Transcript Slide 1

Revitalizing the
Palestinian Economy:
Challenges &
Opportunities
Presentation to
The International Conference:
Economic Transformation
& Social Change in the Middle East
Bassim S. Khoury
Chairman of the Palestinian Federation of Industries
Berlin
December 5th 2007
Revitalizing the
Palestinian Economy:
Challenges &
Opportunities
The current Reality in Palestine:
Israeli occupation’s impediments,
slow political developments & growth
of extremism:
Critically destabilizing Palestine
Potential additional instability factor for
the ME and beyond
Revitalizing the
Palestinian Economy:
Challenges &
Opportunities
“ We are tired of this out-of-wedlock relationship,
Israel should either marry us or let us go”
(Elias Fraij, late mayor of Bethlehem,1980’s)
Getting worse from 1980’s. In 2007,
Palestinians see relationship with
Israel as that of:
enslavement with impoverishment
Revitalizing the
Palestinian Economy:
Challenges &
Opportunities
Over- riding Challenge: 40+ yrs occupation
•Challenges Pressing Relentlessly:
1.
Poverty, youth Unemployment & Reduced Per capita Income.
2.
Stagflation !! & Malnutrition.
3.
Massive Birth Rate & Brain Drain.
4.
Lack of Political Horizon.
•Challenges Improving a bit
5.
Frustration: Extremism & Lawlessness
6.
Degradation of Social Values
Revitalizing the
Palestinian Economy:
Challenges &
Opportunities
1. Poverty Rates – Q1 2007
80%
70%
60%
50%
40%
30%
20%
10%
0%
is
za
Ga
oun
Y
an
Kh
fah
Ra
lem
llah
hem
ma
usa
thl e
e
Ra
Je r
B
n
bro
He
s
blu
Na
i
Je n
n
al.
e. P
v
A
In Q3 & Q4 2007 the situation is improving: formation
of the Fayyad government
Revitalizing the
Palestinian Economy:
Challenges &
Opportunities
1- Per Capita Income
25,000
20,000
15,000
Palestine
Israel
10,000
5,000
0
1994 1999 2000 2002 2005 2006 Q1
Oslo
2007
When the Oslo was signed, per capita income in Israel was 11X that of
Palestine. After six years of Peace the gap was 13X. Now it is close to 23 X.
Gap between the Rich & Poor in Palestine has widened tremendously
Revitalizing the
Palestinian Economy:
Challenges &
Opportunities
1. Unemployment
• Need 50,000 annual new jobs annually.
• More than 30,000 University Graduates from local
universities annually
• More than 150,000 high school graduates per year
Economy must grow 11% annually for 5 Years
for Per Capita Income to go back to 1999 levels.
Revitalizing the
Palestinian Economy:
Challenges &
Opportunities
1. Unemployment Rates – Q1 2007
80%
70%
60%
50%
40%
30%
20%
10%
0%
za
Ga
a
Kh
is
un
o
nY
fah
Ra
t
m
ah
ric
he
all
e
ist
l
m
D
th
m
Ra
Be
ale
s
ru
Je
ron
b
He
b
Na
lus
nin
Je
Increased youth unemployment leads to:
decreased stability
Revitalizing the
Palestinian Economy:
Challenges &
Opportunities
2. Stagflation!! – Sharp Price
increase 6.0
5.0
4.0
Gaza
West Bank
0
Israel
3.0
2.0
1.0
0.0
2006
Cost of living in 2006:
Gaza prices increased by 70% more than increase in Israel
high transaction costs due to M&A impediments
Revitalizing the
Palestinian Economy:
Challenges &
Opportunities
2. Sharp increase in Gaza Food Prices
10.0
9.0
8.0
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0
Gaza
West Bank
0
Israel
In 2006:
Food cost increase in 2006
Food in Gaza increased by 250% more than increase in Israel
high transaction costs due to M&A impediments.
Revitalizing the
Palestinian Economy:
Challenges &
Opportunities
3- Birth Rates
• Fertility rate: 4.6
• Natural annual population increase : 3.2
• Population (Jan 2007):
Jerusalem governorate: 411,885
Gaza Strip
West Bank
Total
• Age : 0 - 17 = 52%
&
1,473,907
2,483,786
3,957,693
15 – 29(youth) = 27%
Revitalizing the
Palestinian Economy:
Challenges &
Opportunities
3- Brain Drain
• Palestine is exporting the qualified and
skilled instead of goods & services
• Historically young entrepreneurs & the
middle class immigrated. Now, even
industrialists are leaving with their factories.
Revitalizing the
Palestinian Economy:
Challenges &
Opportunities
4 - No Political Horizon
• Palestinian’s dream of statehood dream in ICU.
• No solution in the foreseeable future
•The end of the Two States solution
Revitalizing the
Palestinian Economy:
Challenges &
Opportunities
5- Increased frustrations:
Extremism & Lawlessness
• Rejection of other interpretations
• Violence as means to change
Improving a bit:
With the formation of the Fayyad government
Revitalizing the
Palestinian Economy:
Challenges &
Opportunities
6- Degradation of Social Values
• Fraud
• Burglaries
• Prostitution
• Drugs
Improving a bit:
With the formation of the Fayyad government
Revitalizing the
Palestinian Economy:
Challenges &
Opportunities
Opportunities: What is relatively
good in the Palestinian economy:
I.
Infrastructure is Relatively Good
II. Finance is Not a Significant Impediment
III. Corruption and Bureaucracy are Not serious
problems, (Below the Regional Norms)
IV. Legal system is the Regional Norm
V. Literacy & Work Ethics
VI. Debt Free National accounts
VII. A Gate way to the World
VIII. A religion, cultural & heritage Epicenter
Revitalizing the
Palestinian Economy:
Challenges &
Opportunities
I. Infrastructure:
Lebanon
Egypt
% w / Water Shortages
Turkey
Gaza
Median: Avg No. of
Monthly Pow er
Outages
Egypt
WB
Lebanon
Syria
Turkey
Gaza
WB
Lebanon
Median % of self Gen.
Pow er
Egypt
Syria
Turkey
Gaza
WB
0
5
10
15
20
25
30
35
Source: Investment Climate Assessment – World
Bank
II. Finance is Not a Significant
Impediment
Banks are highly liquid
Enterprises have collateral and most can afford
credit
Given the low level of economic activity most
enterprises do not need or want a bank loan at
the current interest rates
Source: Investment Climate Assessment – World
Bank
III. Corruption and Bureaucracy are
not Serious Problems
Corruption levels reported by businesses are
below those reported in neighboring countries
Officials and utility providers are unlikely to
ask for bribes
Large government contracts do require
payments.
Source: Investment Climate Assessment – World
Bank
III. Corruption in the Bureaucracy is
Low
100
90
80
70
60
50
40
30
20
10
0
93 94
68
72
Palestine
Turkey
38
44
Syria
20
6
% Inspected by Tax
Officials
1.3
5.1
18
6.9
Average Times
Inspected by Tax
Officials
2
24
7
Egypt
Lebanon
% Where Tax
Officials Expected
Bribes
Source: Investment Climate Assessment – World
Bank
III. Corruption is Below The Regional
Norms
11.2
12
10
8.5
Palestine
8
Turkey
6
4
2
Egypt
2.9
1
3
1.1
0.95
Lebanon
0.5
0
% of Gov't Contrat paid as Bribe
Bribes as % of Annual Sales
Source: Investment Climate Assessment – World
Bank
III. Avg. Days Waiting to Receive
Operating License
151
160
140
120
106
100
80
60
63
60
40
30
20
0
Palestine
Turkey
Syria
Egypt
Lebanon
Source: Investment Climate Assessment – World
Bank
IV. Legal System is the Regional
Norm
80
70
60
50
40
30
20
10
0
72
70
69
64
63
52
52
43
59 57
Gaza
48 48
38
Turkey
Syria
26
23
WB
12 14
Egypt
Lebanon
% of Business Median: Avg Weeks % Where Judgment
Disputes Going to
to Receive
was Enforced.
Court
Judgment
Source: Investment Climate Assessment – World
Bank
V. Literacy and Work Ethics
Palestine has high levels of literacy and
Palestinians have good work ethics
VI. Debt Free National Accounts
• Palestine has debt free national accounts &
• Many untapped resources like:
- The Gaza in Gaza:
Estimated reserve USD 5 Billions.
Expected yearly sales USD 400 Millions.
VII. Gate way to the World &
VIII. Religion, cultural & Heritage:
Palestine is well positioned in the path of major
trading routes huge trade potential
Free trade agreements with USA and Europe
Significant to the 3 monolithic religions
Yet Palestine’s economy is not
growing:
Pal. manufacturing is not growing.
II. Manufacturing has low relative
performance.
III. Contribution of manufacturing to
GDP around 15%. Declined from
18% in 1999.
I.
Revitalizing the
Palestinian Economy:
Challenges &
Opportunities
What Palestine needs:
I.
Access to Technologies
II. Access to high end markets
III. Access and Movement
IV. New investments (instability is
the main problem)
V. Reduce the Cost Of Doing
Business
Revitalizing the
Palestinian Economy:
Challenges &
Opportunities
I. Access to technologies:
Integrated approach: Fund Viable access to
technology programs.
 Bridge the R&D Gap
 Applied R&D – benefit from salary gaps
 Show case results
 Motto: Teach today for tomorrows world

II. Access to high end market
Palestine has trade agreements giving it
access to the High End markets, yet no
benefiting, no such access.
Need to:
Encourage business contacts
Upgrading standards - training
Certification: Quality & Safety
Revitalizing the
Palestinian Economy:
Challenges &
Opportunities
III. Access & Movement:
The biggest nightmare
More than 500 check points in the West Bank
 Access of people and goods to Gaza curtaied
 The Wall & the settlements

“It is often difficult to reconcile the use of M&A
restrictions for security purposes from their use
to expand and protect settlement activities”
(World Bank – May, 2007)
VI. No New Investments:
Instability is Main Problem
(From 3 Major Business Problems)
Other
Licensing,Reg.& Corruption 7%
land
4%
6%
Competitors in
Informal Sector
6%
Macroeconomic
Instability
30%
Finance (availability
and cost)
7%
Electricity
7%
Transportation
9%
Political Instability
24%
Other: customs, crime, courts, worker education and taxes
Source: Investment Climate Assessment – World Bank
Revitalizing the
Palestinian Economy:
Challenges &
Opportunities
V. Reduce the Cost of Doing
Business



Provide infrastructure at affordable prices
Reduce costs of funds
Reduce costs of Energy : electricity & fuel
Revitalizing the
Palestinian Economy:
Challenges &
Opportunities
The unbalanced “Balancing Act”:
“While recognizing that Israel has legitimate reason to
protect its citizens from violence, It is likewise
recognized that this could not take place against the
backdrop of Palestinian economic hardship and
collapse”
(World Bank, May 2007)
Revitalizing the
Palestinian Economy:
Challenges &
Opportunities
The vicious cycle: “economy hostage to security”
Misguided policies in fighting extremism
Security:
Pretext for Economic
Pressure
Poverty
&
Deprivation
Instability
&
Extremism
• The “security establishment”
must have a political & an
economic vision.
• Economic prosperity should
be the tool to bring stability,
reduction of violence & thus
real security.
Revitalizing the
Palestinian Economy:
Challenges
&
Opportunities
Reality in Gaza:
I.
Oslo – 2005 Disengagement:
All Gaza trade from or through Israel (2 crossings):
Population crossing through Rafah to Egypt
Even though with high transaction costs life went on
II.
Disengagement – Q2 2007 (Post C. Rice M&A agreement) :
Trade severely curtailed, drastic increase in transaction
costs (payment to officials/contractors on both sides)
Climax mid – end 2006.
Mid 2006-Q1 2007 eased a bit (Big PS Pal. & Isr. Lobbying)
Break down of law & order
Revitalizing the
Palestinian Economy:
Challenges
&
Opportunities
Reality in Gaza (cont):
III.
Q2 2007 – June 2007 ( National Unity Era):
Further easing a bit of crossings for goods & people
Start salaries and PS arrears
Further break down of law and order
IV.
Q3 2007 – Present:
Hamas coup d’ etat against a Hamas majority
Parliament & a Hamas majority Government of National
unity gave Israel the perfect alibi to impose a
Hermetic seal of Gaza ( only few essential food
items and medicines allowed). A total melt down
of the PS with 120,000 jobs lost
Bloody take over, imposing some order but
no law
Revitalizing the
Palestinian Economy:
Challenges
&
Opportunities
Reality in Gaza:
“ This cruel closure of Gaza which is effecting only the innocent
must stop. It will not succeed, especially with tunnels bringing in
Iranian cash and various other products. Boycotts generally do not
work”
(Dr Fayyad, Palestinian prime minister, Oct. 2007)
Revitalizing the
Palestinian Economy:
Challenges
&
Opportunities
Current reality in West Bank:
June 2007 – present:
1. Payment of salaries (stopped for 13 months)
2. Payment of PS arrears (more than 50% paid)
3. Improvements in law and order (Nablus)
4. A more relaxed environment
5. Government thinking ahead:
• Preparation of 3 year plan
• Openness to PS
• Opportunity for PS to influence reforms
Economy Finally growing.
Towards greater
European
engagement.
The need for “The Magnet” theory:
Konrad Adenauer stipulated that creating a stable, prosperous
& Democratic W. Germany will act as a magnet to counter
communism and reunify Germany.
To counter the Gaza model of brutality and destitute
we need to build a better reality for the majority of
Palestinians.
Only ending the occupation & true reform will
alleviate poverty and help the disenfranchised
Towards greater
European
engagement.
For the Magnet theory to succeed
Germany needed the cooperation of its
occupiers. The US obliged with the
‘Marshal Plan’.
How will our occupier behave?
A question with:
• huge ramifications &
• inherent ability to profoundly
change current dynamics
Revitalizing the
Palestinian Economy:
Challenges &
Opportunities
Uplift
Standard
of Living
Sustainable
Growth
Reforms
Solution in the
Short Term
Solution: Near Future
Solution in the
Long Term
Solution: Distant future
Needed Reforms
Today
Where we want to be
Revitalizing the
Palestinian Economy:
Challenges &
Opportunities
Private Sector Agenda:
KAS involvement
Detailing needed reform measures
Revitalizing the
Palestinian Economy:
Challenges &
Opportunities
Occupation,
settlements, the wall,
closure:
Pal. Territory Isolation
Legal Framework
Industrial Policies
Trade Policies
Fiscal / Monitory Policies
Revitalizing the
Palestinian Economy:
Challenges &
Opportunities
Thank You