The Deterioration of the Palestinian Economy | Economic Growth | Economic Inequality

Firas A.

(ISM IB2-A)

World Bank-IMF says Palestinians' economy faces more dark times this year, needs more aid
The chosen article mainly discusses the reasons for the deterioration of the Palestinian economy, and outlines the increased need for aid – including associated problems with it. The article reveals a clear relationship between the still ongoing Israeli-Palestinian conflict and the very poor economic performance of Palestine.

One main problem facing the Palestinian economy in the future can be identified to be the increased dependence on foreign aid – much needed aid that is declining at an increasing rate. The reason for the aid declining at an increasing rate can be found considering political instability and corruption. In the article it is stated that project financing is estimated to have fallen by almost $ 150 billion in 2006. The recent detention of Palestinian members of the parliament and ministers has further complicated the government’s ability to function and increased its dependence on foreign aid. Political instability and corruption can both be identified to represent major barriers to growth and development. The Israeli-Palestinian conflict has caused significant loss of life and displacement of the population. During the conflict, a large part of the much needed Palestinian infrastructure has been destroyed, discouraging investment and aid. Infrastructure is a term embracing utilities that are necessary for economic activity. Examples are airports, roads, water systems, sewage treatment, telecommunications and railways. In addition, restrictions on movement and access imposed by Israel have further limited the flows of goods and people. The overall ability for Palestine to achieve economic growth is severely impacted, as goods cannot be transported from one area of the country to another due to movement restrictions or the lack of proper roads. Moreover, numerous power cuts and generally unreliable power supplies make the efficient production of goods almost impossible. Even the coordination of economic activity is severely limited due to poor (or non-existent) communication channels. However, limited infrastructure does also limit or even eliminate development prospects for Palestine. One simple example is how poor public transport makes it impossible for children to get to school, hindering them to obtain a proper education.

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Firas A. (ISM IB2-A) On the other hand, corruption remains to be a major issue in Palestine. It is generally known that if government officials are not well paid, they tend to dishonestly exploit their power for personal gain. As can be read in the article, resources available to pay the Palestinian Authority's expenditures fell by more than a third in 2006 compared with 2005. Money that is made by means of corruption is oftentimes immediately moved out the country. This form of capital flight has resulted in a significant decrease in internal investment. Moreover, corruption has lead to an unfair allocation of resources, resulting in market failure and misallocation of resources. One example is where contracts are given to the highest bidder, instead to the most efficient producer. Inefficient producers are oftentimes protected from competition by means of this method.

Another problematic issue hindering growth and development in Palestine is the unequal distribution of income. The actual inequality can be measured by the Gini coefficient.1 In the case of Palestine, the Gini coefficient was found to have increased by 73% between 2005 and mid 2006. In fact it was 0.37 in 2005 and increased at the end of the second quarter 2006 to 0.64.2 Such high income inequality acts as a major barrier for growth as the poor are only able to save a very small proportion of their income. Low savings lead to low investment, therefore leading to low growth. Thus many Palestinians find themselves trapped in a poverty cycle, which is a linked combination of barriers to growth and development. Such a cycle is summarized below3:

Growth

Development

Low economic growth

Low levels of education & healthcare

Low levels of investment

Low incomes

Low levels of human capital Low productivity

Low levels of saving (High MPC)

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Source: http://en.wikipedia.org/wiki/Gini_coefficient Palestinian Central Bureau, http://www.pcbs.gov.ps/Portals/_pcbs/PressRelease/endyear2006_E.pdf 3 Oxford University Press, Econ. Course Companion 2007, Barriers to economic growth/development, p. 343
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Firas A. (ISM IB2-A) High income inequality in Palestine is marked by the rich moving large amounts of funds out of the economy (capital flight). A large proportion of the goods purchased by the rich are foreign-produced which means that their consumption does not help the domestic economy at all. It rather contributes towards a current account deficit, as seen in the red marked values in the table below:
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In conclusion it can be said that the only solution to most problems described above (political instability etc.) is peace.

Word count: 700
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PCBS, 1994 – 2003. National and labor force surveys URL http://static.flickr.com/81/238282802_6eb6114e95_o.png

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