The Palestine-Israel Journal is a quarterly of MIDDLE EAST PUBLICATIONS, a registered non-profit organization (No. 58-023862-4).
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Editorial Board

Adnan Abdelrazek

Danny Rubinstein

Sam'an Khoury

Daniel Bar-Tal

Walid Salem

Galia Golan

Gershon Baskin

Hind Khoury

Edy Kaufman

Ata Qaymari

Benjamin Pogrund

Nafez Nazzal

Dan Jacobson

Jumana Jaouni

Moshe Maoz

Munther Dajani

Khuloud Khayyat Dajani

Izhak Schnell

Lucy Nusseibah

Meir Margalit

Menachem Klein

Ali Abu Shahla

Ilan Baruch

Hanna Siniora

Yehudit Oppenheimer

Mossi Raz

Susie Becher

Frances Raday




Vol.4 No.1 1997 / Children of The Conflict

Economics

Israel and the Palestinian Economy

The 1994 Paris economic protocol is not being implemented for political reasons.

     by Arie Arnon and Gideon Eshet

Arieh Amon: We have to put into perspective the structural changes which have occurred in the links between the Israeli and Palestinian economies. It was Israel that decided, soon after the 1967 war, to open the links between the two economies, to let Palestinian workers seek work in the Israeli economy and, with some restrictions, to let each side sell products in the markets of the other. After some years, the figures stabilized, with some 30 percent of the West Bank and 32 percent of the Gaza Strip work force working in Israel.
Since 1972, and even before, one finds a large deficit in the trade between the West Bank and Gaza and the rest of the world. This was paid for by work in the Israeli economy, by other capital inflows and by some unilateral funds transferred to the Palestinian economy.
Without going into detail about the public sector, which was controlled by the Israeli authorities and was inadequately developed, up to 1992-1993 the worst deficiency in the Palestinian economy was in productive capacity. Capital per person remained at a low level. While savings rates in the West Bank and Gaza were impressive, they were mainly channeled into residential rather than productive investments.
This was the background to the Paris Protocol of April 1994. In the 1970s and, to a lesser extent in the 1980s, rising living standards were pushed forward by wages from the work of Palestinians in Israel. The negotiators of the Paris agreement assumed that the existing relationship between the Israeli and Palestinian economies could be maintained, even though, in 1993, it was already known that closures were being imposed.
During the 1993-1997 period, the standard of living in the West Bank and Gaza decreased by about one-third. Because of its dependence on work in Israel, as this work declined, the Palestinian economy underwent a radical structural transformation. From 27 percent of the work force working in Israel in 1993, the number dropped to 7 percent in 1996. Income from abroad, mainly workers' wages, also declined. Unemployment went up from 18 percent to 34 percent.
The first and primary reason for this was, of course, the closure policy. Since 1994, however, one must add to this the phenomenon of foreign laborers in Israel, non-Israelis and non-Palestinians whose numbers grew from 10,000 to some 200,000 today (plus or minus 30,000-40,000, since there are no exact figures). These have replaced Palestinians who were unable to come to work on a regular basis due to the closures. So, even if the closures were somehow to be lifted, who can tell whether the Palestinians would regain their past level of employment in the Israeli economy?
Closures have other far-reaching implications. In their wake, the macroeconomic environment became highly unpredictable and, with such a level of uncertainty, potential entrepreneurs and the private sector are unable to lead the development process as expected in the Paris Protocol. This had assumed free trade between economies, the same customs for exports and imports, the absence of economic borders. Though the term customs union doesn't appear, this was the concept.
The other important concept was the normal movement of laborers, on the assumption that closures would be only for short periods of time and that some 100,000 laborers would continue to work in Israel. This did not take place and now it will be almost impossible to return to such levels of employment, with all the implications for the Palestinian economy.
International aid was not part of the Paris agreement, but it materialized in an impressive manner. Over the last three years, the Palestinian economy enjoyed a stream of about half a billion dollars annually in international aid. Rather than being channeled into productive channels, some went into emergency aid for solving urgent problems created by the structural change. This is not the most efficient use of international aid.
When it became clear that the Paris Protocol was not being implemented by either the Israeli or the Palestinian side, the agreement should have been renegotiated. For example, the Palestinian economy should be allowed more access to regional and international markets in exports and imports, and not through the Israeli economy. If fewer than 100,000 workers will be employed in Israel in the next few years, creating employment within the Palestinian economy is a more urgent task than was assumed in the Paris Protocol.

Adnan Samara: Our basic problem is that, until now, we do not know the plan of the Israeli government for the Palestinian economy. We have been negotiating with them for a long time, but after solutions are found and implementation begins, everything stops. The reason may be a military attack or difficulties in political negotiations, but the result is that we have to start again from the beginning, regardless of whatever may have been achieved.
The Paris Protocol contributed nothing to the independence of the economy of Palestine. Since the difficulty of separating the economies was agreed upon, the agreement was based on the fact that we are one economy. If this means anything, it means free movement of goods and people. At the outset, things did not go badly, but then came the military attacks and the imposition of the closures, especially on Gaza.
Citing security reasons, the Israelis then demanded that merchandise from Gaza be unloaded from Palestinian onto Israeli trucks. Using trucks from Gaza costs a third or a quarter of the cost of Israeli ones. Thus transportation costs go up, and when goods are transferred, there is the risk of their being damaged or broken. Then we were informed that, for security reasons, the trucks must not approach each other. Later it was claimed that inspection must be carried out by machines. At the Karni Checkpoint one can see the results. This is how the Paris Protocol is working out today.
According to the Paris agreement, everything is to be exported and imported through Israel's borders, harbors, airports or crossing points. But one cannot move from Gaza without a permit. Sometimes 1,000 permits are granted, sometimes 100. Permits granted can be frozen or cancelled if anything happens. In effect, while we are meant to have freedom of goods and movement, we cannot send goods freely because every step needs a permit. Permits are valid until seven or ten o'clock at night, which means that someone from Gaza with business in the West Bank must go and come back on the same day since he cannot sleep over.
Then one needs a certificate from the Standards Institute of Israel, but since, often, a Palestinian cannot enter Israel, he cannot obtain the certificate. We have created a Standards Institute and we proposed to Israel to recognize it after checking out our regulations, our machines and our laboratories. It was not approved. The same applies to certificates from the Israeli Health Ministry concerning medicine or to documents from the ministries of Agriculture and Transport for food processing. We have proposed that recognition be given to the Palestinian ministries, according to the same regulations customary in Israel.
When a Palestinian wants to invest, according to the Paris Protocol, the same procedure is required as in the past. The investor submits an application to the Israeli authorities and, eventually, he receives a confirmation certificate. Only about a hundred of these have so far been received. Because this is meant to be one economy, most of the currency is in Israeli shekels, but the rate changes without any coordination with us and even without our being informed of the change. Such instability worsens our situation. The World Bank wants to give a loan for industry in Gaza, but only on condition that there be free movement of people and goods with Israel.
We have an agreement with Jordan, but one cannot compare the Palestinian-Jordanian and the Israeli-Jordanian agreement. From Amman goods can be sent anywhere in Israel, door to door so to speak. To reach West Bank markets, Jordanians must go via the Allenby Bridge and through the loading and unloading procedure mentioned above. All goods coming into the territories undergo security checks, sometimes involving opening every packet in a consignment.
We have created industrial zones step by step with the Israeli authorities and we have conducted protracted negotiations on the movement of people and goods into the zones and on subjects like electricity, water and the environment. We have agreed to give Israel the right to check everything coming in, but, after two years, we still have no security agreement. Sometimes one crosses the Erez Checkpoint quickly, on another occasion the same procedure takes an hour. Everything is attributed to security. Security freezes all agreements.
Though the general situation is a little (but not much) better in the West Bank than in Gaza, under these conditions I do not believe we can build an economy. At the last meeting of the joint economic committee, I told the Israelis they might as well reoccupy the territories because, as things stand, there will be no progress for the Palestinian economy.

Gideon Eshet: At the beginning of the 1990s, before the economic agreements were signed, some Israelis involved in discussions on future economic relations between Palestine and Israel favored a free-trade agreement, and some stressed the importance of borders. However, from an economic point of view, the nature of the Palestinian-Israeli relationship was not very significant due to the different size of the economies and the different standards of living.
In any case, when it came to Paris and to the negotiations, it turned out that, regardless of what economists see as good or bad, the main factor behind the agreement was political. In terms of politics, any agreement other than a customs union would have the political consequence of determining a border line between Israel and Palestine. The overwhelming factor in the Paris agreement was political and not economic, regardless of Israeli economists who say that the customs union is good and the Palestinians are doing well because we Israelis are collecting taxes for them and saving them all the costs involved, etc. The overwhelming consideration was and remains political.
Take currency as an example: From the Israeli economic point of view, what difference does it make if the Palestinians have or do not have a currency? It does not make much difference. The only reason for Israel objecting to a Palestinian currency was because of the political symbolism involved.
Politics is the main and, I think, the only factor determining what Israel can do to enhance economic development within Palestine.
The idea was to set up a customs union with completely free trade in goods and labor. It is quite obvious today that there is no free movement of labor or, no less importantly, of goods, or, for the most part, in services. In essence, the whole agreement is falling apart because of political factors.
A week ago the Israeli Internal Revenue Service, an institution of the Ministry of Finance which handles taxation policy, after the usual criticism of the Palestinian Authority wrote that, while the Palestinians are violating the Paris agreement, the Israelis are doing so on a larger scale, given the disparity in the economic power of both sides. The government official who wrote the report comes to the conclusion that there is a basis for renegotiating the agreement.
One comes back to the concept that, from the Israeli point of view, the formalities of the relationship are hardly important. There should be wide cooperation on standards, on ecological issues and on water for, basically, we are drinking water from the same reservoir. But beyond these, there are good grounds for discussing the idea that, whatever the Palestinians decide is good for them, is basically alright for Israel.
It is goodwill that is presently lacking in the political process. The previous Israeli government had some goodwill, but the present one has none, in the sense that, what Netanyahu and his government have in mind is to bargain with the Palestinians so as to get better conditions for a possible agreement. This is a kind of bargaining that goes on in the market and, as long as this attitude prevails - and I do not see this changing in the near future - the possibility of changing the situation of the Palestinians is very poor. The economic future is totally dependent upon political decisions.

This material is published with the kind permission of IPCRI.
The roundtable discussion took place before the economic measures imposed by Israel on the West Bank and the Gaza Strip after the attack in Jerusalem's Mahane Yehudah market on July 30, 1997. These measures paralyzed all economic activity in the territories. In addition to the general and internal closures, the new steps included the unprecedented measure of freezing money owed by Israel to the Palestinian Authority.








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