SPECIAL PROJECTS

Joint Project 1995/96

BUILDING A BASE FOR COMMON SCHOLARSHIP AND UNDERSTANDING:
PALESTINE - JORDAN - ISRAEL
IN THE NEW ERA OF THE MIDDLE EAST

The Palestinian Team:

Dr. Mahdi Abdul Hadi, Head of PASSIA
Dr. Osama Hamad, Research Coordinator, MAS
Samir Huleileh, Assistant Undersecretary, PNA Ministry of Economy and Trade

The Jordanian Team:

Dr. Mustafa Hamarneh, Director, Center for Strategic Studies, University of Jordan, Amman
Hani M. Hourani, Director General of Al-Urdun Al-Jadid Research Center, Amman

The Israeli Team:

Dr. Asher Susser, Senior Fellow, Moshe Dayan Center for Middle Eastern and African Studies, Tel Aviv University
Dr. Elie Rekhess, Moshe Dayan Center for Middle Eastern and African Studies, Tel Aviv University
Dr. Martin Kramer, Head, Moshe Dayan Center for Middle Eastern and African Studies, Tel Aviv
Dr. Paul Rivlin, Fellow, Moshe Dayan Center for Middle Eastern and African Studies, Tel Aviv

Others:

Ms. Ailie Saunders, Head, Middle East Program, Royal United Services Institute for Defense Studies (RUSI), London
HE Richard Dalton, British Consul General, Jerusalem

Summary:

Economics and Demography - A Jordanian Perspective
by Hani Hourani

General observations:

Economic and demographic factors in Jordan have a reciprocal relationship and it is difficult to separate one from the other. Jordan's socioeconomic development has always been and still is influenced by regional conditions and is affected by the consequences of regional disputes, be it the Arab-Israeli conflict in general or particular events such as the Gulf War.

Population and demography:

Jordan's total population was 4,139,458 in 1994 - among them 1,193,339 Palestinians refugees registered with UNRWA. This implies a seven-fold increase since 1952 and an average annual growth rate of 4.7% (increased in 1991 with the return of expatriates from the Gulf). The average family consists of 6.2 persons. While in 1979, 50% of the population were 15 years old or younger, in 1994, only 41.1% fell into this category. The sex ratio is 100 females to each 109 males. 38% of the population live in the Amman district, followed by Irbid (18.2%) and Zarqa (15.4%). 92.4% of the population are Jordanian citizens while 7.6% are non-Jordanians. Illiteracy rates dropped from 48.2% (1979) to 20.6% (1994) among females, and from 18.9% to 9.8% among males. The rate of holders of secondary school certificates rose from 19.1% to 37.2% among males, and from 10.2% to 31.8% among females. 7.4% of the population are university graduates while 9% hold college degrees. 50.3% of the population over 18 years of age are economically active (83.9%= males). The labor force (1994) was estimated at 949,000 people, among them 795,000 males. 9.7% of the population changed their residence within the country, moving outside their place of birth.

Economy:

Jordan's economy is affected by regional developments, immigration patterns and the internal distribution of the population (manpower concentrated in central Jordan). Historically, Jordan has been influenced by two main factors: its small economy and lack of natural resources (limited by its small population, low per-capita-income and internal productivity capacity, which have made it dependent on foreign aid and imported resources), and the influence of its geopolitical position. The government is the largest employer (employing an estimated 50% of the work force).

All this led to the expansion of imports and limitations of exports of Jordanian origin and an increase in government spending while no remarkable domestic revenues were available. While remittances from expatriates working abroad and, domestically, revenues from the tourism sector help balance the balance of trade and the balance of payments, Jordan relies on foreign loans and aid to offset its budget deficit. Jordan's spending on consumption exceeded the GDP considerably and investment depended on external financing. State development projects were mainly financed with foreign loans which eventually led to Jordan's inability to service its foreign debts, which stood at US$11 billion in 1988. This led to negotiations with the International Monetary Fund (IMF) to reschedule the debts and to apply a structural adjustment program, which is still in force. In terms of labor, Jordan faces high unemployment rates, an absence of skilled workers, many of whom work in the Gulf, and an imbalance in its sectoral and professional distribution to the disadvantage of the commodity-producing sector.

Jordan's economy has achieved considerable growth, but mainly due to external funding and foreign aid, and without dealing with the underlying structural problems. Reforms are urgently needed, especially in the post-peace treaty era when competitiveness is becoming more important. Jordan has to reduce the economic role of the state while the private sector should be encouraged and government funds should be reallocated for infrastructural projects. Jordan has to create an attractive climate for investment. However, Jordan cannot be seen separated from its geopolitical context: its future will be affected to a great extent by the developments on the Israeli-Syria-Lebanon track, the PLO-Israeli final status negotiations, and the developments within the wider region.

Discussion: Jordan's GDP and prospects; impact of the peace process on the economy; the Gulf area and its meaning for Jordan; Jordan and the EU-Mediterranean partnership program; competitiveness in the region; Israel-Palestine-Jordan future economic links; priorities and opportunity costs for Jordan; underlying political structures; Jordan's population policy; refugee issue; population growth and policies; Jordanian expectations of peace dividends; possibility of Palestinian investment and capital flow into the West Bank and Gaza from Jordan; Palestinian-Jordanian confederation; regional integration.

Economics and Demography - A Palestinian Perspective
by Dr. Osama Hamad

The Palestinian economic capacity for job creation has traditionally been low and has led to huge migration rates. Emigration from 1982-90 was a relief for the employment market while now, there is negative immigration due to returnees and the coming young generation. Following the Gulf war, the availability of jobs in the Gulf and inside Israel decreased considerably, which means that the economy is now under extreme pressure to absorb the growing labor force.

Long-term Development Prospects:

A lasting and acceptable political solution will solve many problems and is the only basis for any real development of the Palestinian economy. Then, the economy will rely on experience, money and human capital from the Diaspora. What the inside lacks is available outside. As for sectoral development, the only sector truly capable of providing a high number of jobs is industry. However, careful consideration of what is advantageous for the Palestinian economy is needed (e.g., high-tech development vs. labor-intensive industries, export vs. import-substitution). Currently we cannot compete with the lower wages in Jordan while our prices and labor market are still influenced by Israeli conditions. Changes in this regard will depend on future trade arrangements and labor laws. As for high-tech industries, our education system cannot provide the necessary skills and qualifications. Here, too, a strong linkage to the Diaspora will be crucial. As for future trade cooperation, total independence from Israeli interference is decisive, and this includes the need for our own port and airport. As for capital creation, there are still limits. Most banks have only (re)opened in the past two or three years and the banking sector is still in the making; banks are hardly used other than to deposit money or obtain loans. The main resource base for the Palestinian economy remains the Diaspora, but it needs incentives and a healthy investment environment, including free mobility of capital, an infrastructure for funds systems and legal regulations regarding investment and other economic activities. Government intervention needs to be kept to a minimum.

Short-term Prospects:

In the short-term perspective the main obstacle for development is political uncertainty. In addition, Israeli measures such as closures impose harsh restrictions on any development and make it impossible to deliver. Regarding many imports, Palestinians are bound to Israeli trade agreements and cannot compete with their Jordanian counterparts. While we have to import our leather from Italy for example, Jordan purchases it in South East Asia where the prices are 20-30% cheaper. Another problem is our linkage to the Israeli wage structure, which makes our workers too expensive. Because of credit risks, loans are still unavailable to the poorer members of society. There is a lot of potential for progress, especially regarding housing-related lending, but it will depend on external support. Furthermore, private sector initiatives need to be encouraged; incentives could be given by introducing investment insurance schemes or export insurance programs, limiting the risks of those willing to invest. Shortcomings of the agreements with Israel also hinder our development (e.g., the Paris Agreement provides that some US$200 million of collected tariffs on imports go to Israel, not to the Palestinians). Israel has the right to veto on issues such as the Palestinian currency, and there is a pressing need to establish a Central Bank if we are to solve our liquidity problems. Lastly, we urgently need access to international markets.

Discussion: Investment structure and legal regulations in the Palestinian Territories; problems regarding transparency and monopolies; Palestinian competitiveness by sectors; free trade arrangements; taxes and revenues; Palestinians in the Israeli labor market - future prospects; Israeli intentions regarding Palestinian development.

Economics and Demography - An Israeli Perspective
by Dr. Paul Rivlin

Since 1990, the Israeli economy has grown rapidly, due to several reasons: There has been increased immigration from the former Soviet Union which has subsequently increased the demand for and the supply of labor. The peace process improved Israel's image and increased confidence in the region. This enabled Israel to import capital on a large scale and on favorable terms, which helped the effort to balance the deficit and finance the investment boom by supplier credits and loans; with the end of the Arab secondary boycott, foreign firms and banks began business with Israel. The burden of the defense budget was finally reduced, releasing resources for civilian uses and investment. The main growth occurred in the trade and service sector (by 12%), industry (7.5%) and construction (7%).

Nevertheless, the Israeli economy also faces problems. The balance of payments has deteriorated due to several factors, including: a high growth of private consumption; an unchanged Shekel-Dollar exchange rate which led to a real revaluation of the Shekel, making exports to the US less competitive and reducing the relative price of US imports in Israel; and slow growth in productivity.

Recent Israeli economic and demographic trends include:

• a gradual move towards lower government spending as a share of GDP;
• increased internationalization of the economy (opening up of formerly closed markets, new trade agreements and increasing foreign investment);
• increased level of spending on civilian research and development;
• a population growth that is faster than that of the EU states;
• the immigrant population constitutes some 12% of the total population or 15% of the Jewish population;
• Russian immigrants have a smaller average size than the average native-born Israeli family;
• since 1960, the Jewish population has grown more slowly than the minority population so that its share of the total population has declined continuously ever since.

Discussion: Relationship between Jews and Arabs in Israel; foreign investment; expected changes in trade relations; protectionism vs. free trade; Israeli-Palestinian economic ties; internal migration; right of return for Palestinians/returnees impact on the economy.