Area C and the Future of the Palestinian Economy

Orhan Niksic, Senior EconomistThe World Bank

The Palestinian Economy

19992000

20012002

20032004

20052006

20072008

20092010

20112012

2013*

-30

-20

-10

0

10

20

30

Palestinian territories WB Gaza

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 20110.0

1,000.0

2,000.0

3,000.0

4,000.0

5,000.0

6,000.0

7,000.0

8,000.0

9,000.0

10,000.0

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0Investment (USD million)Consumption (USD million)GDP growth (%)

Growth: a roller coaster ride Consumption has been the main driver of growth

19981999

20002001

20022003

20042005

20062007

20082009

20102011

20122013*

0%

5%

10%

15%

20%

25%

30%

35%

40%35%

22%

Youth Unemployment Unemployment

Unemployment remains very highLow share of exports in the economy

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 20110

10

20

30

40

50

60

70

80

90

59.1

15.4

importsexports

What is Area CThe Interim Agreement between the PLO and the GoI divided the West Bank into three areas under different jurisdictions: Areas A, B and C.

• Area A: 18 percent of West Bank, full Palestinian security and civil control, urban centers.

• Area B: 21 percent of West Bank, Palestinian civil control and Israeli security control, peri-urban areas and small towns.

• Area C: 61 percent of West Bank and defined by the Interim Agreement as "areas of the West Bank outside Areas A and B, which, except for the issues that will be negotiated in the permanent status negotiations, will be gradually transferred to Palestinian jurisdiction .“

What is the report about?

• Area C = 61% of West Bank, but negligible economic activity there & wider impacts!

REASON: Restrictions

• OUR OBJECTIVES:– Understand the mechanisms

– Estimate macroeconomic impact and potential

Why does Area C matter?

• Sheer size? NO

• Contiguity? YES– Connectivity

• Infrastructure• Costs

• Resources? YES– Land– Other natural resources

How is the problem manifested?

• Very difficult to:– Develop communications and other public

infrastructure

– Build any permanent structures commercial and residential. • (1.6% of permit applications approved)

– Enforce property rights.

Effects on economic activity

How we measured direct effects on Palestinian economy?

• (1) Identified sectors evidently and significantly affected by restrictions:– Agriculture,– Dead Sea minerals-based industries,– Stone & Marble,– Construction– Tourism,– Telecommunications.

• (2) Constructed counterfactuals assuming:

NO RESTRICTIONS AND ATTRACTIVE BUSINESS CLIMATE

Potential: Agriculture

• Assessed incremental production: – Mostly through irrigation– No productivity growth!– Excluding land used by settlements

• Estimated as much as $700 million potential in incremental value added (7% of GDP).

Dead Sea Resources• Dead Sea is home to vast deposits of valuable and relatively rare minerals.

• Investment in potash & bromine industries: $920 million in incremental value added or 9% of Palestinian GDP.

Stone Mining & Quarrying

• Majority of stone deposits lie in Area C

• Current operations threatened.

• New quarries in Area C $240 million IVA

Construction Sector

Scarce landHigher

Construction Costs

Higher unit price

(24%)

Less units produced

Forgone value added$240 million

Tourism

• Tourism has a huge potential in Palestine

• Home to 3,110 archeological sites

• And Dead Sea

• Potential: $126 million

Telecommunications• Key problems related to Area C restrictions:

• Infrastructure development (fixed and mobile)

• Lack of effective Law enforcement in Area C

• Illegal competition & no access to 3G frequencies

$50 million in forgone VA …and a much larger potential threat from illegal competition!

Indirect effects

Growth

Physical infrastructure

Sector B Output

Sector B Input

Sector A output

Institutional infrastructure

Multiplier effect 1.5 x

Restriction Removal could increase Palestinian GDP by 35 percent

Current GDP Potential GDP0

2000

4000

6000

8000

10000

12000

14000 Potential increase in value added:

USD 3.4 billion

Spillover multiplier effect (1.5)

Incremental tourism

Incremental telecommunications

Incremental construction

Incremental Dead Sea mineral processing

Incremental stone mining, quarrying and processing

Incremental agriculture

Other sectors and activities

Tourism

Information and communication

Construction

Manufacturing

Mining and quarrying

Agriculture, forestry and fishing

USD

mil

lion

The associated benefits would be large

• Large growth in employment and drop in unemployment rate

• Lower poverty and improved living standards

…and at least 50% lower fiscal deficit

Status Quo Potential

-2000.0

-1000.0

0.0

1000.0

2000.0

3000.0

4000.0

56% reduction in defict

PA revenuesPA expendituresPA deficit

USD

mil

lion

And what will it take for this to happen?

• Removal of restrictions on movement and

access in Area C.

• Removal of broader movement

and trade restrictions.

• Overall improvement in risk environment

…and last but certainly not least: reforms to improve business climate

Doing Business 2013 Rank Doing Business 2012 Rank Change in Rank

135 135 0

Topic Rankings DB 2013 Rank DB 2012 Rank

Starting a Business 179 177

Dealing with Construction Permits 130 128

Getting Electricity 85 84

Registering Property 78 80

Getting Credit 159 165

Protecting Investors 49 46

Paying Taxes 55 55

Trading Across Borders 114 116

Enforcing Contracts 93 94

Resolving Insolvency 185 185

Summary of Findings

• Development in several sectors crucially depends on access to Area C.

• Area C critical to infrastructure development.

• Access to Area C is essential for sustainability of the Palestinian economy.

• Broad removal of restrictions is necessary.

• Reforms by PA are also necessary.