Although economic considerations play a minor role in the slow and
tortuous Middle East peace process, and despite the fact that the
Israeli-Arab conflict primarily concerns political questions (e.g.,
self-determination, land, borders and security guarantees), when
peace is eventually established, economic relations will
undoubtedly receive higher priority. It should be borne in mind
that economic transactions can enhance the economic welfare of all
parties, thus offering "peace dividends" and creating a vested
interest in maintaining stability in the region. The questions most
frequently asked in this regard are:
• Is there potential for economic cooperation between Israel
and its Arab neighbors, and especially between Israelis and
• Could such potential cooperation be translated into
reality, bearing in mind the past hostility between the two parties
and the constant need for tight security measures?
It is not easy to answer these questions. On the one hand, most
researchers claim that potential economic transactions between
Israel and its Arab neighbors are limited in scope, and
insignificant for the Israeli economy. On the other hand, many of
these researchers encourage integration of the Israeli and
Palestinian economies (generally interpreted as supplying work
places in Israel for the Palestinian work force), by claiming that
such integration is much more important for the Palestinians'
welfare than for the Israeli economy.
This article will focus on potential Israeli-Palestinian industrial
cooperation. I shall endeavor to lay the foundations for a
different point of view, showing how we (Israelis and Palestinians)
should approach these rather complicated questions. Firstly, I
shall present several brief assumptions that are, in my opinion,
the essential basis for establishing economic relations between
Israelis and Palestinians. Secondly, I shall describe several
actual methods for industrial cooperation between Israelis and
Palestinians that can be implemented in the short and in the long
Israeli-Palestinian Economic Relations
While everyone agrees that increasing the income per capita of the
Palestinians is a very important factor in reaching stability in
the region, there are many contradictory propositions between
Israeli and Palestinian researchers and policy-makers concerning
economic relations between Israel and the Palestinian National
As mentioned above, the basic approach is that the integrated
Israeli and Palestinian economies should not be separated.
Therefore, the Palestinian labor force should be able to work in
Israel in order to reduce Palestinian unemployment. Both sides also
agree that economic relations between Israel and the Palestinians
are far less important for a developed country like Israel than
they are for the Palestinians. Nevertheless, implementation of
Israeli-Palestinian economic relations is perceived differently
because of political and economic considerations.
The Israeli side prefers to have a Customs Union (CU) between
Israel and the PNA (as agreed upon in the Paris Accords, 1994). A
CU eliminates the need to set up borders between the two parties
and offers the Palestinians better access to Israel, as their
nearest and largest export market.
The Palestinian side not only emphasizes the importance of
establishing borders between the PNA and Israel, but demands free
export and import of goods to and from the PNA (through Gaza Port
or Dahania Airport), as well. On the issue of trade arrangements,
the Palestinians also see a Free Trade Agreement (FTA) with Israel
as preferable to a Customs Union (the main difference between a
Free Trade Area and Customs Union being the need for border control
stations between Israel and the PNA).
I would like to contradict several of these propositions and
present a different set that I believe to be inevitable in order to
secure political and economic stability between Israel and the
From Dependence to Independence
The Palestinians want independence. Period. But they should
remember that independence in the 21st century is not only a
question of flags and armies, but more a question of economic
independence. Developing an independent export industry that
enables a country to improve its foreign trade balance and reduce
deficits is vital (note Russia, with all its nuclear strength,
begging the West to erase its debts).
The Israelis want security. Period. These two simple facts lead to
several interesting conclusions or new propositions.
• In the long run, the Palestinians should develop their own
economy (writer's emphasis) and industry and not rely on Israel as
a supplier of work places.
• It is, of course, impossible to stop employment of
Palestinians in Israel immediately, but there should be a plan for
reducing the Palestinian work force that is employed in Israel
within, let's say, five years.
• Security and independence can only be achieved by the
separation of both parties. This means creating borders between
Israel and the PNA.
• The need of the Palestinians to create fledgling industries
will compel them to protect those industries against competition
from Israel and the world.
This does not necessarily mean that the PNA should enforce high
customs barriers. Other measures of protection (e.g., subsidy for
such industries) might work even better. But, whatever the trade
arrangement between Israel and the PNA will be, it will have to be
asymmetric and weighted in favor of the Palestinians.
The overall picture is that, for both political and economic
reasons, the economies of the two parties should be separated. Only
by this means will the Palestinians be able to develop their
independence and not be dependent on Israeli goodwill in
opening/closing borders or transferring tax funds according to
political circumstances. Only by this means will Israelis achieve
security with the ability to control incoming Palestinians and
goods from the PNA by physical borders and border stations.
This theory contradicts common economic theory where the
enforcement of trade and mobility barriers and the discouragement
of economic integration are perceived as negative. Is this really
the case? Let us ask ourselves some simple questions about the
economic development of Israel during the first years of its
1. Could the Israeli economy have grown as rapidly as it did unless
it was protected?
2. Could Israel have given up the development of industries where
it had no comparative advantage in order to avoid dependence on
The answer to these questions is apparently negative. Therefore,
should we conclude that there is room for economic cooperation
between Israel and Palestine? Not necessarily. The concept that
should be applied is moving from current "dependence" to
"independence" and from there to "cooperation."
In the short term, this concept means that the current
complementary nature of Israeli industry (capital and technology
abundant) and Palestinian industry (labor abundant) might lead to
several modes of cooperation that would not only enhance the growth
and strength of Palestinian industry, but compensate for
comparative disadvantages of Israeli industry as well.
In the long term, the nature of cooperation might change according
to the nature of development of Palestinian industry and its
ability to specialize and create comparative advantage. In this
state, after the political situation in the region stabilizes, the
removal of trade and mobility barriers will be possible. This
concept is presented in the next section.
Current and Future Modes of Cooperation
Trade between Israel and the PNA, in 1998, is estimated at about
$1.8 billion of Israeli exports (including re-export of goods
imported to Israel) and about $0.5 billion of Palestinian
The Palestinian market is basically a "captive market" for Israel
and is actually the latter country's second-largest export market
(second only to the U.S.A.). Current cooperation between Israelis
and Palestinians involves the employment of over 50,000 Palestinian
workers in Israel. At the industrial level, most cooperation is in
the textile, clothing and leather industries.
Israeli textile and clothing firms hire Palestinian
subcontractors/workers for performing labor-intensive activities
(mainly cutting and sewing). Israeli firms, such as Kitan,
Teva-Naot, Hulata, and many others have extensive experience in
such cooperation. In the newly built Industrial Park at Karni
(GIE-Gaza Industrial Estate) there are about 10 Israeli textile and
clothing firms that are already operational. Another area of
cooperation is agriculture: a large share of Israeli agricultural
exports of flowers and strawberries are grown in Gaza. Some
cooperation exists in the manufacturing of electronic consumer
goods, where Amcor, a leading refrigerator manufacturer in Israel,
is operating in Gaza together with Palestinian partners.
The current political instability hurts such collaboration. From
time to time, Palestinian labor is banned from entering Israel or
Palestinian goods are stopped or delayed for inspection (a critical
factor where agricultural produce is concerned). What will be the
nature of future cooperation between Israel and the PNA? The basic
propositions presented in the previous section indicate that
collaboration should not be focused on Palestinians working in
Israel, but on other forms of cooperation. Several recent studies
contradict the common perception that Israel has very limited trade
potential with its Arab neighbors.1 A central factor that is
present in these models is "Input Sharing." This factor means that
the complementary nature of the Israeli and Arab economies enables
advantage to be taken of the proximity between Israel and its
neighbors in order to create joint industry clusters with worldwide
Nevertheless, in order not to preserve the structure of a
capital-intensive economy that utilizes the cheap labor of a
labor-intensive economy, several important concepts must be
• The preferred form of cooperation should be through
subcontracting, or joint ventures between Israeli and Palestinian
firms, and not through Palestinian labor employed by Israeli
• The Palestinians must understand the importance of the time
factor in building international competitiveness: it takes time to
create know-how; it takes time to be efficient in manufacturing
(going down the learning curve); it takes time to penetrate
international markets; and it takes time to build country/brand
The Israelis must decide if they are able to compete in
international markets on their own; Palestinians must decide if
they want to wait several decades until they develop export
industries, or if they prefer to take several "short cuts" through
cooperation with Israeli firms.
The implementation of this point of view can be demonstrated in
Textiles and Clothing
Cooperation in this industry should combine division of labor
between Israel and the PNA. At first, automatic stages of
production and areas that demand specific know-how such as design,
finishing, dyeing and printing should be performed in Israel.
Labor-intensive activities such as cutting, sewing and packaging
should be performed in the PNA.
Marketing should be based on Israeli channels in order to enable
"quick response."2 This division of labor means that around 20%-25%
of the added value in the manufacture of textiles and clothing
products will be created by Palestinians. In later stages, as more
and more experience and know-how are created on the Palestinian
side, other stages of production can be shifted into the PNA.
Marketing of the jointly manufactured products can be
differentiated: some will be exported to Israeli current export
markets and others to new markets (possibly under Palestinian brand
names). Investment in textile education institutions (similar to
Shenkar in Israel) will enable a generation of Palestinian
designers to develop. In time, Palestinian products will achieve
more and more international recognition and other markets could be
penetrated as well.
Israel has specific know-how in land-reclamation, irrigation
techniques, sophisticated greenhouses and other agricultural inputs
such as seeds, chemicals, etc. Palestinians are able to offer land
and labor. Israel has already penetrated most Western agricultural
markets (which are fairly restrictive ones).
The basic pattern of cooperation that exists today can be replaced
in the future by a pattern where Palestinians will develop more and
more know-how in using Israeli input in order to penetrate new
markets on their own and develop their own brand names. A fine
example is a joint project of Israeli know-how, developed by the
prestigious Volcani Institute, in growing genetically modified
durum wheat, implemented by Palestinian farmers (in order to supply
the famous pasta manufacturer Barilla in Italy). Another example is
the joint development of hi-tech fish hatcheries in Gaza with an
exceptionally high yield per cubic meter of water.
Electronic Consumer Goods
This industry, which includes products such as refrigerators, air
conditioners etc., requires a combination of capital investments
and technical know-how, together with the ability to assemble units
at competitive prices.
Israel can compensate for its inability to compete in world markets
because of its high wages by cooperating with Palestinian
subcontractors. The relative proximity of Israel and the PNA to
Europe may lead to another advantage over competitors from the Far
East, for example. Such an industry, which combines know-how and a
need for competitive labor, is a fine example of an industry that
might develop rapidly in the PNA and, with time, spearhead
Israel is one of the world leaders in this field. Israeli software
firms currently compete with leading international software giants.
This fact has led to a shortage of over 3,000 programmers in
The Palestinian labor force (most of it unemployed) is usually
highly educated and has good knowledge of English and, sometimes,
even Hebrew. The phenomenon of American software firms hiring
Indian programmers could be adopted as a new pattern for
Israeli-Palestinian cooperation. Development of software centers
where Palestinian firms could initially be subcontractors for
Israeli software firms might be beneficial to both parties. In
time, Israeli know-how of development processes and procedures will
be transferred to the Palestinians to enable them to develop their
New markets (e.g., the Arab countries) could also be penetrated by
such joint efforts. First signs of cooperation in this field can be
found in the joint activities of Israeli and Palestinian engineers
at Siemens International. The company has created joint projects
for its Israeli and Palestinian branches. Other good signs are the
efforts to establish hi-tech education institutes in the PNA and
the plan to create a high-tech industrial park in Tulkarem.
There are many other examples of potential input sharing: the
Palestinian food processing industry can rely on cans supplied from
Israel (mainly consumer-size cans produced by Kaniel or Lageen).
Light fixtures, furniture, aluminum manufacture, spare parts (for
vehicles, machinery, etc.) or any other industries that combine
capital and labor-intensive activities are also interesting
The ability of Israeli and Palestinian firms to share input in
order to create clusters of internationally competitive industries,
should be the focus of Israeli-Palestinian cooperation.
Cooperation among such firms will not only enable enforcement of
security measures - by replacing movement of labor with
transportation of finished and semi-finished products and by joint
manufacturing in industrial parks on the border - but will allow
the Palestinian economy to develop rapidly. This will enable the
PNA to develop economic independence - a crucial component of
The dynamics of the process will help the Palestinian economy to
exploit cooperation with Israeli firms in order to shorten the
period needed to acquire know-how by transferring Israeli know-how
in design, R&D and manufacturing, in penetrating foreign
markets and in creating recognition for Palestinian brand
In parallel, cooperation with Palestinians will make it possible
for Israeli firms to compensate for the lack of competitive input
and to upgrade their manufacturing supply into more sophisticated
Hirsch S., Ayal, I & Fishelson, G. (1995). The Arab-Israeli
Methodological Considerations and Examples. IIBR and the Armand
Hammer Fund for Economic Cooperation in the Middle East, Tel Aviv
Hirsch, S. & Hashai, N. (1998). Arab-Israeli Potential Trade:
The Role of Distance. The College of Management, Rishon Lezion and
the Armand Hammer Fund for Economic Cooperation in the Middle East,
Tel Aviv University, Israel.
Hirsch S., Ayal, I., Hashai, N. & Khesin R. (1999).
"Arab-Israeli Potential Trade: The Role of Input Sharing." The
International Trade Journal, Vol. XIII, No. 2, Summer 1999, pp.
1. See Hirsch, Ayal & Fishelson (1995); Hirsch &
Hashai (1998); Hirsch, Ayal, Hashai and Gal-Yam (1999).
2. The lead-time between placement of order and goods arriving at