My article titled "The Bes't Way for Both Sides," published in the first issue of this journal, five years ago, contemplated greater Palestinian exports to and through Israel, following Oslo and the successive agreements. The original, and additional articles in that issue expressed the opinion that a voluntary Customs Union or an advanced FTA (free trade area) with Israel - allowing for greater exports - was the best Palestinian hope for economic growth. Interchange with the Palestinians did not play a major role in the Israeli economy. However, the articles envisaged the daily economic interaction involved as one of Israel's best guarantees of a lasting peace. All in all, a robust trade could indeed be visualized as the best way for both sides.
This has been, and still is, a most accurate assessment of the political┬Čeconomic options facing the parties. But it has been and still is an appraisal conditioned by the ability of the parties to maintain an environment of mutual trust. So far, in the absence of trust, an expansion of Palestinian exports to and through Israel did not materialize. On the contrary, exports have declined considerably from their pre-Oslo level. By 1997, the value of total Palestinian exports to Israel approximated 60% of their level in 1992, merely 40% of their potential.
Furthermore, administrative developments in the post-Oslo era, reflecting an implicit spirit of mistrust, are hardly conducive to future trade. The Karni Checkpoint - an assemblage of concrete and electronics and officious clerks, the designated gateway for goods originating in Gaza on their way to Israel - is a plain manifestation of the prevalent spirit. Every piece of merchandise will be checked: trust is to play no role in the procedure.

A Detrimental Development in Israel's Labor Market

Imports of lab or services and the presence of non-citizens in Israel's labor market have been rising ever since the early 1970s. Figures processed by Israel's Central Bureau of Statistics and employed by the Bank of Israel seem to indicate that in 1970 non-citizens comprised a mere 2.1 % of Israel's total work force. But eventually that percentage trebled, reaching a level of 5.6% in 1980 and 6.8% in 1990. In 1997, in spite of a recession, the percentage of non-citizen employees increased to 7.9%.
It is possible to suggest that during the time-period in question real income and wages in Israel came close to European levels, and attribute this influx of non-citizens to factors generating similar phenomena in Western Europe. It may be suggested that non-citizen employment in Israel has been induced by the presence of excess supplies of inexpensive daily-commuting Palestinians. But, in regard to the Israeli-Palestinian post-Oslo relations, a full explanation of the pre-Oslo development is unimportant. The fact is that, after Oslo, Palestinians have been replaced in Israel's labor market by foreigners originating in the Far East and Eastern Europe. According to the data presented by the Bank of Israel, Palestinian employees in Israel approximated 100,000 in 1992.1 In 1997 the number dropped below 50,000. At the same time, total non-citizen employment rose from 132,000 in 1992 to 176,000 in 1997.
Relative to the data for 1992, the Palestinians lost 50,000 jobs from 1992 to 1997.
In an environment of trust and in the spirit of the Oslo agreement and the adjacent Paris (Economic) Protocol, Palestinians could have retained their 1992 share (87.5% of total non-citizen employment) and expected 154,000 jobs in 1997. Relative to that potential, their loss to foreigners approximated 105,000 jobs.
But an environment of trust did not prevail. A terrorist outburst just prior to Oslo generated a 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 government of Israel succumbed to public opinion and resorted to closures. However, unlike the pre-Oslo experience, the post-Oslo policy now allowed for tens of thousands of work permits to foreign workers. These foreigners "crowded out" the Palestinians even when closures were relaxed toward 1997.
Relaxing the closures was not enough because, in the eyes of an average employer, preference for farmhands from the Far East and for construction workers from Eastern Europe reflected a real cost consideration. Even where Palestinian and foreign labor were competitive in terms of out-of-pocket expense, Palestinian lab or was, supposedly, less reliable - thus costlier - in real terms.
1 It has been argued that the data processed by Israel's Central Bureau of Statistics supposedly overlook unauthorized foreign and Palestinian labor, and thus fall short of the "real" figures. However, the focal point of the comparative analysis presented here is differences between values recorded in 1992 and 1997 and not the recorded (supposedly biased) values themselves.

Discouraging Developments in Bilateral Trade

In terms of the bilateral balance of trade, the detrimental development in Israel's labor market implies a decline in Palestinian exports. According to data published by Israel's Central Bureau of Statistics and summarized in Table 1, Palestinian exports of services to Israel dropped from U.5.$ 920 million to U.5.$ 475 million in 1997.2 In terms of potential, Palestinian exports of services in 1997, which amounted to 0.5.$ 475 million, fell short of their potential calculated here as U.5.$ 1,520 million (Table 1, row 11, column (c┬╗. Hence, relative to the potential, the loss in Palestinian export of services to Israel amounts to U.5.$ 1,045 million.
Palestinian exports of goods to Israel did not compensate for the negative development in the export of services. Exports of Palestinian goods were stagnant, U.5.$ 240 million in 1997 compared with U.5.$ 250 million in 1992. The pre-Intifada level of U.5.$ 305 million - considered here as a proxy of the respective 1997 potential- has been recovered. Relative to that potential, the loss in Palestinian export of goods amounts to U.5.$ 65 million. Neither was hope for the development of joint ventures and sourcing alliances realized.
This failure could be attributed, in part, to an effort by the authorities to provide for a risk-mitigating environment. The Palestinians failed to preserve the solidity of an institutional-legal framework. Israel failed to provide a compensatory mechanism.
In the face of a decline in the Palestinian exports to Israel, the exports of goods produced or processed by Israelis and procured by Palestinians increased from U.5.$ 1,105 million in 1992 to U.5.$ 1,570 million in 1997. At the same time Israel's export of services dropped from U.5.$ 325 million to U.5.$ 170 million. This drop of U.5.$ 155 million is most likely to represent a transfer of intermediary commissions realized in the past by Israeli commercial agents to their Palestinian counterparts.
Altogether, the Israeli economy registered a slight increase in total exports.
Yet, in relative terms, trade with the Palestinians decreased from 7.5% of Israel's total exports in 1992 to 5.5% in 1997, reinforcing the trend of marginalizing Israel's economic interaction with her immediate neighbor.
This trend is contrasted with the situation on the Palestinian side, where exports to Israel are not a marginal affair. A loss of 0.5.$ 1,045 million in potential exports of labor services and U .5.$ 65 million in exports of goods imply a loss of more than U.5.$ 1 billion in value added. For an economy capable of attaining a gross national product of U.5.$ 4-5 billion this is an enormous loss.
The transfer of U.5.$ 155 million of intermediaries' commission provides a compensation of sorts. However, the compensation is small and the loss is very large. Moreover, the enormous loss incurs to the unemployed masses, while the small compensation accrues to the privileged few.

The Best Way

In spite of the setbacks, it is not utterly impossible to reverse the tide: allow Palestinian exports of goods a genuinely free access and favor Palestinian exports of lab or-services, and encourage viable bilateral trade and the free movement of Palestinian goods. If this is the case, then Palestinian leaders should mind the real needs of the people (rather than the desires of the privileged few) and Israeli officials should pay attention to the common cause (rather than the particular interests of farmers and contractors). In the interest of common people and the cause of peace, the "best way" should be pursued as vigorously as possible.

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