WASHINGTON: A new World Bank report says that the Palestinian economy has suffered one of the worst recessions in modern history under Israel's policy of closing borders and restricting the population's movement , and warns that a new Israeli plan to forfeit some settlements and withdraw from Gaza is not enough to improve the situation.

The bank's conclusion was part of an economic assessment that examined the potential impact of Israel's Disengagement Plan on the Palestinian economy.

Under the plan, Israel would commit to halting Jewish settlement expansion and begin dismantling some outposts. Israel will also withdraw from occupied Gaza but will surround the area militarily.

Israel will not be required to return to the borders that existed before the 1967 Middle East war, in which Israel annexed Arab land, including the West Bank, Gaza and east Al Quds. The plan also says that Palestinian refugees cannot return to their homes in the Palestinian areas that existed before the declaration of the state of Israel in 1948.

The World Bank's report argues that Israel's Disengagement Plan would have "very little impact" on the Palestinian economy, since it proposes only a limited easing of closure.

"A focus on this over-arching issue is essential if disengagement is to deliver long-term benefits," the 51-page report says.

The bank said that Israel's handover of Gaza to the Palestinians should not be accompanied by sealing Gaza's borders to labour and trade or by shutting off supplies of water and electricity. If this happens, "disengagement would create worse hardship than is seen today".

"This could forfeit the international goodwill that Israel's initiative has created," says the report. "Under such circumstances, the plan's assertion that Israel is no longer responsible for the population of Gaza will not resonate."

Since the beginning a wave or violent resistance activities, known for the Arabic word intifadah, in Sept 2000, the West Bank and Gaza have endured one of the worst recessions in modern history.

Gross Domestic Product per capita has slumped by almost 40 per cent and is now approaching $900. Private investment has declined dramatically and nearly half of the Palestinian population is currently living below the poverty line of two dollars per day. The bank estimates that average personal incomes have also declined by more than a third for the same period. As a result of the recession, the Palestinian Authority's estimated budget deficit at the beginning of the year stood at $650 million.

But the bank warned that without major changes in Israel's closure regime, the Palestinian economy will not rebound and that poverty and alienation will deepen.

"Disengagement alone will not alter this dangerous, unsustainable situation," said James D. Wolfensohn, President of the World Bank, in a statement. "If disengagement is implemented with wisdom and foresight, however, it could make a real difference."

The assessment recommended that Israel introduce a modernized border trade regime that would permit an organized flow of cargo while maintaining security.

"Introducing such a regime would make a major difference to Palestinian welfare and commercial prospects," says the report.

The bank also urged the Palestinian Authority (PA) to implement reforms that would create an investor-friendly business environment. Wolfensohn said that if that happens, an additional $500 million each year could help the Palestinian economy turn the corner.

"If the PA shows a firm commitment to security and economic reform, and if Israel seriously addresses closure, another major donor effort definitely would be justified," said Wolfensohn.

Those extra funds could spur growth in real personal incomes by some 12 per cent by 2006, and could reduce unemployment to levels only slightly higher than prior to the intifada, says the bank.

If the situation fails to improve, the bank predicted that Palestinian unemployment levels could surpass 35 per cent by 2006, with poverty afflicting more than 55 per cent of the general population, and 70 per cent in Gaza.-Dawn/The InterPress News Service.