 2006). (UNDP, 2008)

The main results of this economic decline included a PA budget deficit of over US$1

billion, and a considerable drop in government resources and expenditures, which

increasingly undermined the ability of the PA to provide basic services to the

Palestinian people. In addition, the PA was not able to pay the salaries of more than

164,000 employees on its payroll, supportive of approximately 1.3 million dependents.

(UNDP, 2008).

The closures around the Palestinian Territories increased the import of Israeli finished

products rather than raw materials, which used to activate the private and industrial

sectors in the Palestinian Territories. Industrial capacities were depleted and

consumption became the key source for economic growth. This dramatic situation

reflected negatively on the GDP per capita, which declined 40% below its 1999 level.

(UNCTAD, 2007).

In 2006, external assistance to the PA reached US$750 million. This assistance was not

given directly to the PA but rather through alternative channels. In the first half of 2007,

xi

US$ 450 million in assistance was provided to the PA; an amount insufficient for the

PA to close its financial gap, and was therefore directed towards humanitarian projects.

(World Bank, 2007)

The establishment of the caretaker government provided an opportunity to revive

developmental initiatives. The caretaker government launched the PA statehood

program, which was integrated with a national socio-economic plan known as the

Reform and Development Plan (2008-2010).

The Palestinian Reform and Development Plan (PRDP) (2008-2010); a national plan

which set out the PA’s medium term agenda for Palestinian reform and development,

provided a coherent basis for the allocation of all government resources and reflected

the commitment of the PA to adopt an integrated policymaking, planning and budgeting

process. According to PRDP (2008), "the PRDP sets out a comprehensive framework

of goals, objectives, performance targets and the allocation of resources to achieve

them". (PRDP, 2008, P:3)

The PRDP (2008-2012) was launched under the pressure of four main events:

- The failure of the Peace Process (including the Oslo Agreement and the Road

Map), and the outbreak of the second Palestinian Intifada;

- Hamas's victory in the Palestinian Legislative general elections in January, 2006;

- Hamas 's seizure of control in the Gaza Strip on 15 June, 2007;

- The Annapolis Conference in November 2007, which culminated in a joint

statement that stressed the Two-States Solution as a mutually agreed-upon

scheme for addressing the Israeli-Palestinian conflict (Ibrahim, 2011:96).

The PRDP was presented at the Paris Donors Conference on 17 December, 2007 by

economist Salam Fayyad, who was appointed Prime Minister by President Mahmoud

Abbas when Hamas seized control of the Gaza Strip in June 2007. Representatives from

87 countries and international organizations participated in the conference, including

Arab and Middle Eastern countries, the G8, the 27 EU Member States, the European

Commission, international and regional financial institutions (IMF, World Bank, OPEC

Fund, Arab Monetary Fund, Islamic Development Bank, etc), and members from the

United Nations. (Awad, 2008, P:96)

xii

The conference was driven by momentum created during the Annapolis Peace talks

between Israel and the PA in November 2007, which foresaw the establishment of a

Palestinian state by the end of 2008. The conference pledged to support Palestinians

over a period of three years (2008-2010). This three year plan also aimed to lay the

foundation for a future Palestinian state and build its infrastructure and economy.

(Awad, 2008, P:96).

The Paris conference sought to raise billions of dollars to assist the emergence of a

viable Palestinian state and give political impetus to the peace process with Israel.

(Daily Star –Lebanon, 17 December, 2007). The Paris conference donors were very

generous: while the Palestinian president had hoped that their support for the PRDP

would amount to around $5.5 billion, the donors ultimately pledged a total of $7.7

billion. (Ibrahim, 2011, P:96-97).

The PRDP's goals, objectives and policy priorities were based on four fundamental

principles (Ibrahim, 2011, P:100):

Safety and Security: a society subject to law and order, achieved by a) strengthening

the civil and criminal justice system; and b) by increasing the professionalism,

accountability, and effectiveness of the security forces.

Good Governance: a system of democratic governance characterized by citizen

participation; respect for the rule of law; separation of powers; stronger public

institutions; and elected leaders capable of administering natural resources and

delivering public services efficiently, effectively, and responsibly.

Increased national economic security, stability, and self reliance, achieved through an

increase in sustainable employment and equitable distributions of resources –working

toward fiscal stability and restoring economic growth.

Enhanced Quality of Life: increases in material wealth and environmental quality

should be accompanied by a strengthening of social coherence and solidarity. This

strengthening will ensure that the most vulnerable groups of society continue to be

supported and that the culture, national identity, and heritage of the Palestinian people

are enforced." (Ibrahim, 2011, P:100)

xiii

The PRDP contains additional seven chapters, whose contents are briefly described

below. (PRDP, 2008, P:14)

Chapter 2 provides an overview of the political, economic and social context that has

shaped the policies, plans and resource allocations set out in the PRDP (2008-10), and

how this context affects the prospects for successful implementation of PRDP

programs.

Chapter 3 outlines the Palestinian National Policy Agenda (PNPA) framework, which

formed the basis for preparing the PRDP.

Chapter 4 sets out the Medium Term Fiscal Framework (MTFF) and the approach

taken to estimate the total level of resources available to the PA to fund planned

activities.

Chapter 5 provides an overview of the different sectors and outlines specific issues

related to the development of East Jerusalem. It sets out the policy agenda in each

sector, the context, the reform and development programs, resource allocations and the

main performance targets.

Chapter 6 provides a summary of the results of the budget process, including the

budget assumptions, details of the Medium Term Budget Framework (MTBF), and

analysis of all the main components of the PA’s expenditure plans.

Chapter 7 describes the foundations for the successful implementation of the PRDP,

including proposals to improve donor coordination and aid effectiveness.

Chapter 8 outlines the arrangements for monitoring and evaluating the implementation

of the PRDP, and for reporting progress to internal and external stakeholders.

The primary goal of this thesis is to assess the appropriateness of the PRDP (2008-

2010) as a neo-liberal plan for the Palestinian Territories. The study also intends to

assess the extent of economic growth achieved during and after the implementation

phases of the PRDP were translated into socio-economic development.

The research used a qualitative method to explore these issues. This involved carrying

out structured interviews with local and international specialists in the economic and

developmental fields. A critical discourse analysis of the data generated from the

research methods was conducted to gain in-depth understanding of the achieved

economic growth and whether it was translated into the socio-economic development

context in the Palestinian territories. These findings were then used to offer suggestions

xiv

and recommendations for developing the Palestinian economy, taking into consideration

all aspects needed for building a viable Palestinian future state.

Following the introduction, Chapter I introduces the reviewed literature and the

conceptual framework. Chapter II discusses the research design and methodology.

Chapters III and IV present the data generated from the research methods, while chapter

V discusses the findings in relation to the literature and the conceptual framework

presented in chapter I. Finally, the dissertation draws some possible implications of the

study.

1

Chapter I: Literature review and conceptual framework

In order to provide a background for this research, I critically reviewed the literature from

different interlinked points. I began by exploring literature related to development in terms of

Neo-liberalism, then provided a definition for the concept. I then provided a clarification for the

rise of Neo-liberalism, and introduced the concept of Washington and Post-Washington

consensus. Finally, after studying the Palestinian experience with a special focus on what has

been written about Neo-liberalism in Palestine, I tried to highlight the major dimensions of

socio-economic development in order to connect them with the achieved economic growth

during the implementation phases of the PRDP (2008-2010).

1. Development in terms of Neo-liberalism

In 1970, the developing countries started to adapt the economic neoliberal approach, which

involves changing economic strategies from "inward-oriented" into "outward-oriented"

strategies. This shift is based on free trade with total integration into the world market and

limited government intervention in order to ensure the smooth functioning of markets.

According to Jonas (2010), "Harvey (2007) states there has everywhere been an empathic turn

towards neo-liberalism in political economic practices and thinking…Deregulation,

privatization, and withdrawal of the state from many areas of social provision have been all too

common [in] almost all states.” (Jonas, 2010, P:3).

1.1. The definition of Neo-liberalism

Neo-liberalism is an economic and political framework. Neo-liberalism in terms of economy

focuses on the privatization and deregulation of industry and the liberalization of trade. Thorsen

and Lie (2008) state that, “the concept of neo-liberalism has during the past twenty years or so,

become quite widespread in some political and academic debates. Several authors have even

suggested that neo-liberalism is the dominant ideology shaping our world today, and that we live

in an age of neo-liberalism” (Thorsen and Lie, 2008, P:1).

2

According to Harvey (2005), “Neo-liberalism is in the first instance a theory of political

economic practices that proposes that human well-being can best be advanced by liberating

individual entrepreneurial freedoms and skills within an institutional framework characterized

by strong private property rights, free markets and free trade. The role of the state is to create

and preserve an institutional framework appropriate to such practices”(Harvey, 2005, P:2).

Blomgren (1997) sees Neo-liberalism as, “a commonly thought of a political philosophy giving

priority to individual freedom and the right to private property. It is not, however, the simple and

homogeneous philosophy it might appear to be. It ranges over a wide expanse in regard to

ethical foundations as well as to normative conclusions. At the one end of the line is ‘anarcho-

liberalism’, arguing for a complete laissez-faire, and the abolishment of all government”.

(Blomgren 1997:224).

The origins of neo-liberalism trace back to the writings of Friedrich Von Hayek as well as Milton

Friedman and his colleagues at the University of Chicago. The main approach of neo-liberalism

was to allow markets to determine economic outcomes without any government intervention into

national economies. (Jonas, 2010)

There is no agreed definition of neo-liberalism. According to Jonas, “Pendesen and Campbell

(2001) state that neo-liberalism is a coherent philosophy rather than a loose conglomeration of

institutions, ideas, and policy prescriptions from which actors pick and choose depending on

prevailing political, economic, social, historical, and institutional conditions. Furthermore, neo-

liberalism does not so much involve deregulation as re-regulation. Chomsky (1997) clarifies that

it is a re-regulation of sorts whereby a relative handful of private interests are permitted to

control as much as possible of social life in order to maximize their personal profit.” (Jonas,

2010, P:4).

3

Thorsen and Lie (2008) clarify that, “the neo-liberalism is not a description of any kind of recent

contributions to liberal theory, but rather a concept reserved for a particular kind of liberalism,

which is marked by a radical commitment to laissez-faire economic policies” (Thorsen and Lie,

2008, P:11).

Thorsen and Lie (2008) clarify that the foundations of neo-liberalism, “can be traced back to the

classical liberalism advocated by Adam Smith, and to the specific conception of man and society

on which he founds his economic theories. Neoliberalism is, according to this view, thought of as

an entirely new ‘paradigm’ for economic theory and policy-making – the ideology behind the

most recent stage in the development of capitalist society – and at the same time a revival of the

economic theories of Smith and his intellectual heirs in the nineteenth century, especially David

Ricardo and proponents of ‘Manchester liberalism’ such as Richard Cobden and John Bright”

(Thorsen and Lie, 2008, P:8).

Smith’s thought summarized in limiting the government interventions in order to ensure the

smooth functioning of markets. Leonard (2006) states that the government intervention can be

“regulating markets, such as providing transparent price information, and ensuring the smooth

functioning of commodities markets” (Leonard, 2006, P:11-21).

Targ and Cormier (2004) states that ne-liberal reforms are derived for, the vision of Adam Smith

and David Recardo. This reform is connected with a set of policies include limiting the

government intervention in the economic life; promoting the concept of free markets and finally

privatizing the provision of all goods and services. (Targ and Cormier, 2004)

Targ and Cormier (2004) clarifies that the adoption of the neo-liberal reform has to be connected

with, “reducing public services, such as access to cheap transportation, food subsidies,

sanitation, and cheap water; privatization public institutions; such as selling publicly owned

business to private investors; and promoting exports of cheaply produced goods to wealthy

countries, including shifting agricultural production from goods produced for local markets to

crops for foreign consumers” (Targ and Cormier, 2004, P:4)

4

Neo-liberalism in accordance with Stiglitz (2008) is: "a grab-bag of ideas based on the

fundamentalist notion that markets are self-correcting, allocate resources efficiently, and serve

the public interest well” (Stiglitz, 2008, P:1) .

1.2. The Rise of the Neo-liberal Globalization

During the 1970’s and 1980’s, developing countries adopted the neo-liberal approach mainly

because they were experiencing internal and external economic crises. Jonas (2010) states that,

“Chase (2002) explains that the source of neoliberal policies can be traced to the international

economy, and especially to the piling up of foreign debt by Latin American countries in the early

1970s. These policies have been implemented often at the behest of this banking system through

institutions such as the International Monetary Fund and the World Bank.” (Jonas, 2010, P:8).

According to Kotz (2000), “Globalization is usually defined as an increase in the volume of

cross-border economic interactions and resource flows, producing a qualitative shift in the

relations between national economies and between nation-states” (Kotz, 2000, P:8)

According to Targ and Cormier (2004), the neo-liberal globalization has expanded dramatically

with the collapse of socialism. The globalization of the neo-liberal policies is accompanied with

an increase in cross national interactions, particularly in trade production, communication and

cultural exchange. (Targ and Cormier, 2004)

After the Second World War, the main development strategy focused on the Global South with

special attention to South Asia and Latin America; two regions that adopted the import

substitution industrialization (ISI) policy. The ISI is based on a Kenysian model that encourages

developing countries to be self-sufficient and industrialized. A stable balance of payments,

minimal labor surplus, limited external dependency and economic diversification are the main

characteristics of self-sufficiency. Encouraging self-sufficiency is based on providing incentives

to domestic firms and erecting protectionist barriers to deter foreign competition. At that time, it

5

was uncertain whether imports could cope with the massive increase that can lead to economic

growth and economic modernization. (Jonas, 2010)

ISI was the main result of high growth rates, particularly in the initial stages of its adoption.

Brohman (1996) clarifies that ISI was followed by a cheap industries that had protected markets

for an array of products. (Brohman, 1996).

One of the most important examples that have to be mentioned here is Latin America. The

production of basic consumption goods in this region became widespread, and heavy machine

industries emerged in some countries. From 1950-1980, Latin America experienced average

annual growth rates 5.5% and the region’s population doubled at the same period. After this

period, the achieved growth slowed down and the debt began to accumulate. This period was

marked by an increase in global lending in Latin America and Asia and much of the capital flow

consisted of recycled oil revenues. (Jonas, 2010)

Also this period was marked by heavy debts and a decline in the achieved economic growth.

Governments of this region had a lot of fiscal problems and they were insisted to take loans from

local and international banks. These loans were used in order to finance the fiscal imbalances in

many developing countries and this is the main reason which leads to balance of payments crisis.

This issue indicates that neo-liberalism was not an adequate long-term strategy for growth.

Neoliberals argued that a new paradigm should be granted hegemony, an export-oriented model

emphasizing import substitution, and limited government interventions. It is worth mentioning

here that Neo-liberalism spread across the developing world in the 1980’s under the

administration of then US President Ronald Regan and British Prime Minister Margaret

Thatcher, and in the 1990’s, particularly following the collapse of communism. states that by the

end of 1983, the majority of Latin American and African countries were operating under the

regulations of IMF. (Jonas, 2010)

6

1.3. Economic growth and Neo-liberalism

In this new era of development, the neo-liberal paradigm was considered to be a means for

fostering economic growth and human development in developing countries. All countries and

states were encouraged to be integrated totally into the capitalist global economy by maximizing

trade and foreign investment. These countries had to liberalize trade by eliminating tariffs,

privatize industries, and minimize public spending. The liberalization process (Neo-liberal

strategy) in these countries focused mainly on economic growth. (Jonas, 2010)

The situation of human beings will be improved as a result of economic growth. Jonas (2010)

clarifies that, Pieterse (1970) explains the process of achieving economic growth and states can

be achieved through the following phases; deregulation, structural reform, liberalization and

privatization. In other words, the responsibility of development switches from the state to the

market, hence, neo-liberalism becomes an anti-development perspective in terms of means

without taking the goals into consideration. (Jonas, 2010)

Weaver (2000) explains, “the structural adjustment was often considered to have two distinct

phases. First, economic stabilization and second the comprehensive reforms of Structural

Adjustment to create more productive and market-oriented national economies considered

necessary to generate long-term economic growth.” (Weaver, 2000, P:178)

Proponents of neo-liberalism state that neo-liberal development is the best means for generating

economic growth, which is the main reason behind human development and poverty alleviation.

The proponents of the neo-liberal approach are divided into two categories. The first is the pro-

neoliberal group, which emphasizes the importance of this approach in achieving economic

growth. The key representatives of the pro-neo-liberal group are Williamson (1993) and Krueger

(1993), and their main argument can be reflected clearly in the foremost assumptions of neo-

classical economic theory, which is based on comparative advantages as well as the

counterproductive role of the state regarding ownership and economic growth. (Jonas, 2010)

7

The second group of proponents is less enthusiastic about neo-liberalism as an economic and

political approach, but nevertheless considers it an appropriate forward-looking policy path for

the developing countries. The main representatives of this group are Maloney and Baer (1997),

Walton (2004), and Sally (2008). As previously mentioned, the neoliberal approach prioritizes

growth, and economic growth plays a major role in alleviating poverty, which in turn constitutes

development. Market efficiency is the ideal approach for distributing resources in such a way

that leads to producing growth. (Jonas, 2010)

People who detracted neo-liberalism fall into two groups. The first group rejects the neo-liberal

approach as a means to promote growth and development, while the second group demonstrates

the exploitation of neo-liberalism faculties and the motives of their implementers. The majority

of scholars who fall into the first group criticize the assumptions of the neo-liberal approach and

present evidence that this approach has not played a role in advancing economic or human

development. (Jonas, 2010)

1.4. The Washington Consensus

The Washington Consensus was introduced for the first time by John Williamson in 1990 during

the Latin American and Caribbean (LAC) policymakers meeting, which was attended by

international agency representatives and academics. Jonas (2010) states that the main elements of

Washington Consensus in accordance with Perry and Burki (1998) are: "fiscal discipline; public

expenditure priorities in education and health; tax reform; positive but moderate market-

determined interest rates; competitive exchange rates; liberal trade policies; openness to foreign

direct investment; privatization; deregulation; and protection of property rights." (Jonas, 2010,

P:6).

According to Williamson's conception, Washington included several international organizations

such the International Monetary Fund (IMF), the World Bank, the US executive branch, the

Federal Reserve Board, the Inter-American Development Bank and all the think tanks concerned

with developing economic policies. It is very clear that the Washington Consensus was one of

the main outcomes of the neoliberal policy paradigm. Williamson's argument however,

8

summarizes that neoliberal policies were not being implemented in a dedicated manner.

Williamson and Marangos clarified that the Washington Consensus has been misinterpreted by

Naim (2000), Stiglitz (2002) and others who described it as a neoliberal manifesto. (Jonas, 2010)

Stiglitz (2002) states that the Washington Consensus policies were “designed to respond to the

very real problems in Latin America, and made considerable sense… The problem was that

many of these policies became ends in themselves, rather than means to a more equitable and

sustainable growth. In doing so, these policies were pushed too far, too fast, and to the exclusion

of other policies that were needed.” (Stiglitz, 2002, P: 53-54).

Also, Stiglitz (2002) clarifies that:"The policies of privatization, in particular, were instituted at

a pace and in a manner that often imposed very real costs on countries ill-equipped to incur

them."(Stiglitz, 2002, P: 53-54).

1.5. The Post-Washington Consensus

Recently, the Post-Washington Consensus has been established as the fundamental principal for

developing economies. The Washington Consensus was confined rather narrowly to standard

neoclassical economics, relying on market competition for efficient resource allocation. The

Post-Washington Consensus broadened the scope to include nonmarket factors such as social

norms and power balances, drawing heavily on the recent achievements of institutional

economics.

The PWC is thus variously characterized as “a synthesis of national developmentalism and the

neoliberal policy agenda” (Öniş and Şenses, 2005, P:273); “a change in the speed, not the

direction” (Sumner, 2006, P:1411); and the “rebel heir” (Krogstad, 2007, P:83) of the original

Washington Consensus. Thus, it is neither a paradigm shift nor a stasis, but perhaps more of an

ongoing broadening, revision, or reorganization of a paradigm.

9

Joseph Stiglitz (1998) presented his new concept of a 'Post-Washington Consensus' in one of his

main lectures, which was part of the Annual Lecture of the World Institute for Development

Economics Research (WIDER) of the University of the United Nations (1998). Stiglitz (1998)

presented a set of policies that "are the basis for what he sees as an emerging consensus, a post-

Washington consensus.” (Stiglitz, 1998, P:34). The main question raised was whether this

concept was a new consensus suggested by Stiglitz or were his ideas related to economic

development presented as a consensus?

The intellectual base of the PWC was to shift the analytical focus away from the neoclassical

concepts on competition and the principles of perfect markets towards the institutional setting of

economic activity, the significance of market imperfections, and the potential outcomes of

differences or changes in institutions.

According to Harriss and others (1995), "inspired by new institutional economics, the PWC can

provide a more nuanced understanding of economic development. For example, the PWC

acknowledges that at the core of the development process lies a profound shift in social

relations, the distribution of property rights, work patters, urbanization, family structures, and

so on, for which an analysis limited to macroeconomics aggregates is both insufficient and

potentially misleading.” (Harris and others, 1995, P: 34).

Wade (2000) states that: "the PWC represents a distinct break with the WC, as they associate

neo-liberalism narrowly with the WC and the dogmatic belief in the virtues of the free market."

(Wade, 2000, P:215-243).

The Washington institutions continued to stress the virtues of the reforms and to blame poor

countries for their failure during the adaptation and implementation phases of the Washington

Consensus. For Example, the implication is that, in view of the IMF, countries must "do more of

the same, and do it well." (Rodrik, 2006, P: 997). On the other hand, the World Bank has dealt

with the WC policies in a careful way. The implications of the East Asian success and the

association of this success with the distribution of income, mass education and state guidance

were the main elements that played a major role in the position of this international organization

towards these policies.

10

The main discourse of PWC is based on strongly emphasizing the importance of appropriate

institutions for achieving growth. According to Rodrik (2006), "Getting the institutions right has

sometimes been exaggerated to the point of becoming a mantra, just like getting the process right

was the mantra of the WC." (Rodrik, 2006, P: 979-980). It is worth mentioning here that the

suffering of institutions is concentrated on three levels. The first is related to the literature that

failed to establish strong links between institutional designs and long-term economic

performance. The second is that the demanded institutional reforms by the PWC are rarely new,

which is the reason why the World Bank advised poor countries to conduct several

improvements pertaining to the investment climate and education. Finally, the last point is

related to the empowerment of institutions in such a way that can be reflected positively on

attaining rapid reforms necessary for "development."

1.6. Neo-liberalism in Arab Countries and Middle East

It is worth mentioning here that the hegemony exerted by neo-liberalism is linked directly with

US economic and political interests and the agenda of BWI. (Khalidi and Samour (a), 2011).

Over the last two decades, and particularly under the Bush administration, the US has pursued a

policy to support the region through the creation of a neo-liberal economic zone tied to a series

of bilateral trade agreements. The US vision is summarized in promoting the free flow of capital

and goods throughout the Middle East region. The region’s markets will be dominated by US

imports, while cheap labor will be concentrated in economic free zones in order to manufacture

low-cost exports destined for markets in the US, the EU, Israel, and the Gulf. (Hanieh, 2008).

At the regional level, the adoption of the neo-liberal approach started in the early-1990s. North

African states started this process in order to replace their failed socialist or status development

strategies by a new paradigm suggested by the US and BWI. (Khalidi and Samour (a), 2011).

Sadat’s openness policy or infitah, for paving the way to private investment in Egypt, was a

turning point in Egyptian economic strategies in the late 1970’s. Signing the Israeli-Jordanian

peace treaty was the first step toward the adoption of the neo-liberal agenda in Jordan. It was

very clear that all the countries that have implemented neo-liberal reforms experienced an

increase in their poverty and unemployment rates, and the rise of a new social class whose main

11

interest is directly linked to the privatization of the public sector and the liberalization of the

economy. (Khalidi and Samour (a), 2011).

1.7. Neo-liberalism in Palestine

The PA’s adoption of the neo-liberal approach has to be understood in the context of

longstanding efforts to reconfigure Middle Eastern states, their economies, and the region as a

whole. Attempts to push the PA to adopt the neo-liberal approach existed even before its creation

in 1994. This issue was very clear during the discussions of the ‘regional economic development

working group’ of the pre-Oslo Madrid negotiations, in which the PLO participated. (Khalidi and

Samour (a), 2011).

Khalidi (2011) clarifies that Neo-liberalism in the Palestinian Territories goes back to the 1990’s,

to the Madrid Peace Conference, the Oslo Peace Process, globalization and the incremental

involvement of International financial institutions in Palestine. Particularly the World Bank, and

increasingly the IMF, influenced the way of thinking of policy making elites. (Khalidi, 2011)

By 1993, Harvard economists and the World Bank, together with several Palestinian economists

recommended the neo-liberal approach as a basis for economic policies in order to guide the PA

through what was still seen as a five-year path to independence. (World Bank, 1993).

In 1999, the Council on Foreign Relations argued that good governance, the rule of law, and

policies related to investment are the necessary preconditions for Palestinian independence.

(Khalidi and Samour (a), 2011).

1.8. Neo-liberalism and PRDP (2008-2010)

While neo-liberalism is being rejected by many experts and countries around the globe, the PA is

developing its neo-liberal state-building program ‘Ending the Occupation, Establishing the

State'.

The program was developed and launched by Palestinian Prime Minister Salam Fayyad in 2009.

It was designed in order to offer the Palestinian people living in the West Bank a practical plan

that aims at delivering growth and prosperity. The program is based on a neo-liberal model

associated with the premiership of Salam Fayyad, when he formed the caretaker government

12

after the struggle of between Fatah and Hamas and the establishment of a parallel government in

the West Bank and the Gaza Strip.

Khaildi and Samour (2011) state that "the Palestinian Reform and Development Plan (2008-

2011) incorporate with the statehood program. The PRDP is based on the neo-liberalism

approach which faithfully reflects the economic policy agenda set forth in the so-called "Post-

Washington Consensus". Post-Washington Consensus orthodoxy has been advanced by the

Bretton Woods Institutions (BWI), the World Bank Group, and the International Monetary Fund

(IMF), since the late 1990s. The more rhetorical than substantial overhaul of the previous

Washington Consensus reflects a more "inclusive" form of neo-liberalism, without abandoning

its free markets-centric, fiscally conservative, and light-touch regulatory core identity. The

transition of the PWC came largely as a result of political and intellectual dissatisfaction

globally (and even from within the institution concerned) with its poor outcomes and the flawed

theoretical underpinnings. The PWC envisions a responsive, capable state that ensures the

maintenance of security and public order, promotes opportunities for all, and empowers its

citizens who will now have the moral responsibility to rely on themselves instead of a

paternalistic social welfare state." (Khalidi and Samour (b), 2011, P:9).

Hanieh (2008) states that “the PRDP (2008-2010) is a developed plan in close collaboration with

institutions such as the World Bank and the British Department for International Development

(DFID), the PRDP has been implemented in the West Bank where Abu Mazen-led PA has

effective control. It embraces the fundamental percepts of neo-liberalism: a private sector-driven

economic strategy in which the aim is to attract foreign investment and reduce public spending

to a minimum.” (Hanieh, 2008, P:3)

The first point that has to be noted about the PRDP is that the heavy hand of the World Bank, the

International Monetary Fund and other neo-liberal institutions such as DFID, can be clearly seen

through the policy recommendations and outlook of these entities. Hanieh (2008) clarified that

“the argument behind PRDP is explicitly neo-liberal, calling on the PA to undertake a series of

fiscal reforms in order to foster an enabling environment for the private sector as the engine of

sustainable economic growth.” (Hanieh, 2008, P:4).

13

2. Socio-Economic Development

In general, development can be viewed as a multi-dimensional phenomenon. Development has

major dimensions which include the level of economic development, the level of education, the

level of health services, the degree of modernization, the status of women, the level of nutrition,

the quality of housing, the distribution of goods and services, and access to communication.

2.1. Level of Economic Development

Economic development is seen as an analysis method of the economic growth of nations. It

includes a wider variety of variables and not a just a focus on economic growth. According to the

World Bank, “Economic growth by itself may not alleviate the problem of poverty within any

reasonable time-period." (Chenery, Ahluwalia, Bell, Duloy and Jolly, 1976, P:3)

The term ‘economic development’ was initiated in respect to economic growth and

industrialization only. This classification was made by the classical school of economics in the

early part of the 20th

century. Economic development in several countries such as Latin America,

Asia and Africa was not taken into consideration, and these countries were viewed as under-

developed versions of the Western World and could in time, catch up with European and North

American standards.

Schultz (1951) stated that "The term Economic Development shifted from a focus only on a

capital oriented concept to include human capital formation." (Schultz, 1951, P:585-587). This

idea of social development was further extended by Singer (1964) who included health and

fertility into the equation. This marked a notable change in defining economic development,

especially after the newly invented definition by Dudley Seers (1969): "incorporating

elimination of poverty, inequality and unemployment." (Seers, 1969, P:20)

Seers (1977) also commented on social development and said that “this kind of development had

been included to form part of the overall definition of Economic Development alongside

economic growth showing that third world countries were not merely less developed versions of

Western countries but had distinctive characteristics of their own, also known as the

Structuralism Theory." (Seers, 1977, P:25).

14

Last but not least, economic development is "the process of improving the quality of human life

through increasing per capita income, reducing poverty, and enhancing individual economic

opportunities. It is also sometimes defined to include better education, improved health and

nutrition, conservation of natural resources, a cleaner environment and a richer cultural life."

(Penn State University, 2008).

2.2 Variables of Economic Development

In the following section all the variables of economic development are defined:

2.2.1 Structural Change

The term Structural Change, as defined by Matsuyama (1977), "is a complex, intertwined

phenomenon, not only because economic growth brings about complementary changes in

various aspects of the economy, such as the sector compositions of output and employment,

organization of industry, etc., but also these changes in turn affect the growth, and hence can be

seen through the development of an economy." (Matsuyama, 1997)

Based on the aforementioned, structural change refers to changing the structure of production,

which leads to the achievement of an overall higher economic growth observed in an increase in

output and employment. Also, Structural change can be used in order to describe change in an

industry; an increase in the service sector and the agricultural industry for example.

According to World Economy and Social Survey (Anonymous, 2006), structural change is a

necessary requirement for achieving economic growth. This growth can be achieved by adopting

and adapting existing technologies, substituting imports and entering into world markets for

manufacturing goods and services, and through the rapid accumulation of physical and human

capital.

15

2.2.2. Economic Growth

Kendrick (1961) defines economic growth "as the increasing of the economy to satisfy the wants

of goods and services of the members of society. Economic growth is enabled by increase in

productivity, which lowers the inputs (labor, capital, material, energy, etc) for a given amount of

output." (Kendrik, 1961, P:111).

Robert (1998) clarifies that "lowered cost increases demand for goods and services, which also

results in capital investment to increase capacity. New capacity is more efficient because of new

technology, improved methods and economies of scale. This leads to further price reductions,

which further increases demand, until markets become saturated due to diminishing marginal

utility." (Robert, 1998, P:193-194).

Kendrick (1961) ensures that "Increases in productivity are the main factor responsible of

economic growth, especially since the mid 19th

century." (Kenderik, 1961, P:193-194).

According to Kendrick’s (1961) argument, a large part of the economic growth achieved at the

time was due to the reduction in economic input as per output. The balance of growth was

attained from using more inputs overall because of the growth attained in outputs. (Kendrick’s,

1961)

According to Robert (1998), "Modern economic growth started in the West in the early

nineteenth century; this growth was connected directly with the industrial revolution." (Robert,

1998, P:192).

According to Soubbotina (2004), "Economic growth becomes a difficult to sustain politically.

Second, economic growth itself inevitably depends on its natural and social human conditions."

(Soubbotina, 2004, P:4). Soubbotina (2004) clarifies that economic growth can be sustainable

when it relies on a certain amount of natural resources and services provided by nature.

Moreover, economic growth must be connected with the fruits of human development, such as

highly qualified workers who are capable at the technological and managerial levels.

(Soubbotina, 2004)

16

2.2.2.1. Gross National Product (GNP) per capita or Gross Domestic Product (GDP)

per capita

Soubbotani (2004) defines GNP per capita or GDP per capita as "statistical indicators that are

easier to calculate, provide a rough measure of the relative productivity with which different

countries use their resources the relative material welfare in different countries, whether this

welfare results from good fortune with respect to land and natural resources or from superior

productivity in their use" (Soubbotani, 2004: P12).

2.2.2.2. Gross Domestic Product and Gross National Product

According to Soubbotani (2004), "GDP is calculated as the value of the total final output of all

goods and services produced in a single year within a country's boundaries. GNP is GDP plus

income received by residents from abroad minus incomes claimed by non-residents."

(Soubbotani, 2004, P:12). There are two ways to calculate GDP and GNP: 1) adding together all

the incomes in the economy - wages, interest, profits and rents. 2) adding together all the

expenditures in the economy - consumption, investment, government purchases of goods and

services, and net exports (exports minus imports). (Soubbotani, 2004, P:12-13). It is worth

mentioning here that GDP and GNP can serve as indicators of a country's economy. In order to

judge a country's level of economic development, these indicators have to be divided by the

population of the country. GDP per capita and GNP per capita indicate the approximate amount

of goods and services that each person in a country would be able to buy in a year if incomes

were divided equally. This is also known as "per capita incomes". (Soubbotani, 2004, P:13-14).

2.2.2.3 Purchasing Power Parity (PPP)

Soubbotani (2004) defines PPP as "a conversion factor that shows the number of units of a

country's currency required buying the same amount of goods and services in the domestic

market as one dollar would buy in the United States. By applying this conversion factor, one can,

for example, convert a country's nominal GNP per capita (expressed in U.S. Dollars in

accordance with the market exchange rate of the national currency) into its real GNP per capita

(an indicator adjusted for the difference in prices for the same goods and services between this

country and the United States, and independent of the fluctuations of the national currency

17

exchange rate). GNP in PPP terms thus provides a better comparison of average income or

consumption between economies." (Soubbotani, 2004, P:14).

2.2.2.4 External influence on Government

Through neo-liberalism, a government’s power in matters pertaining to economic development

can be influenced by external organizations. International organizations such as the IMF and the

World Bank have the potential to decrease government control in its own country in order to

cause a loss of legitimacy (Riddell, 1992). In terms of economic development, this issue can

have drastic effects on political instability as well, because this instability could lead the

government to reduce effective measures for implementing policies related to economic

development. The stability of the government and its participation in economic issues are seen as

essential conditions for anticipating the implementation of effective measures concerning

economic development. According to Riddle (1992), "in relation to developing countries, we see

that the influence of external forces have profound impacts on the organization of the state and

can lead to a decline in the states' capacity to implement economic development policies."

(Riddell, 1992, P:53-68).

According to Miller (1992), "External influence on local governments consists of political

instability and policy instability. Political instability deals with the potential or actual change in

the political system and the opportunities evolving from such changes. Policy instability refers to

the instability in Government policies." (Miller, 1992, P:311-331).

2.2.2.5 Industrialization

A growing economy changes the proportions and interrelations among its basic sectors -

agriculture, industry, and services - and between other sectors - rural and urban, public and

private, domestic and export oriented.

Soubbotani (2004) states that "one way to look at the structure of an economy is to compare the

shares of its three major sectors - agriculture, industry and services in the country's total output

and employment." (Soubbotani, 2004, P:63).

18

2.2.2.6 Foreign direct investment and Trade

2.2.2.6.1 Foreign Direct investment

Many economists, decision makers and academics contend that foreign direct investment (FDI)

can have important positive effects on a host country’s development efforts. FDI can be

considered as a source of valuable technology, which can help jumpstart an economy. Based on

the aforementioned arguments, developing countries have offered incentives to encourage

foreign investments in their economies.

Economic and technological forces were the main reason behind the growth in international

production. Also, the growth of international production is driven by the ongoing liberalization

of FDI and trade policies. In this context, globalization offers a good opportunity for developing

countries to achieve faster economic growth through trade and investment. It is worth

mentioning here that during the 1970’s, international trade grew more rapidly than FDI. This

situation has been changed in a dramatic way in the middle of the 1980’s when world FDI started

to increase sharply. In that period, the world FDI has increased its importance by transferring

technologies and establishing networks for efficient production and sales at the international

level (Shujiro, 1998).

Most countries offered a wide range of incentives to attract FDI. Experience from other countries

shows that such developed plans have limited impact on new investment opportunities, reduce

transparency of the business climate, and lead to higher taxes. Tax incentives and free zones are

employed by some countries in order to attract investors, despite mixed evidence about their

impact on FDI flows and the potentially high costs compared to the benefits (Sorsa, 2003).

Parantap Basu Derrick Reagle (1988) and Chandana Chakraborty (1988) carried out an analytical

study on 23 countries for the period between 1987 to 1996 in order to identify long run and short

run effects of FDI. The study clarifies that for open economies, causality between FDI and GDP

appears to be bi-directional. The study emphasizes that this causality is bi-directional only in the

short run for relatively closed economies. Also, the study ensures that long run causality for

relatively closed economies is uni-directional and runs mainly from GDP and FDI (P.P.A

Wasantha Athukoral, 2003).

19

According to P.P.A Wasantha Athukoral (2003), “The analysis of Brecher and Diaz-Alejandro

(1997), gives us evidence that foreign capital can be the main reason to lower the economic

growth. This issue can be occurred by earning excessive profits in a country with severe trade

distortions as such high tariffs. Maria Carkovic and Ross Levine (2002) also came to conclusion

that the exogenous component of DFI doesn’t exert a robust, independent influence on growth.”

(P.P.A Wasantha Athukoral, 2003, P:8).

It is worth concluding here that no consensus has been reached on the steady state and dynamic

effects of FDI on growth. There are two kinds of studies in this regard: Ones which argue that

the impact of FDI on growth is highly heterogeneous across countries with relatively open

economies showing statistically significant results, while the other studies maintain that the

direction of causality between the two variables depends on the recipient country’s trade regime.

2.2.2.6.2 Foreign Trade

The relationship between economic growth and foreign trade was tackled by many economists

when foreign trades came into being. The development of foreign trade has been one of the most

important debates of economic research in academe. This issue refers to its impact on economic

growth. To some extent, the emergence of foreign trade and its development were closely related

with economic growth. In a way, foreign trade has a fundamental aim to promote the economic

growth of a country.

Chen (2009) states that “the classical school of economics believed that foreign trade promoted

economic growth in two ways. On the one hand, foreign trade improved the optimal distribution

of resources and productivity consequentially and then stimulated the economic growth; on the

other hand, one country could gain raw materials and equipments which it could not produce.

Those provided material basis for economic development.” (Chen, 2009, P: 127).

The most famous theories were ‘exports of surplus’ of Adam Smith, ‘comparative advantage’ of

David Ricardo, the ‘interest of trade development’ of John Mueller and “trade is the engine of

economic growth” of D.H. Robert Morrison. All the aforementioned theories tried to give an

interpretation for the relationship between foreign trade and economic growth (Chen, 2009).

20

Chen (2009) states that “the representatives of structural school put forward dual economy

model which parted a developing country into capitalist part and non-capitalist part. The

capitalist sector was bound to promote the growth of the economy through absorbing and

accumulating surplus labor form non-capitalist sector. If the capitalist part produced the

exporting goods and traditional part produced the importing goods, foreign trade would

undoubtedly expand the market and demand of products in capitalist part and reduce the wages

of labor. Then it would further increase the profit and accumulation of the part and promote

economic growth.” (Chen, 2009, P:127-128).

Based on the analysis of Max Corden, Chen (2009) clarifies that a country’s foreign trade affects

macro-economics in five ways; the revenue effect, the effect of capital accumulation, the

substitution effect, the income distribution effect and the effect of the weighted elements. All the

above effects were cumulated, and the impact of trade on economic growth was strengthened

gradually with the development of the economy (Chen, 2009).

New growth economists pointed out that the growth of developing countries would be attributed

to the improvement of productivity. Based on that, this theory made a series of models to study

the relationship among international trade, technological progress and economic growth. This

group concluded that international trade promotes economic growth through technology, and

clarified that the mutual promotion relations between international trade and technical change

could help in ensuring long-term economic growth (Chen, 2009).

Chen (2009) states that “the new-trade theory economists believed there were two ways for

international trade to promote economic growth. One was the effects of economies of scale

brought by trade, and the other was that international trade could promote economic growth

through improving the optimal allocation of resources between materials production sector and

knowledge production sector.” (Chen, 2009, P: 128).

21

2.2.2.7 Public and Private Enterprises

2.2.2.7.1 Public Enterprises

The role of government in developing countries grew dramatically in the second half of the 20th

century, especially after the end of the colonialism époque. In many of these countries, the state

was responsible for mobilizing resources and directing them towards accelerated economic

growth, rather than just stabilizing the economy, as is the case in most developed countries.

There is no universally agreed upon definition among scholars regarding the conceptual meaning

of public enterprises. According to Laleye (1985), the bewildering number and types of

organizations known as ‘public enterprises’ and the different contents and rational for which they

are set up, accounts for the lack of authoritative and generally acceptable definition for public

enterprises. (Laleye, 1985)

Sosna (1983) opined that there are many reasons why there is not a single standard definition for

public enterprises in developed capitalist countries. Public enterprises have been established at

different periods, and each epoch naturally brought forth the types of public enterprises most

clearly matching its own conditions. (Sosna,1983)

Efange (1987) defines public enterprises as institutions which are owned by the state or in which

the state holds a majority interest, whose activities are of a business in nature, and which provide

services or produce goods and have their own distinct management. (Efange, 1987)

Literature has noted that the establishment of public enterprise was regarded as a remedy for

market failures. Public enterprises facilitated economic independence and planned development.

Where there is market failure, and unregulated pursuit of profit does not lead to the maximization

of economic efficiency, public enterprise can be established in order to correct misalignment of

public and private objectives.

Other reasons for the establishment of public enterprises were explored by Cook (1997). Firstly,

it was thought that public enterprises could provide government too much needed revenues. Van

De Walle (1989) states that “Governments mistakenly believed that public enterprises would

22

generate large profits with which they would be able to finance investment in priority sectors of

economy.” (Van De Walle, 1989, P:602).

Secondly, there were ideological and political reasons. For example, public production could be

made to seem more attractive in an ideological climate in which the private sector was held in

low esteem and a large public role in the economy was seen as a main reason for rapid sustained

development. It could secure for the government the provision of valuable industrial information

and control of strategic industries. Based on that, public enterprise may be justified for the sake

of employment creation and job security.

Thirdly, public enterprises could be used as a counterweight to the concentration of private

economic power or as a remedy for short supply aversion of the private entrepreneur, or to

strengthen the economic position of particular ethnic groups or geographical regions or to

overcome critical economic bottlenecks.

Cook (1997) states that public enterprises are often established by governments for different

reasons, one of which is profit maximization. (Cook, 1997)

According to Hemming & Mansor (1988), “It is noted that the state owned enterprises enable

governments to pursue goals of social equity that the market ordinarily ignores.” (Hemming &

Mansor, 1988, P:1-22)).

The majority of neo-institutional scholars, such as Douglas and Mancur Olson, state that several

cross national empirical studies have found a positive relationship between the quality of

institutions and governance structures and economic growth (Kaufman et al. 2000).

Other studies clarify that the quality of institutions and governance structures cannot be

considered as a reason for economic growth (Chong and Calderon, 2000, P:69-81).

2.2.2.7.2 Private Enterprises

The role played by the private sector in the development of economic growth and its impact on

eradicating poverty, is currently at the center of development plans for many countries around

the world. Private enterprises do not only promote economic growth and reduce poverty, but also

contribute to the provision of employment opportunities for the poor and to enhancing the quality

23

of life. Supporting private sector development is a critical step towards the achievement of

sustainable economic growth.

The Private sector can therefore be defined as “a basic organizing principle for economic activity

in a market-based economy, where physical as well as financial capital is generally privately

owned and production decisions are made for private gain.” (General Bank of Lesotho, 2009,

P:1)

According to the General Bank of Lesotho report (2009), which was published in 2009, “the

relationship between the private sector and the economic growth has been recognized globally.

Most of developed and developing countries have drawn up strategies and implemented

programs aimed at developing the private sector. The private sector comprises individual

households, corporate firms, and multinational companies.” (General Bank of Lesotho, 2009,

P:1).

There is a growing recognition among countries that provide donations to poor and developing

economies, concerning the role which the private sector can play in order to create employment

opportunities, increase efficiency and production and promote economic growth. According to

the World Development Report (WDR) 2005, “Private sector entities invest in new markets and

new facilities that help strengthen the infrastructural foundation of the economy which, in turn,

lays a good ground work for attracting investors from abroad and facilitating achievement of

economic growth.” (World Development Report, 2005, P:56)

Private sector development also contributes to the reduction of unemployment and corruption,

which have far reaching implications for both economic and social life. Jobs and incomes created

by private sector enterprises lead to economic diffusion of growth by having a direct impact on

poverty alleviation. Developing the private sector helps in making people more involved in

economic activities and decision making processes by attracting new stakeholders in the

economy in order to maximize profits (General Bank of Lesotho, 2009).

It is worth mentioning here that the private sector is also the main source of tax revenue,

contributing to the public funding of health, education, clean drinking water, food security and

agricultural inputs, thus satisfying public demands.

24

2.3 Social Development

Development is actually much more than just economic growth. The understanding of

development can differ from one country to another and even from one individual to another, but

it usually goes far beyond the objective of increased average income to include things like

freedom, equity, health, education, safe environment, and much more.

According to recent United Nations documents, "Human Development is measured by life

expectancy, adult literacy, access to the three levels of education as well as people's average

income which is necessary condition of their freedom of choice." (Soubbotani, 2004, P:7).

Soubbotani (2004) clarifies that “in a boarder sense the notion of Human Development

incorporates all aspects of individuals' well-being from their health status to their economic and

political freedom.” (Soubbotani, 2004, P:7-8).

The Human Development Report (1996) published by the UNDP states that "Human

Development is the end – economic growth a mean." (Human Development Report, 1996, P:35).

It is not easy to measure the level of social development and progress in human development.

There is a wide range of social indicators which can be used for this task, including education,

health, poverty and hunger, income in-equality, clean water, sanitation and electricity.

In the following sections the variables of social development will be defined:

2.3.1 Income In-equality

Soubbotani (2004) clarifies that "the number of people in a country and the average quality of

life depend on how equally or unequally income is distributed." (Soubabotani, 2004, P: 28).

Soubbotani (2004) ensures that measuring income in-equality can be conducted through the use

of Lorenz curves and Gini indexes. A Lorenz curve plots the cumulative percentages of total

income received against the cumulative percentages of recipients, starting with the poorest

individual or household (See Figure 2) (Soubbotani, 2004, P:29).

25

Soubbotani (2004) clarifies that " Excessive inequality adversely affects people's quality of life,

leading to a higher incidence of poverty, impeding progress in health and education and

contributing to crime." (Soubbotani, 2004, P:31).

2.3.2 Poverty and Hunger

Poverty is deprivation of well being. According to traditional definitions, poverty is understood

as material deprivation, which incorporates living with low income and consumption. This issue

can be characterized by poor nutrition and poor living conditions.

Soubbotani (2004) states that "the broader definition of poverty as a multidimensional

phenomenon leads to a clearer understanding of its causes and to a more comprehensive policy

which aimed at poverty reduction. For example, in addition to the issues of economic growth and

income distribution, it brings to fore equitable access to health and education services and

development of social security systems." (Soubbotani, 2004, P:33).

According to Soubbotani (2004), "hunger is the most extreme manifestation of poverty and

arguably the most morally unacceptable. In the globalized world of the 21st century, with more

than enough food produced to feed all of its 6 billion inhabitants, there are still over 800 million

poor suffering from chronic undernourishment." (Soubbotani, 2004, P:38).

According to the estimate of the UN Food and Agriculture Organization (FAO), in 1999-2001

there were 842 million undernourished people in the world. This number is distributed across

developing countries, countries with transition economies and in high-income economies. (FAO,

2001)

2.3.3 Education

Human capital is developed through education or capacity building programs that increase the

productivity of an individual at the economic levels. In turn, this economic productivity enables

individuals to produce more valuable goods and services, thus attaining high income.

Governments invest in human capital to accumulate knowledge and skills. The majority of

governments believe that better education will contribute to faster sustainable development. The

following are two main indicators to measure education outcomes:

26

2.3.3.1 Net enrolment ration in primary education

Net enrolment ration in primary education is a ration of the number of children of official

school age enrolled in primary education to the population of the corresponding official school

age. On other hand, gross enrolment rations are defined as the ration of number of students

enrolled in primary education to the total population of the corresponding age group. Barro

(1991) views that "the enrolment ratios for different levels of schooling as indicators of the stock

of human capital, they may be inappropriate proxies for human capital stocks for current

economic production." (Barro, 1991, P:407-433).

Thomas and others (2000) state that "the only problem with this approach is that the enrolment

ratios are both flow variable, which represent human capital investment flows and the stock

itself." (Thomas and others, 2000).

2.3.3.2 Adult Literacy Rate

Literacy is defined as the ability to read and write, and having an understanding for any simple

statement related to everyday life. Adult literacy rate is defined as the percentage of literate

individuals (aged 15 years and up) to the corresponding population. On the other hand, youth

literacy rate is defined as the percentage of literate individuals (aged between 15-24 years) to the

corresponding population. The aforementioned indicators reflect one basic human right - a

minimum level of education. Adult literacy is considered as an excellent overall quality of life

indicator, which is associated with many other elements of quality of life, such as measures of

employment, income and health. (Barro, 1991)

Chen and Dahlman (2004) state that "while there has been some criticism concerning the

international comparability of the adult literacy rate because of the difficulty of ensuring that it

is applied systematically, it is commonly used to measure progress in achieving universal

primary education." (Chen and Dahlman, 2004, P:45).

Hicks (1980) clarifies that "the purpose of monitoring progress in meeting needs for primary

education, adult literacy is a better indicator than primary school enrolment since it is oriented

towards effects rather than efforts." (Hicks, 1980, P:17-20).

27

2.3.4 Health and Longevity

Usually, the health of a country's population is monitored through the use of three main

statistical indicators: life expectancy at birth, infant mortality, and the under-five mortality rate

(U5M). These three indicators are frequently referred to as measures, by and large, of a

population’s quality of life, simply due to the fact that they reflect many aspects of the welfare of

people, counting their income level, the quality of their environment, their nutrition level, and

their ability to access healthcare, safe water and sanitation.

2.3.4.1 Life Expectancy at Birth

Life expectancy at birth is the number of years a newborn infant would live if prevailing patterns

of age-specific mortality rates at the time of birth were to stay the same throughout the child's

life. In other words, it is the theoretical number of years a newborn will live if the age-specific

mortality rates in the year of birth are taken as constant.

According to Hicks (1980), "It seems appropriate to use life expectancy at birth as one basic

measure the efficacy of a country's success in providing for basic needs." (Hicks, 1980, P:17-20).

This indicator reflects the level of health, nutrition, sanitation improvements, cleans water and

income, and thus indirectly links employment and shelter (Mazumdar, 1996, P: 361-384). Thus,

when a country witnesses a low life expectancy rate, this indicates the existence of a sizeable

percentage of the population who face poor living conditions, including lack of adequate health

premises and facilities.

2.3.4.2 The Infant Mortality Rate

The infant mortality rate is the death of babies under one year of age expressed for every 1000

live births. Infant mortality is understood to be a good indicator of the availability of a sanitation

system and clean water facilities, which are considered crucial for infants since they are

susceptible to water-borne diseases. Infant mortality has been characterized as an outcome

variable summarizing the degree of existence of contagious disease in a country, as infants are

more susceptible to these problems. This indicator demonstrates rapid response to many health

policies. Thus a high figure would show that there are many people living in conditions under

which basic health needs are not met (Mazumdar 1996; Goldstein 1985).

28

2.3.4.3 The Under-Five Mortality Rate (U5M)

U5M is the probability of dying between birth and exactly five years of age, expressed per 1000

live births. Hence, it is considered to be the most suitable indicator of the increasing exposure to

the risk of death because it presents the most appropriate measures of recording mortality risks

during the most vulnerable years of childhood - the first five years of life. It has several

advantages over the infant mortality rate as a composite measure of health risks at childhood.

The risk of death remains high among children from this age group. Therefore, this indicator is

also an appropriate outcome measure in evaluating the effect of the many and different

intervention programs that aim to improve child survival (Ahmad and others, 2000).

29

3 Conceptual Framework

Indicators of Economic

Development

Human Development

Index

Development

Other measures Growth

Growth

National income

per capita Gross Domestic

Product (GDP)

Real GDP versus

Nominal GDP

Gross National

Product (GNP)

30

Development

Poverty Inequality

Health/Primary/Secondary/Tertiary

Education

Human Development

Index

Literacy Rate

Life expectancy

Standard of Living

31

4 Conclusion

Neo-liberalism is an economic and political framework. Economically speaking, it focuses on the

privatization and deregulation of industry and the liberalization of trade. During the 1970’s and

1980’s, developing countries were experiencing internal and external economic crises, and

therefore, adopted the neoliberal approach, which was considered to be a means for fostering

economic growth and human development.

The PA adopted the neo-liberal approach through the statehood program – sated with alluring

neo-liberalism terminology; plurality, accountability, equal opportunity, empowerment of

‘citizens’, protection of social, economic and political rights, and the state’s efficient provision of

services and public goods - which was launched by Dr. Salam Fayyad. This program, which was

incorporated with the PRDP, is based on four independent components: building good

governance institutions, achieving private sector growth, delivering effective services and

policing of the Palestinian population

Economic growth is a means to achieve development but not an end. As previously mentioned,

development is much more than just economic growth, and can be viewed as a multi-

dimensional phenomenon. It has major dimensions, which include the level of economic

development, the level of education, the level of health services, the degree of modernization, the

status of women, the level of nutrition, the quality of housing, the distribution of goods and

services, and access to communication.

32

Chapter II: Research Design and Methodology

The primary goal of this thesis is to evaluate the extent to which the PRDP (2008-2010) may be

considered as a neo-liberal plan for the Palestinian Territories, and to also assess the extent of

economic growth achieved during and after the implementation phases of PRDP were translated

into socio-economic development.

Each of the four subsequent chapters is constructed around the same aforementioned research

question. I have approached each question independently, taking into consideration the fluidity

of themes across chapters.

The following questions are the main sub-questions which have been used during this study:

- Did the Palestinian territories adhere effectively to the neo-liberal approach? Was this

adherence appropriate? And did the PRDP lead to a paradigm of development?

- In what aspects have the Occupied Palestinian Territories experienced economic growth during

the implementation phases of the PRDP?

- What are the main reasons behind the achievement of this economic growth?

- Was this growth translated into socio-economic development in the Palestinian Territories?

- Did the Occupied Palestinian Territories become more socially developed after the

implementation phases of the PRDP?

This chapter will explain the research design and methodology that I used to respond to these

questions.

In the course of conducting this study, I employed a qualitative method using data from both

primary and secondary sources. I conducted several interviews with economists and academics.

The combination of approaches and data sources provides a balanced methodology and paves the

way for further development in later studies.

33

1. Significance of the Study

The PRDP (2008-2010) is seen as an important development framework for achieving economic

growth and socio-economic development in the Palestinian Territories. As previously mentioned

the PRDP is incorporated in the statehood program and based on a neo-liberal approach.

Economic growth in West Bank and the Gaza Strip regions is estimated to have reached 9.3% in

2010, exceeding the PA budget projection of 8% (World Bank Report, 2011, P:5). Many people

give the PRDP the credit for this economic growth. Others argue that economic growth in the

OPT does not appear to be sustainable and thus cannot be considered as an indicator of success

in achieving socio-economic development.

The results and recommendations of the research can be valuable for Palestinian planners and

economists. This study can encourage the PA to assess Palestinian growth and development

during and after the implementation phases of PRDP (2008-2010), in order to assess neo-

liberalism as a policy paradigm for the Palestinian economy. It can also contribute to

encouraging Palestinians to move away from the current context toward a new paradigm that

understands development as a means to realize self-determination, rights and freedoms. Finally,

the research can create a platform for future researches in this area for people who are interested

in the most suitable economic and political paradigms that can lead to real socio-economic

development in Palestine.

2. Research Methods

The major concern of the research is to explore the extent to which PRDP (2008-2010)

contributes to the achievement of high economic growth and socio-economic development in

Palestine. To achieve this, the research methods should investigate multi level perspectives from

economists, academics, and reports conducted by national and international organizations.

The research methodology adopted is a qualitative method that depends mainly on the following:

Follow up and analysis of documents and official reports issued by states and

international institutions related to development plans in the Palestinian Territories

34

(World Bank, International Monetary Fund, the United Nations, the European Union, et

al.).

Reports published by the PA: the Ministry of Planning and the Ministry of Finance.

Reports and statistics published by PCBS: Palestinian Center Bureau of Statistics.

Data collected through direct written questions, and interviews conducted with:

Representatives of international organizations, in order to understand the status

quo of the Palestinian economy.

Representatives of the PA, with special focus on the Palestinian Ministry of

Finance and Economy in order to explore the impact of economic growth on

socio-economic development in the Palestinian Territories.

Economists and academics, for the abovementioned reasons.

There are a number of advantages of qualitative methodologies for scientific research. Epstein

(1988) states, “descriptive, inductive, and unobtrusive techniques for data collection are viewed

as compatible with the knowledge and values of the scientific research” (Epstein, 1988, P:185-

195).

For situations in which researchers are faced with issues and problems that are not amenable to

quantitative examination, qualitative methods have been advocated (Sherman & Reid, 1994).

According to babbie (1986), “Qualitative approaches also have the advantages of flexibility, in-

depth analysis, and the potential to observe a variety of aspects of a social situation (Babbie,

1986, P:56).

A qualitative researcher who conducts a face-to-face interview can develop using questions on

the spot, gain a more in-depth understanding of the respondent's beliefs, attitude regarding the

main subject of the interviews. (Babbie, 1989)

The qualitative method was chosen for the aforementioned reasons. Moreover, the difficulty to

depend on questionnaires as a tool for data collection is another reason for this selection.

35

Interviews also played an important role in the research methodology; they enriched the content

of the study by permitting a focus on sensitive topics that cannot be truly discussed if the

research depended solely on quantitative methods. Also, this research draws from secondary data

that includes: historical data, periodical reports, and previous studies, enabling the attainment of

needed findings and recommendations.

2.1 Interviews

To provide an in-depth response to the questions addressed in this research, open-ended

questions were prepared to allow the exploration of each theme. The flexibility of questions also

provided an opportunity for raising more questions and obtaining further insight and ideas. Of

course, this also depended on the type of conversation that was going on with interviewees.

It was also very necessary to strengthen the research by a series of oral and written interviews

with a number of international organizations working in Palestine, think tanks, in addition to the

viewpoints of a number of experts and academics in the socio-economic development field.

It is worth emphasizing here that the basic research methodology focused primarily on the

review and evaluation of official documents and reports published by international organizations,

in addition to those published by the PA. Therefore, these interviews are limited to a role of

furthering the discussion and supporting some of the facts related to socio-economic

development in Palestine.

Based on the objectives of the research, questions may be configured in a manner that spans

across two main axes:

1. Questions evaluating the extent to which the PRDP may be considered as a neo-liberal

plan for the Palestinian people.

2. Questions pertaining to economic growth and whether it was translated into socio-

economic development in Palestine.

The interviewees have been selected in accordance with special criteria:

- Two economists from the PA.

36

- Two economists from the Palestinian Independent Commissions (direct relation with

research fields).

- Two academics specialized in the fields of economy and development.

- Two senior economists from international organizations.

- Two representatives from the private sector.

Ten interviews were conducted with the following individuals:

1. Mr. Ala’ Tartir – Policy Advisor – Al Shabaka / The Palestinian Policy Network.

2. Sam Bahour – Business Consultant – Applied Information Management (AIM).

3. Dr. Khalil Nakhlah – Expert in the development field, and previous consultant for the EU

and the Welfare Association.

4. Dr. Samir Abed Allah – Former Minister of Planning and General Director of the

Palestine Economic Policy Research Institute (MAS).

5. Dr. Samir Hazboun - President of the Bethlehem Chamber of Commerce and Industry.

6. Mr. Azmi Abdulrahman – General Directorate of Policies, Research and Analysis –

Palestinian Ministry of Economy.

7. Mr. Raja Al Khalidi – Senior Economist at the United Nations Conference on Trade and

Development (UNCTAD)

8. Mr. Metri Abu Eita – Former Minister of Tourism and business man.

9. Mohammad Attalah – Head of the Research Department – Palestinian Monetary

Authority.

10. Strahan Spencer – Economic Advisor – UK Department for International Development

(DFID).

37

All interviews were conducted in February, March and April 2012. Some were conducted face-

to-face, while most were through written responses. The reactions of the interviewees were very

useful and efficient for the results of this study.

2.2 Limitations and Difficulties

Development in Palestine is not merely a technical process, but also a political and economic

vision. Within it, a wide issue, an amalgamation of factors are intertwined and overlapped, all of

which have profound impact on the attitudes and developmental priorities of the plans that have

been introduced, with a special focus on the PRDP (2008-2012).

The research by itself is an attempt to assess the economic performance of Palestine during and

after the implementation phases of the PRDP and whether this performance was translated into

real socio-economic development.

For that I would like to list some of the difficulties I was confronted with during the completion

of this research:

The refusal of some PA representatives to offer the possibility for an interview or respond

to the research questions explicitly addressing the adoption of the neo-liberal approach as

a political and economic paradigm.

Given the lack of political stability and security in Palestine, as well as the historically

inconsistent dedication to actually implement development plans, it is difficult to speak

of a cumulative and sustainable development process. This difficulty constitutes a major

obstacle to any researcher seeking to assess the impact and economic and social

consequences of short and long term plans.

Sometimes, there are discrepancies in the figures and statistics cited. These discrepancies

are a result of the differing references used by the various institutions, such as the PA, the

World Bank, IMF, UN, EC and so forth.

38

Chapter III: Economic Growth during and after the PRDP

The neo-liberal paradigm emphasizes primarily on economic growth, and subsequently on

socioeconomic development – as its byproduct. This chapter will assess the extent to which the

PRDP succeeded as a neo-liberal plan in the Palestinian Territories, and highlight the major

dimensions of socioeconomic development linking them to the achieved growth during the

implementation phases of the PRDP (2008-2010).

1. Neoliberal policies as an economic and political paradigm in Palestine

Most of the literature reviewed indicated that the neo-liberal approach was the basis for the

PRDP (2008-2010). The PA’s formal declaration concerning the adoption of this approach is

stipulated in Article (21) of the Palestinian Basic Law (amended in 2005), which states that “the

economic system in Palestine shall be based on the principle of free market economy.”

(Palestinian Basic Law, 2005, P:21)

As previously mentioned, the aim of this research is to evaluate the extent to which the PRDP

may be considered as a neo-liberal plan for the Palestinian Territories. To support this, the

research took into consideration the various views of Palestinian experts who work in the field of

economic and social development and who are closely linked to the Palestinian reality.

Dr. Khalil Nakhleh (2012) refers to the importance of placing matters in their historical context

prior to responding to the research question. He emphasizes that “the PA’s adoption of neo-

liberalism appeared clearly after the occurrence of several fundamental shifts in the Middle East

in particular and the world in general; the defeat of the Arab States in the 1967 War, the events

of Black September (1970) in Jordan, the PLO’s departure from Lebanon to Tunisia, the death of

President Gamal Abdul Nasser, and the October War in 1973. Sadat’s presidency in Egypt was a

major turning point in the path of the Palestinian case, whereby during its meeting in Algeria in

1974, the Palestinian National Council was forced to come out with the "Ten Points Program",

and to press for accepting a political solution to any section of historic Palestine in order to

shape a nucleus for the formation of a Palestinian state. The year 1974 was a crucial year that

transformed the PLO from a liberalization organization to a bureaucratic one with the political,

economic and social branches.” (Nakhleh, 2012)

39

Nakhleh (2012) also emphasized the constant role played by Samed Institute in adopting free

market policies and investing in business ventures in various countries around the world. He

believes that the PA adopted neo-liberalism and accompanied the Bretton Woods Institutions

throughout the Palestinian economic development stages since the Oslo Agreement. Nakhleh

(2012) however, does not think that the PRDP succeeded to play the role of a neo-liberal plan

because it does not take the development and liberalism factors into consideration. He added that

“we seem to have forgotten that the Palestinian Territories are occupied territories that suffer

from complete dependence on the Israeli Occupation that controls everything.” ( Nakhleh,

2012).

Khalidi (2012) confirms that “the PA undoubtedly adopted the neo-liberal approach through the

PRDP, and it was clearly visible following the Oslo Agreement and the Paris Protocol of

Economic Relations in 1994. This adoption established the groundwork for a relationship

characterized by Palestinian dependency on Israeli goods and donor aid, thus creating an

economy linked with the Israeli economy; one of the most liberal economies in the region and the

world.” Khalidi (2012).

Khalidi (2012) asserts that the PRDP is based on the so-called Post Washington Consensus that

encouraged states to adopt liberal economic policies derived from neoclassical philosophy. He

asserts that this approach is not appropriate for the Palestinian territories because it conflicts with

liberation and sustainable development. The PRDP, according to Khalidi (2012), is no more than

a security plan devoted to the presence of the occupation hindering any chance for reaching a

political and just solution to the ongoing conflict that has been going on for over 60 years. The

PRDP was created in order to prove to the Palestinians and others that the new era of the PA has

a different methodologically than that which existed during the Arafat era (1994-2004). (Khaledi,

2012)

It is worth mentioning here that the security plan is interlinked with Israel’s policy of asserting

control over important strategic assets and locations in order establish order among the

Palestinian people living within these locations to enable the control over and colonization of

land.

40

To provide further clarification to this, Leech (2012) states that, “Hilal and Khan (2004) use the

following metaphor: “In a prison, the prisoners control 95% of the space.” Leech, 2012, P: 7.

Leech (2012) clarifies the metaphor of Hilal and Khan: “Because the PA took over responsibility

of day to day management of Palestinians in Area ‘A’, the Israeli’s policies produce equivalent

prisoners in order to police the Palestinian people and to organize their own services.” Leech,

2012, P:7).

This Israeli policy was embedded since 1967. A real change in this policy came only from the

rupture in Israel’s methodology of control over the Palestinian Territories affected by the

Palestinian popular uprisings. Therefore, the Israeli leadership came up with a new strategy to

cooperate with the Palestinian elite living within the Occupied Palestinian Territories and with

PLO leaders to create an authority that plays the role of police instead of the Israeli government.

As a result of the Oslo Process, thousands of Palestinian political elites from the PLO and Fatah

returned to the Palestinian Territories, dependent on the help and financial investments of a

group of capitalists who became successful in the Gulf after being forced to leave Palestine

during the Nakba. These capitalists returned to Palestine in 1990 in order to give legitimacy for

the PA through their financial support and investments.

Recently, the PRDP was the main reason for creating a newly empowered Palestinian capitalist

class that was portrayed as a predatory and oligarchic group of elites whose dominant position

was favored by the PA’s neo-liberal program made possible by security collaboration with Israel.

Khalidi (2012) concludes that the aim of the PRDP comes from the Israeli interest to weave co-

existence alongside economic peace, which was promoted by the Israeli government. The PRDP

was the main reason behind increasing Palestinian dependency on foreign aid and Israel. The

latter continues to exploit its dominating position to establish a hold on Palestinians by creating a

framework for control over vital and important resources, thus curtailing any potential

Palestinian capacity to confront the superiority of the Israeli government and effectively

nullifying any meaningful progress toward achieving their independence. (Khalidi, 2012)

41

Al Khalidi (2012) states that “the adoption of the neo-liberal policy in the PRDP is one of the

PA’s most grievous mistakes. This adoption is inimical to development and liberation, which are

much needed by the Palestinian people. The PRDP cannot succeed neither as a midwife for

independence that is based on a strategy of resistance, nor as a development paradigm”

In reaction to the same question, Alaa Tartir (2012) states that “the adoption of the PRDP as a

neo-liberal paradigm depends on the definition and understanding of liberalism and neo-

liberalism. In sense, liberalism is the socio/political/ideological background of capitalism. And

in this spirit depending on international and regional experiences it became evident that the

blueprint of the neo-liberal agenda seems to be very problematic and in many ways harmful to

be implemented in a place like Palestine. It is not about right or wrong per se, it is about what

sort of path we need to have in order to create development. Do we need a development state or

do we need a quick jump with policies based on liberalization, privatization and stabilization?

Of course, the adoption of the neo-liberal agenda requires certain pre-requisites such as control,

rights and sovereignty, which are lacking in Palestine.” (Tartir (a), 2012).

Also in response to the same question, Sam Bahour (2012) states:”I cannot assure that the PA

has succeeded in adopting the neo-liberal approach and I cannot say that it was the right

decision. But I would like to say that the leaders of the Palestinian Authority have a strong

conviction that the solution of the Palestinian case will come only through the United States. I

believe that there is no problem for any country to adopt a socio-economic plan in order to

reach a paradigm of development, but the problem is how this country can benefit from this

adoption and have political and economic gains, and this is the main question regarding the

PRDP.” (Bahour, 2012)

According to Bahour (2012), the PRDP contributes to concentrating power and wealth in the

hands of a selected few (elites), who are apparently motivated by their short term personal

interests, without taking the real needs of the Palestinian people into consideration. The PRDP

has to be replaced by another strategy that is based on a participatory approach, with a special

focus on resistance and development. Bahour (2012) believes that planning at the national level

cannot be implemented in any form in a country that is under occupation. (Bahour, 2012)

42

Muhammad Attaallah (2012), who also gave his feedback regarding the same question stated: "I

believe that the PRDP is built on the main concepts of neo-liberalism. The PRDP tends to move

towards the development of the private sector and encourage the privatization of basic services,

such as electricity and water. However, the PRDP is considered a positive factor; especially the

return of the Palestinian capitalists to the Palestinian territories and their contribution to the

development of the Palestinian economy at many levels.”(Attaalah, 2012).

On other hand, Leech (2012) states that, “Hanieh (2011) explains that the majority of private

enterprises in the West Bank can now be traced through a series of holding companies owned by

the Masri and Khoury families. These two families directly own a considerable range of

properties and organizations operating in the West Bank. In short, this collection of capitalists

“completely” dominates the political economy of the Palestinian territories. This dominance

creates monopolies and prevents the development of the private sector on a competitive basis.”

Leech, 2012, P:12).

Dr. Samir Abdullah (2012) had a different opinion regarding the study and the same question. He

stated that “the basis of this research is completely out of context and has no relationship to

reality. The world has abandoned the Washington Consensus (WC) long before the existence of

the PRDP because the WC created many crises. The WC is practically considered as a victory

declaration for the capitalist system over the liberals, who believe that market mechanisms can

solve all problems as they are able to reach optimal distribution of resources, achieve growth,

equal distribution of income, and justice on the long term. However, the results indicate how

these policies failed, particularly with regard to human resources such as education, health and

citizen wellbeing. We cannot say that the PA, which is under occupation, adopted the neo-liberal

approach; this claim is completely out of context. The PRDP was developed in a period when the

Palestinian territories were under a state of chaos, and this chaos had a negative influence on

the development and production processes. Simply put, the PRDP is a short-term plan that

contributes effectively to the achievement of the long-term goals of the Palestinian people.”

(Abdullah, 2012).

43

Azmi shared Abdullah`s vision in his response to the same question: "The PRDP is not based on

the concepts of the neoliberal approach. It is just a short term plan that aims to achieve long-term

goals. It is worth mentioning here that the PRDP is the main reason behind improving the

performance of the Palestinian government in terms of managing public money, enhancing

revenues collection, reducing dependence on foreign aid from $1.8 billion to one billion Dollars,

and developing many sectors without neglecting the major obstacles imposed by the Israeli

occupation. It should be noted that many successes have been achieved on the political and

economic levels, and the PRDP is considered very suitable for the political and economic reality

in Palestine.” (Azmi, 2012).

It is very important to conclude here that four of the experts who have been interviewed stated

that the PRDP was based on the neo-liberal approach as a theoretical and practical framework.

The PRDP is not suitable for the Palestinian territories because it does not take the issue of

resistance and sustainable development into account. According to these experts, the PRDP and

its policies, particularly those that can be described as security sector reform or neoliberal

economic re-organization, have in fact worsened and made the Palestinians and their economy

even more dependent on the will of Israel and international donors. The PRDP has made

conditions much harder for the Palestinians to remain tied to the land, particularly the residents

of Area “C”. The other three experts argue that the plan did not pursue a neoliberal approach,

but rather arrived in an era of widespread chaos and lawlessness. They stated that the plan used

to be an important base for re-straightening economic and social development, from which all

Palestinians would benefit.

2. Economic growth during the PRDP

The long years of dependency on the Israeli market, the continued expansion of settlements,

political instability and the restriction of movement, have deterred productive investment and

decreased the growth of Palestinian industrial, agricultural and productive capacity. Palestinian

economic growth during more stable periods was been driven by the construction and

agricultural sectors and labor in Israel. There has also been little investment in developing high

value added export businesses, which can be considered as the basis for a self-sustainable

economy.

44

According to the PRDP (2008), “economic growth in the Palestinian Territories witnessed in

2003-2005 was largely driven by public sector spending and private consumption funded by aid

and remittances.” (PRDP, 2008, P:65).

The PRDP clarifies that the Palestinian economy has an enormous potential for future growth.

This point is clarified clearly in the third goal of the Plan, which states that the PA should work

on increasing national prosperity by moving towards fiscal stability and restoring economic

growth.

Since 2008, the Palestinian economy has been growing with real GDP projected at 8% in 2010.

This growth started at a very low level, especially in the Gaza Strip, where standards of living

are well below that prevailed in 1994.

SIDA (2011) clarifies that the growth has been driven by aid inflows, which do not entail real

economic growth in the long term. (SIDA, 2011).

On other hand, the World Bank (2011) states that “real economic growth in the West Bank is

estimated to have reached 9.3% in 2010 exceeding the PA’s budget projection of 8%.” (World

Bank, 2011, P:5).

Alaa Tartir (2012) explains that “the circulation of donor funds and the increase in government

public expenditure are the reasons behind this economic growth. The private sector and the

construction boom in places like Ramallah can be responsible for that, but for sure are not the

main engines behind this growth, as claimed. So the growth was everything else but sustainable

and long term.” (Tartir (a), 2012).

Sam Bahour (2012) states in his reaction to the same question: “Before starting to talk about

economic growth, whether it was achieved or not, it is very necessary to define the measures and

indicators of economic growth, especially since these indicators and measures have been

developed for sovereign states. I believe that the use of these indicators for measuring

Palestinian growth is a big mistake and this is due to the fact that the Palestinian territories are

under occupation and the Palestinian people have no access or control over any of their natural

resources. For example, it is possible to consider the Israeli checkpoints as one of the main

reasons behind this growth. These checkpoints have a negative effect on the free movement of the

45

Palestinian people - many sectors would require more time to implement their activities due to

the delay at checkpoints. This results in an increase in spending, thus, economic growth.”

(Bahour, 2012).

Bahour states that “another main reason behind this growth is foreign aid. This aid is

unsustainable and results in unsustainable growth. Therefore, foreign aid should be removed

from the formula used to calculate this growth so that Palestinians can have a clear image of

their economy and its performance.” (Bahour, 2012).

To confirm the points raised by Bahour, Nakhlah (2012) stated that “the development achieved

does not reflect any real development, but just the opposite. It is artificial development since it

was achieved as a result of donor funds. How could we even consider the existence of economic

growth with a deficit budget covered by external aid?” (Nakhlah, 2012).

Hazboun (2012) states that: “Unquestionably, the period between 1995 and 2000 did witness real

growth. It was a recovery period where we started to feel that we were taking vigorous steps

towards the state. I think that all the percentages we hear about economic growth do not reflect

the reality. Economists do not pay attention to the inflation rate, which is one of the main factors

that can provide the real percentage of achieved economic growth.” (Hazboun, 2012).

According to Attalah (2012), “the achieved economic growth is not a real and sustainable one,

and does not reflect any development on the socio-economic level. Poverty and unemployment

rates witnessed a steady increase in the last three years. This growth is not based on the

industrial and agriculture sectors. This growth is a natural result of donor money and the new

financial management system established by the PA.” (Attalah, 2012).

Al Khalidi (2011) portrays the achieved economic growth as an economic bubble. He clarifies

that this growth was largely fueled by donor aid and private sector investment recovery in the

West Bank and illicit tunnel economy in Gaza. Most regions, and about half of the Palestinian

people who are actually enjoying economic recovery, are excluded from this growth. (Al

Khalidi, 2011). Moreover, Al Khalidi (2012) makes the distinction between growth and

development. According to him, “development cannot be measured by percentages of economic

growth. The economic growth that has been achieved does not include all the categories of the

46

Palestinian people. This growth is only owned by the capitalists and it is moving towards the

creation of a debt-oriented growth.”(Al Khalidi, 2012).

From another perspective, Abdullah (2012) confirms that “the achieved growth rate was real and

the most important examples that can be made in this regard are the infrastructure, the road

conditions, the state of cities such as Ramallah, as well as the improvement of citizens’ situation

and the investment atmosphere. However, the increase in Palestinian government spending was

the main reason behind this growth.” (Abdullah, 2012).

Abdulrahman (2012) contradicts Abdullah’s point and states that “the achieved economic growth

in the Palestinian territories is not real because it is not directly connected with any

improvement on the poverty and unemployment levels. This growth resulted from external aid,

the improvement of the tax collection system and the infrastructure projects that have been

implemented by the PA.”(Abdulrahman, 2012).

It is very important to mention here that the majority of international organizations share, by one

way or another, the opinion of Palestinian experts who do not consider the achieved economic

growth as real and sustainable growth.

The World Bank (2011): “Growth does not, however appear sustainable. It reflects the recovery

from the very low base reached during the second intifada and is still mainly confined to the

non-tradable sector and primarily donor –driven. Unemployment in WB&G has been amongst

the highest in the world this past decade, and though it has declines slightly recently, it remains

at 16.9% for the West Bank and 37.4% for Gaza.” (World Bank, 2011, P:5).

Also, UNCTAD (2011) clarifies that “While the economy of the occupied Palestinian Territories

(OPT) grew by 7.4 per cent in 2009 and 9.3 per cent in 2010, unemployment remained high, at

30 per cent in both years. The growth was driven by donor support, and reflects an economy

recovering from a low base. Economic growth has not altered the reality of worsening long-term

development prospects, caused by the ongoing loss of Palestinian land and natural resources,

isolation from global markets, and fragmentation. Unemployment, poverty and food insecurity,

especially in Gaza, continue to be alarming. The Palestinian Authority’s fiscal position remains

precarious, despite recent improvements. A large trade deficit and dependence on the Israeli

47

economy persist. New evidence suggests that the trade deficit with Israel is overstated by official

data, which mask “indirect imports”. The tax revenue on such indirect imports, currently lost,

could increase Palestinian public revenue by 25 per cent. Meanwhile, the economic

ramifications of the severance of East Jerusalem from the rest of the OPT call for serious

attention too.” (UNCTAD, 2011, P:1).

3. Conclusion

All the experts that have been interviewed, except for one, agree that the economic growth rate

that was achieved in 2010 is non-genuine and not sustainable since it is not linked to a marked

improvement on socio-economic development indicators in Palestine. All of them confirm that

this growth was driven from external aid and it was not a result of real economic activities

connected with the major productive sectors such as agriculture, industry and services. Also,

international organizations share these experts the same opinion. The next Chapter will explore

some statistical parameters that will help us verify the validity of these views, and the translation

of the achieved economic growth into socio-economic development.

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Chapter IV: Socio-economic Development during and after the PRDP

It is very clear that the PRDP (2008-2010) was developed and based on the main concepts of

neo-liberalism. This approach did appear to have facilitated growth, but did that growth lead to

socio-economic development? This is the main question to be investigated in this chapter.

Before moving on to the analysis phase, it is important to put some definitions on the table as to

what constitutes development. Jonas (2010) clarifies that Cardoso (1979) provides an outline

consisting of three interlinked processes that are connected with economic, social and political

development. (Jonas, 2010) According to this conceptual framework, this chapter will

investigate development during and after the implementation phases of the PRDP (2008-2010),

beginning with economic development and moving on to social development, and concluding

with a brief summary of the PA’s role in this regard.

1. Economic Development during the PRDP

The PRDP is based on economic reforms, which are eventually, and indirectly, expected to lead

to socio-economic development. The structural changes provided by the PRDP reforms are

designed to create an efficient, decentralized and industrialized economy - the main reason for

achieving a highly developed economy. These structural developments are the main

methodologies and mechanisms for achieving the following: developing human and physical

capital; facilitating the growth of private sector enterprises; facilitating economic growth;

alleviating poverty; and more equitable distribution of resources across the population. The

following economic indicators are studied in order to verify whether the economic growth

achieved during the PRDP was translated into socio-economic development.

1.1 Structural Adjustment

After examining the PRDP, we notice that it undertakes measures that are similar to those that

one might be expected to find in a “structural plan” elsewhere in the developing world.

According to Leech (2012), “Fayyadism’s reforms fail to distinguish between rents that are

potentially productive and those that are damaging.” (Leech, 2012, P:16). These reforms were

created to satisfy the concerns and interests of donor states. These reforms adopted market-based

solutions without taking their adverse impact into consideration.

49

Palestinians were unable to deal with these reforms. The privatization of electricity and the pre-

paid system that was adopted in Area C, for example, was the main reason behind increasing

poverty and adding on to the hardships of Palestinians.

Khalidi questions the applicability of structural adjustment policies to the Palestinian territories.

He sees that the longstanding financial problems in the OPT have nothing to do with the

structural problems that can be adjusted. According to Khalidi, the main reason behind these

problems is the occupation and its control over the tax and customs clearance revenue. (Tartir,

Bahour and Abdelnour, 2012)

1.2 Gross Domestic Product (GDP)1

1.2.1 GDP during 2004-2011

The Gross Domestic Product (GDP) is considered as the main indicator for measuring the growth

and development of the economy. The report of the PCBS (2010) indicates that during 2008-

2010, the GDP of the Palestinian Territories increased to reflect the highest economic growth of

9.3% in 2010, despite the circumstances on the ground characterized by the economic and

political separation between the West Bank and Gaza Strip, as well as the Israeli practices in

both regions (PCBS (a), 2011).

According to PCBS reports (2011), “In 2007, the GDP in the Palestinian Territories had

increased by 5.4% while it increased by 11.4% in the West Bank compared to a decline by 8.0%

in the Gaza the Gaza Strip.” (PCBS (a), 2011, P:7).

On the other hand, the Palestinian Territories witnessed a 5.2% decline in the GDP in 2006

compared to 2005. Also, the Gaza Strip recorded a 20.1% decline in the GDP, while the West

Bank recorded a growth of 3.5%. During that period, the Palestinian Territories were undergoing

serious political and economic problems, which resulted in the irregularity of salaries paid to

public sector employees. In 2005, the GDP increased by 8.6% in the OPT (21.1% in Gaza and

2.5% in West bank compared to 2004). (PCBS (a), 2011).

1 This data excludes those parts of Jerusalem which were annexed by Israel in 1967.

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The World Bank’s remarks on the GDP in 2011 were as follows: “Real GDP growth, steadily

increasing in 2009-2010 and previously projected to reach 9 percent in 2011, is now expected to

be 7 percent. The shortfall in external financial support in the first half of 2011 has also

contributed to the current fiscal crisis facing the Palestinian Authority.” (World Bank, 2011,

P:5)

The following figure can give a clear picture about the fluctuation of real GDP growth from

1999-2011

Figure 4.1.: The fluctuation of real GDP from 1999-2011

The above figure clearly indicates that the Palestinian GDP in West Bank has not witnessed any

progress compared with its peak in 1999. This means that during 10 years, the Palestinian GDP

in West Bank remained stable.

1.2.2 Economic activities in the West Bank and the Gaza Strip

As previously mentioned, the Palestinian Territories witnessed a 9.3% growth in the GDP during

2010 compared to 2009. Statistics indicate growth in main economic activities with relatively

highest contribution to GDP. The construction sector recorded the highest growth in 2010.

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According to PCBS Report (2011), “There are other activities which recorded growth of the

value added including agriculture, fishing and wholesale trade, transport and communication

services as well as Public Administration and Defense.” (PCBS Report, 2010, P:8). The

following table shows the percentage change of value added for main activities in 2010

compared to 2009. (PCBS (a), 2011)

A growth in most economic activities was witnessed in the West Bank. The contribution of

wholesale and retail activity was estimated to be about 18% of that growth. The value added in

the West Bank increased by 7.6% during 2010 compared to 2009. It is worth mentioning here

that all the economic sectors in the West Bank witnessed growth except for the mining and

manufacturing domains. The value added for mining and manufacturing recorded a 5.7%

decline. (PCBS (a), 2011)

The GDP in the Gaza Strip witnessed an increase by 15.1%. Construction was the main

economic activity and recorded the highest increase during 2010. This increase was by 232.2%

and accounted for 50.6% of the acute rise of the value added of most economic activities in the

Gaza Strip. In addition, the transport, storage and communication activities witnessed an increase

in their value added. A real improvement was marked in agriculture activity in the Gaza Strip by

34.6% compared to 2009, while the mining and manufacturing activities reflected fallback.

(PCBS (a), 2011)

According to UNCTAD (2011), “The 15 per cent GDP growth registered in Gaza in 2010 is

partly the result of recovery from a low economic base, whereby real GDP fell by 30 per cent

cumulatively between 2006 and 2009, and partly a reflection of relaxation of some Israeli

constraints on imports in mid-2010.” (UNCTAD Report, 2011, P:3). This improvement was

concentrated in the non-tradable sector, mainly construction, whose output doubled in 2010.

(UNCTAD, 2011).

In its 2011 report, UNCTAD states that “In Gaza, a modest relaxation of the Israeli blockade

over the last 18 months has enabled an improvement in economic activity.” (UNCTAD, 2011,

P:3).

52

The services sectors recorded the highest contribution to the GDP - 20.9% compared to a

contribution of 13.9% by public administration and defense. PCBS ensures that the contribution

of manufacturing and mining activities to the GDP reached 12.3% compared to 11.1% for trade

and 9.2% for construction activity. (PCBS (a), 2011)

According to PCBS (2011), “There are variations in the relative importance of the different

economic activities between the West Bank and Gaza Strip. The service activity is the highest

contributing activity to the GDP in the West Bank and Gaza Strip. Public administration and

defense represents the highest relative contributing activity after the service activity in the Gaza

strip compared to manufacturing and mining activity in the West Bank. The contribution of the

Agriculture activity to GDP in the Gaza Strip reached 9.4% compared to 5.3% in the West

Bank.” (PCBS (a), 2011, P:9).

In reaction to economic activities in the Palestinian Territories, the Israeli Government (2011)

stated that “Economic activity in the West Bank appears to have entered a slowdown, after two

years of rapid growth.” (GOI, 2011, P:6).

The Israeli Government (2011) argues that the private sector failed to reach its potential,

particularly the manufacturing sector. The economic slowdown justifies the fiscal crisis currently

plaguing the PA, which resulted from a decline in donor aid, and the inability to obtain loans

from the banking system to finance the shortfall. It is very important to mention here that the

West Bank’s economy still depends on the public sector and construction projects. These sectors

continue to be heavily financed by foreign aid that has also decreased tremendously. (GOI, 2011)

1.3 GDP per Capita

The GDP per capita is an important indicator that can be used for measuring the living conditions

of persons. In the Palestinian territories, the GDP per capita recorded an increase by 6.1% in

2010 to reach USD$ 1,502.4. (PCBS (a), 2011)

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Table 4.1. : GDP per Capita in the Palestinian Territories, 2004-2010

2004 2005 2006 2007 2008 2009 2010

GDP

(Million

US$)

4,198.4 4,559.5 4,322.3 4,544.1 4,878.3 5,241.3 5,728.0

Population

(Thousands)*

3,188.0 3,287.0 3,389.0 3,495.0 3,597.0 3,702.0 3,813.0

GDP per

Capita (US$)

1,317.0 1,387.2 1,275.4 1,303.2 1,356.3 1,415.7 1,502.4

% of per

Capita

- 5.3 -8.1 2.2 4.1 4.4 6.1

* Estimated total population in the Palestinian Territories excluding the part of Jerusalem that

was annexed by Israel in 1967.

Information Source: PCBS, 2011

According to the PCBS (2011), “The time series 2004-2010 indicates that the highest GDP per

capita was recorded in 2010. Regarding Gaza Strip, the GDP per capita in 2010 reached USD$

876.7 compared to USD$ 1,502.4 in the West Bank.” (PCBS (a), 2011. P:10).

In 2011, the GDP per capita in the Palestinian Territories at constant prices recorded an increase

by 7.4% and reached USD$ 1,614. (PCBS (a), 2011).

Abdulla (2012) states that “the GDP per capita achieved in 2010 is similar to that in 1999. This

issue means that the income of Palestinians has not witnessed any change for the past 10 years.”

(Abdulla, 2012).

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1.4 Prices and Purchasing Power

One of the most important indicators that affect the purchasing power is tracking the change of

prices. The Human Development Report – OPT (2009/2010) clarifies that “the overall Consumer

Price index increased from 3.8% in 2005 – 2006 to 9.8% in 2007-2008. The consumer index for

food rose by 14.6% from March to the end of April 2008 in the West Bank and 16.3% in the

Gaza Strip; the price of wheat flour increased by 73% in the West Bank and 68% in Gaza. These

increased prices are not only reflective of global increases but can be partially attributed to

increased transaction cost across the OPT and the economic blockade and containment of the

Gaza Strip.” (Human Development Report –OPT, 2009/2010, P:36).

On the other hand, the PCBS (2011) reported that during 2004-2010, the Consumer Price Index

(CPI) had risen by 29.0% taking into consideration the increase in average daily wages by

24.0%. It is worth mentioning here that the Consumer Prices Index had risen more rapidly than

the rate of change for daily wage workers in the years 2007, 2008 and 2009. (PCBS (a), 2011)

The annual Consumer Price Index in the West Bank and the Gaza Strip during 2010 had

recorded an increase by 3.75% compared to 2009. The overall Consumer Price Index during

2010 reached 129.0 compared to 124.34 in 2009. This growth was due to the increase in the

prices of food items and several products and services such as education and health. The growth

of CPI affects the purchasing power and the consumption pattern of Palestinian individuals. The

consumption pattern of Palestinian households includes food and drink by 37.6% followed by

housing by 10.4%, transportation by 9.9%, clothing by 6.9%, in addition to expenditure on goods

and recreational services, as well as services of restaurants and cafes. (PCBS (a), 2011)

In his paper, Tartir (2012) states that “Real income per capita needs a proper deconstruction

noticing the unbearable increase in the cost of living and the consumer price index.” (Tartir (b),

2012, P:2)

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1.5 The Labor Market

It is very clear that the PRDP pays special attention to the labor market in Palestine. The PRDP

states clearly that its main objective is to facilitate an economic recovery which creates job

opportunities and reflects positively on the Palestinian labor market and labor force.

The Palestinian economy is largely dependent on labor for production; while resources such as

capital and land are very limited. The labor force recorded a lower participation in 2010

compared to 2009. During 2004-2010, the participation rate in the labor force ranged from

40.1% to 41.7%. This rate declined to 41.1% in 2010 compared to 41.6% in 2009. The number

of workers inside the labor force increased by 3.7% during 2010 compared to 2009. The year

2008 recorded a decline by 3.5% in the number of workers inside the labor force. The period

2004-2007 witnessed a continuous increase in the number of workers in the labor force. (PCBS

(a), 2011).

During the period 2004-2010, the Palestinian Territories witnessed fluctuation in the rate of

unemployment. The lowest rate was recorded in 2007 at 21.7%, while that rate reached 23.7% in

2010 compared to 24.5% in 2009. The West Bank witnessed a decline in the unemployment rate

from 17.8% to 17.2%, while the unemployment rate in Gaza strip also declined to reach 37.8%.

(PCBS (a), 2011).

The International Labor Organization affirmed an improvement in the unemployment rate in

2010. This improvement was attributed to the accelerated growth rate, but it is still considered

low in accordance with the international standards. (ILO Annual Report/oPt, 2010)

According to the World Bank’s 2011 report, 19% of the Palestinian population was unemployed

in 2011. The official data indicates that 780,000 people were working in the Palestinian

Territories in the first quarter of 2011 and there was an increase by 130,000 compared to the

previous year. This indicates a decrease in the unemployment rate by approximately 21.7%.

Young men and women are affected by this issue. In 2009, the unemployment rate among young

people was 10% higher than the overall unemployment rate. (World Bank, 2011)

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According to Tartir (2012) , “Unemployment has remained at around 30% since 2009, with 47%

in Gaza in 2010, compared to 20% in the West Bank. Unemployment rate for Palestinian youth

under 30 is particularly alarming standing at 43%. The income and opportunities inequality gap

continues to widen not only between the West Bank and Gaza, but also within the West Bank.

Thinking of the gap between the city of Ramallah, the new Paris of the Middle East, with its

bubbled economy and the Jenin refugee camp, southern Hebron, or even the villages outside

Ramallah, not to mention areas C, can give a taste of the ‘new’ inequality phenomenon.” (Tartir

(b), 2012: P:2).

The GDP growth achieved in 2010 was “jobless”. This growth failed to find a realistic solution

for the high unemployment rate that has persisted for a decade. The growth was achieved largely

by better utilization of existing resources but without a remarkable increase in investment. The

private sector is very weak and faces high risk. These factors explain the lack of progress on job

creation. According to UNCTAD, “the unemployment rate in the Palestinian Territories is

amongst the highest in the world.” (UNCTAD, 2011, P:5).

Based on all the reviewed documents, the persistence of high unemployment rates within the

Palestinian labor force poses a threat on the life of the Palestinian people, not to mention the

strains imposed on the social fabric and on solidarity. The interruption of production activities

can lead to the deskilling of Palestinian institutions and workers, which could be one of the main

reasons behind the destruction of human capital.

57

1.6 Balance of Payments (Current Account)2

Balance of Payments (BoP) is an indicator used to measure transactions between residents of the

Palestinian Territories and non-residents in a given period. This indicator gives detailed

information in receipts and payments between the domestic economy and other countries of the

world. Balance of Payments consists of two major accounts: The Current Account and the

Capital3, and the Financial Account.

According to the PCBS (2011), “In 2004, the deficit in current account reached USD$ 1,516

Million. During 2005-2008, current account witnessed significant and continuous improvement.

In 2005, the deficit in current account decreased by 24.0% compared to 2004 and continued

until the year 2006. The year 2008 witnessed a surplus in current account by USD$ 535.1

Million resulted from a rise in net transfers from abroad, in addition to an increase in net

income, especially compensation of workers. In 2009, current account declined resulting in a

deficit of USD$ 736.8 Million, despite the fact that it was the lowest deficit recorded since

2003.” (PCBS (a), 2011, P:27).

One of the main reasons behind this deficit was the increase in the value of imports of goods and

services to Palestine, which was reflected in deficit in the trade balance, as well as the decline in

current transfers received from abroad. This deficit can reflect negatively on social indicators -

the fluctuation of poverty rate during the implementation phases of the PRDP, as an example.

It is worth mentioning here that the Palestinian economy depends heavily on foreign transfers

received by the PA. Foreign transfers are used in order to support the General Budget of the PA.

The latter seeks to reduce dependence on foreign transfers but is unable to find key solutions to

cover this deficit.

2 Current account is subdivided into four major categories: goods, services, income and current transfers. 3 Capital account is divided into capital transfers and acquisitions/disposals of non-produced non-financial assets. The items that

are recorded under capital transfers include investment grants (including cash transfers for purchases of investment goods), debt

forgiveness and migrants’ transfers. Non-produced, non-financial assets are mainly licenses, franchises and patents. Also,

included acquisitions/disposals of land by representative offices of foreign governments, for example foreign embassies.

Financial Account: Transactions in financial assets and liabilities are recorded in the financial account. Financial stocks can be

divided into four broad categories: direct investment; portfolio investment; other investment (mainly currency, deposits and

loans); and reserve assets.

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1.7 The PA’s Fiscal Situation

In the last few years, the PA carried out strict fiscal reforms in order to control the budget deficit.

The fundamental aim of these reforms was to improve fiscal discipline and reduce dependency

on donor aid by reducing the budget deficit. These reforms were developed in order to put the

Palestinian economy on the path to financial stability – a path designed to create room for

increasing capital investment and developing the expenditure system.

The budget deficit recorded a drop to 15% in 2010 from 24% in 2009. The PA was able to

achieve this result by a combination of spending controls, especially pertaining to the

containment of public employment and wages, and enhanced revenue collection. (PCBS (a),

2011)

According to UNCTAD report (2011), “Tax revenue grew by 57 per cent in 2010, and total

public revenue grew by 22 per cent, to $1.9 billion, while expenditure was reduced by 4 per cent.

On a commitment basis, the recurrent budget deficit was $1.2 billion in 2010, down from $1.6

billion in 2009, and the total budget deficit stood at $ 1.5 billion.” (UNCTAD, 2011, P:7).

During the first quarter of 2010, budget indicators implied significant progress towards fiscal

sustainability, but this progress did not reveal definite prospects. Despite the achieved economic

growth in 2010, tax revenue covered only 15% of total spending, and spending on public

investment remained very low. The public investment accounted for less than 10 % of the total

spending and about 4% of the GDP. (UNCTAD, 2011)

One of the main indicators of fiscal weakness in Palestine is the fact that 42% of total spending

was financed by donors. It is worth mentioning here that dependence of foreign aid is neither

stable nor sustainable, taking into consideration the current state of the world economy.

(UNCTAD, 2011)

The World Bank (2011) stated that “in 2010, shortfalls in expected aid disbursements forced the

PA to resort to borrowing from domestic banks to bridge the spending gap, thus increasing

domestic dept to more than 11 percent of GDP.” (World Bank, 2011, P:7).

59

It seems that the poor should pay the cost of fiscal reforms. In 2011, the PA decided to cut net

lending by 37%, thus reducing it to 3.4% of the GDP from 11% in 2011. Also, the PA had plans

to eliminate net lending by 2011, with the full privatization of electricity companies (IMF, 2011).

Based on the expectations of the WFP, 43% of Palestinian households that use utility bill

payment deferral to cope with the crisis will be affected negatively by the moves towards the

elimination of net lending (UNCTAD, 2011).

The World Bank (2012) stated clearly in its last report that was published on 21 March, 2010 that

“The PA’s fiscal situation appears likely to worsen in 2012…the projected recurrent deficit is

expected to be about US$ 1.1 billion. This represents a nearly 14 percent decline from decline

from the 2011 budget.” (World Bank, 2012, P: 8).

Based on the aforementioned, the PA needs to set strict measures in order to control spending

and increase revenue, and these measures could have a drastic social impact on the Palestinian

people.

1.8 The Government Sector

The government sector accounts for 22.2% of the Palestinian GDP, which calls upon the

necessity to highlight the financial situation of the PA, taking all political and financial changes

into account. (PCBS (a), 2011)

Israeli practices contribute to weakening socio-economic development in the Palestinian

Territories. The development of the PRDP (2008-2010) was a turning point in the role of the

governmental sector.

1.8.1 Governmental Revenue

The year 2010 witnessed a significant increase in the revenue of the central government and a

decrease in government expenditures. This increase reduced the deficit of the general budget.

Also, the year 2010 witnessed impressive progress in the field of tax collection in line with the

PRDP. Local revenues (tax and non tax revenues) constituted 39.0% of total revenues. This

amount was useful in order to cover current expenditure with less dependence on external

transfers to support the general budget. PCBS states that “in 2010, total revenues of the

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Palestinian Authority amounted to US$ 1.9 billion, marking an increase by 21.6%. The collected

tax revenues had reached US$ 487.2 million, which is the highest since 2004 making an increase

by 59.0% compared to 2009.” (PCBS (a), 2011, P:33)

According to the World Bank (2011), “Also, the year 2010 had witnessed an increase in the tax

clearance revenue by 15.1% compared to 2009. This increase resulted from the efficiency in the

application of the taxation system and improvement in the imports. PCBS (2011) indicates that:

“Total tax clearance revenue had reached US$ 1,269.4 million in 2010 compared to US$

1,103.2 million in 2009.” (PCBS (a), 2011, P:33).

On the other hand, UNCTAD (2011) ensured that the PA was required to continuously cope with

the volatility both of aid disbursement, and of the revenue it collects. According to UNCTAD,

the PA revenue instability is caused by a number of factors, mainly the volatility of the tax base,

and the level of economic activities affected by the Israeli closure policy and military practices.

The Israeli control over the tax and customs clearance revenue, which it collects on behalf of the

PA, is another major factor of fiscal instability in the PA. Since the customs clearance represents

60-70% of the total PA revenue, this control is destabilizing the Palestinian economy.

(UNCTAD, 2011). In early May 2011, for example, Israel withheld US$ 100 million in customs

clearance revenues owed to the PA following Palestinian national reconciliation efforts. (BBC,

2011)

According to UNCTAD (2011), “The unpredictability of Israel’s clearance of Palestinian

customs-related revenues has a major impact on Palestinian economic development, and can

easily destabilize public consumption and investment.” (UNCTAD, 2011, P:8).

It is worth mentioning here that unpredictability makes fiscal planning difficult, undermines the

PA’s ability to pay salaries for public employees and threatens its ability to pay private sector

agents who supply it with goods and services. Furthermore, international support and positive

growth cannot be translated into sustainable economic gains without ensuring the stability of

Palestinian tax revenues and reducing the restrictions imposed on the access of Palestinian

producers to external markets.

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1.8.2 Government Expenditure

The Palestinian Central Bureau of Statistics (2011) indicates that “salaries and wages constitute

52.0% of the total government expenditure in the Palestinian Territories.” (PCBS (a), 2011,

P:34).

In 2010, Government expenditures were reduced by US$ 3,101.7 million compared to US$

3,189.8 million in 2009. The main reason for this decline was the result of the 8.2% decrease in

non-wage expenditures. On the other hand, wage expenditures witnessed a 10.9% increase in

2010 reaching their highest level at US$ 1,626.8 million. (PCBS (a), 2011).

It is worth mentioning here that the implementation period of the PRDP witnessed a modest level

of essential recruitment, particularly in the health and education sectors. This had a negative

influence on the ability of these two sectors to meet the demand of the Palestinian population

(growing at approximately 4% yearly) for basic services. (PRDP, 2008)

On the other hand Khalidi (2011) states that “the public sector payroll, at an estimated $1.7

billion, constitutes almost 25% of the GDP. But the GDP is depressed structurally as a result of

the prolonged occupation, hence, the public sector share of a small total GDP appears large.

The public sector share of the GDP even seems to be undergoing inflation.” (Khalidi, 2011)

In terms of net lending, the PRDP considers the cost of subsidizing citizens’ consumption of

energy and electricity as a significant drain on the Palestinian government’s financial resources.

The main intension of the PRDP is to reduce net-lending through the development of a new

collection system that incorporates enforcement measures, such as the obligation of citizens to

present a certificate of payment in order to obtain any public service. Considering the devastating

poverty rate in the West Bank, these measures generate more hardships for Palestinians and

create a lot of obstacles in the daily life of the Palestinian citizen.

Last but not least, the increase of infrastructure expenditures resulted in a 19.3% decline in the

budget deficit in 2010 to reach US$ 1.5 million, and the dependence on external support

witnessed a 14.6% decrease during the same year. (PCBS (a), 2011). This increase did

contribute to economic growth, but the main question here is whether it benefited all the

categories of the Palestinian population.

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1.9 The Private Sector

According to the PRDP, “the Palestinian private sector must be the engine for sustainable

economic growth. It needs to generate productive employment, produce high value-added goods

and services, and enhance national prosperity.” (PRDP, 2008, P:6).

The private sector comprises 77.8% of the total GDP. According to the classification of National

Accounts, the private sector consists of households, non-governmental organizations, financial

and non-financial institutions. The number of workers in the private sector witnessed an increase

by 6.6%. The number of workers who were employed in the private sector in 2010 was 465

thousand. The daily wage increased to reach 74.3 NIS, and the value added for the private sector

reached US$ 4.5 billion in 2010. (PCBS (a), 2011)

According to UNCTAD (2011), “the Palestinian private sector continues to be constrained by

years of restrictions on movement and access, blockade, extremely limited access to external

markets to export goods and import production inputs, and shrinking capital and natural

resources bases.” (UNCTAD, 2011, P:2).

Restrictions imposed by the Israeli government are chief obstacles confronted by the Palestinian

private sector, and they play a major role in hindering its growth. Israel maintains security

control and jurisdiction over planning and construction in close to 60% of the West Bank area

(Area C) despite that fact that the PA is responsible for the provision of services in that area. For

example, “the PA can provide a teacher, but not build a school for the teacher to teach in.”

(World Bank, 2012)

Israel also has control and jurisdiction over the telecommunications sector. Since it retains

control of the electromagnetic spectrum, it hampers the operation of Al Wataniya Company, for

example.

Another example is the official list of military and dual-use items that was released by the Israeli

authorities on 5 July, 2010. One of the lists includes 15 categories of general items that are

prohibited - fiber glass based raw materials, drilling equipment, fertilizers, etc. Another list

contains 19 types of construction materials, which are limited to specific projects approved by

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the PA and implemented through financial grants received from international organizations. (UN

OCHA OPT, 2010)

Land is considered a common means of storing wealth and economic assets. They provide a

foundation for economic activity in various sectors – agriculture, industry, housing, tourism. The

PA’s lack of control over Area C has profound detrimental effects on the Palestinian economy.

(World Bank, 2010). This situation also handicaps Palestinian economic activity in the Jordan

Valley, since most of the Jordan Valley is in Area C. This situation “denies Palestinians a

potential powerhouse of export-oriented high value agriculture.” (World Bank, 2012).

According to a study pertaining to the development of the agricultural and industrial sectors, “an

appropriate combination of new irrigation and growing technologies with “old” greenhouse

growing technologies and some open-field crops would enable Palestinians to develop, on

approximately 50,000 dunum4 in the Jordan Valley, an export-oriented high-value vegetable,

flower, and herb industry valued at around US$1 billion per year.” (Gal et al. 2010). Also this

study focuses on food processing and other industries which can be developed and linked with

this issue.

Due to the security measures, most Palestinians are denied access to East Jerusalem. Historically,

East Jerusalem was the center of the West Bank economy and society. The separation of East

Jerusalem from the West Bank regions also has devastating economic and social effects. (World

Bank, 2010).

The expansion of Israeli settlements in the West Bank also had negative effects on economic

activity and on the role of the private sector in achieving economic development. According to

Peace Now, “in 2011, there was a 20 percent increase in construction starts in Israeli

settlements in the West Bank, and the highest number in a decade of plans in East Jerusalem.”

(Peace Now, 2012)

4 1 dunum = 1,000 square meters

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In response to the research question regarding the situation of the private sector, especially

following the reforms that took place during and after the PRDP, Dr. Samir Hazboun (2012)

stated the following: “The role of the private sector was improved on two levels; the

governmental level and the community level. At the governmental level, representatives of the

private sector are more involved in the planning phases of the Palestinian government, and some

people affirm that the Prime Minister is the main representative of this sector. At the community

level, the private sector begins to organize itself in the form of unions, and donor funds become

oriented towards these unions. Hazboun states that the private sector is suffering from different

constrains, including the restriction of movement imposed by the Israeli government, which

increases transaction costs and practices of the Palestinian government. During the first quarter

of 2012, the Palestinian Government demonstrated its strength in this sector, especially after

raising the rate of the imposed income tax from 15% to 30%, to be fixed later on at 20%. The

Palestinian government also imposed the necessity of professional licenses obtained from the

Palestinian Ministry of Economy. All these practices have a negative effect on the comparative

advantage of the Palestinian labor force, in comparison with the other forces in the region.”

(Hazboun, 2012)

Bahour (2012) states that “the private sector has not witnessed any progress. It is very important

to analyze the private sector in the Palestinian Territories. The private sector is not a single unit -

90% of the private sector consists of Small and Medium Enterprises (SME), which form the core

of the Palestinian economy. The Palestinian government is encouraging business communities

rather than SMEs. One of the examples that can be mentioned here is the Palestinian

Telecommunications company. This company is making an annual profit of US$120 million and

not suffering any losses. It continues to receive incentives form the Palestinian government and

has not paid income tax for the past 20 years. Minister of Economy, Dr. Hasan Abu Libdeh took

a slapdash step when he decided to establish a small department for SME’s at the Palestinian

Ministry of Economy. Bahour believes that there is no sense in establishing such a department at

the Ministry that would solely work for the interest and success of SME’s. (Bahour, 2012)

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1.10 Trade Balance

The PRDP is committed to implementing institutional reforms in order to create an enabling

environment for private sector investment, trade and growth. One the most important indicators

that has to be studied when it comes to trade are the trade balance.

The trade balance involves exports and imports, and it is considered to be one of the major

components of GDP, and used in current accounts for the Balance of Payments.

In 2010, the value of exports reached US$ 1,378 million while the value of imports reached US$

5,367 million. This was the main reason of a deficit by 6.3% in the trade balance. (PCBS (a),

2011)

PCBS indicates that “imports from Israel comprised 75.0% of total exported goods and services

to the Palestinian Territories. This reflects the degree to which the Palestinian economy is

dependent on Israel.” (PCBS (a), 2011, P:29)

According to the World Bank (2011), “since 1967, trade in WB&G has been overwhelmingly

oriented towards Israel. As of 2008, Israel accounted for nearly 89 percent of WB&G’s exports

and 81 percent of imports. The majority of exports were for low value added goods that required

a minimal level of processing.” (World Bank, 2011, P:13).

As previously mentioned, the several years of restrictions, denial of access and blockades,

extremely limited access to external markets for the export of goods and import of production

inputs. On the other hand, GOI pointed out a good indicator pertaining to Israeli cooperation

with the PA in the following statement: “Israel was the destination for 90.3% of Palestinian

exports and the source for 65.2% of Palestinian imports.” (GOI, 2011, P: 7). These figures

indicate the Israeli government’s obstruction of any possibility to extend economic activities and

enhance the export led-oriented strategy within the PA.

Indirect imports from Israel are another indicator that has to be taken into consideration in this

regard. The UNCTAD report revealed that imports produced in a third country and re-exported

to the Palestinian Territories as if they were produced in Israel was the main reason that led to

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the following losses; US$ 480 million per year (25% of public revenue), 10 % in lost GDP and

30000 jobs opportunities per year. (UNCTAD, 2011)

The deficit in the Trade Balance reached its highest in 2010 while the lowest was in 2004.

(PCBS (a), 2011).

The size of the Palestinian market is very small compared to other countries in the region and

around the world. Without access to regional and world markets, Palestinian producers will not

be able to achieve the minimum efficient scale. Competition within international markets will

force Palestinian producers to improve their productivity and this issue will have a positive

impact in terms of increasing employment, raising wages and alleviating poverty. The majority

of Palestinian exports counted for low value added goods. If the PA is talking about a real and

sustainable economic growth, the Palestinian economy must increase overall trade, expand trade

beyond the Israeli market, and increase the value added in exports. To accomplish this, an

appropriate trade policy regime must be in place, including the necessary institutional,

regulatory, and physical infrastructure that would facilitate trade.

1.11 The Investment Climate and the Characteristics of Economic Activities

1.11.1 The Investment Climate

The investment climate in West Bank and the Gaza Strip has been severely hampered by the

Israeli closures. The restriction of movement for goods and people within and across borders was

the main reason behind the increase of transportation costs and discouraging private and foreign

direct investment. According to the World Bank (2011), “This has created a fragmented private

sector that is driven by low-cost, labor-intensive products such as garments, furniture, and shoes

for the heavily protected domestic and Israel markets.” (Word Bank, 2011, P:22).

In its most recent report, the World Bank pointed out that the restrictions imposed by the Israeli

government have an extremely negative effect on the investment climate, plus, the PA is the only

responsible entity to take further steps in order to improve the business environment and attract

foreign direct investments. (World Bank, 2012)

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1.11.2 The Characteristics of Economic Activities

One way to look at the structure of economy is to compare the conditions and the shares of its

major sectors; agriculture, industry and services. In the Palestinian context, tourism has to be

included in these sectors.

1.11.2.1 The Services Sector

The contribution of the services sector to GDP is the highest among economic activities. This

contribution reached 20.9% in 2010. Also, this sector constitutes the highest employment rate

and incorporates 271 thousand workers. (PCBS (a), 2011)

According to Attalah (2012), “there is no doubt that the services sector has a significant

contribution to the Palestinian GDP, but it does not have any competitive advantages since most

of the provided services do not require high technology and high-skill labor” (Attalah, 2012).

It is worth to mention here that this sector has to be developed and based on high technology in

order to compete at the regional and international levels.

1.11.2.2 Industry

The industrial sector in the Palestinian Territories witnessed decades of underinvestment. The

Israeli policies were the main reason behind this long term trajectory of stagnation and de-

development. One of the fundamental aims of the PRDP is to create a support system that would

stimulate private sector investment and link it to other sectors, such as agriculture and

construction.

The statistics of PCBS revealed that the contribution of manufacturing to GDP reached 12.3%

and the number of workers in this sector amounted to 73 thousands. The added value of this

sector declined by 5.5% during 2010. (PCBS (a), 2011)

The steady decline of the manufacturing sector is a major concern, not only because of the

potential output loss, but also because of its long-term implications, which are related to the

technological regression. It is worth mentioning here that this sector tends to be more innovative

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and efficient than companies that produce non-tradable goods. The non-tradable goods sector is

not exposed to the rigors of global competition. (UNCTAD, 2011)

According to UNSCO (2011), “Real GDP growth between 2009 and 2010 was caused mainly by

an increased number of workers and labor force, while the labor productivity was declined.”

(UNSCO, 2011).

Khalidi (2011) states that “UNCTAD estimated that about one third of the productive capacity

that existed prior to the second intifada was lost.” (Khalidi, 2011).

Attalah (2012) states that “if we compare between the share of industry to the GDP in 2010 and

1999, we would not notice any improvement. This issue has negative consequences on the

Palestinian economy, if we are talking about sustainable development.” (Attalah, 2012).

1.11.2.3 Agriculture

The agricultural sector in Palestine is a critical industry, because it mainly contributes to food

security. The improvement of this sector can contribute effectively to immediate economic

recovery through the creation of export development strategies based on highly advanced

business models.

The PRDP clarifies very well that this sector has to be developed in such a way that could

promote the cultivation of higher value added cash crops, marketing services and create

agricultural exports to regional and global markets based on improving the trade infrastructure.

According to PCBS (2011), “The cultivated land area comprises 16.0% of the total area of the

Palestinian Territories during the agricultural year 2009/2010, based on the preliminary results

of the Agriculture Census 2010. The contribution of agriculture to GDP reached 6.2% and the

value added of agriculture increased by 22.8% during 2010. The number of workers in the

agricultural sector increased by 6.3% to reach 81 thousand in 2010.” (PCBS (a), 2011, P:38)

However, the growth rate in agriculture came after a continuous decline that spread over a

decade and therefore, cannot be considered as a good indicator. Hazboun (2012) states that

“there is continuous progress in the Palestinian agricultural sector but it is connected with new

structural changes. These structural changes are summarized in adjusting domestic agricultural

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products to meet the demands of Israeli markets instead of meeting those of domestic markets,

and the separation between the West Bank and the Gaza Strip that contributes to increasing the

dependency of this sector on Israel. These structures contributed to an increase in the prices of

agricultural products and had a negative effect on the purchasing power of the Palestinian

citizen.” (Hazboun, 2012).

Azmi (2012) states that "there is a deterioration in the agricultural sector, but this deterioration

is not the responsibility of PA. There are a lot of factors which have to be taken into account.

According to the 2010 statistics, the contribution of this sector to GDP was about 5.9%. This

percentage reflects a huge deterioration of this sector compared to 2000 (14%). The agricultural

sector in Palestine suffers from low productivity despite the fact that 15% of the Palestinian

labor force is part of this sector.” (Azmi, 2012).

1.11.2.4 Tourism

Tourism has played an important role in the Palestinian economy. It represents a major source of

income for the future Palestinian state. Also, this sector is a way for bridging people from

different countries and cultures.

The tourism sector is significantly influenced by the political reality of the Palestinian

Territories. The Israeli occupation, the siege and the instability are all factors that hamper the

growth of the tourism sector and its contribution to the Palestinian economy. The Palestinian

Territories are rich in their religious and cultural heritage but the contribution of the tourism

sector to GDP does not exceed 3.0%. (PCBS (a), 2011)

According to PRDP, the contribution of the tourism sector to GDP exceeded 10% in 2007. This

percentage reflects the existence of several problems when we take into account the 3%

contribution of this sector to the GDP in 2011.

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The PRDP draws attention to the rehabilitation of historical sites without taking into

consideration the quality of human resources that will assume the responsibility of managing this

sector.

Abueita (2012) states that “in recent years, there was an increase in the number of incoming

tourists, but no remarkable development was witnessed with regard to the services provided by

the tourism sector. The Israeli occupation makes it difficult for the PA to create an investment

environment and open new markets." (Abueita, 2012).

It is very important to conclude that this sector in general suffers from poor infrastructure,

decaying heritage sites and low marketing capacity. In order to ensure the sustainability of this

sector, the PA needs to take into account the systematic changes that contribute effectively to

upgrading the quality of the visitors’ experience.

1.12 Poverty

The PRDP proposes a package of services that have to be provided to the local community. This

package is based on direct intervention in order to alleviate poverty and implement activities that

would enable the poor and vulnerable to become more self-reliant.

Poverty is considered to be one of the most important indicators that reflect the performance of

the economy. According to PCBS, “about 25.7% of persons in the Palestinian Territories

suffered from poverty during 2010 (18.3% in the West Bank and 38.0% in the Gaza Strip).”

(PCBS (a), 2011, P:26).

The statistics of PCBS revealed that one out of four individuals was living below the poverty line

in 2010, and the same rate was recorded for 2009. Furthermore, these statistics indicated that

14.1% of individuals were living below the deep poverty line in 2010 (8.8% in the West Bank

and 23.9% in the Gaza Strip). (PCBS (a), 2011)

PCBS ensured that social assistance provided to households in 2010 was the main reason behind

the alleviation of poverty by 16.8% within Palestinian households in the Palestinian Territories.

(PCBS (a), 2011).

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UNCTAD (2011) had a different opinion in this regard: “Despite GDP growth in 2010, poverty

and food insecurity decreased only slightly-remaining high throughout the OPT, not just in the

Gaza Strip.” (UNCTAD, 2011, P:5).

According to the WFP (2011), “50% of Palestine households in the Palestinian Territories were

impacted by food insecurity - 33% were classified as food insecure and nearly 17% were

classified as vulnerable to food and insecurity.” (WFP, 2011)

During his interview, Bahour (2012) stated that “poverty in Palestine is a serious problem. Last

December, the Palestinian Government decided to use the soft definition of poverty instead of the

hard definition. This decision was made to refrain from reflecting the status quo, which is really

a disaster.” (Bahour, 2012).

Bahour (2012) views deep poverty in Palestine as a new phenomenon in Palestinian society,

which has not existed prior to Oslo. (Bahour, 2012).

Palestinian survival during these hard times was clarified by the FAO: “The Palestinian people

have used various strategies to cope with poverty and food insecurity. These strategies have

included – in addition to borrowing - receiving food support from family and friends, restricting

food to adults in order to feed children, reducing health and education spending, running down

savings, and selling off jewelry, furniture, and productive assets.” (FAO, 2010, P:45)

What was the result? Overdue utility bills, lower quality and quantity of food intake, and

increased borrowing – posing a threat to Palestinian health and human capital formation in the

long-run.

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2. Social Development

According to the PRDP (2008), economic growth requires a work force characterized by strong

work ethics, good knowledge, skills and experience – all required by the private sector. Also

economic growth requires healthy people. All of these indicators need to ensure the following:

- A modern curriculum in the primary and secondary stages.

- Relevant Tertiary education.

- High enrolment rates.

- High quality educational system and educators.

- High quality of health services.

- Significant capital investment.

It is worth mentioning here that economic growth is a means to economic development, which

leads to social development. The fundamental aim of this chapter is to assess social development

in Palestine, based on education, health and other measurements.

Regarding social development in Palestine, Alaa Tartir (2012), a Policy Advisor in Al Shabaka

(The Palestinian Policy Network) stated the following: “In my opinion the social aspect of

development needs more time to be tracked and felt. For sure, two years of implementation of the

PRDP are not enough per se to conclude whether social development was achieved. If you mean

health and education indicators for instance, maybe I would say yes, to some extent, since some

better service delivery was achieved there in comparison to the past. However, I do not consider

this social development. I consider it a better public service delivery which is a duty of the PA.

What matters here is the empowerment and enhancement of the capacities and choices of the

people to conclude whether social development was achieved. This is what I believe to be more

important than the indicators concerning the increase of the number of classes or beds.” (Tartir

(a), 2012)

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Hazboun states that social development in Palestine is deteriorating significantly. The economic

growth achieved creates a gap between the capitalists and the poor people. Hazboun does not

want to have the Latin American model, especially the high rate of poverty and unemployment.

Hazboun clarifies that the Palestinian Government should refer to the Palestinian Development

plan, which was developed by Dr. Yusuf Sayegh (1990 -2010) as a long term development plan

that carries the clear slogan: “no development under occupation.” (Hazboun, 2012).

Nakhlah (2012) shares Hazboun’s opinion. For him, there are no signs or indicators for real

social development in Palestine during the implementation phases of the PRDP. The catholic

marriage between the capitalists and the decision makers leaves a negative impact on the

distribution of wealth, contributes to the creation of monopolies, increases poverty and

unemployment rates, and produces a fracture in Palestinian society that has been domesticated

with loans and debts that prevent people from expressing their opinions freely. According to

Nakhlah (2012), “education continues to deteriorate. Tertiary education institutions are not able

to cover their running costs and suffer from deficits. There is a lack in teaching tools. On the

other hand, the health sector is suffering from many problems represented by lack of investment

and brain drain phenomena. Citizens resort to obtain distinct medical services from neighboring

countries.” (Nakhla, 2012).

Abdullah (2012) has a different opinion regarding social development in Palestine. He believes

that real social development was achieved during and after the implementation phases of the

PRDP. “Services are more accessible now and high in quality. Services are accessible to only

those who need them the most, with a special focus on marginalized people.” (Abdullah, 2012).

2.1 The Human Development Index

The Human Development Index provides a composite measure of four dimensions of human

development; life expectancy, adult literacy, gross enrolment in education and decent standard of

living, measured by PPP and income.

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HDI cannot be considered as a comprehensive measure of human development. The index does

not include important indicators, such as gender or income inequality, and it cannot measure the

levels of human rights and political freedoms. In general, the index tries to formulate a

relationship between income and well-being.

According to the UNDP (2010), “the HDI for oPt is 0.737, which gives the country a rank of the

110th

out of 182 countries with data, in the medium human development range. This index is

compiled using life expectancy at birth (73.3), the adult literacy rate (93.8%), combined with the

gross enrolment ration in education (78.3%) and GDP per capita (UD$2,243.0).” (UNDP, 2010,

P:33).

These indicators demonstrate that the OPT achieved the regional Arab average in life

expectancy, literacy rate and education, and lags behind in GDP per Capita. The following table

indicates the rank of Arab Countries:

Table 4.2. : The Rank of Arab Countries (Human Development Index)

Number Country Rank

1 Qatar 33

2 The United Arab Emirates 35

3 Libya 55

4 Saudi Arabia 59

5 Lebanon 83

6 Tunisia 98

7 Algeria 104

8 Syria 107

9 oPt 110

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10 Egypt 123

11 Yemen 140

12 Sudan 150

13 Djibouti 155

Information Source: UNDP, 2010

According to the UNDP (2011), “The HDI for oPt is 0.641, which gives the country a rank of

114 out of 187 countries which comparable data. The HDI of Arab states as a region increased

from 0.444 in 1980 to 0.641 today, placing oPt below the regional average. HDI trends tell an

important story both at national and regional level and highlight the very large gaps in

well0being and life chances that continue to divide our interconnected world.” (UNDP, 2011)

Table 4.3. : The Rank of the indicators of Human Development Index in OPT, 2011

Human Development Index Rank 114

Health Life expectancy at birth (years) 72.8

Education Education index (Expected and

mean years of schooling)

0.674

Income GNI per capita in PPP terms

(constant 2005 international $)

2,656

Inequality Inequality –adjusted HDI NA

Poverty Multidimensional Poverty Index (%) 0.005

Gender Gender Inequality index NA

Sustainability Adjusted net savings (% of GNI) NA

Demography Population, total both sexes 4152.4

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(thousands)

Information Source: UNDP, 2011

2.2 Education

The educational sector is one of the most important sectors in any society, and calls for special

attention from governments since it represents a real investment in the future of nations.

Educational indicators are used to measure the degree of social development.

2.2.1 Students

All the statistics of the scholastic year 2009/2010 reveal that the number of students enrolled in

the primary and secondary stage was 1,113,802 students. Female students constitute around 50%

of the aforementioned number. Also, 68.8% of the total students were enrolled in governmental

schools and the remaining students were enrolled in UNRWA schools and private schools. There

was a steady increase in the number of school students between 1994/1995 and 2009/2010,

whereas the percentage of increases in primary education and secondary education stage was

80.3% in the Gaza Strip and 72.5% in the West Bank. (PCBS (b), 2011)

2.2.2 Primary School Enrollment

Attending primary school helps children acquire basic literacy and numeracy as well as other

knowledge and skills needed for their future education. In developing countries, primary

education in itself often improves the welfare of the poor by making them more productive

workers, enabling them to learn new skills throughout their working lives, and reducing the risk

of unemployment. In addition, primary education, especially for girls and women leads to

healthier and smaller families and fewer infant deaths.

According to the PCBS (2011), “there is an increase in the number of school students at the

primary stage. This increase was 67.9% from 1995 to 2010. Females and males constituted

49.4% and 50.6% respectively. In the scholastic year 2009/2010, 86.3% of all students were

enrolled in the primary stage.” (PCBS(b), 2011)

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It is very worth mentioning here that enrollment in primary school is generally lower among

girls, compared to boys. This gender gap is widespread in South Asia, Sub-Saharan Africa, and

the Middle East.

The aforementioned percentages indicate that the PA achieved a big success regarding the

increase of enrollment in primary education and in bridging the gender gap at this stage

(Percentages of males and females who enrolled in the primary education are very close).

2.2.3 Secondary School Enrollment

In most developing countries, enrollment in secondary schools is much lower than in primary

schools. According to PCBS (2011), “between 1994/1995 to 2009/2010, the number of students

who were enrolled in the secondary stage increased by 235.5%. Statistics of 2009/2010 reveal

that the number of students who were enrolled in the secondary stage has witnessed an increase

by 13.7%.” (PCBS(b), 2011). This percentage does not reflect a real progress when taking

international standards into consideration.

2.2.4 Schools

“Governmenl schools constituted 74.6% of schools in 2009/2010, compared to 12.8% private

schools and 12.6% UNRWA schools. The number of schools in the Palestinian Territories

witnessed an increase from 1994 to 2010. Increasing the number of schools is influenced by

Israeli control in Area ‘C’.” ((PCBS(b), 2011)

This increase reveals that the PA did a great effort in this regard; taking into consideration that

PA does not have any control over Area ‘C’.

2.2.5 Crowdedness Rate

According to PCBS, “classroom density (number of students per classroom) is a good indicator

for having the right educational environment. The average number of students per classroom in

the scholastic year 2009/2010 was 32.0 at the basic stage and 29.4 at the secondary stage.”

(PCBS (b), 2011, P: 37).

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It is worth mentioning here that the average number of students per classroom in developed

countries is 22 (UNESCO, 2011). This means that the Palestinian Ministry of Education and

Higher Education needs to make considerable efforts in order to reduce this number in the

coming years in order to ensure the efficiency of the educational process.

2.2.6 Teachers in Schools (West Bank)

According to PCBS (2011), “the number of teachers in schools in the West Bank was 29,390

during the scholastic year 2009/2010 (12,162 male teachers and 17,228 female teachers). 78.1%

of teachers teach at governmental schools, 7.1% teach at UNRWA schools, 14.8% teach at

private schools in the West Bank. The number of students per teacher at governmental schools

was 23.2 in 2009/2010; in UNRWA schools, the figure was 26.7, while in private schools it was

16.9.” (PCBS (b), 2011, P: 38).

It is worth mentioning here that the average number of students per teacher in developed

countries is 11.4 (UNESCO, 2011), meaning once again, that the Palestinian Ministry of

Education needs to conducts more efforts to achieve this number.

Abed Al Rahman states that “with the population rate growing at approximately 4% per year,

and taking into consideration the high poverty and unemployment rates, the Palestinian social

sector is under increasing stress. It is hard to provide high quality services within the education

and health systems. Also the PA has not recruited any teachers in the last two years, which

reflected negatively on the quality of the education system.”

2.2.7 Literacy Rate

In 2010, there were 120,402 illiterate individuals aged 15 years and over in the Palestinian

Territories; 79,548 in the West Bank and 40,854 in the Gaza Strip, 28,478 males and 91,924

females, distributed in the following manner: 81,984 in urban localities, 26,149 in rural localities

and 12,269 in refugee camps. (PCBS (b), 2011)

Wafa (2011) states that “illiteracy rates among individuals aged 15 years and over in the

Palestinian Territories fell from 13.9% to 5.1% from 1997 to 2010.” (PCBS (b), 2011). This

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decline is considered a big success for the PA when compared with the slower rise of literacy in

other countries at the regional and international levels.

2.2.8 The Quality of Education in Palestine

Neither the number of students enrolled at a level of study nor the amount of resources invested

in education can indicate the quality of education. Consequently, we would only have a rough

idea about a country’s accomplishments in education.

A report issued by the UNESCO (2011) notes that the Palestinian educational system does not

work diligently to promote active learning, and the educational tools used do not contribute

effectively to the development of this system. Also, a recent study issued by the Palestinian

Ministry of Education highlighted the deteriorating level of hygiene in a large number of

governmental schools. (UNSECO, 2011)

According to the World Bank (2007), government schools in the Gaza Strip and the West Bank

are quite small in comparison to international standards. This issue poses important implications

for resource utilization and efficiency. (World Bank, 2007)

There are still many schools that require resources, equipment and educational tools that can

reflect positively on enhancing the quality of education in the Palestinian Territories.

Overcrowding in schools continues to be a challenge yet to be overcome by the PA.

Taking into consideration the speedy rate of advancements in technology and the economy,

today’s students should be morally and intellectually prepared for several career changes over

their working lifetime. The ability for constant learning is becoming a major requirement of the

new job market, characteristic of the knowledge economy. Investing in education is not only an

important way to build a country’s human capital and move it closer to the knowledge economy,

thus improving its prospects for economic growth and higher living standards. For every

individual, education also has a value in its own right because it broadens people’s horizons and

helps them to live healthier, more financially secure, and fulfilling lives. Furthermore, human

capital is established through education or training that increases the economic productivity of

individuals, enabling them to produce more valuable goods and services, and along these lines,

80

earn a higher income. Governments, workers and employers invest in human capital by devoting

money and time to education and training.

2.3 The Health Sector

The health of a country’s population is often monitored using two statistical indicators: life

expectancy at birth and the under-5 mortality rate (U5M). These indicators are also often cited

among broader measures of a population’s quality of life because they indirectly reflect many

aspects of people’s welfare, including their levels of income and nutrition, the quality of their

environment, and their access to health care, safe water, and sanitation.

2.3.1 Life Expectancy at Birth

As mentioned previously in the literature review, life expectancy at birth indicates the number of

years a newborn baby would live if health conditions prevailing at the time of its birth were to

stay the same throughout its life. This indicator does not predict how long a baby will actually

live, but rather reflects the overall health conditions characteristic of this particular country in

this particular year.

According to the UNICEF (2010) life expectancy at birth in the Palestinian Territories is 75

years for females and 72 years for males. (UNICEF, 2010) This is a good percentage in

accordance with the international standards

2.3.2 The Mortality Rate

The Palestinian society has a high fertility rate, which indicates that the Palestinian society is a

young society with a relatively high proportion of young people. The decline in the rates of

mortality and the stability of high fertility rates lead to a high natural rate of population, which

requires appropriate economic and social practices and policies in order to confront the

implications of this increase. The natural rate of population increased by 2.9% in during the first

half of 2010, which makes it one of the highest rates in the world. The mortality rate in the

Palestinian Territories is very low compared to that rate in Arab countries. The mortality rate was

declined from 4.9 per one thousand in 1997 to 4.1 per thousand in 2010. (PCBS (b), 2011)

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The U5M rate indicates the probability of dying by age five per 1,000 live births. Due to the fact

that children are most susceptible to malnutrition and inadequate hygienic conditions, they

account for the largest portion of deaths in most developing countries.

According to the UNICIF (2010), infant mortality and U5M rates in the Palestinian Territories

for 2010 were 20 and 22 per one thousand respectively. This percentage reflects a real progress

in the health conditions of the Palestinian people, taking into consideration the infant mortality

and under five mortality rates for 2008, which recorded a rate of 27 and 28 per one thousand

respectively. (UNICEF, 2010)

Decreasing the U5M is usually seen as the most effective way for increasing life expectancy at

birth in the developing world. All the indicators demonstrate a steady improvement, although the

PA needs to invest in improving public health measures (safe drinking water, sanitation, and

mass immunizations), training medical personnel, and building clinics and hospitals.

82

Chapter V: Discussion and Conclusion

- Neo-liberalism and the PRDP

While neo-liberalism is being rejected by many experts and countries around the globe, the PA is

developing its neo-liberal state building program ‘Ending the Occupation, Establishing the

State’. This program was designed and incorporated with the PRDP (2008-2010) in order to offer

the Palestinian people a practical plan that aims to achieve growth and prosperity.

The PRDP is no more than a security plan devoted to the presence of the occupation hindering

any chance for reaching a political and just solution to the conflict that has been going on for

over 60 years. The PRDP was the main reason for creating a newly empowered Palestinian

capitalist class that was portrayed as a predatory and oligarchic group of elites whose dominant

position was favored by the PA’s neo-liberal program, made possible by security collaboration

with Israel. This plan contributes to concentrating power and wealth in the hands of these elites,

who are apparently motivated by their short term personal interests, without taking the real needs

of the Palestinian people into consideration.

The PRDP comes from the Israeli interest to weave co-existence alongside economic peace,

which was promoted by the Israeli government. The PRDP was the main reason behind

increasing Palestinian dependency on Foreign aid and on Israel. The latter continues to exploit its

dominating position to establish a hold on Palestinians by creating a framework for control over

vital and important resources, thus curtailing any potential Palestinian capacity to confront the

superiority of the Israeli government and effectively nullifying any meaningful progress toward

achieving their independence

The adoption of the neo-liberal policy in the PRDP is one of the PA’s most grievous mistakes.

The PRDP failed as a midwife for independence that is based on a strategy of resistance and a

development paradigm. The PRDP has to be replaced by another strategy that is based on a

participatory approach with special focus on the two aforementioned options.

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- Economic Growth during the PRDP

Economic growth in the Palestinian Territories was merely an “economic bubble” and therefore,

could not be considered sustainable. The economic growth by 9% in 2010 was nothing other than

a myth. It was fueled by donor aid and private investment recovery in the West Bank without any

focus on the Gaza Strip. This growth is mainly taking place in Areas A and B, and not in Area C.

This growth does include all categories of the Palestinian people. It is solely owned by the

capitalists and is moving towards the creation of a debt-oriented growth. The achieved growth is

not real because it is not directly connected with any improvement on the poverty and

employment levels. This growth is accompanied by an ongoing loss of Palestinian land and

natural resources, isolation from global markets, fragmentation and food insecurity. This growth

is not linked to a marked improvement in socio-economic development. This growth was not a

result of real economic activities connected with the major productive sectors such as agriculture,

industry and services.

- Socio-economic development in Palestine’s neo-liberal era

Structural Reform and Adjustment

Palestinians were unable to deal with these reforms. The privatization of electricity and the pre-

paid system that was adopted in the Palestinian Territories was the main reason behind

increasing poverty and adding on to the hardship of Palestinians. There is a big question mark

regarding the applicability of structural adjustment policies in the Palestinian Territories. The

longstanding problems in the territories have nothing to do with the structural problems that can

be adjusted. The occupation and its control over tax and customs clearance revenue is the main

reason behind these problems.

The Palestinian GDP during the PRDP (2008-2010)

The Palestinian GDP during and after the PRDP has not witnessed any progress compared with

its peak in 1999, meaning that for a period of 10 years, the Palestinian GDP remained stable.

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Economic activities during the PRDP (2008-2010)

Economic activities in the Palestinian territories have entered a slowdown, especially after years

of rapid growth. The private sector was unable to reach its potential, particularly the industrial

sector. A fiscal crisis is currently plaguing the PA, which resulted from a decline in donor aid,

and the inability to obtain loans from the banking system to finance the shortfall. The economy

of West Bank still depends on the public sector and construction projects. These sectors continue

to be heavily financed by foreign aid, which has also decreased tremendously.

GDP per Capita

The GDP per Capita achieved in 2010 is similar to that in 1999, meaning that the income of

Palestinians has not witnessed any change for the past 10 years.

Prices and Purchasing Power

The consumer price index in the Palestinian Territories increased by 29.0% during 2004-2010,

due to the increase in the prices of food items and several products and services, such as

education and health. This increase in prices is not only reflective of global increases but it was

the reason for the transaction cost increase across the OPT and the economic blockade and

containment of the Gaza Strip. The growth of CPI affects negatively the purchasing power and

the consumption pattern of Palestinian individuals, who are already suffering high poverty and

unemployment.

The labor Market

The Palestinian economy is largely dependent on labor for production, while resources such as

capital and land are very limited. The labor force recorded a lower participation in 2010

compared to 2009. During 2004-2010, the participation rate in the labor force ranged from

40.1% to 41.7%. This rate declined to 41.1% in 2010 compared to 41.6% in 2009. During the

period 2004-2010, the Palestinian Territories witnessed fluctuation in the rate of unemployment.

The lowest rate was recorded in 2007 at 21.7%, while that rate reached 23.7% in 2010 compared

to 24.5% in 2009. The West Bank witnessed a decline in the unemployment rate from 17.8% to

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17.2%, while the unemployment rate in the Gaza strip also declined to reach 37.8%. (PCBS,

2011)

The employment rate in the Palestinian Territories is still considered low in accordance with the

international standards, yet some international organizations assert that the unemployment rate in

the Palestinian Territories is amongst the highest in the world. The achieved economic growth in

2010 was jobless. This growth was failed to seek a realistic solution for the high unemployment

rate in the Palestinian Territories. This growth was driven from Foreign aid without a remarkable

increase in investment. The private sector is unable to achieve any progress in terms of job

creation.

The persistence of high unemployment rates within the Palestinian labor force poses a threat on

the life of the Palestinian people, not to mention the strains imposed on the social fabric and on

solidarity. The interruption of production activities can lead to the deskilling of Palestinian

institutions and workers, which could be one of the main reasons behind the destruction of

human capital.

Balance of Payment

According to PCBS (2011): “In 2009, current account declined resulting in a deficit of USD$

736.8 Million, despite the fact that it was the lowest deficit recorded since 2003.” (PCBS, 2011,

P:27).

One of the main reasons behind this deficit was the increase in the value of imported goods and

services to Palestine, which was reflected as a deficit in the trade balance, as well as the decline

in current transfers received from abroad. This deficit may reflect negatively on social indicators

- the fluctuation of poverty rate during the implementation phases of the PRDP, as an example.

It is worth mentioning here that the Palestinian economy depends heavily on foreign transfers

received by the PA, which are used in order to support the General Budget of the PA. The latter

seeks to reduce dependence on foreign transfers but is unable to find key solutions to cover this

deficit.

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The PA’s Fiscal Situation

In the last few years, the PA carried out strict fiscal reforms in order to control the budget deficit.

The fundamental aim of these reforms was to improve fiscal discipline and reduce dependency

on donor aid by reducing the budget deficit. These reforms were developed in order to put the

Palestinian economy on the path to financial stability – a path designed to create room for

increasing capital investment and developing the expenditure system.

One of the main indicators of fiscal weakness in Palestine is the fact that 42% of total spending

was financed by donors. It is worth mentioning here that dependence on foreign aid is neither

stable nor sustainable, taking into consideration the current state of the world economy.

It seems that the poor should pay the cost of fiscal reforms. The PA has plans to eliminate net

lending by 2011, with the full privatization of electricity companies. All international

organizations predict that the fiscal situation of the PA will deteriorate even more in 2012.

Based on the aforementioned, the PA needs to set strict measures in order to control spending

and increase revenue, and these measures could have a drastic social impact on the Palestinian

people.

Government Revenue

The year 2010 witnessed a significant increase in the revenue of the central government, which

reduced the deficit within the general budget, and a decrease in government expenditures. Also,

the year 2010 witnessed impressive progress in the field of tax collection in line with the PRDP.

The PA is required to continuously cope with the volatility both of aid disbursement and of

collected revenue. The instability of revenue is caused by a number of factors, mainly the

volatility of the tax base, and the level of economic activities affected by Israeli closure policies

and military practices. The Israeli control over the tax and customs clearance revenue is another

major factor of fiscal instability in the PA.

The unpredictability of Israel’s clearance of Palestinian customs-related revenues makes fiscal

planning difficult, undermines the PA’s ability to pay salaries for public employees and threatens

its ability to pay private sector agents who supply it with goods and services. Furthermore,

87

international support and positive growth cannot be translated into sustainable economic gains

without ensuring the stability of Palestinian tax revenues and reducing the restrictions imposed

on the access of Palestinian producers to external markets.

Government Revenue

In 2010, Government expenditures were reduced by US$ 3,101.7 million compared to US$

3,189.8 million in 2009. The main reason for this decline was the result of the 8.2% decrease in

non-wage expenditures. On the other hand, wage expenditures witnessed a 10.9% increase in

2010 reaching their highest level at US$ 1,626.8 million. (PCBS (a), 2011).

It is worth mentioning here that the implementation period of the PRDP witnessed a modest level

of essential recruitment, particularly in the health and education sectors. This had a negative

influence on the ability of these two sectors to meet the demand of the Palestinian population

(growing at approximately 4% yearly) for basic services.

In terms of net lending, the PRDP considers the cost of subsidizing citizens’ consumption of

energy and electricity as a significant drain on the Palestinian government’s financial resources.

The main intension of the PRDP is to reduce net-lending through the development of a new

collection system that incorporates enforcement measures, such as the obligation of citizens to

present a certificate of payment in order to obtain any public service. Considering the devastating

poverty rate in the West Bank, these measures generate more hardships for Palestinians and

create a lot of obstacles in the daily life of the Palestinian citizen.

The PRDP was accompanied by an increase in infrastructure projects. This increase did

contribute to economic growth, but the main question here is whether it benefited all the

categories of the Palestinian population.

The Private Sector

Restrictions imposed by the Israeli government are chief obstacles confronted by the Palestinian

private sector, and they play a major role in hindering its growth. Israel maintains security

control and jurisdiction over planning and construction in close to 60% of the West Bank area

(Area C) despite that fact that the PA is responsible for the provision of services in that area.

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This situation also handicaps Palestinian economic activity and reflects negatively on any

potential to develop the Palestinian private sector.

Small business enterprises are the main pillar of the Palestinian private sector. The Palestinian

government is encouraging business communities rather than SMEs. One of the examples that

can be mentioned here is the Palestinian Telecommunications company. This company is making

an annual profit of US$120 million and not suffering any losses. It continues to receive

incentives form the Palestinian government and has not paid income tax for the past 20 years.

Trade Balance

The deficit in the Palestinian trade balance is 6.3%. The percentage of PA imports from Israel is

75% from the total imported goods. This issue indicates the extent to which the Palestinian

economy depends on the Israeli economy – almost totally.

Several years of restrictions, denial of access and blockades, have extremely limited access to

external markets for the export of goods and import of production inputs. Indirect imports from

Israel are another indicator that has to be taken into consideration in this regard. The UNCTAD

report revealed that imports produced in a third country and re-exported to the Palestinian

Territories as if they were produced in Israel was the main reason that led to the following losses;

US$ 480 million per year (25% of public revenue), 10 % in lost GDP and 30000 jobs

opportunities per year. (UNCTAD, 2011)

The deficit in the Trade Balance reached its highest in 2010, while its lowest was in 2004.

(PCBS (a), 2011). The size of the Palestinian market is very small compared to other countries

in the region and around the world. Without access to regional and world markets, Palestinian

producers will not be able to achieve the minimum efficient scale. Competition within

international markets will force Palestinian producers to improve their productivity, which will

have a positive impact in terms of increasing employment, raising wages and alleviating poverty.

The majority of Palestinian exports counted for low value added goods. If the PA is talking about

a real and sustainable economic growth, the Palestinian economy must increase overall trade,

expand trade beyond the Israeli market, and increase the value added in exports. To accomplish

89

this, an appropriate trade policy regime must be in place, including the necessary institutional,

regulatory, and physical infrastructure that would facilitate trade.

The Investment Climate

The investment climate in the West Bank and the Gaza Strip has been severely hampered by

Israeli closures. The restriction of movement for goods and people within and across borders was

the main reason behind the increase of transportation costs and discouraging private and foreign

direct investment.

The services sector has a significant contribution to the Palestinian GDP, but it does not have any

competitive advantages since most of the provided services do not require high technology and

high-skill labor.

Industry

The industrial sector in the Palestinian Territories witnessed decades of underinvestment. The

Israeli policies were the main reason behind this long term trajectory of stagnation and de-

development.

The steady decline of the manufacturing sector is a major concern, not only because of potential

output loss, but also because of its long-term implications, which are related to technological

regression. It is worth mentioning here that this sector tends to be more innovative and efficient

than companies that produce non-tradable goods. The non-tradable goods sector is not exposed

to the rigors of global competition. (UNCTAD, 2011)

There was no remarkable improvement in the share of industry to the GDP in 2010 and 1999;

which has negative consequences on the Palestinian economy when sustainable development is

taken into consideration.

90

Agriculture

The agricultural sector in Palestine is a critical industry, because it mainly contributes to food

security. The improvement of this sector can contribute effectively to immediate economic

recovery through the creation of export development strategies based on highly advanced

business models.

There is continuous progress in the Palestinian agricultural sector connected with new structural

changes, summarized in adjusting domestic agricultural products to meet the demands of Israeli

markets instead of meeting those of domestic markets, and the separation between the West

Bank and the Gaza Strip that contributes to increasing the dependency of this sector on Israel.

These contributed to an increase in the prices of agricultural products and had a negative effect

on the purchasing power of the Palestinian citizen.

There is deterioration in the agricultural sector, and this is not the responsibility of PA. There are

a lot of factors which have to be taken into account. According to the 2010 statistics, the

contribution of this sector to GDP was about 5.9%. This percentage reflects a huge deterioration

within this sector compared to 2000 (14%). The agricultural sector in Palestine suffers from low

productivity despite the fact that it employs 15% of the Palestinian labor force.

Tourism

In recent years, there was an increase in the number of incoming tourists, but no remarkable

development was witnessed with regard to the services provided by the tourism sector. The

Israeli occupation makes it difficult for the PA to create an investment environment and open

new markets.

This sector in general suffers from poor infrastructure, decaying heritage sites and low marketing

capacity. In order to ensure the sustainability of this sector, the PA needs to take into account the

systematic changes that contribute effectively to upgrading the quality of the visitors’

experience.

91

Poverty

Despite the achieved economic growth in 2010, poverty and food insecurity are remaining high

in the Palestinian Territories and the Gaza Strip. Poverty in Palestine is a serious problem and a

new phenomenon – which did not exist prior to Oslo - in Palestinian society.

- Social Development

Social development in Palestine is under siege, and is deteriorating significantly. The economic

growth achieved creates a gap between the capitalists and the poor people. The catholic marriage

between the capitalists and the decision makers leaves a negative impact on the distribution of

wealth, contributes to the creation of monopolies, increases poverty and unemployment, and

produces a fracture in Palestinian society that has been domesticated with loans and debts that

prevent people from expressing their opinions freely.

The Human Development Index

In comparison with Arab countries, the Palestinian Territories ranked well in all the indicators of

the Human Development Index.

Education

There was a steady increase in the number of school students between 1994/1995 and

2009/2010, whereas the percentage of increases in primary education and secondary education

stage was 80.3% in the Gaza Strip and 72.5% in the West Bank. (PCBS (b), 2011).

The PA achieved a big success regarding the increase of enrollment in primary education and in

bridging the gender gap at this stage (Percentages of males and females who enrolled in the

primary education are very close). The percentage of enrollment in the secondary education does

not reflect a real progress when taking international standards into consideration.

The increase in the number of schools from 1999 - 2010 reveals that the PA did a great effort in

this regard; taking into consideration that the PA does not have any control over Area ‘C’.

92

The average number of students per classroom in developed countries is 22 (UNESCO, 2011).

This means that the Palestinian Ministry of Education and Higher Education needs to make

considerable efforts in order to reduce this number in the coming years in order to ensure the

efficiency of the educational process.

The average number of students per teacher in developed countries is 11.4 (UNESCO, 2011),

meaning once again, that the Palestinian Ministry of Education needs to conduct more efforts to

achieve this number. With the population rate growing at approximately 4% per year, and taking

into consideration the high poverty and unemployment rates, the Palestinian social sector is

under increasing stress. It is hard to provide high quality services within the education and health

systems. Also the PA has not recruited any teachers in the last two years, which reflected

negatively on the quality of the education system.

The decline of the literacy rate in 2010 is considered a big success for the PA when compared

with the slower rise of literacy in other countries at the regional and international levels.

A report issued by the UNESCO (2011) notes that the Palestinian educational system does not

work diligently to promote active learning, and the educational tools used do not contribute

effectively to the development of this system. Also, a recent study issued by the Palestinian

Ministry of Education highlighted the deteriorating level of hygiene in a large number of

governmental schools. (UNSECO, 2011)

Taking into consideration the speedy rate of advancements in technology and the economy,

today’s students should be morally and intellectually prepared for several career changes over

their working lifetime. The ability for constant learning is becoming a major requirement of the

new job market, characteristic of the knowledge economy. Investing in education is not only an

important way to build a country’s human capital and move it closer to the knowledge economy,

thus improving its prospects for economic growth and higher living standards. For every

individual, education also has a value in its own right because it broadens people’s horizons and

helps them to live healthier, more financially secure, and fulfilling lives. Furthermore, human

capital is established through education or training that increases the economic productivity of

individuals, enabling them to produce more valuable goods and services, and along these lines,

93

earn a higher income. Governments, workers and employers invest in human capital by devoting

money and time to education and training.

Health

According to the UN, life expectancy at birth in the Palestinian Territories is 75 years for

females and 72 years for males. (UNICEF, 2011). This is a good percentage in accordance with

the international standards

Decreasing the U5M is usually seen as the most effective way for increasing life expectancy at

birth in the developing world. All the indicators demonstrate a steady improvement, although the

PA needs to invest in improving public health measures (safe drinking water, sanitation, and

mass immunizations), training medical personnel, and building clinics and hospitals.

Final Conclusion

The study concludes that adherence to the neo-liberal approach through the PRDP did not lead to

a paradigm of development, but rather one that maximized dependency on external aid and on

Israel. The study also shows that economic growth in the Palestinian Territories was merely an

“economic bubble” and therefore, could not be considered sustainable. Realized economic

growth was not translated into socio-economic development. The implementation of neo-liberal

reforms in the Palestinian Territories experienced an increase in poverty and unemployment

rates, in addition to the rise of a new social class whose main interest is directly linked to the

privatization of the public sector and the liberalization of the economy. The PRDP has to be

replaced by another strategy that is based on a participatory approach with special focus on

resistance and sustainable development.

94

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Appendices

Appendix 1: Interview questions

- Did the Palestinian territories adhere effectively to the neo-liberal approach? Was this

adherence appropriate? And did the PRDP lead to a paradigm of development?

- In what aspects have the Occupied Palestinian Territories experienced economic growth during

the implementation phases of the PRDP?

- What are the main reasons behind the achievement of this economic growth?

- Was this growth translated into socio-economic development in the Palestinian Territories?

- Did the Occupied Palestinian Territories become more socially developed after the

implementation phases of the PRDP?