By Elisabeth Koek
The economic state of the newly recognised State of Palestine
In the face of the global financial crisis, the Palestinian economy seems to have made significant advances since 2007. Palestine’s Gross Domestic Product (GDP) hovered around the US$4.5 billion mark in 2007 and 2008, whereas the 2011 figures point to a GDP of some US$6 billion. While growth of the Occupied Palestinian Territory’s (OPT) economy is in and of itself commendable, it is imperative to consider the broader context, including the origins of economic growth and the actors who contribute to it.
According to a recent World Bank report, the OPT’s economy continued to grow during the first four months of 2012, although not at its previous pace. A major decline in the Gaza Strip’s tradable sectors, such as agriculture and fishing, has contributed to the stagnated economic growth rate witnessed during 2012’s first quarter. In the same period, the economic growth rate in the West Bank did not exceed its 2011 level.

Notably, economic activity of the West Bank’s tradable sectors also declined. Construction slowed down significantly as a result of the increasing amount of Palestinian Authority (PA) arrears to local contractors, and the growth rates of manufacturing and agriculture sectors diminished. Most of the West Bank’s economic growth came from an expansion of services, VAT collections, and wholesale and retail trade.

The continuous expansion witnessed in non-tradable sectors not only contributes to a distortion of the state of Palestine’s economy as one that is subject to consistent sustainable economic growth, it also clearly exposes the role of donor aid in driving the Palestinian economy. As such, various analysts, including the World Bank, have suggested that to halt the downward trend in economic growth and to subsequently make it sustainable, the potential of the Palestinian private sector must be explored.
While there is undoubtedly a strong argument to be made for incubation of Palestinian private sector capital to generate development and growth across the OPT, the root causes of the stagnation of the OPT’s economic growth rate must not be ignored. It is, furthermore, vital to work towards solutions that are informed by the broader context of the on-going Israeli occupation of the OPT.

The ever-increasing dependence on foreign aid, closely intertwined with the PA’s protracted fiscal crisis, and the restrictions imposed by the Occupying Power form the ingredients of a dangerous cocktail of an impending economic implosion. Short-term “donor-funded Band-Aids” or medium-term solutions involving private sector investments cannot stand in isolation and must be accompanied by political efforts to lift Israel’s multi-layered system of restrictions that continues to severely curtail sustainable economic development and growth in the OPT.

The lack of access to water as a root cause of the economic decline in the agricultural sector
Prior to 1967, the agricultural sector accounted for more than a third of Palestine’s GDP and was equal in size to the Israeli agricultural sector. Today, the agricultural sector contributes not even 5 percent and continues to shrink as a result of Israeli restraints.

Palestinian farmers across the OPT rely on the water resources of the Mountain Aquifer and the Coastal Aquifer, two major productive groundwater resources shared between Israel and Palestine, for irrigation of their lands. The bulk of Palestinian agricultural and grazing lands are located in the West Bank’s Area C, which covers some 60 percent of the West Bank, including the majority of the Jordan Valley. Area C is considered the “bread-basket” of the West Bank because of the abundance of fertile agricultural lands and water, providing an economic foundation for growth in key sectors of the economy. As the only contiguous land in the West Bank, Area C connects the numerous Area A and B enclaves, which are fragmented by the surrounding Israeli settlements, established in contravention of international law. Since the Israeli occupation of the OPT, Israel has consistently implemented policies and practices that mainly revolve around exercising control over Palestinian land and water. This has made it virtually impossible for Palestinian farmers to access, cultivate, and irrigate their lands.

In particular, Israel’s exercise of exclusive control over the region’s shared water resources contributes to the decline in the agricultural sector. Since the Six-Day War of June 1967, during which Israel captured and occupied lands strategic for its natural water resources, Israel has exerted considerable military and political efforts to consolidate and conserve its exclusive control over the major surface and groundwater resources of the region. This has included military orders declaring all water resources subject to Israeli military control, the establishment of settlements, and the discriminatory allocation of water resources, a restrictive permit regime, and frequent confiscation and destruction of water infrastructure, mainly in Area C of the West Bank.

Currently, Israel exercises control over some 80 percent of all shared water resources in the region, thereby hampering Palestinian access and use of its share. The remaining water and infrastructure available for Palestinian use is largely located in Area C and thus regulated and controlled by the Israeli Civil Administration, which has actively and systematically denied permits for any construction or maintenance of water infrastructure. Any water structure built without a permit from the Israeli authorities – permits that are virtually impossible to obtain – faces the risk of confiscation or demolition. At the same time, Israel has developed wells, mainly concentrated in the Jordan Valley, and allows its national water company, Mekorot, to pump copious amounts of water directly from the wells to the settlements. The water is intended for irrigation of high-intensive and specialised agricultural production, enabling settlers to develop and profit from flourishing agricultural enterprises.

The Jordan Valley settlements have plentiful water available to cultivate all their lands with crops that require significant amounts of water, often received against subsidised prices by the Israeli government. Illustrative are the dates of Tomer, the grapes of R’oi, the bananas of Shadmot Mehola, and the watermelons of Na’aran settlement. Next door, Palestinian farmers are forced to depend on Mekorot for their water supply, which Mekorot often significantly reduces during the summer months – sometimes by as much as 50 percent – to meet consumption needs in settlements. Due to the lack of control over and consistency of the amounts of water supplied, farmers have no choice but to purchase water from external vendors against high prices, adding considerable financial strain to already struggling businesses. Consequently, Palestinian farmers are limited to low water-intensive crops, such as potatoes, cabbage, beans, cauliflower, okra, and zucchini. Many farmers do not even have enough water to cultivate all their lands, leaving large portions of their highly fertile lands fallow.

The availability of and access to water enjoyed by Israeli settlers demonstrates that resources are available and that the lack of sufficient water for Palestinians to unleash the potential of their agricultural sector is a direct result of Israel’s discriminatory policies in water management. Furthermore, Israel’s illegal appropriation of Palestinian water resources violates the provisions of international humanitarian law, as well as the international legal principle of “equitable and reasonable utilisation” enshrined in transboundary water law. This principle, binding on all states, determines equitable apportionment of shared water resources, considering various different factors. Among the factors are the social and economic needs of the sharing states. As such, the size, state, and needs of the agricultural sector of one state’s economy could be significant when setting standards for equal apportionment.

Private-sector capital potentially futile
The World Bank has suggested that if Israel lifts restrictions on access to land and water in the West Bank and allows Palestinians to cultivate an additional 1.5 percent of Area C, an extra US$1 billion could be generated per year. Others have argued that the amount of Palestinian land suitable for agriculture would triple if sufficient water were made available for irrigation, creating more than 30,000 jobs and allowing for an estimated potential income for farmers and hired labourers of some US$600 million.
However, all these projected estimations and developments stand on the political will of the international community of donors. While incubation of private-sector capital, whether derived from local or foreign investors, would certainly be required, it will fall short in making the Palestinian economy sustainable if the broader context of the on-going Israeli occupation is ignored.

Moreover, it is highly unlikely that private investors would commit to investing in agriculture, or any other industry for that matter, if uncertainty over the ability to bring in materials needed to be able to compete with modern agricultural enterprises or to obtain construction permits for the necessary infrastructure, visas, and export licenses remains. As long as any development or construction of new economic activity in Area C continues to face the risk of demolition, private-sector capital will steer clear of the whims of the Israeli government.

Looking into the future
The current protracted fiscal crisis experienced by the PA due to falling donor aid demonstrates that sustainable growth of the tradable sectors is direly needed to continue to boost the Palestinian economy until after the donor community ceases its financial support. Therefore, the root causes of the rapid economic decline of sectors such as agriculture can no longer be ignored – even tolerated. If the international donor community is serious about its endeavours of making the Palestinian economy sustainable, its political efforts must match its financial support.

Once Israel has abandoned its multi-layered system of restrictions, especially on access to land and water in Area C, the Palestinian government must promote investment by creating a favourable environment for foreign and local investment through direct and indirect investment incentives.

Elisabeth Koek is currently working as a legal researcher for Al-Haq. Prior to her work with Al-Haq, Elisabeth worked in Johannesburg on socio-economic rights issues and in Amsterdam and New York in corporate law. Elisabeth holds an LL.M in public international law from King’s College London, as well as an LL.M in corporate law from the University of Leiden Law School in the Netherlands. This article reflects the personal views of the author only. Elisabeth publishes regularly on the topic of human rights.