The Growth of the Service Sector in Palestine: The productivity challenge

Résumé En

This paper is one of the first to discuss service sector productivity in Palestine. We have empirically addressed the main factors that are responsible for growth in productivity in the Palestinian service sector, and discussed the impact of intra-sectoral heterogeneity on the growth of productivity using a panel data provided by the Palestinian Central Bureau of Statistics. The results show that FDI has a positive and significant influence on the growth of labor productivity. Capital-intensive service sectors have a high influence on the growth of labor productivity compared to other sectors, while public services and traditional services such as retail trade, the sale and repair of motor vehicles and land transport are the main areas responsible for weak growth in service productivity. The political instability also negatively affects the growth of productivity in the service sector. In order to increase productivity in traditional services, new policies should be adopted, based on the use of ICTs. Government should adopt an efficient plan aimed at absorbing the thousands of unskilled workers who lost their jobs inside Israel, and this should be based not on expansion of the public sector but on the rehabilitation of these workers, employing them in the various economic sectors. Introduction The Palestinian economy faces many challenges. Firstly, it is highly dependent on the Israeli economy-more than 73% of Palestinian imports of goods and services originated in Israel in 2010 (PCBS, 2012). Secondly, the restrictions imposed upon it by Israel impede the development of a viable Palestinian economy. These restrictions take several forms: control over raw materials, control over the borders of Palestinian areas and prevention of the construction of industrial zones. They result in political instability, and they distort the investment climate. Thirdly, the productive sector suffers from a lack of competences and financial resources in both public and private sectors. The Palestinian Authority mainly depends on foreign aid to support its budget. The final challenge results from the technological revolution and strong growth in ICTs seen over the past two decades; this has accelerated economic openness and trade liberalization, creating a high competitive pressure on the Palestinian fragile economy.