The Current Economic Policy - Term Paper Example

A high level of external dependence, lack of infrastructural facilities and political instability are some of the key factors impacting the Palestinian Economy. Based on the assumption that some day peace will prevail and Palestine will enjoy the status of a free state, this paper tries to examine the issues that will affect the sustainability of the Palestine economy. The paper examines the scope for economic growth in Palestine and is based on the premise that all issues pertaining to water and land have been amicably settled between Israel and Palestine. It further assumes that Israel would not take up any activity that would hinder economic growth in Palestine. The current economic scenario in Palestine is not very encouraging. In the second quarter of 2007, the GDP of Palestine grew by 6.5%. The largest increases in gross value added were registered the following sectors: education (+32.1%), hotels (+24.9%), health ( +15.2%), construction (+13.9%) and agriculture (+12.8%). There was a decline however in sectors like mining, water and electricity and manufacturing. However in Gaza, due to political problems, 95% of the factories in Gaza had closed down leading to 32000 job losses. Many of these factories were approaching a point of 'no return' where owners were likely to sell their assets and shut down completely. (The Portland trust, Nov, 2007) Fig 1 marks the economic growth in the period 1997 to 2007 Fig:1 Source: (World Bank Document, 2007) In the previous years, between 2005 and 2006, the GDP in Palestine fell by 8.8%. In the first quarter of 2007, the GDP fell by 4.2%. This was 13.2% lower than the GDP for the first quarter of 2006.(The Portland Trust, July 2007) Besides the negative growth of the economy, it is the composition of the GDP that remains a cause for concern. The GDP is driven by Government and private consumption from aid rather than investment or production. Public sector employment for instance has increased by 60% between 1999 and 2006. Much of the foreign aid which could e used in infrastructure building is spent on salaries of government employees. (World Bank, 2007) Fig:2 Source: (World Bank Document, 2007) Even among Palestinians, the condition of those living in Gaza is particularly bad. Despite receiving aid, the number of people in Gaza living below the poverty line has increased from 21.6% in 1998 to nearly 35% in 2006. Without aid, the figure is likely to be around 67%. (World Bank, 2007) Fig:3 Source: (World Bank Document, 2007) Given the current economic scenario, it is likely that an independent Palestine face the immense challenge of managing the repercussions of years of negative economic growth and political instability. In the context of Palestine, the concept of 'peace' is crucial to the economy. According to a World Bank report, in 1968, an average Israeli was approximately 10 times richer than the average Palestinian. Today the situation is far worse. The GDP of Israel is almost 20 times that of Palestine and over 2/3rds of Palestinians live below the poverty line. (2007). This disparity in income level and lifestyle is a cause for concern. As Moshe Alamaro, a research scientist at the University of Massachusetts points out there can be no lasting peace if a destitute third world nation stress across the border to find a prosperous modern democracy. Alamaro compares the relationship between Japan and North Korea to that between in Israel and Palestine and says that Japan helped fuel economic growth in South Korea and thereby avoid any friction between the two states. Similarly, he believes that the west along with Israel needs to fuel economic growth in Palestine and thereby establish a mutually beneficial socio-economic relationship.(Alamaro, 2002) From the Palestinian perspective however, it is important to break free from the dependence on Israel. The Palestine National authority has charted a framework for Economic development. The framework suggests that dependence on Israel can be reduced by diversifying the export markets and import sources. Competitive pricing, long with the restructuring of productive structures and identification of strategic markets could also help the growth of the Palestine economy. Optimal utilization of its abundant labour force could also play a key role in the economy. (Palestinian National Authority) The framework also charts the need for Palestine to focus on physical, human and electronic infrastructure. Transport facilities need to be improved to make trade viable and competitive. Based on transit trade agreements with Jordan , Egypt and Israel, Palestine will need to build a multi-nodal transport system that includes cargo and transport facilities with Jordan, Egypt and Israel, air and seaport facilities using the neighboring Jordanian and Egypt ports and upgrade trade access routes and trunk roads. (Palestinian National Authority) In its early stages, the Palestine Government can also seek 'less advantaged nation' and 'most favoured nation' status with trading nations. (IDRC) .The European Union and Arab states could be a large market for Palestinian products. Investment on information and communication technologies (ICT's) could also mark the way forward for the Palestine economy. On the infrastructure level there is need to frame legislation allowing for the growth of ICT's. Private-public partnership along with competition can bring down prices and improve efficiency. The state will also need to train and retain talent in this field. Effective deployment of ICT's can result in betterment of public infrastructure with the improvement in quality of access and service. (Palestinian National Authority) Human infrastructure too is a key component to the growth of the economy. Palestine has a large young talent pool. Efforts must be made to provide quality education and training to enable people learn and adapt to the requirement of the global market. Besides education, the entrepreneurial drive in people must be recognized and encouraged. (Palestinian National Authority) The Palestine Economy comprises 3 major sectors, Agriculture, Industry and Services. Olive production contributes to nearly 25% of the agricultural sector. The climate in Palestine allows for the cultivation of a wide variety of crops. This was not possible because of constrains placed by Israel on the use of water and land. With the improvement of relations with Israel and settlement of issues pertaining to land and water, Palestine will now be allowed to increase and diversify their agricultural output. (Cottier, Pannatier, 2000) Organic olive oil exports have grown at 20% a year since 2002. (Portland Trust, Nov, 2007)Competitive pricing and effective marketing could further raise these figures and make a significant contribution to the economy of independent Palestine. Agriculture can become a major source of employment for Palestinians. The number of people employed in this sector has increased from 13.2% in Q2 of 2001 to 20.8% in Q2 of 2007. (Portland Trust, Nov, 2007) Over 60% of Palestinians live in rural areas and 90% of the workforce in this sector comprises women. Besides this, in the international market, Palestine enjoys a reputation of producing high-quality natural and organic products. This factor can improve the marketability of these products and help them target niche markets Knowledge of agricultural practices, technologies and access to modern farming techniques can give Palestinian farmers a competitive edge in the international market.. Besides Palestine also produces products like dates which are grown in very few places across the world. (Attaya,2005) The contribution of Palestinian industry to GDP has been less than that of agriculture. This sector which consists primarily of mining, manufacturing, construction and utilities, has been plagued by lack of infrastructure facilities, restriction imposed by Israel and lack of investment. Also the sector is dominated by small enterprises. Over 95% of the companies employ less than 5 people. (Cottier, Pannatier, 2000). One major problem that plagues the industry is labour costs. Because of its links to the Israeli economy, Palestinian workers of enjoy the high wage levels prevalent in developed economies. (World Bank, 2007) Microfinance sector is also seen as key to poverty alleviation and creation of jobs in Palestine. Efforts are need to encourage entrepreneurial efforts and provide the people with adequate technical and financial assistance. Existing entrepreneurs must also be allowed to upgrade their ventures and create further job opportunities. Based on the current economic scenario, it is expected that SMEs estimate their credit requirements over the next five years could be around $996m of which 95% of the amount would be in the form of loans over $10,000. (Portland Trust Website) However in an independent Palestine, the requirement could be far higher. Proper utilizations of these funds could result in economic growth, increase job opportunities and improvement in lifestyle. Services have also been an important contributor to the GDP in Palestine. Wholesale and retail trade along with transport and tourism used to account for nearly 25% of the jobs in Palestine during 1997-98.(Cottier, Pannatier, 2000). Because of its historic and religious significance, Palestine has the potential to become a favoured tourist destination. This sector remains rather undeveloped in the region and has immense potential. Palestine's geographic location also makes it an ideal bridge between the east and the west. On the one hand it can become the bridge between the Mashreq and Maghreb of the Arab World, and simultaneously be a bridge between Europe and the West and Western and Central Asia. Developing the tourist potential can help enhance the image of Palestine and also bring about significant economic gains. (Palestinian National Authority) To promote industry and encourage trade, and tourism, focus must be laid on infrastructure development. As a thumb rule is that it takes about $30,000 of investment per job created. If 40% of the population has to be employed it would call for an investment of $12 billion per million of population. Investment I infrastructure could cost about $6 billion per million of the population. (Brito, 2004) One interesting aspect about Palestine is that more Palestinians live outside the territory than within it. A large number of Palestinians live as refugees and there are many others who have achieved great success in foreign shores. (Cottier, Pannatier, 2000). With the formation of the Palestine state it is likely that many of these Palestinians residing outside might choose to come back to their land. First generation Palestine refugees might want to come back to the land they spent their childhood in. Others may just want to be part of a state that is formative of their identity. (Harel) With the coming of these people it is likely that there will be need to create more jobs and greater spending on infrastructure. At the same time the experience, skill and investments that comes with Palestinians who have seen success can contribute to the growth of the Palestine economy. With their skill and expertise they can provide employment opportunities to their people and ensure the progress of their state. The challenges are many. But the implementation of a careful planned strategy along with help from neighboring states and world bodies can help the Palestine economy gain momentum and strive for sustainability. References: Alamaro M, "The Economics of Peace", Harvard Business Review, November 2002. Accessed on 5 December 2007 at http://alamaro.home.comcast.net/alamaro/hbr_alamaro_nov_02.pdf Attaya,N, "Agriculture is a Key Pillar in the Palestinian Economy", Grassroots Online. 2005. Accessed on 5 December 2007 at http://www.grassrootsonline.org/news-publications/articles_op-eds/agriculture-key-pillar-palestinian-economy Brito DL, "The Economics of Disengagement",The James A BakerIII Institute for Public Policy, 2004. Cottier T, Pannatier S, "Overview of Palestine's Economic Policy and Foreign Trade Regime", London School of Economics, 2000. Accessed on 5 December 2007 at http://www.met.gov.ps/epp/EPPI/EPP_WYO_Work/7.pdfCottier -2000 Harel, A, "Whose Home is It Reflections on the Palestinian Interest in Return" . Theoretical Inquiries in Law, Forthcoming Available at SSRN: http://ssrn.com/abstract=555863. Accessed on 5 December 2007 Palestinian National Authority, "Framework for National economic Development: Economic Relief, Recovery and development strategy", Ministry of National Economy. Accessed on 5 December 2007 at http://home.birzeit.edu/cds/arabic/news/other/2004/apr-21-strategy.pdf International Development Research Centre (IDRC), "Evaluation of Palestinian International and Trade Agreements." Accessed on 5 December 2007 at http://idrinfo.idrc.ca/archive/corpdocs/124111/62067.pdf The Portland Trust Website. "Financing Palestinian SME's" Palestinian Economic Policy research Institute. Accessed on 5 December 2007 at http://www.portlandtrust.org/FINANCING_PALESTINIAN_SMES.html The Portland Trust Website, "Microfinance in the Palestinian Territories", Palestinian Economic Policy research Institute. Accessed on 5 December 2007 at http://www.portlandtrust.org/Micro_Finance_Palestinian_Territories.html The Portland Trust, Palestine economic Bulletin, November 2007. Accessed on 5 December 2007 at http://www.portlandtrust.org/Bulletin%20Issue%2014%20November%202007.pdf The Portland Trust, Palestine economic Bulletin, July 2007. Accessed on 5 December 2007 at http://www.portlandtrust.org/Bulletin%20Issue%2010%20July%202007.pdf The World Bank, "Two Years after London: Restarting Palestinian Economic Recovery", Economic Monitoring Report to the Ad Hoc Liaison Committee. Accessed on 5 December 2007 at http://www.minfo.gov.ps/English/reports/Restarting%20Palestinian%20economy%20-%20World%20Bank.pdf Read More