The annual Palestinian Gross National Product (GNP) approximated $2,750 million in the late 1980s. Values added through exports of goods to Israel and Jordan contributed to the national product the modest amount of $150 million. The concurrent contribution of commuter-labor renumeration, that is, the value added by Palestinian labor services exported to Israel was quite substantial, reaching a level of $765 million. Altogether, trade in goods and services accounted for one-third of the Palestinian national product.
Considering the small size of the Palestinian economy, the share of trade in the national product is not surprising. A similar phenomenon and magnitude can be detected in the small economy of Jordan, which realized, in the late 1980s, a national income of $3,500 million. Exports of goods generated 10% of the Jordanian GNP. The apparent contribution of exported services ¬incorporating a sizeable repatriation of wages and salaries earned abroad ¬could be twice as large.
Even Israel, with a GNP 15-20 times larger than the above was in effect another small economy, deriving no less than one fifth of its national product from trade. However, in the case of Israel, goods were more important than exported services and the weight of labor services thereof was utterly insignificant.
In the political environment of the late 1980s, the Palestinians were able to benefit from the relatively large and developed labor market in their vicinity. Taking advantage of this opportunity, they managed to contain unemployment, preserve their national product and relieve a current deficit in the balance of trade in goods.
The overwhelming role played by labor services in the Palestinian balance of trade with Israel was partly due to an accommodative labor policy, but at the same time it reflected a restrictive policy with regards to trade-oriented development in the Palestinian industry.

Trade Policies before 1992

With respect to Israel's policies toward Palestinians, it is necessary to distinguish between farm and non-farm trade. Israel's general farm trade policies - internal as well as external - relied upon non-market arrangements involving production and marketing quota privileges. These restrictive arrangements, which are detrimental to the Israeli consumer and undesirable from a macro-economic point of view, affected Palestinians and prejudiced Israeli farm producers alike.
A distinctive approach toward the Palestinians, characterized Israel's policies regarding non-farm trade. Direct trade policies toward Palestinian manufacturers in existence since 1968, was quite liberal. Palestinian industrial products and consumer and producer goods were admitted into the respective Israeli markets free of fiscal and administrative barriers. From 1968 to 1977 the effect of this policy upon the volume of exports proved quite positive. The annual rate of growth of the volume of goods traded with Israel during that period reached the level of 16%. However, in the next decade the corresponding rate dropped to zero as the growth process leveled off.
One of the reasons for leveling off, and eventually for the modest share of goods in the Palestinian exports, was Israel's policy toward new trade¬-oriented industry.
Directed at the establishment of new industrial enterprises by Palestinian entrepreneurs, a licensing policy required that a new industrial enterprise prove a capacity to sell its products outside Israel, either in the Territories or abroad, before it received a license to establish the new plant. This was done with a view of discouraging Palestinian industrialists from competing in the domestic Israeli markets.
During the first decade, the established manufacturers were able to expand their operations and production for export. Further expansion at a later stage required new products, improved quality and new plants. At that point, licensing had gone into effect resulting in an adverse impact on the growth pattern, and in pressures directed at the military authorities. In the late 1980s the authorities tended to overlook the licensing conditions. Indeed, in a number of instances new plants were granted licenses even though their production was directed at the Israeli market from the outset. The licensing regulations - a dissonance in Israel's general trade policy - were eventually discarded by the end of 1991. Recently, the formal agreement reached in Paris between Israel and the PLO accorded the Palestinians formal free access to Israel's markets for manufactured goods.

Free and Effective Access

The formal agreement, if implemented properly, enables Palestinian entrepreneurs to take full advantage of their geopolitical proximity to Israel. It also enables them to benefit from their socio-economic affinity to Israel's versatile consumer markets and its wide spectrum of producer markets which are, quite often, the gateways to the respective European and North American markets. Exploiting the opportunity provided by the Paris Accords, the Palestinian economy may return to the rates of growth of exportation of the 1970s. This is a realistic proposition because of a rare intersection of two systems: a political macro-economic framework, within which access to the markets is possible, is matched by a social micro-economic fabric, within which realization is probable.
Under these exceptional circumstances, entrepreneurs should be able to realize the access permitted: that is, be able to negotiate particular transactions, process, forward, and market particular pieces of merchandise.

The Routing of Access - a Critical Precondition

Small countries rely on exports for their development. Small countries, rich in fuel or minerals may develop their exporting industries through established trading channels. In their case a capacity to produce is quite often synonymous with an instant potential to trade with developed and developing countries alike.
Small countries, poor in natural resources must rely on manufacturing as their only salvation. However, in their case, a capacity to produce is by no means an indication of a potential to forward and market the manufactured goods.
The experience of the immediate neighbors of the Palestinian economy seems to suggest that once a limited opportunity to develop primary commodity exports is exhausted, the only development outlet is manufacturing. But manufacturing depends upon a capacity to penetrate the capricious markets of the industrial West.
Deprived of a generous resource-base and determined to accomplish a decent standard of living, Palestinians will also depend upon export¬-oriented manufacturing. Hence, they will depend upon extensive processing, forwarding and marketing services.
In this context the macro-economic Accords and their micro-level realization are likely to playa critical role in the future of the Palestinian economy.

References

Arab Republic of Egypt. General Agency for Public Mobilization and Statistics. Statistical Yearbook 1952-1988, 1989.
Feiler, Gil. The Syrian Economy: Potentials of Cooperation with Israel. The Armand Hammer Fund
for Economic Cooperation in the Middle East, Tel Aviv University: 1992.
Hashemite Kingdom of Jordan. Department of Statistics. Statistical Yearbook, 1991. Israel. Central Bureau of Statistics. Statistical Abstracts of Israel, and earlier issues, 1993.
US AID. Center for Development Information and Evaluation. International Trade Tables, 1987¬-1989, 1993.