The Palestinian Industrial Sector: Between Disruptions in Value Chains and Economic Multiplier Erosion

Diagnosis of the Crisis and Paths to Recovery

The small and medium industrial sector is one of the most important pillars of the productive economy in developing and fragile economies, due to its role in generating job opportunities, enhancing local value added, and expanding the production base. However, the period 2024–2026 witnessed sharp changes in the global trade environment, including extended disruptions in supply chains, rising transportation and energy costs, and tightened monetary policies, which directly reflected on the operational efficiency of small and medium enterprises.

Recent estimates from the World Bank and UNIDO indicate that small and medium enterprises account for about 90% of total companies worldwide, provide between 50% and 70% of job opportunities, and contribute more than 40% of GDP in developing economies, with variation according to the economic structure of each country.

In the Palestinian context, the crisis takes on a more severe dimension due to movement restrictions, weak geographical market integration, fragility of the production system, and high dependence on imports for intermediate inputs. This paper concludes that the current crisis is not only a demand or funding crisis, but rather a structural crisis in the industrial value chain that has led to the erosion of the economic multiplier and shifted its impact from expansionary to contractionary.

First: The Economic Importance of the Small Industrial Sector The small and medium industrial sector performs crucial economic functions, the most prominent of which are:

• Creating direct and indirect job opportunities
  
• Increasing local value added and reducing dependence on imports
  
• Enhancing economic diversification and reducing growth fragility
  
• Stimulating supporting sectors (transport, services, trade)
  
• Supporting economic stability by distributing productive activity

Data from UNIDO and the World Bank suggest that a 1% growth in the industrial sector is usually associated with an increase ranging between 0.3% and 0.6% in output in related sectors, depending on the degree of production interlinkage in the economy.

Second: Analysis of the Industrial Value Chain:

1. Production Inputs:
Production inputs are the most sensitive link to external shocks.

A. Supply Chains and Raw Materials:
During 2024–2026, global shipping disruptions continued due to geopolitical tensions in several key maritime corridors, in addition to rising insurance and shipping costs.
In small economies, this resulted in:

• Increased inventory levels from 15–20 days to 35–60 days
• Freezing a larger portion of working capital
• Increased fragility of operational cash flows

B. Transportation and Logistics:
World Bank reports indicate that global shipping costs have risen by between 15% and 50% compared to pre-2020 averages, varying by trade routes.
The economic impact:

• Increased cost per unit produced
• Decline in competitiveness
• Reduced profit margins
• Disruption in production regularity

C. Financing and Liquidity:
Liquidity constitutes the most sensitive challenge for small enterprises. The OECD indicates that more than 55% of small businesses rely on short-term financing, making them more vulnerable to rising interest rates and liquidity fluctuations.

2. Operations and Production:
Operations represent the actual core of the value chain.
Under sound operational conditions, industrial enterprises operate at 70%–80% of their production capacity to achieve sustainable profitability.
However, during 2024–2026, in many fragile economies, operating rates dropped to 50%–65%.
The results:

• Increased fixed cost per unit
• Decreased marginal productivity
• Erosion of operational profitability
• Depletion of working capital
• Operating below the breakeven point for extended periods turns the enterprise from a productive unit into a gradually depleting financial unit.

3. Distribution and Marketing:
A. Weak Actual Demand:
The decline in global purchasing power due to inflation and interest rates has led to decreased demand for non-essential goods.

B. Market Concentration:
A large percentage of small enterprises depend on a limited number of customers or markets, raising the level of systemic risks.
C. Weak Digital Transformation:
A significant percentage of enterprises still rely on traditional marketing channels, limiting:
Access to foreign markets
Diversifying customer bases
Reducing marketing costs

Third: Economic Multiplier Analysis

How does the industrial multiplier work?
The industrial sector typically features a high economic multiplier due to its interconnection with multiple sectors.
Under normal conditions:

• Every industrial job generates 1.5 to 2.5 indirect jobs
• Every unit of value added generates 1.4 to 2.2 units of additional economic activity

However, in disrupted environments, the multiplier effect turns negative: Declining production → Declining income → Declining demand → Further contraction.

This is known as the: Negative Multiplier Effect.

Slow Cash Turnover

Delays in trade collections beyond 60 days lead, according to studies by the IMF and World Bank, to:
Reduced operational liquidity
Declining short-term investment
Significantly increased likelihood of financial defaults in small businesses.

Fourth: SWOT Analysis

Strengths:

• High operational flexibility
• Ability for rapid adaptation
• High labor density
• Low fixed capital

Weaknesses:

• Weak long-term financing
• Low technical productivity
• Fragility of supply chains
• Weak marketing and export capabilities

Opportunities:

• Relocation of certain industries
• Industrial digital transformation
• Contract manufacturing
• Green economy

Risks:

• Continued global trade disruptions
• Increasing energy costs
• Low-cost competition
• Declining domestic demand

Fifth: Economic Links in the Value Chain:
Backward Linkages include:

• Suppliers of raw materials
• Energy
• Financing
• Transportation and technical services

Any disturbance in these links directly reflects on costs and productivity.
Forward Linkages include:
Distribution
Domestic and foreign trade
Final consumer
Subsequent manufacturing industries
Weakness in these leads to marketing congestion and reduced cash flows.

Sixth: Executive Recommendations:

First: Short term (0–12 months)
Develop working capital financing programs related to production rather than traditional guarantees
Support wages to maintain skilled labor
Establish shared logistics platforms to reduce shipping costs
Accelerate digital transition in industrial marketing

Second: Medium term (1–3 years)
Develop industrial clusters
Increase the share of local components in production
Strengthen local supplier chains with long-term contracts
Invest in automation and industrial technology

In conclusion: the current crisis reveals that the challenge in the small industrial sector is not limited to liquidity shortages or weak demand, but extends to the fragility of the value chain structure itself.

Recent shocks have shown that enterprises operating independently from integrated production and supply networks become more vulnerable to default and market exit, even when partial financing is available.

Restoring a positive economic multiplier requires a shift from the "independent enterprise" model to the "integrated industrial system", enhancing the interlinkages among inputs, production, and distribution, and increasing the retention of value added within the local economy.