Chapter 1
A society facing economic shocks

The survey presented in this report aims to depict the situation for households in Gaza and the West Bank refugee camps as of autumn 1993. Like all small, open economies, the Occupied Territories are highly vulnerable to shocks from the outside world. Israeli military occupation has made the dependency on external events even stronger than in otherwise comparable economies.

The 1967 war brought with it profound changes in regional economic relations in the Middle East and had a penetrating impact on the economy of the Occupied Territories. Contacts with neighbouring Arab states were disrupted, and the economy of the Occupied Territories became oriented completely towards the much stronger Israeli economy. These changes have provided the backdrop for all subsequent changes in the economic environment in the area.

Mainly through export of manual labour to the Israeli economy, the Occupied Territories experienced rapid economic growth in the 1970s and early 1980s. After the outbreak of the Intifada in 1987, economic performance in the Occupied Territories has stalled, and developments have been even more heavily influenced by outside forces, due to a sequence of external political and economic shocks.

In its September 1993 report on the economy of the Occupied Territories, the World Bank lists four unusual features of the policy environment after 1967 (World Bank 1993:25):

  • Asymmetric market relations with Israel and other countries that caused a bias towards export of labour
  • Regulatory restrictions that held back the expansion of the private productive sector
  • Fiscal compression that led to under-provision of public goods
  • A declining natural resource base
The structural distortions described above have rendered the economy of the Occupied Territories highly vulnerable to economic fluctuations in Israel, but also to developments in the Gulf States, Jordan, and other countries in the Middle East importing Palestinian products and labour. The absence of Palestinian-controlled instruments for macro-economic policy has magnified the impact of the shocks, which have affected the Occupied Territories almost unmitigated by attempts at alleviation.

In recent years, three major shocks have shaken the economy of the Occupied Territories. These are the Intifada continuing from 1987, the Gulf War in January 1991, and the Israeli border closure in March 1993.

The outbreak of the Intifada has had a pervasive influence on the economy of the Occupied Territories. Normal economic activity has been disrupted through strikes, curfews and periodic border closures. Workers' earnings have been affected, both as a consequence of the above-mentioned factors, and through reduced demand for labour in Israel. The Intifada has led to a situation of general instability and unpredictability in the Occupied Territories. Together with increased and firm Israeli enforcement of taxation, it has created strong incentives against private investment and economic activity.

The Gulf War had dramatic short-run effects in early 1991 due to a 24-hour curfew, which for six weeks virtually paralysed the economy of the Occupied Territories. Stricter restrictions on employment in Israel after the initial complete border closure were to have more lasting effects, in particular in Gaza, where new permits were required for entry to Israel. Some of these restrictions were, however, later softened somewhat.

Public and private transfers also dropped sharply as a consequence of the Gulf War. Many households lost remittances, due to expulsions of Palestinians from several Gulf States. Furthermore, the loss of Arab grants distributed through the PLO deprived many households and institutions in the Occupied Territories of substantial financial means. Adding to the severe economic problems stemming from the Gulf War, the extremely harsh winter of 1991-92 caused extensive damage to West Bank agriculture.

Perhaps even more critical to the economy of the Occupied Territories was the March 1993 border closure, following incidents involving Palestinian workers in Israel. After an initial complete closure, some workers were re-admitted to their workplaces, but in far smaller numbers than before. New, meticulous and time-consuming security checks were introduced at the border checkpoints. Because many of the economic incentives for Palestinian employment in Israel still exist both among employers and workers, it is hard to predict how permanent the border closure will be.

All these shocks add up to a large adverse change in external sources of income growth. Loss of income from remittances and employment in Israel have only partly been counter-balanced by other factors. There has been some increase in demand for Palestinian workers in construction due to immigration to Israel from the former Soviet Union, as well as increased local construction in the Occupied Territories due to families returning from the Gulf after the war, but this demand has failed to compensate for the negative effects of the dramatic shocks described.

Today the economy of the Occupied Territories is in the process of adapting to a new situation of reduced household income. If employment in Israel is cut off permanently, there will be a far more urgent need to reorient the labour force and the economy towards domestic production.

Figure 1.1 places the negative shocks to the economy of the Occupied Territories in recent years along a time axis, highlighting the Gulf War and the border closure. The present survey must also be seen against the background of the Intifada, which is in effect low-intensity warfare with more or less active phases.

Figure 1.1 Economic situation in recent years

The same figure indicates the fieldwork periods of FAFO's two living condition surveys in the area. FALCOT 92 took place in the summer of 1992, after the Gulf War but before the border closure. FALUP 93 was carried out in October/ November 1993 and should thus be able to record effects from both these events as well as the Intifada.

The general aim of FALUP 93 has been to get a better understanding of the mechanisms at work among individuals and households with regard to adaptation to economic shocks. In pursuing this goal we have also updated economic data from FALCOT 92 and hence monitored developments in the area.

For reasons of time and cost, the scope of FALUP 93 has been limited in two ways compared to FALCOT 92. First, FALUP's geographical coverage is confined to Gaza and the West Bank/Arab Jerusalem refugee camps. Second, FALUP 93 investigates only conditions of employment and aspects of the household economy.

As to geographical coverage, we wished to select those areas which had scored lowest on the household wealth index in FALCOT 92. Emphasis was further put on employment and household economy because these living condition components were assumed to be most affected by the border closure. Moreover, there is little reason to believe that other aspects of living conditions, such as health or education, would be measurably affected during this short time-span.

Because of the diversity and magnitude of the shocks described above, it is important to specify what is really measured. We are plainly measuring the long-term effects of occupation and Intifada, the medium-term effects of Gulf War factors, and the short-term effects of the border closure, in one and the same survey.

The problem of interpretation is amplified because the survey has been conducted in two distinct geographical areas. Did for example the shocks have the same timing and impact in the two areas?

The answers to such questions will be left for the conclusion of the report. In the subsequent discussions we shall to some degree use FALCOT 92 as a point of reference for comparison with the new data. In Gaza, this approach should be straightforward, as FALUP 93 was conducted in the same localities as FALCOT 92, although other households were interviewed. In the West Bank refugee camps, however, the FALCOT 92 sample was generally too small to enable comparisons of results, and so none have been attempted.

We will now proceed by outlining a simplified model for possible household adaptation strategies in a situation of reduced labour income.

Model for household adaptation.

In what ways have households and individuals in the Occupied Territories responded to the economic shocks described above? To give an overview of household adaptation strategies and coping mechanisms, figure 1.2 presents a simplified model of the household economy.

Figure 1.2 The household model.

The input side of the model comprises three main components: income from (formal) labour activity, income from household activities, and public and private transfers. Income from formal labour activity increased substantially after 1967, constituting the main share of disposable household income. The recent cuts in Palestinian employment, particularly among those employed in Israel, have led to a sharp drop in labour income.

The importance of household income-generating activities declined steadily after 1967. The Intifada brought some revival of these activities, as self-reliance and reduced dependence on Israel could be highly desirable for ideological reasons.

Transfers comprise both public and private transfers. UNRWA support to refugees who fled in 1948 and to their descendants is the most important type of public transfers. Some UNRWA support is means-tested and distributed only to particularly needy households, the "special hardship cases". Other kinds of means-tested "public" transfers are social benefits from the Israeli Civil Administration, funds distributed through religious institutions (Zaqat), and from political organizations (e.g. "Martyr money" for families of Intifada victims, prisoners).

Private transfers are mainly remittances from family members working in the Gulf or in Western countries. Support among members of the extended family in the same localities is also common.

UNRWA support and social benefits per capita have remained relatively unchanged in recent years, but remittances have dropped dramatically after the Gulf War, as has support from the PLO.

The output side of the household economy model comprises various household consumption expenditures and investments. Average household consumption expenditures in the Occupied Territories increased sharply after 1967, mainly because of increased income, but also due to the decline in the self-subsistence economy. The Intifada brought a halt to this rising trend. "Investments" comprise traditional material investments, but also non-material investments like education of household members or sending them abroad to work or study.

The level of household wealth reflects cumulative differences between household income and consumption expenditures over time. The primary indicators for changes in net household wealth are developments in the household's stock of consumer durables, gold and other savings, and utilization of debt and credits. Household wealth increased from 1967 to 1987, but has most likely declined since the outbreak of the Intifada.

How have households in Gaza and the West Bank refugee camps responded to the sharp drop in labour income after the border closure in March 1993? On the basis of the simplified model about household economy, we may identify three principal coping strategies.

First, compensation may take place on the input side, through greater involvement in household income-generating activities, or through increased public or private transfers.

Second, the output side may be adjusted to the new low level of input through reductions in household consumption and investment expenditures.

Third, households can, at least in the short run, avoid having to adjust output by drawing on reducing their net wealth. Net wealth may decrease through sales of savings, by taking up loans or credits, or through a combination of these measures. For most households, this strategy can only be used as a temporary remedy.

It seems reasonable to assume that households will tend to choose some mixture of these three adaptation strategies. Since it is still not clear whether the cut-off of Palestinian employment in Israel will be permanent or temporary, an important question is how the composition of adaptation strategies will vary over time, depending on expectations of a lasting reduction in income from labour activity.

We will continue this discussion in chapter two below, with an investigation of the situation in the labour market as of autumn 1993. The units of analysis are all individual household members, 15 years of age or older, in the survey population.

Of principal concern are labour force participation, the prevalence and types of under-utilization of labour, and current employment patterns. A special section about individual engagement in household income-generating activities has also been included. Finally, we present some scenarios for future labour-force participation.

Chapter three focuses on how households as economic units adapt to the effects of the border closure. The first part of the chapter investigates income-generating activities on the household level, and whether household production have been increased to compensate for the loss of formal labour income. The second part discusses the relationship between household income types, the household wealth index, and employment. Here we focus on household systems for re-distributing economic resources among members, and to which extent households seem dependent on transfers from non-private sources like UNRWA.

The third part discusses net household wealth, measured through sales of savings, or through taking up loans or credits. We look into the prevalence of savings, as well as the use of and sources of credits and debt. Finally, we turn to the role of net wealth as a household coping strategy for various types of households.


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