West Bank and Gaza : Area C and the future of the Palestinian economy

This is the first report to systematically evaluate and quantify the economic potential of Area C, which constitutes approximately 61 percent of the West Bank. The report reveals that lifting the restrictions on economic activity in Area C could have a large positive impact on Palestinian GDP, public finances, and employment prospects. Among other things, access to economic activity in Area C is expected to be a key prerequisite for building a sustainable Palestinian economy. However, full potential of the Area C could be materialized only if other restrictions on free movement of goods, labor and capital are removed and the overall business environment in Palestinian territories has become more attractive. The economic significance of Area C lies in that it is the only contiguous territory in the West Bank, which renders it indispensable to connective infrastructure development across the West Bank, and a relative abundance of natural resources situated therein. Area C offers large potential for the development of several sectors of the Palestinian economy: agriculture, stone and mineral processing, cosmetics, construction, tourism, and telecommunications. The report shows that access to economic activity in Area C could increase the Palestinian GDP by as much as 35 percent, the majority of this impact would stem from agriculture and Dead Sea minerals processing industries, as well as the multiplier effect, which has been estimated at 1.5. Although the importance of building connective infrastructure through Area C is discussed in the report, the quantification of this impact is beyond the scope of this report. An increase in GDP of 35 percent, although thought to be a conservative estimate, would be expected to result in at least $800 million increase in tax revenues for the Palestinian authority, which would drastically reduce its dependence on donor aid for financing chronic budget deficits.

Restrictions on economic activity in area C of the West Bank have been particularly detrimental to the Palestinian economy. Area C constitutes about 61 percent of the West Bank territory. Area C is richly endowed with natural resources and it is contiguous, whereas areas A and B are smaller territorial islands. Mobilizing the area C potential will help a faltering Palestinian economy. Since area C is where the majority of the West Bank's natural resources laid, the impact of these restrictions on the Palestinian economy has been considerable. Thus, the key to Palestinian prosperity continues to lie in the removal of these restrictions with due regard for Israel's security. This report shows that rolling back the restrictions will bring substantial benefits to the Palestinian economy and can usher in a new period of increasing Palestinian gross domestic product (GDP) and substantially improve prospects for sustained growth. This report examines the economic benefits of lifting the restrictions on movement and access as well as other administrative obstacles to Palestinian investment and economic activity in area C. It focuses on the economic potential of area C and does not prejudge the status of any territory which may be subject to negotiations between Palestinians and Israelis. The authors examine potential direct, sector-specific benefits, but also indirect benefits related to improvements in physical and institutional infrastructure, as well as spillover effects to other sectors of the Palestinian economy. Realizing the full potential of such investments requires other changes as well - first, the rolling back of the movement and access restrictions in force outside area C, which prevent the easy export of Palestinian products and inhibit tourists and investors from accessing area C; and second, further reforms by the Palestinian authority to better enable potential investors to register businesses, enforce contracts, and acquire finance.

Orhan Niksic, Nur Nasser Eddin, Massimiliano Cali. Includes Bibliographical References (pages 81-83) And Index.