“Economic Decline and Dependency in the West Bank and Gaza Strip,”
by Atif Kubursi

Overview:

The various agreements that make up the Oslo process, including the Declaration of Principles (DOP) signed by Israel and the Palestine Liberation Organization (PLO) on 13 September 1993, and subsequent “interim agreements,” initially generated tremendous euphoria in the Palestinian community. That excitement has disappeared as Palestinians have confronted a reality unchanged by the numerous interim agreements, a reality whose elements include the maintenance of Israeli colonial structures and the deepening dependency of the Palestinian economy on Israel.

Israel’s continuing occupation of the West Bank and Gaza, and the terms of the interim agreements, have exacted high economic costs from the Palestinians. The negotiating process between Israel and the PLO has conferred, in a very unequal fashion, all the economic advantages to Israel without delivering a peace dividend to the Palestinians.

Access to Resources and Markets:

The asymmetrical division of power between Israel and the Palestinian Authority (PA), which lies at the very root of the Palestinians’ problems, has enabled Israel to deny Palestinians access to their own natural resources. Israel continues to consume more than 80 percent of Palestinian groundwater and occupies 59 percent of the West Bank and 20 percent of Gaza. (In the West Bank, the PA exerts full civil and security control over only 17.2 percent of the land. See Information Brief No. 32, “Recapitulating the Redeployments: The Israel-PLO ‘Interim Agreements’,” dated 27 April 2000.) Most of the land that Israel has returned to the PA is the least desirable and least productive, from an economic point of view.

Moreover, Israel has completely severed Palestine from its surrounding milieu—the countries with which it has historically interacted—and from its logical trade partners. The cost of textile production in the West Bank, for example, is 2.17 times that in Jordan because Palestinians have to use expensive, heavily-taxed inputs from Turkey, while Jordan has access to cheaper, higher-quality inputs from Asia. Wages in the West Bank and Gaza have increased quickly—and are much higher than in Jordan and surrounding countries—reflecting the high cost/high wage economy in Israel. These high wage costs exist in the West Bank without complementary adjusting variables, such as high productivity.

Taxation, Wealth Extraction, and Economic Decline:

A punishing monetary regime, as well as high value-added and other taxes imposed by Israel, have extracted tremendous surpluses from the stagnant Palestinian economy. Palestinians have been forced to use the Israeli shekel, which, while costing Israel only four cents to produce, generates some 25 cents of purchasing power. That difference accrues to the benefit of Israel as the suzerain power. Ironically, Israel uses the resulting monetary surpluses to finance the occupation.

Moreover, Israel has actively worked to discourage Palestinian production. Israel destroyed some 50 percent of Palestinian industry in the West Bank and Gaza in the 1967 war. Palestinian efforts to rebuild have been thwarted by closures and transaction costs imposed by Israel on the flow of goods and services, as well as by permits required by Israel for the export of goods that the Palestinian economy is most suited to produce. In short, closures, the threatened and actual disruption of exports, and other transaction costs imposed by Israel have raised the cost of production as well as generated uncertainties that have discouraged direct foreign investment in the Palestinian economy.

Rather than benefiting the Palestinian economy, the Oslo process has resulted in further declines—even in relation to economic performance levels achieved by the Palestinians under Israeli occupation since 1967. Real per capita gross national product (GNP) has dropped by 20 percent since September 1993, despite the PA’s receipt of more than $3 billion in foreign aid from various donors. Moreover, per capita consumption has declined by 15 percent, while core unemployment rates have tripled.

The Israeli Boom Economy:

Israel has used the Oslo negotiations to its great advantage; in contrast to the Palestinian economy, the Israeli economy is thriving. Before the signing of the DOP and the interim agreements, Israel was unable to attract more than $300-400 million in direct foreign investment annually. Since then, Volkswagen, Intel, Motorola, Daimler-Benz, and a host of other companies all have made significant investments in Israel. By 1998, foreign investment in Israel had grown to $2.6 billion and, by 1999, reached $3.7 billion. Trade with Asia, in particular, has increased dramatically; some 33 percent of Israeli exports are sent to Southeast Asia, and exports to South Korea have grown by 50 percent. Israel has also developed trade worth several billion dollars annually with China, with whom it had no trade prior to the signing of the DOP in 1993.

Another direct effect of the interim agreements was the breaking of the Arab economic boycott. That boycott cost Israel an estimated $70-100 billion.

While Israel has reaped the economic benefits of the “peace process,” it has not delivered a peace dividend to the Palestinians. The West Bank and Gaza remain occupied and dependent.

Creating Dependency:

While some leading economists argue that free trade benefits the poor, the circumstances needed for this to occur do not exist in the Palestinian economy. The proximity of the poor Palestinian economy to the technologically sophisticated, highly integrated Israeli economy creates dependency and weakness in the former. The negative “backwash effects” of this proximity outweigh the benefits of positive “spread effects,” especially when—as in the Palestinian case—the advanced economy constrains the poor economy, raises transaction costs, exposes the poor economy to the high costs of the advanced economy, and permits the movement of labor. Because labor typically moves from the poor to the advanced economy, the Palestinians find themselves largely earning their income in the Israeli economy and using it to buy surplus products produced by Israel.

A Scenario for Palestinian Development:

At present, one-third of Palestinian workers are employed in the Palestinian agricultural sector, which generates roughly 15 percent of the PAÕs GNP. (By contrast, agriculture contributes only 1.7 percent to Israel’s GNP.) If Israel made available to the Palestinians as much water as is needed for agricultural production (roughly the amount of Palestinian groundwater now annually confiscated by Israel, some 500 million cubic meters per year), the Palestinians could increase the value of their agricultural output to $2 billion per year.

Water alone, however, is insufficient to make the Palestinian economy more productive. Real economic growth will also require Palestinian control over their land and open access to markets. Palestinian sovereignty will be achieved only when Israel dismantles its colonial structures, ends its extraction of Palestinian economic surpluses through taxation and tariffs, and restores Palestinian access to its natural resources and markets—in short, when Israel forgoes its suzerainty over the Palestinians.

Atif Kubursi is Professor of Economics at McMaster University in Ontario, Canada. This Information Brief is based on remarks he delivered on 10 April 2000 at a symposium organized by the Palestine Center. The above text may be used without permission but with proper attribution to the author and to the Palestine Center. This Information Brief does not necessarily reflect the views of Palestine Center or The Jerusalem Fund.

This information first appeared in Information Brief No. 36, 5 July 2000.