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<b>Chapter 1</b><br>
<font size=+3>A society facing economic shocks</font><p>
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.<p>
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.<p>
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 <i>Intifada</i> 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.<p>
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):<p>
<ul>
<li> Asymmetric market relations with Israel and other countries that caused a bias towards export of labour
<li> Regulatory restrictions that held back the expansion of the private productive sector
<li> Fiscal compression that led to under-provision of public goods
<li> A declining natural resource base
</ul>
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.<p>
In recent years, three major shocks have shaken the economy of the
Occupied Territories. These are the <i>Intifada</i> continuing from 1987, the
Gulf War in January 1991, and the Israeli border closure in March
1993.<p>
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 <i>Intifada</i> 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.<p>
The <i>Gulf War</i> 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 <i>border closure</i> 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.<p>
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.<p>
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.<p>
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.<p>
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.<p>
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.<p>
<i>Figure 1.1 Economic situation in recent years</i>
<br>
<img src="bilder/011.gif">
<p>
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.<p>
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.<p>
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.<p>
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.<p>
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 <i>long-term effects of occupation and Intifada</i>, the
<i>medium-term effects of Gulf War factors</i>, and the <i>short-term
effects of the border closure</i>, in one and the same survey.<p>
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?<p>
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.<p>
We will now proceed by outlining a simplified model for possible
household adaptation strategies in a situation of reduced labour
income.<p>
<br>
<a name="model"><b><font size=+1>Model for household adaptation.</font></b></a><p>
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.<p>
<i>Figure 1.2 The household model.</i>
<br>
<img src="bilder/012.gif">
<p>
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.<p>
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.<p>
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 (<i>Zaqat</i>), and from
political organizations (e.g. "Martyr money" for families of
Intifada victims, prisoners).<p>
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.<p>
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.<p>
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.<p>
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.<p>
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.<p>
First, compensation may take place on the input side, through greater
involvement in household income-generating activities, or through
increased public or private transfers.<p>
Second, the output side may be adjusted to the new low level of input through
reductions in household consumption and investment expenditures.<p>
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.<p>
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.<p>
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 <i>individual</i> household members, 15
years of age or older, in the survey population.<p>
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.<p>
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 <i>household</i>
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.<p>
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.<p>
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