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 Israel.
Quantitatively, the prolonged association concerned a value added, approximating at the eve of the Oslo agreement, $1-1.35 billion on either side.
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 readily soluble.
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 2010.
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 time.
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 greater employment.
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 850,000.
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 [2] 35.5 percent
• CU: Compensated detachment column [3] 25.5 percent
• BWC: Unassisted association column [4] 13.0 percent
• BWC: Assisted association column [5] 8.5 percent
In conclusion, considering the crucial question of Palestinian employment, the Union (the CU or a CU-like arrangement) is worth preserving.

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 in 2010.
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 worth preserving

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