A World Bank report published ahead of a forum of donors to the Palestinian Authority to be held in Brussels next week warns of the continued deterioration of the Palestinian economy, one “that will have lasting and costly implications for economic competitiveness and social cohesion.”

The report called on the international community to consider not only the immediate fiscal stress of the Palestinian Authority, but also the long-term decline, caused directly by Israeli-imposed economic restrictions and the prolonged system of closures.

The report being published today, titled “Fiscal Challenges and Long Term Economic Costs,” summarizes the fiscal problems that characterized the recent year, including the world recession and the slowing of economic activity in Israel, higher than expected PA expenditures, lower than anticipated revenues, and a persistent shortfall in donor funding. Other factors mentioned in the report are large PA debts to banks and suppliers, delays in transferring custom rates collected by Israel, and delays in paying wages, which affected the quality of services and led to strikes and protests.

Still, the report determines that the Palestinian economy lost its competitiveness years ago, and that this trend will have long-term consequences. The report states that the PA’s substantial achievements in institution building are not enough to change the trend. The gross domestic product growth for the first three quarters of 2012 was 6.1 percent − down from an average of 11 percent in 2010 and 2011. The growth in Gaza was 7.7 percent, compared to 15 percent in each of the two previous years, and in the West Bank, 5.5 percent compared to 9 percent in each of the two previous years.

Despite the decline, these numbers seem positive in comparison to other states and in the context of the global crisis − a fact underlined by Israeli representatives in the forum of donors. The report fails to explain the seeming contradiction between the positive data and the negative overall review, but mentions that most of the growth was based on an increase of public sector activity, which lead to a substantial improvement of health, education and social services, in comparison to the years of direct Israeli rule.

‘Manufacturing stagnated since 1994’

Reiterating previous reports that stated the problems stemming from Israeli restrictions and the political stalemate, the report adds that “the growth potential of a small economy depends to a large extent on its capacity to compete in global markets − yet, since 1994, the Palestinian economy has been steadily losing this capacity. In particular, the manufacturing sector, one of the key drivers of export-led growth, has largely stagnated between 1994 and the present and its share of Gross Domestic Product ‏(GDP‏) has declined substantially.”

The report warns against the social implications of the economic situation: “With low labor force participation and high rates and duration of unemployment, many Palestinians of working age do not have the opportunity to develop on-the-job skills. Furthermore, the concentration of the labor force in small enterprises for trade and services is not conducive to the development of skills that would render Palestinian workers competitive in the global economy. The growth in public sector employment has supported job creation but is not a sustainable solution in the medium and long term. The worrisome implication of these phenomena is that the long term employability prospects for the Palestinian labor force are being eroded. In addition to the economic implications, protracted unemployment, especially among youth, tends to weaken social cohesion.

These figures indicate that Palestinian youth is highly discouraged from joining the labor force because of the lack of opportunities.

Unemployment and job loss are also associated with lower levels of both trust and civil engagement, which are two indicators of social cohesion. Given the fragile situation in the Palestinian Territories, protracted unemployment, especially among youth, raises the potential for growth in social instability.”