Developments in the Palestinian economy have had a substantial impact on social conditions. The poor economic performance in 1994-98 led to declining per capita income, and real GDP per capita in the West Bank and Gaza is estimated to have been about 15 percent lower, and unemployment about twice as high, in 1998 as in 1993. Private consumption per capita was about 10-15 percent lower in real terms.


Developments in the Palestinian economy have had a substantial impact on social conditions. The poor economic performance in 1994-98 led to declining per capita income, and real GDP per capita in the West Bank and Gaza is estimated to have been about 15 percent lower, and unemployment about twice as high, in 1998 as in 1993. Private consumption per capita was about 10-15 percent lower in real terms.

Conversely, social structures have clear economic implications. In general, the educational and health standards in the West Bank and Gaza are good relative to most countries in the region. For example, the level of illiteracy is only 15 percent in the West Bank and Gaza, comparable to the levels in Jordan and Lebanon, and life expectancy at 72 years is only surpassed in Israel. Health and education standards have benefited from a comprehensive primary health and education system. There has been a trend increase in the natural population growth to just below 4 percent a year, as the mortality rate declined and the fertility rate remained high (Box 7.1). Such a strong population growth rate puts strains on the economy in general, and on the labor market and the education system in particular. Furthermore, there are substantial budgetary implications to these demographic and social trends: a large part of the education and health services are currently financed by UNRWA and NGOs, but in the medium term the PA ought to prepare for a possible takeover of at least some of these responsibilities.

This chapter provides an overview of social conditions in the Palestinian economy, focusing on health, education, and housing. It also discusses the possible fiscal implications of the PAs assuming responsibility for the provision of social services to refugees within the West Bank and Gaza.

Household Income and Expenditure

As a result of unfavorable macroeconomic developments in 1994-96, standards of living in the West Bank and Gaza deteriorated over the period, and real per capita consumption declined, although some recovery has taken place in 1997-98.1 A comparison of the PCBS household expenditure and consumption surveys for 1995/96 and 1997 shows that both household and per capita consumption remained roughly flat in real terms when using different CPI deflators for the West Bank and for Gaza to obtain consumption figures in constant 1996 prices. Per capita real consumption in the Gaza Strip declined slightly as a result of the higher population growth (Figure 7.1).2 It is noteworthy, however, that the 1996 levels were already lower than the estimated level in 1994. At the same time, the 1997 survey showed that the average Palestinian household consumed just over NIS 3,000 a month, of which 37 percent was spent on food, but the share of households where food exceeded 45 percent of total consumption dropped to 31 percent in 1997 from 36 percent in 1995/96. This rough measure of living standards suggests that living conditions may have improved slightly in 1997, although regional differences are quite large, particularly in view of the small geographical size of the areas.3 In addition, differences in consumption appear to be closely tied to the source of income (Figure 7.3).4 Also, consumption reflects, to a certain extent, the level of education.5

Figure 7.1
Figure 7.1

Real Household Consumption, 1995/96-97

Source: Palestinian Central Bureau of Statistics.
Figure 7.2
Figure 7.2

Household Consumption by Region, 1997

Source: Palestinian Central Bureau of Statistics.
Figure 7.3
Figure 7.3

Household Consumption by Source of Income and Level of Education, 1997

Source: Palestinian Central Bureau of Statistics.

Population Data

According to the population census carried out by the PCBS in December 1997 (the first since 1967), the Palestinian population in the West Bank and Gaza was 2.6 million, of which 1.6 million were in the West Bank and 1.0 million in the Gaza Strip, where the population density is much higher (2,500 people per square kilometer, compared with 275 people per square kilometer in the West Bank).

The West Bank and Gaza has one of the fastest growing populations in the world. There has been an upward trend in the natural population growth rate, as the mortality rate has declined but the fertility rate has remained high. In the 1970s and into the early 1980s, this trend was masked by large net emigration, and population growth was relatively low (in the order of around 1—2 percent a year in the West Bank and 2-3 percent in the Gaza Strip). As from the early 1980s, however, the growth rate rose sharply due to a decline in the mortality rate, particularly for infants, and a sharp drop in the net outflow of people, which eventually turned to a net inflow. The West Bank and Gaza appears to be in a transition phase where population growth accelerates because the drop in the mortality rate is not accompanied by a similar drop in the birth rate. It is estimated that the natural population growth rate in the West Bank increased from 2.2 percent in 1968 to 3.1 percent in 1978 and to 3.5 percent in 1987. In the Gaza Strip, the corresponding rates were 2.3 percent, 3.7 percent, and 4.3 percent. The natural, or underlying, population growth rate is now estimated at just under 4 percent (3.4 percent in the West Bank and 4.6 percent in the Gaza Strip). In addition, following the signing of the Oslo Accords, there seems to have been significant net immigration.

Several factors contribute to the high fertility rates, including the prevalence of early marriage and limited use of contraception.1 There has been a decline in fertility rates in the West Bank to 5.4 today from 6.7 in 1980-84, whereas the decline in the Gaza Strip has been much lower to 7.4 from 7.6. Fertility rates are negatively correlated to women’s education: women with less than secondary education have fertility rates of 6.3 while women with higher than secondary education have fertility rates of 4.5. Despite a decline in mortality rates, a demographic transition resulting in lower fertility rates does not yet seem to have taken place, particularly in the Gaza Strip.

As a consequence of high fertility rates, about 47 percent of the population is younger than 15 years (50 percent in the Gaza Strip and 45 percent in the West Bank). In the region, countries such as Jordan, Iraq, and Syria have a similar age structure, whereas Egypt, Israel, and Lebanon have a smaller share of the population below 1.5. The elderly population, older than 65 years, amounts to 3.5 percent of the total population in the West Bank and Gaza (2.9 percent in the Gaza Strip and 3.8 percent in the West Bank). Since the working age population constitutes only 53 percent of the total population (defined as the population over 15 years of age), and given the low participation in the labor force and the high unemployment rate, the dependency ratio is very high at 5-6 people to one worker.

The most common household type is the nuclear family (two-thirds of households). However, 28 percent of households lives as extended families, and only 3 percent of households consists of individuals. Extended family households are more prevalent in the Gaza Strip, representing 35 percent of all households relative to the West Bank with 24 percent. The PCBS population census shows that the average household has 6.4 members (6.9 persons in the Gaza Strip and 6.1 in the West Bank). Most households are headed by men (92 percent), and, where a household is headed by a woman, the majority of these are widows. Marriage among relatives is common—almost half of the married women are wed to first cousins or members of the same extended family (PCBS, 1998).

1 The fertility rate is the average number of children born alive to a woman. The following fertility rates apply to neighboring countries: Syria (6.1), Iraq (5.7), Jordan (5.7), Egypt (4.1), Lebanon (3.1), and Israel (2.9) (PCBS, 1998).

A study by MAS, using a poverty line fixed at $650 annual per capita income, showed that about one-fifth of the population could be classified as poor at the end of 1995, representing about half a million people.6 The incidence of poverty was greater in the Gaza Strip, where 36 percent of the population—about 350,000 people—was considered poor at the end of 1995; in the West Bank, about 10 percent of the population—150,000 people—was considered poor. Poverty is very closely linked to unemployment. An average family with a head of household employed at the going wage should be able to remain above the poverty line. The link is clearly apparent in refugee camps, where poverty was 31 percent compared with 17 percent for rural/urban households because most refugees have labor earnings as their only source of income, and therefore are more severely affected by external shocks and economic downturns. Thus, one could hypothesize that, as a result of worsening labor market conditions in 1994-96, poverty must have increased from its already high level. Some improvement, however, must have taken place in 1998, reflecting the more favorable employment situation.

General Socioeconomic Conditions


The Palestinian population has high health standards relative to most other countries in the region. Life expectancy at 72 years is surpassed only in Israel and is high compared with countries of the same income level (Table 7.1). The comprehensive primary health system can be credited with low mortality rates for infants and children.7 Since 1976, infant and child mortality rates have declined by more than 50 percent. In part this was because of the comprehensive immunization program, with up to 96 percent of children covered in the Gaza Strip. Children’s nourishment indicators are also quite favorable for a developing country (Table 7.2).

Table 7.1

Social Indicators for Selected Middle Eastern Countries

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Sources: Latest available country information from World Development indicators, World Bank, and Palestinian Central Bureau of Statistics

In percent.

In years.

Per 1,000 live births.

Percent gross.

Table 7.2

Immunization and Malnourishment Among Children, 1996

(In percent)

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Source: Palestinian Central Bureau of Statistics.

Immunization of children aged 12-23 months.

Percentage of children showing symptoms of stunting.

Percentage of children showing symptoms of wasting.

Percentage of underweight children.

Maternal mortality rates are relatively low and, in general, lowest for women aged 25-34 years. The use of contraceptive methods is fairly low (only 45 percent of married women), mainly for family or religious reasons. Social attitudes and beliefs seem to be more of an obstacle to family planning than the level of education.8 While access to health services is high, the quality of services suffers from the absence of harmonized standards for diagnosis, treatment, and follow-up of many common diseases, as well as the frequent liquidity problems of the system.9


Palestinians are generally well educated. The level of literacy is high, almost universal among the young. The literacy rate in 1995 was 84 percent of the population, 92 percent for males and 77 percent for females. Illiteracy has practically been eradicated among both male and female Palestinians aged between 15-24 years, and the literacy rate for all persons between 15-34 years is above 90 percent. School attendance is high: more than 90 percent of both boys and girls aged 6-14 attend basic level schools (Table 7.3). School attendance drops for the 15-17 year age group. The comprehensive primary education system has contributed to a relatively low level of repeater and dropout rates for both genders.10

Table 7.3

School Attendance by Age Group, 1995

(In percent)

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Source: Palestinian Central Bureau of Statistics.

In the 1997/98 school year, almost three-quarters of the schools were run by the Ministry of Education and 16 percent by UNRWA; the private sector and NGOs were also active, with 11 percent of schools and all kindergartens (Table 7.4).11 Ninety-two percent of students attended basic level schools (Table 7.5): two-thirds of these were in public schools, and 28 percent were attending schools run by UNRWA. Public schools dominate the secondary level. Almost half the student body was female, explaining the high level of literacy among young women (Table 7.6). The number of students per class differed between the various levels of schools, with 37 students on average in basic level classes and 30 in secondary level classes. This was higher in UNRWA schools but lower in private schools. The high population growth puts pressure on the education system, forcing some schools to operate in double shifts. But contrary to perceptions, only 3 percent of basic level and 2 percent of secondary level students attend schools with double shifts (Table 7.7). None of the schools practiced triple shifts. The higher education sector consists of eight universities and three community colleges. In 1996-97, about 50,000 students were enrolled at these institutions, over 40 percent of whom were women.

Table 7.4

Public and Private Schools

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Source: Palestinian Central Bureau of Statistics.
Table 7.5

Students at Primary and Secondary Level

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Source: Palestinian Central Bureau of Statistics.
Table 7.6

Number of Students Attending School

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Source: Palestinian Central Bureau of Statistics.
Table 7.7

Students Attending One-Shift and Two-Shift Schools

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Source: Palestinian Central Bureau of Statistics.

Includes all students in schools with both primary and secondary levels.

The basic and secondary education system run by the Ministry of Education is relatively efficient in its use of inputs (teachers, staff, and materials), but in the long run the efficiency of the system could be jeopardized by the absence of systematic cost tradeoff and cost recovery analysis.12 Public schools have lower student-teacher ratios than UNRWA schools, and these ratios are declining, largely reflecting the rapid hiring of teachers in the last couple of years by the PA.13 But the increase in the number of nonteaching staff may indicate bureaucratic bloating. While the Ministry performs its functions quite well, setting standards and measuring the system’s performance are areas yet to be developed. The Ministry has been encouraged to set learning standards by grade; construct standards for classrooms; and refine standards for hiring, retaining, and promoting teachers. Another issue is the need to integrate the Egyptian curriculum used in the Gaza Strip and the Jordanian curriculum used in the West Bank.


Housing in the West Bank and Gaza is of a relatively good standard; nonetheless, a large share of the population still lives in refugee camps: 26 percent of the population in the West Bank and 64 percent in the Gaza Strip are registered refugees, although not all are living in refugee camps. The high population growth has led to an increased demand for housing, reflected in the large proportion of private investment in residential housing, which is often in the form of gradual additions to the existing housing stock. Many new houses were built, and in 1996-97 more than 26,000 new building licenses were issued for housing units, excluding those in UNRWA-run refugee camps. This rapid growth in the housing stock has been necessary just to keep up with the population increase; the average number of persons per room declined only slightly to just above two in 1997 (Table 7.8).

Table 7.8

Housing Situation, 1997

(In percent)

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Source: Palestinian Central Bureau of Statistics.

Includes housing units owned by UNRWA.

While the need for new housing is large, the rental market is very small: only 9 percent of households live in rented accommodations, whereas over 80 percent own their accommodations. The small rental market makes it difficult for young people to establish their first home, particularly since there is no well-developed mortgage market to assist home buyers. In addition, construction in the West Bank and Gaza is hampered by the numerous legal restrictions and lack of clear titling. The rental market is smaller in the Gaza Strip, even though the population growth is higher there, leading to a greater need for low-cost housing. The characteristics of the housing market constitute a serious obstacle to labor mobility and may contribute to increasing unemployment.

Infrastructure has improved greatly since 1994: a substantial amount of donor assistance was used for water and sanitation, with a visible impact. The percentage of households connected to a public water system increased to 86 percent in 1997 from 81 percent in 1995 (Table 7.9). Likewise, the percentage of households connected to a public sewer system rose to 38 percent in 1997 from 32 percent in 1995. In contrast, the already high access to electricity increased only marginally to 99 percent. The percentage of households connected to public water and sewer systems is highest in the Gaza Strip, presumably due to the higher urbanization rate.

Table 7.9

Housing Characteristics, 1995-97

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Source: Palestinian Central Bureau of Statistics.

Excluding refugee camps.

Implications for Social Expenditure

Social Expenditures and the Social Safety Net

Expenditure on the social sectors accounts for about one-third of current expenditure in the budget of the PA. Even so, the public provision of social services in the West Bank is not comprehensive and remains fairly uneven. While most of the population has access to health and education services, a large share of those services is provided by UNRWA. Moreover, there is no unemployment insurance, and the pension system basically covers only public employees, while most of the population relies on the cohesive family structure to provide income in old age (see the annex on the pension system in the West Bank and Gaza).

The Ministry of Health provides a number of basic services free of charge to all the population.14 In addition, primary curative care, secondary care and hospitalization, and tertiary care (including overseas treatment and referrals to local private providers) are provided to those with government health insurance. The Ministry has reduced the premium for public health insurance in an attempt to expand coverage to a greater portion of the population.15 This has reduced the overall collection of health insurance premiums despite an increase in the participation rate, which has necessitated increased budgetary allocations in order to cover the shortfall.16 At present, 39 percent of the population is insured through the government health insurance system; 4 percent has private health insurance or relies on social insurance (for example, from charities); 18 percent is covered by UNRWA; and 39 percent has no health insurance (Table 7.10).17 As a result, the financial repercussions of illness and accidents are quite different for the various groups.

Table 7.10

Health Insurance Coverage

(in percent)

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Source: Palestinian Central Bureau of Statistics.

As far as education is concerned, public schooling is essentially free but, as in the case of health, its coverage is incomplete and the reliance on UNRWA is substantial.18 In the coming years, the main challenge for the PA will be to cope with a young and rapidly growing population that will produce a large number of new school entrants every year, putting the capacity and finances of the education system under great pressure. Already 90 percent of the budget of the Ministry of Education is devoted to teachers’ salaries, and insufficient resources are devoted to materials and maintenance. In the future, a larger share of budgetary resources will have to be channeled to the education system in order to maintain the current high standards.

Refugees in the West Bank and Gaza and Future Social Responsibilities19

The responsibility for providing social services to the refugee population within the West Bank and Gaza currently remains with UNRWA, which finances a large amount of the social expenditures of the Palestinian population. The Interim Agreement stipulates that the issue of Palestinian refugees will be dealt with in the permanent status negotiations. If an agreement is reached regarding the refugee issue, it is possible that the responsibility of providing social services to the refugee population in the West Bank and Gaza would then be transferred from UNRWA to the PA, in which case the PA would face additional social responsibilities and fiscal demands. It is likely, however, that the increase in responsibilities would be phased in and that some financial support would be available.

A large number of Palestinians became refugees following the war in 1948. UNRWA was established in December 1949 to provide assistance for the relief of the Palestine refugees to prevent conditions of starvation and distress among them and to further conditions of peace and stability.20 Subsequently, UNRWA has also been providing some assistance to Palestinians displaced as a result of the June 1967 war. By June 1951, UNRWA had 876,000 registered refugees, and this number had grown to 3.6 million by December 1998. Out of these, 1.3 million refugees are living in the West Bank and Gaza. At the end of 1998, the number of registered refugees was 786,000 in the Gaza Strip and 563,000 in the West Bank.21 The main activities of UNRWA continue to be to provide primary education, health care services, and relief and social services. In addition, since the Declaration of Principles in 1993, it has also been conducting a Peace Implementation Program targeting basic infrastructure and income-generation programs.

The fiscal impact of assuming responsibility for providing services to refugees presently registered with UNRWA would be substantial. The cost of education, health, and social services to the more than one million refugees registered with UNRWA is estimated at around $133 million, or 4 percent of GDP (Table 7.11). Assuming that the transfer of social responsibilities would not have been accompanied by an increase in revenue (although it might be financed by external donor assistance), the impact on the budget deficit would have been significant: total current expenditure would have been higher by about 4 percent of GDP.22

Table 7.11

Social Expenditure

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Sources: Ministry of Finance, PA 1998 budget documents, UNRWA; and IMF staff estimates.

The estimates for 1998 are based on the 1998 budget as passed by the Palestinian Legislative Council.

Consolidated social expenditure equals social expenditure by the PA and the estimated social expenditure on refugees.

The consolidated current balance equals the current balance and the estimated social expenditure on refugees.

Future Prospects and Challenges

Social sector issues will continue to play an important role in the Palestinian economy. Health and educational standards are generally high, largely due to a comprehensive primary health and education system. Fertility rates are also very high, and, as a result, the natural population growth rate is among the highest in the world, resulting in a very young age structure in the population. With almost half the population younger than 15, even if the fertility rate were to decline rapidly today, the large inflow of Palestinians into the 15-35 years age cohort in the coming years will lead to substantial population growth over the medium term.

High population growth will, in turn, put additional pressure on social expenditures, and the PA will face a major challenge merely to keep the education, health, and housing standards at the present level, let alone improve them. In addition, it will have to find resources to establish a more comprehensive safety net, including perhaps some form of unemployment insurance, and to expand the coverage of the pension system to the population at large. Overall, high population growth will lead to further erosion of living standards unless the economy can be shifted to a more rapid growth trajectory.

Another looming issue is the possible takeover by the PA, at some point, of the provision of social services to the large refugee population presently under the responsibility of UNRWA. If the refugee issue is eventually resolved in the context of a final status agreement, UNRWA’s activities in the West Bank and Gaza would presumably be phased out, and the PA would have to take over the responsibility for assisting the refugee population.


The PCBS collects data on household expenditure and consumption at regular intervals through representative surveys. So far, the results of two 12-month survey rounds have been published, for 1995/96 and for 1997. The data cover the periods October 1995-September 1996 and January-December 1997.


Adjusting for household size, average monthly per capita consumption in 1997 was just above NIS 400, with per capita consumption in the Gaza Strip 24 percent below average and in the West Bank 12 percent above average (Figure 7.2).


In 1997, household consumption in the Gaza Strip was 15 percent below average, while household consumption in the West Bank was 6 percent above average (Figure 7.2). In the south of the Gaza Strip, monthly per capita consumption was 42 percent below average; in the middle of the West Bank it was 57 percent above average.


On average, households with a main wage earner in Israel or abroad had 7 percent higher consumption than average, whereas households running their own business had consumption 14 percent above average. Households with wage earnings from the private sector and from the public sector had consumption close to the average, but those without a regular wage income had monthly expenditure 48 percent below average.


A household headed by a university graduate had a monthly consumption of 34 percent above average, whereas one headed by an illiterate person consumed 31 percent below average.


The MAS study has been criticized for, among other things, using too limited a sample size, rather than being based on fullyear observations, and for the methodology used in deriving the poverty line (MAS, 1996a). As a reference point, the Development Assistance Committee (DAC) uses as an indicator of extreme poverty the proportion of the population living on less than one dollar a day.


The health sector in 1997 consisted of 458 primary health clinics and 25 hospitals. There are four major health providers: (1) the Ministry of Health; (2) UNRWA; (3) NGOs and charities; and (4) the private for-profit sector. The Ministry of Health provides both primary and secondary services through its 14 hospitals and 209 clinics and purchases tertiary services through private providers domestically and abroad, primarily in Israel. UNRWA provides free primary services to registered refugees. NGOs provide primary, secondary, and tertiary health care; and private for-profit providers have a broad range of services (World Bank, 1998b).


More boys repeat grades or leave school at the basic level, but at the secondary level, there are more female dropouts (Berryman, 1998).


The Ministry operated more than half the schools in the West Bank, but only one-third of the schools in the Gaza Strip, a difference explained by the larger presence of UNRWA in the latter.


The Ministry of Education has a good reputation among donors and the Palestinian civil society for transparency and minimal corruption (Berryman, 1998).


International evidence suggests that student learning remains the same within a broad band of student-teacher ratios. Given that it is very costly to reduce those ratios, this should be done only if the reduction leads to more effective teaching and learning (Berryman, 1998).


Namely, prenatal and postnatal care, preventive and curative care for all children under the age of three (including immunization), hospital psychiatric services, and community mental health programs.


Under the Israeli Civil Administration, about one-fifth of the population is covered by public health insurance (World Bank, 1998b).


In order to expand the coverage of the health insurance system while ensuring that contributions are made according to ability to pay, it has been suggested that the relatively low ceilings on insurance premium payments be adjusted to make the system less regressive and that the voluntary nature of the system, whereby low-risk population groups can opt out of the system until they require health services, could be improved (World Bank, 1998b).


UNRWA provides coverage in lieu of health insurance to more than one-half of those in refugee camps, while the Ministry of Health provides coverage to one-third. Owing to UNRWA, the lowest proportion of Palestinians without health insurance coverage, 11 percent, is among refugees. Because the proportion of refugees is higher in the Gaza Strip, UNRWA covers a larger share of the population there (31 percent) relative to the West Bank (13 percent).


In schools run by UNRWA, families pay nothing, whereas in schools run by the PA, families pay variable fees in addition to a special education tax in the West Bank (Berryman, 1998).


The discussion in this chapter restricts itself to the implications of providing social services to refugees that are presently in the West Bank and Gaza without addressing the issue of Palestinian refugees abroad.


Resolution 302 (IV) of December 8, 1949, United Nations General Assembly.


Registered refugees include all those needy refugees who, as a result of the establishment of the state of Israel, took refuge elsewhere in Palestine, Lebanon, Syria, and Jordan prior to July 1, 1952; those who were deemed in need and registered in UNRWA records for relief and assistance; their descendants; and those registered refugee women who were married to nonregistered refugees but are widowed or divorced.


Assuming the same coverage of social expenditure that exists today.