Economic Relations between Israel and the Palestinian Authority

Background Paper

Ministry of Economy and Trade

March 9, 1998

The Protocol on Economic Relations (Paris Protocol)

Economic relations between the Palestinian Authority and the State of Israel are governed by the Protocol on Economic Relations, which was signed in Paris on April 29, 1994 (Paris Protocol). The protocol is based on the premise that building a sound economic base for relations between the Palestinians and the Israelis will increase their interest in achieving peace. Furthermore according to the Preamble the two parties recognize each other's economic ties with other markets and the need to create a better economic environment for their peoples and individuals.

The Paris Protocol establishes the contractual agreement that governs economic relations between the two sides and covers the West Bank and Gaza Strip during the interim period. Implementation, based on stages envisaged in the Declaration of Principles (DOP) on Interim Self Government Arrangements of September 13, 1993, began with the entry into force of the Gaza-Jericho accord in May 1994 and will last for five years to May 4, 1999.

Principles underpinning the Paris Protocol

The protocol's Preamble states that each party views economic matters as one of the key elements in relations between them with a view to enhancing their interest in achieving a "just, lasting and comprehensive peace". This peace is to be based on the concept of mutual respect of each other's economic interests. The sovereignty of the Palestinian side in economic policy and decision making is expressly recognized. Another principle found in Oslo which extends to Paris Protocol is that the parties recognized the “West Bank and Gaza Strip as a single territorial unit, the integrity and status of which will be preserved during the interim period” (Oslo Art. XXXI).

Following decades of neglect and decline, the Palestinian external trade regime has undergone important developments since 1994 following the signing of the Paris and Cairo accords between the PLO and Israel. The Paris Protocol has several major declared aims with regard to the Palestinian economy, which are set out in its Preamble:

1. Importantly, the protocol implicitly recognizes the need to rectify Palestine's skewed economic relationship with Israel. It aims "to establish a sound economic base for these relations to be governed by principles of mutual respect of each other's economic interests, reciprocity, equity and fairness".
2. The protocol explicitly addresses the need to equip the Palestinian Authority (PA) with the legal, institutional and procedural means to manage and develop Palestinian external trade (and other areas) within a Palestinian perspective of the future shape of the economy. It "lays 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 economic development plan and priorities."
3. The Protocol recognizes each party's distinct economic interests. Recognition of each other’s "economic ties with other markets" is a significant feature in the case of the Palestinian economy, over 90% of whose trade is conducted with Israel.
4. The Protocol established a free trade area where the flow of goods and services is uninterrupted by political borders. Inherent within the protocol, was the establishment of a semi customs union between the PA and Israel.
5. These points were re-affirmed in the September 1995 Interim Agreement, in the Protocol concerning Israeli-Palestinian cooperation programs. The Principles of Economic Cooperation emphasize that cooperation aims, inter alia, at developing the Palestinian economy's infrastructure and base and strengthening the bases on the Palestinian side for independent and institutional economic decision making processes.

Current economic situation in the Palestinian Authority Areas

Following the signing of the DOP in September 1993, hopes were high for a quick resumption of economic growth. These expectations were rooted in the Palestinian economy’s structural advantages and the fact that, for a variety of reasons, growth had remained below potential prior to the peace process.

Yet, soon enough, high expectations were faced with hard realities. Closure of the Palestinian territories and the resultant diminishing capacity of transportation between the West Bank and Gaza Strip as well as reduced ability of the Palestinians to work, travel and trade, all led to higher unemployment, more poverty, declining private investment and collapse in trade flows. Palestinian policy makers have had to work under unaccounted and constraining framework in implementing the Palestinian Israeli Agreement.

Economic Indicators - on living conditions

Consumption expenditure

According to data obtained by the resident World Bank mission in Jerusalem, the living conditions of the Palestinian people have declined rapidly since the signing of the Paris Protocol. The following conclusions are based on the World Bank's Palestinian Expenditure Consumption Survey:

1. The average per capita consumption expenditure in WB/GS declined by about 15% between 1988 and 1996.
2. Real per capita expenditure is now at its lowest level since 1980.
3. Real per capita consumption expenditure has been steepest in the West Bank, registering a decline of 26% between the 1992-1993 and 1995-1996 period.

High and increasing levels of poverty

A worrying outcome of the declining WB/GS economy since 1993 is the high, and growing, level of poverty. This is mainly the result of worsening labor market conditions. Given a poverty level of an annual $ 650 per capita (less than $ 2 per day), approximately one fifth or 19.1%, of the WB/GS population lived below the poverty line by end-1995. This indicates that 0.5 million of the 2.79 million population of WB/GS are poor. The situation may be more serious than the statistics imply, however. The profile of poverty reveals the nature of the hardship. An average family with a regularly employed person at the going wage rate should be able to avoid poverty. The incidence of poverty is very much tied to the unpredictable labor market and the repeated and severe shocks resulting from border closures. These closures prevent workers from reaching their jobs and inhibit private-sector expansion and job creation.

Unemployment

The Palestine Central Bureau of Statistics (PCBS) estimates that the unemployment rate increased from an 18.2% average in September-October 1995 to 28.4% in April-May 1997. Palestinian employment in Israel declined from an annual average of 116,000 in 1993 to 57,000 in 1997, according to Israeli statistics, and to 28,100 according to World Bank estimates.

Decline in per capita incomes

According to current estimates real per capita GDP in the WB/GS declined by 5.6% in 1996, despite good olive production that year, and by 7.0% in 1997.

GDP and GNP growth rates

(% Change)

1993 1994 1995 1996 1997
Real GDP per capita -5.6 8.0 -1.0 -5.6 -7.0
Real GNP per capita -14.4 3.0 -1.5 -7.0 -12.0

Dramatic fall in trade

As a result of repeated closures and high costs incurred at the border (delays and the use of convoys for transport of goods to Israel), trade has decreased significantly since the start of Palestinian self-government in 1994. The World Bank estimates that merchandise imports fell from 61% to 48% of GDP between 1992 and 1995. Similarly, exports have decreased from 14% to 12% of GDP over the same period.

Free flow of goods - security checks

Despite the provisions under the Protocol for free trade between Palestinian areas and Israel free trade is one-sided - from Israel to the Palestinian areas. Closures, roadblocks and non-tariff barriers (phytosanitary measures and long security inspection procedures) constantly hamper the free flow of goods from Palareas to Israel. The length of security checks of Palestinian trucks entering into Gaza (of 48 hours duration in some instances) cannot be justified on security grounds. Moreover, they increase the cost of internal trade between the West Bank and Gaza so that the prices of Palestinian goods are brought up to those of Israeli goods. Trade is also adversely affected by protectionist measures undertaken by the Israeli authorities to prevent the sale of Palestinian products in Israel.

Free flow of goods - truck transport

The transfer of goods from WB/GS to Israel is confined to Israeli trucks - Palestinian trucks are not permitted to deliver inside Israel. Palestinian trucks crossing through Israel from the West Bank to the Gaza Strip must do so in convoy, guarded by Israeli security. This procedure is time consuming, and adds significantly to transport costs. Security procedures are clearly excessive and sometimes dubious. For example, trucks travelling from the West Bank to the Gaza Strip are inspected at the point of entry into Gaza after they have been driven for 90-120 minutes through Israeli territory. The inspection cost is borne by the shipper. Security checks and inspection of goods for export, implemented by the Israeli authorities at points of exit (at the bridge for export to Jordan), are totally unwarranted for those products which have been through security checks prior to entry into Israeli territory and which must be checked again before loading onto ships, airplanes, or trucks.

Balance of trade

Bilateral trade between the Palestinian Authority and Israel is estimated at an annual $ 3.0 billion. A closer look, however, reveals that the Palestinians import $ 2.7 billion per year from Israel, while Palestinian exports to the Israeli market are at an all-time low, some $ 300 million per year. These figures reflect the clear imbalance of trade and the burden it poses on the Palestinian economy.

Fall in private investment

Of serious concern is the steep fall in private investment - from $ 529 million, or 21% of GDP, in 1993 to an estimated $ 320 million, a low 8% of GDP, in 1995. Moreover, up to 90% of private-sector investment, mobilized for housing construction, came from personal savings. In short, private-sector investment during the interim period has been negligible despite vast potential investments contemplated by large Palestinian companies such as PADICO.

The fall in private investment is a result of the lack of economic security compounded by the difficulty in securing regular transport for the import of raw material inputs and the export of finished products to their final destination (internal and export markets). The arbitrary nature of security inspections and delays at check points/ports of entry and exit all serve to deter business people from starting new enterprises or expanding existing ones.

The inability of Palestinian businessmen to obtain permits to travel from the West Bank to Gaza and vice-versa is a serious problem faced by inter-Palestinian trade. A Palestinian businessman from the West Bank can obtain a permit to go to Tel Aviv without difficulty, but cannot obtain one to go to the Gaza Strip.

Even when foreign investors and Palestinian expatriates do seek to invest in Palestinian Authority areas they are not issued residence permits, and/or are provided with permits on an arbitrary basis. Application procedures for permits have become so cumbersome that investors are discouraged from investing in the Palestinian economy.

Revenue sharing

Although the Paris Protocol clearly stipulates a time frame for the transfer of revenues from Israel to the Palestinian Authority, Israel has used the transfer issue to gain political leverage over the PA. On several occasions, Israel has stopped the transfer of funds to the PA, depriving it of revenue, causing liquidity shortages and delaying the import of inputs for major government development projects. The Israeli Government has also resorted to the deduction of certain “unsubstantiated debts” from the transfer of revenues collected on behalf of the PA, without even consulting with the PA.

Conclusion

The Palestinian economy has been “under siege” for over three years. Governed by a “convoy system” to transport goods, restricted movement of workers and businesspeople, stringent security checks on exports and imports, the Palestinian economy can barely survive and barley can the Palestinians. This was neither stipulated in the Oslo Agreement nor in the Paris Protocol.