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Israeli-Palestinian Industrial Cooperation: Current Status and Future Prospects
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 Palestinians?
• 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 term.

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 Authority (PNA).
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 PNA.

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 establishment.
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 other countries?
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 exports.
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 comparative advantage.
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 implemented:
• 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 firms.
• 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 recognition, internationally.
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 several industries:

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.

Agriculture

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 Palestinian exports.

Information Technology

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 Israel.
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 own industry.
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 opportunities.

Conclusion

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 overall independence.
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 names.
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 market niches.

Bibliography

Hirsch S., Ayal, I & Fishelson, G. (1995). The Arab-Israeli Trade Potential:
Methodological Considerations and Examples. IIBR and the Armand Hammer Fund for Economic Cooperation in the Middle East, Tel Aviv University, Israel.
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. 211-248.


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 the customer.

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