Paul Rivlin: The Crisis in Gaza
Source: CIA World Factbook

In April and May 2017, as tension mounted on the border between Israel and Gaza, the International Monetary Fund (IMF), the World Bank, and the United Nations Special Coordinator for the Middle East Peace Process (UNSCO) all issued reports on the West Bank and Gaza. These included analyses of economic and social conditions in the region and the UNSCO report also examined effects of the conflict between the Palestinian Authority, controlled by Fatah in Ramallah, and Hamas and its government in Gaza. These developments should be seen in their historical context.

Following the first Intifada, which began in Gaza in December 1987, exports, imports, and labor flows from Gaza to Israel fell. This effect intensified after 1991 as a result of a gradual closing of Gaza from Israel and from the West Bank. The process that began with the closure of the Palestinian territories during the Gulf War of 1991, gathered momentum later with additional and longer closures over time, culminating in an almost complete closure in 2006.

Following the withdrawal of Israeli settlers and armed forces from Gaza in 2005, Palestinians from Gaza were no longer allowed to work in Israel. This reduced per capita income sharply because those Palestinians who found alternative employment in Gaza earned less, in a much less productive economy. The decline of productivity and earnings, along with the rise of unemployment, meant that poverty increased dramatically.

A study conducted by the Aix Group (a Palestinian-Israeli NGO) identified two main obstacles to economic growth. The first was the restriction on the movement of goods and people caused by checkpoints, walls, fences, siege, and similar measures. The second was the restrictions on investment, which were both administrative and a result of high risk due to the frequent outbursts of hostilities, both of which deter investments. These obstacles have been much greater in Gaza than in the West Bank. The closure has had effects on agriculture, water supply, and electricity production. According to a World Bank report, by the end of 2008 approximately 50 percent of households lacked running water due to damage incurred during the war in 2008-2009. This damage was never completely fixed due to restrictions on the entry of construction materials. In addition, military operations caused immense damage to capital equipment and infrastructure and deterred new investments. The wars of 2008-2009 and 2012 resulted in damage that had not been repaired prior to the conflict in 2014. The 2014 war was the longest and the most devastating in Gaza since 1967 (See: Iqtisadi, August 2014).

Israel’s Coordinator of Government Activities in the Territories (COGAT) has noted another factor that is hurting the economy: Hamas, that has ruled Gaza since 2007. Since the 2014 war, Hamas has allocated at least $120 million to the construction of tunnels designed for attacking Israel and for smuggling. Concrete has been used to build the tunnels at the expense of civilian reconstruction. This activity endangered residents, and electricity has been used to build and light the tunnels 24 hours a day, while hospitals and private homes suffer constant power shortages. In 2016, 25 tunnels collapsed, killing 21 Hamas operatives and injuring many more.

Hamas imposes payments of almost $200 on imports of furniture from Israel into Gaza through the Kerem Shalom Crossing (on Gaza’s southern border with Israel), while it costs $80 to smuggle a suitcase through the tunnels between Gaza and Egypt. There is a $27 toll for trucks using through Salah al-Din road, which crosses through the Gaza Strip. These are part of Hamas’ system of taxes. In recent years, Hamas has begun to rely increasingly on domestic sources of income. It collects some $100 million in taxes each month, most of which is used to pay Hamas official’s salaries. Hamas has constantly increased taxes while evaluating traders’ responses to these measures in order to silence opposition to the taxation. After its takeover of the Gaza in 2007, Hamas generated funds by taxing trade through tunnels used to smuggle goods from Israel and Egypt, but had difficulties alleviating the economic hardships. The situation deteriorated following the Arab Spring in 2011 and reached a low point during the overthrow of the Muslim Brotherhood regime in Egypt in July of 2013. During this period, Hamas decided to impose more taxes on Gaza residents as foreign aid and smuggling revenues declined.

Several months later, in April 2015, Hamas promoted a new economic plan that included a so-called “solidarity tax.” Hamas has claimed that this new tax will help the poor of Gaza, but in practice, most of the profits from the taxes have been used to fund the salaries of Hamas’s workers. At the same time, Hamas has been imposing new taxes on the Strip’s residents, both directly and indirectly, in addition to increasing other taxes.

The most recent burden that Hamas has imposed on Gazans was to force merchants to pay all their taxes and debts before being allowed to leave the Strip. In February of 2017, Hamas released a new directive regarding the exit of businessmen and merchants from the Gaza Strip through Erez Crossing (on the northern border of the Strip) and Rafah (on the Southern border with Egypt). Businessmen and merchants now had to provide official documentation stating that they had settled their payments and debts with the government and local authorities before leaving the Strip. In addition, Hamas recently attempted to impose new taxes on construction materials, but the move was blocked after rising resentment by Gaza’s importers and Israel’s threat to ban all imports of construction goods to the Gaza Strip. Hamas is now planning to increase taxes in order to finance salary payments. In 2016, Hamas’ average monthly earning from taxation stood at $17 million, and by February 2017, tax revenues reached $28 million.

The tax mechanism that Hamas has created directly influences the lives of Gaza residents. For example, customs fees along with a special tax on cigarettes and tobacco products, which are smuggled through the tunnels, equal 50 percent of the total price. The customs fee paid for a pack of cigarettes is $1.50, and this means Hamas earns up to $10 million a month from cigarette smokers. In addition, Hamas collects taxes at the crossings between Israel and the Gaza Strip. At the Erez Crossing, Hamas collects various taxes, beginning with incoming mail, and including a toll for driving to and from the crossing. These taxes have even affected real estate as well. Not only is the rate of construction in Gaza down, and not rising as expected, but Hamas’ so called Land Authority collects a 17 percent tax from real estate agents on each deal.

By July 2016 Gaza’s population had reached an estimated at 1.75 million and was increasing at a rate of 2.9 percent a year, one of the fastest growth rates in the world. Almost 67 percent of the population was aged 0-24 years, and the crucial labor market entry age group of 15-24 year-olds accounted for 21 percent of the total population. These facts alone present a major challenge because the region is very densely populated and lacks water. These challenges are, of course, only part of the region’s problems, and are essentially political. The Gaza Strip’s territory is only 365 square kilometers (141 square miles) making it one of the most densely populated places on earth.

Since Hamas took over, there has been a serious deterioration in key socio-economic indicators. During the decade since 2007, the average GDP growth rate in Gaza was 2.8 percent compared to 6.9 percent in the West Bank. As Gaza’s average GDP growth rate was lower than that of the population growth rate, per capita real GDP in Gaza declined. This decline amounted to 5.3 percent from 2006 to 2016, while per capital real GDP grew by 48.5 percent in the West Bank during the same period, increasing the gap in living standards between the two areas. Gaza’s economic performance has been closely linked to developments in Israeli closure policies, as well as tensions with Hamas and the wars of 2008-9, 2012, and 2014. Real GDP in Gaza fell in 2007, 2008, and 2014. The contraction of economic activity was particularly significant in 2014 when real GDP fell by over 15 percent due to hostilities (See Figures 1 and 2). Inflow of foreign aid for reconstruction after each escalation of hostilities helped boost Gaza’s growth rate but only temporarily. The poverty rate has reached about 40 percent and is much worse than in the West Bank.

Figure 1: GDP Growth in the Palestinian Territories, 1995-2016