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The Dilemmas of Palestinian Economy under the Occupation and Oslo Restrictions
By: Khaled Ata
July 30, 2017

In the last week of April 2017, Moshe Kahlon, the Israeli Minister of Finance, announced his plan to reduce poverty. This plan is closely related to the inhabitants of Palestinian Bank and Gaza Strip, by reducing the customs and taxes on clothing, footwear and cellular products, which an issue that has been discussed with senior officials of the Palestinian Authority in recent weeks, according to a plan that has been previously sent to the PA, which was the basis of research for various details.

On 29th of May, the Monetary Committee of Bank of Israel, that consists of Governor of the Central Bank of Israel Karnit Flug, the General Director of Ministry of Finance and others have decided to "keep interest in the economy without rising". This decision had an impact on millions of Palestinians in the Palestinian Bank and Gaza Strip, like the rest of the Israelis, the reason is that Palestinians use the Shekel as a currency in their business dealings.

The result is that the Palestinian and Israeli economies are interrelated; therefore, it is doubtful that there will be a political settlement capable of cutting this strong and deep relationship. Dr. Boufal Benziman, a lecturer in conflict research at a multidisciplinary center, says: "From its position on the conflict with the Palestinians, the majority of the Israeli public does not want to hear about the Palestinians. Despite the Israelis' aspiration to ignore the Palestinian problem, the facts say that the structures of two economies are a one structure that cannot be separated from each other, even if it is agreed upon".

Therefore, after 50 years of occupation of the Palestinian Bank and Gaza Strip, the facts show that the price of Shekel and food in the Israeli economy, are connected to the daily lives of Palestinians as Israelis.

The relationship between the two economies

Despite the close ties between the two economies, it is important to note that the Palestinian economic situation is not a part of the economic fundamentals system of Israel's Bank. To illustrate this, we must note that the Bank of Israel deals with the Israeli economy in a similar way that American Fed's deals with US economy, i.e. dealing with the global economic situation. As the main tasks of Israel's Bank and Israeli Finance Minister, for example, are to stabilize the Israeli economy and make it grows only, and their role does not include the status of Palestinian economy.

On the other hand, it is known that there is a head of the Palestinian Monetary Authority and a Minister of Finance in the PA. However, the joint customs cover between the PA and Israel, prevents the PA from taking independent steps to protect its industry from imported goods.

Another example is that dozens of Palestinians are working in Israel and paying income tax to Israeli ministry of finance, according to the Israeli stratum list, which limits the ability of Palestinian Authority to collect taxes according to its needs. So, what is considered in Israel as a minimum wage paid by a marginal tax is considered in the Palestinian Bank and Gaza Strip as a medium wage that is paid by valuable taxes. If the choice was in the hands of the PA, it would have preferred to collect taxes from Palestinians who are working in Israel.

Dr. Eido Zankovitch, who is from the Methven Institute, that studies Palestinian politics, says that "the Palestinian aspiration is reach to full economic independence, and one of the ways to reach this, is to try to make a monetary capacity that is managed as an independent entity. The Palestinian attempt was in 1999-2001 to declare about a state independently, and they began preparing for the issuance of the Palestinian pound''.

Professor Eido adds that the Palestinians "know very well that without monetary independence, political independence will not be achieved, and that is one of the conditions for a state that wants to prove its capacity as a political entity".

The basic feature of the Palestinian economy (if we can say) is an internal economy, a part of the economic life in Israel (microeconomic).

Daily trade is denominated in Shekel

From here, the close ties between the Palestinian and Israeli economies begin. The Palestinian Authority does not have its own currency, and the currency, that is used, is the Shekel. In the Palestinian Bank, for example, the Shekel is the main currency. As for trading with the Dinar or dollar it is used according to its exchange rate to the Shekel. While in Gaza, the Egyptian Pound is added to the Jordanian Dinar and Dollar. 40% of the current accounts of Palestinians there are denominated in Shekel and 20% of deposits and loans are deposited and withdrawn with Shekel.

Daily transactions in PA are denominated in Shekel. The larger transactions, such as buying a property, are denominated in dollars or Jordanian dinars, because Israeli banks do not cover major transactions for PA. This is due to problems in applying the law in Palestinian-Israeli transactions, and the severe fear of the difficulty of collecting debts, in case the Palestinian traders are unable to pay on time. If we add the US laws that prevent banks from granting credit in the Palestinian Bank, and if we also add that Palestinian investors do not invest in Israel because of economic gaps, we conclude that credit in PA is generally denominated in Dollars or the Jordanian Dinar, and as for the interest on Shekel, it does not affect the status of investments in PA, but it indirectly affects the rest of business in Palestinian economy, after Israel's control over all aspects of Palestinian economic life.

The number of Palestinians in the Palestinian Bank who work in Israel is 92,000. 59,000 of them work with permits, half of them in the construction branch.

The capabilities of Palestinian labors in Israel are great they were less than now, before intifada of 1987, half of them were from the Gaza Strip and one-third from the Palestinian Bank. Today, Palestinians constitute 15% of the construction workers in Israel. The productivity of the construction branch is affected because the Palestinian worker spends hours at the checkpoint before reaching the workplace. Higher productivity was possible, but that is the reality. In the goods market, the Palestinian imports from Israel account for more than 60% of the total Palestinian import, equivalent to one third of Palestinian production. In contrast, Palestinian sales to Israel are 81% of the PA's export, equivalent to 6% of the output.

On the Israeli side, Israel's export to PA's zones is the second largest one in terms of services and goods after the United States. The Paris Economic Protocol (that was signed 28 April 1994) approves that the two parties have a joint customs cover, so the trade between Israel and PA, is not formally defined as export and import.

Palestinians are linked to Israel

Despite close economic ties with Israel, there is an Israeli consensus, that the economic importance of Palestinian Bank and Gaza Strip to Israel is marginal at the economic level. For example:
• The GDP of PA is 7.4% of the Israeli GDP.
• The output per capita in Israel is an average of 40,000$ per year, compared with 4% in the PA.
• The trade balance between PA and Israel is in Israel's favor.
• Israeli sales to the PA in 2012 (full year) amounted to 16.4 billion Shekel. This is without the goods that Palestinians buy from settlements.
• Israeli purchases from PA in 2012 are 3 billion Shekel, if we add remittances from the clearing money to the wages of Palestinian workers (4.3 billion Shekel).

According to this trade balance in the simplified form, we find that there is an annual trade surplus in favor of Israel, compared with a PA deficit of 9 billion Shekel. The export rate from Israel to the PA is 5% (of Israel's total export). If we exclude the export of industrial diamonds from the total Israeli exports, the ratio will be 8%.

The discussion here does not refer to the export of advanced technology, but rather to the export of goods, as the percentage of Israeli goods that are exported to the Palestinian Authority is 90% of the total Israeli exports to it. These are conventional goods (consuming industries), and the energy products, in these fields, give the joint customs cover and geographical proximity an advantage to the Israelis who are concerned with exporting.

While the goods that are exported to PA are not developed as the added value to them is less 54% than the added value that is collected by Israel from exporting to the world. What the Israeli economy is getting from PA, as an added value, amounts to 6 - 9 billion Shekel a year, equivalent to 8 to 1.2 percent of Israel's GDP.

Therefore, Israel's great economic advantage over PA makes the possibility of putting pressure on Israel, to reach a political solution, a matter that is out of the question.

You'ez Carney, the founder of Palestinian Economic Cooperation Organization, says "Let's assume that trade with the PA has been stopped, the food industry will be affected slightly, while the other industries will not be affected, like purchasing cement from the Jordanian monopoly instead of the Israeli monopoly".

Israeli economists say that the average of annual output per capita in the PA's territories is 4,000$, in an economic entity that is very close geographically. This represents a huge capability for growth in PA, which will affect the Israeli economy, because it represents a rise in the standard of living, which will affect the increase in import and consuming capacity from Israel.

A threat to financial stability

The increase in public debt of PA from the Palestinian banks in the West Bank puts these banks at a risk of instability, as the credit that is granted by the Palestinian banks to the PA, amounts to 14% of the total deposits of banks in the local banking system of PA, and 12% of the capital of banking system. This situation is highly dangerous.

Dr. Eido Zankovitch says: "the Palestinian economy mainly suffers from problems that are also suffered by the Arab economies, although they are more than its Arab counterparts. The Palestinian economy depends on the support of foreign aids, and suffers from an oversized and unproductive public sector, whose main goal is to create stability, that allows to the PA to remain in power, and makes this authority and its government, the central employing side, which forces the Palestinians who work in it, to be loyal to it, defend it and stand, by its side, in the face of any political move that undermines this authority".

The question in this case, is when the (GDP) rises, where does the surplus go?

Under a public sector that is filled by unemployment of all kinds, clear and disguised, and the dominance of the ruling elite on power, the growth does not lead to a fundamental social change.

Zankovitch adds that the Palestinian Bank, is not rich in natural resources, and has not experienced an industrial and technological revolution. Therefore, the Palestinian economy does not have capacities to develop and rely on productive institutions.

Effects of the Paris Protocol

The Paris Economic Protocol defined the limits of economic relations between the two parties:
• The PA is not permissible to issue a Palestinian currency.
• The PA is not entitled to issue a subscription in debt debentures.
• The PA must not levy any independently from the Israeli side, but it is allowed to levy VAT , which should be lower than those approved in Israel.
• Demanding from Israel exclusively , on a case-by-case basis, for import permits for products from abroad, which are subjected to scrutiny in all its forms.
From these items, it is clear that the Palestinian Authority is characterized by the specifications of the local authority.

Professor Arie Arnon of the Aix group, which aims to develop common economic scenarios for Palestinians and Israelis, said that: "the PA in fact replaced the Israeli Civil Administration, and it controls the administrative services offered in the West Bank. In fact, when financing the public sector, the Palestinians act as a local authority, and if we separate political sovereignty from economic sovereignty, in the Paris Protocol, the Palestinians actually agreed to continue the economic relations that were existed with Israel between 1967-1994 (i.e. to unite the customs between us and them)".

He added that: "Israel controls the borders and customs, Palestinians have given up their authority over trade policy, and they also do not tax imports, they get them through Israel, and they do not control the workers who work in Israel, finally, they do not control the central tables of economic policy, the issue of independence is related only to checks such as electricity and water on which they depend on Israel. Israel has always told them that it is not feasible for you to develop your own checks, which costs a lot of money. Use our electricity and water. Politically this was convenient. But it is about how much Israel wants to have its economic independence”.

Arnon also said that: "In parallel with the negotiations at Camp David in 2000, other negotiations were held on the arrangement of economic relations, in the case of reaching a political agreement. Israel has come to the conclusion that the Paris Protocol is the best for it, as it does not want to be responsible for or participate in aspects of the Palestinian economy. The two parties were close to agreeing on a free trade zone, in which Palestinians would be independent in their trade policy with a third country. Israel also agreed to let Palestinians to have a currency, although it opposed it in the Paris Protocol".

There are those who believe that the current situation is a reality, as it is not easy for a small economy to be independent. "Many Palestinian politicians say that after we gain independence for a day, the next day we will establish a federation with Jordan", says Carney of the Palestinian Economic Cooperation Organization. The reason for this is that the customs cover is better for the Palestinians. Because without that, higher taxes and customs duties will be imposed on goods sold in the Palestinian markets, and then we will see a large number of smuggling operations".

Arnon discusses the matter of issuing a Palestinian currency, by saying that: "this will not be feasible, because the financial inflation is existing; therefore, the currency of Palestinians is going to be un-esteemed".

Arnon adds that: "until 1994, Israel and the Palestinians had no borders for the movement of workers and goods, and the route of goods and services was moving freely".

In the 1994 Israeli-Palestinian negotiations, Palestinians agreed to accept the Israeli position on the issue of customs cover (customs unity), because the alternative, as the Israelis put it, was trade borders that limit the freedom of workers to cross. That is why Palestinians have given up, in return for the entry of Palestinian labor, and the customs unity was approved.

The illusion of economic peace

Carney says that: "perhaps there are different positions between us and Palestinian politicians, but Palestinian businessmen and traders want to be linked to Israel, so that they can be the mediator between Israel and the Arab world from an economic perspective. The main thing is that the Palestinian economy is very similar to the Jordanian one, so they (businessmen and traders) prefer to be heading west rather than east, according to the similarities between the two economies and the difficulty of competing with the East (Jordan)".

"The Israeli economy is strong and it can be import labor and goods because they are cheaper, and because the wages of Palestinian labor are low," Carney adds. "There is no cost to transport their goods according to geography, and this is what is said by Palestinian businessmen". "The Palestinians have a good education system and are sending competencies to all the rich and non-rich Arab countries," Carney said.

There are some Palestinians who warn of the illusion created by the term: "economic peace". Benjamin Netanyahu used this term when the opposition leader was (prime minister and opposition leader). This term has also been used by Naftali Bennett and Ayelet Shaked when they received US President Trump as a good gesture.

"These terms are based on assumptions that economic peace will lead the Palestinians to be in a place strong enough to adopt economic peace", says Benziman. He adds: "This does not address the difficult topics such as borders, refugees, prisoners! These subjects are difficult and even hopeless". In the opinion of Benziman: "Palestinian politicians are aware that economic peace is only a continuation of the occupation, and they want a state with a geographical connection and a part of Jerusalem. These Palestinian politicians do not trust the Israeli government, so they will not move very quickly towards economic peace. "

"There is no such thing as economic peace, because the basis of war is not economic, and when war is not economic, peace cannot be economic, of course a national peace must be created to resolve a national conflict", said Gadi Baltiansky, director general of the Geneva Initiative.

He added that: "The Americans are stressing on the economic development of the Palestinian Authority, because they assume that this will reduce the level and motivation of violence. The Americans believe that the Palestinians will have something to lose and this is not accurate, as the situation during the intifada that broke out in 1987, was better than before the Intifada. It was the Palestinians who decided that they wanted to end the occupation, and the second Intifada was also not because of pressure or economic crisis”.

A realistic view to the Palestinian political and economic conditions under Israeli occupation, leads us to believe that the Israelis, through the Paris Protocol, succeeded in integrating the Palestinian economy with the Israeli economy, as a matter of fact, and through cooperation with donors, they succeeded in creating social groups, that are consisted of businessmen and senior bureaucratic figures in the Palestinian Authority, with interests that are closely linked in ensuring security stability in the areas of PA, to protect their economic and social interests, believing that any disruption caused by a new intifada, would harm the interests of these groups, even if the uprising will lead to the political independence and the establishment of an independent Palestinian state.

The political impasse of the Palestinian Authority, in its economic manifestations, is a direct result of the political bias and coup against the national program in favor of the Oslo project.

Khaled Ata is a member of the Political Bureau of the Democratic Front for the Liberation of Palestine.
Translated by: Al-Hourriah English Staff

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