Adjoining the Oslo agreement, the Paris Accord was intended to
facilitate the economic inter-relationships between Israel and the
Palestinians in the immediate future. Within the framework of this
Accord, the Palestinians consented to the extension of an economic
regime which, ever since 1967, incorporated their economy (without
their political approbation) in a quasi Custom Union with
Quantitatively, the prolonged association concerned a value added,
approximating at the eve of the Oslo agreement, $1-1.35 billion on
At the macroeconomic level, benefits of association accrued to
Israel were quantitatively insubstantial, accounting for 1-2
percent of the gross national product (GNP) and concerning a fairly
replaceable associate. For the Palestinians, benefits of
association were quite substantial, accounting for a 25-35 percent
of the GNP, and concerning a hardly replaceable partner.
Benefits of a prolonged association to the Palestinians were
professed in the Accord in terms of an easy access to the
quasi-Union's internal markets, in particular, a liberal access to
Israel's lucrative labor market. The importance of this labor
market for the Palestinian economy could not be overrated. In 1992,
for instance, before the inception of the Paris Accord, income
earned through Israel's labor market accounted for 25 percent of
the Palestinian GNP.
In view of the role played by this particular market, the
realization of the Paris Accord has been quite discouraging. In
1995, for example, after the ratification of the Accord,
Palestinian employment hampered by closures and wages earned in
Israel dropped to less than 30 percent of the levels realized in
1992. Likewise, industrial trade relations were hampered, reducing
the value added derived by the Palestinians through their trade
with Israel by 35 percent.
Sluggish implementation of the Accord was the unfortunate outcome
of a series of events. A gruesome terrorist outburst, which took
place after Oslo, resulted in an Israeli public opinion hostile to
the presence of Palestinians in Israel's labor market. Even though
terrorist activity was unrelated to the presence of registered
Palestinian employees in Israel, the incumbent government of
Israel, preparing for new elections, succumbed to public opinion
and resorted to closures. Furthermore, unlike the pre-¬Oslo
experience, the post-Oslo policy opted intentionally for long-term
closures. Contemplating a long-term absence, the government issued
tens of thousands of permits to farm hands from the Far East, as
well as construction workers from Eastern Europe. This relatively
inexpensive replacement "crowded out" the Palestinians, even when
closures were relaxed.
The Preservation of the Custom Union
Usually, custom unions face serious difficulties in endeavoring to
stipulate an array of common tariffs. In the case of Israel and the
Palestinian economy, questions of tariffs may arise in less than 8
percent of the quasi-Union's imports. This is the case because the
bulk, comprising 92 percent of the bill of goods, enters the
territories in question under free trade agreements concluded
between Israel and the E.C., the U.S. and several other countries.
Furthermore, Israel is unlikely either to resist the separate
Palestinian taxation of certain components of that imported bulk,
or insist on a universal application of the rules and rates
regarding the remaining 8 percent.
Difficulties in a custom union may also arise with regards to
questions of income sharing. But only a minimal degree of
benevolence on behalf of Israel is needed to make these questions
In the case of Israel and the Palestinians, the real difficulty is
internal rather than external; that is, measures applied in order
to satisfy irrevocable constraints dictated by security needs,
seriously interfere with the principle of free access to the
quasi-Union's internal markets.
But access is the raison d'etre of a custom union. If the union
solicited by the Paris Accord is to be preserved, the balance of
security vis-a-vis access should be approached differently. Access
must be interpreted in terms of irrevocable constraints equivalent
to the ones sanctified by security needs.
Investment in the appropriate facilities and organizational
structures is necessary in order to cope with the two sets of
constraints, simultaneously; that is, in order to guarantee
security not at the expense of free access and vice versa.
In the case of the critical labor market, the Accord itself, or
some other formal document, should be amended to include a clause
which guarantees the Palestinians a certain share of the market.
That share would be treated, from then on, as a constraint.
Why Save the Union?
The present quasi-Union could be replaced by a genuine union giving
both parties a say in the conduct of its affairs. In principle, it
could be replaced by a Free Trade Arrangement (FTA), involving the
harmonization of tariffs and indirect taxes. To the extent that the
procedure regarding harmonization is strict and binding, the
difference between a harmonized FTA and Custom Union proper may
involve some diplomatic niceties, but economically the differences
are merely semantic.
One of the advantages of an Israeli-Palestinian union or a
union-like FTA, is that it does not require physical barriers
throughout the country. For example, there is a consensus rejecting
physical barriers in Jerusalem. But, within the framework of the
present article, we concern ourselves with the economic
consequences of a barrier, or the lack of it, rather than its
intrinsic "noneconomic" value.
The following discussion distinguishes between a Custom Union (and
Union-like) arrangement, denoted CU which facilitates cooperation
between the parties and an alternative separatist arrangement
relying on a physical, as well as administrative barriers, denoted
BWC (barbed wire curtain).
Palestinian Employment - a CU and a BWC
Either one of the regional arrangements has a marginal effect upon
Israel's economic performance. In that respect, the difference in
performance under one of the two arrangements and the other is
minuscule, if any. Advantages or disadvantages of a CU or a BWC
will be reflected in the performance of the Palestinian economy.
The focal point of this particular section is the prospective
employment of Palestinians under either one of the two alternative
arrangements. The following section focuses on the prospects of the
national product and per-capita income of the Palestinians. (It
should be noted that prospective employment and product were
approximated simultaneously and the order of presentation is
arbitrary). The forecasting horizon in either case is the year
Columns 2 and 5 in Table 1 delineate the two alternatives, BWC and
CU in their extreme version. Column 2 describes an uncompensated
detachment from Israel. In that case, Palestinian saving is the
only source of financing employment-generating investments. Foreign
aid, in that case, helps finance the public sector, thus indirectly
upholding a rate of self-financed net investments which accounts
for 4-4.5 percent of the GNP. That rate is enough to generate
employment at an annual pace which equals the rate of growth of
4-4.5 percent, characterizing the Palestinian population and labor
force (hardly allowing for "returnees").
This assessment is consistent with an observation made in the
following section; namely, that uncompensated detachment implies a
national product per capita which does not change much over
Column 5 describes an unhampered association between the
Palestinian economy and Israel, involving an annual investment of
$250 million in free-zone industrial parks by Israeli and
international entrepreneurs. That module guarantees, at the outset,
the employment of 90,000 Palestinians in Israel. This pledge
increases by 5,000 every year up to a ceiling of 150,000 (to be
employed either in Israel or in free-zone industrial parks).
Here, too, Palestinian self-financing of net investment in
employment¬generating facilities account for 4 percent of the
GNP. But, because of the Palestinian labor income earned in Israel,
the per-capita GNP is higher than that observed under detachment.
The outcome is larger employment¬generating investments and
In 2010, unhampered association will provide employment to 625,000
persons "domestically" (that is, neither in Israel nor in the
free-zone parks) and, in addition, 95,000 will find employment in
Israel and 55,000 in free-zone parks established by Israeli and
international entities. Altogether, 780,000 out of a labor force of
850,000 will be employed.
In comparison, in 2010, uncompensated detachment will provide
"domestic" employment to 550,000 persons out of a labor force of
Table 1 describes two "intermediary" modules: detachment partly
compensated by international annual investment of $250 million in
free¬zone industrial parks (column 3); and association without
the support of international investors in free-zone industrial
parks (column 4).
All in all, the apparent disadvantage of detachment and the
advantage of association is reflected in the corresponding rates of
unemployment in 2010:
• CU: Uncompensated detachment column  35.5 percent
• CU: Compensated detachment column  25.5 percent
• BWC: Unassisted association column  13.0 percent
• BWC: Assisted association column  8.5 percent
In conclusion, considering the crucial question of Palestinian
employment, the Union (the CU or a CU-like arrangement) is worth
The Palestinian National Product - CD and BWC
Table 2 and Figure 1 manifest the advantage of CU and association
over BWC and detachment in terms of the Palestinian national
product. Figure 2 relates the recorded levels of the GNP per-capita
of the Palestinian economy between 1968 and 1997:
Following a takeoff period between 1968 and 1976, the Palestinian
per capita GNP grew steadily at an annual rate of 2.5 percent. From
1977 to 1986 the corresponding per capita gross domestic product
(GDP) grew at 2.35 percent per year.
From 1987 to 1996 - a period interrupted by war, the Intifada and
closures - the annual growth rate of the Palestinian per-capita GNP
was practically zero (the corresponding per-capita GDP grew at a
near-zero rate of 0.2 percent). A zero rate of growth is not
exceptional in our vicinity ¬between 1980 and 1996, both Egypt
and Syria displayed near-zero or negative rates of growth (Figure
1) and so did Jordan. Considering these observations, Table 2
ventures an attempt to approximate the per-capita national product
A low estimate - most likely to materialize under a BWC and
detachment rules out substantial employment in Israel and/or
free-zone parks and adopts a near-zero rate of growth for the
per-capita GDP - the characteristic of the interrupted period
(1987-1996) and the neighboring countries.
A high estimate - a possibility under a CU and close association -
takes into consideration systematic employment in Israel and/or in
free-zone parks and adopts the 2.35 percent rate of growth for the
per-capita GDP ¬a revival of the economic heyday of the late
1970s and early 1980s.
The outcome is quite obvious:
GNP $ per capita per year in 2010
• CU: Uncompensated detachment 2050
• BWC: Assisted association column 3550
Once again, considering the crucial question of Palestinian
national product, the Union (the CU or a CU-like arrangement) is