The Paris Protocol, signed in April 1994 as part of the Oslo
Accords, set out the economic relations between Israel and the
Palestinian Authority (PA). Unlike the "unilaterally imposed
customs union" (CU) that followed the 1967 Six Day War, the Paris
Protocol specified almost every form of daily (non-security)
interactions, covering cooperation in water, electricity, energy,
finance, transport, communications, trade, industry, labor
relations and social welfare issues. The Protocol was predicated on
cooperation with the aim of "strengthening the economic base of the
Palestinian side and for exercising its right of economic
decision-making in accordance with its own development plan and
priorities." It specifically granted the PA autonomy over "the
exchange of goods, fiscal policy, currency arrangements, and labor
The Oslo Trade Regime
Under the Protocol, trade relations between Israel and the PA
continued to be governed by a CU, granting free and preferential
access to each other's markets. Tariffs, purchase taxes,
value-added taxes (VAT), import procedures, price valuations,
product classifications, technical and health requirements and
standards were harmonized to the Israeli customs regime and import
policy; the PA was limited in setting its own trade policy. Most
importantly, tariffs could not be lower than the prevailing Israeli
rate. Although the PA was allowed to set its own tariffs on certain
goods from Arab League countries, the lists were such that in 1998
the value of these goods amounted to only "US$35 million, just 1.1%
of total [Palestinian] imports" (World Bank, 2002: 19). In other
words, the PA was granted only the trappings of autonomy.
This arrangement was intended to confer advantages upon both
parties. Israel was to continue to have preferential access to the
Palestinian market and generally reap the dividends of peace. The
Palestinians were to gain access to highly competitive foreign
markets through Israel's free trade partners, as well as
preferential access to the Israeli market. Greater integration
should have provided the Palestinians with technological,
administrative, managerial and organizational spillovers from the
Aside from limited economic liberalization, few benefits accrued to
the PA, due to inefficiencies in the CU as well as poor
implementation of the Protocol. Goods were to move freely through
the construction of a deep water harbor, an international airport
in Gaza, and a safe passage between the Gaza Strip and the West
Bank. However, the port was never constructed, the safe passage was
often closed owing to Israel's security concerns, and the airport
in Gaza is unoperational. As Palestinians had to rely on complex
and expensive procedures to move their goods from the West Bank to
Gaza or abroad, their import and export costs are estimated to be
30% higher than Israeli companies', and goods take 20-80% longer to
reach their destinations.
Labor Flows and Employment
Access to the Israeli job market should have ameliorated some of
the costs associated with the CU. The Protocol promised free labor
movement between the Palestinian territories and Israel, where
Palestinians earned 91% more than in the territories. Closures,
however, negated these benefits. The Israeli government's immediate
response to terror was to impose wholesale closures on the
territories. Conversely, closures were lifted when the security
situation improved. This created an environment of "general
uncertainty… which in turn depresse[d] private investment"
(Alonso et al, 2000: 13).
As then-PA Minister of Finance Salam Fayyad noted: "Although there
are many countries around the world with similarly high or even
higher rates of unemployment, I know of none where the rate of
unemployment can go up by 10-20 percentage points overnight." This
instability caused Israeli employers to seek laborers elsewhere;
immigration policies were changed to grant easier access to foreign
rather than Palestinian workers. The impact on the Palestinian
economy was drastic: In 1992 more than a third of the Palestinian
workforce was employed in Israel, contributing about 25% of the
GNP, but in 1996 only 7% was similarly employed, contributing no
more than 6%.
The Oslo Fiscal and Monetary Regime
As with the trade regime, the PA's fiscal and monetary policies
were subordinate to Israel as part of the Protocol. A Palestinian
Monetary Authority (PMA) was established to oversee the local
banking system and manage official foreign currency reserves, but
its scope of authority is limited; banks must operate according to
"Basel Core Principles" and reserves must be "in line with those in
Israel" (Bennett et al, 2003: 52). The PMA was not granted the
authority to issue its own currency, which denied the PA the use of
monetary policy. VAT and import tariffs were harmonized to the
prevailing Israeli rate, denying the PA much of fiscal
The absence of a Palestinian currency deprived the PMA of the
ability to set interest and exchange rates. There was no
possibility to devalue, meaning that a devaluation of the NIS
inevitably increases the Palestinian trade deficit. Further, $50
million in seigniorage revenue accrues to Israel rather than the PA
each year. Nonetheless, the absence of a currency means that there
is little risk of currency crisis and the circulating currencies'
low inflation rate has benefited those living in the
The PA does have some scope for fiscal policy through direct taxes,
tariffs for imports destined for the Palestinian territories and
VAT. In 1995 and 1996 the VAT was the "largest single source of
revenue for the PA," amounting to $223 million in 1996 (Brynen,
1999: 38). But Palestinian autonomy in this sphere is limited; "VAT
cannot be more than 2 percentage points lower than in Israel"
(Banister, 2001: 107). In addition, there is considerable leakage
in tariff collection. Taxes and tariffs are collected by Israel and
are transferred to the PA if the goods are declared destined for
the territories, less a 3% service charge. These leakages are
estimated at $133-174 million per year, far exceeding the
"estimated US$48 million" saved annually by the PA in not setting
up a customs authority.
A more autonomous fiscal policy would require a different type of
trade relationship with Israel, something that Israel was not
willing to consider during the Oslo years. Banister et al charge
that the limited fiscal policy and absence of monetary policy
impedes the PA's ability to achieve long-term growth and prosperity
From Honeymoon to Discord: The Oslo Years
The Oslo Accords began as an experiment - an academic exercise
apart from the bilateral talks taking place in Washington. The
negotiators were neither beholden to domestic constituents (due to
the secretive nature of the negotiations); nor were there
meaningful constraints from their governments. Thus, the
Declaration of Principles (DOP) was highly optimistic, based on
compromise, cooperation and confidence-building measures (CBMs),
and was ultimately destined to fail.
Despite their differences the two sides came together with a
similar vision. According to David Brodet, the former director
general of the Israeli Ministry of Finance and negotiator during
the Oslo years, "these were the issues that at that time both sides
saw as win-win" (2004, 4). This was to be the "New Middle East"
often described by then-Israeli Foreign Minister Shimon Peres, in
which "men, goods and services can move freely without the need for
customs clearance or police licenses" (1994). Similarly, "Abu Ala
[Ahmed Qurei] spoke of a free trade area between Ashdod and Gaza"
(Beilin, 1999: 66).
The concrete expression of CBMs came in multiple forms. The
Protocol offered a promise of free labor and trade movements in a
CU, as Ron Pundak, one of the lead Israeli negotiators during the
secret negotiations phase, notes: "Israel has a role to play in
strengthening the Palestinian economy, assisting in its
development, and leading the effort to create a donor conference"
Yet the Oslo track moved away from CBMs and cooperation, towards
concerns for security and autonomy. Pundak explains:
The Oslo spirit… was brushed aside by the implementers…
security is beyond everything, at the expense of everything…
From the Palestinian side there was a tendency to try and score
national points at the expense of the generic issues by trying to
attain some fast achievements… [these are] the roots of the
deterioration. (2004: 4)
Israel, habitually fearing for its survival, quickly shunted
economic cooperation aside, focusing instead on security matters
and terror prevention. A slogan used by the Barak campaign during
the 1999 Israeli elections stated simply: "Anakhnu Kan, Hem Sham,"
or "Us Here, Them There." The so-called "border-fence option" gave
Israel a veto over "the transit of goods, capital and labor…
[transforming the] relationship between Israel and the Palestinians
from one of partnership, as stated in the Paris Protocol, to one of
Palestinian subordination" (Usher, 1996: 36).
Many of the side payments promised to the Palestinians were lost
because of Israeli security concerns and, according to Pundak, "the
economic situation on the ground for the Palestinians became worse
than they were before [Oslo]" (2004: 5). As Allier et al note, "in
the absence of a developed system of social assistance, poverty is
closely linked to unemployment" (2000: 12). When closures
increased, production fell and unemployment and poverty
In response, the PA placed disproportionate emphasis on achieving
the trappings of national sovereignty and independence from Israel,
often more for their symbolic value than for their economic,
developmental or collaborative value. Despite the economic risks,
the Palestinians unsuccessfully demanded their own national
currency because a currency is "one of the basic symbols of
national sovereignty" (Schiff, 2002: 33).
Achieving little to satisfy their narrative in the economic realm,
the PA set out to gain national symbols elsewhere. As Yasser Abed
Rabbo, one of the lead Palestinian negotiators during Oslo and
later a PA minister, explains: "The most defining factor at Oslo
was the political factor so these [economic] matters did not play a
major role in confidence-building" (2004: 1).
Rafael Benvenisti, director of projects of the Israeli Ministry of
Finance during the Oslo years, concurs:
Economic and social issues were not the priorities on the agenda of
the parties. They were easily sacrificed for the political and
security interests of both parties. Resources, human life and well
being of the population were not the main considerations of
the parties. The main objectives are land, state, right of
return… not the people and the economy (2004: 1).
The Interim Agreement spelled out "the terms for postage stamps,
radio and television stations, drivers licenses, licence plates,
identity cards, [and] passports/travel documents." Only when the
DOP was nearly hammered out were government constraints introduced.
Later negotiations such as Paris, while based on the optimism of
the DOP, were negotiated in full view of the public, thus the
concerns of domestic constituents factored in.
While the Palestinians claimed that Israel was not doing enough to
implement the agreements, the Israelis complained that the
Palestinians did not do enough to curb terrorism. My research
suggests that the Oslo process was frustrated because the legacy of
the conflict predisposed the parties to treat the economic realm in
a manner not conducive to CBMs.
It is no coincidence that disillusionment with the peace process
was most prevalent where unemployment was highest. Poor economic
conditions contribute to a population that is unsupportive of its
government and negotiators. The Palestinian population was
unwilling to accept or ratify a compromise agreement, thus tying
the hands of their negotiators. The PA's reliance on fees,
especially for social services, also helped fuel the popularity of
anti-Oslo groups offering social welfare and educational services,
such as Hamas. Public opinion polls conducted by the Palestinian
Center for Policy and Survey Research (PCPSR) are telling:
"[Palestinian] respondents ranked job availability and standards of
living ahead of repression, violence, and corruption as the
greatest concern in the transition to self-government" (October
5-10, 1993). In Israel the popularity of Oslo-resistant groups such
as the Likud party rose.
In the optimistic spirit that prevailed at the time, the Oslo
Accords were built on the premise of CBMs. However, when dominant
Israeli and Palestinian narratives were introduced, the emphasis
shifted to security and sovereignty, thus helping to unravel the
process. The parties' win-sets narrowed considerably and
cooperation became a liability.
As the Palestinian economy went into decline, so too did hopes for
a negotiated solution. In the words of Moty Cristal, CBMs became
"catastrophe building measures" (2004: 4).
The best way to solve the Palestinian-Israeli conflict is to
enlarge the win-sets of both parties within the context of their
national narratives. As Jerome Slater argues:
No settlement of this long and bitter conflict can be based on
trust… Any peace plan that seeks to meet legitimate Israeli
security concerns must start from the premise that the Palestinians
might continue to harbor the desire to regain all of Palestine and
might later seek to renege on its commitments. The task is to
ensure that a Palestinian state will never have the capability of
threatening Israel. (1991: 416)
Israel and the PA must respect the narratives that destroyed the
Oslo process in order to satisfy their domestic constituents.
Cooperation and CBMs must be traded in for political and economic
separation. This would ensure the Palestinians the state they so
desire, and would deliver a political victory to the PA large
enough to pursue domestic reforms. Israel would benefit from clear
and defensible borders and increased international legitimacy. Yet,
with all proposed solutions, there remain problems associated with
separation. Over time these may be overcome when Israel achieves
security and the Palestinians obtain statehood - gains that allow
for cooperation to begin in earnest.
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