Economic Viability of a Palestinian State in the West Bank and Gaza Strip:

Is it Possible without Territorial Integrity and Sovereignty?

 

 

Leila Farsakh[*]

 

 

ABSTRACT

 

The Economic Protocol between Israel and the Palestinians signed in Paris in 1994 has maintained that it is possible to establish economic growth in the West Bank and Gaza Strip without defining territorial integrity and sovereignty.  Seven years after the signature of this agreement, though, the situation in the Palestinian areas has deteriorated rather than improved.  This article argues that this deterioration is in large part due to the failure of the Oslo agreements signed to protect Palestinian territorial rights and to resolve questions of sovereignty.

 

 

INTRODUCTION

 

The issue of the economic viability of a Palestinian state has long haunted economists and politicians (Abed 1990, Sayigh 1993). After 25 years of Israeli occupation, which weakened the economic base of the West Bank and Gaza Strip (WBGS) making it almost totally dependent on Israel, many economists came to see the creation of a self-sustaining Palestinian economy as a formidable challenge (Diwan and Walton 1994, World Bank 1993, UNCTAD 1993). However, with the signing of the Oslo peace accords in 1993, many hoped that the constraints stalling viable growth would be removed.  This optimism largely stemmed from a belief that peace would give the Palestinians the means to define and implement their own economic priorities.

 

However, seven years after the initiation of the peace process, we find that the issue of the economic viability of a Palestinian state is still unresolved. Contrary to all hopes, the economic situation in the West Bank and Gaza Strip today is worse than what it used to be before 1992.  Real GNP per capita income dropped by more than 17% between 1994-1996, and unemployment soared to over 28% in 1996, GDP growth was negative in 1996 and 1997 (at -5.1% and -0.7% respectively) (Diwan and Shaban.1 1999a; 21-24; World Bank 2000a). The number of people living in poverty- defined as those earning less than $2.1 per day- represented 37.2% of the population in the Gaza Strip and 15.4% of the west Bank in 1998.[1] While in 1999 and early 2000 GDP registered a positive growth of 6.1%, closures imposed on Palestinian areas, as a result of the Al-Aqsa intifada, represent a daily loss of $9.4 million and has pushed unemployment to highs of 30%.[2] Just like in the pre-1993 period, the Palestinian economy remains structurally fragile and fully dependent on Israel after 7 years of peace negotiations. As the negotiations for the final status start, policy makers as well as researchers are compelled to think how future economic realities can improve on present conditions.

 

The key question that this paper will seek to address is whether the West Bank and Gaza Strip is an economically viable entity, and whether it can survive without full sovereign control over land and resources.  Sovereignty is important for economic growth since it defines a state’s jurisdiction and its scope of intervention.  It is also important because it allows actors, be it individuals, firms or governments, to evaluate the resources they can count, where they can invest and with whom they can trade. The question of territorial sovereignty, though, might appear superfluous in a world which is increasingly globalized, and where freedom of trade, financial and information flows seem to erode the importance of clear territorial jurisdictions. However, as far as the Palestinian case in concerned, this is not the case.

 

 

ECONOMIC VIABILITY AND THE PEACE PROCESS

 

It is generally understood that an economy is viable if it is able to use its human, financial and physical resources to grow, sustain itself and increase the welfare of the inhabitants living within its area. The means by which to achieve this goal depends on whether an outward or an inward looking approach to economic development is pursued. The success of the East Asian Tigers and Western states, in attaining prosperity has revealed the power of outward oriented policies in enhancing growth. In particular, openness to world trade and to financial flows has proved to be a viable vehicle for prosperity, since it induces economies to specialize in areas of their comparative advantage and to attract needed capital and inputs.  Regional integration projects are also looked upon as a supportive means for integrating into the world economy and for sustaining growth. This is because such projects improve complementarity between neighboring countries and allows an efficient allocation of resources (Oman 1994). 

 

In the Palestinian context, it is difficult to talk about economic viability or the means to achieve it due to the absence of a workable definition of what is a Palestinian economy.  While it is generally agreed that the Palestinian economy covers the West Bank and the Gaza Strip, the territories and borders delineating these areas are not well defined. A number of questions thus remain unanswered.  Are the West Bank and the Gaza Strip really one and the same economy, despite the absence of any territorial link between them?  Have they grown in the same way and do they share the same characteristics, potential and outlooks?  Moreover, is it possible to talk about the economy of Palestine while over 140 Israeli settlements[3] are entrenched in different parts of Palestinian land thus preventing any territorial and economic integration of part the West Bank and Gaza Strip?  Can there be growth and prosperity in Palestine while Jerusalem -which is the physical and economic link between the North and the South of the West Bank is not included? Furthermore, can trade be a vehicle for Palestinian growth before borders are clearly defined with Israel, Jordan and Egypt, as well as with the rest of the world? Can regional integration be a motor for growth while Palestinian territorial sovereignty is not clearly demarcated?

 

The Declaration of Principles in 1993 and the Interim Agreement on the West Bank and the Gaza Strip signed between Israel and the PLO in 1995 have maintained that it is indeed possible to achieve economic viability without defining borders or territorial sovereignty. The Declaration of Principles, which sets out the framework for relations between Israel and the West Bank and Gaza Strip in the interim period, clearly establishes that all issues pertaining to borders, just as to refugees, settlements, Jerusalem, and Palestinian sovereign control over land and resources are to be left to final status negotiations.  The Declaration of Principles, though, specifies that “the two sides view the West Bank and the Gaza Strip as a single territorial unit, whose integrity will be preserved during the interim period” (EP, article IV).  It was left to various parts of the Interim Agreement signed between Israel and the PLO, to resolve the enigma of how to maintain this integrity and ensure its economic viability without tackling the central questions of territory, borders and sovereignty.

 

 

THE ECONOMIC PROTOCOL: A SPECIAL CUSTOM UNION WITH ISRAEL

 

The Protocol on Economic Relations,[4] which is the document governing economic relations between Israel and the Palestinians in the interim period, seeks in particular to answer two questions which are central to any concept of economic viability; namely what is to be achieved and how to attain it.  In the preamble, it declares that its aim is to “lay the groundwork for strengthening the economic base of the Palestinian side and for exercising its right of economic decision making in accordance with its own development plans and priorities” (preamble).  The means to attain this aim is through two main measures: the establishment of a Palestinian National Authority in the WBGS, which is responsible for managing the economy, and the establishment of a peculiar form of custom union (CU) between the WBGS and Israel.[5] The domain of the Palestinian national authority (PNA), however, is not to be territorial but functional.  This means that it could run the civil and economic affairs of 93% of the Palestinians living in WBGS (excluding East Jerusalem) but has no sovereign control over land and resources. Since the last Israeli redeployment from Palestinian areas in March 2000, Israel continued to fully control 59% of the West Bank and 15% of the Gaza Strip,[6] as well as access to the rest of world. The Palestinians were to be given territorial control gradually and according to an agreed schedule of Israeli redeployment from Arab populated areas.

 

The Economic Protocol binds the WBGS in a custom union with Israel, which allows for the free movement of capital and goods except for a list of agricultural goods to be phased out by the year 1998. Free movements of labor flows between the two economies are not guaranteed[7], but the economy of the West Bank and the Gaza Strip is allowed to trade directly with Arab and foreign countries for a limited list of goods.[8] Moreover, the CU gives the Palestinians the right to decide on their economic priorities, to determine the nature of their employment, industrial and agricultural policies, as well as to impose tax and to invest in areas under its control. It also gives the Palestinians limited leeway in monetary and trade policy.[9] However, Palestinian trade remains bound by Israel trade policy.  Israeli tax rates, both direct and indirect, also remain the governing guidelines, as are Israeli standards and import regulations. Israel, though, accepted to remit to the Palestinian economy VAT and custom taxes collected on goods specifically destined to the WBGS, something it never did before 1994.

 

Thus, without defining Palestinian borders to the outside world, nor specifying the area under the PNA’s sovereignty, the economic protocol seeks to lay down a mechanism that will allow for economic viability in the West Bank and the Gaza Strip. This mechanism consists basically of keeping the WBGS integrated with Israel through a custom union while at the same time giving the Palestinians the right to run their domestic affairs and time to improve their non-territorial economic base.  It also gives the Palestinians the right to trade in limited goods and quantities with third countries, thereby allowing them to reduce their dependence on Israel.  At the same time, by keeping the link to Israel, the CU enables the WBGS to benefit from trade with a neighboring strong economy.

 

The Economic protocol however did not give the PNA all the necessary means to achieve economic growth. The PNA had control over human resources, and over investment decisions, but not over land or water. These however are central to any decision making process concerned with potential or existing investment or on the nature of goods to be produce and exported. Moreover, the PNA was not given territorial sovereignty, usually a prerequisite for any country seeking to determine its economic potential, to establish a secure institutional and economic environment, and to define its relation to other countries on egalitarian terms. The whole success of the agreement was based on an unverified assumption that Israel will not change the status quo in the interim period and that it will cooperate and coordinate economic policies with the Palestinians. 

 

 

ECONOMIC SUSTAINABILITY: THE RECORD OF THE PAST SIX YEARS

 

The economic agreement raised hopes of improvement. It ended 25 years of military occupation, which subjected the WBGS economy to severe fiscal and financial repression, as well as weakened its agricultural and industrial base (World Bank 1993, UNCTAD 1993).  The reason for optimism stemmed from three main factors: the installation of the Palestinian national authority in the WBGS, the richness of Palestinian human and financial resources in the area and outside it, and the support that the international community was giving to the Palestinian project of state building.  Between 1994-1999, the international community pledged a total of $3.4billion for a total of 2.8 million Palestinians (Diwan et Shaban 1999a; 143).

 

Deteriorating Conditions

 

However, despite all expectations, the economic situation in the WBGS deteriorated (Diwan et Shaban 1999, Roy 1999). Just as alarming has been the fact that the two parts of the Palestinian economy, i.e. the West Bank and the Gaza Strip, have further disintegrated rather than integrated. To begin with, per capita income fell by 17% between 1994-1996, while the percentage of people living in poverty increased to 40% in the Gaza Strip and 11% in the West Bank in 1997.[10]  Unemployment soured, reaching levels as high as 39% in Gaza in 1996 and 24% in the West Bank[11]. Although it fell to less than 11% in WBGS in 2000, it remains today a major problem, particularly for the inhabitants of the Gaza Strip. While, on average 30,000 new domestic jobs were created per year between 1995-1999, this increase remains insufficient to absorb a rapidly growing population (MAS 2000:46). The Palestinian labor force is presently growing at an annual rate of over 40,000 new persons and has, on average, 70,000-120,000 workers employed annually in Israel since 1995 (Farsakh 1998:46).

 

The domestic capacity to generate employment and jobs in the WBGS has weakened rather than strengthened over the past six years.  Looking at sectoral development, we find that the Palestinian economy failed to become more productive. Agriculture contributes to 16% of GDP in the West Bank and less than 13% of GDP in the Gaza Strip. Its exports have dwindled over the past 5 years.  In the West Bank, it employs less than 19.6% of the labor force in contrast to less than 9.3% in the Gaza Strip between 1997-1999(MAS 1999; 32). Industry meanwhile faces increasing hardships.  Industrialists found it increasingly difficult to export their goods and to import inputs.  Industry still contributes to less than 17% of GDP, and less than 18% of the labor force. It continues to suffer from under-capacity (MAS 2000).

 

On the other hand, services grew, but more in the Gaza Strip than the West Bank. Since 1994, service oriented activities have contributed to more than 67% of the GDP in the West Bank and Gaza Strip (MAS 2000:vii). They have helped boost employment growth, but this occurred mainly in public services rather than in technically advanced sectors. Still in 2000, the Public sector today absorbs more than 24% of all employed in the domestic economy in the Gaza Strip and around 15% of the labor force in West Bank.[12] These jobs are not always productive, though, given that they are mainly concentrated in the police and security services. The other sector that boomed was construction. Since 1994, it has represented over 12% of the total labor force and 9% of the GDP (MAS 2000). Its growth was stimulated as a result of the establishment of the Palestinian national authority, the influx of returnees, and the acute deficiency in infrastructure. Until now, much of the investment in the WBGS has been geared towards the housing sector (causing a boom) and the rehabilitation of roads and infrastructure, particularly in the Gaza strip where it helped reduce the high unemployment rates[13]. However, compared to most developing countries the WBGS is still under-served in terms of infrastructure.[14]

 

The Palestinian economy also failed to rely on trade as a vehicle for growth.  The actual size of exports fell by 30% between 1994-1996. At the same time, Israel has continued to absorb 96% of all the WBGS exports, that is at higher rates than those recorded in the pre 1993 period (UNSCO 2000b). Despite the signature of a trade agreement with Jordan and Egypt, of an association agreement with the EU and of an FTA with the USA, trade with the outside world declined. More critically, trade between the West Bank and the Gaza Strip also fell by over 40% between 1995-1997.[15]

 

Meanwhile, economic dependence on Israel has not diminished. The WBGS continues to rely on Israel to both export its goods and receive its imports as well as absorb its growing labor force. In 1992, Israel took in over 35% of the Gaza Strip workers and 30% of the West Bankers.  In the first half of 2000, these shares dropped to less than 15% and 25% respectively, as a result of Israeli closure policy (PCBS 2000). Unemployment in the Palestinians areas remained highly correlated with level of access to Israel (see figure 1)[16]

 

 

CLOSURES, BORDERS AND TERRITORIAL CONTROL

 

Is the reason behind this poor economic record the lack of control over territories?  To a large extent, it is. More specifically, it is the result of unilateral Israeli control of territories and borders. Contrary to what the Economic Protocol predicted, borders and territorial definitions were not transcended in the interim period. The Interim Agreement in itself confirmed Israel’s territorial claims and did nothing to diminish its ability to unilaterally close the borders whenever and for how long it deemed necessary.[17]  The implementation of Oslo simply confirmed Israel’s power and emphasized its ability to continuously impose its territorial control over the WBGS, often to the detriment of economic growth and continuity.

 

This reality is well captured by Israel’s recurrent use of border closures and permits policy. Israel unilaterally closed borders with, and between, the West Bank and Gaza Strip for more than 443 days between 1994-1999(UNSCO 2000). More recently, as a result of al-Aqsa Intifada that erupted on September 28th, 2000, over 50 days of closures have thus far been were imposed. Closures means that goods and people, be it managers or workers, could not access Israel or the world.  At certain times, it also means that access between the various parts of the West Bank and links with the Gaza Strip were severed. These closures were often unpredictable and implied that all economic activity came to a halt.  Moreover, Israeli permits condition Palestinian economic life. Unlike the situation prior to 1993, access of goods and people to Israel or the world hinges on permits issued by the Israeli security services. These measures have increased transaction costs, enhanced unpredictability and brought a halt to all trade and investment. Between 1993-1996, the total cost of closure and permits was estimated at a total of $2.8billion (Diwan et Shaban 1999b; 6). This is equivalent to 80% of one year’s GDP and double the amount disbursed in terms of aid over this period.  The preliminary estimate cost of each day of closure in 2000 was reported at $9.4million dollars,[18] the equivalent of 60% of the West Bank and Gaza Strip estimated daily GDP.

 

While Israel justified its use of closures to protect its citizens from terrorist attacks, the military establishment admitted that these measures do not provide an effective means of controlling entry into Israel.  Moreover, the duration and repercussions of such measures were not always justified on economic or security grounds (Sabbagh 1998). Closures often ended up being a political bargaining tool to pressure Palestinian leadership into making concessions. This was seen, for example, when the government of Netanyahu refused to pay the PNA tax clearance until they cracked down on “terrorism”.  Closures, though, ran counter to the aim set out in the preamble of the EP, namely that “both parties shall cooperate…to establish a sound economic base for (their) relations”.

 

Israel’s unilateral recourse to border closures confirmed two central realities; firstly, that economic prosperity in the WBGS is dependent on access to Israel and through it to the world, and secondly, that Israel is imposing new criteria for defining and conceding territorial rights.  According to the Declaration of Principles and the Interim Agreement, the permanent settlement of the Israeli-Palestinian conflict will be based on UN Security Council Resolutions 242 and 338.  This means that territorial sovereignty will be determined by these two resolutions. These emphasize that Israel is a belligerent country and must retreat from areas it occupied in June 1967, according to the internationally agreed criteria of land for peace.  However, with Israel’s closure policy and the Wye River agreement signed between the Palestinians and Israel in the US in 1998, Israel has introduced a new notion for defining its retreat from the land.  This criterion is no longer “land for peace” as UN resolutions 242 and 338 stipulates.  Rather the criterion that Israel is introducing is one of “security for peace” as defined solely by it.  This means that Israel defines the land from which it is going to retreat on the basis of what it determines to be in line with its security.  In this respect, for example, Israel has long said that it would not retreat from all areas of the Jordan valley, as this is important to protect its borders.  By the same token, it justifies its claim to annex areas around Israeli settlements in the West Bank, in order to protect Israeli settler citizens. Yet, such criteria run counter to UN resolutions as well as the 4th Geneva Convention that applies to occupied territories.  Israeli imposed criteria for its retreat from land it occupied in 1967 means that Palestinian right to self determination, to their land and to a viable state is being further violated

 

 

TERRITORIAL FRAGMENTATION AND ECONOMIC VIABILITY

 

The Oslo agreement gives only limited territorial control to the Palestinian authority.  The implementation of the agreement led to a de facto fragmentation of Palestinian areas, thereby undermining their economic viability. By 2000, the Oslo accord gave the Palestinian authority territorial jurisdiction over 85% of Gaza Strip land and 17.2% of the West Bank (area A).[19] In the former a certain territorial continuity is maintained.  In the latter, it fragments Palestinian control and sovereignty, since it divides the West Bank into three zones A, B and C, which are not always interconnected.  Israel moreover, remains in control of area C that represents 70% of the land.  Territorial jurisdiction means that the PNA could register land in area A and B, decide on the nature of investment in the areas concerned, and have claims to territorial waters (Oslo-II, article XVIII.2a).  However, it does not guarantee access to water, since this is an issue to be continuously negotiated and agreed upon with the Israeli water authority.  It also does not allow the PNA to carry out any comprehensive urban or market development plans for the whole of the WBGS (See map of West Bank hill tops and land confiscation, June 1999, on www.fmep/images/maps/map 9907_1.jpg ).

 

In practical terms, this territorial fragmentation meant that it was impossible to create efficient economic projects.  Given that area C cuts through areas A and B, the PNA, for example, could not build roads joining the various villages nor ensure market access of goods in all of the area.  The lack of secure and safe passage between the West Bank and the Gaza strip led to both duplication of production and acute waste in resources. This in turn has pushed many firms to shift their production to low value products that meet local market needs rather than high value products destined to international markets (e.g. flowers and strawberries)(Diwan and Shaban 1999b: 15).  During the two months of closure of 1996, Palestinians firms reported that sales drops averaged 57% of their annual turnover.[20]

 

Territorial integrity in the West Bank is being further eroded by Israeli policies of isolating East Jerusalem and intensifying the growth of settlements. By the end of 1998 a total of 171,000 settlers were living in the WBGS (excluding East Jerusalem) compared with 116,000 in 1993.[21] As much as 200,000 settlers were reported to be living in East Jerusalem by 2000 (FMEP, 2000).  Moreover, more than 110,00 dumuns have been confiscated between 1993-1997 (MAS 1998b: 23).  Construction in the settlements has grown by over 10% p.a. since 1995, outpacing construction growth in Israel.  The growth has been particularly acute in large settlements such as Maale Adumin and around Jerusalem (FMEP 1999).  This encirclement of Jerusalem will in turn will prevent the territorial unity of the West Bank.  Meanwhile, settlements in the north and south of the West Bank also prevent links between various Palestinian areas.  Their growth deprives the Palestinian economy of water and land, while at increasing Palestinian economic dependence on Israel. Between 1997-1999, more than 2.5% of the Palestinian labor force worked in these settlements. [22] For numerous villages in North and South of the West Bank, the settlements was the main source of employment

 

The territorial fragmentation of the WBGS poses a serious challenge to the future of the Palestinian state and its economic viability. It prevents long-term investments and favors the development of inefficient and segmented production and consumption. Moreover it suggests that Palestinian national and economic aspirations will not be met.  The ongoing economic and territorial separation between the West Bank and the Gaza Strip suggests that a Palestinian state is permissible in the Gaza Strip only, while the West Bank is to be further integrated into the Israeli economy.  This integration is also facilitated by the fact that the borders between the West Bank and Israel are porous while those between the Gaza Strip and Israel are clearly entrenched and non-porous.  It is also seen in the fact that workers and merchants in the West Bank find it easier to continue their work in Israel than Gaza Strip inhabitants[23]. This trend is further strengthened by the fact that the PNA has more comprehensive territorial and administrative control in the Gaza Strip than in the West Bank. As we approach the final status negotiations, the separation between the two entities in the Palestinian economy might be further strengthened, rather than resisted.  This however, runs counter to Palestinian national aspirations and rights, as well as to UN resolutions 242 and 338. 

 

 

ECONOMIC VIABILITY: WHAT OTHER CONDITIONS

 

Human and Financial Resources

 

Sovereignty over land and resources is undoubtedly a necessary condition for the economic viability of a Palestinian state. However, they are not sufficient and other conditions need to be met.  These include human and financial resources, the institutional environment, and trade policies. 

 

The Palestinian population is well endowed with human resources.  The average years of schooling in the West Bank and Gaza is around 8.1 years, which is significantly high by developing countries standards. The fact that 20% of the labor force had more than 13 years of schooling[24], implies that the economy has the potential to specialize in service knowledge oriented sectors. Moreover, the financial abilities of the Palestinian population are also not negligible.  Apart from the money, which the Diaspora can invest, local resources have grown. The local banking sector has expanded as local deposits grew to a total of $2.9billion in 1999. (UNSCO 2000b).[25]  A stock market has been established and the private sector has shown some dynamism in channeling resources to infrastrucural as well as industrial projects such as the Gaza Industrial zone, the Paltel private Palestinian telephone company, and electricity in the Gaza Strip amongst others.

 

However, investment still remains small.  The ratio of loans to deposits was at 34.5% in the West Bank and Gaza Strip (compared to 80% in Jordan) (Hamed 1996; UNSCO 2000b).  This means that the economy is saving more than investing. Moreover the investment has not been directed towards domestic production but rather towards industrial zones (Samara 2000).  These suffer less from closures, but have few linkages with the rest of the economy and so far have not been able to function as an engine of growth.  Meanwhile, the Palestinian economy has grown to be dependent on foreign aid for sustaining employment, a dependency that is costly both to donors and to receivers in the long term.

 

Institutional Environment: The Palestinian Authority

 

The legal and institutional environment in which economic activity will take place is also a central condition for growth.  The record of the Palestinian authority in this regard leaves much to be desired. The Palestinian authority has managed to establish itself as the governing entity.  It has been able to secure a solid base for its revenues, with custom clearance providing over 60% of its resources. The move towards the registration of land is also central as this protects private property and encourages investment. So far 40% of Gaza Strip land is registered while only 10% of the West Bank is. Furthermore, the PNA enacted a number of laws that are necessary to growth, such as the investment code, the industrial zone law, and apartment law, and is working on implementing others such as income tax, banking, labor, securities, etc.

 

However, the investment law has been criticized for being directed to foreign investors who will not come given the instability of the economic and political situation.  It is also ill suited to encourage domestic investment of small and medium firms.[26] Moreover, the PNA’s policy of controlling trade licensing is giving rise to monopolistic practices that are counter-productive. Today, a limited class of PA-affiliated companies and individuals are monopolizing rent and benefits from trade links to Israel. The Palestinian Commercial Service Company (PCSC), fully owned by the PA, holds majority shares in the 34 major Palestinian companies.[27] In 1999, the PCSC held assets totaling $345 million, the equivalent of eight percent of total GDP.

 

Meanwhile, the large size of the public sector raises key questions around the economic survival of the public sector and the efficient use of resources. While the public sector eases unemployment in the short run, it also increases bureaucratic hassles and decreases service efficiency. The separation between the West Bank and the Gaza Strip has in this respect augmented costs since it led to the duplication of administrative services whilst failing to improve decentralization efforts. On the other hand, corruption scandals within the PNA reveal a loss of resources, whilst the failure of the judiciary to assert itself as a workable and independent system suggests that more needs to be done to improve performance in the Palestinian economy.  Without a transparent and legally protected economic environment, investments will not flow nor be effective.

 

Trade

 

The viability of the Palestinian economy will continue to depend on the nature of its trade relations to the outside world.  The policy of closure has shown the devastating results of being cut off from the rest of the world. The question that remains is what is the optimal trade arrangement that can exist between the WBGS and Israel, as well as between the WBGS and the rest of the world keeping in mind that Israel remains today the market for more than 96% of WBGS exports and the importer of more than 76% of its goods (World Bank 2000)?

 

The failure of the economic protocol to help the WBGS achieve economic viability has raised the question of whether the custom union agreement signed with Israel is the best option available. Palestinian negotiators have long suggested that a free trade agreement with Israel would be a far better deal.  Such an agreement would give the PNA recognized borders.  It will also allow it to collect directly its own custom duties, rather than have them transferred through Israel.  Moreover, it would help promote trade relations with other countries under lower tariffs than those imposed in Israel. This would also reduce the devastating effects of closures.

 

However, others have argued that from an economic point of view, the custom union with Israel is more beneficial to the Palestinian economy than a simple free trade agreement (Kanafani 1996, Panagariya et Diwan 1997, Diwan et Shaban 1999, Astrup and Dessus 2000).  This is mainly because the Palestinian economy is a small economy and stands to gain from free and unrestrained access to Israeli high value products and technology. A free trade agreement, while providing the same access to Israel, would have incurred far higher costs, at least in the short run, since the establishment of customs borders and administration would be costly and would give rise to new types of monopolies.  Moreover, given that the WBGS economy is a low value economy compared to Israel, its products would not be able to access Israeli markets easily.  Israeli products would have continued to invade WBGS markets while the PNA would not have access to custom clearance revenues available in a custom union agreement. In 1999 these represented more than 63% of total PNA’s revenues.[28] A free trade agreement would make sense if the PNA would levy lower taxes than those imposed in Israel, or if it could manage to avoid the tax leakage that is presently occurring.  The financial gains from such an FTA are still to be seen.

 

In situations of border closures, though, no agreement, be it free trade or custom union is sustainable or could carry positive implication. The experience of closure has clearly demonstrated how impossible it is to benefit from trade if sovereignty and defined boundaries are not demarcated.  In the future, the custom union might be the best economic option available so long as the Palestinian economy can have its own sovereign access to the outside world. If not, FTA is the only solution.  Without such access, it will not be possible to benefit from the trade agreements already signed with Israel, Europe and neighboring countries. The link with Europe, particularly through the Mediterranean initiative and the association agreement signed, remains a central vehicle for future growth, given that it can help reduce Palestinian dependence on Israel.

 

 

Conclusion

 

The experience of the past 6 years has confirmed that the economic survival, let alone the economic viability of the West Bank and Gaza Strip is impossible if Palestinian territorial rights and sovereignty are not settled. Independent and clear boundaries remain a necessary, if not sufficient, preconditions for economic viability. Leaving such matters to final status negotiations has simply facilitated Israel’s expansion of settlements, asserted its control over Jerusalem and over 70% of the West Bank, and strengthened its ability to impose new criteria for defining its retreat from land it occupied in 1967. 

 

As negotiators sit to discuss the final status accord, they face a situation whereby the territorial integrity of the WBGS has been weakened rather than strengthened. The Gaza Strip and the West Bank are further apart economically and geographically than ever before. At the same time, the West Bank is segmented into various parts as a result of over 123 settlements and their bypass roads. These factors further undermine Palestinian national rights, as well as to the economic feasibility of a future Palestinian state. Accordingly, the establishment of an economically viable state in the West Bank and the Gaza Strip means that a number of conditions need to be meet congruently. These include establishing clear Palestinian sovereignty over the land based on UN resolutions 242 and 338, maintaining free and unobstructed passage between the West Bank and Gaza Strip, and defining clear borders with Israel and the rest of the world.  Only then would trade be a vehicle for growth, while the Palestinians can make better use of their resources. Otherwise, an independent Palestinian entity as enshrined in internationally sanctioned laws and guaranteed by the “peace process” will remain but a pipe dream and will not bring an end to the conflict in the region.

 

Figure 1

Share of West Bank workers who are unemployed and working in Israel, 1995-1999

 

 

 

 

Share of Gaza Strip workers who are unemployed and working in Israel, 1995-1999

 

 

The Left hand side plots the percentage of West Bank and Gaza Strip workers unemployed and who work in Israel and the settlements.  The right hand side refers to the annual days of closure imposed in each area.  (Source: MAS 1999, Economic Monitor no.5, Ramallah & www.pcbs.org/english/labor/lab_curr.html ).

 

 

 

 

 

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Roy, S, (1999), “De-Development Revisited: Palestinian Economy and Society since Oslo”, Journal of Palestine Studies, Vol XXVIII, Number 3, Spring 1999, Issue 111

 

Sabbagh, Z. (1998) “Palestinian Workers in Israel”. Palestine Policy, Vol. 5, No.17, Winter: 51-68. (Arabic).

Samara, A, (2000) “Globalization, the Palestinian Economy and the “Peace Process”, Journal of Palestine Studies, Vol 29, no.2, winter, pp.20-34.

Sayigh, (1993) Program for Development of the Palestinian National Economy for the years 1994-2000, PLO, Tunis

Shaban, R. (1997). Living Standards in the West Bank and Gaza Strip. Ramallah: MAS.

February 1994. Jerusalem. (Arabic).

Shehadah, R. (1997), From Occupation to Interim Accords: Israel and the Palestinian Territories, Cimel: Kluwer Law International, London.

United Nations Conference on Trade and Development. (1993). Economic Development in the Palestinian Economy. Geneva.

United Nations Conference on Trade and Development. (1998) Palestinian Merchandised Trade in the 1990s. Geneva.

Walton,M. and I. Diwan, 1994, Palestine: From Dependency to Autonomous Growth, ERF working paper 9409, Cairo.

World Bank. (1993). Developing the Occupied Territories: an Investment in Peace. In 6 volumes. Washington. D.C.

World Bank (2000b) Poverty in West Bank and Gaza, unpublished report, Washington, D.C.

World Bank (2000), Impact of prolonged closure on Palestinian Poverty, Washington, D.C.

www.worldbank.org/mna/mena.nsf

UNSCO (2000a), The Impact on the Palestinian Economy of the Recent Confrontations, Mobility Restriction and Border Closures (October).

UNSCO (2000b)., Special Report on Palestinian Economy: with Special report on Palestinian Merchandise Trade (spring2000)

 

Agreements:

Declaration of Principles on Interim Self-Government Arrangements, between the government of the State of Israel and the Palestinian Liberation Organisation, September 13, 1993, Washington

The Israeli-Palestinian Interim Agreement on the West Bank and the Gaza Strip, between the government of the State of Israel and the Palestinian Liberation Organisation, September 28, 1995, Washington

 

 

Endnotes

 


[*] Leila Farsakh is a Ph.D. candidate at the London School of Oriental and African Studies, University of London and research affiliate at Harvard University.

 

 


[1] World Bank, Poverty in West Bank and Gaza, unpublished report, 2000.

[2] World Bank, 2000a, Impact of prolonged closure on Palestinian Poverty, and UNSCO, The Impact on the Palestinian Economy of the Recent Confrontations, Mobility Restriction and Border Closures (October 2000). These figures assume a 50 percent reduction in normal economic activities

[3] This figure refers to the number of settlements in the West Bank (123) and in the Gaza Strip (17) as reported by the Israeli Central Bureau of Statistics (ICBS, 1999, table 2.7).  However, according to the Foundation of Middle East Peace, which monitors settlements’ growth, these figures underestimate by 10-20% the actual number of settlements and which they estimate to be 174 in total (FMEP 1999; 1).

[4] Also referred to as the Paris Protocol signed in April 1994.  It is an integral part of the Interim Agreement signed between Israel and PLO in 1995.

[5] The Palestinian team wanted to have a free trade agreement rather than a custom union agreement.  However Israel rejected their demand as an FTA would have led to a de facto recognition of borders; an issue which both parties agreed to settle in final status negotiations.

[6] See foundation for Middle East Peace, 2000, Report on Israeli settlements in the Occupied Territories, Vol 10, number 4, July-august.

[7] Until 1992, there was a de facto freedom of labor movements between Israel and the WBGS. Between 1976-1992, Israel absorbed more than one third of the Palestinian labor force (Farsakh 1998).

[8] These include the lists A1, A2, B.  Quantities to be imported under these lists are to be determined by some agreed estimates of Palestinian market needs. Imports of goods A1 and A2 were not subject to Israeli imports duties but were regulated by Israeli standards and regulations.

[9] In monetary policy, the PNA could not issue an independent currency. However, it was allowed to establish a monetary authority, responsible for the management of banks and control of financial activity in the area.

[10] The poor are defined as segments of the population earning 650$ or less per year.  Per capita income was calculated at 1379$p.a.  In 1995, the poor represented 36% of the total population in Gaza Strip, and 10.6% of the total population in the West Bank (MAS 1998; 8, Shaban 1997).

[11]  PCBS 1997, tables 1.1 and 1.2.  The definition of unemployment as used by the Palestinian central Bureau of Statistics is based on ILO definitions.  It refers to all persons who, during the week preceding the labor survey, did not work for more than one hour.

[12] These figures were calculated by MAS and were based on data obtained from the PCBS.

[13] Between 1994 and first quarter of 2000 unemployment rates in the Gaza Strip ranged between 14-36% as compared to 9-24% in the West Bank (PCBS, 2000, www.pcbs.org/english/labor/-curr.htr )

[14] On average LDC’s invest 4% of their GDP in infrastructure.  In the West Bank it was 1% of its GDP and in the Gaza Strip up to 2% (Mody 1997; 3).

[15] Between 1994-1996, Gaza Strip exports to the West Bank remained at $22.7million while exports from the West Bank to the Gaza Strip fell from $27.3 to $16.3million over the same period (UNCTAD 1998).

[16] Between 1970-1990, unemployment in the WBGS did not exceed 4% (Farsakh 1998: 46).

[17] This is confirmed in the protocol on Redeployment and Security Arrangements, where article IX states that Israel alone controls entry of persons and goods into its area, and can close crossing points whenever deemed necessary. In article 7 of the Economic protocol, Israel also states that it can close borders whenever it wants. The Declaration of Principles specifies that Israel remains in control of external and internal security. It also states that relations to other neighbors are to be determined in the final status negotiations (article V).

[18] World Bank 2000a, op.cit.

[19] The PA continues to jointly control with Israel 23.8% of the West Bank land (area B) (FMEP, 2000).

[20] Reported in Roy, 1999, “De-Development Revisited: Palestinian Economy and Society since Oslo”, Journal of Palestine Studies, Vol 28, no.3, spring 1999.

[21] ICBS 1999, table 2.7

[22] Unpublished data obtained from the PCBS.

[23] Israel today absorbs 25% of all West Bank workers compared with less than 15% of Gaza Strip workers.  Merchants from the West Bank access Israel more easily than those from Gaza, since Israeli control and permits concerning West Bankers are implemented with the fewer restrictions than those of Gazaians.

[24] Calculated from PCBS 1999, table 2.

[25] Up from $220million in 1993 (Hamed 1996).

[26] See Adel Samara 2000.

[27] Palestinian Authority, West Bank and Gaza Economic Policy Framework Progress Report, presented to the secretariat of the Ad Hoc Liaison Committee, Lisbon, June 7-8, 2000.

[28] Palestinian Authority, West Bank and Gaza Economic Policy Framework Progress Report, presented to the secretariat of the Ad Hoc Liaison Committee, Lisbon, June 7-8, 2000.

 


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