DEVELOPMENTBRE Number 32 The Wordd Bank March 1994 The future of the West sets," says Caio Koch-Weser, World Bank Vice President for the Middle Bank and the Gaza Strip East and North Africa region. "These include a high-quality human re- Israelis and Palestinians agree on the urgent need for sourcebase,alargeandrelatively stimulating economic development and growth in the prosperous expatriate Palestinian community in the Arab world and Occupied Territories elsewhere that can contribute to eco- T he economy of the West ciple, free to return. The return of nomic development in the Occupied Bank and the Gaza Strip, others will be subject to negotiation Territories, a potential for developing known as the Occupied between Israel and the Palestinians. into an important tourism center, no Territories, is under severe strain. The economy is mainly service- external debt burden, and good pros- Income levels have stagnated over oriented, with agriculture account- pects for attracting international fi- the past decade. Unemployment ing for about 30% of GDP in 1991, nancial assistance because of their and underemployment are unac- industry about 8%, construction special situation." ceptably high. Public infrastructure about 12%, and services the remain- and social services are grossly over- ing 50%. Private sector activity Scenarios for the future stretched. And the fragile natural dominates, accounting for about Forecasting the pattern of growth is resource base is threatened. Above 85% of GDP. a highly uncertain business. But as- all, the economy remains highly suming sound economic manage- vulnerable to external develop- ment, it would be reasonable to ments, as shown vividly by the eco- prospects for expect a relative expansion of do- nomic hardship experienced after mestic over external employment. the sharp reduction in external in- attracting Over time, a substantial diversifica- flows from the Arab countries fol- tion in economic relations would lowing the Gulf war and from Israel international also be probable, with greater inter- following the partial border closure dependence among economies in in March 1993.* financial assistance the region and an expansion in The Occupied Territories have a are ood trading relations outside the region, combined area of about 6,000 6 notably with Europe. Some scope square kilometers, a 1991 popula- exists for expansion in agricultural tion of about 1.7 million, a GNP of Structural imbalances are mani- and industrial production, once the about US$2.9 billion, and a GNP fest in several areas: (1) heavy de- present constraints on private sec- per capita of $1,715. The population pendence on outside sources of tor development are removed, in- of East Jerusalem is about 300,000, employment for the Occupied Ter- cluding access to outside markets. including about 150,000 Israelis ritories' labor force, (2) an unusu- But diminishing water resources settled there since 1967. In addition, ally low level of industrialization, throughout the region will con- there are about 135,000 Israeli set- (3) a trade structure heavily domi- strain agricultural development, tlers residing in some 150 settle- nated by trading links with Israel with future growth limited to high- ments built in the Occupied and saddled with a large trade defi- value export crops catering to niche Territories over the past 25 years. cit, and (4) inadequate public ser- markets. Skill-based, light, and me- An estimated 3.5 million Palestin- vices and infrastructure. dium-size industries would appear ians live outside the Territories. "Although the Occupied Territo- to be more promising. Above all, Some have maintained residency ries suffer from serious structural the economy of the West Bank and rights in the areas and are, in prin- problems and imbalances and have Gaza is likely to remain mainly ser- 'For more details, see World Bank, Developzng the Occupied a very limited natural resource vice-oriented, with an important Terltories: An Investment in Peace, 6 volumes, 1993. base, they also have substantial as- contribution by tourism. Bank staff developed some sce- economy on a path of sustained doubtedly be associated with rising narios to explore the possible trajec- growth over the medium to long poverty and worsening social con- tory of the economy. A critical factor term. It appears feasible to achieve ditions. While poor policy can ini- in the scenarios is the overall policy medium-term growth in income per tially be offset by official capital setting, encompassing a range of capita in excess of 3% a year. inflows, the situation would be likely influences on future develop- unsustainable, since private capital ment. "Good policy" would include, inflows are unlikely when policy among other things, a peace agree- conditions are not perceived as ment that resolves strategic uncer- Additional investor-friendly. tainty sufficiently to provide the basis for private capital inflows and financing Public sector financing investment in productive activities. requirements for requirements Other policies would include: The total external financing require- * A relaxation of supply-side 1994-98 are ments of the public sector-defined constraints, including deregulation to include a central administration, and improvements in the supply of estimated at about municipalities, the United Nations economic infrastructure and indus- . . Relief and Works Agency, and vari- trial land. $2.4 billion ous nongovernmental organiza- * Trade arrangements that allow tions-have been estimated at $3 substantial trade expansion. Under this scenario, growth is as- billion for 1994-98. If taken over * A strong public finance frame- sociated with a steady rise in invest- and above existing programs sup- work with substantially expanded ment and quite large net transfers of ported by external financing, the re- revenues (including taxes now ac- foreign resources, which decline quirements are estimated at about cruing to the Israeli treasury). steadily over time. Declining labor $2.4 billion. Donors committed to * A major strengthening of the income from Israel is compensated providing such funding during a administrative and policy-formu- for by substantial inflows of exter- conference on peace in the Middle lating capability of the emerging in- nal finance, going to both the public East held at the U.S. State Depart- terim self-governing authority. and the private sector. Over time, ment in October 1993. Almost all of e A strengthening of the human the sum of remittances and net these commitments would go into resource base through stepped-up transfers of extemal capital falls as funding investment activities in the training programs and through ac- growth in exports allows the trade Occupied Territories. Still, in the cess to the entrepreneurial and pro- balance to improve. initial stages some external funding fessional skills of Palestinians living Bad policy scenario. Failure to would be needed for the startup abroad. tackle the policy conditions for and transitory expenditures of the Good policy scenario. Securing a growth leads to a very different out- Palestinian administration-as well combination of a good policy set- look. There could easily be declines as for the current operations of ting with adequate intemational in per capita income of 20% in a de- some nongovernmental organiza- capital inflows could set the cade. Such a scenario would un- tions that are quasi-govemmental. Development Briefs are issued by the World Bank to inform the media, business, academic, and government policy communities about development policy analyses and results from the Bank's research activities. They are drawn from the work of individual Bank researchers and do not necessarily represent the views of the World Bank and its member countries-and should not therefore be attributed to the World Bank or its affiliates. Briefs are issued periodically by the Research Advisory Staff, Development Economics Vice Presidency, The Wortd Bank, 1818 H Street, NW, Washington, DC 20433. Tel: (202)473-3984, Fax: (202)477-0955. Briefs are not copyrighted and may be reproduced with the appropriate attribution.