Declaration of Palestinian State

Economic Repercussions




Suzanne K. Sukkar



University of Michigan

Political Science 498: Arab-Israeli Conflict

Professor Raymond Tanter

April 15, 1999







Economic Repercussions







The Puzzle: Despite the trend towards nationalism, why have the Palestinians been unsuccessful in economicially organizing a state?






The Palestinians have been working towards establishing a state, a political entity that unites the people under one government, for several years. The aspiration of the Palestinians is sovereignty and recognition by the international community. The Palestinians are looking for a place where they can call home and accordingly a place to build their own culture and heritage. The overwhelming need is for a progressive society built on democratic values. However, under Israeli occupation, the means towards achieving a Palestinian state have been ridiculed and shunned. Despite the Palestinians attempted move towards a peaceful negotiation and settlement, their need for autonomy has been met with opposition. Their has been a marked increase in Israeli harassment in the Palestinian territories: the occupation continues, increased Palestinian land confiscation, rising house demolitions, blockage of developing the economy, lack of human and basic civil rights, Palestinian homes are raided, men and children arrested, and families terrified. 2


Palestinian Nationalism: The Palestinians already shared a sense of community. However, the idea of nationalism began to solidify after the disintegration of the Ottoman Empire and the increase of Western presence in the region, which brought forth concepts such as nationality and statehood. Palestinian national identity or wataniyyah began to thrive and ideas of independence and collective unity flourished. Indeed, once UN General Assembly Resolution 181 was proposed in 1947, the Palestinians rejected the resolution in their strong desire for a coherent Palestinian state. However, the events to follow and the declaration of an Israeli state in 1948, changed the dynamics of the situation.


After the declaration of Israel in 1948, the Palestinians were conceivably left without any options. Zionist hopes of creating an exclusively Israeli state were unattainable because Palestinians remained on the land. However, a series of events led by Israel, began to create a situation for the Palestinians that limited any Palestinian movement or chances at a Palestinian state. The creation of the Zionist State in Palestine resulted in the dispossession of over 85% (about 900,000) of the Arab population of Palestine, who became refugees in the Diaspora. However, approximately 160,000 (15%) Palestinian Arabs remained inside the newly created Jewish state. Currently, the United Nations Relief and Works Agency for Palestine Refugees in the Near East (UNRWA) approximate 3.4 million Palestinians out of the 4.7 total Palestinians are registered as refugees. 3


Palestinians that lived in primarily Arab cities were placed under military rule. The Israelis placed the Palestinians in this predicament because Israel perceived a national security dilemma. As a result, Israeli policy limited the movement of Palestinians by not permitting them to leave security areas without permits, land was seized, individuals were subject to arrest and economic activities were halted. The series of Israeli policy limited Palestinian attempts to abscond and consequently were placed under more repressive measures. Specifically, the measures taken to limit Palestinian control were a set of laws that constricted their economic and political role. 4


Various laws that Israel implemented resulted in the blockage of the return of refugees. These laws include “Abandoned Areas Ordinance” (1948), “Emergency Regulation concerning the Cultivation of Waste Lands (1949), “The Absentees Property Law” (1950) and “Land Acquisition Law” (1953). Under such laws, Israel “legalized” the expropriation of Arab land and property, some of which even belonged to several Palestinians who had remained in their homes.


One specific example is the Absentees Property Law. This law dictated that any Arab that left his or her home outside Jewish control between November 29, 1947 and September 1, 1948 and spent time in the enemy or Arab country, would be declared by the state absent, even if that person is currently living in the state. Many Palestinians, who were legal residents of the state, left for a short period of time to avoid fighting and returned immediately after (a present absentee). Women who were considered absent/present were not allowed any rights at all to the land, even if they inherited the land from family. Also if the sister in the family was present and her absent brother returned, the family would still have no rights to the land because a woman was not able to own land. Subsequently, the land of the absentee person would be forfeited to the state, specifically the Jewish Agency. The Jewish Agency only needed to "suspect" that a person was absent; proof was not necessary to make the decision. Through this law, the Palestinians lost thousands of dunams and were thus added to the number of refugees. 5


While Israel was mandating these laws against Palestinians return to their land, they were also issuing "the law of return" in 1950. This law granted any Jew, regardless of origin, nationality, or place of birth, citizenship immediately upon arrival to Israel. Israeli citizenship became available the day of arrival. Another option was to come to Israel as an oleh or Jewish immigrant. An oleh certificate may be denied for three reasons. First, if the immigrant acts against the Jewish people. Second, endangers the security of the state. Third, if the immigrant has a criminal record and is likely to endanger the public welfare. After 1970, the law was extended to include children, grandchildren and their spouses. In addition, amendments were made to incorporate citizens who lived in Israel from after the establishment of Israel in 1948 throuh the enactment of the Nationality Law in 1952 by residence or by return. The repercussion for the Palestinians was that the Jewish immigrants were settling on the Palestinians lands because they were denied return or were evacuated from their homes. 6


The United Nations General Assembly has continuously implemented or reaffirmed the resolutions to assist the Palestinians in their return. However, Israel has violated these international laws and repeatedly denied Palestinians return.




Economic Repercussions


The operation and survival of a Palestinian state depends on various factors: health services, infrastructure, economy, trade, industry, telecommunications, transportation, labor, and agriculture. Under Israeli occupation, Palestinians were confronted with a policy that aimed at freezing any economic development, preventing independent economic growth. The Palestinians provided cheap labor since they could not develop their own market. The reason behind Israeli policy restrictions was to protect the Israeli government and economy. The economic disparity of the Palestinians has left them in only one solution to the oppression they have been faced with, which is to form a state giving them the power necessary to achieve their own independence and development.

According to Dr. Munther S. Dajani of the Palestinian Center for Regional Studies, the Palestinian economy is an "economy under siege." Dr. Dajani argues that three major actors adopting three specific policies cause the siege hindering the economic development in Palestine. The first actors are the donors on the international level with their Funding Policy. The second actor is Israel on the regional level and their Closure Policy. The third actors are the Palestinians on the domestic level with their Investment Policy. 7


The first actors, the donors, have not been committed to their funding policy and have withheld from donating the promised funds to the Palestinians. The delay or lack of delivery of funds has imposed the Palestinians into a worse economic standing. Without the promised aid, the PNA is unable to implement economic projects to further the development of a strong Palestinian economy. The improvement of the economy depends upon the development of the technology, institutions, infrastructure, industry, agriculture, trade and the private sector. A short-term plan would be inefficient in changing the stagnant economy. However, a long-term plan is imperative to the creation of a productive, exporting economy.

Indeed, the five-year development plan that Yasser Arafat has put forth is a project that depends on the aid of donors to achieve the objectives of an independent economy. The plan projects 4.5 billion U.S. dollars to assist in developing the technology and resources needed for a solid economy. The development of this proposed plan is essential to the management of a fiscal budget, particularly the administration of the expenditures and revenues. The recent developments of the promised aid by the United Nations (UN), specifically the European Union (EU) and the United States could help solidify the Palestinian cause for independence and give them a foundation for structuring their economy. 8


The second actor, Israel, has continued with a Closure Policy. This policy is aimed at closing the West Bank and Gaza Strip to prevent the Palestinians from working. Despite the fact that Palestinians have integrated themselves in the Israeli workforce and economy, Israel had persisted closing the occupied territories. The policy of closure is ineffective in regards to the control of violence. Israel maintains that the closure was induced because of suicide bombings. However, there is no evidence that the Palestinians working in Israel are related to the bombings. Therefore, not permitting the approximately 170,000 Palestinians from working in Israel did not relieve Israeli concern of security. The Palestinians view the closure as collective punishment while adding to the difficult living conditions and sometimes forcing the Palestinians to leave their homes in search of better conditions. Immigrant workers replaced the people that left their homes. Thus Palestinians, who returned to their homes, could not regain employment because of the reduced amount of jobs.

Closure began after the October war in 1973. After the Intifada, the amount of Palestinian workers also dramatically decreased. After the Gulf War in 1991, the occupied territories were closed for seven weeks. Closure since the PNA took over from July 1994 through July 1997 totaled 335 days. In 1996, closure reached 180 days at a loss of approximately $471 million dollars. In 1997, the total days of closure reached 144 days with an estimated loss of $144 million dollars. 9

The Closure Policy has had tremendous detrimental effects on the Palestinian economy. The rate of economic growth slowed down immensely after 1996. Losses accrued significantly in sectors including agriculture, exports, fishing, industry, trade, transportation, and wages from workers in Israel and the occupied territories with a grand total loss of $13.6 million per day as a direct result of the closure. In addition, by the end of July 1997, Israel refused to refund the tax and customs revenues that amounted to more than $65 million collected on behalf of the PNA. As a result of these policies, the National Palestinian Income and the real Gross National income have been declining.

Specifically, one sector that has shown tremendous losses to the economy is the labor sector. According to the Palestinian Ministry of Labor, an average of $50/day in wages was lost to almost 55,000 Palestinian workers who lost their jobs, which totals an average loss of $2.5 million/day to the Palestinian economy. The number of workers was also expected to increase to 70,000 workers. Indeed, the rate of unemployment during closure rose to above 70% in the West Bank and Gaza Strip. Normally unemployment in the occupied territories reaches 18% and within the Green Line about 40%. However, the closure has caused more people to lose their jobs. The unemployment rose in the occupied territories primarily because building materials were forbidden to enter the territories, resulting in a stoppage of the construction sector. Unemployment rose inside the Green Line because Palestinian workers were not permitted to leave their homes to reach their place of employment in the cities. According to a World Bank report, the Israeli closure denied entry of people and goods into the West Bank and Gaza Strip. Accordingly, the report indicated that financial losses from preventing exports of Palestinian goods reached $39 million in one month. 10

As a result of many of these policies, the PNA budget deficit rose to $120 million. Eventually the PNA was forced to borrow money from local banks and countries such as the United Arab Emirates and Egypt. The loans only added interest to the already burdened Palestinian economy. The Palestinian banking sector was significantly hurt. The banking activities of the 20 banks with 80 branches in the West Bank and Gaza Strip primarily consist of withdrawals, deposits, loans and transfer of funds.

Palestinians began to withdraw funds from their checking and savings account as a direct result of the unemployment, so that they could meet their daily needs. Subsequently, the Palestinians could not make deposits because they had no work. The one-way flow of funds resulted in a domino effect. Palestinian banks became short on liquidity. They were forced to withdraw from other banks to meet their clients needs. Consequently, the banks did not have enough funds to loan other establishments and individuals. Next, local and foreign investors were hesitant to continue with transactions because of the uncertainty and risk involved. The last domino to fall was a result of the World Bank, international organizations and donor countries from discontinuing development projects in the West Bank and Gaza Strip because of rising costs and difficulties in transportation. 11

UN Committee for the Elimination of Racial Discrimination reviewed the situation on October 22, 1997 and condemned the actions taken by Israel. The Committee deliberated that the economic suppression by Israel was collective punishment and goes against international law; specifically, Article 33 of the Fourth Geneva Convention. The Committee determined that the consequences of the closure were tremendous on the lives and welfare of the Palestinians and felt that these actions were a great hindrance to the peace process. 12

The third actors are the Palestinians and their Investment policy. Palestinians are in the process of developing a system for investment within their own economy. The Palestinian Public Investment Program (PPIP) developed by the PNA is a means for funding projects that are desperately needed by the Palestinians. In conjunction with the World Bank, United Nations and the donor community, PPIP began developing projects in 1997 in the West Bank and Gaza Strip. Both the private and public sector are jointly developing the projects and providing the framework for the investments. The developments of the projects started under the PPIP are essential to the building of any state. One such project is the opening of the Gaza Airport. Such services are necessary to provide the citizens. While the Palestinians are working on these features, they are demonstrating their capacity to sustain a state.

"This is really a window for the Palestinian people to the outside world. This is a symbol of our soverignty and an open economy". Nabil Shaath, director of the Gaza Airport. 13

Four main components are the basis for the PPIP: Investment in 1. Physical infrastructure, 2. Social sectors, 3. Direct support of private sector, and 4. Capacity-building for the public sector. The first component of the PPIP is aimed at improving the welfare of the Palestinians by developing infrastructure. Physical infrastructure is the basic groundwork for connecting all the people through communications, railroads, roads, water, power and transportation. The physical infrastructure is in desperate need of improvement because the current system is under-developed. Therefore the development of this sector is essential in connecting the people, providing basic necessities and facilitating movement.

The second component, the social sector, is the development of Education, Health, Housing, Social Affairs, Culture and Youth. The social sector is essential to the creation of a healthier and more equitable state. The economic success of Palestine could be held accountable to factors such as education. If the youth are educated and taught different services, they could work towards improving the sectors of Palestine. Higher education in either the curriculum or vocational schools needs to expand and modernize for the inflow of students. The schools need to have the accommodation and high level caliber needed to strengthen the educational facilities. The PPAP also is investigating the possibility of improving the quality of health care. Specifically, the PNA wants to improve women's health care and the standards of health institutions, such as hospitals and clinics. The well being of the citizens is reflective of the care and maintenance that the government is providing to the people. The PNA is working with the United Nations Relief and Works Agency for Palestinian Refugees (UNRWA) to extend the private sector, which implies non-governmental health organizations. Another area of concern for the PNA in its PPAP is housing. The housing sector is essential in improving living conditions. The PNA is developing programs with the World Bank to provide affordable housing. Specific initiatives are long term financing and insurance through commercial banks, upgrade infrastructures in impoverished areas and encourage private sector participation in the development of housing. The financing systems to develop these initiatives are the establishment of a Mortgage Insurance Fund, Housing Assistance Fund and Palestinian Banks. According to the PPAP, a thorough and efficient system is in the process of developing the social sector. With the assistance of the World Bank and UNRWA, the PNA can feasibly succeed in its attempts to develop the social sector.

The third component, the private sector, can only flourish under a Palestinian state. The closures that Palestinians have faced by Israel only demonstrate the destructive capacity to the Palestinians economy. Unless a state is formed and the Palestinians are able to live independently, than the Palestinians would not have access to the markets, raw materials and goods necessary to build the private sector. The development of the infrastructure to sustain the private sector work cooperatively to ensure a lasting economy. The specific areas of development are agriculture, industry and tourism. Improving the agricultural output and access to the markets advances the chances at success. Technological advances promote the increasing output into the world markets. PPIP is looking at opening the industry to local industrial zones and small enterprises. The capital for these industries would come from both domestic and international sources. These industries are also job-creating markets which additionally contribute the Gross National Income of the Palestinian economy. Lastly, tourism is a popular sector. The religious and cultural ties increase the amount of tourists. Therefore, the PPIP intends to upgrade and maintain historical sites.

The fourth component of the PPIP is the institutional development. The PNA has devoted time and resources to improving and building institutions. The institutions will be able to support people, equipment and facilities in assisting the implementation of these programs. The development of the institutions is needed to begin the various programs and strengthen their management.

The Palestinian Public Investment Program looks at the different sectors that keep a government functional. The satisfaction of the people and the administration of these programs can only be efficiently worked through the Palestinian state. By investigating the various factors and criterion, a Palestinian state is feasible. The funds that have been pledged by the World Bank and donor countries are sufficient to undertake these programs. Currently, the main constraint on the Palestinians is the closure policy by the Israelis that has been blocking the development of the Palestinian economy. 14

A potential source that could contribute greatly to the Palestinian economy are the Palestinians. The donation of funds could open the market for investment and be a significant benefit to the development of a Palestinian state. The Palestinian financial sector is underdeveloped. The lack of financial institutions, such as Palestinian Banks, need to be organized to handle the demand of a state. The objective of the state should be to liquidize its assets and convert a substantial amount into the Palestinian economy and financial institutions. The World Bank is contributin $15 million for the proposed projects. The World Bank assistance reduces financial intermediation and is more secure to the financing. 15

Consequently, the Palestinians are strategically utilizing the private sector by committing itself to specific projects. The projects that the Palestinian Authority (PA) has undertaken include the Palestine Telecom Company, the Gaza power plant, the Gaza port, the Gaza Marriott Business Center, and the industrial park. Other projects are currently under development, such as the food processing plant. For the Palestinian financial sector to succeed, the development of a Palestinian Enterprise Bank could lessen the burden of the other sectors. According to the analysis provided, a Palestinian state could survive economically if measures were not taken to stop or deter the functions of the state. The policies that have been created by Israel would be a significant hindrance to the success of a Palestinian state. The border closures, limitation on trade and civil disturbances need to end for the Palestinian economy to grow. Consequently, once a state is created, the Palestinians are responsible for taking control of all the governmental functions and in the success of its own initiatives. Israel would not be able to interfere in the development of the economy or the Palestinians would incur severe repercussions. 16




Crisis as an opportunity of diplomacy:

The Palestinian establishment of a state based on pre-1967 boundaries is an achievement the Palestinians have been working on for decades. The crisis that has evolved is the maintenance of the state. Yasser Arafat needs to remain strong and fight any opposition that may be encountered during this fragile time. Israel has already tried to destroy the Palestinian State by annexing parts of the West Bank and Gaza Strip. This crisis has led Palestinian President Yasser Arafat to request support from international powers. The European Union pledged its support to the Palestinians and their right to a state (EU: Agenda 2000). The European Union has also strongly condemned Israel's annexation of the land. Israel has not responded to the EU demands. Arafat has taken advantage of the situation and has strengthened his ties by allying himself with the superpowers. Israeli actions have given Arafat the opportunity for diplomatic actions. However, the resurgence of the Intifada has slowed the progress of a peaceful solution to the crisis. Once again, Israel has tried to isolate the Palestinians within the region, but Palestinians have revolted. Palestinian leaders have met with the United Nations to try to stop the land confiscation and to remove the Israeli troops from the borders.





1 Palestinian National Authority Homepage. State of Palestine: Declaration of Independence. [Online]. 15 November 1988. Available: WWW. URL: http://www.pna.net/facts/pal_independence.htm (Back to Text)


2 Palestinian National Authority Homepage. Statement to the World. [Online]. 27 January 1999.Available: WWW. URL: http://www.pna.org/mininfo/statements/est_2701.htm (Back to Text)


3 Palestinian National Authority Homepage. Palestine Refugees: 50 Years of Injustice. [Online]. 1 April 1997.Available: WWW. URL: http://www.pna.net/un/un_pal_1948.htm (Back to Text)


4 Gerner, Deborah. One Land, Two Peoples. Colorado: Westview Press, Inc., 1991. (Back to Text)


5 Ibid. (Back to Text)


6 Israel Minisitry of Foreign Affairs. Acquisition of Israeli Nationality. [Online]. 10 April, 1999. Available: WWW. URL: http://israel.org/mfa/go.asp?MFAH00mz0 (Back to Text)


  7 Palestinian National Authority Homepage. An Economy under Siege: A Palestinian View. [Online]. 29 September, 1997. Available: WWW. URL: http://www.pna.net/reports/An_Economy_Under_Siege%20.htm (Back to Text)


8 Palestinian National Authority Homepage. Speech by H.E. President Yasser Arafat. [Online]. 2 February, 1999. Available: WWW. URL: http://www.pna.net/speeches/frankfurt_050299.htm (Back to Text)


9 See Endnote 7. (Back to Text)


10 State Department. Economic Development in West Bank and Gaza. [Online]. 20 March, 1996. Available: WWW. URL: http://www.state.gov/www/regions/nea/960320.html (Back to Text)


11 See Endnote 7. (Back to Text)


12 United Nations. Committee on the Exercise of the Inalienable Rights of the Palestinian People. [Online]. 12 February, 1993. Available: WWW. URL: http://www.un.org/plweb-cgi/iopcode.p (Back to Text)


13 British Broadcasting Company. [Online]. 24 November, 1998. Available: WWW. URL: http://news.bbc.co.uk/hi/english/world/middle_east/newsid_220000/220780.stm (Back to Text)


14 Palestinian National Authority. Palestinian Public Investment Program for 1997. [Online]. 1997. Available: WWW. URL: http://www.pna.net/reports/pal_public_invest_prog.htm (Back to Text)


15 World Bank. [Online]. 16 January, 1998 Available: WWW. URL: http://www.worldbank.org/pics/pid/xo43340.txt (Back to Text)


16 Palestine Economic Pulse. The Role of the Palestinian Private Sector. Jamal Abu Issa, Salem International Investments. [Online]. 10 March, 1997. Available: WWW. URL: http://www.palecon.org/papersdir/visions.html  (Back to Text)


Copyright © 1999. All rights reserved. Suzanne K. Sukkar

This page is intended for academic use only. No images seen herein are subject to copyright laws.

Special thanks to Professor Raymond Tanter.


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