Presentation to The International Conference: Economic Transformation

Revitalizing the Palestinian Economy: Challenges & Opportunities Presentation to The International Conference: Economic Transformation & Social Change in the Middle East Bassim S. Khoury Chairman of the Palestinian Federation of Industries Berlin December 5th 2007

Revitalizing the Palestinian Economy: Challenges & Opportunities The current Reality in Palestine: Israeli occupation’s impediments, slow political developments & growth of extremism: Critically destabilizing Palestine Potential additional instability factor for the ME and beyond

Revitalizing the Palestinian Economy: Challenges & Opportunities “ We are tired of this out-of-wedlock relationship, Israel should either marry us or let us go”(Elias Fraij, late mayor of Bethlehem,1980’s) Getting worse from 1980’s. In 2007,Palestinians see relationship with Israel as that of: enslavement with impoverishment

Revitalizing the Palestinian Economy: Challenges & Opportunities • Over- riding Challenge: 40+ yrs occupation • Challenges Pressing Relentlessly: Poverty, youth Unemployment & Reduced Per capita Income. Stagflation !! & Malnutrition. Massive Birth Rate & Brain Drain. Lack of Political Horizon. • Challenges Improving a bit 5. Frustration: Extremism & Lawlessness 6. Degradation of Social Values

Revitalizing the Palestinian Economy: Challenges & Opportunities • Poverty Rates – Q1 2007 In Q3 & Q4 2007 the situation is improving: formation of the Fayyad government

1- Per Capita Income Revitalizing the Palestinian Economy: Challenges & Opportunities When the Oslo was signed, per capita income in Israel was 11X that of Palestine. After six years of Peace the gap was 13X. Now it is close to 23 X. Gap between the Rich & Poor in Palestine has widened tremendously

Revitalizing the Palestinian Economy: Challenges & Opportunities 1. Unemployment • Need 50,000 annual new jobs annually. • More than 30,000 University Graduates from local • universities annually • More than 150,000 high school graduates per year Economy must grow 11% annually for 5 Years for Per Capita Income to go back to 1999 levels.

Revitalizing the Palestinian Economy: Challenges & Opportunities 1. Unemployment Rates – Q1 2007 Increased youth unemployment leads to: decreased stability

Revitalizing the Palestinian Economy: Challenges & Opportunities 2. Stagflation!! – Sharp Price increase Cost of living in 2006: Gaza prices increased by 70% more than increase in Israel high transaction costs due to M&A impediments

Revitalizing the Palestinian Economy: Challenges & Opportunities 2. Sharp increase in Gaza Food Prices In 2006: Food in Gaza increased by 250% more than increase in Israel high transaction costs due toM&A impediments.

Revitalizing the Palestinian Economy: Challenges & Opportunities 3- Birth Rates • Fertility rate: 4.6 • Natural annual population increase : 3.2 • Population (Jan 2007): • Jerusalem governorate: 411,885 • Gaza Strip 1,473,907 • West Bank 2,483,786 • Total 3,957,693 • Age : 0 - 17 = 52% & 15 – 29(youth) = 27%

Revitalizing thePalestinian Economy: Challenges & Opportunities 3- Brain Drain • Palestine is exporting the qualified and • skilledinstead of goods & services • Historically young entrepreneurs& the • middle class immigrated. Now, even • industrialists are leavingwith their factories.

Revitalizing the Palestinian Economy: Challenges & Opportunities 4 - No Political Horizon • Palestinian’s dream of statehood dream in ICU. • No solution in the foreseeable future • The end of the Two States solution

Revitalizing the Palestinian Economy: Challenges & Opportunities 5- Increased frustrations: Extremism & Lawlessness • Rejection of other interpretations • Violence as means to change Improving a bit: With the formation of the Fayyad government

Revitalizing the Palestinian Economy: Challenges & Opportunities 6- Degradation of Social Values • Fraud • Burglaries • Prostitution • Drugs Improving a bit: With the formation of the Fayyad government

Revitalizing the Palestinian Economy: Challenges & Opportunities • Opportunities: What is relatively good in the Palestinian economy: • Infrastructure is Relatively Good • Finance is Not a Significant Impediment • Corruption and Bureaucracy are Notserious • problems, (Below the Regional Norms) • Legal system is the Regional Norm • Literacy & Work Ethics • Debt Free National accounts • A Gate way to the World • A religion, cultural & heritage Epicenter

Revitalizing the Palestinian Economy: Challenges & Opportunities I. Infrastructure: Source: Investment Climate Assessment – World Bank

II. Finance is Not a Significant Impediment • Banks are highly liquid • Enterprises have collateral and most can afford credit • Given the low level of economic activity most enterprises do not need or want a bank loan at the current interest rates Source: Investment Climate Assessment – World Bank

III. Corruption and Bureaucracy are not Serious Problems • Corruption levels reported by businesses are below those reported in neighboring countries • Officials and utility providers are unlikely to ask for bribes • Large government contracts do require payments. Source: Investment Climate Assessment – World Bank

III. Corruption in the Bureaucracy is Low Source: Investment Climate Assessment – World Bank

III. Corruption is Below The Regional Norms Source: Investment Climate Assessment – World Bank

III. Avg. Days Waiting to Receive Operating License Source: Investment Climate Assessment – World Bank

IV. Legal System is the Regional Norm Source: Investment Climate Assessment – World Bank

V. Literacy and Work Ethics Palestine has high levels of literacy and Palestinians have good work ethics

VI. Debt Free National Accounts • Palestine has debt free national accounts & • Many untapped resources like: - The Gaza in Gaza: Estimated reserve USD 5 Billions. Expected yearly sales USD 400 Millions.

VII. Gate way to the World &VIII. Religion, cultural & Heritage: Palestine is well positioned in the path of major trading routes huge trade potential Free trade agreements with USA and Europe Significant to the 3 monolithic religions

Yet Palestine’s economy is not growing: I. Pal. manufacturing is not growing. • Manufacturing has low relative performance. • Contribution of manufacturing to GDP around 15%. Declined from 18% in 1999.

What Palestine needs: I. Access to Technologies II. Access to high end markets III. Access and Movement IV. New investments (instability is the main problem) V. Reduce the Cost Of Doing Business Revitalizing the Palestinian Economy: Challenges & Opportunities

I. Access to technologies: Revitalizing the Palestinian Economy: Challenges & Opportunities • Integrated approach: Fund Viable access to technology programs. • Bridge the R&D Gap • Applied R&D – benefit from salary gaps • Show case results • Motto: Teach today for tomorrows world • “It is often difficult to reconcile the use of M&A • restrictions for security purposes from their use • to expand and protect settlement activities” • (World Bank – May, 2007)

II. Access to high end market Palestine has trade agreements giving it access to the High End markets, yet no benefiting, no such access. Need to: • Encourage business contacts • Upgrading standards - training • Certification: Quality & Safety

III. Access & Movement: The biggest nightmare Revitalizing the Palestinian Economy: Challenges & Opportunities • More than 500 check points in the West Bank • Access of people and goods to Gaza curtaied • The Wall & the settlements • “It is often difficult to reconcile the use of M&A • restrictions for security purposes from their use • to expand and protect settlement activities” • (World Bank – May, 2007)

VI. No New Investments: Instability is Main Problem (From 3 Major Business Problems) Source: Investment Climate Assessment – World Bank

V. Reduce the Cost of Doing Business Revitalizing the Palestinian Economy: Challenges & Opportunities • Provide infrastructure at affordable prices • Reduce costs of funds • Reduce costs of Energy : electricity & fuel

Revitalizing the Palestinian Economy: Challenges & Opportunities The unbalanced “Balancing Act”: “While recognizing that Israel has legitimate reason to protect its citizens from violence, It is likewise recognized that this could not take place against the backdrop of Palestinian economic hardship and collapse” (World Bank, May 2007)

Revitalizing the Palestinian Economy: Challenges & Opportunities The vicious cycle: “economy hostage to security” Misguided policies in fighting extremism • The “security establishment” • must have a political & an • economic vision. • Economic prosperity should • be the tool to bring stability, • reduction of violence & thus • real security.

Revitalizing the Palestinian Economy: Challenges & Opportunities Reality in Gaza: I. Oslo – 2005 Disengagement: All Gaza trade from or through Israel (2 crossings): Population crossing through Rafah to Egypt Even though with high transaction costs life went on II. Disengagement – Q2 2007 (Post C. Rice M&A agreement) : Trade severely curtailed, drastic increase in transaction costs (payment to officials/contractors on both sides) Climax mid – end 2006. Mid 2006-Q1 2007 eased a bit (Big PS Pal. & Isr. Lobbying) Break down of law & order

Revitalizing the Palestinian Economy: Challenges & Opportunities Reality in Gaza (cont): III. Q2 2007 – June 2007 ( National Unity Era): Further easing a bit of crossings for goods & people Start salaries and PS arrears Further break down of law and order IV. Q3 2007 – Present: Hamas coup d’ etat against a Hamas majority Parliament & a Hamas majority Government of National unity gave Israel the perfect alibi to impose a Hermetic seal of Gaza ( only few essential food items and medicines allowed). A total melt down of the PS with 120,000 jobs lost Bloody take over, imposing some order but nolaw

Revitalizing the Palestinian Economy: Challenges & Opportunities Reality in Gaza: “ This cruel closure of Gaza which is effecting only the innocent must stop. It will not succeed, especially with tunnels bringing in Iranian cash and various other products. Boycotts generally do not work” (Dr Fayyad, Palestinian prime minister, Oct. 2007)

Revitalizing the Palestinian Economy: Challenges & Opportunities • Current reality in West Bank: • June 2007 – present: • Payment of salaries (stopped for 13 months) • Payment of PS arrears (more than 50% paid) • Improvements in law and order (Nablus) • A more relaxed environment • Government thinking ahead: • Preparation of 3 year plan • Openness to PS • Opportunity for PS to influence reforms • Economy Finally growing.

Towards greater European engagement. The need for “The Magnet” theory: Konrad Adenauer stipulated that creating a stable, prosperous & Democratic W. Germany will act as a magnet to counter communism and reunify Germany. To counter the Gaza model of brutality and destitute we need to build a better reality for the majority of Palestinians. Only ending the occupation & true reform will alleviate poverty and help the disenfranchised

Towards greater European engagement. • For the Magnet theory to succeed Germany needed the cooperation of its occupiers. The US obliged with the ‘Marshal Plan’. • How will our occupier behave? • A question with: • huge ramifications & • inherent ability to profoundly • change current dynamics

Revitalizing the Palestinian Economy: Challenges & Opportunities Reforms Uplift Standard of Living Sustainable Growth

Solution in the Short Term Solution in the Long Term Solution: Near Future Solution: Distant future Needed Reforms Today Where we want to be

Revitalizing the Palestinian Economy: Challenges & Opportunities Private Sector Agenda:KAS involvement Detailing needed reform measures

Revitalizing the Palestinian Economy: Challenges & Opportunities Occupation, settlements, the wall, closure: Pal. Territory Isolation Industrial Policies Legal Framework Trade Policies Fiscal / Monitory Policies

Revitalizing the Palestinian Economy: Challenges & Opportunities Thank You

Presentation to The International Conference: Economic Transformation