West Bank and Gaza Poverty and Shared Prosperity Diagnostic

Transcription

1 Public Disclosure Authorized Public Disclosure Authorized West Bank and Gaza Poverty and Shared Prosperity Diagnostic Public Disclosure Authorized August 14, 2018 Public Disclosure Authorized Authors: Aziz Atamanov and Nethra Palaniswamy, Poverty and Equity Global Practice. Acknowledgements: We are indebted to our colleagues from the Palestinian Bureau of Statistics, Jawad Al- Saleh and Fida Twam, for their collaboration in preparing the data for analysis in a very short period of time. We are also grateful to Ruth Hill for peer reviewing the document. We acknowledge overall guidance and support from Mark Ahern, Benu Bidani, and Marina Wes. 1

2 CONTENTS Main Findings... 6 Trends in poverty and shared prosperity... 6 Drivers of deterioration in Gaza and fragile improvements in the West Bank... 8 Declining investments and unequal opportunities... 9 I. Introduction II. Context III. Trends in poverty and shared prosperity, : A widening welfare gap III.1 Poverty trends: fragile welfare gains in the West Bank and a humanitarian crisis in Gaza III.2 Vulnerability: a highly vulnerable population that is reliant on aid III.3 Changes in the distribution of welfare: pro-poor expenditure growth in the West Bank, negative growth across the distribution in Gaza III.4 Shared prosperity and inequality: increasing equality in the West Bank, and shared despair in Gaza 25 III.5 Trends in non-monetary living standards A crisis in essential public service delivery in Gaza Record intact on health and sanitation, but declining investments in secondary education in both regions III.6 Profile of the poor in 2017: Who are the poor? Have their characteristics changed? IV. Drivers of trends in poverty and inequality: Explaining the divergent trends in the West Bank and Gaza 34 IV.1 Changes in the labor market: Fragile, externally dependent labor market opportunities in the West Bank, while Gaza remained cut-off and reliant on the public sector as a safety net V. Differential effects on monetary and non-monetary living standards: Long-term volatility and the deterioration in welfare has affected population groups differently VI. References VII. Annexes

3 LIST OF FIGURES Figure 1: Long-term volatility in real GDP per capita economic growth, especially in Gaza Figure 2: The Palestinian economy had a per capita growth rate close to zero Figure 3: Aid can no longer sustain growth Figure 4: Patterns in the composition of GDP reveal the toll on Gaza, and the continued reliance on aid to finance growth Figure 5: Since 2011, poverty has increased in the Palestinian territories, driven by divergent regional trends: a sharp increase in Gaza and a small decline in the West Bank Figure 6: The decline in poverty in the West Bank was limited to urban households, while poverty increased across all groups in Gaza Figure 7: Relative to 2011, the distribution of the poor population in the West Bank shifted away from urban areas towards rural areas and camps Figure 8: The distribution of the poor population across areas in Gaza remained largely unchanged between 2011 and Figure 9: The depth of poverty increased in Gaza between 2011 and 2017, driving an increase in the territories as a whole Figure 10: Between 2011 and 2017, the severity of poverty in Gaza doubled Figure 11: Ownership of assets generally increased in the West Bank since Figure 12: Asset ownership in Gaza remained well below the West Bank and did not increase since Figure 13: Subjective assessments about the adequacy household income in West Bank are consistent with measured welfare improvements Figure 14: In Gaza, an increasing share of respondents report difficulty in meeting basic needs since 2011, consistent with increasing poverty Figure 15: Using internationally comparable poverty lines (US$ PPP), the West Bank compares favorably with MENA countries, while Gaza ranks with the poorer countries in the region Figure 16: The population of the West Bank remains particularly vulnerable to welfare shocks Figure 17: One quarter of the bottom 40 percent of the distribution in the West Bank received some form of aid in Figure 18: More than 90% of the bottom 40 in Gaza receive some form of aid; and even among the most well-off, half receive assistance Figure 19: Among the poor, assistance accounted for as much as 45% of incomes in Gaza, and 38% in the West Bank in Figure 20: Growth incidence curves for 2017 relative to 2011 reveal the pro-poor growth in expenditures in the West Bank, declining growth across the distribution in Gaza, and a sharp fall in expenditures for the less well-off among the camp population Figure 21: In the West Bank, shared prosperity increased, while in Gaza and in camps, the less well-off bore the brunt of the decline Figure 22: The Gini coefficient increased between 2011 and 2017 in camps and fell in the West Bank Figure 23: Overall inequality remains relatively low in the Palestinian territories, around the average for MNA countries Figure 24: While the decline in poverty in the West Bank was primarily driven by redistribution, the increase in poverty in Gaza was driven by negative expenditure growth Figure 25: Access to improved drinking water has sharply declined in recent years, driven by Gaza

4 Figure 26: The West Bank and Gaza together now fall well below comparable countries (based on GNI per capita) in terms of access to improved drinking water Figure 27: Satisfaction with the quality of electricity grid and piped water reflects the decline in access Figure 28: Access to improved sanitation, net enrollment in secondary school, and infant mortality indicators continued to improve during circa Figure 29: While trends in infant mortality have maintained a secular decline since 2000, net and gross secondary enrollments have declined since Figure 30: Poverty headcount ratios by demographics in West Bank, Figure 31: Poverty headcount ratios by demographics in Gaza, Figure 32: Poverty headcount ratios by characteristics of the head of household in the West Bank, Figure 33: Poverty headcount ratios by characteristics of the head of household in Gaza, Figure 34: The decline in income per adult equivalent poverty during in the West Bank was driven by a shift towards wage employment and an increase in wage earnings Figure 35: The increase in income per adult equivalent poverty during in Gaza was driven by a decline in transfers, despite an increase in wage employment and wage earnings Figure 36: The removal of social assistance from governmental and non-governmental sources from the consumption of households above the poverty line is estimated to increase poverty, especially in Gaza Figure 37: A substantial pro-poor shift towards regular wage employment in the West Bank between 2011 and Figure 38: In Gaza, a small shift towards regular wage employment between 2011 and 2017, especially among the bottom two quintiles Figure 39: In the West Bank, the poor gained access to regular wage employment in 2017, especially through construction Figure 40: The public sector remained the main source of regular wage employment in Gaza. However, Gaza s poor relied on regular wage employment in commerce Figure 41: Gaza accounts for a disproportionate share of the poorest expenditure quintile and of the NEET population in Figure 42: Distribution of population groups by quintile, West Bank and Gaza, Figure 43: Coverage and HOI for selected set of opportunities in West Bank Figure 44: Decomposing the D-index, West Bank Figure 45: Coverage and HOI for selected set of opportunities in Gaza Figure 46: Decomposing the D-index in Gaza Figure 47: Structure of employment in 2011, LFS Figure 48: Structure of employment in the 1 st quarter (3 months) of 2017, LFS Figure 49: Structure of employment by economic sector in 2011, LFS Figure 50: Structure of employment by economic in 2016, LFS Figure 51: Trends in unemployment indicator across regions in 2011 and 2016 using PECS and LFS data, % Figure 52: Trends in employment indicator across regions in 2011 and 2016 using PECS and LFS data, % Figure 53: Structure of employment in the West Bank and Gaza region during , % Figure 54: Real daily wage in NIS in 2010 prices in the Palestinian territories West across employment type Figure 55: Real daily wage in NIS in 2010 prices in Gaza across employment type Figure 56: Headcount poverty rates using consumption and income per adult equivalent as welfare aggregates 54 Figure 57: Cumulative distribution function of welfare aggregate for West Bank, Figure 58: Cumulative distribution function of welfare aggregate for Gaza,

5 Figure 59: Explaining changes in income per capita Gini coefficient by income sources in West Bank, Figure 60: Explaining changes in income per capita Gini coefficient by income sources in Gaza, Figure 61: Explaining changes in income per capita Gini coefficient by income sources separating wage and selfemployment in West Bank, Figure 62: Explaining changes in income per capita Gini coefficient by income sources separating wage and selfemployment in Gaza, Figure 63: While access to improved sources of drinking water increased across all asset quintiles in the West Bank between 2010 and 2014, Gaza witnessed a decline across the distribution; Since 2014, all groups witnessed a decline in access Figure 64: The wealth gradient in access to improved unshared sanitation has generally disappeared, although access appears to have declined since 2014 in the West Bank LIST OF TABLES Table 1: Characteristics of the poor and differences with the non-poor, Table 2: Pro-poor wage and wage employment growth contributed to poverty reduction in the West Bank. In Gaza, wage growth was less pro-poor, and, for the bottom 40, both wages and transfers declined between 2011 and Table 3: Jobs in Israel and the settlements accounted for almost a fifth of all employment for residents of the West Bank in 2017; in contrast, work outside Gaza for its residents fell close to zero Table 4: Opportunities analyzed for children in the West Bank and Gaza Table 5: Population shares across strata within regions, % Table 6: Explaining changes in consumption by income using PECS Table 7: Structure of income by income source across income per adult equivalent quintiles in West Bank, Table 8: Structure of income by income source across income per adult equivalent quintiles in Gaza, Table 9: Structure of other transfers by consumption per capita quintiles Table 10: Construction of comparable income aggregates Table 11: Cross tabs of coverage of different human opportunities across different circumstances in West Bank 61 Table 12: Cross tabs of coverage of different human opportunities across different circumstances in Gaza LIST OF BOXES Box 1: Data in the West Bank and Gaza Box 2: Measurement of poverty in the West Bank and Gaza Box 3: Subjective measures of poverty and changes in asset ownership are consistent with the trends in monetary poverty Box 4: Analyzing changes in poverty using income decompositions Box 5: The role of social assistance in Gaza Box 6: Women and youth are largely excluded from these weak and stagnant labor markets Box 7: Calculating the Human Opportunity Index (HOI) for the West Bank and Gaza Box 8: Explaining details of HOI using a simple example

6 MAIN FINDINGS For close to three decades, the people in the West Bank and Gaza have lived in a volatile and aid-dependent economic environment, defined by external restrictions on trade and the mobility of people, in addition to openended political uncertainty and internal challenges. Accordingly, economic welfare has been volatile to episodes of conflict, and recoveries have been fragile. At the same time, the territories impressive record on human capital investments and outcomes in health and education was widely recognized as providing the basis for sound economic growth, should the political outlook improve. This poverty diagnostic documents how monetary and non-monetary living standards evolved in the West Bank and Gaza from and examines the drivers of change. During this period, poverty increased by 3.4 percentage points in the Palestinian territories as a whole, from 25.8 to 29.2%. However, trends in the West Bank and Gaza diverged sharply. The proportion of the population living below the poverty line in the West Bank declined by 3.9 percentage points, from 17.8 to 13.9%. Poverty in Gaza rose by 14.2 percentage points, from 38.8 to 53%. From , economic growth remained vulnerable to conflict and constrained by external restrictions, and declining aid flows cannot continue substituting for private growth. The main welfare narratives of this period are thus a fragile improvement in monetary living standards in the West Bank, alongside deterioration in refugee camps and a precipitous decline on every monetary and non-monetary indicator of welfare in Gaza. In Gaza, every second person is now poor, and no one has safe water and regular electricity. At the same time, certain investments in human capital showed clear signs of long-term decline across the territories, and access to opportunity varied across different population groups. Trends in poverty and shared prosperity Over , a divergence in poverty trends at the regional level widened the gap in living standards between the two Palestinian territories. By 2017, poverty in Gaza had climbed to 53%, while the rate in the West Bank fell to 13.9%, though the decline was largely restricted to urban households. Consequently, the Palestinian poor became more concentrated in Gaza (71% in 2017, compared to 57% in 2011). The average household in the West Bank had slightly higher living standards in 2017 than in 2011, while the precipitous decline in living standards in Gaza was accompanied by an alarming fall in access to essential public services like water and electricity. Although fragile due to a worsening political outlook, monetary living standards in the West Bank improved over this period, despite stagnant rates of employment. This was accompanied by a recovery in access to basic public services like water, which had been on the decline till At the same time, access to sanitation improved from high baseline levels, particularly in the poorer and more rural parts of the West Bank. In contrast, in Gaza, high poverty rates were accompanied by an alarming decline in access to these essential services. 6

7 Rural Urban Camp Rural Urban Camp Rural Urban Camp Poverty headcount Poverty headcount Since 2011, poverty has increased in the Palestinian territories, driven by divergent regional trends: a sharp increase in Gaza and a small decline in the West Bank The decline in poverty in the West Bank was limited to urban households, while poverty increased across all groups in Gaza 38.8% 25.8% 17.8% 53.0% 29.2% 13.9% 70% 60% 50% 40% 30% 20% 10% 0% West Bank and Gaza West Bank Gaza Source: Staff calculations, based on PECS 2011 and 2017 West Bank and Gaza West Bank Gaza Gaza was effectively reduced to a safety-net state, with over 75% of its households relying on some form of social assistance in Gaza s population is over 50% poor, and its unemployment rate surpasses 40%. Combined with a nearly universal lack of access to reliable water and electricity services and restrictions on access to medical services outside the region, the current situation in Gaza is widely recognized as a humanitarian crisis (World Bank, 2018). In the period from , a majority of households in Gaza accessed government or non-governmental social assistance in every expenditure quintile except the richest. This aid accounted for nearly 30% of expenditures among the poor and for close to a quarter of consumption expenditures, on average, across all quintiles. The trends in monetary poverty described in this diagnostic are consistent with subjective indicators of wellbeing that relate to self-assessment of income levels in Gallup Poll data. Gallup asks households to assess whether their incomes are adequate to live comfortably, or just enough to get by, or if they find it difficult to make ends meet. The share of Gallup respondents in Gaza finding it difficult or very difficult to live on current income increased from 63% in 2011 to 74% in 2016, while the same indicator declined in the West Bank from 59 to 42%. Poverty and inequality in camps increased in 2017 relative to While this trend was driven by Gaza, camp populations in the West Bank also witnessed deterioration in living standards, and they faced inequities in access to basic public services. With a ten percentage-point increase in camp poverty between 2011 and 2017, the welfare gap between camp and non-camp populations widened in both regions, and inequality in camps increased by 4 points (Gini) over this time. In addition to a large decline in consumption, particularly for the poor, the population living in camps in the West Bank also had worse access to essential services like water and electricity. Children in these camps had unequal access to educational opportunities. Poverty in the West Bank is volatile to even small shocks to expenditures and incomes. In a context where expenditures are sensitive to conflict and dependent on aid, even small changes in expenditures can result in large increases in poverty. Even a 5% drop in expenditures in the West Bank - which would be much lower than the 20% decline observed during the 2007 Gaza internal divide, for example - could increase poverty by as much as 16%. A 15% expenditure drop will increase poverty in the West Bank by as much as 50%. 7

8 Although the combined West Bank-Gaza poverty rate is low compared to countries in the MENA region, Gaza alone would rank amongst the region s poorest. For the Palestinian territories, poverty rates calculated using an international poverty line of $5.5 (2011 PPP US$) compare favorably to both lower middle-income countries and to upper middle-income countries in the MENA region. However, if poverty rates for Gaza alone were compared using this international line, Gaza would rank with the poorest countries in the MENA region, including Yemen, Egypt, and Iraq. Inequality remained low between 2011 and 2017, although it increased in refugee camps. While consumption growth in the West Bank was pro-poor, the cost of economic despair in Gaza and in refugee camps was borne slightly more by the bottom deciles of the population. Over this time, the Gini in the West Bank declined slightly, while it increased slightly in Gaza. In camps, the Gini index increased by four points to reach 29 in The poorest witnessed very different consumption trends over the period in the three distinct political geographies defined by the West Bank, Gaza, and camps. In the West Bank, consumption for bottom-20 and bottom-40 populations grew faster than the average, while this was not the case in Gaza or refugee camps. Drivers of deterioration in Gaza and fragile improvements in the West Bank Over the period , economic growth continued to be volatile to conflict, while declining flows of international aid were increasingly unable to substitute for private sector growth and sustain public expenditures. The annualized average rate of growth in GDP per capita was close to zero. Compared to the past decade, the Palestinian economy appears to have ground to a complete halt since The economy in Gaza was volatile - contracting by 18%, measured by real GDP per capita, during the 2014 war and growing by 6% during the recovery. Growth rates in the West Bank varied from 2.5% to 0.8%. At the same time, a worsening political economy deepened economic distortions and continued to erode the narrow productive base of the economy, particularly in Gaza. Aidfinanced sectors e.g., public administration, education, and health services - continued to play a critical economic role. In a context where employment rates were low and declining, public administration and public services accounted for at least one-third of all jobs in each region, although the private sector was the largest employer in both regions. Employment rates were persistently low in both regions, and they declined by two percentage points in both regions between 2011 and 2017, to reach 41% in the West Bank and 31% in Gaza. In 2017, the public administration and other services sectors accounted for 37% and 45% of jobs in the West Bank and Gaza, respectively. Construction was the single largest employer in the West Bank, accounting for a quarter of all jobs, and a similar share of jobs in Gaza came from the commerce sector. Despite low employment, changes in labor market earnings were the key driver of poverty reduction in the West Bank. In contrast, declining transfers accounted for most of the increase in poverty in Gaza. Declining poverty and inequality over the period in the West Bank were mostly driven by changing conditions in the labor market (earnings). In Gaza, declining transfers (pensions, retirement payments, and domestic remittances) were a key driver of the observed increases in poverty and inequality. While labor earnings contributed to some reduction in poverty over this time in Gaza as well, this effect was not strong enough to compensate for the magnitude of decline in income transfers. Changing labor market conditions included an increasing share of jobs with regular wages in a stagnant labor market, particularly in the West Bank, and the increased availability of jobs in Israel and the settlements, though these jobs were only accessible to workers in the West Bank. In both regions, there was an increase in the share of regular 8

9 wage employment between In large part, the movement out of irregular wage employment was accompanied by an increased share of workers reporting regular wage employment, particularly from the bottom three expenditure quintiles in the West Bank. Jobs in Israel and the settlements - which paid over twice the domestic wage - increased by four percentage points, and they accounted for 17% of all jobs in the West Bank. The poor had access to regular wage employment in the construction and commerce sectors in the West Bank. The Gaza commerce sector, which was the dominant employer of the poor, had a lower share of regular wage jobs. A large share of jobs in construction and commerce (which together accounted for 43% of all jobs) offered regular wages in the West Bank. Construction, which accounted for at least one in five jobs in every income quintile, employed a third of the bottom-20 population. In Gaza, most regular jobs were in the public sector and other services sectors, which were primarily accessed by wealthier households. Commerce, the single largest private employer, was dominated by the poor and had fewer formal jobs. Only 48% of commerce jobs in Gaza that were accessed by the bottom 20 paid regular wages, while 74% of the construction jobs that employed bottom-20 workers in the West Bank were regular jobs. Declining investments and unequal opportunities While the Palestinian Authority s record as a superior performer in the provision of social services like health, education, and sanitation - remained intact, secondary school enrollments declined for over a decade and settled at a lower rate over the period Between 2000 and 2016, on sanitation and net enrollment in secondary school, the West Bank and Gaza continued to perform on par with upper middle-income countries and better than Middle East and North African countries on average (excluding high-income countries). While access to sanitation, infant mortality rates, stunting, and overall school enrollment rates continued to improve during this period, enrollment in secondary school started to decline. Both net and gross enrollment rates in secondary school gradually fell after 2007, settling at their lower rate post 2011, and a gender differential emerged. In 2017, 7% and 13% fewer boys than girls completed grade 9 in the West Bank and Gaza respectively. Access to opportunity - as defined by access to social and essential infrastructure services and measured by a human opportunity index - was more unequal in Gaza in 2017, though inequities in access to secondary education and water were also observed for children living in camps in the West Bank. While the coverage and access to secondary education (and high-quality education) were unequal in both regions, inequalities were higher in Gaza, and the circumstances that drive these trends differ across the two regions. In Gaza, children from poorer households and those with disabled household heads are more likely to face unequal opportunity, while poverty status is not the largest factor contributing to such inequality in the West Bank. In both regions - albeit to differing degrees - boys are likely to face worse educational opportunity relative to girls. In addition, severe shortages of water and electricity in Gaza coincide with an unequal access to uninterrupted water and electricity services for children in camps and refugees in the West Bank. Of note, Gaza had greater equity in access to health insurance relative to the West Bank, though this access relies on the provision of insurance by the United Nations Refugee Welfare Agency (UNRWA). In summary, over the period , monetary living standards declined in Gaza and in refugee camps. Welfare improvements in the West Bank were fragile. They relied in large part (i) on the construction sector, which in the past has been dependent on public expenditures, and (ii) on access to jobs in Israel and the settlements, which have also been historically volatile. At the same time, signs emerged of a long-term decline in some non-monetary standards of living. Key investments in human capital settled at a lower rate following a decade-long decline. Some 9

10 groups faced unequal access to opportunities, which could evolve to produce long-term drops in non-monetary living standards. Looking forward, in the context of a worsening economic and political outlook, two key areas will be important to investigate further: (i) the implications for monetary welfare of a rapidly changing policy environment that includes long-term wage cuts in the public sector and a potential withdrawal of funding for health and education services; and (ii) the underlying social and economic drivers of unequal access to opportunity. 10

11 I. INTRODUCTION This poverty diagnostic documents changes in welfare and living standards in the West Bank and Gaza over the period 2011 to Since the last poverty assessment for these territories, in 2011, the economic constraints facing them have worsened. The 2011 poverty assessment covered the period from 2004 to 2009, spanning the end of the second Intifada, as well as the 2007 internal divide in Gaza (World Bank, 2011). The current diagnostic draws on the 2011 and 2017 Palestinian Expenditure and Consumption Surveys (PECS, Box 1) to assess key welfare trends and highlight areas for further investigation. Box 1: Data in the West Bank and Gaza The West Bank and Gaza are unique among fragile jurisdictions in that they have continued to implement multiple surveys - including household expenditure, labor force, and demographic and health surveys - on a regular basis, despite protracted fragility and conflict. Among surveys conducted by the Palestinian Central Bureau of Statistics (PCBS), the Palestinian territories Labor Force Survey (LFS) and the Palestinian Expenditure and Consumption Survey (PECS) are implemented on an annual basis. In addition, the Statistics Bureau implemented four rounds of the Demographic and Health Survey (DHS) until 2010, and the Multiple Indicators Cluster Survey (MICS) in 2010 and The PECS is a is a household budget survey that collects information on food and non-food expenditures, along with core data on socio-economic and health characteristics; dwelling conditions and access to key public services; and labor activities and incomes. The primary focus of the survey is a 30-day diary that is used to collect data on food and non-food consumption expenditures. Twelve-month and three-year recall periods are used for some selected items that are not purchased frequently. In addition, this survey is also used to track some core Multidimensional Poverty Index (MPI)indicators, including those relating to education and access to public services. Since 2009, this survey has been used to track poverty and household welfare in the West Bank and Gaza. The 2011 Poverty Assessment used all three core data sources - the LFS, PECS, and the DHS. It also used data on the location of roads closures and checkpoints collected by UN-OCHA to create measures of checkpoint-induced mobility restrictions in the West Bank. 11

12 Specifically, this poverty diagnostic seeks to: depict trends in living standards and welfare; identify drivers of stagnation/deterioration; and assess whether certain groups in the population face disproportionately lower access to human opportunities. Following a brief description of the West Bank-Gaza context in Section II, Section III examines the evolution in welfare and living standards since This section documents trends in monetary poverty and non-monetary indicators; identifies distributional changes in welfare and trends in inequality; and profiles the poor. Section IV examines the drivers of poverty reduction through an income decomposition analysis and explores key labor market outcomes to better understand these drivers. Section V analyzes indicators of social and economic welfare to identify groups that may face a higher risk to their future productive potential due to diminished human opportunity. This diagnostic comes at a time of escalating political and economic crisis, when there is urgent need for an update on welfare trends to inform policy. The principal goal of this diagnostic - which has been completed within three months from data availability - is to be timely and actionable, given the worsening outlook in the territories and the urgency of an effective response. 12

13 % GROWTH GDP PER CAPITA internal divide in Gaza War in Gaza II. CONTEXT For nearly three decades, the people in the West Bank and Gaza have lived in a volatile and aid-dependent economic environment, with open-ended political uncertainty and increasingly restricted mobility within and out of the territories. During this period, downward fluctuations in GDP per capita have coincided with intermittent episodes of conflict (Figure 1). Continued restrictions on movement and access (including the territorial fragmentation of Gaza from the West Bank), trade restrictions (on imports of capital equipment and on external trade links), and limitations on the use of natural resources (including land, water, and energy) have resulted in a steady, long-term erosion of economic space. This has been accompanied by a decline in total factor productivity, constrained capital investments, and long-term stagnation or decline in endogenous sources of growth. In this context, aid-financed public expenditures have historically been a significant motor of growth (The AIX Group, 2015). Figure 1: Long-term volatility in real GDP per capita economic growth, especially in Gaza West Bank and Gaza West Bank Gaza Strip Second Intifada Source: Staff calculations based on PCBS National Accounts From 2011 to 2017, economic growth remained volatile to conflict, but declining flows of international aid could no longer stimulate growth through the expansion of public expenditures. The average annualized rate of GDP per capita growth was close to zero. Over the period , growth in GDP per capita was 0.32% per year on average. It was higher in the West Bank (0.9%), but negative in Gaza (-1.2%) (Figure 2, Figure 3). Between 2000 and 2016, the trade deficit increased from 28% to almost 40% of GDP, 1 and gross capital formation fell from 32% of GDP to 21% (IMF, 2017). 1 Net imports of goods and services accounted for 56% of GDP, while exports made up only 18% of GDP. 13

14 -5.05 ANNUALIZED % GROWTH IN GDP PER CAPITA Net ODA (% of GDP) GDP growth (% Annual) Figure 2: The Palestinian economy had a per capita growth rate close to zero Figure 3: Aid can no longer sustain growth West Bank and Gaza West Bank Gaza Strip GDP growth (Annual %) Net Overseas Development Assistance (% of Source: Staff calculations based on PCBS national accounts; Net ODA from WDI on June 8, During , a worsening political economy - defined by continued restrictions on mobility within the West Bank and the nearly complete isolation of Gaza - deepened economic distortions and continued to erode the productive base, particularly in Gaza. Changes in the composition of value added to GDP from different economic activities demonstrate the shrinking productive base and the importance of aid and consumption as growth drivers (Figure 4). In the West Bank, the overall reliance on aid-financed sectors - e.g., public administration, education, and health services - fell starting in In contrast, in Gaza, aid-financed government and social services together accounted for over 40% of GDP, and private-sector activities narrowed over the period 2011 to By 2017, alongside a widening regional gap in living standards, Gaza was effectively reduced to a safety-net state, with over 75% of households receiving some form of social assistance. With a population that is over 50% poor and unemployment rates above 40%, combined with no access to medical services outside Gaza and a nearly universal lack of reliable access to water and electricity, Gaza s situation is widely recognized as a humanitarian crisis (World Bank, 2018). In early 2017, the Palestinian Authority implemented significant wage cuts in the Gaza public sector, which had accounted for more than one-fifth of the region s jobs. While a possible reconciliation of the Palestinian Authority with Hamas could strengthen economic growth and improve public services, this may also increase the pressure on strained financial resources. A potential decline in financial support to relief agencies like UNRWA may further darken Gaza s outlook. Comprehensive reforms will be required to make the fiscal situation sustainable (IMF, 2018). 14

15 Figure 4: Patterns in the composition of GDP reveal the toll on Gaza, and the continued reliance on aid to finance growth Palestinian territories S E C T O R A L S H A R E A S A P E R C E N T O F G D P Agriculture Mining+manuf Wholesale/retail trade Construction Transport and Storage Information and communication Real estate Education+health Public administration Other Gaza strip West Bank Source: Staff calculations based on PCBS national accounts 15

16 III. TRENDS IN POVERTY AND SHARED PROSPERITY, : A WIDENING WELFARE GAP Recent poverty narratives in the Palestinian territories have been three-fold. From , for example: (i) monetary welfare was volatile to conflict; (ii) post-conflict recoveries were fragile, largely associated with aidfinanced public consumption rather than structural improvements in the economy; and (iii) non-monetary living standards remained high. From , these narratives and the trend of economic stagnation continued, with no change in poverty in the West Bank and a slight rise in poverty in Gaza (World Bank, 2017). Between 2011 and 2017, with split political rule between the regions and Gaza s economic isolation, overall poverty rates increased, regional poverty trends diverged, and the welfare gap between the regions expanded. This section details this evolution of welfare and living standards in the West Bank and Gaza since Specifically, it tracks recent trends in monetary welfare (section III.1); shows the differing nature of vulnerability in the West Bank and Gaza (section III.2); presents distributional analysis to better understand the relative importance of growth and redistribution changes (section III.3); considers implications for shared prosperity and inequality (section III.4); examines trends in non-monetary dimensions of wellbeing (section III.5); and profiles the bottom deciles and the poor (section III.6). III.1 POVERTY TRENDS: FRAGILE WELFARE GAINS IN THE WEST BANK AND A HUMANITARIAN CRISIS IN GAZA With bleak results on almost every indicator of economic performance, overall poverty increased by 3.4 percentage points in the Palestinian territories from However, trends in the West Bank and Gaza diverged sharply. 61 percent of the population of the territories lives in the West Bank. 2 While the proportion of the population living beneath the poverty line in the West Bank declined by 3.9 percentage points, from 17.8 to 13.9 percent, poverty increased by 14.2 percentage points in Gaza, from 38.8 to 53 percent, leaving every second Gazan below the poverty line (Figure 5). In the Palestinian territories, poverty is measured using a poverty line, that is defined based on the median expenditure levels for certain key items for the poorest 25 to 30 percent of households (Box 2). Poverty in the West Bank and Gaza is also measured in adult equivalent terms, rather than per capita. All relevant indicators on consumption and incomes in this diagnostic adopt this metric. 2 Table 5 in the annex shows population shares by region (West Bank and Gaza) and strata (urban, rural and camp). 16

17 Box 2: Measurement of poverty in the West Bank and Gaza The National Commission for Poverty Alleviation (1998) established an official definition of poverty in the West Bank and Gaza. The poverty line is set at the median expenditure level of a specific type of household for certain key items for the poorest 25 to 30 percent of households, and it used to be calculated every year. The Palestinian Central Bureau of Statistics (PCBS) also started a consistent poverty trend, beginning in The first consistent poverty trend ( ) used the 1998 poverty line. In early 2011, the PCBS decided to redefine its poverty line by changing the reference household to two adults and three children, and it started a new consistent poverty series beginning in The current poverty trend ( ) uses 2010 poverty line updated by inflation. Poverty in the Palestinian territories is measured using adult equivalence rather than on a per capita basis. Data on household expenditures are collected in the Palestinian Expenditure and Consumption Survey (PECS). In addition to standard items related to the consumption of food and non-food items, the welfare aggregate that is currently used to measure poverty includes purchases of durables, health, education, and rent expenditures. A Laspeyres price index- derived for the West Bank, Gaza, and East Jerusalem using a subset of food and nonfood prices from the CPI dataset - is used for spatial price adjustments. The 2017 PECS was modified to collect data on the flow of services from key durable assets (to replace the current method of simply including durable purchases), based on a subset of technical recommendations made by the World Bank in A companion technical note summarizes the implications of incorporating this improved measure for durable goods along some other key methodological improvements (These include improving estimation of rental values and the spatial adjustments methods used, as well as improvements in data collection). While the current poverty estimates are robust to alternate methodological choices that were tested, the technical note summarizes improvements that would be useful to consider going forward. The poverty trend reported in this diagnostic follows this official methodology, and uses the 2011 poverty line (updated by inflation to an equivalent poverty line for 2016/17) to construct a consistent poverty trend over the years In Gaza, poverty increased everywhere: in rural and urban areas and in camps. The reduction in poverty that is observed in the West Bank was limited to urban households (Figure 6). Gaza now accounts for 71% of the poor in the Palestinian territories, compared to 57% in Overall, while poverty remained a largely urban phenomenon, it became slightly less urban in the West Bank over the period (Figure 7). Relative to 2011, poverty in camps increased by 10 percentage points, and the differential in poverty rates between camp and non-camp populations widened in both regions (by 7.5 percentage points). This national trend was due to a worsening of poverty in camps in Gaza, and the concentration of poverty reduction amongst the non-camp population in the West Bank. While poverty rates in refugee camps at in the West Bank were close to stagnant, they were higher than the regional average at 23%, and there was an increase in the share of the poor population living in camps (Figure 7 and Figure 8). The increase in poverty in Gaza over the period was accompanied by a worsening in the depth and severity of poverty, while both these indicators improved slightly in the West Bank (Figure 9 and Figure 10). Over this period, poverty depth or the poverty gap index 3 doubled in Gaza, from 9 to 16 percent, while it declined by 1 percentage point in the West Bank. The squared poverty gap (Figure 10, also known as the poverty severity index) puts greater weight on the poorest households, those further away from the poverty line, by averaging the squares of the 3 The poverty gap index is measured by the average distance of consumption expenditures from the poverty line, expressed as a percentage of the poverty line. 17

18 % OF POOR POPULATION % OF POOR POPULATION Rural Urban Camp Rural Urban Camp Rural Urban Camp Poverty headcount Poverty headcount poverty gaps relative to the poverty line. By this measure, the severity of poverty more than doubled in Gaza over the period (3% to 7%). Both the poverty gap and its severity are much lower in the West Bank than in Gaza, and both measures improved slightly for the West Bank over this period. Figure 5: Since 2011, poverty has increased in the Palestinian territories, driven by divergent regional trends: a sharp increase in Gaza and a small decline in the West Bank Figure 6: The decline in poverty in the West Bank was limited to urban households, while poverty increased across all groups in Gaza 38.8% 25.8% 17.8% 53.0% 29.2% 13.9% 70% 60% 50% 40% 30% 20% 10% 0% West Bank and Gaza West Bank Gaza Source: Staff calculations, based on PECS 2011 and 2017 West Bank and Gaza West Bank Gaza Figure 7: Relative to 2011, the distribution of the poor population in the West Bank shifted away from urban areas towards rural areas and camps Figure 8: The distribution of the poor population across areas in Gaza remained largely unchanged between 2011 and 2017 Rural Urban Camp Rural Urban Camp Source: Staff calculations, based on PECS 2011 and

19 POVERTY GAP (%) 3% 4% 6% 8% 9% POVERTY GAP, SQUARED (%) 1% 1% 2% 3% 3% 16% 7% Figure 9: The depth of poverty increased in Gaza between 2011 and 2017, driving an increase in the territories as a whole Figure 10: Between 2011 and 2017, the severity of poverty in Gaza doubled W E S T B A N K A N D G A Z A W E S T B A N K G A Z A W E S T B A N K A N D G A Z A W E S T B A N K G A Z A Source: Staff calculations, based on PECS 2011 and 2017 Using internationally comparable poverty lines, the West Bank compares favorably in the Middle East and North Africa (MENA) region, whereas Gaza falls among the poorest. For the Palestinian territories, poverty rates calculated using an international poverty line of $5.5 (2011 PPP US$) compare favorably relative to both lower middle-income countries and upper middle-income countries in the MENA region (such as Algeria, Lebanon, Iran, and Iraq; see Figure 15). For example, at $ PPP, poverty in the West Bank and Gaza is almost three times lower than poverty in Egypt, which has similar Gross National Income (GNI) per capita, and it is lower compared to some countries that have a higher GNI per capita (Figure 15). However, if poverty rates for Gaza alone were compared using this international line, Gaza would be on the level of the poorest countries in the MENA region, including Yemen, Egypt, and Iraq. 19

20 % of respondents % of respondents C A R M I C R O W A V E C O M P U T E R S O L A R B O I L E R C A R M I C R O W A V E C O M P U T E R S O L A R B O I L E R POPULATION (%) 7% 7% 15% 15% 29% 28% 43% 41% 48% 43% POPULATION (%) 49% 57% 62% 62% 76% 82% Box 3: Subjective measures of poverty and changes in asset ownership are consistent with the trends in monetary poverty In both the West Bank and in Gaza, access to key household assets such as cars, washing machines, and refrigerators is fairly widespread. Such access can track economic welfare in the context of a middle-income country. Access to these key assets generally improved in the West Bank in 2017 compared to 2011, while there was little change in Gaza (which also lagged West Bank in terms of overall levels of access) (Figure 11 and Figure 12). In both regions, rates of reported computer ownership fell, but the decline was particularly large in Gaza. Figure 11: Ownership of assets generally increased in the West Bank since 2011 Figure 12: Asset ownership in Gaza remained well below the West Bank and did not increase since Source: Staff calculations, based on PECS 2011 and 2017 The trends in monetary poverty are also consistent with subjective indicators of wellbeing that relate to selfassessment of income levels from Gallup Poll data. This indicator asks households to assess whether their incomes are adequate to live comfortably, or just enough to get by, or if they find it difficult to make ends meet. Between 2011 and 2016, this indicator tracks the worsening situation in Gaza, as well as improvements in the West Bank. The share of respondents in Gaza finding it difficult or very difficult to live on current income increased from 63 percent in 2011 to 74 percent in 2016, while the same indicator declined in the West Bank from 59 to 42 percent. Figure 13: Subjective assessments about the adequacy household income in West Bank are consistent with measured welfare improvements Figure 14: In Gaza, an increasing share of respondents report difficulty in meeting basic needs since 2011, consistent with increasing poverty Living comfortably Getting by Finding it difficult Living comfortably Getting by Finding it difficult 20

21 L E B A N O N ( ) W E S T B A N K ( ) I R A N ( ) J O R D A N ( ) A L G E R I A ( ) T U N I S I A ( ) M O R O C C O ( ) G A Z A ( ) I R A Q ( ) E G Y P T ( ) D J I B O U T I ( ) Y E M E N ( ) HEADCOUNT, % Poverty headcount, 5.5$ 2011 PPP Source: Staff calculations, Gallup poll data Figure 15: Using internationally comparable poverty lines (US$ PPP), the West Bank compares favorably with MENA countries, while Gaza ranks with the poorer countries in the region Yemen, Rep Gaza Egypt, Arab Rep. Morocco Tunisia Iraq Jordan Algeria 10 0 West Bank Iran, Islamic Rep. Lebanon GNI per capita (Atlas, current USD) Source: MNAPOV database as of May 2, 2018 for poverty rates and WDI for GNI per capita. Notes: Consumption per capita is used as a welfare aggregate for all countries for comparability. 21

22 III.2 VULNERABILITY: A HIGHLY VULNERABLE POPULATION THAT IS RELIANT ON AID Living standards can be fragile if a significant share of the population remains highly vulnerable to poverty. Such vulnerability is central to understanding the nature of poverty in a context where episodic conflicts and economic shocks frequently have a negative effect on incomes and expenditures. For example, during the 2007 internal divide in Gaza, consumption expenditures declined by over 20% across all consumption quintiles (World Bank, 2011). In order to identify such vulnerability, middle-class lines can be estimated. This approach can identify the segments of the population that are economically secure and have a low probability of falling into poverty by using panel or synthetic panel data. In the absence of such data, one commonly used measure focuses on the household s ability to meet its basic requirements in the face of shocks to incomes or expenditures. Figure 16: The population of the West Bank remains particularly vulnerable to welfare shocks Source: Staff calculations based on PECS 2017 Despite lower rates of poverty relative to countries in the MENA region, vulnerability to poverty remains an important concern in the West Bank and Gaza. While the population in the West Bank is vulnerable to falling into poverty with even small changes in household expenditures, close to 30% of current expenditures for the poor in Gaza come from social assistance. Figure 16 illustrates this vulnerability to poverty by estimating the increase in poverty under three different scenarios all of which are more conservative than the decline in expenditures documented during the 2007 internal divide in Gaza. These estimates suggest that even a 5% decline in consumption expenditures can increase national poverty rates by 10%, while a 15% increase will increase national poverty by over 30%. Poverty in the West Bank is more sensitive to increases in the poverty line. A decrease of 5% or 10% in consumption expenditures will increase poverty in the West Bank by 17% and 33% respectively, while a 15% decrease would increase poverty by as much as 57%. In Gaza, for the decreases in expenditure considered, the range of increase in poverty rates will lie between 7-25%. Even small shocks to household expenditures and incomes are therefore likely to bring a significant share of non-poor households into poverty, particularly in the West Bank. Monetary living standards in Gaza are dependent on aid, and poor and non-poor Gazans are vulnerable to sudden declines in aid. 79% of the population of Gaza had access to some kind of government or non-government aid in 2017 (compared to 15% in the West Bank). A majority of Gazans had some access to aid in every consumption quintile except for the richest (see Figure 17 for the West Bank and Figure 18 for Gaza). Even in the richest quintile, 48% of the population accessed some form of aid. Aid accounted for close to 30% of expenditures among the poor in Gaza (with two-thirds of this coming from government aid), and it accounted for close to a quarter of 22

23 SHARE OF AID IN EXPENDITURE OR INCOME 8% 12% 10% 13% 18% 20% 20% 32% 20% 11% 13% 10% 11% 7% 4% 3% 4% 2% 1% 9% 12% 15% 26% COVERAGE 46% 38% 32% 42% 52% 59% 62% 73% 79% 84% 83% 82% 93% COVERAGE 94% 93% consumption expenditures on average across all quintiles (Figure 19). Measured as a percentage of income, aid accounted for as much as 45% of total income among Gaza s poor. Figure 17: One quarter of the bottom 40 percent of the distribution in the West Bank received some form of aid in 2017 Receive any government aid Receive any non-government aid No assistance Figure 18: More than 90% of the bottom 40 in Gaza receive some form of aid; and even among the most well-off, half receive assistance Receive any government aid Receive any non-government aid No assistance P O O R E S T R I C H E S T CONSUMPTION PER ADULT EQUIVALENT QUINTILES P O O R E S T R I C H E S T CONSUMPTION PER ADULT EQUIVALENT QUINTILES Source: Staff calculations, PECS 2017 Figure 19: Among the poor, assistance accounted for as much as 45% of incomes in Gaza, and 38% in the West Bank in 2017 West Bank (poor) Gaza (poor) G O V A I D N O N - G O V A I D G O V A I D N O N - G O V A I D I N T O T A L C O N S U M P T I O N I N T O T A L I N C O M E Source: Staff calculations, PECS

24 Annual growth rate, % Annual growth rate, % Annual growth rate, % Annual growth rate, % Annual growth rate, % III.3 CHANGES IN THE DISTRIBUTION OF WELFARE: PRO-POOR EXPENDITURE GROWTH IN THE WEST BANK, NEGATIVE GROWTH ACROSS THE DISTRIBUTION IN GAZA This section takes a closer look at changes in the distribution of consumption in the two Palestinian territories from , and it examines the role of growth and redistribution in the observed changes. Changes in poverty are only one measure of household welfare. With strong volatility in growth in Gaza and a low growth rate in the West Bank, it is important to understand how consumption growth and its distribution are linked to poverty. Even with reductions in poverty like that observed in the West Bank, all households might not experience the distribution of improvements in consumption. Consistent with the regional divergence in economic narratives, annualized rates of growth in per capita consumption expenditures also diverged sharply between the two regions (Figure 20). Between 2011 and 2017, while per capita expenditures declined by 2.9% in Gaza, a slight increase of 0.2% in the West Bank muted the overall decline to 0.8% for the Palestinian territories. Figure 20: Growth incidence curves for 2017 relative to 2011 reveal the pro-poor growth in expenditures in the West Bank, declining growth across the distribution in Gaza, and a sharp fall in expenditures for the less well-off among the camp population 10 West Bank 6 Gaza consumption per adult equivalent percentiles consumption per adult equivalent percentiles 10 Rural 10 Urban 10 Camp consumption per adult equivalent percentiles consumption per adult equivalent percentiles consumption per adult equivalent percentiles Source: PECS 2011 and Notes: Consumption per adult equivalent is used as a welfare aggregate. Consumption growth rates are annualized assuming six years difference between survey rounds. 24

25 In the West Bank, the small increase in overall expenditure growth was pro-poor, with higher growth in consumption expenditures among the bottom deciles. Consumption expenditures of the bottom 40 percent of the population grew faster than the average, at 1.5%, and those of the bottom 20 grew even faster. Growth rates were relatively equal for about 60 percent of the distribution and then gradually declined for the remaining wealthiest 40 percent. At the same time, alongside this improvement on the indicator of shared prosperity, consumption contracted at the upper end of the distribution, resulting in improvements in some measures of inequality. In Gaza, negative rates of growth in consumption across the distribution defined a situation of shared despair, and the bottom deciles living in camps faced a precipitous decline in consumption. Everyone in Gaza was worse off in 2017 compared to 2011, and the bottom 40 and bottom 20 were even harder hit, with an additional decline of 1.1 and 0.5 percentage points in consumption expenditures compared to the average. Consumption in camps declined by 1.5% overall, with the poorest deciles suffering larger drops. Specifically, the bottom 40 in camps witnessed a 3.4% decline in consumption expenditures, and this decline was even sharper for the bottom 20. III.4 SHARED PROSPERITY AND INEQUALITY: INCREASING EQUALITY IN THE WEST BANK, AND SHARED DESPAIR IN GAZA Figure 21: In the West Bank, shared prosperity increased, while in Gaza and in camps, the less well-off bore the brunt of the decline -1.9% A N N U A L I Z E D R E A L G R O W T H R A T E S O F C O N S U M P T I O N ( % ) Total West Bank Gaza Camp 1.6% 1.4% -3.4% -4.0% -1.3% -3.4% -4.2% -0.8% The growth incidence-based analysis suggests that the growth in consumption in the West Bank improved shared prosperity, while the cost of the economic despair in Gaza was borne slightly more by the bottom deciles of the population (Figure 21). While this analysis offers some indication as to how inequality has changed over time, discussion of the Gini coefficient, a summary measure of inequality, will provide a more robust account. Source: Staff calculations PECS 2011, PECS 2017 The economic narrative of the Palestinian territories, though dismal, is shared, as measured by the Gini coefficient. This is largely true for both the regions, and over time. However, inequality in refugee camps has increased. From , when annual poverty data were collected, the Palestinian territories Gini index hovered within two percentage points of 30 (World Bank, 2011). Between , the Gini indices continued to be low, and they varied across the regions. Over the period, the Gini in the West Bank declined, from 30 to 27; while it increased slightly from 27 to 28 in Gaza (Figure 22). In camps, the Gini index increased by 4 points. Though not strictly comparable, inequality in the West Bank and Gaza is low by global standards, and it is close to the average (measured consumption per capita) for selected countries in the MNA region (Figure 23). This Gini is a little higher than that in Lebanon in 2011 (excluding Syrian refugees), and similar to that seen in Jordan in 2010 (prior to the influx of Syrian refugees). 0.2% -2.9% Bottom 20 Bottom 40 Total -1.5% 25

26 % CHANGE IN POVERTY DUE TO GROWTH AND REDISTRIBUTION GINI COEFFICIENT Figure 22: The Gini coefficient increased between 2011 and 2017 in camps and fell in the West Bank Figure 23: Overall inequality remains relatively low in the Palestinian territories, around the average for MNA countries West Bank and Gaza West Bank Gaza Camp Source: Staff calculations based on PECS 2011, Notes: Consumption per adult equivalent is used as a welfare aggregate. Source: MNAPOV database as of May 2, Notes: Consumption per capita is used as a welfare aggregate for all countries for comparability. Figure 24: While the decline in poverty in the West Bank was primarily driven by redistribution, the increase in poverty in Gaza was driven by negative expenditure growth 13% 87% Growth W E S T B A N K A N D G A Z A Distribution -13% -87% W E S T B A N K 95% Source: Staff calculations based on PECS 2011 and % G A Z A The observed trends in poverty, when decomposed, are driven by changes in consumption growth, but with key differences across regions (Figure 24). Changes in poverty can be decomposed into a part that comes from an average change in consumption across the population (i.e., consumption levels of all households increasing or decreasing), and a part that comes from a change in the shape of the consumption distribution or redistribution (i.e., consumption among the poorest growing at a different rate from that of the richest). Redistribution accounted for a major share of the reduction in poverty observed in the West Bank between 2011 and Over this period, while consumption growth in the West Bank on average was close to zero (0.2), the consumption of the bottom-40 and bottom- 20 households rose faster. In contrast, inequality in Gaza did not change much, and the increase in poverty was mostly driven by the lower growth in consumption per capita across the distribution. 26

27 III.5 TRENDS IN NON-MONETARY LIVING STANDARDS Two groups of people with similar monetary living standards will have very different qualities of life, if there are significant differences in their access to safe drinking water, health care, or education services. Effective provision of public goods is therefore a key element of quality of life, and mechanisms for effective delivery of public goods and services are central to any credible poverty reduction strategy (Besley and Ghatak, 2003). A crisis in essential public service delivery in Gaza With no access to safe drinking water or consistent electricity supply, Gaza - where 71% of poor Palestinians live - is in a humanitarian crisis today. This emergency situation, which is in large part due to the complex political economy that defines this region, is very different from what currently prevails in the West Bank and from the record of the Palestinian territories over time. Up until the early 1990s, households in the Palestinian territories had nearly universal access to piped drinking water and reliable electricity. Until recently, the average household in the Palestinian territories also had good education and health outcomes. The 2009 poverty assessment (which used DHS data from 2006) documented an outperformance - relative to similar middle-income and wealthier countries - on health outcomes related to early childhood development and nutrition; a near universal coverage of ante-natal services and access to basic education; and school enrollment rates that were consistently high over time and across regions. However, this assessment also noted that differences in school enrollment between girls and boys began to emerge in the late teenage years 4 (World Bank, 2011). In a complex geo-political context, where the provision of essential services like water and electricity does not depend on the Palestinian Authority alone, access to these services is on the decline in Gaza, and volatile in the West Bank. Access to improved drinking water declined to 90% in the West Bank and 14% in Gaza by Access in the West Bank was high and variable: it recovered to reach 97% in 2014, and declined to 94% in In Gaza, the secular declined continued, and in 2016, only 1% of the population had access to improved water (Figure 25). Data from multiple sources 5 corroborate this alarming decline in access to water in Gaza and document a slight wealth gradient 6 in access to improved water sources in both regions (Figure 63 in the Annex; World Bank, 2018, forthcoming). With this decline, the indicator on access to improved water in the West Bank and Gaza is now much lower than in lower middle-income countries and in the MNA region (Figure 26). The 2017 PECS collected data on access to public networks as in the past, and it added a new question on the regularity of supply of water and electricity services. While it cannot be used to measure trends in the quality of access, the headline numbers on access to regular and uninterrupted services are qualitatively similar to those seen in the LGPA survey, which was completed in In this survey, only 2% of households in Gaza report having access to uninterrupted 4 A wealth differential in enrollment rates also emerged at this age. At 17 years of age, rates of enrollment were more than 10 percent higher for girls than for boys; and only 23% percent fewer boys from the poorest households were enrolled in school in Gaza, compared to more than the wealthiest households 5 The Multiple Indicator Cluster Surveys 2012, 2014 and the 2017 Local Government Performance Assessment survey 6 This draws on analysis from the WASH diagnostic, which did not collect data on consumption expenditures; and used an asset index to measure wealth 27

28 2.3 % OF POPULATION Figure 25: Access to improved drinking water has sharply declined in recent years, driven by Gaza Trends in access to improved drinking water services by regions excluding camps, 2010, 2014, and 2016, % water supply. Alarmingly, there is a complete lack of access to sustained electricity. In the West Bank, 45% of households still lack access to uninterrupted water, though 89% report sustained access to electricity. Overall levels of satisfaction with water and electricity services are quite low, and largely reflect the conditions on access (Figure 26). In the LGPA survey, which collected detailed data on the quality of and satisfaction with these services, only about 50 percent of the population in West Bank and Gaza reported full satisfaction with the quality of services from electricity grid and piped water (Figure 27). Source: MICS 2010/2014 and LGPA Note: Camps are excluded from MICS data Figure 26: The West Bank and Gaza together now fall well below comparable countries (based on GNI per capita) in terms of access to improved drinking water Figure 27: Satisfaction with the quality of electricity grid and piped water reflects the decline in access West Bank Gaza Total E L E C T R I C I T Y G R I D P I P E D W A T E R Source: WDI accessed using wbopendata ado, 11 April 2018 Source: LGPA 2016 data, authors calculation 28

29 Note: HIC high-income, UMC upper middle-income, LMS low middle-income, MNA - Middle East and North Africa, WBG West Bank and Gaza. Record intact on health and sanitation, but declining investments in secondary education in both regions In contrast to the situation with water and electricity, the Palestinian territories remarkable record on investments in human capital has, for the most part, been sustained over a period of protracted conflict and volatility. Between 2000 and 2016, the Palestinian territories continued to perform on par with upper middle-income countries, and better than Middle East and North African countries on average (excluding the high-income countries) on sanitation and net enrollment in secondary school (Figure 28). Access to sanitation, infant mortality rates, stunting, and overall school enrollment rates also continued to improve over this period (Figure 29). In improved sanitation, access actually increased from high baseline rates in 2012 in both regions, to reach the leftout poor. This increase in access to improved sanitation was largely driven by improvements in rural areas in the West Bank, which has also witnessed increased access to piped water. Access to unshared improved sanitation was not related to wealth (measured by an asset index 7 ) in 2016, unlike in 2010, when it showed a slight wealth gradient in both regions (Figure 64 in the Annex) (World Bank, 2018, forthcoming). Figure 28: Access to improved sanitation, net enrollment in secondary school, and infant mortality indicators continued to improve during circa Source: WDI accessed using wbopendata ado, 11 April Note: HIC high-income, UMC upper middle-income, LMS low middle-income, MNA - Middle East and North Africa, WBG West Bank and Gaza. 7 This draws on analysis from the WASH diagnostic, which did not collect data on consumption expenditures. 29

30 Despite a good record on delivering education services, there are some early signs of declining investments in higher education alongside an emerging gender gap that is leaving young men behind. Enrollment in secondary school (measured by net and gross enrollment rates) started to decline gradually after 2007, and enrollments seem to have settled at a lower rate post Alongside a decline in the expected years of schooling after 2011, data from the UNESCO Institute for Statistics show an 8 percentage-point decline in net enrollment rates between , suggesting that fewer Palestinian youth are staying in grades 11 and 12 (Figure 29). There is also a gender differential in secondary school completion. In 2017, 7% and 13% fewer boys compared to girls completed grade 9 in the West Bank and Gaza respectively. This trend of a decline in education-related investments is corroborated across multiple data sources, including the PECS and the Palestinian labor force surveys. 8 Figure 29: While trends in infant mortality have maintained a secular decline since 2000, net and gross secondary enrollments have declined since 2007 Source: WDI accessed using wbopendata ado, 11 April III.6 PROFILE OF THE POOR IN 2017: WHO ARE THE POOR? HAVE THEIR CHARACTERISTICS CHANGED? Little has changed in the correlates of poverty since As in 2009, poverty rates in the Palestinian territories continue to be strongly correlated with labor market outcomes; education of the household head; and key demographic variables measured at the level of household over the period Larger households with more children tend to be poorer in both regions (Figure 30, Figure 31, Figure 32, and Figure 33). In Gaza, the household size relationship is stronger, with the poverty rate increasing by four times for households with three to five members compared to one- or two-member households. With six members, the poverty headcount rate is as high as 50%, and it rises to 80% for the largest households in Gaza. In the West Bank, the largest households - with more than six members - also have the highest headcount poverty rates. Poverty rates were higher for older household The lack of panel data that is nationally representative does not allow for an examination of changes in terms of which households lost incomes or jobs and performed worse. In this section, we use cross-sectional data to profile the characteristics of the poorest households in the Palestinian territories. 30

31 A G E O F H E A D O F H O U S E H O L D 8% 20% A G E O F H E A D O F H O U S E H O L D H O U S E H O L D S I Z E 16% 42% H O U S E H O L D S I Z E 10% 38% 56% 81% 15% 42% N U M B E R O F C H I L D R E N 21% N U M B E R O F C H I L D R E N 41% 73% G E N D E R O F H E A D 13.5% 18.7% G E N D E R O F H E A D heads (particularly those over 65) in the West Bank, while there is no systematic difference across household-head age groups in Gaza. In a context with high rates of unemployment, having a household head who is employed and better educated reduces the incidence of poverty significantly in both regions. Poverty rates are higher for individuals who live in households where the head has a better job (is an employer in the West Bank or Gaza) compared to those with heads who have poor-quality jobs (self-employed or irregular wage worker head in Gaza; irregular wage in the West Bank). Self-employed jobs are also qualitatively very different across the two regions. While individuals with a selfemployed household head had similar poverty rates to the wage-employed in the West Bank, in Gaza selfemployment was of much worse quality. In particular, individuals in households headed by self-employed (and irregular-waged) workers had poverty rates that were very similar to those with unemployed heads. Poverty rates also decline with better education of the head of household. In both regions, having a head with tertiary education significantly reduces the risk of poverty. In Gaza, however, even individuals with heads with tertiary education have high poverty rates of close to 26 percent. Thus, the relationship between employment and education and welfare is tenuous in Gaza. Disability of the household head was associated with being poor, while individuals in female- and refugee-headed households were not distinguishably poorer than other households in both regions. Having a disabled head of household increased poverty rates by 16 percentage points in the West Bank, and by 20 percentage points in Gaza. In contrast, other plausible correlates of poverty -- refugee- or female-headed households -- do not seem to increase poverty rates. The differences in poverty rates are statistically not significant for households headed by refugees or females in both regions. Figure 30: Poverty headcount ratios by demographics in West Bank, 2017 Figure 31: Poverty headcount ratios by demographics in Gaza, 2017 F E M A L E M A L E F E M A L E M A L E 53% 54% % 12% 8% 8% 13% 14% 15% % 53% 56% 52% 51% 56% 56% 52% POVERTY HEADCOUNT POVERTY HEADCOUNT Source: Staff calculations, based on PECS

32 Refug ee Refug ee Gende r LFS status Employment Gende r LFS status Employment Disabil ity Health Education Disabil ity Health Education Figure 32: Poverty headcount ratios by characteristics of the head of household in the West Bank, 2017 Figure 33: Poverty headcount ratios by characteristics of the head of household in Gaza, 2017 Tertiary 6% Tertiary 26% 12 grade and lower 13% 12 grade and lower 52% 9 grade and lower 11% 9 grade and lower 69% 6 grade and lower 22% 6 grade and lower 69% Chronic disease 18% Chronic disease 62% No disease 12% No disease 49% Disabled 29% Disabled 72% Not disabled 13% Not disabled 52% Irregular wage 20% Irregular wage 76% Wage employee 12% Wage employee 42% Self-employed 12% Self-employed 66% Employer 6% Employer 29% Out of labor force 21% Out of labor force 65% Unemployed 32% Unemployed 75% Employed 12% Employed 47% Female 19% Female 54% Male 14% Male 53% Refugee 16% Refugee 54% Non-refugee 13% Non-refugee 51% Source: Staff calculations, based on PECS 2017 Although the national profile of the poor is driven, in large part, by the characteristics of the poor in Gaza, some correlates of poverty vary across the two regions and over time (Table 1). In 2017, poor Palestinians are much more likely to live in Gaza (71% of the poor in 2017, compared to 57% in 2011). Largely driven by this concentration of the poor in Gaza, the poor in the Palestinian territories come from larger households, with higher dependency ratios; and they are more likely to live in camps and have refugee status. In both regions, and over time, the poor are significantly less educated, less employed, and come from larger households. The non-poor have greater access to scarce public-sector jobs. In Gaza, the profile of the poor stayed largely the same over time, with the exception of female-headed households. In the West Bank, the poor were more likely to live in camps in both years, while poverty became less urban and was more correlated with households with a greater share of the elderly in

33 Table 1: Characteristics of the poor and differences with the non-poor,

34 IV. DRIVERS OF TRENDS IN POVERTY AND INEQUALITY: EXPLAINING THE DIVERGENT TRENDS IN THE WEST BANK AND GAZA Many factors could have contributed to an apparently surprising reduction in poverty in the West Bank, during a time when economic growth per capita was nearly stagnant. Likewise, the economic deterioration in Gaza may be due to multiple reasons. For example, a decline in labor incomes may be the key contributing factor in some periods, while in others a decline in the availability of jobs might be the driving force. In a context where transfers and social assistance programs play a key role in helping the poor stay afloat (World Bank, 2011), any change in these transfers and programs can also contribute to rising poverty. In this section, an income decomposition technique (Box 4) is used to quantify the contribution of different factors in explaining the observed poverty trends in the Palestinian territories during the period Box 4: Analyzing changes in poverty using income decompositions One way to quantify the factors contributing to distributional changes is to use a series of counterfactual simulations following Barros et al. (2006). This method allows the quantification of the contribution of changes in labor and nonlabor income, as well as geographic characteristics, to changes in income poverty and inequality. A detailed explanation of the method and its implementation in Stata can be found in Azevedo et al. (2012) and Azevedo et al. (2013), while construction of income aggregates and income poverty rates is explained in the annex. The decomposition analysis in this section uses the data on incomes collected in the 2011 and 2017 PECS surveys. Income decompositions can be problematic if trends in consumption and income poverty are not correlated. This may happen due to measurement problems related to incomes, income volatility, or due to consumption smoothing. However, in the Palestinian territories, trends in income poverty (and in levels as well using a calibrated poverty line) closely resemble those based on consumption (see Annex). Despite an employment rate as low as 37% in 2017, which was down 2% compared to 2011, poverty reduction in the West Bank was mostly driven by improvements in labor incomes (earnings). The key factors contributing to the observed decline in poverty in the West Bank are associated with labor earnings. The contributions of other components, including the share of workers who reported any earnings (a proxy measure for employment) and property incomes, had a negligible influence in reducing poverty over this period. Changes in transfers, remittances, and aid, had similarly small effects on increasing poverty. This paradox, of labor incomes contributing to reducing poverty at a time when employment rates are very low, is investigated further in section IV.1. The increase in poverty in Gaza was driven by a reduction in transfers received by households from various internal sources (pensions, retirement, and domestic remittances). While labor incomes contributed to some reduction in poverty over this time, this effect was not strong enough to compensate for the magnitude of decline in income transfers in Gaza. Similar to the West Bank, earnings and to a lesser extent employment contributed to reducing poverty over this period. However, this positive effect was not large enough to counterbalance the very large increase in poverty associated with the declines in other transfers, which include pensions and internal remittances. Internal remittances refer to transfer incomes received from the West Bank and Gaza Strip and from the Green Line. 10 In Gaza, 89% of these transfers came from internal remittances and the remaining 11% from pensions and 10 The Green Line (or pre-1967 border or 1949 Armistice border) is the demarcation line set out in the 1949 Armistice Agreements between the armies of Israel and those of its neighbors (Egypt, Jordan, Lebanon, and Syria) after the 1948 Arab 34

35 CHANGE IN HEADCOUNT INCOME POVERTY, PP S H A R E O F A D U L T S W A G E E M P L O Y E E S W A G E I N C O M E S E L F - E M P L O Y E D S E L F E M P L O Y M E N T I N C O M E A I D O T H E R T R A N S F E R S P R O P E R T Y I N C O M E R E M I T T A N C E S F R O M A B R O A D T O T A L C H A N G E S H A R E O F A D U L T S W A G E E M P L O Y E E S W A G E I N C O M E S E L F - E M P L O Y E D S E L F E M P L O Y M E N T I N C O M E A I D O T H E R T R A N S F E R S P R O P E R T Y I N C O M E R E M I T T A N C E S F R O M A B R O A D T O T A L C H A N G E transfers. These internal remittances accounted for a more significant share of transfers for the bottom three quintiles in Gaza (Table 9 in the Annex). The observed changes in the labor market contributed to reducing inequality in the West Bank, while increased labor earnings and declining transfers increased inequality in Gaza (Figure 59 and Figure 60 in the Annex show the contribution of different income sources to inequality). The next sub-section further disaggregates these labor market outcomes (by types of employment), in order to better understand how these changes contributed to the observed trends in poverty and inequality. In order to examine how labor markets can contribute to reducing poverty in a context with low and sustained rates of employment, this section (i) disaggregates employment by type (wage and self-employment); and (ii) examines the annualized growth rates of each component used in the decomposition by income quintiles. In both the West Bank and Gaza, access to wage employment and wage incomes reduced poverty (Figure 34 and Figure 35). Both wage employment and wage incomes were also strong equalizing sources in the West Bank. In contrast, only wage employment contributing to lowering inequality in Gaza, while wage incomes increased inequality. In both regions, self-employment was inequality enhancing; while self-employment incomes increased poverty in Gaza and had a nearly neutral effect in the West Bank. Figure 34: The decline in income per adult equivalent poverty during in the West Bank was driven by a shift towards wage employment and an increase in wage earnings Figure 35: The increase in income per adult equivalent poverty during in Gaza was driven by a decline in transfers, despite an increase in wage employment and wage earnings Source: Staff calculations, PECS 2011 and Israeli War. It served as the de facto borders of the State of Israel from 1949 until the Six-Day War in After the Six-Day War, the territories captured by Israel beyond the Green Line came to be designated as East Jerusalem, the West Bank, Gaza Strip, Golan Heights, and Sinai Peninsula (the Sinai Peninsula has since been returned to Egypt as part of the 1979 peace treaty). These territories are often referred to as Israeli-occupied territories. 35

36 The pro-poor distribution of the growth in wage employment over reduced inequality in the West Bank, while the declining real value of transfers in Gaza contributed to increased inequality. Moreover, in Gaza, real wages only improved for the third quintile and above, therefore contributing to increased inequality. Three factors define the contributions of each source of income to reducing poverty and inequality: real growth in the income source during the period under consideration; the distribution of the income source across income quintiles; and the share of a particular income source in total income. Table 2 shows the growth rates of each income source by quintiles and separately for the West Bank and Gaza. 11 The results suggest that the observed reduction in poverty and inequality in the West Bank is driven by the positive growth rates of wages and wage employment and their propoor distribution. In contrast, the observed effect of declining transfers on increasing poverty in Gaza is mostly driven by a sharp decline in the real value of transfers (Box 5). In Gaza, the increase in real wages was observed only at the third quintile and above. Given that income poverty was concentrated around the third quintile, this wage increase contributed to poverty reduction, but increased inequality. Table 2: Pro-poor wage and wage employment growth contributed to poverty reduction in the West Bank. In Gaza, wage growth was less pro-poor, and, for the bottom 40, both wages and transfers declined between 2011 and 2017 Annualized growth rates of each component used for decomposition by income per adult equivalent quintiles, 2017 over 2011 West Bank Poorest Second Third Fourth Richest Share of adults 0% -1% 0% 0% 1% Wage workers 2% 4% 1% 0% -1% Wages 3% 4% 2% -1% 2% Self-employed -11% -12% -11% -6% -8% Self-employment income 2% -5% -8% 5% -1% Aid -5% -10% -9% 2% -27% Other transfers 2% -3% -1% -4% -3% Property income 28% 18% 12% 8% 26% Remittances, abroad -4% -27% -6% -23% -22% Total change 3% 2% 1% 1% 1% Gaza Poorest Second Third Fourth Richest Share of adults -2% 0% 0% -1% 0% Wage workers 0% 1% 4% 5% 9% Wages -8% -1% 3% 10% 12% Self-employed -13% -6% -12% -10% -1% Self-employment income -4% 3% -1% -6% -2% Aid 0% 0% -1% -5% -8% Other transfers -7% -11% -17% -18% -26% Property income 7% 6% 4% 32% 39% Remittances, abroad -6% -5% -10% 5% -6% Total change -4% -1% -1% 0% 1% Source: Staff calculations, PECS 2011 and Table 7 and Table 8 in the annex show shares of each income source in total income for

37 14% 15% 53% 60% Box 5: The role of social assistance in Gaza The PECS survey collects (individual level) data on social assistance from government and non-governmental sources, through its income module. This data is based on two recall periods: monthly (for the last month) and annual. The aim of the yearly recall questions is to capture transfers that might occur on a non-monthly basis. Based on this data, in the period from , social assistance did not play an active role in reducing poverty over the period However, despite the negligible contribution of social assistance to the observed changes in poverty, both government and non-governmental aid play a crucial role in wellbeing, especially in Gaza. In 2017, this aid accounted for about 20 percent of total income on average and almost 50 percent of income among the poorest 20 percent of the population in Gaza. Figure 36: The removal of social assistance from governmental and nongovernmental sources from the consumption of households above the poverty line is estimated to increase poverty, especially in Gaza Poverty 2017 W E S T B A N K Source: Staff calculations, PECS 2017 Simulated poverty without aid G A Z A A simple simulation, which uses the share of aid in total income for each household, is used to examine the effect of social assistance on consumption expenditure and poverty (Figure 36). If, hypothetically, this aid is withdrawn for households above the poverty line, the poverty rate would increase by 1 percentage point in the West Bank and 7 percentage points in Gaza. In the absence of this aid, the poverty gap and its severity would also worsen. 37

38 IV.1 CHANGES IN THE LABOR MARKET: FRAGILE, EXTERNALLY DEPENDENT LABOR MARKET OPPORTUNITIES IN THE WEST BANK, WHILE GAZA REMAINED CUT-OFF AND RELIANT ON THE PUBLIC SECTOR AS A SAFETY NET Changing labor market conditions explain a significant share of the changes in poverty and inequality observed in the Palestinian territories over the period Examining what underlies the observed increase in returns to wage employment despite very low employment rates in the West Bank, and the smaller increase in returns to such employment in Gaza, is therefore critical to understanding the relationship between labor market and poverty in this context. Due to change in the design of the Palestinian Labor Force Survey (LFS) in 2015, which led to a change in how core labor indicators were measured, we confine the analysis in this section to PECS survey data. With the methodological change, there is a divergence in the unemployment trends across the two surveys; though employment rates are (coincidentally) similar (see Annex (LFS) for descriptive statistics comparisons from the LFS). We therefore use employment rates to construct trends in this section, and we focus on variables that are less likely to be affected by the change in survey design, such as the structure of employment over time. These variables are likely to be more consistent with trends from the labor force data. In both regions, there was an increase in the share of regular wage employment and a decline in the share of irregular wage employment, unpaid family work, and self-employment between 2011 and Figure 37 and Figure 38 show changes in the type of employment by quintiles for the West Bank and Gaza. Overall, there was a substantial shift out of (less formal) irregular wage employment, unpaid family work, and self-employment in both regions, with a shift of 20 percentage points in the West Bank and seven percentage points in Gaza. 12 The share of irregular wage employment declined by 23 and 14 percentage points respectively for the two poorest quintiles in the West Bank. In Gaza it declined by six and one percentage points respectively for the first two quintiles, and by four percentage points for the third quintile. This movement out of irregular wage employment was accompanied, in large part, by an increased share of workers reporting regular wage employment (20 and five percentage-point gains in the West Bank and Gaza respectively over the period). The bottom four quintiles in the West Bank accounted for the most of this movement, with the largest shifts among the bottom three quintiles of 40, 23, and 24 percentage points respectively. Over this time, self-employment also declined for all quintiles, and in both regions. 12 This movement is also observed if labor force surveys are used for 2011 and the first quarter of 2017 (Figure 47 and Figure 48 in the annex). 38

39 Figure 37: A substantial pro-poor shift towards regular wage employment in the West Bank between 2011 and 2017 C H A N G E S I N T Y P E O F E M P L O Y M E N T I N T H E W E S T B A N K, B Y C O N S U M P T I O N P E R A D U L T E Q U I V A L E N T Q U I N T I L E S, R E L A T I V E T O , I N P E R C E N T A G E P O I N T S Employer Self employed Unpaid employee Regular wage Irregular wage Poorest Second Third Fourth Richest Total Source: Staff calculations, PECS 2011 and PECS 2017 Figure 38: In Gaza, a small shift towards regular wage employment between 2011 and 2017, especially among the bottom two quintiles C H A N G E S I N T Y P E O F E M P L O Y M E N T I N T H E G A Z A S T R I P, B Y C O N S U M P T I O N P E R A D U L T E Q U I V A L E N T Q U I N T I L E S, R E L A T I V E T O , I N P E R C E N T A G E P O I N T S Employer Self employed Unpaid employee Regular wage Irregular wage Poorest Second Third Fourth Richest Total Source: Staff calculations, PECS 2011 and PECS 2017 The public administration and public services sectors accounted for at least one-third of all jobs in each region in 2017, although the single largest employers in both regions were in the private sector. Employment rates were persistently low in both regions, and they declined by two percentage points in both regions between 2011 and 2017, to reach 41% in the West Bank and 31% in Gaza in the latter year. In 2017, the public administration and other services sectors accounted for 37% and 45% of jobs in the West Bank and Gaza respectively. However, construction was the single largest employer in the West Bank, accounting for a quarter of all jobs, and a similar share of jobs in Gaza came from the commerce sector. The distribution of jobs between the public and private sectors changed slightly in both regions between 2011 and Relative to 2011, there were fewer public jobs in Gaza relative to private jobs in 2017 (a seven percentagepoint decline). There was a negligible shift towards public sector jobs in the West Bank (two percentage points). 39

40 In 2017, the poor had access to regular wage employment in the main sectors of employment in the West Bank. Access to jobs in construction - which was also the region s dominant employer - was both broad-based and propoor. Jobs in services and public sector, meanwhile, were mostly accessed by the third and higher expenditure quintiles (Figure 39). The construction sector accounted for at least one-fifth of all jobs across all quintiles, and the poorest were more likely to be employed in this sector. A majority of construction jobs in the West Bank also paid a regular wage. 75% of construction jobs paid regular wages, and 74% of workers from the bottom two deciles in this sector were paid a regular wage. While individuals across the distribution had access to public-sector jobs, jobs in this sector were slightly skewed towards the wealthier quintiles: 8% of individuals in the poorest quintile had access to public sector jobs, versus 11% in the top quintile. Jobs in other services and in manufacturing (which accounted for close to 20% of the jobs in the bottom two quintiles) were also largely formal, with over 85% of these jobs providing regular wage employment across the distribution. In contrast, the commerce sector, which was a significant employer of the poorest, was less formal, with only 57% of these jobs offering regular wages. In Gaza, the public sector was the dominant employer for the richest two quintiles, while the commerce sector was the dominant employer for the rest. The bottom-20 population were either self-employed or worked for regular wages in the commerce sector (Figure 40). In contrast, close to two-thirds of jobs in the top two quintiles came from the public administration and other services sectors. For the bottom 20, 48% of the jobs in commerce came with regular wages, while 41% of them were self-employed. Other service jobs came with regular wages for only 68% of the bottom-20 persons employed in this sector. In contrast, 90% of the service jobs held by the top 80 came with regular wages. Figure 39: In the West Bank, the poor gained access to regular wage employment in 2017, especially through construction Figure 40: The public sector remained the main source of regular wage employment in Gaza. However, Gaza s poor relied on regular wage employment in commerce % O F T O T A L E M P L O Y M E N T B Y S E C T O R A C R O S S Q U I N T I L E S % O F T O T A L E M P L O Y M E N T B Y S E C T O R A C R O S S Q U I N T I L E Commerce Public Administration Commerce Public Administration Other Services Construction Other Services Construction Total Richest 4th 3rd 2nd Poorest Total Richest 4th 3rd 2nd Poorest Source: Staff calculations, PECS From , the share of jobs in Israel - which pay significantly higher wages relative to domestic jobs - increased by four percentage points, though these jobs were only accessible to workers in the West Bank. Access to these jobs which declined with the restrictions on mobility starting in the early 1990s - expanded gradually in the West Bank 40

41 Place of work Place of work starting in 2010 (World Bank, 2017). In 2017, jobs in Israel accounted for 17% of jobs that employed Palestinians in the West Bank, and these jobs paid a monthly wage that was 2.5 times higher on average than that within the territories. These jobs employed people across all expenditure quintiles in the West Bank, accounting for at least 15% of the jobs in each quintile. In contrast, almost all workers across all income quintiles in Gaza were restricted to work within in Gaza. Even the negligible (1%) share of work in the West Bank for these workers dropped to nearly zero in 2017 (Table 3). Table 3: Jobs in Israel and the settlements accounted for almost a fifth of all employment for residents of the West Bank in 2017; in contrast, work outside Gaza for its residents fell close to zero 2017 Place of residence Change, 2017 relative Place of residence West Bank Gaza Total to 2011 West Bank Gaza Total West Bank West Bank Gaza Gaza Israel & Israel & settlements settlements Other Other Total Total Source: Staff calculations, PECS 2011 and 2017 Box 6: Women and youth are largely excluded from these weak and stagnant labor markets While the rates of female labor force participation increased slightly between 2010 and 2015 (LFS), they still remained among the lowest in the MENA region alongside Jordan and Iran. At the same time, youth aged faced particular challenges in finding jobs, with one of the highest unemployment rates and NEET (not in education, employment, or training) rates in the World (World Bank, 2017). In 2017, women continued to be largely excluded from labor markets in the main sectors of employment. The main sectors that employed women in both the West Bank and Gaza were the social services sector that included education and health services (women accounted for 50% of these jobs in the West Bank and for 35% of these jobs in Gaza), and the public sector. Women made up 15% of the public employees in the West Bank and 6% in Gaza. While the financial and business services sectors did not account for many jobs, they employed a significant share of women. The main sectors of private employment accounted for slightly more jobs among an older population (30+) in the West Bank, while in Gaza, a little more than 50% of jobs in the commerce and construction sectors were occupied by youth aged The public sector and other services were, however, much less accessible to youth in both regions, with youth holding as few as 8% of public-administration jobs in Gaza. S H A R E O F EMPLOYMENT I N KEY S E C TORS, B Y Y O U TH A ND GENDER Commerce Construction Other Services, Uns.. Public Administration M A L E F E M A L E M A L E F E M A L E W E S T B A N K G A Z A W E S T B A N K G A Z A 41

42 The analysis of changes in the labor market which have historically been an important correlate of poverty in the Palestinian territories - is constrained by both the recent changes in the labor force survey and some implementation issues in the labor module of the 2011 PECS survey. The follow-up note to this diagnostic lays out suggestions for forward-looking work that will build on the Palestinian Labor Force Surveys, which are continuous, representative on a quarterly basis and have a panel component. 42

43 share of each group in population, % V. DIFFERENTIAL EFFECTS ON MONETARY AND NON-MONETARY LIVING STANDARDS: LONG-TERM VOLATILITY AND THE DETERIORATION IN WELFARE HAS AFFECTED POPULATION GROUPS DIFFERENTLY Protracted volatility and conflict could create inequalities between population groups through differential effects on geographic areas and populations that face different intensities of volatility and conflict. 13 The consequences for living standards and welfare of the long-term deterioration in economic conditions and the ever-widening gap between the two regions in the Palestinian territories have not been uniform across the population. Drawing on analyses undertaken to inform recent analytical work on marginalization (World Bank, 2018, mimeo), this section: (i) identifies groups that are at a higher risk of economic distress; and (ii) measures inequalities in opportunities across different groups. Certain population groups in Gaza have suffered greater long-term economic distress relative to others, and the limited economic opportunities in the West Bank have not reached some key population demographics. While 30% of Gazans were in the bottom 20 of consumption (per adult equivalent) defined for the whole country (Figure 41), certain population groups within Gaza are disproportionately represented in the bottom expenditure quintiles (Figure 42). The bottom expenditure quintile in Gaza includes 36% of households with a disabled household head and 28% of youth who are not in education, employment, or training (NEET). In the West Bank, one-third of households in the poorest expenditure quintile live in refugee camps. In addition, 27% of West Bank NEET youth and 36% of households with a disabled household head are in the bottom 20. Youth aged accounted for a third of the population of the Palestinian territories in 2017, and nearly 31% of them were not in education, employment, or training. Figure 41: Gaza accounts for a disproportionate share of the poorest expenditure quintile and of the NEET population in 2017 West Bank Gaza Strip Palestinian territories Population In buffer zone* Disabled Not in school and not employed (15-29) Bottom 20** Source: Staff calculations, PECS 2017, * Buffer zone: areas located close to the border wall with Israel; ** Consumption per adult equivalent defined for the whole country 13 In 2017, Gaza accounted for 77% of households in the poorest expenditure quintile in the Palestinian territories. 43

44 Refugees - in camps and otherwise - have higher poverty rates when measured at the national level, and camp populations in the West Bank face disproportionate poverty. Disaggregating the figures on refugee status and poverty to the regional level points to two facts: the national results showing higher poverty rates for refugees are driven by Gaza, but refugees are indistinguishable from other households in Gaza with regard to poverty. In the West Bank, however, camp populations are significantly poorer than those who live outside refugee camps (Figure 42). Figure 42: Distribution of population groups by quintile, West Bank and Gaza, 2017 WEST BANK Poorest Second Third Fourth Richest P O P U L A T I O N I N D I S A B L E D - H E A D E D H O U S E H O L D S P O P U L A T I O N I N W I D O W - H E A D E D H O U S E H O L D S P O P U L A T I O N I N F E M A L E - H E A D E D H O U S E H O L D S N E E T D I S A B L E D I N B U F F E R Z O N E R E F U G E E C A M P U R B A N R U R A L GAZA STRIP Poorest Second Third Fourth Richest P O P U L A T I O N I N D I S A B L E D - H E A D E D H O U S E H O L D S P O P U L A T I O N I N W I D O W - H E A D E D H O U S E H O L D S P O P U L A T I O N I N F E M A L E - H E A D E D H O U S E H O L D S N E E T C H R O N I C D I S E A S E D I S A B L E D R E F U G E E C A M P U R B A N R U R A L Prolonged volatility in economic welfare, with some groups facing sustained, elevated levels of economic distress, could create inequities in access to human opportunities across different population groups. This section uses a human opportunity index (HOI) for children to examine if the different economic circumstances children experience during protracted conflict have had an influence on current opportunities for human development. The analysis creates a HOI for selected opportunities that relate to non-monetary living standards covered by the PECS survey (Box 7). These opportunities - access to education and health insurance, as well as safe and adequate water and 44

45 electricity - are core elements of people s quality of life. They are also critical in expanding children s productive potentials as adults. The analysis also examines drivers of the observed inequities, using a decomposition method that measures the contributions of different circumstances to inequitable outcomes. While this analysis does not examine declines in access to opportunity, and it cannot be attributed to conflict per se, it uses data from the latest PECS to identify groups that face a higher risk of exclusion from social and economic opportunities in the future, due to differential access to human capital investments at present. Box 7: Calculating the Human Opportunity Index (HOI) for the West Bank and Gaza The HOI - which was first estimated for Latin American countries in the early 2000s - has since been widely used (World Bank 2010, Dabalen et al. 2015, Krishnan et al. 2016). The index calculates how personal circumstances such as children s place of birth, gender, or race and their parents education affect their probability of being able to access key services that build productive potential and underpin a good quality of life. The idea underlying the index is that children should have equal access to these fundamental opportunities, regardless of their circumstances and socio-economic origin. The HOI measures how far a society is from universal provision of basic services and goods, or an inequality-sensitive coverage rate. An illustrative example of the logic that underlies the HOI is presented in Box 8 in the Annex. Table 4 provides a selected list of indicators used as opportunities. While this is far from a complete set of opportunities that should be available to a child to achieve his/her potential in life, the indicators cover the thematic areas of education, health, and infrastructure services (water and electricity). The PECS survey is not a detailed multi-topic survey, and is instead focused on measuring consumption expenditures and some selected MPI-related indicators that concern education and public services. On health, the only question in the PECS relates to access to health insurance. The opportunities used in this HOI are therefore restricted by the data collected by the PECS. While the PECS does not use standard (Millennium/Sustainable Development Goal) definitions for access to improved water, the 2017 PECS added a set of questions that relate to the frequency/regularity of supply of water and electricity services. These and the other opportunities used in the HOI are summarized in Table 4 below. Table 4: Opportunities analyzed for children in the West Bank and Gaza Definition Opportunity Education Child attends school, 7-15 school attendance Child finished 6th grade, Child finished 6th grade without repetitions, Child finished 9th grade, Child finished 9th grade without repetitions, grade 6, finished grade 6, no repetition grade 9, finished grade 9, no repetition Health Child has health insurance, 0-17 health insurance Basic housing services access to network water supply without interruptions, 0-17 water access to electricity grid without interruptions, 0-17 electricity Circumstances are defined as exogenous characteristics of the child, which should not negatively affect the probability of accessing the opportunities examined above. A HOI analysis quantifies the contribution of each circumstance to inequality. The circumstances used in this analysis draw on related work recently completed for an analytical brief of marginalization in the Palestinian territories. They focus on: characteristics of children (gender refugee status); characteristics of household heads (education and employment status); the economic welfare of households (expenditure quintiles); and households geographic location (refugee camps, buffer zone). 45

46 Figure 43, Figure 44, Figure 45, and Figure 46 plot the coverage and HOI for a selected set of opportunities in the West Bank and Gaza, and the contribution of each circumstance to the D-index, which depicts the level of inequality for each opportunity. 14 While coverage and equality in access to primary education are high in both the West Bank and Gaza, both these indicators worsen for higher levels of education and when quality is considered, with Gaza performing worse on all indicators. Quality of schooling is measured using the proxy measure of grade repetitions, which is the only MDG-related quality indicator covered by the PECS survey. The share of children who complete 6 th grade is 94 percent in the West Bank, if repetitions are not considered. If repetitions are taken into account, this share drops to 89 percent. Gaza has lower access to opportunity in education across the board (Figure 45). For example, 81% of children complete ninth grade without repetitions in the West Bank versus only 76 percent in Gaza. The gap between coverage and HOI is also higher in Gaza, which suggests that inequality is higher here. The circumstances that drive these trends in education are different across the two regions. However, young men have worse access to education opportunities in both regions. In Gaza, children from poorer households and those with disabled household heads are more likely to face unequal opportunity; while poverty status is not the largest factor contributing to this inequality in the West Bank. In both the West Bank and Gaza - albeit to differing degrees - boys are likely to face worse educational opportunity relative to girls. However, there is no difference in school enrollments in camps and outside in both regions. Notably, residing in the buffer zone reduces the likelihoods of school dropouts in the West Bank. Overall, educational opportunities are more unequal in Gaza than in the West Bank. Gaza has greater equity in access to health insurance relative to the West Bank, though this access relies on the provision of insurance by UNRWA. Inequities in access to health insurance in the West Bank are driven by greater access to insurance among households with refugee status and those located in the buffer zone. Overall, access to insurance is over 94% percent in camps and among refugees in the West Bank. While Gaza has much higher overall coverage, as well as equity in access to health insurance, households with refugee status are slightly more likely to have this access compared to other households. Access to health insurance is close to 100 percent in camps and among refugees. Since this insurance in Gaza and in camps in the West Bank is largely provided by UNRWA, continued access to this opportunity is likely to be heavily reliant on UNRWA s continued offering of health insurance services. Severe shortages of water and electricity in Gaza are accompanied by an unequal access to uninterrupted water services in the West Bank for specific groups. It is widely recognized that Gaza faces severe restrictions in the delivery of infrastructure services, and the region s water and electricity shortages have often been referred to as a humanitarian crisis (World Bank, 2018). According to the 2017 PECS survey, Gaza reports a 2% access to uninterrupted water supply and a universal lack of access to sustained electricity. In the West Bank, only 45% of children aged 0-17 have access to piped water without interruptions, while 90% report access to electricity. Inequality in access to infrastructure services in the West Bank is mostly related to the place of residence, though wealth also matters for access to water. Children in camps and refugees have lower access to electricity without interruptions. Interestingly, living in the buffer zone (areas located close to the border wall with Israel) is associated with better access to electricity. For water, residence in the buffer zone once again accounts for most of the observed inequality. More than 95 percent of children from the buffer zone have access to piped water without interruptions, compared to 45 percent on average in the West Bank. The wealth status of households also 14 Electricity and water are dropped in Gaza given that both coverage and HOI are close to zero. To understand which group is more disadvantaged, coverage rates across groups are also provided in the annex. 46

47 Electricity Water Health insuarance 9 grade, no repetition 9 grade, finished 6 grade, no repetition 6 grade, finished School attendance Electricity Water Health insuarance 9 grade, no repetition 9 grade, finished 6 grade, no repetition 6 grade, finished School attendance Electricity Water Health insuarance 9 grade, no repetition 9 grade, finished 6 grade, no repetition 6 grade, finished School attendance Electricity Water Health insuarance 9 grade, no repetition 9 grade, finished 6 grade, no repetition 6 grade, finished School attendance contributed to inequality in access to water without interruption, with children from the wealthiest quintiles being more likely to have this access in the West Bank. Figure 43: Coverage and HOI for selected set of opportunities in West Bank Figure 44: Decomposing the D-index, West Bank 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% % 10% 8% 6% 4% 2% 0% HOI Coverage Figure 45: Coverage and HOI for selected set of opportunities in Gaza Employed head Education head Quintile Female Refugee Camp Buffer zone D-index (rhs) Figure 46: Decomposing the D-index in Gaza 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% % 10% 8% 6% 4% 2% 0% HOI Coverage Source: Staff calculations, PECS Employed head Education head Quintile Female Refugee Camp Buffer zone D-index (rhs) In summary, over the period , monetary living standards declined in Gaza and in refugee camps. Welfare improvements in the West Bank were fragile. West Bank improvements relied in large part on the construction 47

48 sector - which in the past has been dependent on public expenditures - and on access to jobs in Israel and the settlements, which have also been volatile in the past. At the same time, signs of a long-term decline in some nonmonetary standards of living emerged. Key investments in human capital settled at a lower rate following a decade long decline, and some groups faced unequal access to opportunities, which could evolve to generate long-term declines in non-monetary living standards. To better understand the political and economic determinants of these welfare trends, the key challenge going forward will be to track welfare, at a time when aid flows are declining while the risk of conflict is increasing. Improving monetary living standards and proactively addressing inequality in access to opportunity in this complex context will require a multi-pronged approach that uses short-term, high-frequency data to track and monitor the evolution of key indicators, as well as longer-term learning based on rigorous impact evaluations (Mansuri and Rao, 2013). Better evidence is urgently required to clarify the economic and social drivers of poverty and inequality; prioritize levers for action; and design policy steps to protect welfare and living standards in the Palestinian territories now. Two thematic areas of analysis that would contribute to this evidence base include: (i) further analysis using data from the 2017 PECS and the Palestine Labor Force Surveys to develop welfare scenarios for the risks implied by recent policy events such as the public-sector wage cuts in Gaza and the potential changes in UNRWA health and education funding; (iii) a forward-looking program of evidence, that uses a multi-pronged approach to better understand the economic and social drivers of poverty and inequality. 48

49 VI. REFERENCES Abrahams, Alexei, Hard traveling: Commuting costs and urban unemployment with deficient labor demand. ESOC Working Paper No. 8. June 1, Azevedo, Joao Pedro; Inchauste, Gabriela; Olivieri, Sergio; Saavedra, Jaime; Winkler, Hernan, Is Labor Income Responsible for Poverty Reduction? A Decomposition Approach. Policy Research Working Paper;No World Bank, Washington, DC. Azevedo, Joao Pedro, Minh Cong Nguyen, and Viviane Sanfelice, "Adecomp: Stata module to estimate Shapley Decomposition by Components of a Welfare Measure, Statistical Software Components S457562, Boston College Department of Economics. Barros, Ricardo Paes, Mirela de Carvalho, Samuel Franco, and Rosane Mendoça, Uma Análise das Principais Causas da Queda Recente na Desigualdade de Renda Brasileira. In: Revista Econômica 8 (1): Rio de Janeiro: Universidade Federal Fluminense. Besley, Timothy and Maitreesh Ghatak, Incentives, Choice, and Accountability in the Provision of Public Services, Oxford Review of Economic Policy, Volume 19, Issue 2, 1 June 2003, Pages , Cali, Massimiliano; Miaari, Sami H., The Labor Market Impact of Mobility Restrictions: Evidence from the West Bank. Policy Research Working Paper; No World Bank, Washington, DC. World Bank. License: CC BY 3.0 IGO Dabalen, Andrew; Narayan, Ambar; Saavedra-Chanduvi, Jaime; Suarez, Alejandro Hoyos; Abras, Ana; Tiwari, Sailesh, Do African Children Have an Equal Chance?: A Human Opportunity Report for Sub-Saharan Africa. Directions in Development--Poverty;. Washington, DC. International Monetary Fund, West Bank and Gaza. Report to the Ad Hoc Liaison Committee. August 31, International Monetary Fund, West Bank and Gaza. Report to the Ad Hoc Liaison Committee. March 9, Krishnan, Nandini; Lara Ibarra, Gabriel; Narayan, Ambar; Tiwari, Sailesh; Vishwanath, Tara Uneven Odds, Unequal Outcomes: Inequality of Opportunity in the Middle East and North Africa. Directions in Development--Poverty. Washington, DC: World Bank. Mansuri, Ghazala; Rao, Vijayendra, Localizing Development: Does Participation Work?. Policy Research Report;. Washington, DC: World Bank. World Bank. License: CC BY 3.0 IGO Miaari, Sami H., An analysis of the public private wage differential in the Palestinian labour market, Defence and Peace Economics, DOI: / Molinas Vega, J., R.P. de Barros, J. Chanduvi, and M. Giugale Do Our Children Have a Chance? The 2010 Human Opportunity Report for Latin America and the Caribbean. Washington, DC: World Bank. 49

50 National Commission for Poverty Alleviation (1998) Newman, John, Human Opportunity Index - National: Equality of Children's Opportunities in Pakistan. World Bank Policy Paper Series on Pakistan; no. PK 09/12. World Bank, Washington, DC. The AIX Group, Economics and Politics in the Israeli Palestinian Conflict. Van Der Weide, Roy; Rijkers, Bob; Blankespoor, Brian; Abrahams, Alexei Sisulu, Obstacles on the road to Palestinian economic growth (English). Policy Research working paper; no. WPS Washington, D.C.: World Bank Group. World Bank, Poverty Measurement and Monitoring in the West Bank and Gaza: Methodological Issues, Recommendations and Revised Results. Mimeo. World Bank, Coping with Conflict? Poverty and Inclusion in the West Bank and Gaza. World Bank. World Bank. License: CC BY 3.0 IGO World Bank, 2017, mimeo. The Palestinian territories Inclusive Diagnostic Report. World Bank, Economic Monitoring Report to the Ad Hoc Liaison Committee. March 19, World Bank, 2018, forthcoming. Towards water security for Palestinians: West Bank and Gaza WASH diagnostic. World Bank, 2018, mimeo. Avenues for social and economic inclusion of marginalized groups in the West Bank and Gaza. 50

51 VII. ANNEXES Table 5: Population shares across strata within regions, % West Bank Gaza total Rural Urban Camp Total share in total population Source: Authors calculations using PECS 2017 LFS Figure 47: Structure of employment in 2011, LFS Figure 48: Structure of employment in the 1 st quarter (3 months) of 2017, LFS Source: Authors calculations using LFS 2011 and 2017 from PCBS. 51

52 Figure 49: Structure of employment by economic sector in 2011, LFS Figure 50: Structure of employment by economic in 2016, LFS Source: Authors calculations using LFS 2011 and 2016 Figure 51: Trends in unemployment indicator across regions in 2011 and 2016 using PECS and LFS data, % Figure 52: Trends in employment indicator across regions in 2011 and 2016 using PECS and LFS data, % Source: Authors calculations using LFS 2011 and 2016 and PECS 2011 and

53 Figure 53: Structure of employment in the West Bank and Gaza region during , % a) West Bank b) Gaza Source: Authors calculations using LFS from PCBS Notes: Employment share are calculated for population 15+ Figure 54: Real daily wage in NIS in 2010 prices in the Palestinian territories West across employment type Figure 55: Real daily wage in NIS in 2010 prices in Gaza across employment type Source: PCBS 53

54 Incomes and income decomposition Correlation between income and consumption Trends in income poverty (and in levels as well using a calibrated poverty line) closely resemble those based on consumption (Figure 56). Moreover, the cumulative distribution functions (CDF) compared for 2011 and 2017 by regions also behave similarly for both consumption and income measures (improvement in West Bank and decline in Gaza) as shown below in Figure 57 and Figure 58. Figure 56: Headcount poverty rates using consumption and income per adult equivalent as welfare aggregates Source: Staff calculations based on PECS 2017 Note: Poverty line for income welfare aggregate is calibrated to provide similar poverty rates. Figure 57: Cumulative distribution function of welfare aggregate for West Bank, a) consumption b) income 54

55 Figure 58: Cumulative distribution function of welfare aggregate for Gaza, a) consumption b) income Source: Staff calculations based on PECS 2011 and PECS 2017 To formally test whether consumption is positively correlated to income, a simple OLS is used to regress the log of consumption by log of income including a year dummy and its interaction with income. Table 6 shows that income is significantly and positively correlated with consumption; and that the interaction of income with 2017 has a significant negative impact on consumption in Gaza. Table 6: Explaining changes in consumption by income using PECS 2017 West Bank Gaza Log consumption per adult equivalent log income per adult equivalent 0.387*** 0.474*** 2016 year ** income and 2016 year *** Constant 5.961*** 5.084*** Observations 5,779 2,247 R-squared Table 7: Structure of income by income source across income per adult equivalent quintiles in West Bank, 2017 Wages Selfemployment income Aid External remittances Property income Other income Poorest 58% 15% 8% 1% 3% 14% 100% 2 72% 15% 1% 1% 2% 9% 100% 3 71% 14% 2% 1% 3% 9% 100% 4 62% 24% 1% 0% 2% 10% 100% Richest 61% 24% 1% 1% 5% 9% 100% Source: Staff calculations based on PECS 2017 Total 55

56 Table 8: Structure of income by income source across income per adult equivalent quintiles in Gaza, 2017 Wages Selfemployment income Aid External remittances Property income Other income Poorest 24% 12% 50% 1% 1% 12% 100% 2 47% 15% 25% 1% 0% 11% 100% 3 60% 12% 14% 2% 1% 12% 100% 4 67% 11% 6% 1% 2% 13% 100% Richest 72% 15% 2% 1% 2% 8% 100% Source: Staff calculations based on PECS 2017 Total Table 9: Structure of other transfers by consumption per capita quintiles Gaza Quintile Green line Civilian pension Military pension Heritage pension Private pension Other internal remittances Poorest 0% 0% 0% 5%. 95% 2 0% 3% 3% 5%. 89% 3 0% 2% 0% 4%. 94% 4 1% 9% 5% 3%. 82% Richest 0% 8% 6% 1%. 85% Total 0% 4% 3% 4%. 89% West Bank Quintile Green line Civilian pension Military pension Heritage pension Private pension Poorest 5% 3% 1% 0% 0% 92% 2 7% 8% 1% 0% 0% 84% 3 15% 7% 2% 0% 0% 77% 4 28% 5% 0% 0% 0% 66% Richest 33% 7% 1% 2% 0% 57% Total 18% 6% 1% 1% 0% 75% Source: Staff calculations based on PECS 2017 Other internal remittances 56

57 S H A R E O F A D U L T S W A G E E M P L O Y E E S W A G E I N C O M E S E L F - E M P L O Y E D S E L F - E M P L O Y M E N T I N C O M E A I D O T H E R T R A N S F E R S P R O P E R T Y I N C O M E R E M I T T A N C E S F R O M A B R O A D T O T A L C H A N G E S H A R E O F A D U L T S W A G E E M P L O Y E E S W A G E I N C O M E S E L F - E M P L O Y E D S E L F - E M P L O Y M E N T I N C O M E A I D O T H E R T R A N S F E R S P R O P E R T Y I N C O M E R E M I T T A N C E S F R O M A B R O A D T O T A L C H A N G E S H A R E O F A D U L T S W O R K E R S W I T H N O N - Z E R O E A R N I N G S E A R N I N G S A I D O T H E R T R A N S F E R S P R O P E R T Y I N C O M E T O T A L C H A N G E S H A R E O F A D U L T S W O R K E R S W I T H N O N - Z E R O E A R N I N G S E A R N I N G S A I D O T H E R T R A N S F E R S P R O P E R T Y I N C O M E T O T A L C H A N G E Figure 59: Explaining changes in income per capita Gini coefficient by income sources in West Bank, Figure 60: Explaining changes in income per capita Gini coefficient by income sources in Gaza, Source: Staff calculations, PECS 2011 and Figure 61: Explaining changes in income per capita Gini coefficient by income sources separating wage and selfemployment in West Bank, Figure 62: Explaining changes in income per capita Gini coefficient by income sources separating wage and selfemployment in Gaza, Source: Staff calculations based on PECS 2011 and

58 Property income Other Earnings Table 10: Construction of comparable income aggregates Wage income from main work Wage income from secondary work In-kind benefits in wage employment Mixed income of employers Mixed income of self-employed Civilian retirement Military retirement Heritage retirement Private pension Government aid cash Government aid in kind Nongovernment aid cash Nongovernment aid in kind Transferred income from West Bank and Gaza strip Income from green line Income from abroad Other receipts Interests Profit from stocks Rent of land Rent of building Monthly recall Proposed creation of comparable income aggregates for income decomposition exercise Yearly recall Monthly recall Yearly recall Monthly recall Other Other transfers Other transfers Yearly recall Aid Income from abroad 58

59 Non-monetary indicators and HOI Figure 63: While access to improved sources of drinking water increased across all asset quintiles in the West Bank between 2010 and 2014, Gaza witnessed a decline across the distribution; Since 2014, all groups witnessed a decline in access a. West Bank b. Gaza Source: MICS 2010/2014 and LGPA Note: Camps are excluded from MICS data. Figure 64: The wealth gradient in access to improved unshared sanitation has generally disappeared, although access appears to have declined since 2014 in the West Bank a. West Bank b. Gaza Source: MICS 2010/2014 and LGPA Note: Camps are excluded from MICS data. 59

60 Box 8: Explaining details of HOI using a simple example 15 The HOI is defined as the difference between two components: (i) The overall coverage rate of the opportunity (C); and (ii) a penalty for the share of access to opportunities that are distributed in violation of the equality of opportunity principle (P). Computing P requires identifying all circumstance groups with coverage rates below the average rate. If all groups have the same coverage rate, penalty will equal to zero. Using a penalty allows to calculate inequality-adjusted coverage rate or HOI. Thus, the HOI=C-P. The HOI can be also calculated using coverage rate and dissimilarity index (D). HOI=C(1-D). D is a measure of relative inequality in the allocation of the opportunities and can be obtained by dividing the penalty, P, by the overall coverage rate, C. The example below shows how the HOI, P and D are calculated using a simple example. Imagine two countries each having a population of 100 children. In each country, children are grouped into the 50 poorest and 50 richest groups based on per capita income. The average enrollment rate in both countries is 60 percent, however, education opportunity is not distributed equally across groups. The principle of equality will hold only if each group has 30 kids and the same coverage. In reality, bottom 50 percent in country A have only 20 kids and bottom 50 in country B have only 25 kids. This suggests inequality in opportunity in both countries and that country A is more unequal than country B. More formally, D-index for country A is 10/60 and 5/60 for country B. HOI index for country A is equal to 0.5 and for country B In sum, despite equal coverage rate, HOI is lower and D-index is higher for country A signaling that inequality in access to education opportunities is higher than in country B. HOI a = C a (1-D a) = 0.6 * (1-10/60) = 0.50 and P a = C a*d a = 0.6 * (10/60) = 0.10; HOI b = C b (1-D b) = 0.6 * (1-5/60) = 0.55 and P b = C b * D b = 0.6 * (5/60) = 0.05 Calculating D-index when there are multiple circumstances is done econometrically. The HOI has a number of appealing features. For example, HOI will increase by a factor k if coverage for all groups increases by a factor k. If coverage for one group increases without decreasing coverage for other groups, the HOI increases. When the coverage for a vulnerate group increases. If inequality declines and overall coverage remains constant, or overall coverage increases while inequality remains constant, the HOI will always improve. 15 This box draws heavily from Newman (2012) and Molinas et al. (2010). 60