Jerusalem's Economy Faces Deep Crisis Amid War and Israeli Integration

The economy of Jerusalem has been severely impacted by the war in Gaza during 2024 and 2025, experiencing a crisis deeper than mere recession. Researcher Munir Qleibo, in an article for "Palestine Studies," describes this as a "detained economy" under chronic occupation restrictions, with limited growth engines stalled and structural dependency deepening. He argues that economic "Israelization" is becoming the only available path, a forced reshaping of labor, production, and consumption conditions that makes the Israeli market the sole framework for income generation, eroding local Palestinian sectors.

Qleibo states that occupation has rendered Jerusalem economically sovereign-less, operating under a dual legal and administrative system subject to Israeli taxation and planning, while being denied Palestinian national economic policy tools. This duality has fostered a fragile economy, now "detained" by the war, exacerbating unprecedented unemployment, housing, and education crises. Unemployment rose by 7.6% due to job losses and movement restrictions, particularly in areas behind the separation barrier like Kafr Aqab and Shuafat refugee camp. The tourism sector, historically 40% of East Jerusalem's income, has collapsed, with major hotels seeing occupancy drop to 58% by mid-2025, while small Palestinian hotels face closures and layoffs. An estimated 80% of businesses in the Old City stopped operating fully or partially in 2024.

The housing crisis is described as the most dangerous front, with licensing restrictions and limited supply driving rents to consume 60-70% of Jerusalem families' income in 2024-2025. This has pushed low-income families to the city's outskirts or outside the separation barrier, despite deteriorating services and the risk of losing their "center of life" and identity. Qleibo explains that Jerusalem's hybrid economy, neither purely Palestinian nor Israeli, causes constant instability. The Israeli market has not fully opened due to occupation restrictions and Palestinian reluctance, while Israelis are unwilling to absorb Jerusalemites due to political and security concerns. Furthermore, Jerusalemites lack the language and skills for integration.

Internal occupation policies, including the "Arnona" property tax and restrictive urban planning, make Palestinian economic activity costly and low-yield. "Arnona" is a fixed cost that has doubled in impact with declining business and tourism, leading to debt, seizures, and closures of historic businesses. This system disproportionately affects small and medium-sized enterprises. The shrinking of Palestinian businesses due to restrictive policies since 1967 has reduced job opportunities. The emergence of alternative economic centers like Ramallah and Bethlehem has drawn capital away, increasing dependency on the Israeli market. There are signs of attempts to replace Palestinian labor with migrant workers in sectors like hotels, threatening Jerusalemites' positions even in their dependent market. Jerusalemites increasingly rely on Israeli banks for advanced services, but loans require difficult-to-meet collateral, promoting short-term consumer loans over investment. The absence of Palestinian financial institutions has led to capital flight and turned savings into a defensive mechanism rather than an investment tool.

The war has devastated tourism, with church closures impacting visitor numbers. This followed the COVID-19 pandemic, leading to a 58% drop in hotel occupancy. Israeli control over tourism routes means foreign tourists visit key sites but do not patronize Palestinian hotels or shops, often warned against buying from Palestinian vendors. Local Israeli Arabs and Asian workers provide some economic activity on weekends. The housing crisis is exacerbated by strict building permit regulations and demolitions, forcing families to move to peripheral areas or outside the separation barrier, paying taxes without adequate services and risking loss of identity.

The closure of UNRWA facilities in Jerusalem has also impacted health and education. Thousands of students displaced from UNRWA schools have moved to municipal schools using the Israeli curriculum, contributing to the "Israelization" of education. The private education sector is also declining due to the economic downturn. Some economic activity is observed in Jerusalem's suburbs, potentially serving as a substitute for Ramallah and Bethlehem, and reflecting a shift of economic centers to the periphery. Israeli commercial spaces are also being established in these areas to attract Palestinian consumers.

Forty-one percent of Jerusalem families live below the poverty line, with severe food insecurity and a 24% drop in consumption. Over 70% of aid recipients cannot afford medical treatment, and 27% have received electricity disconnection notices. Many families rely on Israeli "National Insurance" benefits, conditional on residing within Jerusalem's municipal boundaries, which acts as a control mechanism limiting their economic and social choices.