Sectoral Structure of Palestinian Economy

Palestinians have strong handicraft traditions that have been passed down from master to apprentice for generations, where the competitive advantage of the sector is derived from its relation with the historic nature of this region, which has a rich blend of cultures and religions. The strengths of the sector are typified in the authenticity of products, competitive prices in comparison to the region, wide range of offered products that includes 17 handicrafts sub-sectors, and uniqueness of major handmade products in terms of design and quality, such as: mother of pearl, ceramics, olive wood and Hebron glass, and others.

The majority of handicrafts producers are small workshops and artisan shops heavily clustered in the Bethlehem and Hebron areas; employing 10,000 workers in around 500 workshops. The total sales of the sector are estimated at US$50 million, where about 30% is sold domestically, 35% is destined to Israeli market, and the remaining 35% is exported Europe, USA and the Arab region.

The local market has been traditionally dependent on the tourism industry, where the market is heavily seasonal with peaks during summer, Easter and Christmas where articles are sold in the local souvenir shops in the major tourist cities.

The attraction towards authentic hand-made handicrafts maintains the highest potential for the Palestinian handicraft sector, nevertheless, analysis of the sector revealed that there are promising opportunities in developing new designs and products; inspired from the ethnic Palestinian motifs to meet the modern market desires, and reflecting the new style on the business image, highlighting the values of authenticity and uniqueness.

Furniture sector is one of the oldest sectors in the region, and has flourished during the last few years to become one of the major promising Palestinian industrial sectors. Prior to the political crisis and economic recession beginning in 2000, the sector witnessed the establishment of many firms as a result of the growth of the Palestinian economy and the development of this industry to include new categories like interior design, hospitality and commercial furnishings. In addition, advancements took place in design and manufacturing. More than 67% of local manufacturers are specialized in home furniture production, 21% are specialized producing office furniture, and almost 12% producing construction related components.

The industry has developed significantly to include 1100 establishments that utilize high manufacturing techniques and employ more than 10,000 labors, the estimated annual sales of manufacturers is estimated at US$ 110 million; where around 50% of that is destined to Israel for sale in the Israeli market or export to other markets, It is also worth to note that the sector has recently faced a dramatic recession due to the closure of Gaza trade terminals, while there has been some temporary growth in the West Bank.

Strengths of the furniture sector are mainly typified in high carpentry workmanship skills, good factory conditions, fine quality of produced furniture and the newly emerged Palestinian original designs. Opportunities for furniture sector are foreseen in development of new original and ethic designs, accessing target market with appropriate marketing tactics, upgrading utilized technologies and techniques to further increase competitiveness of products.

The Palestinian textile and garment sector is considered an important economic sector in Palestine, with regard to employment, exports, production/output and investment. In addition, the textile and garment sector provides prospects for development and prosperity, should success factors be made available to it and opportunities seized. The strengths of the garment and textile sector are mainly demonstrated in the accumulative experience in producing for international brands, the high quality of local production and competitive prices. Strengths are also exemplified in the experience of local producers in subcontracting and supply chain management, and the availability of skilled labors.

The garment sector includes 41% of industrial workers in the Gaza strip and 20% of industrial workers in the West Bank. The total output of the garment and textile sector was estimated at US$80 million in the year 2006; however the output is changing based on the local market purchase power and the accessibility to export markets. It is also worth to note that the sector has recently faced a dramatic recession due to the closure of Gaza trade terminals, while there has been some temporary growth in the West Bank, mostly in the field of subcontracting.

There are an estimated 17,562 garment and textile workers, and 2,753 manufacturers in the West Bank and Gaza, mostly in garments, who contribute approximately 14% of Palestinian manufacturing output. The sector is made up primarily of small-medium companies with the flexibility and capacity to accommodate various order sizes according to customer specifications and needs. The sector also includes several larger firms with higher capacities and certifications to international quality.

The stone and marble industry is one of the most important sectors of Palestinian industry. Palestine is renowned for its natural lime stone that is characterized by its bright attractive colors that are in high demand in international markets. The raw material used in production of the stone and marble products is 100% local.

The Palestinian stone and marble industry, although highly automated in certain functional areas, is still considered a labor-intensive industry. This industry employs about 22,000 administrative, skilled and unskilled laborers in 1,200 local cluster establishments, which are heavily located in Bethlehem, Hebron and Nablus areas.

There are various types of stone and marble produced in Palestine. The type of stone is known by its location and its quality is defined by its source. Main Products are: slabs, building stone, decorative construction products and tiles. Current estimates for sales are closer to $400 million, where 50% are exported to Jordan, Europe, USA, and China, and the remaining 50% are destined to the Israeli market, whether for re-export to other markets or for use in the Israeli construction sector. Palestine is classified by the International Trade Center as the world’s 12th exporter of stone, and famous with Jerusalem stone.

There are 10 leading exporting companies in the Palestinian sectors that outsource numerous services of cutting, polishing and other services to local providers. Due to increasing impediments on movement and access, and the restrictions imposed on work sites, around 60 establishments have immigrated from Bethlehem and Hebron to Jordan

The Pharmaceutical Industry in Palestine could be considered as a unique industry if compared with other sectors in terms of its innovation and development. The pharmaceutical industry plays an important role in providing the local market with its pharmaceutical needs. The overwhelming majority of sales are directed toward the Palestinian market. Currently, there are six major Palestinian companies predominantly located in the Ramallah area, where 70% of local producers are located. Local production is relatively unfocused, with manufacturers tending to produce homogeneous product lines. This has created strong inter-industry competition and has weakened the sector in its attempt to develop and improve into a distinctive sector that invests in real research and development and benefits from economies of scale. Most locally produced pharmaceuticals are generic and may not have a significant effect upon satisfy the market in terms of disease and sickness relief.

The Palestinian pharmaceutical manufacturers are Good Manufacturing Practices (GMP) compliant and are ISO 9000 and ISO 14000 certified. Over 1,000 products of various dosage forms of drugs are produced and registered with Palestinian Ministry of Health. The industry invested over $30 million in the last five years on improving facilities and equipment to meet GMP requirements.

The industry covers over 50% of Palestinian pharmaceuticals needs. The industry exports to over fifteen Arab, African and European countries. Total annual sales of the industry are about $40 million, and total number of employees is about 900 employees.

The leather and shoes sector is considered one of the important industrial sectors that has greatly developed through recent decades in terms of investment capital, production capacity and quality. The leather and shoe industry is concentrated in the city of Hebron, where nearly 150 workshops and factories operate in the shoe industry, and 10 leather tanneries provide the industry with required raw materials.

Since early 1970s, the Palestinian industry was oriented towards the Israeli and the local markets, where local producers used to sell their products to the local customers, or to work as subcontractors to Israeli factories, wholesalers and retail shops, however, and based on globalization dynamics, the global industry has deteriorated in the last 10 years, and thereby the subcontracting business relation has sharply declined. As a coping mechanism, the local companies started to target higher segments of export markets, yet mostly through Israeli agents, where the local production has reached European countries, and on the other hand, few local producers managed to directly access Saudi Arabian and Jordanian markets.

Palestinian food manufacturing industries contribute significantly to food security for Palestinian people, and considered one of the oldest industries in the West Bank and Gaza; the industry plays a key role in the Palestinian Territories’ food security and economic growth; represents 23% of the total industrial output.

The main categories of foodstuffs manufactured in the West Bank and Gaza include: confectioneries and sweets, dairies and milk products, meat processing, beverage: soft drinks, snacks, pasta and other grains products, canned food,: tomato paste, chick peas, broad beans oils and traditional industries (particularly tahini, hummus, halaweh, za’atar, freekeh, etc), and animal feeds industr.

Foodstuff products output is estimated at US$400 million. The local industry has shown constant growth in local market share, as witnessed in the increase from 13% in 1994 to 50% in 2007. Palestinian food industries depend primarily and largely on local market. The share of the local market represented some 90% of total sales with less than 10% of sales destined for the Israeli, Jordanian, Gulf markets, France and Germany. There are 156 operating firms in food industries, and there are some 7,800 people working in food industries or 13% of total workers in manufacturing industries.

The ICT sector is a playing a vital role in the development of the Palestinian economy. It was characterized by its fast development and growth of around 45% in the number of ICT firms during the last 3 years, and 25% annual growth in local IT market, currently estimated at more than US$ 300 million -20-30% of which is Software (does not include the telecom sector). In the last decade, an immense development was also noticed in the fixed and mobile telecommunications where a new entrant in the mobile telecommunications was licensed to operate beginning of 2008 “Al Wataniya Telecommunications company”.

There are approximately 150 major ICT companies, one telecom operator and one active cellular phone company “Jawwal” ( Al Wataniya is still waiting for the assignment of frequencies to start operations), more than 2500 employee work for the private IT Sector, and 2400 work for the telecom sector. Approximately 32% of households own computers, rate of internet access is estimated at 15 % of households, while internet use and penetration is around 12%.

Exports of Palestinian ICT are limited to software, R&D and outsourcing services but few companies have started software development projects with regional and international partners. Other companies depend solely on their international clients. With the current focus on software exports and outsourcing, multiple trade missions and exhibitions have been geared to this purpose. ICT companies break down into categories such as hardware sales (direct agents or PC assemblers), software development, consultancy, Internet services, office automation equipment. A number of international companies opened offices or established direct R&D operations in Palestine such as HP, IDS, Timex, and Siemens. However, most of these companies withdrew at the beginning of 2001.

Software development, consulting and online services collectively makes up more than 50% of current activities of companies, with annual exports estimated at US$ 10 million. The software houses have produced a wide range of solutions and products in areas such as human resources management, projects and sales management, finance and accounting, education, children education, management information systems and entertainment. Further; many solutions were designed to address specific public, NGO, and private enterprises needs.

The potential is high in this sector especially with the liberalization of the Telecommunications market and opening it for new entrants. The ICT outsourcing sub-sector has a huge potential, yet development is needed in the areas of outsourcing management and technical/ delivery dynamics

The major cash crops produced by Palestinian farmers today include tomatoes, cucumbers, eggplants, beans and peas, in addition to olive oil in the West Bank. In the Gaza Strip the major cash crops are citrus, strawberries, cut flowers, and cherry tomatoes. The total output of the agricultural sector was estimated at US$ 856 million in 2004 with a value added of US$ 415 million. Over 55% of agricultural output was from plant production (fruit trees, vegetables, field crops, and cut flowers), over half of which is accounted for by vegetable production intended for the local and Israeli markets. Of a total estimated crop output of about 1 million tons in the 2003/ 2004 season, an estimated 568,000 tons were of vegetables (including strawberries), 263,000 tons of fruits (including olives), and 180,000 tons of field crops. The trade data reveals that outside of olive oil to Arab countries, the West Bank exports very little agricultural produce to countries other than Israel. Gaza on the other hand depends heavily on EU exports, with nearly 40% of its exports composed of primarily strawberries and carnations to EU markets. Cucumbers and tomatoes are also notable exports, but are mostly exported to the Israeli market from the West Bank with some cherry tomato exports to the EU countries from the Gaza Strip.

Despite the problems associated with the movement and access restrictions, cash crops continue to be exported to and through Israel in large quantities.

This is an indication of the existence of effective demand for Palestinian cash crops, implying that they are competitive in the Israeli and other markets. With the important exception of olive oil and citrus to Arab countries, Palestinian farmers are almost entirely dependent on Israeli export companies (primarily AGREXCO) to export either to Israel or to other markets through Israel. International agricultural marketing is characterized by tough competition in light of state policies that support exports, decrease imports and attempts to glut markets. Palestine currently has two main agricultural products exported outside of Israel, strawberry and carnation, both of which face severe competition. Palestinian produce enjoys some advantages with respect to price and off-season availability compared to European suppliers and is competitive with regional suppliers in terms of quality.

Targeted export markets include Israel, Western Europe, Saudi Arabia and other GCC countries as well as potential markets in newly or imminently acceding countries to the EU.

The key strengths of the Palestinian cash crop sector are quality and variety of produce, long and off-season availability, and proximity to markets. Opportunities available to the sector are taking advantage of preferential treatment in trade with the EU and Arab markets as well as potential for sector development through the intervention of NGOs and donors.

The biggest threat to this sector is the political instability, restricted access to farms and markets as a result of Israeli restrictions, and competition of large regional suppliers such as Syria, Egypt, and Lebanon.