Contrary to the optimistic forecasts mentioned in the preamble to the Paris Protocol, between 1994 and 1997, the Palestinian economy suffered a significant decline, reflected in a sharp fall in the standard of living. The principal reason for the decline was implementation of Israel's closure policy continuously from 1993, primarily the frequent comprehensive closures that were imposed from 1994 to the end of 1997. In 1998 and 1999, Israel did not impose a comprehensive closure, and consequently the Palestinian economy recovered somewhat, although not to its level on the eve of the Oslo Accords.
The most significant effect of the closure policy was the sharp rise in unemployment, which followed the loss of jobs in Israel. Whereas in 1992 some 30 percent of the workforce from the Occupied Territories were employed in Israel, in 1996, that figure had fallen to only seven percent and the average rate of unemployment reached a peak of 32.6 percent. During comprehensive closure, unemployment reached 70 percent in the Gaza Strip and 50 percent in the West Bank. In the first half of 1999, unemployment in the Occupied Territories stood at 24 percent. Despite the improvement, it should be noted that the rate of unemployment is still extremely high. In comparison, unemployment in Israel in 1999 was nine percent, a figure that the Israeli public considers grave.
The closure policy created problems for Palestinians exporting agricultural and industrial products to Israel and other countries. During the closure of August-September 1997, the loss of trade by Palestinians amounted to $ 50 million. Closure particularly affects the sale of farm produce because many products cannot be preserved throughout the period in which the borders are closed, or because of high storage costs.
The closure policy also created a severance between the Gaza Strip and the West Bank, greatly reducing trade between the two areas and harming Palestinian agriculture and industry by not enabling Palestinians to exploit the relative advantages of each area. For example, whereas prior to imposition of the closure policy in 1993 approximately 50 percent of goods produced in Gaza were marketed in the West Bank, in 1995 that figure stood at only eight percent. As mentioned, the absence of prolonged comprehensive closures in 1998 and 1999 somewhat reduced the damage from severance of the areas. Further improvement is expected to result from the opening of the southern safe passage route in October 1999, which enables freer movement between Gaza and the West Bank.
The grave damage caused by the closure policy is clearly reflected in the fall in Palestinian gross national product, the most comprehensive economic indicator. From the end of 1992 to the end of 1997, real GNP in the Occupied Territories fell by 20 percent. Taking into account population growth during that period (six percent a year), the per capita decline was 37 percent. In the past two years, in which Israel did not impose any prolonged comprehensive closures, Palestinian GNP grew at around four percent a year. However, this growth has not "compensated for" the sharp decline that occurred during the previous four years.
The deterioration of the Palestinian economy during the years in which Israel imposed comprehensive closures on the Occupied Territories directly affected the population's standard of living. During 1996, household consumption was five percent lower than in 1995. This decline was affected, in part, by reduction in consumption of basic products, such as food, clothing, and education. The decline in consumption continued, although at a lower rate, in 1997 and 1998. The decline was accompanied by a persistent increase in the number of persons living in poverty. The Palestinian Central Bureau of Statistics set the poverty line at $650 a person/year. At the end of 1998, some 23 percent of the Palestinian population in the Occupied Territories were living on less than this amount. In the Gaza Strip, where a significantly larger percentage of the population works in Israel, the poverty rate rose from 36 percent at the end of 1995 to 41 percent at the end of 1997, and fell to 37 percent at the end of 1998.
The poverty line in Israel is established according to different criteria, so a precise comparison between Israelis and Palestinians cannot be made. However, the enormous gap between the two is illustrated by the fact that, in 1998, the poverty line in Israel in 1998 was approximately $3,000 a person/year (for a family of four) and 16 percent of Israeli families were living in poverty.