The Palestinian Economy. Theoretical and Practical Challenges

Proceedings “The Palestinian Economy: Theoretical and Practical Challenges” 427
Figure 2: Unemployment Rate in the West Bank and Gaza.
%
40
35
30
25
20
15
10
5
0
West Bank
Gaza Strip
Source: PCBS and Israeli Statistical Abstract.
2.3. Low investment
Among the main problems of Palestine, the lack of investment is a fundamental one but,
contrary to the traditional view, the investment constraint of the economy has nothing to
do with saving-constraints. There is general agreement among economists that most of
investment problems depend on tight direct and indirect hindrances to Palestinian
business activities. Israeli security controls and check-point procedures have made
transaction costs extremely high. Moreover, closures and movement restrictions have
fragmented the domestic Palestinian economy and forced Palestinian firms into small
local enclaves. Both facts have wide economic repercussions. First, high transaction costs
reduce the competitiveness of existing activities. Second, the impossibility to access to
large markets depresses entrepreneurs’ animal spirits, further curbs investments and
causes economic stagnation by constraining effective demand for Palestinian goods.
Therefore, these restrictions create an investment climate which depresses
entrepreneurship because they increase uncertainty and, therefore, risks. The uncertainty
about market access and market fragmentation prevent investors from seeing forward
linkages; this situations keeps investments low and it is the real cause of Palestinian
stagnation. So the lack of investments reflects not the lack of funds but the absence of
profitable investment opportunities.