EXECUTIVE SUMMARY The Office of the United Nations Special Coordinator in the Occupied Territories' Autumn 1998 Report on Economic and Social Conditions in the West Bank and Gaza Strip presents updated data and information on conditions and trends in the macroeconomy, the labour market and in household living levels during the first half of 1998 as compared to the first half of 1997. The report presents new information on the value of trade flows, credit extension to Palestinian businesses as this relates to private investment, as well as trends in per capita income and expenditures.

AGGREGATE TRENDS in the WBGS ECONOMY Based on modest economic improvements in 1997, the Palestinian Ministry of Finance (MOF) and the International Monetary Fund (IMF) initially projected real GDP and GNP growth of 2.1 and 3.5 per cent respectively for 1998. The projections assumed an average of 35,000 workers employed in Israel on a monthly basis, that household consumption would grow by about 4 per cent, that there would be limited growth in public investment, weak private investment and 4-5 per cent growth in the value of imports and exports.

Indicators for the first half of 1998 suggest a mixed performance. Average daily WBGS labour flows to Israel were an estimated 45,800 in first-half 1998, about 12 per cent higher than the same period in 1997. There were no potential work days lost due to comprehensive closure days during first-half 1998, as compared to a 14 per cent loss in the first half of 1997. Fewer closure-induced disruptions led to greater labour flows which contributed to reduced levels of unemployment and a stabilisation in average real wages.

There was also modest growth in business activity. New company registrations rose by about 12 per cent, businesses increased their planned construction activities by 14 per cent, bank credit extended to businesses grew about 10 per cent, while credit extended by NGOs and UNRWA to small businesses rose by about 25 per cent between first-half 1997 and first-half 1998. The proportion of bank credit extended to businesses in productive activities--e.g. agriculture, manufacturing and construction--increased. Public sector investment received a boost from hgher donor disbursements, which reached US$ 216.4 million in first-half 1998--over twice the amount disbursed during the same period in 1997.

On the other hand, there were several worrying trends. WBGS trade with Israel--its main trading partner--stagnated as the value of WBGS exports declined and that of imports rose by 2.6 per cent. Other evidence of depressed trade was a 6.4 per cent decline in truckload exports from the WBGS through monitored commercial crossings and a 17.1 per cent increase in truck inflows. Trade therefore inhibited economic growth, as total imports and import growth exceeded that of exports during this period.

Another cause for concern was the notable decline in planned residential construction activity--the largest component of private investment in the WBGS. The surface area licensed for new construction fell 8.5 per cent between first-half 1997 and first-half 1998. Furthermore, while banks were extending more credit, only 32.8 per cent of all credit were medium term loans with repayment periods of 1-3 years--one of the lowest ratios since the establishment of the Palestinian banking system. This indicates that the confidence levels of banks and borrowers about extending or taking on credit for longer term investment may be declining--a result of increased risk perceptions.

Moreover, real monthly household expenditures--which indicate trends in living levels--declined 10.6 per cent in first-quarter 1998 relative to first-quarter 1997 level. This suggests that modest improvements in macroeconomic performance, and reduced unemployment rates, have been insufficient to positively affect living levels. The decline in consumer purchases, if not reversed in the remainder of the year, will also dampen economic growth.

Assuming that the MOF/IMF growth projections for 1998 are realised, the real GDP of the WBGS (including East Jerusalem) will grow from an estimated US$ 3,950 million to US$ 4,030 million while real GNP will grow from US$ 4,600 million to US$ 4,760 million. Despite such growth, real per capita GDP and GNP at end-1998 would be, respectively, about US$ 1,380 and US$ 1,630--a 3.4 per cent decline in the former and a 2.1 per cent decline in the latter, as compared to 1997.

WBGS LABOUR MARKET CONDITIONS The working-age population in the WBGS (including East Jerusalem) grew an estimated 5.8 per cent to 1,370,000 persons between first-half 1997 and first-half 1998. However, due to a decline in the labour force participation rate, the labour force grew only by an estimated 2.6 per cent, to about 556,400 persons. Higher labour flows to Israel contributed to overall employment growth, as the total number of employed persons--both fully-employed and underemployed--reached an average of 469,650 in first-half 1998, an increase of about 8.8 per cent compared to first-half 1997. The full employment rate--the proportion of the labour force working at least 35 hours per week--rose to about 77.3 per cent as the underemployment rate--the proportion of the employed who involuntarily worked less than 35 hours per week--declined to 7 per cent.

Under the standard definition of unemployment, the total number of unemployed persons is estimated to have fallen by 20.6 per cent during this period to about 86,750 persons. The standard unemployment rate declined from 20.1 to 15.6 per cent of the labour force. Including discouraged workers--the unemployed who did not actively seek work--the total number of the unemployed declined 13.8 per cent to about 155,450 persons. The broader unemployment rate in the WBGS declined from 29.4 during first-half 1997 to 24.9 during first-half 1998. The rate stood at 21.1 per cent in the West Bank and 29.9 per cent in the Gaza Strip during first-half 1998.

There were an average of 38,300 more jobs available for WBGS workers during this period and, except for services, there was employment growth in every economic branch. The largest increases in employment were in construction--26.3 per cent, and in the public sector--10.3 per cent. Employment in the transport and communication, commerce and manufacturing branches grew 4-5 per cent each, while agricultural employment rose 3.2 per cent and service employment declined by about 1.4 per cent.

Employment in Israel accounted for 65.3 per cent of total job growth for WBGS workers as between first-half 1997 and first-half 1998--an absolute increase of 24,900 jobs. Palestinian employment in Israel grew by 33 per cent during this period. Construction employment accounted for 68.6 per cent of this growth, agriculture accounting for 12.7 per cent, services for 9.5 per cent, hotels and restaurants for 6.3 per cent, with manufacturing and transportation contributing to about 2.5 per cent of Palestinian job growth in Israel.

Employment in the WBGS accounted for 34.7 per cent of total job growth during this period--an absolute increase of 13,400 jobs. This translated into a 3.7 per cent increase in domestic employment in the WBGS, despite absolute declines in agricultural and service employment. Public sector employment accounted for 46.9 per cent of domestic employment growth, construction for 19.5 per cent, manufacturing for 15.7 per cent, commerce, hotels and restaurants for 13 per cent, and transport and communication for 4.7 per cent of job growth.

Women's labour force participation rate fell to 11.4 per cent in first-half 1998. However, women's full-employment rate increased to 81.6 per cent--higher than men's--while their underemployment rate declined to 3.1 per cent--significantly below that of men. The growth of public sector employment, where women are disproportionately represented, seems to be responsible for the increase in full-employment and the decline in women's underemployment. The standard unemployment rate for women declined to about 15.4 per as compared to 20.6 per cent in first-half 1997, which may be due to a greater proportional decline in women's formal labour force participation relative to men during this period. The low female labour force participation rate indicates continuing social and structural obstacles facing women in the labour market. As working women have considerably lower fertility rates than women generally, greater formal female labour force participation would contribute to improvements in women's social standing, mitigate the rapid growth of the WBGS labour force and reduce unemployment in the longer term.

In the aggregate, the monthly working time of employed WBGS workers rose 1.2 per cent as between first-half 1997 and first-half 1998. The increased proportion of Palestinians working in the higher-wage Israeli economy led to a 6.2 per cent increase in the real average NIS daily wage. Greater work time and higher average wages resulted in a 6.5 per cent increase in the average real NIS monthly wage of a fully-employed WBGS worker. However, due to the depreciation of the NIS, the average monthly wage in US$ terms rose by only 2.5 per cent.

Workers employed in the West Bank experienced the greatest improvements, as their monthly wages rose 4.4 per cent in US$ terms, while those in employed in Gaza suffered a 2.5 per cent decline. This discrepancy seems to be due to the higher degree of integration of the Israeli and West Bank labour markets. Tighter control of the Israel-Gaza border, and significant flows of non-permitted West Bank workers to Israel, have resulted in a higher proportion of West Bank workers employed in Israel relative to Gaza workers--23.5 per cent versus 16.3 per cent in the first-half of 1998. The West Bank has thus experienced larger proportional declines in local unemployment and larger increases in wage incomes from Israel. These have apparently produced greater secondary spending, employment and wage effects in the West Bank economy.

Palestinians employed in Israel, depite significant increases in work time, experienced average declines in the real US$ daily wage of 7.8 per cent and a 2.4 per cent decline in the average US$ monthly wage. This decline was due in part to the depreciation of the NIS/US$ exchange rate, but also to the increased number of unofficial West Bank workers employed in Israel who generally receive lower wages. Their participation in larger proportions seems to have reduced the overall average daily and monthly wage for Palestinians employed in Israel.

HOUSEHOLD EXPENDITURES and the LEVEL of LIVING Real expenditures of WBGS households fell from a monthly average of US$ 754 in first-quarter 1997 to US$ 674 in the first quarter of 1998--a 10.6 per cent decline. There were declines in every spending category except for education and recreation, both relatively minor components in overall expenditures. Household expenditures on basic items fell by 9.8 per cent while expenditures on secondary items declined by 12.8 per cent as between the two periods. Among basic expenditures, there were sharp declines in taxes and clothing and footwear--38.1 and 23.1 per cent respectively. Among secondary expenditures, there were significant declines in household operations, tobacco and inter-household transfers of money.

Average income--as measured by real per capita GNP--declined about 11.6 per cent between end-1995 and end-1997, while real per capita expenditures during the same interval declined 12.1 per cent. Greater proportional declines in per capita expenditures suggest a desire among households to maintain some savings, given the considerable uncertainty about future economic conditions and incomes. Anxiety among Palestinian households may be related to the growth in poverty levels during this period. Research conducted by the Palestine Economic Policy Research Institute (MAS) indicates that at the end of 1995, about 19.1 per cent of Palestinians had expenditures below US$ 650 per person per year--the estimated poverty line (10.5 per cent in the West Bank and 36.3 per cent in Gaza). By the end of 1997, the proportion had grown to 20.1 per cent (11.1 per cent in the West Bank and 40.4 per cent in Gaza).

The rate of consumer inflation in first-half 1998 was 1.16 per cent which, on an annualised basis, translates into 2.3 per cent--the smallest increase in recent years. The annual inflation rates 1996 and 1997 were 7.7 and 6.1 per cent respectively. The disinflationary trend may be due to the macroeconomic compression experienced in recent years. Slower economic growth rates, high levels of unemployment and falling wages, as well as underutilised productive capacity and reduced levels of consumer spending, seem to have contributed to lower inflation rates. As such, this may indicate a fundamental downward adjustment of the wage and price structure of the WBGS economy.

LOOKING AHEAD Growth in Palestinian labour flows to Israel continued in July and August, averaging around 49,000 on a daily basis--or 6.7 per cent above their first-half 1998 average. This situation changed on 11 September when the Israeli authorities imposed a comprehensive closure on the WBGS, thereby invalidating over 45,000 work permits and approximately 21,000 business persons' permits to enter Israel. On 17 September the Israeli authorities began to issue valid work permits which, by 29 September, had reached 13,800 permits for Gaza workers and 9,500 for West Bank workers. On that day, the Israeli authorities re-imposed the comprehensive closure which--except for 2 October--lasted until 13 October when permits began to be re-issued.

The combined effect of the comprehensive closures was to reduce September labour flows to an estimated daily average of 27,350--or 44 per cent below the July-August average. In September alone, the reduction in labour flows resulted in estimated wage income losses of US$ 11.4 million for permitted Palestinian workers with perhaps greater losses for unofficial workers. Proportional losses in trade flows were probably not as great, as truck traffic through monitored commercial crossings seems not to have been affected as drastically. The recent comprehensive closures disrupted about 10 per cent of the total potential work days for the second half of 1998. There were no such disruptions in the first half of the year.

Besides the expected increase in unemployment in the third quarter, the recent comprehensive closures will limit the effects of the modest improvements witnessed in first-half 1998, and accentuate the noted negative tendencies. In particular, the closure will limit potential growth in national income which, given population growth, must increase by about 5 per cent per year to avoid continued per capita income declines. Moreover, the quantity and quality of private investment and exports--the keys to sustained growth--remain far below potential. The recent closure will feed the already high levels of anxiety regarding future economic prospects. Such anxiety is mainly a function of the political deadlock between Israel and the PA, which remains a significant impediment to growth and the qualitative transformation of the Palestinian economy.

On the other hand, a political breakthrough which produces more open borders and freer movement of goods and people would instill greater confidence among economic actors. The commencement of operations at the Gaza Industrial Estate and Gaza International Airport, the creation of the safe passage between the West Bank and Gaza Strip, and the construction of the Gaza sea port would allow Palestinian businesses to use a greater amount of existing capacity, increase domestic employment of the Palestinian labour force, boost domestic and foreign investment, stimulate regional and international trade and, thus, give significant impetus to the economic development effort in the WBGS.

The UNSCO Report on Economic and Social Conditions in the West Bank and Gaza Strip (Autumn 1998) has been completed and is available as downloadable WordPerfect 6.0 at the UNSCO WWW site in the near future. The address is: http://www.arts.mcgill.ca/mepp/unsco/unfront.html

Sincerely,