How good news became bad for Gaza

Israel eased the trade embargo - but it's bringing some Palestinian businesses to their knees

Hasan Abu Dan still has at hand a single pair of trendy River Woman grey denim shorts, ending just above the knee and complete with Hebrew price label, to remind him of just what a traumatic year 2007 was for his family's garment business. For when Hamas seized control of Gaza after the collapse of its short-lived coalition with Fatah, and Israel imposed a total embargo on the territory in response, the Abu Dan factory was holding 100,000 pairs of the shorts, hitherto a hot-selling item in Israeli fashion stores.

With the main Karni cargo crossing closed, the Abu Dans had – and still have – no way of getting the goods to their Israeli clothing partners. Staring at a three million shekel (£521,000) loss on the shorts alone, they had only one way of recouping a small part of it – by selling them off at a big loss to local women. In socially conservative Gaza, where women are invariably covered from head to feet, buyers could only wear them in the privacy of their homes. "The shorts cost me 30 shekels (£5.20) to make," he said last week, "And I was selling them to the Israeli company for 35. I sold them off to the local Gaza market for 10 shekels (£1.70) each." His story is a metaphor for the Gaza economy.

To explain why Mr Abu Dan is today, if anything, more "frustrated", to use his word, than he was then, a little recent history is needed. The shorts are a potent symbol of what happened after 2007 to the clothing industry, which was the largest manufacturing sector in Gaza. Traditionally garment firms like the Abu Dans' – 90 per cent of whose finished goods served the Israeli market – were ideal producers for the Tel Aviv-based clothing industry, their cheap but highly skilled labour enabling them to compete with the Far East on price and quality. Moreover, they had the advantage, compared with the length of time it took to ship clothing from, say, China, of being near enough to their retail market to adapt quickly to fast changing fashions. But after the Israeli-imposed embargo, the sector ground to a near-total halt, starved of the raw materials it had imported and denied any opportunity to export the finished goods.

Then, in May this year, Israel's military launched its bitterly controversial marine assault on the Turkish vessel Mavi Marmara as it attempted to break the siege of Gaza. Nine Turks were killed and in the aftermath of a world-wide outcry, the international Quartet (US, EU, Russia and the UN) urged Israel to ease the embargo.

In a series of intensive negotiations with the Israeli Prime Minister, Benjamin Netanyahu, Quartet envoy Tony Blair managed to secure a tangible change of policy. Israel agreed to allow imports to Gaza of all goods other than those on a list of items – notably cement and other building materials deemed security risks if appropriated for military purposes by Hamas – rulers of this territory of 1.5 million people.

True, Karni remained closed, and the increase in imports to Gaza only reached below 40 per cent of pre- siege levels. But the truckloads increased to around 250 a day, and previously banned consumer goods, from chocolate to children's toys, from refrigerators to bathtaps, from window glass to cars, have flowed into Gaza. This was good news for those Gaza consumers who can afford them, for Israeli goods are at once cheaper and better than those that were previously smuggled through tunnels from Egypt. Moreover, some unbanned raw materials including cloth for the imploded garment industry slowly began to move into the Strip, allowing some production to restart – albeit at a fraction of pre-2007 levels.

Yet for companies like the Abu Dans' – whose decades-old, $1.5m factory was the biggest clothing enterprise in Gaza – the easing of the embargo had a perverse effect. With the ban on exports still in force, the family was now hard pressed even to sell to the local market, because of its flooding by – often Chinese made – cheap clothing coming through Israel. "They talk about easing the embargo but that means allowing in finished goods which we cannot compete with. Believe me, things are worse for us now than before it happened," says Mr Abu Dan.

Before the siege, 250 employees in the company – started by his father with a single sewing machine in a back room in 1989 – was working 350 days out of 365 and turning over $1m a year, despite the constant interruptions imposed by military conflict. Even after the siege – thanks to earlier profits – it could afford to import high priced raw materials from Egypt to supply the local market, working around 90 days a year. Now he says he can only bring in around seven workers on odd days (he calculates it will be around 20 in all this year, producing a turnover of a mere $7,000) when he gets a local order. The family raised the imbalance between the export ban and the free flow of imports with those Palestinians they hoped could restrict what is admitted. "We went to Hamas here and to the [Palestinian Authority] people in Ramallah and said, 'What are you doing?' But we felt that they weren't listening to us."

Having laid off the majority of his workers, Mr Abu Dan says that they "have gone their own way". But like many other manufacturers and building contractors in Gaza, Mr Abu Dan does not deny that many have gone to work for Hamas-controlled organisations, including its security forces, which for three years were, along with smuggling, the only source of employment growth. His father finally moved to Jordan a year ago and started a new factory, employing 50 workers, mainly Indian. "If he asked me to join him, believe me, I would," says Hasan Abu Dan.

The Abu Dans' experience provides some context for the headline-making estimate by the International Monetary Fund that Gaza's economy grew by an impressive-sounding 16 per cent in the first half of 2010. First, the IMF estimate covers a period, before the shift in Israeli policy and, more importantly, as the IMF itself said in something of an understatement, is from a "very low base" – in which Gaza's unemployment, at 37 per cent, remains "one of the highest in the world". Indeed it reflects growth over the same period in 2009, in the immediate aftermath of Israel's military offensive in 2008-9, which devastated what little economic activity there was.

According to Amr Hamad, Gaza director of the Palestinian Federation of Industries, the Abu Dans' case is far from unique. While acknowledging that sectors like plastics have seen a marked improvement, he says the net effect of the easing has been neutral for industry, with around 675 companies still working partially with around 6,000 employees compared with 1,600 employing 35,000 before the embargo. Gaza's market is also severely limited, not least by poverty levels which, according to the UN, has left 80 per cent of Gazans dependent on aid.

One argument is that Gaza manufacturing will simply have to switch focus to the home market, competing with Israeli goods on quality and price. But Mr Hamad says: "We are a small piece of one economic entity, one that has always planned on working with a stronger economy, that of Israel. That's why we have a customs envelope with Israel." Instead, the old two-way link with Israel, which, among much else, provided fruitful partnerships across the Arab Jewish divide – has been broken.

For Mr Hamad there are two overriding priorities: to restore the exports on which Gaza once depended, and to allow in cement and other building materials. In a report after this summer's easing, the Israeli human rights agency Gisha accused Israel's government of having devised a policy of "economic warfare" and argued that continued restrictions still sprang from "political motivations" rather than security concerns. Mr Blair's office in Jerusalem continues to press Israel to lift the export ban, but in the meantime, Mr Abu Dan agrees with Gisha. "Israel wants to destroy the infrastructure of Gaza's economy," he insists.