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Potential of the Palestinian Private Sector in Crisis

By Rafi-uddin Shikoh
Posted Sep 20, 2007

Meanwhile Massar also has brokerage houses and real estate interests in Jordan, Egypt, Morocco and Serbia.

Similarly, Sam Bahour is another Palestinian private sector stalwart who first participated in the establishment of the Palestine Telecommunications Company (PalTel), which is today the largest business enterprise in Palestine.  Mr. Bahour, who is also a prolific writer on the Palestinian plight, now runs Ramallah based Applied Information Management which provides Information Technology consulting services in a growing IT services sector.

The fact that such new economy ventures are being managed by people subjected to a crushing occupation of their lands is a tribute to the Palestinians spirit of survival with dignity. 

Both Mr. Bahour and Masri are part of the professional, globally experienced Palestinian diaspora, which post the Oslo Peace Accords in 1993, moved to Palestine to contribute and build businesses in the hope that the Israeli military occupation will end. They were able to invigorate the Palestinian private sector and leverage the qualified workforce (93% literacy rate) in building and supporting a new Palestinian economy which today includes, a stock market, a banking industry, an ICT industry, an olive oil industry, a furniture industry, and a pharmaceutical industry, among others.

Resilience in adversity

Since the occupation began, the economy of the occupied lands (the Gaza Strip and the West Bank including East Jerusalem ) have been systematically tied to that of Israel .  In 2003, this wounded economy was sent reeling with  Israel 's decision to unilaterally 'disengage' with the Palestinians.  Thousands of workers allowed into Israel for work were stopped--causing a sudden spike in unemployment, and the Separation Wall's cut farmers from their lands causing major strain to the agricultural sector.  Compounding the crisis had been the lack of free movement within the occupied territories and very limited market access. 

The list of adversities is endless, but the recent situation in Gaza where Hamas militants have taken over resulting in further Israeli restrictions has deepened the abyss.  It is amidst such continual crisis which Mr. Bahour calls "hyper resilent" that the private sector has been able to keep its head above water, backed by a quality workforce and fundamental market potential.

Many governments and businesses support the Palestinians through massive humanitarian programs.  However, as is true with any economy, the real sustainable engine of development and survival has to be its entrepreneurial private sector.  Especially, given the endurance of this private sector and the market potential even in crisis, the World Bank and many professionals such as Mr. Bahour are asking donors to not only provide near term humanitarian aid but invest in real opportunities that support long-term sustainable development.

Problems choking the private sector

A March 2007 assessment by the World Bank on West Bank and Gaza Investment Climate revealed that shrinking market access and the lack of free movement are the main constraints to growth for Palestinian enterprises.

The report concluded that relative to other countries in the region, the Palestinian investment climate is actually good: petty corruption is low, the bureaucracy is relatively efficient and financial markets are well developed.   Unfortunately, the growing settlements and movement restrictions imposed by Israeli authorities for security reasons overshadow all other elements of the investment climate. The restrictions close off markets, raise transaction costs and prevent producers from guaranteeing delivery dates.

Gisha, an Israeli Legal Center for Freedom of Movement, just released shocking data about Gaza 's economy, post-Hamas overrun. They state that:  "75% of Gaza 's factories have shut down because of the closure of the borders. 85% of Gaza residents are already dependent on food aid and the number is growing. There is a serious shortage of raw materials, including flour and sugar for household and industrial  consumption, and prices of raw materials have risen between 15% and 34%.

In addition, since the Palestinian economy is tied to Israel, it has a higher cost structure than other countries producing labor intensive products. The average wage of a production worker in the West Bank and Gaza  is about twice that of a Jordanian worker and almost three times an Egyptian's. According to the World Bank report, if the Palestinian private sector is going to grow and provide jobs for the rapidly expanding population, Palestinian entrepreneurs will have to invest and move to high value goods that can compensate for the high costs of production.

The challenge is also exasperated by growing poverty amongst the populace.   Kevin Kennedy, the UN's Jerusalem-based Humanitarian Coordinator recently said, "Two-thirds of Palestinians in the West Bank and the Gaza Strip are now living in poverty. Growing numbers of people are unable to cover their daily food needs and agencies report that basic services such as health care and education are deteriorating and set to worsen much further."

There is certainly a steady stream of state donation to counter this.  Mr. Sam Bahour in one of his recent writings pointed out that on average, donors annually injected $650 million into the Palestinian Authority from 2001-2007. This amounts to over $7 billion, more per capita than anyplace in the world except for Israel, which is heavily subsidized by the U.S.  

However he laments that of those funds, less than 5% were invested in private sector development.  The result he said is that, "state donor's role in funding Palestinians' 'development' turned into an international underwriting of the Israeli occupation, reducing, and many times removing, the financial costs of military occupation from Israel. In short, knowingly or not, donor funding had an accomplice-type role in allowing the situation to reach where it is today."

What's Needed

Mr. Sam Bahour's plea is clear -- an integral part of every donor intervention should include support to the Palestinian private sector which is the only place where sustainable development can be realized.  "Even with meager donor support, the private sector has proved its stamina and resilience in the face of crisis. Productive economic sectors have been organized, firms are now experts in crisis management, and a greater understanding of the limitations of economic growth while yet under Israeli occupation has been internalized" said Mr. Bahour.

The World Bank report supports Mr. Bahour's assertion and offers specific recommendations both on political and investment fronts. 

Politically it recommends that free movement and access must be re-established, while maintaining Israeli security.   At the same time investments should focus on building enterprise capabilities.  In this unstable situation, Palestinian enterprises are highly risk averse and the level of investment is below what is socially optimal. Palestinian enterprises need support to help lower the cost of developing learning mechanisms and to offset some of the risk of investing in new capabilities. 

The report suggests that focusing investments on creating a few world class "made in Palestine " brands that will offset some of the negative perceptions about the ability of Palestinians to reliably supply goods.  It also suggested a matching grant challenge fund or some other type of program that directly supports individual Palestinian enterprises upgrade their internal capabilities.  Such support however must target specific market failures and should focus on helping find and adopt new technologies and opening new markets.

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