NABLUS, West Bank (Reuters) - Nestled in a basin in the northern West Bank, the city of Nablus was for millennia a Palestinian cultural and commercial hub, attracting traders to its souk in the heart of the old town.
But Israel's occupation of the West Bank, and local policy paralysis, have since isolated the Palestinian economy from global markets and pushed unemployment up to nearly 25 percent.
Fledgling Palestinian high-tech firms hope they can now help revitalize the economy, making the West Bank more resistant to Israeli controls on land and the movement of goods and people and less dependent on fickle foreign aid flows, which are blighting the public sector.
"We're far, far away from being Silicon Valley," conceded Husam Dweikat, general manager of Isra Software & Computer Co., an e-commerce firm with 35 employees based near the old city.
"Still, we can become a sector that transforms the future of the Palestinian economy, despite the fact the Israeli occupation and our government have deprived us of the right infrastructure, skills and exposure," Dweikat said.
The information and communications technology (ICT) sector, which includes telecommunications, contributed 6.1 percent of Palestinian gross domestic product by 2011, a more than seven-fold increase since 2008.
Relatively high rates of computer literacy and English language skills compared to Arab neighbors offer advantages.
Paradoxically, proximity to Israel is also a boon. A powerhouse of global ICT, Israel provides Palestinian IT companies with outsourcing work from multinational firms that have subsidiaries in Netanya and Tel Aviv, just 20 kilometers from the West Bank.
Those companies are taking advantage of cheaper labor in the West Bank compared to Israel and a strong local skillset, and have also cited corporate social responsibility as a reason to invest there.
U.S.-based Cisco Systems, the world's largest maker of networking equipment, along with other tech partners and the European Investment Bank have pumped $78 million into developing the sector since 2008, raising the profile of the Palestinian industry abroad and providing valuable know-how.
Yet business owners still speak of horror stories trying to import hardware past Israeli authorities, who impose strict curbs on materials they deem a security risk, and of travel problems which deter potential clients.
"Try landing in (Tel Aviv's) Ben Gurion airport and telling Israeli passport control you have business in Palestine - it doesn't work so well," said Abeer Hazboun, general manager of the Palestinian Information Technology Association (PITA), which represents more than 100 ICT firms.
Israel has denied Palestinian companies access to the 3G frequency, key to innovating in the mobile phone app market, granting it to Israeli firms serving Jewish settlers instead.
Israel captured the West Bank, East Jerusalem and Gaza in the 1967 Middle East War, and built Jewish settlements across much of the territory. Palestinians, who number 2.65 million, wish to establish an independent state and want the half a million Jewish settlers to depart.
U.S. Secretary of State John Kerry, on a round of shuttle diplomacy last week, said Israeli and Palestinian leaders had agreed to unveil shortly a U.S.-backed plan to relieve the "bottlenecks and barriers" to economic growth in the West Bank.
Infrastructure rebuilding helped the aid-dependent Palestinian economy average 11 percent growth in 2010-11 but the World Bank predicts growth will more than halve to 5 percent this year, again driven by construction.
Rising unemployment and soaring prices helped sink the popularity of U.S.-backed Prime Minister Salam Fayyad, who resigned on Saturday after months of tension with President Mahmoud Abbas.
Many businessmen say years of high costs and limited reforms have made it difficult to boost growth.
"Somebody needs to come up with a plan. The emphasis on bureaucracy that's been built up is an impediment to private sector growth," said Tareq Maayah, head of Exalt Technologies, a Palestinian company.
Exalt does research and development of software and mobile phone technologies outsourced by companies like Cisco, Hewlett-Packard and French-American group Alcatel-Lucent and is one of the sector's biggest and most profitable companies.
In the shade of Nablus's al-Najah University campus - Arabic for "success" - 28-year-old freelance web programmer Abdullah Yaseen clicks away at his bulky PC.
Since he graduated six years ago, he has marketed his services through social network elance.com and has devised computer programs for a range of U.S. websites from America's Home Shopping Network to U.S.-based consultancy RES. He is the lead engineer of its offshore IT solutions branch, RESpodo.
"All I need is my laptop and the Internet," Yaseen said. "Most of my friends go and look for work with the (Palestinian) Authority, because a government job is fixed, easy. Me, I don't think this way."
Many of the 2,500 Palestinian graduates specializing in computer science each year, however, cannot find steady work and seek jobs abroad.
Nearly a quarter of the Palestinian labor force is employed in the public sector, but unstable government revenues means wages are volatile.
The United States withdrew aid money last year after the Palestinians successfully bid for a status upgrade at the United Nations, while Israel withheld customs tax revenues it collects on Palestinians' behalf.
Declining state revenues, and a shortfall in aid from Arab states distracted by unrest at home, have frequently delayed public sector salary payments, setting off strikes and protests.
The shortfall has also left the Palestinian Authority (PA) with a recurring deficit and external debt, both of about 1 billion dollars, or nearly a fifth of gross domestic product.
The private sector meanwhile is held back by Israeli curbs on land, water and movement. Around 40 percent of all Palestinian workers are employed by small enterprises of around three or four employees making low-cost products mostly for the domestic market.
Since the 1993 Oslo Peace accords gave Palestinians partial self-rule, upheaval has repeatedly challenged economic progress.
Hazboun of the Palestinian IT association said that had implanted a mindset among Palestinians that there was no confidence that the economy could prosper.
"ICT can help counter this with its emphasis on innovation and a knowledge economy," she said.
A wave of Palestinian suicide bombings during the second Palestinian Intifada in 2000-2005, or uprising, was countered by numerous Israeli incursions that wrecked local infrastructure. A violent rift between the Palestinian Fatah and Hamas parties in 2006 paralyzed parliament and prevented economic reform.
Sabri Saidam, an economic adviser to President Abbas, said developing the IT sector would provide opportunities for the territory's brightest young people.
"But no Palestinian will ever accept economic development as a substitute for our national liberation," he said.
Still, outsourcing work from international firms based in Israel is helping to counter an unequal economic relationship in which the Palestinian market is mostly captive to Israeli goods, Maayah of Exalt said.
"Go into a supermarket here and what do you see? Eighty percent of the produce is Israeli. By outsourcing, it's us selling to them. This pushes the economic balance in our favor," he said.
Editing by Susan Fenton