Situation in the Middle East concerning economic reconstruction and development, with particular reference to the Palestinian Authority territories


Doc. 7641

18 September 1996



by Mr BLAAUW, Netherlands, Liberal, Democratic and Reformers' Group


I.          Introduction

II.         The economy in the West Bank and Gaza Strip

III.       The structure of international assistance

IV.       Past and present reconstruction and development efforts

V.        Water management

VI.       Conclusions

            Appendix: Background: The peace process in the Middle East


1.         On 29 September 1993 the Parliamentary Assembly of the Council of Europe adopted Resolution 1013 and Recommendation 1221 on the peace process in the Middle East[2]. Recommendation 1221 fully supported the current peace process in the Middle East "as a means of resolving the Israeli-Arab conflict, on the basis of United Nations Security Council Resolutions 242 (1967) and 338 (1973)". The text also referred to the need to ensure "durable agreements" and recommended that the Committee of Ministers "urge the governments of member states and the Commission of the European Communities to support economic development programmes in the Middle East, mainly in the West Bank and Gaza Strip, and promote trade arrangements with local enterprises". Resolution 1013, referring to Recommendation 1221 , "reiterates its readiness to contribute to building a climate of confidence between the parties engaged in this process". Accordingly, the Parliamentary Assembly decided to invite "representatives and/or parliamentarians from all parties to the peace process to attend meetings it organizes (conferences, colloquies and seminars) on matters of interest to the Middle East countries".

2.         It was within this context that the Bureau of the Assembly established an ad-hoc committee to organise, in co-operation with the North-South Centre of the Council of Europe, a meeting on the implementation of Resolution 1013, in Rhodes, on 9-11 July 1995, at the invitation of the Greek parliament.

3.         It was decided in Rhodes that the Political Affairs Committee, through its Sub-Committee on the Situation in the Middle-East, and in co-operation with the North-South Centre, "could take the initiative to set up five task forces with a limited number of members and specific themes to deal with". In particular, one of such themes is economic development and reconstruction. The work of the task force on this theme has been coordinated with that of the Assembly committee concerned, the Committee on Economic affairs and Development.

4.         Accordingly, a meeting organized by the ad hoc Sub-Committee for the Task Force on Economic Development and Reconstruction in the Middle East was held in Brussels on 15-16 November 1995. The meeting was attended by members of the Parliamentary Assembly's Committee on Economic Affairs and Development, representatives of the Palestinian Authority, Israel, Norway, the European Union, international organisations, the Council of Europe's North-South Centre, research institutes and NGOs. The discussions of the meeting were extremely fruitful to further the understanding of priorities among the various parties.

5.         The Chairman of the Task Force meeting, Mr. Aristotelis Pavlidis, who is also Vice-Chairman of the Committee on Economic Affairs and Development, in summing up the deliberations of this meeting, pointed out that the role of the Council of Europe is one of serving as a catalyst for further contacts among the parties concerned, and also to act as an intermediary with the various financial institutions with which the Parliamentary Assembly, in particular its Committee on Economic Affairs and Development, has privileged contacts.

6.         It is essential that the peace process in the Middle East survive the many pressures brought on it. The Rapporteur takes comfort in the continuation of the process in spite of the tragic death of Israel's Prime Minister Yitzhak Rabin through an assassin's bullet in November 1995, and in spite of several suicide bombings in Israel in early 1996, causing considerable loss of life. The process gained momentum following the January 1996 elections for an 88-member Palestinian Council and a head of a Palestinian Executive Authority. It has continued, albeit at a more hesitant speed, following the change in government in Israel in mid-1996.


7.         The first important factor to bear in mind when analysing the economy in the West Bank and Gaza Strip (WBGS) is the fact that any study has had to cope with serious data gaps and inconsistencies. This being said, a great deal of assistance, provided by donor countries and international organizations especially since 1994, has been focusing on data collecting. Therefore, the Rapporteur is basing himself on indicative data collected from the most authoritative sources (including the World Bank, United Nations Development Programme/Programme of Assistance to the Palestinian People (UNDP/PAPP) and the IMF).

8.         In the last 25 years the economic performance of the WBGS can be characterized as rapid - albeit uneven - growth, especially until the early 80's. Then, a relative decreasing trend was exacerbated by the beginning of the Intifada in 1987, with the consequence of a real decline in all economic activities negatively affecting trade and employment. According to the World Bank, exports fell after 1987 and never fully recovered (in 1991 merchandise exports were estimated at US$248 million, compared with US$395 in 1987). This decline was mainly due to shocks caused by periodic closures and strikes, and amplified by a tightening up of the regulatory regime bearing on private sector activities, including restrictions on the movement of goods and people, prolonged delays in the granting of business licences and permits and stringent tax administration measures. Furthermore, even during growth years, various factors contributed to develop significant imbalances that now partly characterize the economy in the WBGS. Major distortions emerged in the production side of the economy, in the labour market, in the pattern of trade, in the balance between public and private consumption, and in the different level of wealth between the WB and GS[3]. In fact, most economic and social problems tend to be more acute in the GS than in the WB. The economy of the WBGS is principally based on private sector activities - accounting for about 85% of GDP - and mainly service oriented: a UNDP/PAPP breakdown by sector for 1995 indicates that agriculture is 28% of GDP, services 49%, construction 12% and industry only 8%.

a)         Shortcomings and positive features of the Palestinian economy

9.         The shortcomings of the Palestinian economy - related to structural distortions - are manifested in several areas:

i.          The economy is inward-looking and highly dependent on Israel for trade and employment opportunities. According to the PA Ministry of Finance, over 85% of overall trade is with Israel, which, in the period 1990-92 accounted, on average, for about 87% of total commodity imports of the WBGS and 83% of its total commodity exports. Wage remittances of Palestinians working in Israel averaged about 27% of GNP, while until the late 1980's (i.e. before the end of the oil boom and the Gulf War in 1991 ) the WBGS had more diversified sources of foreign exchange earnings, in particular from Palestinians working in the oil-exporting countries.

ii.          There is an unusually low degree of industrialization: the share of industrial production in GDP is a figure well below that of other economies at similar income levels. (Estimates for 1995 indicate a figure of nominal GDP per capita of US$1,677, one-tenth of that in Israel). Small enterprises dominate the industrial scene, with only about 3% employing more than 20 people. According to UNIDO, some of the most serious obstacles to the development of Palestinian industry are: severe constraints on imports and exports, lack of experience in modern marketing techniques, and a shortage of information on raw materials, intermediate goods, technologies, equipment and finished products.

iii.         The quality of physical infrastructure and public services is inadequate and considerably inferior to the levels achieved in neighbouring countries. This is especially true as regards urban water supply, electricity consumption (due to supply constraints and network deficiencies), solid waste collection, road networks, telecommunications capabilities and educational facilities. There is the further problem of water supply, both for the PA  and for the region as a whole, both at present and in the longer term. The Rapporteur is aware that this is in part an environmental issue, intimately linked also with agriculture. However, it is equally a vital determinant of economic development, an increasingly scarce factor necessitating careful use and fair sharing among all concerned. This is why your Rapporteur will deal with it at greater length in his continued work as Rapporteur on the more general subject of Europe's support for economic development in the Middle East and North Africa.

iv. Political, institutional and regulatory features are also a major constraint on economic growth. The main ones include, according to the PA Ministry of Finance:

- the absence of a developed banking system, and therefore of financial intermediation, which bears heavily on access to credit and, therefore, on a growth of domestic investments in the economy;

- tenuous property rights;

- a combination of licensing, taxation, and trade procedures and practices, which has increased the cost of private sector operations, created barriers to entry, distorted the allocations of resources, and discouraged the modernization of technology;

- uncertainty over political developments and associated security measures.

10.       The positive features of the economy are:

i.          The WBGS has no external public debt, and so far its domestic debt is limited.

ii.          The labour force is relatively skilled: there is a strong entrepreneurial tradition in the WBGS - proved by the resilience of most Palestinian firms even under harsh external conditions

iii.         Palestinians are highly educated, especially because much of higher education has been received from North American and European institutions. It should be remembered, however, that the quality of primary and secondary education in the WBGS is relatively inadequate.

iv.         There is potential for significant capital inflows from the Palestinian diaspora, provided that the political and security scenarios improve further.

b)         The PA representatives' perspective at the Brussels Task Force meeting

11.       At the November 1995 Task Force meeting in Brussels, the Assistant Undersecretary for Economy and the Assistant Undersecretary for Trade of the PA Ministry of Economy and Trade-Industry, both depicted extensively their view of the economy in the WBGS. Their remarks underscored many of the points presented in previous sections.

12.       As far as a short-term strategy for development is concerned, the main problem is a high rate of unemployment, which is the result of both long-term stagnation and Israeli border  closures. The issue of unemployment is also political, as it is directly related to social stability.

13.       As far as long-term strategy is concerned, the two main areas of intervention should focus on:

i.          Physical/social infrastructure. Over the last twenty years only US$15 per year per capita were invested in the WBGS (compared with US$1,000 in Israel in 1991 and US$400 in Jordan during the 1980's). Important examples are the road network and the electricity grid, which are not integrated;

ii.          The legal and regulatory environment. In the WB, pre-1967 Jordanian law is still in place, while in the GS some laws - such as company law - date back to the 1920s or longer. A comprehensive reform is needed in order to attract private investment.

14.       Although the PA has a variety of plans and projects at the micro level, for the time being an overall co-ordinating plan at the macro level is missing. Priorities until now have been defined by the World Bank and IMF in co-operation with the PA. The mechanism to build consensus within the Palestinian people on project and investment priorities is still not available. The Rapporteur is convinced that the Council of Europe could be very helpful in this respect. International assistance should also help efforts to link the executive to the private sector.

15.       The Palestinian economy has two main comparative advantages: a dynamic private sector and skilled human resources. Furthermore, a construction boom has been initiated by the peace process.

16.       More intensive trade with Europe and other countries in the region, including Israel, is needed, as is continuous technology transfer, for instance in agriculture and public health.

17.       There is an urgent need to establish or improve Chambers of Commerce, Manufacturers' Associations, Export and Specifications and Standards Councils as well as industrial zones. Europe could assist this process by engaging in more open trade policies and by granting export guarantees. (So far France is alone in doing so.)

18.       International donors have started concentrating on the private sector, in part because the PA is no longer operating under a deficit. However, as mentioned above, to render this approach more effective, it is necessary to build and upgrade the WBGS's infrastructure.


19.       The structure of international assistance to the Palestinian people can be looked at as a largely "vertical" set-up, with more "horizontal" implementation mechanisms at local level. This apparently complex structure has no doubt developed in order to reduce duplications and overlaps that might have resulted from the involvement of many donors in the reconstruction and development of the WBGS.

20.       At the top of the "pyramid" is the international political umbrella, the Multilateral Steering Group of the Multilateral Talks On Middle East Peace (MSG). The MSG approached peace in the Middle East from a regional perspective, identifying five areas: regional economic development, refugees, environment, water and arms control.

21.       In October 1993 the MSG created a Ministerial Ad Hoc Liaison Committee (AHLC) - of which Norway is the Chair and the World Bank the Secretariat - in order to link the MSG to development realities in the WBGS. The AHLC was set up to support social and economic development in the WBGS, with the overall objective of promoting and co-ordinating donor efforts to meet the development necessities of the Palestinian people (based on the US$2.4 pledges made in Washington, D.C., at the October 1993 Conference to Support Middle East Peace).

22.       The AHLC reviews the status of the Palestinian economy and the overall development effort, and promotes transparency. Consistent with the recommendation of the AHLC of September 1995, the second meeting of a Consultative Group (CG) for the WBGS met in Paris on 18-19 October 1995 to agree on a development strategy to guide the next phase of the peace process. The third meeting of the CG convened in Paris on 8-9 January this year.

23.       At the bottom of the "pyramid" is the local co-ordination structure. Apart from a liaison committee and a task force on project implementation, the local structure for international assistance relies on the decisions taken by the Local Aid Co-ordination Committee (LACC), set up by the AHLC in November 1994. The LACC, which met for the first time in January 1995, convenes on a monthly basis, and its members include the PA and donor representatives to the WBGS.

24.       Twelve Sectoral Working Groups (SWG) were established in January 1995 in order to promote and co-ordinate activities in PA's priority sectors. These are: agriculture, public finance, education, tourism, employment generation, environment, private sector development, health, infrastructure and housing, transport and communications, institution building and police. Since the membership of the SWGs includes representatives from both the PA and the donor community, in each of the SWGs the "Gavel Holder" is a PA representative, and the "Sheperd" a donor representative. The secretariat is ensured by the World Bank and the United Nations Special Coordinator Office (UNSCO)[4].

25.       A special role in the international assistance coordination effort is being played by the United Nations. In 1994 the UN Secretary General appointed a Special Coordinator in the Occupied Territories, Mr. Terje Rod Larsen, as the focal person for all the United Nations economic, social and other assistance in the WBGS. The Special Coordinator provides overall guidance to UN programmes and agencies in the WBGS, and facilitates co-ordination within the UN family, including the World Bank, in working towards an integrated and unified approach to the development effort. The Special Coordinator serves as the focal point in dealing with the donor community, maintaining relations with relevant regional organizations and financial institutions, as well as keeping close contact with non-governmental organizations.


26.       The first phase  of the development programme in the WBGS has been identified with the period starting in late 1993, immediately following the US$2.4 billion pledge made by 42 countries and institutions at the October 1993 Conference to Support Middle East, and ending in 1995. In the course of the past two years, a Triangular Partnership for Peace has been formed between the PA, the Government of Israel and the donor community, supported by the United Nations and the World Bank. This innovative partnership has been an essential element in focusing international aid and implementing investment programmes and assistance to the PA. The local co-ordination mechanisms described in the foregoing have helped increase the accountability, transparency and the efficient use of funds, targeting the areas of greatest and most urgent need, avoiding duplication and ensuring that the donor effort moves forward step by step.

27.       As of October 1995, and after a slow beginning due to difficult and exceptional conditions, donors had committed US$1.4 billion of the total US$2.4 billion ( 67% of this amount, US$1.6 billion, was pledged in the form of grants, and 33%, US$0.8 billion, in the form of loans and guarantees). According to UNSCO and the World Bank, about US$600 million, or 37% of the grant-based funds, have been disbursed by the donors. Of this amount about US$480 million have been realized on the ground, either through investments in projects through technical assistance, or through start-up or recurrent cost financing. Of necessity, the majority of funding has been dedicated to supporting the delivery of minimum public services and to the rehabilitation of a deteriorated and inadequate infrastructure. In the emergency conditions prevailing, particularly in the GS, only a small amount has been invested in building a new future in terms of increasing the capital base or providing for sustainable long-term employment. About US$67 million, or less than 10%, of the loans and guarantee financing have been committed, of which about US$10 million has actually been disbursed. A major challenge in the second stage of the donor effort will be to ensure that these forms of assistance can be used to finance long-term, sustainable development in the WBGS.

28.       The second phase, starting in late 1995 for a period of eighteen months, will have to respond to the fact that the present development effort underway is fragile, and vulnerable to political and economic disruption. This is due to:

-- the effects of border closures

-- as yet fragile Palestinian institutions

-- the necessity of ensuring tight fiscal control

-- the urgent need to increase the pace of project implementation

29.       The members of the Consultative Group that met in Paris in October 1995 agreed on a two-pronged strategy based on:

- continued support in favour of rehabilitation, institution-building and the Palestinian budget

- larger-scale programmes be launched as soon as possible, in housing and the social sectors, in infrastructure and in support of the private sector.

(At the last CG meeting in Brussels on 8-9 January 1996, donors pledged extra US$865 million.)


30.       Water has always been of central concern to life in the Middle East. Early civilizations emerged along the Tigris-Euphrates and Nile, and the struggle for water shaped life in desert communities. Yet concerns of the past are dwarfed by those of the present day. Burgeoning populations are placing unprecedented pressure on the resource (5% of the world population sharing just 1% of world water resources), urgently calling for new strategies as regards water planning and management, if escalating conflicts are to be averted and environmental degradation reversed.

31.       The water situation in the Middle East is precarious. Within one lifetime (1960 to 2025) per capita renewable supplies will have fallen from 3,300 cubic metres to 667 cubic metres, and in several countries of the region renewable freshwater will barely cover basic human needs by the early years of the next century. Rivers and aquifers crossing national borders are as invitations to conflict and pose difficult issues of resource management. As the limits of renewable supplies are approached, complex reallocation issues must be addressed if future crises are to be effectively managed, and costly desalination or other non-conventional sources of supply are to be avoided.

32.       Irrigation accounts for some 80 percent of use in the region, but demand is expanding most rapidly in urban areas. The region is highly urbanised, and the share of domestic and industrial demand in the total is already higher than in other parts of the developing world. By 2025, according to World Bank data, the share of population living in urban areas will increase from 60 percent to nearly 75 percent.

33.       Deteriorating water quality is an increasingly serious issue in several areas due to a combination of low river flows, inadequate treatment, pollution from agriculture and uncontrolled effluent from industry. Declining quality directly affects the utility of the resource, and treatment costs will rise steeply if rivers and potable aquifers are to be sustained in usable forms. Most health costs are associated with biological pollution, although chemical pollutants from industry and intensive agriculture are increasingly damaging. Seawater intrusion into coastal aquifers is a critical issue in most locations, and waterlogging and secondary salinity adversely affect several of the major irrigated areas.

34.       Water resource problems in the Middle East are among the most urgent, complex, and intricable of any region in the world. The Parliamentary Assembly of the Council of Europe can add impetus to new initiatives which must be flexible and fair to all parties, and tailored to the requirements of the region.


35.       It is clear from this report that the Palestinian Authority territories and the surround countries have a major opportunity radically to enhance their prosperity and thereby the prospects for peace itself - provided of course that the forces of peace themselves can continue to prevail. There is every evidence that they will, judging by the continuation, some would say acclamation, of the peace process in spite of the well-known tragic events in recent months. As we have seen there is an impressive will on all sides jointly to approach practical problems, thereby helping the fledgling Palestinian economy develop. The international community, including the Council of Europe member States, has also shown itself ready to supply the necessary resources. As recommended by the Task Force, it seems particularly important at the present stage to assist in the building of an efficient administration in the Palestinian Authority (PA) areas, including at local level, and to promote democracy and human rights in every possible way, in line with the Council of Europe's mission.

36.       We must also support, in our national parliaments, the participation of Council of Europe member states in the Middle East Bank for Reconstruction and Development agreed at the recent Middle East Summit in Amman, and to encourage international financial institutions to participate actively in this new undertaking.

37.       In addition, efforts must be intensified to improve further the co-ordination of assistance to the Palestinian Authority - not least among NGOs (including through the Council of Europe's North-South Centre).

38.       In presenting the present memorandum for a first discussion in the Committee on Economic Affairs and Development at its February 1996 meeting, the Rapporteur hopes for many comments from his colleagues, to be incorporated in the next version.

39.       Finally, it is to be noted that the present contribution forms the opinion of the Committee on Economic Affairs and Development on the Council of Europe's support for the peace process in the Middle East (Doc. 7363), for which debate the Political Affairs Committee is mainly responsible. The Rapporteur intends, however, to follow the subject of European support for economic development in the Middle East and North Africa beyond that debate (Cf. Doc. 7364), which was formally referred to our Committee for report (Ref. No. 2028 of 25 September 1995), since our Committee has yet to produce its proper report on this subject. He hopes to do this on the basis of a fact-finding mission to the area, in which the emphasis would be on economic aspects of the Middle East 'problematique' rather than the more purely political ones. The Parliamentary Assembly and the Council of Europe as a whole owes to this troubled region its involvement in these two equally important fields.

40.       In conclusion, the Committee approves the following paragraphs as amendments to the draft Resolution presented by the Political Affairs Committee in Doc 7636 (not available at the time of the approval of this contribution), while giving the Rapporteur latitude as to their precise insertion in that text and in consideration of any possible overlaps.

"1.        The Assembly believes that economic development and cooperation between the countries concerned is a condition for maintaining peace in the region and for the realisation of its rich human potential. At the same time it considers the continuation of the peace process a prerequisite for further economic development, including direct foreign investment.

2.         The Assembly calls on Council of Europe member states to focus their assistance on improving the region's infrastructure, in particular as regards ports, roads, telecommunications, energy transmission and water management, the latter being of special importance in the face of an upcoming shortage situation.

3.         The Assembly

i.          welcomes the already close cooperation among international donors and the countries in the region as regards the allocation of resources, and hopes that it can be further intensified;

ii.          expresses the hope that Israel will soon find itself in a position to ease the closure of border crossings to the Palestinian Authority entity it imposed after the recent terrorist attacks, in view of the great importance of cross-border contacts for economic development in the region;

iii.         asks Council of Europe member States to do their utmost to help the countries in the region develop their trade with Europe and to avoid any protectionist measures."



            Lengthy secret negotiations between the PLO and Israel began in April 1992 under the aegis of Norway's Foreign Minister Lohan Jorgan Holst. On 13 August 1993 these talks resulted in an agreement - the Oslo Accord - which provided for an Israeli withdrawal from the Gaza Strip and the West Bank town of Jericho, which would fall under the civilian control of the Palestinian Authority.

            On 13 September 1993, the Israelis and the Palestinians made a historic breakthrough in the peace process in the Middle East by signing at the White House, an agreement on Interim Self-Government Arrangements, the Declaration of Principles (DOP). The DOP called for a transitional period of no more than five years, during which final status arrangements for a lasting and comprehensive peace settlement would be negotiated. The DOP stipulated mutual recognition between Israel and the PLO, and a commitment by the Palestinians to end terrorism and delete from the Palestinian National Charter calls for the destruction of the State of Israel. Some major issues - the status of Jerusalem, refugees, settlements, security arrangements, borders, and relations with other neighbouring states - were deferred to "final status" negotiations. Only two weeks later, on 1 October 1993, the international community underlined the importance of the DOP at the Conference to Support the Peace in the Middle East: 42 countries and institutions pledged US$ 2.4 billion in aid to the Palestinian people.

            The Washington Declaration was signed on 25 July 1994 by Jordan's King Hussein and Israeli Prime Minister Yitzhak Rabin. The agreement ended the state of belligerency between Jordan and Israel and reinforced hopes for a comprehensive peace in the region. After the signing of three supplementary agreements between the PLO and Israel in the course of 1994[5], the peace process crossed another historic threshold in 1995.

            The Israeli-Palestinian Interim Agreement (IPIA) was signed in Washington on 28 September 1995. The political magnitude of this agreement is as significant as the DOP: the IPIA stated that a Palestinian Council would be elected for an interim period not to exceed five years from the signing of the Gaza-Jericho agreement (i.e. no later than May 1999). The negotiations on the permanent status arrangements will begin no later than May 1996. The permanent status negotiations will deal with remaining issues, including Jerusalem, refugees, settlements, security arrangements, borders, relations and cooperation with neighbouring countries etc.

Reporting committee: Political Affairs Committee (Doc 7636).

Committee for contribution: Committee on Economic Affairs and Development.

Reference to committee: Doc. 7363, Reference No. 2027 and Doc. 7364, Reference No. 2028 of 25 September 1995.

Opinion approved by the committee on 9 September 1996.

[1]. By the Committee on Economic Affairs and Development

[2]. See Appendix for the political background of the current peace process in the Middle East.

[3]. According to World Bank estimates, GNP per capita in the GS, with one of the highest population density in the world, amounted to US$1,230 in 1991, compared to US$2,000 in the WB. It should also be remembered that in the GS demand for water supply, infrastructure needs and dependency on the Israeli market for employment are much higher than in the WB. Moreover, investment per capita in the GS is less than half of that in the WB, while refugees make up over two-thirds of the population compared to about 40% for the WB. 

[4]. UNSCO has, however, delegated such responsibility to UNDP for six SWG's, to the World Health Organization for the SWG on health and to UNICEF for education (see appendix 3).

[5]. Cairo Accord: a document on principles of self-rule in Gaza and Jericho agreed to by PA Chairman Yasser Arafat and Israeli Foreign Minister Shimon Peres on 9 february 1994.

            Agreement on the Gaza Strip and Jericho Area: provided for the withdrawal of Israeli military forces and the transfers of cicil powers in these areas to the PA. Signed on 4 May 1994.

            Agreement on Preparatory Transfer of Power and Responsibilities: signed in Cairo on 29 August 1994 by PA negotiator Dr. Nabil Sha'ath and his Israeli counterpart Danny Rothschild. The accord set the transfer of the administration of education, tourism, health, social welfare, and direct taxation and VAT on domestic production in the West Bank. Effective 1 December, 1994, the PA assumed authority over the five civilian shperes of activity.

            Protocol on Further Transfer of Powers and Responsibilities: signed on 27 August 1995 this agreement transferred another eight spheres of activity (commerce and industry, insurance, gas and petroleum, postal services, labor, local government, statistics and agriculture) effective 1 September, 1995.