Hamas leader Dr. Abdel Aziz Rantisi was killed in Gaza only a few hours after the Palestinians carried out another attack on the Erez Industrial Zone, which has become a symbol of Israeli-Palestinian economic cooperation. Presumably, this was merely a prelude to the drama anticipated in the Gaza Strip in the coming months, assuming that Prime Minister Ariel Sharon succeeds in carrying out his disengagement plan.
Ironically, Israel is right now marking the tenth anniversary of the Protocol on Economic Relations between Israel and the Palestinian Liberation Organization, (Paris Protocol) signed on April 29, 1994. The fate of this protocol reflects the history of the entire Israeli-Palestinian peace process. What was intended as a five-year temporary economic agreement has now lasted a decade, has been only partly implemented, and neither party is satisfied with it.
Despite the lessons that ought to be learned from the ten-year history of the Paris Protocol, it seems that the present disengagement plan does not really mention economic issues as a major topic in Israeli-Palestinian relations, even though economic relations will persist in some form for many years after the withdrawal and disengagement.
"On the basis of interviews and opinions expressed about the disengagement plan, it appears that, publicly at least, decision-makers have not given much thought to the question of the economic aspects of the disengagement plan," says Prof. Arie Arnon of Ben Gurion University Department of Economics, an expert in Israeli-Palestinian economic relations.
Arnon is also the Israeli coordinator of the Aix group, a group of Israeli, Palestinians and international economists that recently published "The Economic Road Map" - a proposal for Israeli-Palestinian economic relations under a permanent settlement.
"Globes": Economically, can the Palestinians survive the consequences of disengagement?
Arnon: "Palestinian dependency on Israel will persist. Israel will continue to hold the economic levers of labor, water, electricity and other areas after the disengagement. As the plan is currently presented, it does not return us to the situation before [the Six-Day War] of 1967, but creates a new situation, in which there is a semi-severed economic entity within the Israeli economy. If Israel thinks that it will not be responsible for developments there, it is mistaken."
What do you mean?
"Indirect Israeli control of the Palestinian economy is very considerable. Israel controls the entry and exits points to and from Palestinian territory and provides basic goods. What will happen with the water supply, for instance? The Palestinian Authority (PA) is part of Israel, and even if it were possible to sever the administrative links, Israel will still have to provide water. Even if Israel would like another external entity to take over these responsibilities, that's a long-term process that won't happen overnight."
Palestinian development is the key
Can we revert to the situation of a sealed Israeli-Palestinian economic border, of the kind that existed before 1967?
"The only way to revert to the economic structure that existed before 1967 would be to seal an internal border between the geographical Palestinian territory and open the external Palestinian border to the outside world. That would mean a land link between Gaza and Egypt, a sea link, and an air link from an airport.
"If Israel also withdraws from the West Bank, and the disengagement model is applied there, too, then there would be a situation similar to the one that prevailed before 1967. But a sweeping severing of the Palestinian economy from Israel without linking it to Jordan and Egypt and providing air, land and sea links would have extremely severe consequences for the Palestinians."
Can the Palestinian economy grow without an external link?
"Under these circumstances, the Palestinian economy cannot exist independently, and certainly not flourish and develop. It would be like fencing in the Beer Sheva area and declaring that henceforth there will be no regular exit to the wider world."
The "Economic Road Map" was formulated by Israeli and Palestinian experts and academics. They were assisted by Israeli government officials, mostly from economic ministries, who worked in a private, not official capacity, and by Palestinian Ministry of Economic Affairs and Trade director general Saeb Bamya.
Prof. Gilbert Ben-Hayoun of the Department of Applied Economics at the University of Law, Economics and Science of Aix Marseille, France heads the Aix group. Other members include representatives of the EU, World Bank, International Monetary Fund, the Peres Center for Peace, and other institutions. The "Economic Road Map" was published two weeks ago, arousing great interest in Israel and around the world.
The Aix group focused on economic arrangements relating to the third, permanent, stage of the "Road Map", on the assumption that President George W. Bush's vision of two independent, sovereign stages will be realized. The Palestinian state will be economically sovereign, have defined borders, and manage its economy in the spirit of cooperation.
The Aix group proposes a free trade zone model. It recommends continued Palestinian employment in Israel and border transit points for the movement of workers with work permits, and Palestinian workers receiving preference to other foreign workers in Israel.
Why should Israel change its commitment to provide Palestinians jobs?
"During the current intifada, and up to the closure following the killing of [Hamas leader] Sheikh Ahmed Yassin, 50,000 Palestinians, mostly from the West Bank, worked in Israel. Anyone talking about reducing this number to zero doesn’t fully understand the economic consequences of closing Israel's labor market to Palestinians.
"On the other hand, it's also obvious that the people talking about a return to the previous levels of Palestinian employment in Israel are delusional. To be practical, you have to establish an agreed-upon 'breathing' border for the movement of workers and goods for the benefit of both sides."
Should there be free movement of workers?
"The free flow of workers to the best employer of the moment isn’t always preferable. The ramifications over time are inferior compared with imposing some restrictions on the flow of labor. Since the cost of labor in Israel is higher than in the West Bank and Gaza, this inevitably creates upward pressure on local wages in the territories. The incentive for Israeli or foreign investors to invest in the local economy will therefore decline, at a time when the key to creating a balanced economic relationship is economic development in the territories."
Restrictions on movement will tighten
Would a free trade zone be preferable to continuing the current situation based on the Paris Protocol?
"The Paris Protocol as a model for a permanent economic agreement is inferior to the free trade zone model of a permanent settlement. International institutions, such as the World Bank, agreer. Leaks from the economic negotiations that paralleled the Camp David talks in July 2000 indicate that both the Ministry of Finance and the Palestinians realize that a future economic agreement would be based on a free trade zone, and that alternatives to the Paris Protocol were necessary for a permanent economic agreement.
The Paris Protocol stipulated, among other things that Israel and the PA would have a "uniform customs envelope", i.e. the two parties would maintain uniform customs and permit the free movement of goods between themselves. A limited number of goods, mainly imports from Arab states and basic foods, were excluded from the uniform customs arrangement, in order to give the Palestinians a degree of economic independence. "
A decade later, what conclusions can be drawn from this system?
"Usually, under a uniform customs agreement, the parties jointly determine the external customs envelope. But in this case, Israel did not promise to jointly manage the matter with the Palestinians, and decided the external customs envelope alone. For example, when Israel wanted to liberalize, it simply did so. But if Israel wants to continue the Paris Protocol, it will have to manage its trade policy jointly with the Palestinians, and I oppose this. Each party should be allowed to manage its trade policy at its own discretion."
The Economic Road Map recommends establishing an Israeli-Palestinian bilateral free trade zone that will give the Palestinians open access to the Israeli market, while Israel will continue as the main trading partner. At the same time, each party will set its own trade arrangements and customs duties with third parties, which will enable the Palestinians to diversify their trade relations.
The Aix group recommends that the Palestinian state, as a developing economy, should receive from Israel the option of temporarily protecting certain sectors from competition as part of a "most favored nation" status. A free trade zone requires determining a clear border between the parties to prevent smuggling and allow for the inspection of goods from third parties crossing the border under rules of origin. Such a border would also help prevent terrorist attacks.
Isn't economic integration preferable to separation?
"The Paris Protocol assumed that both parties would make progress on the political track to allow the almost-free movement of labor, goods, and even capital. In practice, the restrictions on the movement of labor and goods only tightened in the past decade. In practice, the Paris Protocol was never implemented, and it's a de jure, not a de facto agreement. "
Has such an experiment succeeded anywhere in the world?
"In many other places around the world, the attempt to achieve economic development behind defined economic borders was more successful than here, when the gaps between the parties are so wide. In Europe, after World War II, international economic relations were managed through filters and economic borders, and the idea of union came much later."
The international community wants results
Another mechanism inserted into the Paris Protocol was to make Israel the main customs collector for the PA. The Protocol stipulates that Israel will collect customs on goods imported to Palestinian territories via Israel. The customs duties are to be transferred to the Palestinian Ministry of Finance each month. Arrangements were also set for the collection and transfer of indirect taxes (VAT, excise, and purchase tax) on goods Palestinians bought in Israel, and vice-versa.
In practice, the Palestinians strongly opposed these arrangements, especially after Israel froze transfers at various times during the intifada, on the grounds that the money was financing terrorism. But even before the outbreak of the intifada in September 2000, the revenues were not shared equally.
Another problem of the disengagement plan is that the Israeli shekel, lalongside the Jordanian dinar and US dollar, is the currency for transactions in the PA. Under the Paris Protocol, the Palestinians were forbidden from issuing an independent currency. The Aix group recommends that, if the Road Map initiative is resumed, the monetary restrictions on the PA banning the issue of a Palestinian currency should be lifted, regardless of whether the PA decided to issue a currency or not.
Israel talks about the international community financing the rehabilitation of the Gaza Strip after Israel's withdrawal. Will it do so?
"The international community has provided support above and beyond the expectations of the architects of the Paris Protocol in 1994. The world donated over $500 million a year before the outbreak of the current crisis, amounting to 10-12% of the Palestinian GDP, and over $1 billion a year during the past two years. This is a huge amount of foreign aid, amounting to $300 per capita annually.
"The problem is that the outside money financed humanitarian activities that support a minimal level of existence for the population, and not long-term productive capacity. If we were to examine what's left now of the huge amount of money transferred, in terms of infrastructures, stock of private capital, and the creation of conditions for growth, you'd see very little. Then there is the lack of law enforcement. The private sector senses considerable uncertainty, and, apart from during the two years following the Paris Protocol, it stopped investing.
"Therefore, it is questionable whether the international community will continue financing a supported economy. The international community has indicated in the past year that it wants to see results, not just in the provision of basic services, but also signs of economic development. There must be a degree of political stability for this to happen, which we don't see on the ground at this time."
Israel's nightmare
Arnon and Denmark-based Palestinian economist Prof. Nu'man Kanafani recently completed a study entitled "Absorbing Returnees in a Viable Palestinian State". It included estimates of the ramifications for Israel's economy.
What are the numbers?
"There are a number of scenarios, depending on the number of refugees wanting to return and the timeframe for their return. Kanafani and I tried to estimate the amount of international support required to absorb and rehabilitate the refugees.
"We concluded that the numbers were not impossible - around $10 billion a year for ten years, depending on the scenario. This sum has already been mentioned in negotiations with the international community.
"We also emphasized the difference between individual and communal compensation, and we actually stressed the importance of communal compensation. There is also a need to discuss the effect on refugees currently living in the West Bank and Gaza, and how to deal with the refugee camps there."
To sum up, do you favor or oppose disengagement?
"I think that total Israeli economic disengagement from the Palestinians, whether in labor or trade, would be a nightmare for Israel. If you want to take an optimistic view of the future, and not building a fortress Israel severed from the region, we have to keep in contact, despite the great differences. A long-term strategy of building an First World island in a sea of developing countries is not good for Israel."
Link to the Paris Protocol
Link to Economic Road Map
Published by Globes [online] - www.globes.co.il - on April 21, 2004