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Last Updated: Tuesday, 16 August 2005, 22:52 GMT 23:52 UK
Can Gaza's economy be revived?
By Steve Schifferes
BBC News economics reporter

Palestinian children shelter in a doorway in Jabaliya camp
Nearly half of Palestinians live below the poverty line
The Israeli withdrawal from the Gaza Strip could worsen economic conditions if key issues regarding trade barriers are not resolved.

Since the intifada began in 2000, the Palestinian economy has been in crisis.

And nowhere was the crisis worse than in the Gaza Strip, which has little of the agriculture or light manufacturing base of the West Bank.

The economy of the Gaza Strip largely depended on Palestinians who worked in Israel.

And the border closures for security reasons have hit them hard.
GDP: $1bn
Population: 1.4 million
GDP per person: $722
Change in GDP per person since 1999: -38%
Poverty rate: 65%
Unemployment rate: 35%
Source: World Bank

Overall, the Palestinian economy declined in per capita terms by 38% in the four years from 1999-2003.

In the Gaza Strip, the official unemployment rate doubled to 35% in the five years to 2004, compared to unemployment of 23% in the West Bank.

And many who list themselves as "self-employed" or "working for family members" may be under-employed.

Even worse, the poverty rate (those living on $2 per day) rose to 65%, twice as high as that in the West Bank.

An emphatic doctrine of physical and economic separation cannot be expected to encourage private investment
World Bank

Measured on an Israeli poverty line, 88% of the population would be poor.

The Palestinian economy has only been maintained at all by a doubling of foreign aid to nearly $1bn per year adding nearly $400 per year to per capita income.

War and closures

The Gaza economy was particularly hard-hit in 2004 by an escalation in the conflict with Israel after a modest recovery of the whole Palestinian economy in 2003.

A number of actions by the Israeli Defence Forces restricted movement within the Gaza strip and blocked people and goods from crossing the borders into Egypt or Israel.

Israeli security barrier in the West Bank, woman and child watching
The security barriers have affected economic activity

As a result, exports declined, humanitarian aid was temporarily curtailed, and the number of workers crossing to Israel declined to a daily average of 1,000, compared to 6,000 the previous year.

In addition, there was extensive damage to the physical infrastructure like buildings, shops, and roads.

Trade and agriculture

The withdrawal of Israel from the Gaza settlements could lead to some modest gains for the local economy, but has to be seen in the context of much bigger economic and political issues that are still not resolved.

Restrictions on movement should ease, and some of the assets of the settlements, notably greenhouses, could prove valuable.

There would be the possibility of more intensive agricultural cultivation in the future if the Gaza Strip could attract investment from abroad.

Palestinian men in front of the closed Bank of Palestine
The Palestinian economy has suffered during the intifada

And the one thing that the Gaza Strip does have is access to the Mediterranean Sea, with the potential of being the main port for enclave.

But investment in port facilities - such as roll-on, roll-off container ships and the airport, which was bombed by the Israeli air force and never repaired - is awaiting some key decisions about the future relations between Israel and the Palestinian Authority.

At the moment, they are linked in a common customs union as far as external trade goes - so Palestinian goods can pass freely through Israel and be exported.

But Israel has signalled it may abolish this customs union in Gaza once the Palestinian Authority takes full control of the area.

According to the World Bank, this could further disrupt the Palestinian economy, reduce its access to the Israeli market, and lead to significant losses of customs revenues for the Palestinian Authority.

And the promised physical link between the West Bank and the Gaza Strip - which would help ease these problems - is now an even more urgent priority, if Gaza is not to be further isolated economically, but that awaits resolution of Israeli security concerns.

Linkages needed

Meanwhile, Israel is making other moves to de-link the Israeli and Palestinian economies, such as the construction of a security barrier on the West Bank, and plans to stop issuing permits for Palestinians to work in Israel from 2008.

As the World Bank said in its report on Israeli disengagement, "an emphatic doctrine of physical and economic separation cannot be expected to encourage private investment -particularly since the immediate potential for Palestinian economic recovery lies in rebuilding trading links with Israel."

It says that there is a high economic cost to such closures, which must be reversed if the Palestinian economy is to prosper.

Israel argues that it is going to invest millions to improve the border crossings, and wants to encourage Palestinian autonomy.

However, given that the Palestinian economy is only one-fortieth the size of Israel's economy, ($3bn vs. $130bn), it is bound to live in its shadow for some time to come.

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