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

3. 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

4. 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.“

5. 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

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

7. 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.

8. Effects on economic activity

9. 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

10. 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).

11. 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.

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

13. Construction Sector

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

15. 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!

16. Indirect effects Multiplier effect 1.5 x

17. Restriction Removal could increase Palestinian GDP by 35 percent

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

19. …and at least 50% lower fiscal deficit

20. 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

21. …and last but certainly not least: reforms to improve business climate Doing Business 2013 RankDoing Business 2012 RankChange in Rank 135 0 Topic RankingsDB 2013 RankDB 2012 Rank Starting a Business179177 Dealing with Construction Permits130128 Getting Electricity8584 Registering Property7880 Getting Credit159165 Protecting Investors4946 Paying Taxes55 Trading Across Borders114116 Enforcing Contracts9394 Resolving Insolvency185

22. 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.