Area C and the Future of the Palestinian Economy Orhan Niksic, Senior Economist The World Bank

The Palestinian Economy Growth: a roller coaster rideConsumption has been the main driver of growth Unemployment remains very high Low share of exports in the economy

What is Area C The Interim Agreement between the PLO and the GoI divided the West Bank into three areas under different jurisdictions: Areas A, B and C. Area A: 18 percent of West Bank, full Palestinian security and civil control, urban centers. Area B: 21 percent of West Bank, Palestinian civil control and Israeli security control, peri-urban areas and small towns. Area C: 61 percent of West Bank and defined by the Interim Agreement as "areas of the West Bank outside Areas A and B, which, except for the issues that will be negotiated in the permanent status negotiations, will be gradually transferred to Palestinian jurisdiction.“

What is the report about? Area C = 61% of West Bank, but negligible economic activity there & wider impacts! REASON: Restrictions OUR OBJECTIVES: – Understand the mechanisms – Estimate macroeconomic impact and potential

Why does Area C matter? Sheer size? NO Contiguity? YES – Connectivity Infrastructure Costs Resources? YES – Land – Other natural resources

How is the problem manifested? Very difficult to: – Develop communications and other public infrastructure – Build any permanent structures commercial and residential. (1.6% of permit applications approved) – Enforce property rights.

Effects on economic activity

How we measured direct effects on Palestinian economy? (1) Identified sectors evidently and significantly affected by restrictions: – Agriculture, – Dead Sea minerals-based industries, – Stone & Marble, – Construction – Tourism, – Telecommunications. (2) Constructed counterfactuals assuming: NO RESTRICTIONS AND ATTRACTIVE BUSINESS CLIMATE

Potential: Agriculture Assessed incremental production: – Mostly through irrigation – No productivity growth! – Excluding land used by settlements Estimated as much as $700 million potential in incremental value added (7% of GDP).

Dead Sea Resources Dead Sea is home to vast deposits of valuable and relatively rare minerals. Investment in potash & bromine industries: $920 million in incremental value added or 9% of Palestinian GDP.

Stone Mining & Quarrying Majority of stone deposits lie in Area C Current operations threatened. New quarries in Area C $240 million IVA

Construction Sector

Tourism Tourism has a huge potential in Palestine Home to 3,110 archeological sites And Dead Sea Potential: $126 million

Telecommunications Key problems related to Area C restrictions: Infrastructure development (fixed and mobile) Lack of effective Law enforcement in Area C Illegal competition & no access to 3G frequencies $50 million in forgone VA …and a much larger potential threat from illegal competition!

Indirect effects Multiplier effect 1.5 x

Restriction Removal could increase Palestinian GDP by 35 percent

The associated benefits would be large Large growth in employment and drop in unemployment rate Lower poverty and improved living standards

…and at least 50% lower fiscal deficit

And what will it take for this to happen? Removal of restrictions on movement and access in Area C. Removal of broader movement and trade restrictions. Overall improvement in risk environment

…and last but certainly not least: reforms to improve business climate Doing Business 2013 RankDoing Business 2012 RankChange in Rank Topic RankingsDB 2013 RankDB 2012 Rank Starting a Business Dealing with Construction Permits Getting Electricity8584 Registering Property7880 Getting Credit Protecting Investors4946 Paying Taxes55 Trading Across Borders Enforcing Contracts9394 Resolving Insolvency185

Summary of Findings Development in several sectors crucially depends on access to Area C. Area C critical to infrastructure development. Access to Area C is essential for sustainability of the Palestinian economy. Broad removal of restrictions is necessary. Reforms by PA are also necessary.