Abstract

The poor overall performance of the Palestinian economy in the last five years raises the question of whether the outlook for the medium term can be expected to be any brighter.1 It is clear that some of the conditions necessary for achieving a better performance are already present. The population is young and well educated. Furthermore, there have been important improvements in both the physical and the institutional infrastructure, including the establishment of key policy institutions and some progress in legal and regulatory reform. The capacity to effectively implement public investment projects—in the public sector as well as in the private (subcontractor) sector—has improved considerably, and in the future a larger share of foreign aid should go to investment rather than consumption. Thus, there are objective elements for a better outcome than in the last five years. At the same time, major obstacles will have to be removed for the economy to be able to reach its potential, including those that restrict the flow of goods, people, and capital within the West Bank and Gaza, and that limit trade with the rest of the world. Another key obstacle relates to the institutional capacity. While progress has been made in setting up policy institutions, much remains to be done (including adoption and effective implementation of laws and regulations) in order for the institutional framework to be truly supportive of economic growth. This chapter discusses the challenges posed by the demographic dynamics over the medium term, the implications of maintaining a real GDP growth rate around the level recorded in 1998 and the investment requirements to sustain that growth performance. The chapter also reviews the factors that could help enhance medium-term growth prospects.