Tuesday, December 4, 2018

Punishing Gaza - The Economic Repercussions

While the Gaza/Israel conflict rears its ugly head on a fairly regular basis, those of us who live in the West where news of the Middle East is filtered through a pro-Israel sieve rarely actually learn anything of significance about the Gaza Strip other than Hamas' ability to manufacture and deploy rockets.  Thanks to a recent study by the World Bank, we can now get an insider's viewpoint on one of the most significant problems facing residents of the Gaza; its economy which has been strangled by years of Israeli pressures which began in 2007 when Hamas took over leadership of Gaza.

Let's open by looking at a map showing Gaza, the main crossing points into Israel (the majority of which are closed) and the 6 nautical mile fishing limits (which were reduced to 3 nautical miles as you will see later in this posting):

Thanks to restrictions on movement, access and trade, investment levels in Gaza have resulted in deindustrialization.  Compared to its peer group in the West Bank which saw real GDP growth of almost 5 percent in Q1 2018, the Gaza saw its economy shrink by 6 percent over the same quarter on a year-over-year basis  Here is a graphic showing a historical comparison of real economic growth rates of the West Bank, Gaza (in red) and the Palestinian Territories as a whole:

In large part, Gaza's economy shrank because of severe cuts in aid for reconstruction and transfers from the Palestinian Authority.  As well, Gaza's economic isolation has led to further degradation of its economy.

Here is a graphic which shows a historical comparison of the unemployment rates of the West Bank, Gaza (in red) and Palestinian Territories as a whole:

The overall unemployment rate in the Palestinian Territories hit a two-decade high of 32.4 percent in Q2 2018, five percentage points up from its average in 2017.  This increase in unemployment is due to a growing unemployment problem in Gaza where 53.7 percent of the labor force was unemployed in Q2 2018.  Unemployment among Gaza's youth exceeded 70 percent and hit 78 percent for females.  Is it any wonder that Gaza's youth are protesting against Israel? 

One of the biggest problems facing Gaza's economy is the full blockade that was enforced by Israel after Hamas was elected in 2007.  This factor, along with wars in 2008, 2012 and 2014 have taken a significant toll on Gaza's economy despite international aid for reconstruction.  The blockade has restyled in a deindustrialization of its economy with manufacturing now accounting for only 8 percent of GDP compared to 16 percent in 1994.  Thanks to the ongoing conflict, the size of Gaza's agricultural sector has also declined, now comprising less than 5 percent of its economy compared to 11 percent two decades ago.  The only sector showing growth is the public sector whose share of the economy rose from 12 percent in 1994 to 29 percent in 2018.  This, however, is likely unsustainable; public spending was reduced by 7 percent during the first half of 2018 as the Palestinian Authority.was forced to cut its total wage bill by 17 percent on a year-over-year basis through the cutting of salaries and the imposition of early retirements.  This has led the number of Palestinian Authority employees in Gaza to drop by more than 22000 since the beginning of 2017 compared to a drop of only 4000 in the West Bank.  Additionally, the Palestinian Authority has cut wages to its employees in the Gaza; salary reductions of 30 percent took place in 2017 followed by further cuts of 50 percent in 2018.  This has resulted in a drop in Palestinian Authority monthly total spending in the Gaza from $125 million per month in 2016 to $96 million currently.

Here is a graphic showing how the sectoral contributions to Gaza's GDP have evolved over the past two decades:

In the first half of 2018, the Palestinian Authority's financing deficit hit $400 million.  Aid totalled $240 million ($183 million in budget support and $57 million in development financing) which is one-third lower than the same period in 2017.  This has forced the Palestinian Authority to fill the fiscal gap through arrears to its pension plan which have already reached $1.6 billion and the private sector which now exceeds $600 million.  If the economy continues as it has for the first half of 2018, the projected deficit for the Palestinian Authority is expected to reach $1.24 billion or 8.2 percent of GDP.

One of Gaza's biggest problems hinges on recent decisions by the Government of Israel (GoI).  The Israeli government closed the Karm Abu Salem crossing in July 2018; this crossing was the only operational commercial crossing into Gaza.  Since the crossing was closed, only food and medicine have been allowed into Gaza but on a case by case basis.  The crossing of much-needed fuel and construction materials has been fully banned.  As well, in mid-October 2018, the GoI also reduced Gaza's fishing zone in the Mediterranean Sea from 6 nautical miles to 3 nautical miles, much lower than the internationally mandated 20 nautical mile limit.  This was done to prevent Palestinian attempts to infiltrate Israeli territory and harm its forces and has made it much more difficult for Palestinian fishermen to make a living from fishing.

All of this has had a significant impact on poverty levels in Gaza.  The current poverty rate is 53 percent, a 14 percentage point jump since 2011 as shown on this graphic which compares the poverty levels of Gaza and the West Bank in both 2011 and 2017:

Currently, poverty in Gaza account for 71 percent of poverty in the Palestinian Territories, up from 51 percent in 2011.  

Let's close with a final quote from the World Bank report.:

"The economic and social situation in Gaza that has been declining for over a decade, has deteriorated exponentially in recent months as transfers from outside the territory are squeezed. The impact this is having on people can be seen in the significant increase in poverty and reduced opportunities since 2011 – which has worsened further in 2018. The situation has reached a critical point with increased frustration, feeding into downward cycle....

To prevent an immediate collapse, the recent corrosion in the livelihood of Gazans needs to be reversed. The quick deterioration in conditions in Gaza in recent months has been driven by a severe weakening in purchasing power and economic activity, accompanied by a decline in service delivery. This situation needs to be addressed to avoid further blows to wellbeing, health, and stability. The quickest response mechanism would be to reverse the decline in transfers that have maintained services and economic activity in the past decade....

The Israeli constraints on movement, access and trade continue to be the main impediment to economic growth in the Palestinian territories. In particular, restrictions related to Area C (West Bank) and the blockade on Gaza represent the biggest challenges to growth, and their removal can generate momentous economic benefits. Nonetheless, progress in easing these constraints has not yet materialized." (my bolds)

Unless Israel backs down on its relentless program of punishment, Gaza residents are facing an extremely grim future.  With Washington fully backing Israel on just about every key Middle East geopolitical issue and punishing the Palestinian Authority by cutting aid in August 2018 as shown in this statement from the State Department:

"Earlier this year...the President directed an overall review of U.S. assistance to the Palestinian Authority in the West Bank and also in Gaza....

The decision was then made, and we sent out a statement to this effect [on August 24], that that money at this time is not in the best interests of the U.S. national interest and also at this time does not provide value to the U.S. taxpayer."

...and this statement in September 2018 from Donald Trump in the Rosh Hashanah National Press Call:

"I stopped massive amounts of money that we were paying to the Palestinians and the Palestinian leaders. [The] United States was paying them tremendous amounts of money. And I’d say, you’ll get money, but we’re not paying you until we make a deal. If we don’t make a deal, we’re not paying. And that’s going to have a little impact."

...the future of Gaza looks grim at the very best.

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