Gaza has suffered drastically since the beginning of the siege in 2006. In addition, it has witnessed continuous military operations, with more severe eruptions in 2009, 2012 and lately in 2014. These operations left Gaza with massive destruction, poor infrastructure and without any potential for economic recovery. An international conference with the participation of more than 50 countries was held in Cairo after the last war on Gaza in October, 2014. Its goal was to raise funds for the reconstruction of Gaza and its economy. It is almost 2 years since the last war, but not much reconstruction has taken place. Though 25 countries pledged to donate more than US$4 billion, they have transferred only US$967 million for the reconstruction so far, according to a report prepared by the World Bank. Though many countries met their commitments, the seven major donors have transferred only 19 percent of their commitments. Also, a large portion of the funds are allocated for rebuilding public structures, but the restrictions on bringing in construction materials for those projects is significantly suspending Gaza’s reconstruction.
In this project we focus not only on the physical reconstruction of Gaza, but also on ways to improve the standards of living and the economic potential. This includes allowing the movement of goods and people through a safe passage to the West Bank, as the contiguity between Gaza and the West Bank is crucially required economically (and was already agreed upon in the Oslo agreement). Lifting the siege also includes construction of a sea port and an international airport. Developing Gaza also requires a significant expansion of its infrastructure so it is able to absorb potential future economic growth. This paper also covers various political and security concerns that might arise due to the implementation of these suggestions.
- A Brief Description of the Economic Situation in Gaza
Following the first Intifada, which started in Gaza in December, 1987, exports, imports and labor flows from Gaza started to decrease. This process intensified after 1991 as a result of a gradual closing of Gaza from Israel and from the West Bank, mainly through closures. The process began with the long closure of the Palestinian Territory during the Gulf War of 1991, and it gathered momentum later with more and longer closures over time until reaching a full siege in 2006.
In 2005, after the disengagement and the withdrawal of Israel from Gaza, Gazans were not allowed to work in Israel anymore. This reduced income per capita significantly, and since many of these workers began to work in Gaza, it should have lowered GDP per worker in Gaza relative to the 1990s. Indeed, the Aix Group (2015) did find that GDP per worker declined between 1995 and 2013 at an average annual rate of 3.4 percent. This was a huge decline in labor productivity.
This decline of productivity, coupled with the rise of unemployment, contributed to the decline of real wages by 21.4 percent, cumulative since 2005. More than 67 percent of the private sector wage employees in Gaza earned less than the minimum wage in 2013, which means that poverty has increased dramatically.
This long process of falling productivity, income as well as rising unemployment and poverty, implies that the recovery of Gaza must address not only the immediate impact of the war and the destruction it inflicted, but also the factors that led to the deterioration of the economy of Gaza prior to the war.
- The Causes of the Economic Decline of Gaza Strip
A study conducted by the Aix Group in 2015 in order to understand the lack of economic development in Palestine identified two main obstacles to economic growth. The first was the restriction on access and movement of goods and people caused by checkpoints, walls, fences, siege and similar measures. The second was the restrictions on investment, which can be either administrative or a result of high risks due to the frequent outbursts of hostilities, both of which deter investments. These obstacles have been much harsher in Gaza than in the West Bank.
Gaza’s export of labor to Israel stopped completely already at the disengagement in 2005 and the siege for people and commodities became almost complete since 2006, just after Hamas won the national election. Today, Gaza has only a few operating crossings to Israel and to Egypt with high restrictions on access and the movement of goods and people.
The systematic constraints on mobility are clearly manifested by the volumes of imports and exports to and from Gaza. Since 1997, the number of imported truckloads to Gaza has decreased by 70 percent. During the seven years from 2008 to 2014, only 951 trucks crossed the border from Gaza to Israel, mainly with agricultural produce. These restrictions on mobility contributed much to the economic decline of Gaza. In Aix (2015), we show that between the years 2006 and 2008, the beginning years of the siege, labor productivity in Gaza declined by around 30 percent. A recent study by Etkes and Zimring (2015) calculates the welfare loss in Gaza due to the siege by using data on consumption. They find that welfare in Gaza declined by more than 20 percent.
The siege also had a major impact on water supply and electricity production. According to a World Bank report, by the end of 2008 approximately 50 percent of households had no access to a running water supply due to damages incurred by Israeli bombings during “Operation Cast Lead” in December, 2008. These damages were never fixed due to restrictions on the entry of construction materials. All these effects point at the urgent need for immediately lifting the siege and opening Gaza to the movement of people and goods.
In addition to the siege, the military operations have caused immense damage to already installed capital and infrastructure and deterred new investments. The most recent three bursts of violence were: Operation Cast Lead in 2008- 2009, Operation Pillar of Defense in 2012 and Operation Protective Edge in 2014. Most of the damages caused by these military confrontations, even before 2014, have not yet been repaired. The last war in 2014 was the longest and the most devastating military operation in Gaza since 1967. During 51 days, 2,145 people were killed, of which 1,523 were civilians, including 581 children. According to UNOCHA, approximately 490,000 people, more than a fourth of the population, lost their homes, and 60,000 homes were destroyed.
The war of 2014 also inflicted large losses on the economy. An estimation of total damages to agriculture reached US$550 million, of which damage to plant infrastructure is US$200 million, to animal production infrastructure is US$81 million, to irrigation and soil (in an area of 34 square km ) is US$68 million and the opportunity costs were around US$200 million.
The Information and Communication Technology (ICT) sector in Gaza has a large potential due to the high education levels of Gazans and because it enables exporting without crossing borders. The Ministry of Telecommunication and Palestinian Information Telecommunication Association of Companies (PITA) conducted a damage assessment for the ICT sector that includes both direct and indirect costs. According to this assessment, the losses to the telecommunications infrastructure and to the ICT sector exceeded US$34 million, of which 92 percent is in infrastructure.
The war of 2014 had a significant effect on unemployment, as well. According to International Labor Organization (ILO) figures, the rate of unemployment increased significantly, as 6.4 percent of those previously employed in Gaza lost their jobs. According to the Palestinian Central Bureau of Statistics, Gaza witnessed an even higher unemployment rate in 2015, which reached 42.7 percent in the third quarter of 2015. The number of unemployed has exceeded 200,000 people. According to the World Bank, the unemployment rate in Gaza is the highest in the world, mainly among young people and graduates, where it is higher than 60 percent.
- Required Steps for Economic Recovery
It is important to stress that our specific suggestions do not in any way replace the reconstruction plan made by the Palestinian Unity Government, but only complements it with some additional economically required measures.
- Gaza Housing Crisis
Gaza has already been suffering from high population density due to high birth rates and a lack of available housing units. According to the United Nations Relief and Works Agency (UNRWA), during the war of 2014 over 12,600 housing units were totally destroyed and an additional 6,500 units sustained severe damage. Almost 150,000 additional housing units sustained various degrees of damage but remained inhabitable. This led to a homelessness crisis in Gaza, with 500,000 people displaced at its peak, although many thousands remain displaced to this day. Reconstruction of sufficient housing is critical for the people of Gaza. However, restrictions on imports of cement and building materials are causing serious delays in the reconstruction. Hence, a fast solution to the cement crisis is crucial.
- Reconstructing and Improving Electricity Supply
The shortage of electricity also has a severe impact on the Palestinian economy and on the humanitarian and environmental situations in Gaza. The PA estimates that the overall total financing required to get full electricity supplied to Gaza, including repair and an increase of generation capacity, is US$180 million. We believe that the 2014 plans of the Palestinian Unity Government for reconstruction of the electricity system are reasonable and sound. We only suggest that they should examine the possibility of putting as many lines as possible underground, to make them less vulnerable to war activities.
- The Water Crisis and the Need for Infrastructure Rehabilitation
The 2014 war inflicted an estimated damage of US$34 million on the water system, of which US$17 million are required for urgent repairs. But, reconstruction should not only repair the damages from the 2014 war. It should also improve access to a reliable water supply and to sanitation services, in order to minimize public health hazards. Another important indirect effect of such an improvement could be on the environment, by reducing uncontrolled disposal of untreated or partially treated sewage.
- A Safe Passage between the West Bank and Gaza
The lack of mobility between the West Bank and Gaza is a clear violation of the Oslo Accords that recognize the West Bank and Gaza as a single territorial unit and promise a ‘safe passage’ between the two regions. As shown above, its absence is a major cause for the economic decline in Gaza, and it affects the West Bank as well.
The economic benefits for Gaza from opening a direct free passage to the West Bank would be significant. It will reduce prices for consumers in Gaza and increase the returns of producers from Gaza for their current principal exports of strawberries, flowers and textiles. Enabling trade between the two regions can lead to further gains in a short time. Gaza can become a principal provider of perishable goods such as vegetables and fish, which require fast transit to the West Bank, and reduce dependency on Israeli products. In later periods the safe passage can provide a link between the West Bank and a future seaport and airport in Gaza, which will reduce transaction costs. The free flow of goods between the two regions can reduce the use of expensive Israeli raw materials and industrial inputs. Movement of workers between the two regions can also reduce unemployment and raise wages in Gaza.
The Aix Group has already dealt with the connection between Gaza and the West Bank (Aix, 2010), and analyzed the issue of the Territorial Link in the final peace agreement. That research suggested building a ground level road between the Karni and El Majed Crossings. The construction of such a route should cost US$700 million, with an additional US$180 million for expected security measures. Since implementing this route might take several years, Aix (2010) has recommended that construction should start immediately at the present, before the peace treaty. But this document suggests that even before beginning building the Territorial Link, a safe passage based on existing roads should be operated immediately. There were several attempts to operate such a safe passage in the past, as it is one of the requirements of the Oslo Accords, but each attempt stopped after some short period of operation, mostly as a sanction in reaction to some Palestinian violence. We suggest that Israel allow the operation of the short-run safe passage again, and this time not to use it for potential punishments on Palestinian general conduct.
- Gaza Strip Commercial Seaport
The need for a seaport in Gaza has been recognized by Israel already in the Declaration of Principles (DOP), signed first in Oslo and then in Washington in September, 1993. It was reaffirmed in the interim agreement (1994). We base our recommendations on recent plans to establish a commercial seaport in Gaza. The first stage requires deepening and protecting the current harbor’s basin, fortifying the breakwater structure, and repairing the northern coast in order to stop erosion in the area of Ash-Shati’ refugee camp. The estimated cost of this stage is US$16 million. The next step should be construction of a deep-water seaport. In 2000, a European Gaza Strip Development group signed a contract with the Gaza Strip Seaport Authority to build such a seaport. However, at the second Intifada the project and the funds were frozen and by the end of 2002, the Israeli Army had completely damaged the seaport facilities that were built and the installations on the construction site.
Relying on the previous construction plans, we outlined the main steps in building a deep-water seaport. According to our Gaza Strip Study (Aix, 2015), the planned total cost of the deep water seaport is estimated at US$220 million.
- Gaza Strip International Airport
The Gaza Strip International Airport (GIA) in Dahaniya opened in November 24, 1998. It operated for three years until Israel began to demolish it in December, 2001, during the Second Intifada. We estimate the cost of reconstructing the airport to be US$86 million. Immediate priorities in the reconstruction plan are to repair the damaged parts of the GIA to enable it to resume operations, to introduce a computerized system in the operation of the airport and the Civil Aviation Authority, and to carry out technical training programs for the GIA staff. According to the Palestinian National Development plan for 2014-2016, the Ministry of Transportation has planned to reconstruct 75 percent of the airport in 2014, 90 percent in 2015 and 100 percent in 2016. These plans were delayed in the aftermath of the war in 2014.
- Reconstruction and a Comprehensive Ceasefire Agreement
One of the main problems with previous ceasefire agreements in Gaza was their implementation. There are four main reasons for such failures in implementation. One reason is the coexistence of many fighting organizations in Gaza. Another reason is the differential treatment of the West Bank and Gaza by Israel. Even if Israel respects the ceasefire in Gaza, but operates against the Hamas in the West Bank, it might lead Hamas to break the status quo in Gaza, as happened in 2014. A third reason for collapses in the ceasefire has been what Israel saw as a violation of the spirit of the ceasefire agreements by Hamas in its continuing efforts of armament during ceasefires. The fourth reason is that the non-military aspects of the ceasefires, mainly with respect to the siege on Gaza, are usually not respected by Israel. Clearly, there is a need to deal with all these four problems in order to reach a stable ceasefire agreement. Such a stable agreement will reduce suffering on both sides of the border, will enable reconstruction and most importantly, will enable a gradual economic revival of Gaza.
To tackle these four problems, we need to follow two complementing strategies. One is to make the ceasefire agreement between Israel and the Palestinian Unity Government, not between Israel and Hamas. The second is to change policies and attitudes with respect to the ceasefire agreement on both sides. Israel should accept the lifting of the siege on the one hand and Hamas should stop the process of armament during ceasefires on the other hand.
- Security Aspects
Clearly, lifting the siege, which involves opening a safe passage, opening the port of Gaza and opening an airport raises serious security concerns on the Israeli side. While this document does not supply details on how to deal with these concerns, it analyzes the main concerns and shows that they can be dealt with in satisfactory ways.
- The Land Passage
We turn first to the opening of the safe passage between Gaza and the West Bank. Such a passage raises concerns about possible movement of arms and fighters between the two regions, and of potential infiltration to Israel during the use of the passage. We suggest that the safe passage will operate by daily convoys from Gaza Strip to the West Bank and back. The Israeli military will check the convoys at the point of entry to Israel. To avoid costly back-to-back transfers, cargo trucks should use containers that can be checked by special equipment that is already available. Military forces will escort the convoys throughout their journey in Israeli territory to prevent infiltrations. We believe that these measures can handle the main potential security risks. This is not just wishful thinking, but an assessment based on many previous agreements for safe passage between the West Bank and Gaza that Israel signed with the Palestinian Authority, the last of them on November 15, 2005, following the Israeli disengagement from Gaza. The implementation of these agreements did not fail, and they stopped only as general punishment on the Palestinian side for events that happened elsewhere.
- A Seaport in Gaza Strip
A deep-water sea port in Gaza might lead to a number of security concerns in Israel. The main one is the possibility of the entry of military equipment into Gaza through the port. There are two main possible ways to cope with such security risks:
- The expansion of the port should be done in three main stages. In the first stage, the port will transport commodities, but not in containers. In that case,
search-in-sea and similar security checks of incoming and outgoing ships will be possible at relatively low costs. After some period of operation, the port will go into a second phase of reconstruction and add a container terminal to the port. At this second stage, containers will be used for exports, but not for imports. Only after an additional period of operation, specified in time, but also in levels of adherence and performance, the port will move to the third stage of using containers for incoming cargo as well.
- The Israeli Navy will search boats and ships entering the port of Gaza in-sea for military material. Initially they might search every boat and ship, but later the search will narrow to a sample of sea vessels.
- Airport in Dahaniya
The potential security risks connected with the airport are mainly entry of combatants and light arms. There are many ways to reduce these risks and we mention just two. One possibility is that foreign inspectors will monitor the operation of the airport. Another possibility can use the fact that most of the incoming flights to Gaza will be from the nearby Arab countries like Egypt, Jordan, Saudi Arabia and the Gulf countries. Israel can reach agreements with these countries on monitoring incoming passengers to Gaza and their luggage. Two of these countries have formal relations with Israel, while the others have informal relations with Israel.
- Some General Comments on Security
Controlling a nation of around 5 million people must be partial, since following everyone permanently is far too costly. Thus, Israeli forces monitor a statistical sample of people, which is not random of course, but is still a sample. As a result, the ability to detect every hostile activity is far from perfect. Hence, there is a need to discuss any change in control not in absolute terms but in relative terms. If we use economic terms, the cost of opening Gaza is not a total loss of security, but some reduction of security due to reduced control. However, one should compare this cost with the security benefits of the opening of Gaza. First, lifting the siege will improve the standards of living for many people, especially the young. This will reduce the incentive to participate in armed activities. Second, sometimes a reduction of control can also improve security. The tight control imposed on Palestinians in general, and on Gaza in particular, is a terrible, suffocating burden on them and might motivate violence. We estimate that taking all of these issues into consideration, the cost-benefit analysis of security tilts strongly in favor of opening Gaza.
This idea is in line with one of the basic concepts of the Aix Group, namely “reverse engineering.” We have long reached the conclusion that the best way to reach a permanent agreement and to implement it is to first outline the contours of the final agreement and then to derive from that how to get from here to there. This holds for economic issues, but it should hold for security issues, as well.
- Political Considerations
When this document recommends lifting the siege from Gaza, we are aware that this has also been a major demand of Hamas throughout the past decade. It therefore raises the question whether opening Gaza might be viewed as giving in to Hamas. The Aix Group is a think-tank that is committed to the Two-State solution and we view Hamas as an important opposition to this political solution. Hence, we wish to explain why we support the opening of Gaza, even if it seems to strengthen Hamas. We next offer three explanations, going from the more formal to the more substantial.
- The Unity Government
The Palestinian Unity Government was born on June 2, 2014 following an agreement of unity between the two leading movements, Fatah and Hamas. This agreement came after many previous failed attempts. Surprisingly, despite the difficult history of the relations between the two movements, and despite the harsh steps Israel has taken against the Unity Government, it has survived until now, although with some problems. Clearly, Hamas has a stake in the Unity Government, but it is definitely not theirs alone, as it is a government of technocrats with no representative of Hamas. Furthermore, the government has at least two members close to Fatah, so that it is much closer to Fatah than to Hamas. Until the founding of this government, Hamas was the only ruler of Gaza, and the operation of the Unity Government in Gaza can take the harness from Hamas, gradually but persistently. This will happen only if the siege is lifted.
- The Failure of the Siege Policy
The main political goals of the siege were to punish the population in Gaza for their support of Hamas and to lead to the collapse of Hamas and of its control. None of these goals were achieved. Hamas still controls Gaza and its population still supports it. The siege is ten years old and Gaza has not become quiet, but more rebellious. It is time to change this failing policy and shift to an alternative. Actually, this document claims that removing the siege might yield an opposite result to what we have experienced so far.
- Economic and Political Impacts
The great project of the reconstruction of Gaza by upgrading its infrastructure and opening it to the mobility of goods and people, is supposed to boost its economic situation, both in the short and in the long term. In the short run, the large investments will increase aggregate demand, which will improve employment in the area significantly. In the long run, these investments will increase the stock of capital in Gaza, both public and private, and will increase production from the supply-side. The ceasefire and the reconstruction agreement will not only improve the economic situation in Gaza, but will also improve the general mood, as people will be able to travel more, to meet family and friends, and to feel more free, in general.
All of these improvements will have a positive impact on the support for the Two-State solution in Gaza. Of course, economic improvement by itself will not be sufficient, since people also care about their freedom. But an economic improvement that is a result of a significant change in Israel’s policy should clearly increase the political support for peace.
We claim that reconstruction should include necessary measures that will contribute to the improvement of the economic situation in Gaza and even lay foundations for future economic growth. More specifically, we raise the following main points:
- The siege on Gaza is a major obstacle to economic improvement. Any attempt to improve the standard of living in Gaza must include opening it to the mobility of people and goods.
- Lifting the siege includes a set of measures which have already been part of the Oslo Accords: the safe passage between Gaza and the West Bank, the development of the seaport in Gaza, and the reconstruction and operation of Gaza Strip International Airport.
- In addition, a large effort should be made to renovate and improve the failing infrastructure in Gaza, mainly electricity, water, sewage, and communication.
- The opening of Gaza raises some security concerns on the Israeli side, but it can deal with them in reasonable ways.
- After more than a decade, the siege is clearly a failed policy. Removing the siege in an agreement with the Palestinian government might be a much better policy to improve security and also increase the support for negotiation with Israel among Palestinians.
 More details on the crossings are available in the Gaza paper in Aix Group (2015).